<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from ______ to ______
Commission file number 0-11337
___________________________________
FOOTHILL INDEPENDENT BANCORP
(Exact name of Registrant as specified in its charter)
California 95-3815805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 South Grand Avenue, Glendora, California 91741
(Address of principal executive offices) (Zip Code)
(909) 599-9351
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
As of March 14, 1997, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $52,453,548.
As of March 17, 1997, there were 4,541,363 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference form the
Registrant's Definitive Proxy Statement for its 1996 Annual Meeting which will
be filed with the Commission on or before April 29, 1997.
______________________________
Page 1 of __ Pages
Exhibit Index on Sequentially numbered Page __
<PAGE> 2
PART I
ITEM 1. BUSINESS
Foothill Independent Bancorp (the "Company") is a one-bank holding
company which owns all of the capital stock of Foothill Independent Bank, a
California state-chartered bank (the "Bank"), that was organized and commenced
business operations in 1973. The business of the Bank is carried on as a
wholly-owned subsidiary of the Company. The Company, which was organized in
1982, is a California corporation and is registered under the Bank Holding
Company Act of 1956, as amended.
The Bank
The Bank was organized as a national banking association under federal
law and commenced operations under the name Foothill National Bank on June 1,
1973. The Bank converted from a national banking association to a California
state-chartered bank effective July 1, 1979 and changed its name to Foothill
Independent Bank. The Bank's accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is not a member of the Federal
Reserve System.
The Bank presently operates eleven banking offices, one in each of the
communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho
Cucamonga, Covina, Walnut, Glendale, Corona and Chino, California, and a
lending center in West Covina, California, which are located in the area of
Southern California that includes the San Gabriel Valley of Los Angeles County
and the western portions of San Bernardino and Riverside Counties commonly
known as the Inland Empire. The Glendale office, which was opened in March
1995, extends the Bank's market areas into the West San Gabriel Valley,
approximately 10 miles northeast of Los Angeles. All of the other offices are
located further east, approximately 25 to 45 miles east of Los Angeles.
Services Provided by Foothill Independent Bank
The Bank's organization and operations have been designed to meet the
banking needs of individuals and small-to-medium size businesses located in
the San Gabriel Valley and the Inland Empire in Southern California, where the
Bank conducts its operations. The Bank emphasizes personalized service and
convenience of banking and attracts banking customers by offering services that
are designed to meet the banking requirements of the customers in its
communities. Drive-up or walk-up facilities and 24-hour Automated Teller
Machines ("ATM's") are available at ten of its banking offices. The Bank also
offers a computerized telephone service which enables customers to obtain
information concerning their bank deposit accounts telephonically at any time
day or night.
The Bank offers a full range of commercial banking services including
the acceptance of checking and savings deposits, and the making of various
types of commercial loans and real estate loans. In addition, the Bank
provides safe deposit, collection, travelers checks, notary public and other
customary non-deposit banking services.
2
<PAGE> 3
Deposits of Foothill Independent Bank
Deposits represent the Bank's primary source of funds. As of December
31, 1996, the Bank had approximately 15,793 demand deposit accounts representing
aggregate deposits of approximately $108,993,000 with an average account balance
of $5,591; approximately 8,870 accounts representing approximately $110,586,000
in money market & NOW checking accounts with an average account balance of
$12,628; approximately 9,779 accounts representing approximately $33,294,000 in
savings deposits with an average account balance of $3,422; and approximately
3,108 accounts representing approximately $118,416,000 in time deposits
("TCD's") with an average account balance of $37,969. Of the total deposits at
December 31, 1996, $58,159,000, or 15.8%, were TCD's in denominations of
$100,000 or more and $21,444,000, or 5.8%, were municipal and other governmental
deposits, both time and demand.
During the twelve months ended December 31, 1996, average demand
deposits increased by approximately $20,726,000 or 25.3%; average money market
deposit accounts increased by approximately $137,488,000 or 14.7%; average
savings deposits remained substantially unchanged; and average time deposits
decreased by approximately $5,810,000 or 4.6%, which was the result of a
decrease of $3,653,000 in TCD's in denominations of $100,000 or more and a
decrease of approximately $2,157,000 in TCD's of less than $100,000 ("other time
deposits").
Although there are some public agency depositors that carry large
deposits with the Bank, the Bank does not believe it is dependent on a single
customer or a few customers for its deposits. Most of the Bank's deposits are
obtained from individuals and small and moderate size businesses. This results
in relatively small average deposit balances, but makes the Bank less subject to
the adverse effect on liquidity which can result from the loss of a substantial
depositor. No individual, corporate or public agency depositor accounted for
more than approximately 2% of the Bank's total deposits and the five largest
deposit accounts represented, collectively, 3.2% of total deposits.
3
<PAGE> 4
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential
The following table sets forth the Company's condensed average
balances for each principal category of assets and liabilities and also for
stockholders' equity for each of the past three years. Average balances are
based on daily averages for the Bank and quarterly averages for the Company,
since the Company did not maintain daily average information. Management
believes that the difference between quarterly and daily average data (where
quarterly data has been used) is not material.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- --------------------
Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Investment Securities
Taxable $ 38,410 9.7% $ 34,852 9.5% $ 34,322 11.0%
Non-Taxable 7,810 1.9 3,671 1.0 2,698 0.9
Federal Funds Sold 20,033 5.0 33,762 9.2 12,384 4.0
Due from Banks - Time Deposits 7,391 1.8 2,789 0.8 1,534 0.5
Loans 278,560 69.4 250,248 67.9 220,196 70.6
Direct Lease Financing 2,205 0.6 2,154 0.6 2,095 0.7
Reserve for Loan and Lease Losses (4,012) (1.0) (3,586) (1.0) (2,432) (0.8)
-------- ----- -------- ----- -------- -----
Net Loans and Leases 276,753 69.0 248,816 67.5 219,859 70.5
-------- ----- -------- ----- -------- -----
Total Interest Earning Assets 350,397 87.4 323,890 88.0 270,797 86.9
Cash and Non-Interest Earning
Assets 29,308 7.3 24,712 6.7 23,288 7.5
Net Premises, Furniture and
Equipment 7,477 1.9 6,924 1.9 7,656 2.5
Other Assets 13,726 3.4 13,026 3.4 10,133 3.1
-------- ----- -------- ----- -------- -----
Total Assets $400,908 100.0% $368,552 100.0% $311,874 100.0%
======== ===== ======== ===== ======== =====
LIABILITIES AND STOCKHOLDERS EQUITY
Savings Deposits(1) $140,258 35.0% $127,467 34.6% $123,659 39.7%
Time Deposits 121,453 30.3 127,263 34.5 91,485 29.3
Long-term Borrowings 190 -- 228 0.1 294 0.1
-------- ----- -------- ----- -------- -----
Total Interest-Bearing
Liabilities 261,901 65.3 254,958 69.2 215,438 69.1
Demand Deposits 102,802 25.7 82,076 22.3 68,683 22.0
Other Liabilities 2,898 0.7 2,148 0.6 1,836 0.6
-------- ----- -------- ----- -------- -----
Total Liabilities 367,601 91.7 339,182 92.1 285,957 91.7
Stockholders' Equity 33,307 8.3 29,370 7.9 25,917 8.3
-------- ----- -------- ----- -------- -----
Total Liabilities and
Stockholders' Equity $400,908 100.0% $368,552 100.0% $311,874 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------------------
(1) Includes NOW, Super NOW and Money Market Account.
4
<PAGE> 5
Interest Rates and Differentials
The Company's earnings depend primarily upon the difference between the
interest income the Bank earns on loans, investment securities and other
interest-earning assets and the Bank's cost of funds, principally interest paid
on savings and time deposits. Interest rates charged on the Bank's loans are
affected principally by the demand for loans, the supply of money available for
lending purposes, and competitive factors. In turn, these factors are
influenced by general economic conditions and other constraints beyond the
Company's control, such as Federal economic and tax policies, general supply of
money in the economy, governmental budgetary actions, and the actions of the
Federal Reserve Board. (See "Business -- Effect of Governmental Policies and
Recent Legislation.")
Information concerning average interest earning assets and interest
bearing liabilities, along with the average interest rates earned and paid
thereon is set forth in the following table. Averages were computed based upon
daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------ ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------- ------------------------ ---------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Investment Securities
U.S. Treasury.................... $ 4,025 $ 236 5.9% $ 10,080 $ 468 4.6% $ 30,986 $ 1,080 3.5%
U.S. Government Agencies......... 31,253 1,743 5.6 22,441 1,445 6.4 1,609 227 14.1
Municipal Leases(1).............. 7,810 589 7.5 3,671 240 6.5 2,698 131 4.9
Other Securities................. 3,132 192 6.1 2,331 132 5.7 1,727 138 8.0
----------------- ----------------- ------------------
Total Investment Securities.... 46,220 2,760 6.0 38,523 2,285 5.9 37,020 1,576 4.3
Federal Funds Sold............... 20,033 1,070 5.3 33,762 1,944 5.8 12,384 524 4.2
Due from Banks - Time Deposits..... 7,391 402 5.4 2,789 165 5.9 1,534 60 3.9
Loans(2)........................... 278,560 30,939 11.1 250,248 28,872 11.5 220,196 25,348 11.5
Lease Financing(1)................. 2,205 185 8.4 2,154 276 12.8 2,095 299 14.3
----------------- ----------------- ------------------
Total Interest-Earning
Assets(1)................... $354,409 $35,356 10.0% $327,476 $33,542 10.2% $273,229 $27,807 10.2%
================= ================= ==================
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------ ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------- ------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST BEARING LIABILITIES:
Domestic Deposits and
Borrowed Funds:
Savings Deposits (3)............. $140,258 $3,100 2.2% $127,467 $2,602 2.0% $123,659 $2,160 1.7%
Time Deposit..................... 121,453 6,750 5.6% 127,263 7,149 5.6% 91,485 3,876 4.2%
Long-Term Borrowings............. 190 19 10.0% 228 35 15.4% 294 170 57.8%
----------------- ---------------- -----------------
Total Interst-Bearing Liabilities.. $261,901 $9,869 3.8% $254,958 $9,786 3.8% $215,438 $6,206 2.9%
================= ================ =================
</TABLE>
The table below shows the net interest earnings and the net yield on
average earning assets:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Total Interest Income(1)(2).................................... $ 35,356 $ 33,542 $ 27,807
Total Interest Expense(3)...................................... $ 9,869 $ 9,786 $ 6,206
Net Interest Earnings(1)(2).................................... $ 25,487 $ 23,756 $ 21,601
Net Average Earning Assets(2).................................. $354,409 $327,450 $273,229
Net Yield on Average Earning Assets(1)(2)...................... 7.2% 7.3% 7.9%
Net Yield on Average Earning Assets
(excluding Loan Fees)(1)(2)................................... 6.4% 6.6% 6.7%
</TABLE>
- ----------------------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate
37.0 percent for 1996, 37.1 percent for 1995 and 37.9 percent for 1994.
(2) Loans, net of unearned discount, do not reflect average reserves for
possible loan losses of $4,012,000 in 1996, $3,586,000 in 1995 and
$2,432,000 in 1994. Loan fees of $2,891,000 in 1996, $2,141,000 in
1995 and $3,372,000 in 1994 are included in loan interest income.
Average loan balances include loans placed on non-accrual status
during the period presented, but interest on such loans is excluded.
There were twenty-one non-accruing loans at December 31, 1996,
forty-five at December 31, 1995 and sixty at December 31, 1994.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
6
<PAGE> 7
The following table sets forth the changes in interest earned,
including loan fees, and interest paid. The net increase (decrease) is
segmented into the change attributable to variations in volume and variations
in interest rates. Changes in interest earned and interest paid due to both
rate and volume have been allocated to the change due to volume and the change
due to rate in proportion to the relationship of the absolute dollar amounts of
the changes in each.
<TABLE>
<CAPTION>
INVESTMENT
SECURITIES
------------------
FEDERAL DIRECT
NON- FUNDS LEASE TIME
INTEREST EARNED ON: TAXABLE TAXABLE(1) SOLD LOANS(2) FINANCING DEPOSITS TOTAL
- ------------------- ------- ---------- ------- -------- --------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1996 compared to 1995-
Increase (decrease) due to:
Volume Changes $206 $373 $ (742) $ 3,407 $ 7 $251 $ 3,502
Rate Changes (80) (24) (132) (1,340) (98) (14) (1,688)
---- ---- ------ ------- ---- ---- -------
Net Increase (Decrease) $126 $349 $ (874) $ 2,067 $(91) $237 $ 1,814
==== ==== ====== ======= ==== ==== =======
1995 compared to 1994-
Increase (decrease) due to:
Volume Changes $ 21 $121 $1,175 $ 2,326 $ 8 $ 65 $ 3,716
Rate Changes 579 (12) 245 1,198 (31) 40 2,019
---- ---- ------ ------- ---- ---- -------
Net Increase (Decrease) $600 $109 $1,420 $ 3,524 $(23) $105 $ 5,735
==== ==== ====== ======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
SAVINGS TIME LONG TERM REPURCHASE
INTEREST PAID ON: DEPOSITS DEPOSITS BORROWING(3) AGREEMENTS TOTAL
- ----------------- -------- ---------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
1996 compared to 1995-
Increase (decrease) due to:
Volume Changes $273 $(324) $ (16) $ - $ (67)
Rate Changes 225 (75) - - 150
---- ------ ----- --- ------
Net Increase (Decrease) $498 $ (399) $ (16) $ - $ 83
==== ====== ===== === ======
1995 compared to 1994-
Increase (decrease) due to:
Volume Changes $ 68 $1,785 $(135) $ - $1,718
Rate Changes 374 1,488 - - 1,862
---- ------ ----- --- ------
Net Increase (Decrease) $442 $3,273 $(135) - $3,580
==== ====== ===== === ======
</TABLE>
- ------------------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate
37.0% for 1996 and 37.1% for 1995.
(2) Includes an increase in loan fees of $750,000 in 1996 and a decrease
of $1,231,000 in 1995.
(3) Long term borrowings in 1996 and 1995 consist of an obligation secured
by deed of trust that bears interest at 10.0%. In 1994 such
borrowings also included an unsecured note, at 1 % over the City
National Bank Base Prime Rate (which was 8.5% at December 31, 1994),
that was repaid in April 1994.
7
<PAGE> 8
INVESTMENT PORTFOLIO
The objectives of the Bank's investment policy is to manage interest
rate risk, provide adequate liquidity and reinvest in its community while
maximizing earnings with a portfolio of investment-grade securities. Each
security purchased is subject to the credit and maturity guidelines defined in
the investment policy and is reviewed regularly to verify its continued credit
worthiness.
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, " Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and reclassified its investment security
portfolio to differentiate between Investment Securities Held-to-Maturity and
Investment Securities Available-For-Sale. Previously, the investment
securities were carried at cost, adjusted for the accretion of discounts and
amortization of premiums. The classification of securities is made by
management at the time of acquisition.
The following table summarizes the components of the Company's
investment securities at the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------- --------- -------
INVESTMENT SECURITIES
HELD-TO-MATURITY:
- ---------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Agency $ 2,796 $2,800 $19,735 $19,815 $17,451 $17,264
State and Political Subdivisions 2,529 2,538 3,506 3,517 2,759 2,677
Other Securities 250 250 250 250 250 250
------- ------ ------- ------- ------- -------
Total Investment Securities $ 5,575 $5,588 $23,491 $23,582 $20,460 $20,191
======= ====== ======= ======= ======= =======
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
- ---------------------
U.S. Treasury and Agency $31,877 $31,800 $11,804 $11,811 $ 8,921 $ 8,917
State and Political Subdivisions(1) 4,772 4,792 4,434 4,477 -- --
Other Securities 3,238 2,885 2,707 2,455 1,982 1,600
------- ------- ------- ------- ------- -------
$39,887 $39,477 $18,945 $18,743 $10,903 $10,517
======= ======= ======= ======= ======= =======
</TABLE>
_________________________
(1) Includes, in 1996 and 1995, non-rated certificates of participation
evidencing ownership interests in the California Statewide Communities
Development Authority - San Joaquin County Limited Obligation Bond Trust
with book values of $4,428,000 and $4,434,000 and market values of
$4,452,000 and $4,477,000 at December 31, 1996 and 1995, respectively.
8
<PAGE> 9
The following table shows the maturity of investment securities at
December 31, 1996, and the weighted average yields (for tax-exempt obligations
on a fully taxable basis assuming a 37.0% tax rate) of such securities.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
-------------- -------------- ------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------ ----- ------ -----
INVESTMENT SECURITIES
HELD-TO-MATURITY:
- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Agencies $ 2,399 5.81% $ 397 5.25% $ - -% $ - -%
State and Political 420 3.80 1,860 4.36 249 4.20 - -
Other Securities 250 - - - - - - -
------- ---- ------- ---- ------ ---- ---- ----
$ 3,069 4.86% $ 2,257 4.52% $ 249 4.20% $ - -%
======= ==== ======= ==== ====== ==== ==== ====
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
- ---------------------
U.S. Treasury and Agencies $23,879 5.71% $ 7,921 5.78% $ - -% $ - -%
State and Political - - 1,642 5.99 3,150 5.99 - -
Other Securities 1,238 - 1,647 - - - - -
------- ---- ------- ---- ------ ---- ---- ----
$25,117 5.43% $11,210 5.86% $3,150 5.99% $ - -%
======= ==== ======= ==== ====== ==== ==== ====
Total Investment Securities $28,186 5.37% $13,467 5.64% $3,399 5.86% $ - -%
======= ==== ======= ==== ====== ==== ==== ====
</TABLE>
9
<PAGE> 10
LOAN PORTFOLIO
The following table sets forth the amount of loans outstanding at
December 31 of each of the years in the five year period ended December 31,
1996.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
Domestic:
Commercial, Financial and Agricultural $ 40,979 $ 44,801 $ 67,551 $ 46,813 $ 40,942
Real Estate Construction 12,008 32,745 33,155 14,906 15,280
Real Estate Mortgage(1) 231,012 171,321 129,650 112,472 93,621
Consumer Loans 8,157 10,887 15,986 18,606 15,057
Lease Financing(2) 2,864 2,086 3,727 2,189 23,872
All Other Loans (including overdrafts) 407 178 112 178 34
-------- -------- -------- -------- --------
Subtotal: 295,427 262,018 250,181 195,164 188,806
Less:
Unearned Discount (797) (864) (1,165) (928) (605)
Reserve for Loan and Lease Losses (4,744) (3,644) (3,145) (2,328) (2,168)
-------- -------- -------- -------- --------
Total: $289,886 $257,510 $245,871 $191,908 $186,033
======== ======== ======== ======== ========
</TABLE>
- ----------------
(1) A portion of these loans were made, not for the purpose of financing
real properties, but for commercial or agricultural purposes.
However, in accordance with the Bank's credit policies, such loans
were secured by deeds of trust on real properties and, therefore, are
classified as real estate mortgage loans.
(2) Lease financing includes residual values of $33,000 for 1996; $322,000
for 1995; $567,000 for 1994; $1,397,000 for 1993 and $2,582,000 for
1992, and is net of unearned income of $329,000 for 1996; $252,000 for
1995; $391,000 for 1994; $491,000 for 1993 and $4,375,000 for 1992.
The significant decline in Lease Financing was due primarily to the
sale in 1993 of a portfolio of $19,000,000 of municipal leases by the
Bank, and the use of the proceeds thereof primarily to fund new loans
and purchase additional investment securities.
MATURITIES AND SENSITIVITIES TO INTEREST RATES
The following table shows the maturities and sensitivities to changes in
interest rates on loans outstanding at December 31, 1996.
<TABLE>
<CAPTION>
MATURING
-----------------------------------------
WITHIN ONE TO AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
-------- ---------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Domestic:
Commercial and Agricultural $20,463 $ 15,213 $ 5,303 $ 40,979
Real Estate Construction 10,259 1,188 561 12,008
Real Estate Mortgage 49,874 104,792 76,346 231,012
Consumer Loans 3,464 4,554 139 8,157
Lease Financing 1,205 1,469 190 2,864
All Other Loans 278 115 14 407
------- -------- ------- --------
Total $85,543 $127,331 $82,553 $295,427
======= ======== ======= ========
</TABLE>
Of the total amount of loans (exclusive of loans on non-accrual
status) outstanding as of December 31, 1996 that had maturities of more than
one year, $119,455,000 had predetermined, or fixed, rates of interest and
$90,429,000 had floating or adjustable rates of interest.
10
<PAGE> 11
ASSET/LIABILITY MANAGEMENT
The table below sets forth information concerning the interest rate
sensitivity of the Company's consolidated assets and liabilities as of December
31, 1996. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
Generally, where rate-sensitive assets exceed rate-sensitive
liabilities, the net interest margin is expected to be positively impacted
during periods of increasing interest rates and negatively impacted during
periods of decreasing interest rates. When rate-sensitive liabilities exceed
rate-sensitive assets generally the net interest margin will be negatively
affected during periods of increasing interest rates and positively affected
during periods of decreasing interest rates.
<TABLE>
<CAPTION>
Over Three Over One
Three Through Year Over Non-
Months Twelve Through Five Interest
or Less Months Five Years Years Bearing Total
------- ---------- ---------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits in banks $ 3,362 $ 595 $ - $ - $ - $ 3,957
Investment securities 23,974 6,367 12,883 595 1,233 45,052
Federal Funds Sold 14,900 - - - - 14,900
Net loans 28,686 59,231 112,629 83,225 6,115 289,886
Noninterest-earning assets - - - - 56,710 56,710
------- ------- -------- -------- -------- --------
Total assets $70,922 $66,193 $125,512 $ 83,820 $ 64,058 $410,505
------- ------- -------- -------- -------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Noninterest-bearing deposits $ - $ - $ - $ - $108,670 $108,670
Interest-bearing deposits 75,032 50,899 21,261 115,104 - 262,296
Short-term borrowings - - - - - -
Long-term borrowings 9 27 132 - - 168
Other liabilities - - - - 3,149 3,149
Stockholders' equity - - - - 36,222 36,222
------- ------- -------- -------- -------- --------
Total liabilities and stockholders equity $75,041 $50,926 $ 21,393 $115,104 $148,041 $410,505
------- ------- -------- -------- -------- --------
Interest rate sensitivity gap $(4,119) $15,267 $104,119 $(31,284) $(83,983) $ -
======= ======= ======== ======== ======== ========
Cumulative interest rate sensitivity gap $(4,119) $11,148 $115,267 $ 83,983 $ - $ -
======= ======= ======== ======== ======== ========
</TABLE>
11
<PAGE> 12
RISK ELEMENTS
Non-accrual, Past Due and Restructured Loans
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans More Than 90 Days Past Due(1):
Aggregate Loan Amounts:
Commercial.......................... $ 500 $ 584 $ 281 $ 92 $2,349
Real Estate......................... 2,328 869 2,117 - 116
Consumer............................ 1 3 51 36 7
Aggregate Leases.................... - - - - -
Troubled Debt Restructurings(2)....... 4,787 6,397 1,337 640 903
Non-Accrual Loans(3).................. 11,623 12,620 8,621 9,424 3,963
------- ------- ------- ------- ------
$19,239 $20,473 $12,407 $10,192 $7,338
======= ======= ======= ======= ======
</TABLE>
- ----------------
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days or more.
(2) Troubled Debt Restructuring are loans which have been renegotiated to
provide a deferral of interest or principal. The terms of the
restructured loans did not involve any deferrals of interest and
interest collected in 1996, 1995, 1994, 1993 and 1992 were the same
amounts that would have been collected in accordance with the original
terms of the loans.
(3) Ordinarily, a loan is placed on non-accrual status (that is, accrual
of interest on the loan is discontinued) when the Bank has reason to
believe that continued payment of interest and principal is unlikely.
There were twenty-one loans on non-accrual status at December 31,
1996; forty-five loans at December 31, 1995; sixty loans at December
31, 1994; thirty-one loans at December 31, 1993 and sixteen loans at
December 31, 1992. The amount of interest that would have been
collected on these loans had they remained current in accordance with
their original terms was $1,488,000 in 1996, $985,000 in 1995,
$510,000 in 1994, $504,000 in 1993 and $262,000 in 1992.
Effective January 1, 1995 the Company adopted Statement of Financial
Accounting Standards N. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e., both
principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the loans'
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118,
had no material impact on the Company's consolidated financial statements as the
Bank's existing policy of measuring loan impairment is consistent with methods
prescribed in these standards.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that it will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In determining impairment, the Bank principally evaluates those
loans, both performing and non-performing, that are large non-homogenous loans
in its commercial and real estate mortgage and construction loan portfolios
which exhibit, among other characteristics, high loan-to-value ratios, low
debt-coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. In general, payment delays of less
than 90 days or payment shortfalls of less than 1% are deemed insignificant and
would not necessarily result in classification of a loan as impaired. However,
management considers all non-accrual loans to be impaired. The Bank does not
consider all non-accrual loans to be impaired. The Bank does not consider
smaller balance, homogenous loans in determining loan impairment. These loans
include consumer installment, credit card and direct lease financing.
Loans identified as impaired are placed on non-accrual status and are
evaluated for write-off, write-down or renegotiation with the borrower. Impaired
loans are charged-off when the possibility of collecting the full balance of the
loan becomes remote. The reserves set aside for possible losses related to
impaired loans totaled approximately, $485,000 for the year ended December 31,
1996 and were included in the Bank's Reserve for Loan Losses at December 31,
1996. The average balance of the impaired loans amounted to approximately
$10,314,000 for the year ended December 31, 1996. Cash receipts during 1996
applied to reduce principal balances and recognized as interest income were
approximately $2,073,000 and $137,000, respectively. For additional information
regarding SFAS 114, see Note 5 to the Company's Consolidated Financial
Statements set forth in part II, Item 8 of this Report.
12
<PAGE> 13
Potential Problem Loans
- -----------------------
At December 31, 1996, there were no loans on accrual status where
there were serious doubts as to the ability of the borrower to comply with then
present loan repayment terms.
Foreign Outstanding
- -------------------
The Bank did not have any loans, acceptances, interest-bearing
deposits or other monetary assets of any foreign country.
Loan Concentrations
- -------------------
The Bank does not have loans made to borrowers who are engaged in
similar activities where the aggregate amount of the loans exceeds 10% of their
loan portfolio that are not broken out as a separate category in the loan
portfolio.
Other Interest-Bearing Assets
- -----------------------------
The Bank does not have any interest-bearing assets as to which
management believes that recovery of principal or interest thereon is at
significant risk.
13
<PAGE> 14
Summary of Loan and Lease Loss Experience
The following table sets forth an analysis of the Bank's loan and
lease loss experience, by category, for the past five years.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans and
leases outstanding(1) $280,765 $252,402 $222,291 $183,401 $196,752
======== ======== ======== ======== ========
Loan and lease loss reserve
balance at beginning of year $ 3,644 $ 3,145 $ 2,328 $ 2,168 $ 2,027
-------- -------- -------- -------- --------
Charge-Offs:
Domestic:
Commercial, financial and agricultural (96) (1,414) (1,114) (773) (1,380)
Real Estate-construction - - - - -
Real Estate-mortgage (1,365) (543) (516) (84) -
Consumer Loans (142) (109) (207) (94) (58)
Lease Financing - - - - -
-------- -------- -------- -------- --------
(1,603) (2,066) (1,837) (951) (1,438)
Foreign: - - - - -
-------- -------- -------- -------- --------
Recoveries:
Domestic:
Commercial, financial and agricultural $ 295 $ 284 $ 78 $ 75 $ 9
Real Estate-construction - - - 1 -
Real Estate-mortgage 152 186 140 - -
Consumer Loans 56 79 72 10 15
Lease Financing - - - - -
-------- -------- -------- -------- --------
503 549 290 86 24
Foreign: - - - - -
-------- -------- -------- -------- --------
Net Charge-Offs (1,100) (1,517) (1,547) (865) (1,414)
Additions charged to operations 2,200 2,016 2,364 1,025 1,555
-------- -------- -------- -------- --------
Loan and lease loss reserve
balance at end of year $ 4,744 $ 3,644 $ 3,145 $ 2,328 $ 2,168
======== ======== ======== ======== ========
Ratios:
Net charge-offs during the year
to average loans and leases
outstanding during the year 0.39% 0.60% 0.69% 0.47% 0.72%
Loan loss reserve to total gross loans 1.61% 1.39% 1.26% 1.20% 1.17%
Net loan charge-offs to loan loss reserve 23.19% 41.63% 49.19% 37.16% 65.22%
Net loan charge-offs to provision for loan losses 50.00% 75.25% 65.44% 84.39% 90.93%
Loan loss reserve to non-performing loans(2) 32.82% 25.88% 28.41% 24.37% 33.69%
</TABLE>
- -----------
(1) Net of unearned discount.
(2) For purposes of this ratio, non-performing loans consist of loans more than
90 days past due and non-accrual loans. Troubled debt restructured loans
have been excluded because they are performing in accordance with the
revised terms thereof.
14
<PAGE> 15
Loans and leases are charged against the reserve for loan losses when
management believes that the collectability of principal is unlikely. The
reserve is replenished through provisions charged against current period
income. The amount of the provision is determined by management based on
periodic evaluations of the loan and lease portfolio which result in the
establishment of (i) specific reserves for specific problem loans and leases,
based on such factors as a deterioration in the financial condition of the
borrower, a decline in the value of the assets securing repayment of the loan
or payment delinquencies by the borrower, and (ii) general reserves for
unidentified potential losses in the loan and lease portfolio, based upon
historical experience and periodic evaluations of prevailing and anticipated
economic conditions, such as increases in interest rates or the onset of
recessionary conditions in the Bank's market areas, which can affect the
ability of borrowers to meet their payment obligations to the Bank.
The relatively higher levels of loan charge-offs during the past five
years were due primarily to the continuing severity and duration of economic
recession in Southern California which, it now appears, began in the second
half of 1990. The recession resulted in an increase in loan delinquencies
and defaults by borrowers and forced the Bank, like many other banks in
Southern California, to rely more heavily on sales of the assets
collateralizing the defaulted loans for their repayment. However, at the same
time, the recession caused a decline in the realizable value of such assets,
making it more difficult for banks to obtain full recovery of defaulted loans.
These circumstances led the Bank, as well as many other banks in Southern
California, to reduce the amounts at which the loans of the affected borrowers
were carried on its books to amounts which, based on conservative valuation
approaches mandated by federal and state banking regulators, could be expected
to be recovered from the borrowers or from the sale of the assets
collateralizing the loans.
These loan charge-offs were, in accordance with applicable accounting
principles, applied against the reserves that the Bank had established for
potential loan losses. As a consequence, it was necessary for the Bank to
replenish the reserve through additional "provisions" charged against operating
income and bring the reserve back to a level which management of the Bank
deemed adequate in light of economic conditions.
The risk of non-payment of loans is an inherent feature of the banking
business. That risk varies with the type and purpose of the loan, the
collateral which is obtained to secure payment, and ultimately, the
creditworthiness of the borrower. In order to minimize this credit risk, the
Bank has established lending limits for each of its officers having lending
authority, in each case based upon the officer's experience level and prior
performance. Whenever a proposed loan by itself, or when aggregated with
outstanding extensions of credit to the same borrower, exceeds the officer's
lending limits, the loan must be approved by a management committee which is
comprised of the Chief Executive Officer and the Chief Credit Officer of the
Bank and two senior loan administrators or by the Loan Committee of the Board of
Directors of the Bank. The Bank also maintains a program of periodic review of
all existing loans. The Bank's administrative officers review a percentage of
all loans and leases made, with emphasis placed on large credits. Loans and
leases are reviewed for creditworthiness as well as documentation and compliance
with the Bank's lending policies. Problem or substandard loans or leases
identified in the review process are scheduled for special attention and
remedial action.
The reserve for possible loan losses should not be interpreted as an
indication that charge-offs will occur in the amounts or proportions shown in
the table above, or that the allocation of the reserve set forth in the table
below indicates future charge-off trends. While management believes that the
reserve for loan losses is adequate, future additions to the reserve can be
expected as a result of any of a number of factors, including changes in
prevailing economic conditions in the Bank's market areas and the incurrence
of currently unanticipated losses on loans in the loan portfolio due to
deterioration in the financial condition of the borrowers. In addition, both
Federal and state banking regulatory agencies, as an integral part of their
periodic oversight examinations of the Bank, routinely review the loan loss
reserve and often recommend additions to the reserve based on their evaluation
of the loan portfolio.
15
<PAGE> 16
Allocation of Reserve for Loan Losses
-------------------------------------
The loan loss reserve is allocated among the different loan
categories, as set forth in the table below, as a result of the differing
levels of risk associated with each loan category. The allocation is made
based on historical loss experience within each category and management's
periodic review of loans in the loan portfolio. However, the reserves
allocated to specific loan categories are not the total amounts available for
future losses that might occur within such categories because the total reserve
is the general reserve applicable to the entire portfolio.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
% of % of % of
Reserve Loans to Reserve Loans to Reserve Loans to
Loan Total Loan Total Loan Total
Losses Loans Losses Loans Losses Loans
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Domestics:
Commercial, Financial and Agricultural $1,148 13.87% $1,093 17.10% $1,493 27.00%
Real Estate-construction 169 4.06% 194 12.50% 459 13.25%
Real Estate-mortgage 2,899 78.20% 1,603 65.38% 1,215 51.82%
Installment loans to individuals 77 2.76% 293 4.15% 210 6.39%
Lease financing 17 0.97% 13 0.80% 18 1.49%
Other 434 0.14% 448 0.07% (250) 0.05%
------ ------ ------ ------ ------ ------
$4,744 100.00% $3,644 100.00% $3,145 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1992
------------------ -------------------
% of % of
Reserve Loans to Reserve Loans to
Loan Total Loan Total
Losses Loans Losses Loans
------- -------- ------- --------
<S> <C> <C> <C> <C>
Domestic:
Commercial, Financial and Agricultural $1,084 23.99% $1,153 21.69%
Real Estate-construction 189 7.64% 152 8.09%
Real Estate-mortgage 871 57.63% 587 49.59%
Installment loans to individuals 152 9.53% 125 7.97%
Lease financing 7 1.12% 16 12.64%
Other 25 0.09% 135 0.02%
------ ------ ------ ------
$2,328 100.00% $2,168 100.00%
====== ====== ====== ======
</TABLE>
16
<PAGE> 17
DEPOSITS
The average amount (in thousands) of and the average rate paid on
deposits is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
In Domestic Offices:
Noninterest bearing demand deposits $102,802 - $ 82,076 - $ 68,683 -
Savings Deposits(1) 140,258 2.21% 127,467 2.00% 123,659 1.70%
Time Deposits 121,453 5.56% 127,263 5.60% 91,485 4.20%
-------- -------- --------
Total Deposits $364,513 2.70% $336,806 2.90% $283,827 2.13%
======== ======== ========
</TABLE>
- --------------
(1) Includes NOW, Super NOW, and Market Deposit Accounts.
Set forth below is maturity schedule of domestic time certificates of
deposits of $100,000 or more:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
(In Thousands)
<S> <C>
Three Months or Less $11,723
Over Three through Six Months 9,626
Over Six through Twelve Months 15,356
Over Twelve Months 21,454
-------
$58,159
=======
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average
total assets (return on assets), net income to average equity (return on
equity), dividends declared per share to net income per share (dividend payout
ratio), and average equity to average total assets (equity to asset ratio).
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on Assets 1.04% 0.97% 1.19%
Return on Equity 12.56% 11.90% 13.33%
Dividend Payout Ratio - - 40.82%
Equity to Asset Ratio 8.31% 8.13% 8.31%
</TABLE>
17
<PAGE> 18
Competition
- -----------
The banking business in the Bank's marketing areas is highly
competitive. In those areas, the Bank competes for loans and deposits with
other commercial banks, including branches of most of California's major banks,
many of which have greater financial, marketing and other resources than those
of the Bank. Larger commercial banks have greater lending limits than the Bank
and offer certain services, such as trust services, which the Bank does not
offer directly. Competition is expected to continue to increase as a result of
legislation passed in California in 1986 which permits bank holding companies
in other states to acquire California banks and bank holding companies. See
"Effects of Governmental Polices and Recent Legislation." The Bank also
competes with savings and loan associations, finance companies, credit unions,
mortgage companies, insurance companies, brokerage firms, leasing companies and
other financial institutions in its market areas. In competing with other
financial institutions, the Bank places emphasis on providing a high level of
personal service and convenience to its customers and conducts local
advertising and promotional programs and activities in its market areas.
Supervision and Regulation
- --------------------------
Regulations Applicable to the Company
-------------------------------------
The Company, as a bank holding company, is subject to regulation under
the Bank Holding Company Act (the "Act"). The Act requires every bank holding
company to obtain the prior approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board" or the FRB") before it may acquire
substantially all of the assets of any bank or acquire ownership or control of
any voting shares of any bank if, after such acquisition, it would own or
control, directly or indirectly, more than 5% of the voting shares of such
bank. The Federal Reserve Board may not approve the acquisition by the
Company of voting shares, or substantially all the assets, of any bank located
in any state other than California unless the laws of such state specifically
authorize such an acquisition.
Under the Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries,
except that it may engage in certain activities which, in the opinion of the
Federal Reserve Board, are so closely related to banking or to managing or
controlling banks as to be a proper incident thereto. The Company is also
prohibited, with certain exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank or
a bank holding company unless that company is engaged in activities which the
Federal Reserve Board has determined are a proper incident to banking. If a
company is engaged in prohibited activities, then the Federal Reserve Board's
approval must be obtained before the shares of any such company can be acquired
by the Company or before the Company can open new offices. In ruling on
applications for approval of acquisitions of shares, the Federal Reserve Board
is required to consider whether performance of the activity to be carried on by
the proposed subsidiary can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board has followed for some time a
restrictive policy in permitting the entry or expansion of bank holding
companies and other bank affiliates into domestic and foreign banking and
banking-related activities. The act does not place territorial restrictions on
the activities of non-bank subsidiaries of bank holding companies.
The major non-banking activities that have been permitted to bank
holding companies with certain limitations are: making, acquiring or servicing
loans that would be made by a mortgage, finance, credit card or factoring
company; operating an industrial loan company; leasing real and personal
property; acting as an industrial agent, broker, or principal with respect to
insurance that is directly related to the extension of credit by the bank
holding company or any of its subsidiaries and limited to repayment of the
credit in the event of death, disability or involuntary unemployment; issuing
and selling money orders, savings bonds and travelers checks; performing
certain trust company services; performing appraisals of real estate and
personal property; providing investment and financial advice; providing data
processing services; providing courier services; providing management
consulting advice to nonaffiliated depository institutions; arranging
commercial real estate equity financing; providing certain securities brokerage
services; underwriting and dealing in government obligations and money market
instruments; providing foreign exchange advisory and transactional services;
acting as a futures commission merchant; providing investment advice on
financial futures and options on futures; providing consumer financial
counseling; providing tax planning and preparation services; providing check
guarantee services; engaging in collection agency activities; and operating a
credit bureau. The Federal Reserve Board has also requested comments on a
proposal that would allow bank holding companies to engage in certain types of
real estate investment activities subject to certain restrictions on the manner
in which such activities may be conducted.
18
<PAGE> 19
Under the Act, bank holding companies are required to file with the
FRB annual reports and such additional information regarding the business
operations of the holding company and its subsidiaries as the FRB may require.
The FRB may conduct examination of such holding companies and their
subsidiaries. The FRB also has authority to regulate provisions of certain
bank holding company debt. Under the Act and regulations adopted by the FRB, a
bank holding company and its subsidiaries are prohibited from requiring certain
tie-in arrangements in connection with any extension of credit, lease, or sale
of property or furnishing of services.
In connection with its regulation and supervision of bank holding
companies, the FRB has established capital maintenance guidelines, under which,
on a consolidated basis, a bank holding company must maintain a minimum ratio
of total capital (inclusive of loan loss reserves)-to-total assets of not less
than 6.0% and a ratio of primary capital to total assets of not less than 5.5%.
The FRB utilizes total capital "zones" whereby a banking organization with a
ratio of total capital to total assets of less than 6% will be considered
undercapitalized, absent extenuating circumstances. Institutions with a total
capital ratio of 6-7% may be considered to be adequately capitalized if other
financial and managerial factors are satisfactory. Institutions with a total
capital ratio in excess of 7% will generally be considered to be adequately
capitalized unless there are significant adverse financial and managerial
factors present. Regardless of the level of total capital, a banking
organization with a primary capital ratio of less than 5.5%% will generally be
considered undercapitalized. At December 31, 1996 the Company, on a
consolidated basis, had total and primary capital of approximately $39,637,000
and a primary capital-to-asset ratio of approximately 9.7%.
Under FRB capital adequacy guidelines, bank holding companies are also
required to maintain a minimum level of "qualifying capital" determined on the
basis of a holding company's total consolidated weighted risk assets. For
purposes of satisfying the FRB guidelines, "qualifying Capital" equals "core
capital" plus "supplementary capital" less certain required deductions. Core
capital consists of common stock, related surplus and retained earnings (net of
treasury stock), perpetual preferred stock in an aggregate amount of up to 25%
of total core capital including such stock, and minority interests in the
equity accounts of consolidated subsidiaries. Supplementary capital consist of
allowances for loan and lease losses in an amount of up to 1.25% of total
weighted risk assets, perpetual preferred stock, long-term preferred stock
with a maturity of twenty years or more and related surplus (to the extent not
included as core capital), certain "hybrid" capital instruments (i.e.,
instruments having characteristics of both debt and equity), mandatory
convertible debt, term subordinated debt and intermediate-term preferred stock
in an aggregate amount of up to 50% of core capital (net of goodwill), and
perpetual debt. The amounts to be deducted from capital to determine qualifying
capital consist of goodwill, which must be deducted from core capital, and
investments in certain subsidiaries and reciprocal holdings of capital
instruments (i.e., cross-holdings resulting from formal or informal
arrangements in which two or more banking organizations swap, exchange or other
wise agree to hold each other's capital instruments), 50% of which generally
must be deducted from core capital and 50% from supplementary capital.
Total weighted risk assets, for purposes of the FRB guidelines, is
determined by assigning to one of four risk categories the holding company's
consolidated assets and credit equivalent amounts of off-balance sheet items.
The dollar amount of the items in each category will then be multiplied by the
risk weight assigned to that category (i.e., 0%, 20%, 50% or 100%). The
resulting weighted values from each risk category will be added together and
the sum of such values will constitute the holding company's total weighted
risk assets. Total qualifying capital is divided by total weighted risk assets
to determine the holding company's risk-based capital ratio. The guidelines
require that all bank holding companies must have a minimum ratio of qualifying
capital to total weighted risk assets of 8% and a minimum ratio of core
capital-to-total weighted risk assets of 4%. At December 31, 1996, the
Company's risk-based capital ratio, determined in accordance with the FRB
regulations, was 12.4% which exceeds the minimum ratio required to comply with
those regulations.
The Company is an affiliate of the Bank and is subject to various
legal restrictions which limit the extent to which the Bank can supply funds to
the Company. Such restrictions also apply to any non-banking entities which
the Company might acquire or become affiliated with in the future. In
particular, the Bank is subject to certain restrictions imposed by federal law
on any extensions of credit to the Company, on investments in stock or other
securities thereof, on the taking of such securities as collateral for loans to
borrowers, and on the purchase of assets from the Company. Such restrictions
prevent the Company from borrowing from the Bank unless the loans are secured
by specified obligations and are limited in amount as to the Company to 10% of
the Bank's capital and surplus and as to the Company and all affiliates to an
aggregate of 20% of the Bank's capital and surplus.
19
<PAGE> 20
The Bank is subject to restrictions applicable to the payment of cash
dividends to the Company, which are the principal source of cash available for
the payment of dividends by the Company to its shareholders. Under California
law, the approval of the California Superintendent of Banks is required before
a state-chartered bank, such as the Bank, may declare a dividend which would
exceed the lesser of: (i)the Bank's retained earnings or (ii) its net income
for the immediately preceding three years (after deducting all dividends paid
during that period). At December 31, 1996, the maximum dividend payable by the
Bank to the Company under these restrictions would have been $9,784,301. See
"Item 5. - Dividends" below.
Under the Change in Bank Control Act, persons who intend to acquire
control of a bank holding company, acting directly or indirectly or through or
in concert with one or more person, generally must give 60 days' prior written
notice to the FRB. "Control" exists when the acquiring party has voting
control of at least 25 percent of the insured institution's voting power, or
the power directly or indirectly, to direct the management or policies of such
bank. Under FRB regulations, the power to direct the management or policies of
a an holding company is presumed to exist where the acquiring party has
ownership, control or the power to vote at least 10 percent of a class of
voting securities of the bank holding company, if (i) the bank holding company
has any class of voting securities which is registered under Section 12 of the
1934 Act, or (ii) immediately after the transaction no other person will own a
greater proportion of that class of voting securities. The statute authorizes
the FRB to disapprove the proposed transaction on certain specified grounds.
Regulations Applicable to the Bank
----------------------------------
The Bank is subject to regulation, supervision and regular examination
by the California State Banking Department and the FDIC. The regulations and
policies of these agencies affect most aspects of the Bank's business and
prescribe permissible types of loans and investments, the amount of required
reserves, the requirements for branch offices, the permissible scope of the
Bank's activities, and various other requirements. In addition, as part of
their regular examinations of the Bank, the California State Banking Department
and FDIC consider and make recommendations with respect to the adequacy of the
Bank's capital and the efficacy of lending, investment and other policies
established and implemented by the Bank. The Bank is also subject to certain
reporting requirements of the State Banking Department and the FDIC. Although
the Bank is not a member of the Federal Reserve System, it is nevertheless also
subject to certain regulations of the Federal Reserve Board.
The FDIC has adopted regulations and a statement of policy which define
and establish certain minimum requirements for capital adequacy. Under the
regulations, insured state non-member banks are required to maintain a ratio
(known as the "leverage capital ratio") of "Tier 1" or "core" capital-to-average
total assets of 3% in the case of banks that are financially strong and are not
experiencing significant asset growth; and between 4% and 5% in the case of most
other banks. However, the FDIC has the authority to impose higher leverage
ratio requirements where warranted by the risk profile of the bank, as
determined by the FDIC. As defined in the regulations, "Tier 1" capital
consists of common shareholders' equity, less intangible assets and assets
classified loss; and "average total assets" consist of total assets, less
intangible assets and assets classified loss. At December 31, 1996 the Bank's
Tier 1 leverage ratio had increased to 8.5% from 7.7% at December 31, 1995.
Banks with capital ratios below the minimum do not have adequate
capital, and will be subject to appropriate administrative actions, including
the issuance by the FDIC of a capital directive requiring that the bank restore
its capital to minimum required level within a specified period of time and
denial of applications for mergers, new branches, etc. Any insured bank
operating with a leverage capital ratio of less than 3% will be deemed to be
operating in an unsafe and unsound condition, and will be subject to
appropriate administrative actions.
In addition, under FDIC regulations, FDIC-insured banks are required
to maintain a so-called "risk-based" capital ratio that is determined on the
basis of a bank's weighted risk asset base. The weighted risk asset base is
determined on the basis of a bank's assets and certain off-balance sheet items
to one of five separate risk categories, after which the aggregate dollar value
of the items in each category is multiplied by a risk factor assigned to each
specific asset category. After the items in each category have been totaled
and multiplied by the category's risk factor, the total of the adjusted capital
base is divided by the weighted risk assets to derive the bank's risk-based
asset ratio. FDIC-insured banks are required to maintain a ratio of total
capital to total risk-weighted assets of 8.0%. At December 31, 1996 the
Bank's risk-based capital ratio, determined on the basis of the FDIC rules, was
approximately 12.3%.
20
<PAGE> 21
As an insured bank, the Bank also is subject to certain FDIC
requirements designed to maintain the safety and soundness of individual banks
and the banking system. The FDIC periodically conducts examinations of insured
banks and, based upon its findings, may revalue assets of an insured bank and
require establishment of specific reserves in amounts equal to the difference
between such revaluation and the book value of the assets. During the past few
years, there has been a pronounced increase in regulatory oversight activity by
the FDIC and the California State Banking Department in response to recessionary
conditions and a resulting increase in non-performing loans at many banking
institutions in California. As part of that oversight activity, both of these
agencies have increased the standards by which they evaluate the quality and
collectability of loans and, through a number of regulatory devices, have
required banks in California to devote greater resources on efforts to reduce
the level of non-performing loans and to increase loan loss reserves against the
possibility that economic conditions in California will not improve and loan
defaults by borrowers will increase.
In response to FDIC examinations of the Bank in 1992, 1993, 1995 and
1996, the Bank increased loan loss revenues and implemented more stringent
credit and loan collection policies. Despite the increases in reserves, which
are made by means of charges against income, during the three years ended
December 31, 1996, the Bank was able to maintain Tier 1 leverage ratios of
8.53% as of December 31, 1996 and 7.77% as of December 31, 1995 and 7.20% as of
December 31, 1994.
Effects of Governmental Policies and Recent Legislation
- -------------------------------------------------------
Government Monetary Policies. A principal determinant of a bank's
earnings is the difference between the income it receives on its loans and
investment securities and the cost of its funds, primarily interest paid on
savings and time deposits and other liabilities. The interest rates charged on
loans are effected by, and are highly sensitive to, the demand and the supply
of money for loans, which are, in turn, directly affected by general economic
conditions, the general supply of money in the economy, and the policies of
various governmental and regulatory agencies.
The earnings and business of the Company are and will be affected by
the policies of various regulatory authorities of the Unite States, including
the Federal Reserve Board. Important functions of the Federal Reserve Board,
in addition to those enumerated under "Supervision and Regulation" above, are
to regulate the supply of credit and to deal with general economic conditions
within the United States. The monetary policies adopted by the Federal Reserve
Board for these purposes influence in various ways the overall level of
investments, loans, other extensions of credit and deposits, and the interest
rates paid on liabilities and received on earning assets.
The Federal Reserve Board has broad powers to, and does, regulate
money, credit conditions, and interest rates in order to influence general
economic conditions. For example, in times of inflation it has exercised such
powers to increase the cost of money which affects (i) the interest rates which
the Bank can charge on loans and the interest and yields it can obtain on its
investment securities, (ii) the interest which the Bank must pay on deposits
and other liabilities, and (iii) the yields on money market investments which
compete with the Bank for the funds of the Bank's depositors. These policies,
as well as the specific policies of other governmental agencies, have a
significant effect upon the overall growth, distribution and yields of the
Bank's loans and investments and the interest rates it must pay for time
deposits, as well as the extent to which such rates will be attractive to the
Bank's customers. At times, such regulations result in the cost of money to
the Bank, as well as other banks, increasing at a rate greater than the
increase in the rate at which the Bank is able to lend, resulting in a
reduction of gross profit margins. At other times, such regulations can result
in increases in the spread between the cost of money to the Bank and the price
at which the Bank lends, thus potentially increasing its gross profit margins.
During three years ended December 31, 1993, the Federal Reserve Board
followed a policy of reducing interest rates to promote borrowing and
investments in response to recessionary conditions in the economy. Although
this policy led to reductions in yields on loans and investments which the Bank
made during that period, it also had the effect of significantly reducing
interest rates on deposits, which reduced the cost of funds to the Bank and
contributed to the increase in net interest income in 1993. In 1994, the
Federal Reserve Board began increasing interest rates because of concerns about
potential increases in inflation due to improvements in the general economy.
Those increases in interest rates occurred at various times during 1994 and
contributed to increases in the Bank's interest expense in 1994 and 1995. It
is not possible to predict with any certainty, however, the impact of the
Federal Reserve Board's actions upon the future business and earnings of the
Company.
21
<PAGE> 22
Recent Legislation. In 1992, the FDIC adopted and began implementing
regulations under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), which will impose potentially far-reaching and extensive
government regulation over and restriction on the operations of most
federally-insured banks. FDICIA established five criteria or levels of capital
adequacy by which the financial condition of banks is measured, ranging from
"well capitalized" to "critically undercapitalized," and imposes increased
operating restrictions and greater regulatory control over a bank as its level
of capital declines. A bank is deemed to be "well capitalized" if it has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, a leverage ratio of at least 5%, and is not subject to
any written agreement or prompt corrective action directive issued by the FDIC
to meet and maintain a specific capital level for any capital measure. A bank
is "adequately capitalized" if it has a total risk-based capital ratio of at
least 8%, a Tier 1 risk-based capital ratio of at least 4%, and either a
leverage ratio of at least 4% or a leverage ratio of at least 3% if the bank is
rated composite 1 under the CAMEL rating system in the most recent examination
and is not experiencing or anticipating significant growth.
FDICIA also authorizes the FDIC to take supervisory actions against a
bank based on a determination, after notice an opportunity for hearing, that a
bank is in an unsafe and unsound condition or is engaging in an unsafe or
unsound practice. In such circumstances, the FDIC may reclassify a well
capitalized bank as adequately capitalized, or require and adequately
capitalized bank to comply with one or more requirements applicable to
undercapitalized banks, such as submitting a plan or restoration of adequate
capital, limiting asset growth or being prohibited from making an acquisition
or engaging in a new line of business.
FDICIA also requires that all insured institutions with total assets
greater than $150 million prepare and submit to the FDIC annual financial
statements audited by an independent public accounting firm. The annual report
must include a statement by management concerning the establishment and
maintenance, within the institution, of internal control mechanisms to ensure
compliance with applicable laws and regulations. In addition, FDICIA requires
that the appropriate Federal or State banking authority conduct an annual
on-site examination of each insured institution, the cost of which is to be
borne by the institution. Civil penalties may be assessed under FDICIA against
an institution and its officers and directors for a failure to provide
information or otherwise cooperate with the examination.
FDICIA also requires that FDIC-insured state-chartered banks, like the
Bank, comply with certain restrictions on investment activities that are
applicable to national banks pursuant to regulations adopted by the U.S.
Comptroller of the Currency. Those restrictions are not expected to materially
affect the Bank's operations.
Based upon the Bank's capital ratios and its overall financial
condition, the Bank is not subject to any significant operating restrictions
under FDICIA. However, FDICIA also requires bank regulatory agencies to adopt
regulations establishing nationwide lending standards and auditing procedures
which will be applicable to all federally insured banks, including the Bank,
the potential effects of which cannot yet be determined.
Other legislation and government regulations have been proposed which
could also affect the business activities of the Bank and it is likely that
additional legislation affecting such business will be introduced in Congress
or in state legislatures in the future. The proposed legislation includes
wide-ranging proposals to alter the structure, regulation and competitive
relationships of the nation's financial institutions, such as proposals to
alter the present statutory separation of commercial and investment banking; to
permit bank holding companies and banks to engage in certain securities
underwriting and distribution activities and certain real estate investment
activities; to permit bank holding companies to own or control thrift
institutions; to subject banks to increased disclosure and reporting
requirements; and to generally expand the range of financial services which can
be provided by bank holding companies as well as by other financial
institutions. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the present of future business
of the Bank may be affected thereby.
Employees
- ---------
At December 31, 1996, the Bank had approximately 218 full-time and 48
part-time employees.
22
<PAGE> 23
Executive Officers of the Company
Set forth below is certain information regarding the executive
officers of the Company and the Bank:
<TABLE>
<CAPTION>
Name Age Position with the Company Position with the Bank
- -------------------- --- ------------------------- ----------------------
<S> <C> <C> <C>
George E. Langley 55 President and Chief President and Chief
Executive Officer Executive Officer
Tom Kramer 53 Executive Vice President Executive Vice President,
and Secretary Chief Credit Officer and
Secretary
Donna Miltenberger 41 N/A Executive Vice President
and Chief Administrative
Officer
Carol Ann Graf 51 Senior Vice President, Senior Vice President, Chief
Chief Financial Officer Financial Officer and
and Assistant Secretary Assistant Secretary
</TABLE>
All officers hold office at the pleasure of the Board of Directors,
except that Mr. Langley is employed under an Employment Agreement with the
Bank.
George E. Langley. Mr. Langley has been the President and Chief
Executive Officer of the Company and the Bank since April 1992. From 1982 to
April 1992, Mr. Langley served as the Executive Vice President, Chief Financial
Officer and Secretary of the Company and the Bank. From 1976 to 1982 Mr.
Langley held various executive positions with the Bank.
Tom Kramer. Mr. Kramer was appointed Executive Vice President - Chief
Credit Officer of the Bank in April 1994, as well as, Secretary of the Company
and Bank in April 1992 and has been an Executive Vice President of the Company
since its organization in December 1982. From 1979 to 1982, Mr. Kramer held
various executive positions with the Bank, including Senior Vice President -
Loan Administrator and Assistant Secretary.
Donna Miltenberger. Ms. Miltenberger has been an Executive Vice
President of the Bank since November 1993 and named Executive Vice President -
Chief Administrative Officer in 1994. Due to an increase in the scope of her
responsibilities, she was appointed to the position of Chief Administrative
Officer of the Bank and was designated as an executive officer by the Company's
Board of Directors in 1994. From June 1992 to November 1993, Ms. Miltenberger
held the position of Senior Vice President of the Bank. Prior to June 1992,
Ms. Miltenberger held various management positions with Chino Valley Bank, in
Chino, California, including Executive Vice President - Cashier.
Carol Ann Graf. Ms. Graf was appointed Chief Financial Officer of the
Company and First Vice President and Chief Financial Officer of the Bank in
January 1993 and Senior Vice President and Chief Financial Officer of the Bank
in January 1997. From April 1988 to January 1993, Ms. Graf served as Vice
President and Comptroller, and from 1984 to April 1988 as Assistant
Comptroller, of the Bank.
ITEM 2. PROPERTIES
The Company's executive offices are located at the Bank's main banking
office at 510 South Grand Avenue, Glendora, California. The Bank owns the
building and the land on which its main banking office is located; owns the
building and leases, under a 20-year ground lease, the land on which its
Claremont banking office is located; and occupies its nine other banking
offices, and the facilities where its loan center and service center are
located, under expiring at various dates through 2027. Management believes
that the Bank's present facilities are adequate for its present purposes and
anticipated growth in the foreseeable future.
23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company or the
Bank is a party or to which any of their respective properties are subject
other than ordinary routine litigation incident to the Bank's business, the
outcome of which is not expected to be material to the Company or its
operations or properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market
System under the symbol FOOT. The following table sets forth the high and low
closing sales prices per share of the Company's Common Stock as reported on the
NASDAQ National Market System for all four quarters of 1996 and 1995. On March
14, 1997 the closing per share price was $13.50 and, as of that same date,
there were 1,114 record shareholders of the Company.
<TABLE>
<CAPTION>
Trade Prices of Stock
Common Stock(1) Dividends Declared
--------------- ------------------
High Low
1996(1) ------- -----
- -------
<S> <C> <C> <C>
First Quarter $ 9.75 $7.88 -
Second Quarter 8.25 8.25 10%
Third Quarter 8.75 7.75 -
Fourth Quarter 11.75 8.00 -
1995
- ----
First Quarter $ 8.75 $7.75 10%
Second Quarter 8.50 7.38 -
Third Quarter 9.00 7.75 -
Fourth Quarter 9.00 7.75 -
</TABLE>
- ----------------
(1) Stock prices for the quarterly periods preceding the 10% stock dividends
to shareholders of record April 10, 1995 which was paid on May 1, 1995
and March 22, 1996 which was paid on April 5, 1996, have not been
adjusted to reflect those dividends.
24
<PAGE> 25
Dividends
- ---------
Dividend Policy. It had been the Company's policy to pay cash
dividends out of internally generated funds that are not required to meet
capital and cash requirements or to support growth of the Company's business.
Pursuant to that policy, the Company paid cash dividends of $.25 per share in
1984; $.25 per share in 1987; $.37 per share in 1988; $.16 per share in both
1989 and 1990; $.47 per share in 1991; and $.40 per share in each of 1992,
1993, and 1994.
In order to take advantage of opportunities to achieve further growth
and in order to support that growth through increases in capital, in March 1995
the Board of Directors determined, in accordance with its dividend policy, that
the Company should retain its earnings. Accordingly, no cash dividends were
paid in 1995 or 1996. The Board of Directors has determined to continue to
retain earnings to support growth in 1997 and, therefore, it is not expected
that cash dividends will be paid in 1997.
Restrictions Applicable to the Payment of Dividends. The principal
source of funds available to the Company for cash dividends, at least until
such time, if any, as it may acquire or develop other businesses, is cash
dividends from the Bank. Therefore, government regulations, including the laws
of the State of California, as they pertain to cash dividends by state
chartered banks, will limit the ability of the Company to pay cash dividends
for the foreseeable future. California law places a statutory restriction on
the amounts of cash dividends a bank may pay to its shareholders. Under that
law, dividends declared by the Bank may not exceed, in any calendar year,
without approval of the California Superintendent of Banks, the lessor of (i)
net income of the Bank for the year and retained net income from the preceding
two years (after deducting all dividends paid during the period), or (ii) the
Bank's retained earnings. However, because the payment of cash dividends has
the effect of reducing capital, as a practical matter capital requirements
imposed on federally insured banks operate to preclude the payment of cash
dividends in amounts that might otherwise be permitted by California law; and
the FDIC, as part of its supervisory powers, generally requires insured banks
to adopt dividend policies which limit the payment of cash dividends much more
strictly than do applicable laws.
In addition, Section 23(a) of the Federal Reserve Act restricts any
banking subsidiary of the Company from extending credit to the Company unless
the loans are secured by specified obligations and are limited in amount to no
more than 10% of the banking subsidiary's contributed capital and retained
earnings.
25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal
years ended December 31, 1996, 1995, and 1994, and the selected balance sheet
data as of December 31, 1996 and 1995, are derived from the audited
consolidated financial statements of the Company examined by Vavrinek, Trine,
Day and Company, certified public accountants, and included elsewhere in this
Report and should be read in conjunction with those consolidated financial
statements. The selected income statement data for the fiscal year ended
December 31, 1993 and 1992, and the selected balance sheet data as of December
31, 1994, 1993 and 1992, are derived from audited consolidated financial
statements examined by Vavrinek, Trine, Day and Company which are not included
in this Report.
<TABLE>
<CAPTION>
Dollars in Thousands, Except Per Share Data
--------------------------------------------------------------
STATEMENT OF INCOME DATA 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest Income $ 35,147 $ 33,403 $ 27,690 $ 21,732 $ 23,482
Interest Expense 9,869 9,786 6,206 5,382 7,316
Net Interest Income 25,278 23,617 21,484 16,350 16,166
Provision for Possible Loan Losses (2,200) (2,016) (2,364) (1,025) (1,555)
Net Interest Income after Provision
for Possible Loan Losses 23,078 21,601 19,120 15,325 14,611
Other Income 5,264 4,687 5,052 5,962 4,294
Other (Expense) (21,700) (20,625) (18,613) (16,925) (14,600)
Income Before Income Taxes 6,642 5,663 5,559 4,362 4,305
Applicable Income Taxes 2,459 2,100 2,105 1,335 1,152
Net Income Before Cumulative
Effect of Change in Accounting
for Income Taxes 4,183 3,563 3,454 3,027 3,153
Cumulative Effect of Change in
Accounting for Income Taxes - - - 126 -
Net Income 4,183 3,563 3,454 3,153 3,153
Cash Dividends(1) - - 1,417 1,310 1,235
BALANCE SHEET DATA
Investment Securities 45,052 42,234 30,977 43,953 28,554
Loans and Leases (net) 289,886 257,510 245,871 191,908 186,033
Assets 410,505 395,180 331,262 280,494 266,878
Deposits 370,966 361,114 301,222 253,298 242,667
Long Term Debt(2) 168 208 245 466 558
Shareholders' Equity 36,222 31,042 26,871 24,959 21,779
PER COMMON SHARE DATA
Income Before Cumulative Effect 0.95 0.82 0.81 0.75 0.81
Cumulative Effect - - - 0.03 -
Net Income(3) 0.95 0.82 0.81 0.78 0.81
Cash Dividends - - 0.40 0.40 0.40
Book Value (At year-end) 8.01 7.85 7.57 7.07 6.96
Number of Shares used in
Per Share Calculation(3) 4,402,806 4,326,095 4,282,910 4,039,788 3,894,489
</TABLE>
- --------------
(1) For information regarding restrictions affecting the ability of the
Company to pay cash dividends, see Note 13 to the Company's
Consolidated Financial Statements.
(2) For information regarding long term debt, see Note 9 to the Company's
Consolidated Financial Statements.
(3) Retroactively adjusted for stock dividends and stock splits.
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's principal operating subsidiary is Foothill Independent
Bank, a California state chartered bank (the "Bank"), which accounts for
substantially all of the Company's revenues and income. Accordingly, the
following discussion focuses primarily on the operations and financial condition
of the Bank.
NET INTEREST INCOME. Net interest income is a principal determinant of
a bank's income. Net interest income represents the difference or "spread"
between the interest earned on interest-earning assets, such as loans and
investment securities, and the interest paid on interest-bearing liabilities,
principally deposits. Net interest income increased by approximately $1,662,000
or 7.0% in 1996 compared to 1995, due primarily to (i) an increase in interest
income that resulted from an 11% increase in the average volume of loans
outstanding during 1996, and (ii) a decline in interest paid on time deposits,
including time certificates of deposits ("TCD's") in denominations of more than
$100,000 and other time deposits, due to decreases in the volume of and in the
rates paid on those deposits during 1996 as compared to 1995. In 1995, net
interest income increased by approximately $2,132,000 or 9.9% due primarily to
increases in market rates of interest in the first half of 1995 and increases in
the volume of investment securities and other interest-earning assets which more
than offset a reduction in loan fees that was caused by a slowing in the rate of
loan growth in 1995.
RATE SENSITIVITY AND EFFECT ON NET INTEREST INCOME. A bank's net
interest income is affected by a number of factors including the relative
percentages or the "mix" of (i) variable and fixed rate loans in its loan
portfolio and (ii) demand and savings deposits, on the one hand, and time
deposits, including TCD's, on the other hand. As a general rule, a bank with a
relatively high percentage of fixed-rate loans will experience a decline in
interest income during a period of increasing market rates of interest, because
it will be unable to "reprice" its fixed rate loans to offset fully the increase
in the rates of interest it must offer to retain maturing time deposits and
attract new deposits. Similarly, a bank with a high percentage of time deposits
and TCD's generally will experience greater increases in interest expense, and
therefore, a decrease in net interest income, during a period of increasing
market rates of interest than a bank with a greater percentage of demand and
savings deposits which are less sensitive to changes in market rates of
interest. By contrast, during a period of declining market rates of interest, a
bank with a higher percentage of variable loans, as a general rule, will
experience a decline in net interest income because such loans usually contain
automatic repricing provisions that are "triggered" by declines in market rates
of interest; whereas offsetting reductions in the rates of interest paid on
TCD's cannot be implemented until they mature, at which time a bank can seek
their renewal at lower rates of interest or allow such deposits to terminate or
"run-off" in order to reduce interest expense.
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its net interest
margin or spread by seeking (i) to attract and maintain a significant volume of
demand and savings deposits that are not as sensitive to interest rate
fluctuations as are TCD's, and (ii) to match opportunities to "reprice" earning
assets, particularly loans, in response to changes in market rates of interest
which require or cause repricing of deposits. Beginning in the second half of
1996, the Bank's management elected to allow maturing TCD's to "run-off" and
commenced marketing programs designed to attract additional demand and savings
deposits. As a result of these efforts, during 1996, the average volume of
demand and savings (including money market) deposits increased by $33,517,000 or
15.9% and, at December 31, 1996, such deposits represented 68% of the Bank's
total deposits as compared to 62% at December 31, 1995. At the same time, the
average volume of TCD's in denominations of $100,000 or more, on which the Bank
pays interest at its highest rates, declined by $3,653,000 or 2.2%. The change
in the mix of deposits, together with the increase in interest and fees earned
on loans in 1996, as compared to 1995, contributed to an improvement in the
Bank's net interest margin (i.e., net interest income stated as a percentage of
interest
27
<PAGE> 28
income) in 1996 which increased to 71.9% from 70.7% in 1995, during which the
Bank's net interest margin declined from 77.6% in 1994.
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates the Bank is able to
charge on loans and the interest rates it must offer to maintain and attract
deposits are affected by (i) national monetary policies established and
implemented by the Federal Reserve Board and (ii) competitive conditions in the
Bank's service areas. In addition, the effect on a bank's net interest margins
of changes in market rates of interest will depend on the types and maturities
of its deposits and earning assets. For example, a change in interest rates
paid on deposits in response to changes in market rates of interest can be
implemented more quickly in the case of savings deposits and money market
accounts than with respect to time deposits as to which a change in interest
rates generally cannot be implemented until such deposits mature. In addition,
a change in rates of interest paid on deposits can and often does lead
consumers to move their deposits from one type of deposit to another or to shift
funds from deposits to non-bank investments or from such investments to bank
deposit accounts or instruments, which also will affect a bank's net interest
margin.
The Bank currently anticipates improvement in its net interest margin
for 1997, as compared to 1996, due to a number of factors, including (i) a
stabilizing in market rates of interest, (ii) the anticipated run-off of some of
the Bank's higher interest-bearing TCD's in denominations of $100,000 or more
due to a decision by management not to seek renewal of those deposits, which is
expected to reduce interest expense, and (iii) somewhat greater loan growth
which is expected to result from the more stable interest rates, a gradually
improving economy in Southern California and an increase in the number of
customers as a result of the growth of new banking offices that were opened in
1996 and marketing programs directed at customers of recently consolidated
state-wide and regional banks with offices in the Bank's service areas who
desire more personalized service than their existing banks provide them.
However, there are a number of uncertainties and risks that could adversely
affect the Bank's net interest margin in 1997, including the possibility of
adverse changes in economic conditions in Southern California, increases in
market rates of interest and the possibility of increased competition in the
Bank's market areas, both from other banks and from financial institutions and
from securities brokerage firms that offer competing loan and investment
products.
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------
INTEREST INCOME. The increase in interest income of approximately
$1,745,000 or 5.2% in 1996 compared to 1995 was due primarily to an increase of
$2,067,000 or 7.16% in interest and fees earned on loans that was attributable
to an 11% increase in the average volume of the Bank's outstanding loans. The
increase in interest and fee income attributable to increased loan volume more
than offset the effects on interest income of (i) somewhat lower interest rates
during 1996 than in 1995 and (ii) a decrease in the average volume of federal
funds sold, which were reduced to fund new loans and a planned reduction or
"run-off" of TCD's.
INTEREST EXPENSE. Interest expense increased by less than 1% in 1996,
as reductions in the average volume of TCD's and slightly lower interest rates
largely offset an increase in interest expense attributable to increases in the
volume of savings and money market deposits.
PROVISION FOR LOAN AND LEASE LOSSES. The Bank follows the practice of
maintaining a reserve for possible losses on loans and leases that occur from
time to time as an incidental part of the banking business. Write-offs of loans
(essentially reductions in the carrying values of non-performing loans due to
possible losses on their ultimate recovery) are charged against this reserve
(the "Loan Loss Reserve"), which is adjusted periodically to reflect changes in
the volume of outstanding loans and in the risk of potential losses due to a
deterioration in the condition of borrowers or in the value of property securing
non-performing loans or changes in general
28
<PAGE> 29
economic conditions. Additions to the Loan Loss Reserve are made through a
charge against income referred to as the "provision for loan and lease losses."
During 1996 this provision was $2,200,000 compared to $2,016,000 for 1995 and
the Loan Loss Reserve at December 31, 1996 was approximately $4,744,000 or 1.6%
of total loans and leases outstanding, compared to approximately $3,644,000 or
1.4% of total loans and leases outstanding at December 31, 1995. The increase
in the provision made in 1996, as compared to the provision made in 1995, was
due to the increase, during 1996, in the volume of loans outstanding and a
decision to increase the ratio of reserve for loan losses-to-total loans to a
more conservative level, consistent with the practices of other
California-based banks of comparable size ("peer group banks") and the
recommendations of bank regulatory agencies, despite the fact that,
historically, the Bank's ratio of loan charge offs-to-average loans and leases
outstanding has been lower than that recorded by California-based peer group
banks. Net loan charge-offs for 1996 aggregated $1,100,000, representing
thirty-nine hundredths of one percent (0.39%) of average loans and leases, as
compared to net loan charge-offs in 1995 of $1,517,000, which represented
sixty-one hundredths of one percent (0.61%) of average loans and leases
outstanding.
The Bank's non-performing loans, which consist primarily of loans for
which there have been no payments of principal or interest for more than 90
days, totaled approximately $11,622,000 or 3.9% of total loans at December 31,
1996, as compared to $12,620,000 or 4.8% of total loans at December 31, 1995 and
$8,621,000 or 3.5% of total loans at December 31, 1994. The ratio of the Bank's
Loan Loss Reserve to non-performing loans was 40.8% at December 31, 1996, as
compared to 28.9% and 36.5% at December 31, 1995 and 1994, respectively.
OTHER INCOME. Other income increased by $576,000 or 12.3% in 1996
compared to 1995, primarily as a result of increases in transaction fees and
service charges that were attributable to increases in the volume of total
deposits and other banking transactions.
OTHER EXPENSE. Non-interest expense, consists primarily of (i)
salaries and other employee expenses, (ii) occupancy and furniture and equipment
expenses, and (iii) other operating and miscellaneous expenses that include
insurance premiums, marketing expenses, data processing costs and charges that
are periodically made against income to establish reserves for possible losses
on the disposition of real properties acquired on or in lieu of foreclosure of
defaulted loans (commonly referred to as "other real estate owned" or "OREO").
Non-interest expense increased by approximately $1,075,000 or 5.2% in 1996
compared to 1995. Contributing to that increase were personnel expenses
attributable to staffing requirements for the two new banking offices opened by
the Bank, respectively, in Corona, California in the third quarter of 1995 and
in Chino Hills, California in the first quarter of 1996. This increase was
partially offset by a reduction of $387,000 in the provision for possible losses
on other real estate owned that was made possible by the disposition of certain
of the OREO properties and a determination by the Bank's management that, after
giving effect to those dispositions and the risk exposures related to the
remaining OREO properties, the reserves for possible OREO losses were adequate.
Despite the increase in the total dollar amount of non-interest expense, as a
percentage of operating income (net interest income plus other income) Other
Expense declined from 72.9% in 1995 to 71.0% in 1996.
INCOME TAXES. Income taxes increased by approximately $359,000 or
17.1% during 1996 compared to 1995, primarily as a result of the increase in
pre-tax income achieved in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------
INTEREST INCOME. The increase in interest income of approximately
$5,712,000 or 20.6% in 1995 compared to 1994 was due to an increase of
$3,524,000 or 13.9% in interest and fees earned on loans which was attributable
to increases in the volume of the Bank's outstanding loans. Additionally,
increases in the volume of the Bank's
29
<PAGE> 30
other interest-earning assets, such as federal funds sold and investment
securities, generated an increase in interest income of $2,206,000 or 103.8%
for 1995 compared to 1994.
INTEREST EXPENSE. Interest expense increased by approximately
$3,580,000 or 57.7% in 1995 compared to 1994, primarily as a result of increases
in the average volume of time deposits which generally bear interest at higher
rates than savings deposits, and, to a lesser extent, somewhat higher interest
rates paid on deposits as a result of increases in market rates of interest.
PROVISION FOR LOAN AND LEASE LOSSES. The provision for loan and lease
losses made in 1995 was $2,016,000 compared to $2,363,000 for 1994. Net loan
charge-offs for 1995 aggregated $1,517,000, representing sixty-one hundredths of
one percent (0.61%) of average loans and leases, as compared to net loan
charge-offs in 1994 of $1,546,000, which represented sixty-nine hundredths of
one percent (0.69%) of average loans and leases outstanding.
OTHER INCOME. Other income decreased by $364,000 or 7.2% in 1995
compared to 1994. This decrease was primarily due to decreases in the volume of
and, consequently, in the fees generated from, sales of Small Business
Administration ("SBA") loans.
OTHER EXPENSE. The Bank's non-interest expense increased by
approximately $2,012,000 or 10.8% during 1995. This increase included a
$974,000 increase in salaries and employee benefits and a $456,000 increase in
occupancy expenses which increases were primarily attributable to internal
growth in the Bank's assets and operations. Also contributing to the increase
in other operating expenses in 1995 was an increase of $108,000 in the
provisions made for possible losses on other real estate owned.
INCOME TAXES. Income taxes decreased by approximately $6,000 or .3%
during 1995 compared to 1994, primarily as a result of the increase in the
volume of tax-exempt investments securities held by the Bank.
FINANCIAL CONDITION
The Company's total assets at December 31, 1996 were approximately
$15,324,000 or 3.9% higher than at December 31, 1995. Average total assets for
1996 increased by approximately $32,356,000 to $400,908,000 from $368,552,000
for 1995. These increases were primarily the result of new loan volume, which
was partially offset by reductions in other interest-earning assets, principally
cash and balances due from other banks and Federal funds sold, to fund the
higher yielding loans and planned reductions in time deposits, including TCD's.
The average volume of loans and leases (less reserves) outstanding
during 1996 increased by approximately $29,920,000 or 12.3% compared 1995. The
average amount of investment securities held by the Bank during 1996 increased
by approximately $7,697,000 or 20% compared to 1995 figures. The average volume
of interest bearing deposits held at other financial institutions increased by
189% to $7,391,000 in 1996 from $2,789,000 in 1995. These increases were offset
by a 41% reduction in the average volume of Federal Funds sold in 1996 to
$20,033,000 from $33,762,000 in 1995.
Beginning in the first quarter of 1996, the Bank initiated new
marketing programs designed to increase the volume of demand, savings and money
market deposits, which are either non-interest bearing or bear interest at rates
which are substantially lower than those paid on time deposits. At the same
time, management began reducing the interest rates it offered on TCD's and other
time deposits to discourage renewals of existing and purchases of new time
deposits by customers and, thereby, reduce the volume of those deposits at the
Bank. As a result, at December 31, 1996, the volume of demand deposits and
savings deposits at the Bank was
30
<PAGE> 31
$24,716,000 higher than at December 31, 1995 and non-interest bearing demand
deposits, as a percentage of total deposits, had increased to 29.3% from 26.7%
at December 31, 1995. By contrast the volume of time deposits, including TCD's
of $100,000 or more, outstanding at December 31, 1996 was $19,292,000 or 14%
lower than at December 31, 1995.
The Company currently anticipates that there will be modest growth in
the Bank's total assets in 1997, which is expected to result from increased
lending and deposit activity at the Bank's newer banking offices in Glendale,
Corona and Chino Hills and new programs designed to attract customers from
recently merged state-wide and regional banks with offices located in the Bank's
service areas.
LIQUIDITY MANAGEMENT. Liquidity management policies attempt to achieve
a matching of sources and uses of funds in order to enable the Bank to fund its
customers' requirements for loans and deposit withdrawals. In conformity with
those policies, the Bank maintains short-term sources of funds to meet periodic
increases in loan demand and deposit withdrawals and maturities. At December
31, 1996, the principal source of liquidity consisted of $33,673,000 in cash and
demand balances due from banks and $14,900,000 of Federal funds sold which,
together, totaled $48,573,000, as compared to $68,028,000 at December 31, 1995.
This reduction was primarily attributable to the use of a portion of these
assets primarily to fund increases in loan volume in 1996 and withdrawls of
TCD's which management permitted to run-off rather than to renew. Other sources
of liquidity include $39,477,000 in securities available for sale, of which
approximately $25,877,000 mature within one year and $3,900,000 in
interest-bearing deposits at other financial institutions, which mature in 6
months or less. The Bank also has established facilities to borrow Federal
Funds from other banks which total $10,100,000 and has an unused line of credit
with the Federal Home Loan Bank in the amount of $8,415,000. Furthermore,
substantially all of the Bank's installment loans and leases, the amount of
which aggregated $11,021,000 at December 31, 1996, require regular installment
payments, providing a steady flow of cash funds to the Bank. Accordingly, the
Company believes that the Bank has adequate cash and cash equivalent resources
to meet any increases in demand for loans and leases and any increase in
deposit withdrawals that might occur in the foreseeable future.
CAPITAL RESOURCES. During 1995, the Board of Directors made the
decision to discontinue the payment of cash dividends in order to retain
internally generated funds to support the growth of the Bank. In addition to
the two new offices opened during 1995, the Bank opened its eleventh office, in
Chino Hills, California on March 25, 1996. During the first quarter of 1996,
the Company declared its second 10% stock dividend in two years, which was
distributed on April 5, 1996 and for accounting purposes was recorded as a
$3,571,000 reduction in retained earnings, offset by a corresponding $3,571,000
increase in the Company's contributed capital.
As a result of the increased earnings in 1996 and the retention of
internally generated funds, the Company's total shareholders' equity increased
by approximately $5,180,000 or 16.7% to $36,222,000 at December 31, 1996 from
$31,042,000 at December 31, 1995. Net earnings in 1996 represent a return on
beginning assets (that is, total assets as of January 1, 1996) of 1.06% and a
return on beginning equity (total shareholders' equity as of January 1, 1996) of
13.48%.
At December 31, 1996, the Bank's Tier 1 capital ratio was 8.5% compared
to 7.7% at December 31, 1995, and as of those same respective dates, the Bank's
Tier 1 risk-based capital ratios were 12.3% and 11.3%. The risk-based capital
ratio is determined by weighting the bank's assets in accordance with certain
risk factors and, the higher the risk profile of a bank's assets, the greater is
the amount of capital that is required to maintain an adequate risk-based
capital ratio, which generally is at least 8%. The Bank's Tier 1 capital and
Tier 1 risk-based capital ratios compare favorably with other peer group banks.
31
<PAGE> 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking information which reflects Management's
current views of future financial performance. The forward-looking information
is subject to certain risks and uncertainties, including but not limited to,
the effects on future performance of increased competition from other financial
institutions and firms that offer competitive loan and investment products;
local economic conditions that affect loan demand, the ability of borrowers to
meet their loan obligations to the Bank and the ability of the Bank to prevent
potential losses on non-performing loans by means of sales of collateral
securing such loans; national economic conditions and the monetary policies of
the FRB that affect the cost of funds to the Bank and the yields it can realize
on its earning assets; and the regulatory policies of the federal and state
bank regulatory agencies that regulate the Bank. Due to such uncertainties and
risks, readers are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date of this Annual
Report.
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Foothill Independent Bancorp and Subsidiaries:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Balance Sheets at December 31, 1996 and 1995. . . . . . . 35
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 40
</TABLE>
33
<PAGE> 34
[VAVRINEK, TRINE, DAY & CO. LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Foothill Independent Bancorp and Subsidiaries
Glendora, California
We have audited the accompanying consolidated balance sheets of Foothill
Independent Bancorp and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income and changes in stockholders' equity
and statements of cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foothill
Independent Bancorp and Subsidiaries as of December 31, 1996 and 1995, and the
results of its operations and cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
-------------------------------
Vavrinek, Trine, Day & Co., LLP
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
January 23, 1997
34
<PAGE> 35
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks (minimum Federal Reserve
balance at December 31, 1996, was $8,423,000) $ 33,673 $ 26,278
Federal funds sold 14,900 41,750
-------- --------
Cash and Cash Equivalents 48,573 68,028
-------- --------
Interest-bearing deposits in other financial institutions 3,957 6,433
Investment securities held-to-maturity (Notes #1C and #2) 5,575 23,491
Investment securities available-for-sale (Notes #1C and #2) 39,477 18,743
Loans, net of unearned income (Notes #1D, #3 and #6) 291,766 259,068
Direct lease financing (Notes #1F and #4) 2,864 2,086
Less reserve for possible loan and lease losses
(Notes #1E and #5) (4,744) (3,644)
-------- --------
289,886 257,510
-------- --------
Bank premises and equipment (Notes #1G and #7) 7,304 7,353
Accrued interest 2,681 2,851
Other real estate owned (Notes #1H and #8) 4,595 3,879
Cash surrender value of life insurance 3,596 3,149
Prepaid expenses 967 917
Deferred tax asset (Notes #1J and #16) 1,954 1,607
Other assets 1,940 1,220
-------- --------
Total Assets $410,505 $395,181
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $108,670 $ 96,478
Savings and NOW deposits 84,781 78,144
Money market deposits 59,099 48,784
Time deposits in denominations of $100,000 or more 58,547 61,457
Other time deposits 59,869 76,251
-------- --------
Total Deposits 370,966 361,114
Accrued employee benefits (Note #12) 1,417 1,195
Accrued interest and other liabilities 1,732 1,622
Long-term debt (Note #9) 168 208
-------- --------
Total Liabilities 374,283 364,139
-------- --------
Stockholders' Equity
Common Stock - authorized, 12,500,000 shares without par
value; issued and outstanding, 4,520,590 shares in 1996
and 3,955,761 shares in 1995 15,406 10,789
Additional paid-in capital 592 456
Retained earnings 20,607 19,999
Valuation allowance for investments (Notes #1C and #2) (383) (202)
-------- --------
Total Stockholders' Equity 36,222 31,042
-------- --------
Total Liabilities and Stockholders' Equity $410,505 $395,181
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1D) $30,939 $28,872 $25,348
Interest on Investment Securities
Taxable 2,171 2,045 1,445
Exempt from federal taxes 430 175 96
Interest on deposits 402 165 60
Interest on federal funds sold 1,070 1,944 523
Lease financing income (Note #1F)
Taxable 13 43 105
Exempt from federal taxes 122 158 113
------- ------- -------
35,147 33,402 27,690
------- ------- -------
INTEREST EXPENSE
Interest on savings and NOW deposits 1,269 1,211 1,187
Interest on money market deposits 1,831 1,391 973
Interest on time deposits in denominations
of $100,000 or more 3,302 3,441 2,040
Interest on other time deposits 3,448 3,708 1,836
Interest on borrowings 19 35 170
------- ------- -------
9,869 9,786 6,206
------- ------- -------
Net Interest Income 25,278 23,616 21,484
PROVISION FOR POSSIBLE LOAN LOSSES (Note #1E and #5) (2,200) (2,016) (2,363)
------- ------- -------
Net Interest Income After Provision
for Possible Loan and Lease Losses 23,078 21,600 19,121
------- ------- -------
OTHER INCOME
Services fees 4,843 4,300 4,612
Gain on sale of SBA loans 83 46 213
Other 338 342 227
------- ------- -------
5,264 4,688 5,052
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 10,286 9,740 8,766
Net occupancy expense of premises 2,092 1,928 1,472
Furniture and equipment expenses 1,509 1,261 1,223
Other expenses (Note #15) 7,813 7,696 7,152
------- ------- -------
21,700 20,625 18,613
------- ------- -------
INCOME BEFORE INCOME TAXES 6,642 5,663 5,560
------- ------- -------
INCOME TAXES (Notes #1J and #16)
Currently payable 2,805 2,603 2,675
Deferred (346) (503) (569)
------- ------- -------
2,459 2,100 2,106
------- ------- -------
NET INCOME $ 4,183 $ 3,563 $ 3,454
======= ======= =======
NET INCOME PER COMMON SHARE (Note #17) $ 0.95 $ 0.82 $ 0.81
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Valuation
Number Additional Allowance
of Shares Common Paid-in Retained For
Outstanding Stock Capital Earnings Investments Total
----------- ------- ---------- -------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 3,531,460 $ 7,335 $456 $17,324 $(155) $24,960
Cash dividend paid (1,062) (1,062)
Cash dividend declared (355) (355)
Exercise of stock options 10,500 59 59
Common stock issued under dividend
reinvestment and optional investment plan 5,605 46 46
Net unrealized loss on securities
available-for-sale (231) (231)
Net income for the year 3,454 3,454
--------- ------- ---- ------- ----- -------
BALANCE, December 31, 1994 3,547,565 7,440 456 19,361 (386) 26,871
10% stock dividend (Note #14) 356,433 2,940 (2,940)
Cash paid in lieu of fractional shares (3) (3)
Exercise of stock options 8,610 52 52
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 43,153 357 357
Net unrealized gain on securities
available-for-sale 18 184 202
Net income for the year 3,563 3,563
--------- ------- ---- ------- ----- -------
BALANCE, December 31, 1995 3,955,761 10,789 456 19,999 (202) 31,042
10% stock dividend (Note #14) 396,840 3,571 (3,571)
Cash paid in lieu of fractional shares (4) (4)
Exercise of stock options 130,493 716 136 852
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 37,496 330 330
Net unrealized loss on securities
available-for-sale (181) (181)
Net income for the year 4,183 4,183
--------- ------- ---- ------- ----- -------
BALANCE, December 31, 1996 4,520,590 $15,406 $592 $20,607 $(383) $36,222
========= ======= ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C>
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 35,262 $ 32,580 $ 27,130
Service fees and other income received 4,771 4,269 3,848
Financing revenue received under leases 135 201 218
Interest paid (10,117) (9,450) (5,823)
Cash paid to suppliers and employees (20,287) (20,235) (17,475)
Income taxes paid (2,796) (2,409) (2,399)
-------- -------- --------
Net Cash Provided By Operating Activities 6,968 4,956 5,499
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities 185,330 63,914 43,736
Purchase of investment securities (188,437) (74,816) (31,241)
Proceeds from maturity of deposits in other financial
institutions 5,828 792 2,759
Purchase of deposits in other financial institutions (3,352) (6,037) (1,881)
Net (increase)/decrease in credit card and revolving
credit receivables 22 19 (314)
Recoveries on loans previously written off 503 549 291
Net increase in loans (39,043) (21,260) (56,830)
Net (increase)/decrease in leases (730) 1,746 (924)
Capital expenditures (1,020) (2,806) 845
Proceeds from sale of other real estate owned 3,531 4,102 2,064
Proceeds from sale of property, plant and equipment 71 216 61
Capitalized other real estate owned expenditures (102) 360 -
-------- -------- --------
Net Cash Used In Investing Activities (37,399) (33,221) (41,434)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
savings accounts and money market deposits 29,131 25,313 22,720
Net increase/(decrease) in certificates of deposit
with maturities of three months or less (14,059) 37,758 20,433
Proceeds from exercise of stock options 852 52 59
Proceeds from stock issuance 330 357 46
Net increase/(decrease) in certificates of deposits
with maturities of more than three months (5,234) (2,965) 4,795
Principal payments on long-term debt (40) (37) (221)
Dividends paid (4) (358) (1,419)
-------- -------- --------
Net Cash Provided By Financing Activities 10,976 60,120 46,413
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (19,455) 31,855 10,478
CASH AND CASH EQUIVALENTS, Beginning of year 68,028 36,173 25,695
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year $(48,573) $ 68,028 $ 36,173
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(dollars in thousands)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income $4,183 $3,563 $3,454
------ ------ ------
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Depreciation and amortization 1,044 704 762
Provision for possible credit losses 2,200 2,016 2,363
Provision for possible OREO losses 572 959 772
Provision for deferred taxes (346) (503) (569)
Gain on sale of equipment (46) (43)
Increase/(decrease) in taxes payable 10 (442) (293)
(Increase)/decrease in other assets (767) (335) (98)
(Increase)/decrease in interest receivable 170 (457) (343)
Increase/(decrease) in discounts and premiums 80 (165) (248)
Increase/(decrease) in interest payable (248) 336 383
Increase in fees and other receivables (51) (389) (948)
Increase/(decrease) in accrued expenses and other liabilities 697 (94) 472
Loss on sale of other real estate owned - - 98
Increase in cash surrender value of life insurance (447) (287) (50)
(Gain)/loss on sale of investments and other assets (83) 50 (213)
------ ------ ------
Total Adjustments 2,785 1,393 2,045
------ ------ ------
Net Cash Provided By Operating Activities $6,968 $4,956 $5,499
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 40
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1996 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Foothill Independent Bancorp (the
"Company") and Subsidiaries conform to generally accepted accounting principles
and to general practice within the banking industry. A summary of the
significant accounting and reporting policies consistently applied in the
preparation of the accompanying financial statements follows:
A. Principles of Consolidation
The consolidated financial statements include the Company and its wholly
owned subsidiaries, Foothill Independent Bank ("Bank"), and Foothill BPC,
Inc. Intercompany balances and transactions have been eliminated.
B. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
C. Investment Securities
Securities held-to-maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts over the period to maturity, or to
an earlier call, if appropriate, on a straight-line basis. Such securities
include those that management intends and has the ability to hold into the
foreseeable future.
Securities would be considered available-for-sale if they would be sold
under certain conditions, among these being changes in interest rates,
fluctuations in deposit levels or loan demand, or need to restructure the
portfolio to better match the maturity or interest rate characteristics of
liabilities with assets. Securities classified as available-for-sale are
accounted for at their current fair value rather than amortized historical
cost. Unrealized gains or losses are not recognized as current income, but
rather as an increase or decrease of capital through a separate reserve
(net of tax).
D. Loans and Interest on Loans
Loans are stated at unpaid principal balances, and net of deferred loan
fees and unearned discounts. The Bank recognizes loan origination fees to
the extent they represent reimbursement for initial direct costs, as income
at the time of loan boarding. The excess of fees over costs, if any, is
deferred and credited to income over the term of the loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to make all payments due
according to the contractual terms of the loan agreement. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are
received.
40
<PAGE> 41
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
E. Provision and Reserve for Loan and Lease Losses
The determination of the balances in the reserves for loan and lease losses
is based on an analysis of the respective portfolios and reflects an amount
which, in Management's judgment, is adequate to provide for potential
losses after giving consideration to the character of the portfolios,
current economic conditions, past loss experiences and such other factors
as deserve current recognition in estimating losses. The provision for
loan and lease losses are charged to expense.
F. Direct Lease Financing
The investment in lease contracts is recorded using the finance method of
accounting. Under the finance method, an asset is recorded in the amount
of the total lease payments receivable and estimated residual value,
reduced by unearned income. Income, represented by the excess of the total
receivable over the cost of the related asset, is recorded in income in
decreasing amounts over the term of the contract based upon the principal
amount outstanding. The financing lease portfolio consists of equipment
with terms from three to seven years.
G. Bank Premises, Equipment and Leasehold Improvements
Bank premises, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Repairs and maintenance are expensed as
incurred. Depreciation is computed on the straight line basis over the
estimated useful lives of the related assets. Depreciation expense is
based on the following depreciable lives: buildings (including leasehold
premises) 20 to 30 years; leasehold improvements 3 to 20 years; and
equipment 3 to 20 years.
H. Other Real Estate Owned
Other real estate owned, which represents real estate acquired through
foreclosure, is stated at the lower of the carrying value of the loan or
the estimated fair market value (less selling costs) of the related real
estate. Loan balances in excess of the fair market value of the real
estate acquired at the date of acquisition are charged against the
allowance for loan and lease losses. Any subsequent operating expenses or
income and gains or losses on disposition of such properties are charged to
current operations.
I. Consolidated Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods.
41
<PAGE> 42
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
J. Income Taxes
Provisions for income taxes are based on amounts reported in the statements
of income (after exclusion of nontaxable income such as interest on state
and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed on the liability method as
prescribed in SFAS No. 109, "Accounting for Income Taxes."
K. Loan Sales and Servicing
Gains and losses from the sale of participating interests in loans
guaranteed by the Small Business Administration (SBA) are recognized after
a ninety day right of cancellation period has elapsed based on the premium
received or discount paid and the cost basis of the portion of the loan
sold. The cost basis of the portion of the loan sold was arrived at by
allocating the total cost of each loan between the guaranteed portion of
the loan sold and the unguaranteed portion of the loan retained, based on
their relative fair values. The book value allocated to the unguaranteed
portion of the loan, if less than the principal amount, is recorded as a
discount on the principal amount retained. The discount is accreted to
interest income over the remaining estimated life of the loan. The Bank
retains the servicing on the portion of the loans sold and recognizes
income on the servicing fees when they are received.
L. Current Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" as
amended by SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", establishing accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of the
financial components approach. This approach requires the recognition of
financial assets when control is surrendered and the derecognition of
liabilities when they are extinguished. Specific criteria are established
for determining when control has been surrendered in the transfer of
financial assets. Liabilities and derivatives incurred or obtained by
transferors in conjunction with the transfer of financial assets are
required to be measured at fair value, if practicable. Servicing assets
and other retained interests in transferred assets are required to be
measured by allocating the previous carrying amount between the assets
sold, if any, and the interest that is retained, if any, based on the
relative fair values of the assets on the date of the transfer. Servicing
assets retained are subsequently subject to amortization and assessment for
impairment. Management has not determined the potential impact this
statement will have, however believes that there will be no material effect
on the Bank's financial condition or results of operations. SFAS No. 125
is effective for transactions occurring after December 31, 1996.
M. Reclassifications
Certain reclassifications were made to prior years' presentations to
conform to the current year.
42
<PAGE> 43
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #2 - INVESTMENT SECURITIES
Based upon the guidelines of SFAS No. 115 and management's analysis of
securities holdings, the Company's securities were classified as held-
to-maturity and available-for-sale, respectively, as follows:
o Held-To-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity securities
were as follows for the dates indicated (in thousands):
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
U.S. Treasury Securities $2,796 $ 5 $1 $2,800
Municipal Agencies 2,529 10 1 2,538
Other Securities 250 - - 250
------ --- -- ------
Total Held-to-Maturity
Securities $5,575 $15 $2 $5,588
====== === == ======
December 31, 1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- -----------
U.S. Treasury Securities $ 4,958 $27 $- $ 4,985
Securities of Other U.S.
Governmental Agencies 14,777 53 - 14,830
Municipal Agencies 3,506 15 4 3,517
Other Securities 250 - - 250
------- --- -- -------
Total Held-to-Maturity
Securities $23,491 $95 $4 $23,582
======= === == =======
43
<PAGE> 44
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #2 - INVESTMENT SECURITIES, Continued
o Available-For-Sale Securities
The amortized cost and estimated fair value of available-for-sale
securities were as follows for the dates indicated (in thousands):
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
U.S. Treasury Securities $ 1,944 $ 6 $ - $ 1,950
Securities of Other U.S.
Government Agencies 29,933 - 83 29,850
Certificates of Participation(b) 4,428 24 - 4,452
Municipal Agencies 344 - 4 340
Other Securities 3,238 - 353 2,885
------- --- ---- -------
Total Available-for-Sale
Carried at Fair Value $39,887 $30 $440 $39,477
======= === ==== =======
December 31, 1995
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
Securities of Other U.S.
Governmental Agencies $11,804 $12 $ 5 $11,811
Certificates of Participation(b) 4,434 43 - 4,477
Other Securities 2,707 - 252 2,455
------- --- ---- -------
Total Available-for-Sale
Carried at Fair Value $18,945 $55 $257 $18,743
======= === ==== =======
- ---------------------
(a) The Bank's portfolio of securities primarily consists of
investment-grade securities. The fair value of actively-traded
securities is determined by the secondary market, while the fair
value for non-actively-traded securities is based on independent
broker quotations.
(b) Non-rated certificates of participation evidencing ownership
interest in the California Statewide Communities Development
Authority - San Joaquin County Limited Obligation Bond Trust with
book values of $4,428,000 and $4,434,000 and market values of
$4,452,000 and $4,477,000 at December 31, 1996 and 1995,
respectively.
Proceeds from maturities of investment securities held-to-maturity during 1996,
were $16,630,000. Proceeds from maturities of investment securities
available-for-sale during 1996, were $123,970,000. There were no gains or
losses recognized. Included in shareholders' equity at December 31, 1996, is
$383,000 of net unrealized losses on investments available-for-sale.
44
<PAGE> 45
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 1995,
were $26,946,000. Proceeds from maturities of investment securities
available-for-sale during 1995, were $29,858,000. There were no gains or
losses recognized. Included in shareholders' equity at December 31, 1995, is
$202,000 of net unrealized loss on investments available-for-sale.
Securities with a book value of $27,384,000 and $32,723,000 and market value of
$27,329,000 and $32,801,000 at December 31, 1996 and 1995, respectively, were
pledged to secure public deposits and for other purposes as required or
permitted by law.
The amortized cost, estimated fair value and average yield of securities at
December 31, 1996, by contractual maturity were as follows (in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Securities
-----------------------------------------
Maturities Schedule of Securities Amortized Average
December 31, 1996 Cost Fair Value Yield (a)
- ---------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Due in one year or less $3,069 $3,074 4.86%
Due after one year through five years 2,257 2,264 4.52%
Due after five through ten years 249 250 4.20%
------ ------ ----
Carried at Book Value $5,575 $5,588 4.64%
====== ====== ====
Available-for-Sale Securities
-----------------------------------------
Amortized Average
Cost Fair Value Yield (a)
--------- ----------- ---------
Due in one year or less $25,108 $25,117 5.43%
Due after one year through five years 11,638 11,210 5.86%
Due after five through ten years 3,141 3,150 5.99%
------- ------- ----
Carried at Fair Value $39,887 $39,477 5.77%
======= ======= ====
</TABLE>
- ----------------------
(a) The average yield is based on effective rates of book balances at the
end of the year. Yields are derived by dividing interest income,
adjusted for amortization of premiums and accretion of discounts, by
total amortized cost.
45
<PAGE> 46
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 1996 and 1995, was as
follows (in thousands):
1996 1995
-------- --------
Commercial, financial and agricultural $ 40,980 $ 44,801
Real Estate - construction 11,601 32,098
Real Estate - mortgage
Commercial 201,367 141,462
Residential 30,051 30,505
Loans to individuals for household, family
and other personal expenditures 8,157 10,887
All other loans (including overdrafts) 407 178
-------- --------
292,563 259,931
Deferred income on loans (797) (863)
-------- --------
Loans, Net of Deferred Income $291,766 $259,068
======== ========
Nonaccruing loans totaled approximately $11,622,000 and $12,620,000 at December
31, 1996 and 1995, respectively. Interest income that would have been
recognized on nonaccrual loans if they had performed in accordance with the
terms of the loans was approximately $1,488,000, $985,000 and $510,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Bank had approximately $2,829,000 and
$1,456,000 in loans past due 90 days or more in interest or principal and still
accruing interest. These loans are collateralized and in the process of
collection.
NOTE #4 - DIRECT LEASE FINANCING
The Bank leases equipment to parties under agreements which range generally
from three to seven years. Executory costs are paid by the lessee and leases
do not include any contingent rental features. The net investment in direct
lease financing at December 31, 1996 and 1995, consists of the following (in
thousands):
1996 1995
------ ------
Lease payments receivable $3,183 $2,086
Estimated residual values 33 322
------ ------
3,216 2,408
Unearned income (329) (252)
Lease residual balance account (23) (70)
------ ------
$2,864 $2,086
====== ======
At December 31, 1996, the Bank had no outstanding lease commitments.
46
<PAGE> 47
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #4 - DIRECT LEASE FINANCING, Continued
At December 31, 1996, future minimum lease payments receivable under direct
financing leases are as follows (in thousands):
Year
--------
1997 $1,277
1998 712
1999 568
2000 326
2001 104
Thereafter 206
------
3,193
Less unearned income (329)
------
$2,864
======
NOTE #5 - RESERVE FOR LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows
(in thousands):
1996 1995 1994
------- ------- -------
Balance at beginning of year $ 3,644 $ 3,145 $ 2,328
Recoveries on loans previously charged off 503 549 291
Provision charged to operating expense 2,200 2,016 2,363
Loans charged off (1,603) (2,066) (1,837)
------- ------- -------
Balance at end of year $ 4,744 $ 3,644 $ 3,145
======= ======= =======
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by
Creditors for Impairment of a Loan" on January 1, 1995. The statement
generally requires those loans identified as "impaired" to be measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, except that as a practical expedient, a creditor may measure
impairment based on a loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will not be able to collect all contractual principal
and interest payments due in accordance with the terms of the loan agreement.
The Bank has identified all nonaccruing loans as being impaired loans. The
allowance for loan losses related to impaired loans amounted to approximately
$485,000 for the year ended December 31, 1996, and is included in the above
balance. The average balance of these loans amounted to approximately
$10,314,000 for the year ended December 31, 1996. Cash receipts during 1996
applied to reduce principal balance and recognized as interest income was
approximately $2,073,000 and $137,000, respectively.
47
<PAGE> 48
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #6 - LOANS TO DIRECTORS AND OFFICERS
During prior years, the Bank has granted in the ordinary course of its
business, loans to directors, principal shareholders and their associates. All
such loans were made under terms which are consistent with the Bank's normal
lending policies.
An analysis of the activity with respect to such aggregate loans to related
parties during 1996 and 1995, is as follows (in thousands):
1996 1995
---- -------
Outstanding Balance, Beginning of year $50 $ 1,976
Credit granted, including renewals 82
Repayments and other reductions (9) (2,008)
--- -------
Outstanding Balance, End of year $41 $ 50
=== =======
NOTE #7 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows
(in thousands):
1996 1995
------- -------
Buildings $ 2,424 $ 2,425
Furniture and equipment 9,331 8,532
Leasehold improvements 2,250 2,111
------- -------
14,005 13,068
Less: Accumulated depreciation and amortization (7,923) (6,937)
------- -------
6,082 6,131
Land 1,222 1,222
------- -------
Total $ 7,304 $ 7,353
======= =======
NOTE #8 - OTHER REAL ESTATE OWNED
As discussed in Note #1H, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An analysis of the transactions for December
31, 1996 and 1995, were as follows (in thousands):
1996 1995
------- -------
Balance, Beginning of year $ 3,879 $ 2,470
Additions 4,877 5,715
Valuation adjustment and other reductions (4,161) (4,306)
------- -------
Balance, End of year $ 4,595 $ 3,879
======= =======
The balances at December 31, 1996 and 1995, are shown net of reserves.
48
<PAGE> 49
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #8 - OTHER REAL ESTATE OWNED, Continued
Transactions in the reserve for other real estate owned are summarized for
December 31, 1996 and 1995, were as follows (in thousands):
1996 1995
------ ------
Balance, Beginning of year $ 909 $ 515
Provision charged to other expense 572 959
Charge-offs and other reductions (335) (565)
------ ------
Balance, End of year $1,146 $ 909
====== ======
NOTE #9 - LONG-TERM DEBT
The long-term debt consists of one obligation. This note is a secured
obligation and bears interest at 10%. Principal and interest are payable
monthly in installments of $4,956, beginning October 1, 1990, until maturity at
September 1, 2000.
The following is a schedule of future payments (in thousands):
Year Principal Interest Total
- ---- --------- -------- -----
1997 $ 45 $ 15 $ 60
1998 49 10 59
1999 55 5 60
2000 19 - 19
---- ---- ----
$168 $ 30 $198
==== ==== ====
NOTE #10 - STOCK OPTION PLAN
At December 31, 1996, the Bank has a fixed option plan, which is described
below. The Bank applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plan. Had compensation costs for these
plans been determined based on the fair value at the grant dates consistent
with the method of SFAS 123, the impact would not have materially affected net
income.
The Company's 1993 incentive stock option and nonqualified stock option plan
approved by the stockholders provide that an aggregate of 460,467 shares (after
giving retroactive effect for 10 percent stock dividends) of the Company's
unissued common stock may be granted to certain officers, key employees, and
directors at prices not less than the fair market value of such shares at dates
of grant. Options granted expire within a period of not more than ten years
from the date the option is granted.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1996,
1995 and 1994, respectively: risk-free rates of 6.17%, 5.35% and 5.22%;
dividend yields of 0%, 1.38% and 5.23%; expected life of five years; and
volatility of 35% for all years.
49
<PAGE> 50
NOTE #10 - STOCK OPTION PLAN, Continued
A summary of the status of the Bank's fixed stock option plan as of December
31, 1996, 1995 and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- -------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning of year 414,554 $6.46 256,300 $6.05 219,850 $5.96
Granted 144,000 8.51 162,500 7.12 52,000 7.11
Exercised (130,493) 5.50 (8,610) 6.04 (10,500) 5.62
Expired (9,349) 7.26 (23,635) 7.58 (18,300) 8.06
Canceled 41,446 6.46 27,999 6.08 13,250 5.96
-------- ------- -------
Outstanding, End of year 460,158 7.36 414,554 6.46 256,300 6.08
======== ======= =======
Options exercisable at year end 368,556 7.26 321,267 7.32 205,170 7.50
Weighted average fair value
of options granted during
the year $3.51 $2.76 $2.00
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.116 to $5.904 36,476 4.89 $5.25 36,476 $5.25
$6.592 to $6.968 125,382 10.00 6.84 116,410 6.83
$7.182 to $7.500 154,550 9.83 7.26 114,400 7.23
$8.500 to $8.625 143,750 10.00 8.51 101,270 8.50
------- -------
$5.116 to $8.625 460,158 9.54 7.36 368,556 7.26
======= =======
</TABLE>
NOTE #11 - DEFINED CONTRIBUTION PLAN (401K)
The Company sponsors a defined contribution pension plan that covers all
employees with 1,000 or more hours worked in a year. Contributions to the plan
are based on the employee's gross salary less the IRS Section 125 flex plan.
For the years ending December 31, 1996, 1995 and 1994, the amount of pension
expense was $138,000, $112,000, and $105,000, respectively.
50
<PAGE> 51
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #12 - DEFERRED COMPENSATION
The Bank maintained a nonqualified, unfunded deferred compensation plan for
certain key management personnel whereby they may defer compensation which will
then provide for certain payments upon retirement, death, or disability. The
plan provides for payments for ten years commencing upon retirement. The plan
provides for reduced benefits upon early retirement, disability, or termination
of employment. The deferred compensation expense for 1996 was $322,488
($193,493 net of income taxes), 1995 was $155,000 ($93,000 net of income
taxes), and 1994 was $206,000 ($124,000 net of income taxes).
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the State Banking Department, net income for the year and
the retained net income for the preceding two years. Section 23A of the
Federal Reserve Act restricts the Bank from extending credit to the Company and
other affiliates amounting to more than 20% of its contributed capital and
retained earnings. At December 31, 1996, the combined amount of funds
available from these two sources amounted to approximately $17,054,000 or 47%
of consolidated stockholders equity.
NOTE #14 - STOCK DIVIDENDS
On May 1, 1995, the Bank distributed 356,433 shares of common stock in
connection with a 10% stock dividend. As a result of the stock dividend,
common stock was increased and retained earnings was decreased by $2,940,000.
On January 23, 1996, the Board of Directors declared a 10% stock dividend
payable on April 5, 1996, to stockholders of record on March 22, 1996. As a
result, common stock was increased and retained earnings were decreased by
$3,571,000. All references in the accompanying financial statements to the
number of common shares and per share amounts for 1995 and 1994, have been
restated to reflect the stock dividends.
51
<PAGE> 52
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #15 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31,
1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Data processing $ 893 $ 903 $ 889
Marketing expenses 766 809 545
Office supplies, postage and telephone 1,050 1,044 842
Bank insurance 454 454 468
FDIC assessments 143 473 617
Legal fees 843 558 495
Operating losses 660 389 338
OREO expenses and provision for OREO 574 1,230 1,185
Other 2,430 1,836 1,773
------ ------ ------
Total $7,813 $7,696 $7,152
====== ====== ======
</TABLE>
NOTE #16 - INCOME TAXES
The provisions for income taxes consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Tax provision applicable to income
before income taxes $2,459 $2,100 $2,106
====== ====== ======
Federal Income Tax
Current 1,946 1,903 1,931
Deferred (234) (425) (428)
State Franchise Tax
Current 859 700 744
Deferred (112) (78) (141)
------ ------ ------
Total $2,459 $2,100 $2,106
====== ====== ======
</TABLE>
52
<PAGE> 53
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #16 - INCOME TAXES, Continued
Deferred tax expense results from timing differences in the recognition of
revenues and expenses for tax and financial statement purposes. The sources of
these differences and the tax effect of each are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------------- --------------- -----------------
Federal State Federal State Federal State
-------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Tax effect of
Nonaccrual loan interest computed
differently on tax returns than
for financial statements $ 8 $ 3 $ (50) $(18) $ 17 $ 6
Direct lease financing 9 7 23 2 (274) (101)
Depreciation computed differently
on tax returns than for financial statements 24 18 (9) 9 75 19
OREO transactions computed differently
on tax return than for financial statements (24) (9) (191) (33) 23 7
Deferred compensation plan (70) (27) (75) (24) (63) (20)
Provision for loan loss deduction on tax
return over or (under) amount charged for
financial statements purposes (243) (93) (72) (12) (156) (51)
Other 62 (11) (51) (2) (50) (1)
----- ----- ----- ---- ----- -----
Total $(234) $(112) $(425) $(78) $(428) $(141)
===== ===== ===== ==== ===== =====
</TABLE>
As a result of the following items, the total tax expenses for 1996, 1995 and
1994, were less than the amount computed by applying the statutory U.S. Federal
income tax rate to income before taxes (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $2,258 34.0 $1,925 34.0 $1,890 34.0
Changes due to State income tax,
net of Federal tax benefit 472 7.1 402 7.1 395 7.1
Exempt interest (218) (3.3) (154) (3.1) (128) (2.3)
Other (53) (0.8) (73) (0.9) (51) (0.9)
------ ---- ------ ---- ------ ----
Total $2,459 37.0 $2,100 37.1 $2,106 37.9
====== ==== ====== ==== ====== ====
</TABLE>
NOTE #17 - NET INCOME PER COMMON SHARE
Income per share amounts are computed by dividing net income by the weighted
average number of common shares outstanding during the period, which were
4,402,806, 4,326,095, and 4,282,910 for the years ending December 31, 1996,
1995 and 1994, respectively, after 10% stock dividends in 1996 and 1995. Stock
options granted did not have a dilutive effect, and they have been excluded
from the calculation of income per share.
53
<PAGE> 54
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #18 - COMMITMENTS AND CONTINGENCIES
The Bank leases land and buildings under noncancelable operating leases
expiring at various dates through 2014. The following is a schedule of future
minimum lease payments based upon obligations at year end (in thousands):
Year
----
1997 $1,032
1998 866
1999 863
2000 863
2001 789
Succeeding years 5,267
------
$9,680
======
Total rental expense for the three years ended December 31, 1996, 1995 and
1994, was $1,064,000 $1,087,000, $760,000, respectively. The increase in
occupancy expense in 1996 and 1995 was due to an increase in rental expense
from the sale and leaseback of the service center, and rental expense incurred
as a result of the opening of two new banking offices.
The Bank is involved in various litigation. In the opinion of Management and
the Company's legal counsel, the disposition of all litigation pending will not
have a material effect on the Company's financial statements.
In the normal course of business, the Bank is a party to financial instruments
with off-balance-sheet risk. These financial instruments include commitments
to extend credit and standby commercial letters of credit. To varying degrees,
these instruments involve elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial position. The Bank's
exposure to credit loss in the event of nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. At
December 31, 1996 and 1995, the Bank had commitments to extend credit of
$34,461,000 and $35,642,000, respectively, and obligations under standby
letters of credit of $1,088,000 and $1,982,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under
construction.
54
<PAGE> 55
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #18 - COMMITMENTS AND CONTINGENCIES, Continued
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
NOTE #19 - REGULATORY MATTERS
The bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt correct action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are presented in the following
table (dollars in thousands):
<TABLE>
<CAPTION>
Capital Needed
-------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Provisions
--------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital to risk-weighted assets $39,206 12.3% $25,486 8.0% $31,857 10.0%
Tier 1 capital to risk-weighted assets 35,214 11.1% 12,743 4.0% 19,114 6.0%
Tier 1 capital to average assets 35,214 8.5% 16,550 4.0% 20,687 5.0%
As of December 31, 1995:
Total capital to risk-weighted assets 33,627 11.3% 23,820 8.0% 29,775 10.0%
Tier 1 capital to risk-weighted assets 29,983 10.1% 11,910 4.0% 17,865 6.0%
Tier 1 capital to average assets 29,983 7.7% 15,579 4.0% 19,474 5.0%
</TABLE>
55
<PAGE> 56
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1996 (dollars in thousands). FASB Statement 107,
"Disclosures about Fair Value of Financial Instruments," defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
December 31, 1996
------------------------
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Financial Assets
Cash and cash equivalents $ 48,573 $ 48,573
Investment securities and deposits 49,009 49,022
Loans 292,563 291,906
Direct lease financing 2,864 2,760
Financial Liabilities
Deposits 370,966 368,380
Long-term debt 168 168
Unrecognized Financial Instruments
Commitments to extend credit 34,461 34,461
Standby letters of credit 1,088 1,088
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments:
o Investment Securities
For U.S. Treasury and U.S. Government Agency securities, fair values are
based on market prices. For other investment securities, fair value equals
quoted market price if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities as the basis for a pricing matrix.
o Loans
The fair value for loans with variable interest rates is the carrying
amount. The fair value of fixed rate loans is derived by calculating the
discounted value of the future cash flows expected to be received by the
various homogeneous categories of loans. All loans have been adjusted to
reflect changes in credit risk.
56
<PAGE> 57
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
o Deposits
The fair value of demand deposits, money market deposits, savings accounts
and NOW accounts is defined as the amounts payable on demand at December
31, 1996. The fair value of fixed maturity certificates of deposit is
estimated based on the discounted value of the future cash flows expected
to be paid on the deposits.
o Notes Payable
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
57
<PAGE> 58
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
<TABLE>
<CAPTION>
BALANCE SHEETS
1996 1995 1994
------- ------- -------
(dollars in thousands
except per share amounts)
<S> <C> <C> <C>
Assets
Cash $ 281 $ 195 $ 428
Investment in subsidiaries 35,283 30,135 25,456
Time certificates of deposit - 95 693
Accounts receivable 209 37 16
Loans 15 15 16
Excess of cost over net assets of company acquired (net) 212 255 297
Prepaid and other 222 310 320
------- ------- -------
Total Assets $36,222 $31,042 $27,226
======= ======= =======
Liabilities
Dividends payable - - 355
------- ------- -------
Stockholders' Equity
Common stock 15,406 10,789 7,440
Additional paid-in capital 592 456 456
Retained earnings 20,224 19,797 18,975
------- ------- -------
Total Stockholders' Equity 36,222 31,042 26,871
------- ------- -------
Total Liabilities and Stockholders' Equity $36,222 $31,042 $27,226
======= ======= =======
STATEMENTS OF INCOME
INCOME
Equity in undistributed income of subsidiaries $ 4,328 $ 3,677 $ 3,529
Interest and other income 6 18 29
------- ------- -------
4,334 3,695 3,558
------- ------- -------
EXPENSE
Amortization and other expenses 224 169 117
Interest expense - - 3
------- ------- -------
224 169 120
------- ------- -------
Total Operating Income 4,110 3,526 3,438
Tax benefit of parent's operating expenses 73 37 16
------- ------- -------
Net Income $ 4,183 $ 3,563 $ 3,454
======= ======= =======
</TABLE>
58
<PAGE> 59
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received for tax benefit from Foothill Independent Bank $ 72 $ 37 $ 16
Dividend received from Foothill Independent Bank - - 1,054
Interest and other income received 6 18 29
Interest paid - - (7)
Cash paid for operating expenses (266) (138) (40)
------- ------ -------
Net Cash Provided/(Used) By Operating Activities (188) (83) 1,052
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans - 1 -
(Purchase)/redemption of deposits in other financial institutions 95 598 (495)
Capital contributed to subsidiary (1,000) (800) -
------- ------ -------
Net Cash Provided/(Used) By Investing Activities (905) (201) (495)
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (3) (358) (1,434)
Capital stock purchased 330 357 46
Proceeds from exercise of stock options 852 52 59
Principal payment on long-term debt - - (187)
------- ------ -------
Net Cash Provided/(Used) By Financing Activities 1,179 51 (1,516)
------- ------ -------
NET INCREASE/(DECREASE) IN CASH 86 (233) (959)
CASH, Beginning of year 195 428 1,387
------- ------ -------
CASH, End of year $ 281 $ 195 $ 428
======= ====== =======
RECONCILIATION OF NET INCREASE TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET INCOME $ 4,183 $3,563 $ 3,454
------- ------ -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization 42 42 42
Undistributed earnings of subsidiaries (4,328) (3,677) (2,475)
(Increase)/decrease in accounts receivable (172) (21) 70
(Increase)/decrease in prepaids and other 87 10 (36)
Decrease in interest payable - - (3)
------- ------- -------
Total Adjustments (4,371) (3,646) (2,402)
------- ------- -------
Net Cash Provided by Operating Activities $ (188) $ (83) $ 1,052
======= ======= =======
</TABLE>
59
<PAGE> 60
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #22 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the Company and its
subsidiaries for the two years ended December 31, 1996, is summarized below:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
First Second Third Fourth
------ ------ ------ ------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $8,764 $8,507 $9,076 $8,800
Interest expense 2,641 2,405 2,329 2,494
Net interest income 6,123 6,102 6,747 6,306
Provision for loan losses 490 535 722 453
Net interest income after provision
for loan losses 5,633 5,567 6,025 5,853
Other income 1,246 1,307 1,352 1,359
Other expense 5,553 5,323 5,479 5,345
Income before taxes 1,326 1,551 1,898 1,867
Applicable income taxes 503 598 746 612
------ ------ ------ ------
Net Income $ 823 $ 953 $1,152 $1,255
====== ====== ====== ======
Net Income Per Share $ 0.19 $ 0.22 $ 0.26 $ 0.28
====== ====== ====== ======
1995
-------------------------------------------------------
First Second Third Fourth
------ ------ ------ ------
(dollars in thousands, except per share amounts)
Summary of Operations
Interest income $7,769 $8,345 $8,620 $8,669
Interest expense 1,877 2,358 2,788 2,763
Net interest income 5,892 5,987 5,832 5,906
Provision for loan losses 630 870 170 347
Net interest income after provision
for loan losses 5,262 5,117 5,662 5,559
Other income 1,235 1,145 1,022 1,286
Other expense 5,234 4,809 5,258 5,324
Income before taxes 1,263 1,453 1,426 1,521
Applicable income taxes 481 552 523 544
------ ------ ------ ------
Net Income $ 782 $ 901 $ 903 $ 977
====== ====== ====== ======
Net Income Per Share $ 0.18 $ 0.20 $ 0.21 $ 0.23
====== ====== ====== ======
</TABLE>
60
<PAGE> 61
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Registrant's executive officers
which is included in Part I of this Report, the information called for by Item
10 is incorporated herein by reference from the Company's definitive proxy
statement, for the Company's 1997 annual meeting of shareholders, to be filed
with the Commission on or before April 29, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission
on or before April 29, 1997 for the Company's 1997 annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission
on or before April 29, 1997 for the Company's 1997 annual shareholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission
on or before April 29, 1997 for the Company's 1997 annual shareholders'
meeting.
61
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(1) Financial Statements:
See Index to Financial Statements in Item 8 on Page 33 of this
Report.
(2) Financial Statement Schedules:
All schedules are omitted as the information is not required, is
not material or is otherwise furnished.
(3) Exhibits:
See Index to Exhibits on Page 64 of this Form 10-K.
(4) Reports on Form 8-K:
None
62
<PAGE> 63
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes George E.
Langley, Tom Kramer or Carol Ann Graf, individually, as attorney-in-fact, to
sign in his behalf and in each capacitiy stated below, and to file, all
amendments and/or supplements to this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March 1997.
FOOTHILL INDEPENDENT BANCORP (Registrant)
By: /s/ GEORGE E. LANGLEY
--------------------------------------
George E. Langley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following officers and directors of
the registrant in the capacities indicated on March 27, 1997.
/s/ GEORGE E. LANGLEY President, Chief Executive Officer
- ------------------------------- (Principal Executive Officer) and
George E. Langley Director
/s/ CAROL ANN GRAF Chief Financial Officer (Principal
- ------------------------------- Financial and Accounting Officer)
Carol Ann Graf
/s/ WILLIAM V. LANDECENA Chairman of the Board of Directors
- -------------------------------
William V. Landecena
/s/ RICHARD A. BARKER Director
- -------------------------------
Richard A. Barker
/s/ CHARLES G. BOONE Director
- -------------------------------
Charles G. Boone
/s/ O.L. MESTAD Director
- -------------------------------
O.L. Mestad
/s/ MAX E. WILLIAMS Director
- -------------------------------
Max E. Williams
/s/ DOUGLAS F. TESSITOR Director
- -------------------------------
Douglas F. Tessitor
63
<PAGE> 64
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
- ------- ------------
<S> <C> <C>
21 Subsidiaries of Registrant
23.1 Consent of Independent Certified Public Accountants with respect to
the Financial Statements of the Registrant
23.2 Consent of Independent Certified Public Accountants with respect to the
Financial Statements of the Registrant's 401K Plan included as Exhibit 99
to this Report
24.1 Power of Attorney-- (Included on Signature Page)
27 Financial Data Sheet
99.1 Financial Statements of the registrant's 401k Plan (Partners in Your Future)
required by Form 11-K, which is being filed as part of this Annual Report
pursuant to Rule 15d-21 under the Securities Exchange Act of 1934
Compensation Plan and Arrangements
Nonqualified and Incentive Stock Option Plan -- See Exhibit 10.2 above
Foothill Independent Bank - Deferred Compensation Plan -- See Exhibit 10.2 above
Foothill Independent Bancorp - 1993 Stock Incentive Plan -- See Exhibit 10.18 above
Employment Agreement dated as of March 31, 1995 between Foothill Independent Bank and
George E. Langley -- See Exhibit 10.19 above
</TABLE>
________________
(R-1) Incorporated by reference to the same numbered exhibit to Registration
Statement on Form S-14 (File No. 2-83329) filed on May 10, 1983.
(R-2) Incorporated by reference to the same numbered exhibit to Registration
Statement on Form S-8 (File No. 2-89744) filed on March 2, 1984.
(R-3) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985.
(R-4) Incorporated by reference to Exhibit A to the Proxy Statement/Prospectus
included in the Company's Registration Statement on Form S-4 (File No.
33-5898) filed on May 22, 1986.
(R-5) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1986.
(R-6) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987.
(R-7) Incorporated by reference to same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
(R-8) Incorporated by reference to same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
(R-9) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995.
(R-10) Incorporated by reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A dated February 27, 1997 filed to register, under
Section 12(g) of the Securities Exchange Act of 1934, Rights to Purchase
Common Stock ("Shareholder Rights").
<PAGE> 1
SUBSIDIARIES OF REGISTRANT
Foothill Independent Bank, a California banking corporation, and
Foothill BPC, Inc., a California corporation, are wholly-owned by and are the
only subsidiaries of the Company.
EXHIBIT 21
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Foothill Independent Bancorp:
We consent to the incorporation by reference in Registration Statement No.
2-89744 on Form S-8 filed March 1, 1984, Registration Statement No. 33-57586 on
Form S-8 filed January 29, 1993, and Registration Statement No. 33-83854 on
Form S-3 filed September 12, 1994, of our report dated January 26, 1997 on the
consolidated financial statements of Foothill Independent Bancorp as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 included at page 34 of its Annual Report on Form 10-K for the
year ended December 31, 1996.
/s/ VAVRINEK, TRINE, DAY & COMPANY
---------------------------------------
VAVRINEK, TRINE, DAY & COMPANY
Certified Public Accountants
March 26, 1997
Rancho Cucamonga, California
Exhibit 23.1
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Foothill Independent Bancorp:
We consent to the incorporation by reference of our report dated March 26, 1997,
on the financial statements of Foothill Independent Bank Partners In Your Future
retirement plan as of December 31, 1996 and 1995, included as part of this Form
10-K into the Registration Statement on Form S-8 (Registration Number 33-57586).
/s/ Vavrinek, Trine, Day & Company
---------------------------------------
VAVRINEK, TRINE, DAY & COMPANY
Certified Public Accountants
March 26, 1997
Rancho Cucamonga, California
Exhibit 23.2
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES
THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,673
<INT-BEARING-DEPOSITS> 3,957
<FED-FUNDS-SOLD> 14,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,477
<INVESTMENTS-CARRYING> 5,575
<INVESTMENTS-MARKET> 5,588
<LOANS> 291,766
<ALLOWANCE> (4,744)
<TOTAL-ASSETS> 410,505
<DEPOSITS> 370,966
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,149
<LONG-TERM> 168
0
0
<COMMON> 15,406
<OTHER-SE> 20,816
<TOTAL-LIABILITIES-AND-EQUITY> 410,505
<INTEREST-LOAN> 30,939
<INTEREST-INVEST> 4,073
<INTEREST-OTHER> 135
<INTEREST-TOTAL> 35,147
<INTEREST-DEPOSIT> 9,850
<INTEREST-EXPENSE> 9,869
<INTEREST-INCOME-NET> 25,278
<LOAN-LOSSES> 2,200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,700
<INCOME-PRETAX> 6,642
<INCOME-PRE-EXTRAORDINARY> 6,642
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,183
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 6.4
<LOANS-NON> 11,623
<LOANS-PAST> 2,829
<LOANS-TROUBLED> 4,787
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,644
<CHARGE-OFFS> 1,603
<RECOVERIES> 503
<ALLOWANCE-CLOSE> 4,744
<ALLOWANCE-DOMESTIC> 4,744
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
DECEMBER 31, 1996 AND 1995
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FINANCIAL STATEMENTS
Statements of Net Assets Available For Benefits
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Changes in Net Assets Available For Benefits
For the Year Ended December 31 ,1996 and 1995 . . . . . . . . . . . . . . . . . 3
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUPPLEMENTARY INFORMATION
Schedule of Assets Held For Investment Purposes . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE> 2
[VAVRINEK, TRINE, DAY & CO. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Foothill Independent Bank
Partners In Your Future 401(K) Profit Sharing Plan
Glendora, California
We have audited the accompanying statements of net assets available for
benefits of the Foothill Independent Bank Partners In Your Future 401 (K)
Profit Sharing Plan as of December 31, 1996 and 1995, and the related
statements of changes in net assets available for benefits for the years then
ended. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Foothill
Independent Bank Partners In Your Future 401 (K) Profit Sharing Plan at
December 31, 1996 and 1995, and the changes in its net assets available for
benefits for the years then ended in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule of Assets
Held for Investment Purposes is presented for the purpose of additional
analysis and is not a required part of the basic financial statements, but is
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
VAVRINEK, TRINE, DAY & CO.
Rancho Cucamonga, California
March 26, 1996
-1-
<PAGE> 3
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
INVESTMENTS AT FAIR MARKET VALUE
Mutual funds $ 876,302 $ 559,167
Foothill Independent Bank stock 1,064,272 529,913
Money market funds 176,267 141,547
Loan funds 24,835 2,208
Total Investments (Note #3) ---------- ----------
2,141,676 1,232,835
CASH 289 64
RECEIVABLES (Note #4) 18,648 19,471
---------- ----------
Total Assets 2,160,613 1,252,370
LIABILITIES
Benefits payable (Note #5) 45,123 7,921
---------- ----------
NET ASSETS AVAILABLE FOR BENEFITS $2,115,490 $1,244,449
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 4
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO
Net unrealized appreciation in fair
value of assets $ 321,484 $ 26,357
Interest 8,096 11,364
Dividends 97,180 77,045
Realized gain on sale of assets 13,172 16,986
Other income 41,732 1,185
---------- ----------
Total Investment Income 481,664 132,937
---------- ----------
Contributions
Employee 444,768 432,526
Employer 137,763 134,160
---------- ----------
Total Contributions 582,531 566,686
---------- ----------
Total Additions to Net Assets 1,064,195 699,623
DEDUCTION FROM NET ASSETS ATTRIBUTED TO
Benefits paid directly to participants (193,154) (235,955)
---------- ----------
NET INCREASE IN NET ASSETS 871,041 463,668
NET ASSETS AVAILABLE FOR BENEFITS,
Beginning of year 1,244,449 780,781
---------- ----------
NET ASSETS AVAILABLE FOR BENEFITS,
End of year $2,115,490 $1,244,449
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 5
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE #1 - DESCRIPTION OF PLAN
The following description of the Foothill Independent Bank Partners In Your
Future 401(K) Profit Sharing Plan provides only general information.
Participants should refer to the Plan agreement for a more complete description
of the Plan's provisions.
A. General
-------
The Plan is a defined contribution plan covering all full-time
employees of Foothill Independent Bank (FIB). There is no age or
service requirement. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA). FIB adopted the Plan
effective January 1, 1994.
B. Contributions
-------------
Each year, FIB contributes to the Plan matching contributions equal to
a discretionary percentage, to be determined by the Employer, of the
participant's salary reductions. Participants may contribute up to 10
percent of their annual wages before bonuses and overtime.
C. Participant Accounts
--------------------
Each participant's account is credited with the participant's
contribution and allocation of (a) the FIB contributions, and (b) Plan
earnings. Allocations are based on participant earnings or account
balances, as defined. The benefit to which a participant is entitled
is the benefit that can be provided from the participant's account.
D. Vesting
-------
Participants are vested in FIB contributions according to the
following schedule:
<TABLE>
<CAPTION>
Year of
Service Percentage
------- ----------
<S> <C>
1 Year 25%
2 Years 50%
3 Years 100%
</TABLE>
Employee contributions, deferrals and rollovers are immediately 100%
vested. No vested benefit may be forfeited.
-4-
<PAGE> 6
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE #1 - DESCRIPTION OF PLAN, Continued
E. Payment of Benefits
-------------------
On termination of service, a participant may receive a lump-sum amount
equal to the value of his or her account or may roll-over the value of
his or her account to another plan.
F. Loans to Participants
---------------------
Participants may apply for a loan of up to one-half of total prior
contributions. The loans are secured by the accounts of the
participant. The loans are available to all participants and bear a
reasonable rate of interest.
NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Valuation of Assets
- -------------------
If available, quoted market prices are used to value investments. Many factors
are considered in arriving at fair value. Mutual funds are valued based upon
the market unit value of the fund as a whole and not on individual investments
of the fund.
Tax Status
- ----------
The Trust established under the Plan to hold the Plan's assets is qualified
under the appropriate section of the Internal Revenue Code. Accordingly, the
Plan's net investment income is exempt from income taxes. The Plan has
received a favorable tax determination letter from the Internal Revenue Service
and the Plan sponsor believes that the Plan continues to qualify and operate as
designed.
Administration of Plan Assets
- -----------------------------
Contributions made by FIB and its employees are held and managed by a Trustee,
which invests the cash received, interest and dividends in accordance with
participant's instructions. Distributions to participants are made by the
Trustee. The Trustee also administers the payment of principal and interest on
participant loans.
Certain administrative functions are performed by officers or employees of FIB.
No such officer or employee receives additional compensation from the Plan.
The administrative and Trustee fees associated with the Plan are paid by FIB
and not from the Plan assets.
-5-
<PAGE> 7
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE #3 - INVESTMENTS
The Plan's investments are held by a bank administered trust fund. The
following table presents the fair values of investments. Investments that
represent five percent or more of the Plan's net assets are separately
identified.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- -----------------------
Cost Basis Fair Value Cost Basis Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fair Value of Investments
Mutual funds
Growth equity fund $ 325,590 $ 373,010 $ 189,870 $ 214,727
Intermediate term
bond fund 155,256 154,868 92,181 95,544
Balanced fund 308,001 348,424 221,211 248,896
Foothill Independent
Bank stock 802,999 1,064,272 559,461 529,913
Money market funds 176,267 176,267 141,547 141,547
Loan funds 24,835 24,835 2,208 2,208
---------- ---------- ---------- ----------
Total Investments $1,792,948 $2,141,676 $1,206,478 $1,232,835
========== ========== ========== ==========
</TABLE>
During 1996 and 1995, the Plan's investments (including investments bought,
sold and held during the year) appreciated in value by $321,484 and $26,357
during 1996 and 1995, respectively, as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net Change in Fair Value
Mutual funds $ 38,627 $ 55,905
Foothill Independent Bank stock 282,857 (29,548)
-------- --------
Net Change in Fair Value $321,484 $ 26,357
======== ========
</TABLE>
NOTE #4 - RECEIVABLES
Receivables at December 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Contributions
Employer $ 4,560 $ 5,437
Employee 14,088 14,034
------- -------
Total Receivables $18,648 $19,471
======= =======
</TABLE>
-6-
<PAGE> 8
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE #5 - PENDING BENEFITS PAYABLE
As of December 31, payments to participants who have withdrawn from the Plan,
but have not yet been paid totaled $45,123 and $7,921 for 1996 and 1995,
respectively.
NOTE #6 - TERMINATION OF PLAN
Although it has not expressed any intent to do so, FIB has the right under the
Plan to discontinue its contributions at any time and to terminate the Plan,
subject to provisions of ERISA. In the event of Plan termination, participants
will become 100% vested in their accounts.
-7-
<PAGE> 9
=========================
SUPPLEMENTARY INFORMATION
=========================
<PAGE> 10
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1996
FORM 5500 - SCHEDULE G
<TABLE>
<CAPTION>
Identity of Issue, Borrower, Current
Lessor or Similar Party Description of Investment Cost Value
- ---------------------------- ------------------------- ---------- ----------
<S> <C> <C> <C>
Foothill Independent Bank Common stock 92545 shares $ 802,999 $1,064,272
Union Bank Money Market Fund Money market funds
176267 units 176,267 176,267
Union Bank Intermediate Term
Bond Fund Mutual funds 15913 units 155,256 154,868
Union Bank Balanced Fund Mutual funds 23767 units 308,001 348,424
Union Bank Growth Equity
Fund Mutual funds 19287 units 325,590 373,010
Participant Loans Various loans at 8.25%
to 10.43% interest 24,835 24,835
---------- ----------
$1,792,948 $2,141,676
========== ==========
</TABLE>
-8-
