<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, 1997
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
Rights to Purchase 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 9, 1998, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $76,241,135.
As of March 9, 1998, there were 5,127,342 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 1997 Annual Meeting which will
be filed with the Commission on or before April 30, 1998.
--------------------
<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 Company, like other bank holding companies
in the United States, is subject to regulation, supervision and periodic
examination by the Board of Governors of the Federal Reserve System (commonly
known as the Federal Reserve Board and referred to herein as the "FRB"). See
"Supervision and Regulation -- Regulation of the Company."
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 became a member of the Federal Reserve
System on June 11, 1997.
As a California state-chartered bank that is a member of the Federal
Reserve System (a "state member bank"), the Bank is subject to regulation,
supervision and periodic examination, at the state level, by the California
Department of Financial Institutions (the "DFI"), which is the successor to the
Superintendent of Banks and, at the Federal level, by the FRB. Prior to June
1997, when the Bank became a member of the Federal Reserve System, the Bank was
regulated at the Federal level by the FDIC. The change in its federal bank
regulatory agency from the FDIC to the FRB is not expected to have a material
effect on the Bank's operations or its financial condition or operating results.
See "Supervision and Regulation -- Regulation of the Bank."
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 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, ranging from 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 sized 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. The following
table sets forth the different categories of deposits maintained at the Bank and
the number of deposit accounts, the average balance of each account and the
aggregate amount of the deposits in each such category, as of December 31, 1997:
<TABLE>
<CAPTION>
Type of Number of Average Account Aggregate Amounts
Account Accounts Balance of Deposits
- ------- -------- --------------- -----------------
<S> <C> <C> <C>
Demand 15,777 $ 8,028 $126,654,000(a)
Money market(b) 9,221 $ 13,099 $120,784,000
Savings 9,934 $ 3,231 $ 32,098,000
TCDs(c) 326 $150,503 $ 49,064,000(d)
Other Time Deposits(c) 2,965 $ 20,808 $61,696,000(e)
</TABLE>
(a) Includes $4,448,000 of municipal and other government agency deposits.
(b) Includes "NOW" checking accounts.
(c) As used in this Report, the term "TCDs" means time certificates of
deposit in denominations greater than $100,000, the term "other time
deposits" means certificates of deposits in denominations of $100,000 or
less and the term "time deposits" shall mean TCDs and other time
deposits, collectively.
(d) Includes $5,419,000 of municipal and other government agency deposits.
(e) Includes $891,000 of municipal and other government agency deposits.
During the twelve months ended December 31, 1997, average demand
deposits increased by approximately $14,909,000 or 12.7%; average money market &
NOW checking accounts deposits increased by approximately $6,356,000 or 5.3%;
average savings deposits increased by approximately $4,705,000 or 10.3%; and
average time deposits decreased by approximately $10,324,000 or 9.3%, which was
the result of a decrease of $20,100,000 in TCD's and an increase of
approximately $9,776,000 in 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, 3.3% 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 significant.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
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 $ 46,050 10.9% $ 38,410 9.7% $ 34,852 9.5%
Non-Taxable 7,114 1.7 7,810 1.9 3,671 1.0
Federal Funds Sold 23,673 5.6 20,033 5.0 33,762 9.2
Due from Banks - Time Deposits 4,215 1.0 7,391 1.8 2,789 0.8
Loans 286,438 67.8 278,560 69.4 250,248 67.9
Direct Lease Financing 4,395 1.0 2,205 0.6 2,154 0.6
Reserve for Loan and Lease Losses (4,246) (1.0) (4,012) (1.0) (3,586) (1.0)
-------- ----- -------- ----- -------- -----
Net Loans and Leases 286,587 67.8 276,753 69.0 248,816 67.5
-------- ----- -------- ----- -------- -----
Total Interest Earning Assets 367,639 87.0 350,397 87.4 323,890 88.0
Cash and Non-interest Earning
Assets 33,548 7.9 29,308 7.3 24,712 6.7
Net Premises, Furniture and
Equipment 7,673 1.8 7,477 1.9 6,924 1.9
Other Assets 13,754 3.3 13,726 3.4 13,026 3.4
-------- ----- ------- ----- -------- -----
Total Assets $422,614 100.0% $400,908 100.0% $368,552 100.0%
======== ===== ======== ===== ======== =====
LIABILITIES AND STOCKHOLDERS EQUITY
Savings Deposits (1) $151,319 35.% $140,258 35.0% $127,467 34.6%
Time Deposits 111,129 26.3 121,453 30.3 127,263 34.5
Long-term Borrowings 147 -- 190 -- 228 0.1
-------- ----- -------- ----- -------- -----
Total Interest-Bearing
Liabilities 262,595 62.1 261,901 65.3 254,958 69.2
Demand Deposits 117,711 27.9 102,802 25.7 82,076 22.3
Other Liabilities 3,688 0.9 2,898 0.7 2,148 0.6
-------- ----- -------- ----- -------- -----
Total Liabilities 383,994 90.9 367,601 91.7 339,182 92.1
Stockholders' Equity 38,620 9.1 33,307 8.3 29,370 7.9
-------- ----- -------- ----- -------- -----
Total Liabilities and
Stockholders' Equity $422,614 100.0% $400,908 100.0% $368,552 100.0%
======== ===== ======== ===== ======== =====
</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
income the Bank generates from its loans and investment securities 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, the 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,
-----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- -----------------------------
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 $ 16,610 $ 984 5.9% $ 4,025 $ 236 5.9% $ 10,080 $ 468 4.6%
U.S. Government
Agencies 26,046 1,460 5.6 31,253 1,743 5.6 22,441 1,445 6.4
Municipal Leases(1) 7,114 596 8.4 7,810 589 7.5 3,671 240 6.5
Other Securities 3,394 201 5.9 3,132 192 6.1 2,331 132 5.7
-------- ------- -------- ------- -------- -------
Total Investment
Securities 53,164 3,241 6.1 46,220 2,760 6.0 38,523 2,285 5.9
Federal Funds Sold 23,673 1,274 5.4 20,033 1,070 5.3 33,762 1,944 5.8
Due form Banks - Time
Deposits 4,215 241 5.7 7,391 402 5.4 2,789 165 5.9
Loans(2) 286,438 30,231 10.6 278,560 30,939 11.1 250,248 28,872 11.5
Lease Financing(1) 4,395 398 9.1 2,205 185 8.4 2,154 276 12.8
-------- ------- -------- ------- -------- -------
Total Interest-Earning
Assets(1) $371,885 $35,385 9.5% $354,409 $35,356 10.0% $327,476 $33,542 10.2%
-------- ------- -------- ------- -------- -------
INTEREST BEARING LIABILITIES:
- -----------------------------
Domestic Deposits and
Borrowed Funds:
Savings Deposits(3) $151,319 $ 3,624 2.4% $ 140,258 $ 3,100 2.2% $127,467 $ 2,602 2.0%
Time Deposits 111,129 6,099 5.5% 121,453 6,750 5.6% 127,263 7,149 5.6%
Long-Term Borrowings 147 15 10.2% 190 19 10.0% 228 35 15.4%
-------- ------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities $262,595 $ 9,738 3.7% $ 261,901 $ 9,869 3.8% $254,958 $ 9,786 3.8%
======== ======= ========= ======= ======== =======
</TABLE>
5
<PAGE> 6
The table below shows the net interest earnings and the net yield on
average earning assets:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total Interest Income (1)(2) $ 35,385 $ 35,387 $ 33,542
Total Interest Expense (3) $ 9,738 $ 9,738 $ 9,786
Net Interest Earnings (1)(2) $ 25,647 $ 25,349 $ 23,756
Net Average Earning Assets (2) $371,885 $354,409 $327,450
Net Yield on Average Earning Assets (1)(2) 6.9% 7.2% 7.3%
Net Yield on Average Earning Assets
(excluding Loan Fees) (1)(2) 6.2% 6.4% 6.6%
</TABLE>
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate 35.9
for 1997, 37.0 percent for 1996 and 37.1 percent for 1995.
(2) Loans, net of unearned discount, do not reflect average reserves for
possible loan losses of $5,165,000 in 1997, $4,012,000 in 1996 and
$3,586,000 in 1995. Loan fees of $2,556,000 in 1997, $2,891,000 in 1996
and $2,141,000 in 1995 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-seven non-accruing loans at December 31, 1997, twenty-one at
December 31, 1996 and forty-five at December 31, 1995.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
6
<PAGE> 7
The following table sets forth year-to-year changes in interest earned,
including loan fees and interest paid. The net increase (decrease) is segmented
into the changes attributable, respectively, 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
----------
NON- FEDERAL DIRECT
TAX- TAX- FUNDS LEASE TIME
INTEREST EARNED ON: ABLE ABLE(1) SOLD LOANS(2) FINANCING DEPOSITS TOTAL
- ------------------- ---- ---- ---- ----- --------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 compared to 1996 -
Increase (decrease)
due to:
Volume Changes $ 438 $(52) $ 196 $ 999 $ 197 $(181) $ 1,597
Rate Changes 36 59 8 (1,707) 16 20 (1,568)
----- ---- ----- ------- ----- ----- -------
Net Increase (Decrease) $ 474 $ 7 $ 204 $ (708) $ 213 $(161) $ 29
===== ==== ===== ======= ===== ===== =======
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
===== ==== ===== ======= ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
SAVINGS OTHER TIME LONG TERM REPURCHASE
INTEREST PAID ON: DEPOSITS DEPOSITS BORROWINGS(3) AGREEMENTS TOTAL
- ----------------- -------- -------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C>
1997 compared to 1996 -
Increase (decrease)
due to:
Volume Changes $ 254 $(568) $ (4) $ -- $(318)
Rate Changes 270 (83) -- -- 187
------ ----- ----- ----- -----
Net Increase (Decrease) $ 524 $(651) $ (4) $ -- $(131)
====== ===== ===== ===== =====
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
------ ----- ----- ---- -----
</TABLE>
- ----------------------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate 35.9%
for 1997 and 37.0% for 1996.
(2) Includes a decrease in loan fees of $335,000 in 1997 and an increase of
$750,000 in 1996.
(3) Long term borrowings in 1997 and 1996 consist of an obligation secured
by deed of trust that bears interest at 10.0%.
7
<PAGE> 8
INVESTMENT PORTFOLIO
- --------------------
The objectives of the Bank's investment policy are to manage interest
rate risk, provide adequate liquidity and reinvest in the Bank's market areas,
while maximizing earnings with a portfolio of investment-grade securities. Each
security purchased is subject to 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 investment securities
at the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------- -------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES
HELD-TO-MATURITY:
- ---------------------
U. S. Treasury and
Agency $ 12,384 $ 12,432 $ 2,796 $ 2,800 $ 19,735 $ 19,815
State and Political
Subdivisions 2,476 2,489 2,529 2,538 3,506 3,517
Other Securities 250 250 250 250 250 250
-------- -------- ------- ------- -------- --------
Total Investment
Securities $ 15,110 $ 15,171 $ 5,575 $ 5,588 $ 23,491 $ 23,582
======== ======== ======= ======= ======== ========
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
- ---------------------
U. S. Treasury and
Agency $ 22,956 $ 22,978 $ 31,877 $ 31,800 $ 11,804 $ 11,811
State and Political
Subdivisions(1) 4,749 4,763 4,772 4,792 4,434 4,477
Other Securities 3,538 3,218 3,238 2,885 2,707 2,455
-------- -------- ------- ------- -------- --------
Total Investment
Securities $ 31,243 $ 30,959 $ 39,887 $ 39,477 $ 18,945 $ 18,743
======== ======== ======= ======= ======== ========
</TABLE>
- ----------------------------
(1) Includes, in 1997 and 1996, non-rated certificates of participation
evidencing ownership interests in the California Statewide communities
Development Authority - San Joaquin County Limited Obligation Bond Trust
with amortized cost values of $4,413,000 and $4,428,000 and market
values of $4,427,000 and $4,452,000 at December 31, 1997 and 1996,
respectively.
8
<PAGE> 9
The following table shows the maturity of investment securities at December 31,
1997, and the weighted average yields (for tax-exempt obligations on a fully
taxable basis assuming a 35.9% 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
------------ ----------- ---------- ---------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES
HELD-TO-MATURITY:
- ---------------------
U. S. Treasury and
Agencies $ 7,388 5.98% $ 4,996 6.18% $ -- --% $ -- --%
State and Political 677 5.80 1,077 5.63 722 4.60 -- --
Other Securities 250 -- -- -- -- -- -- --
-------- ----- ------- ---- ------- ---- ---- ----
$ 8,315 5.78% $ 6,073 6.08% $ 722 4.60% $ -- --%
======== ===== ======= ==== ======= ==== ==== ====
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
- ---------------------
U.S. Treasury and
Agencies $ 7,968 5.54% $ 15,010 5.94% $ -- --% $ -- --%
State and Political 421 8.28 2,150 8.43 1,856 8.43 336 5.63
Other Securities 3,218 2.77 -- -- -- -- -- --
-------- ----- -------- ---- ------- ---- ---- ----
$ 11,607 4.87% $ 17,160 6.25% $ 1,856 8.43% $336 5.63%
-------- ----- -------- ---- ------- ---- ---- ----
Total Investment
Securities $ 19,922 5.25% $ 23,233 6.21% $ 2,578 7.36% $336 5.63%
-------- ---- -------- ---- ------- ---- ---- ----
</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,
1997.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
TYPES OF LOANS
Domestic:
Commercial, Financial
and Agricultural $ 44,296 $ 40,979 $ 44,801 $ 67,551 $ 46,813
Real Estate Construction 10,895 12,008 32,745 33,155 14,906
Real Estate Mortgage(1) 228,630 231,012 171,321 129,650 112,472
Consumer Loans 6,450 8,157 10,887 15,986 18,606
Lease Financing(2) 4,749 2,864 2,086 3,727 2,189
All other Loans
(including overdrafts) 2,203 407 178 112 178
---------- ----------- ----------- ----------- -----------
Subtotal: 297,223 295,427 262,018 250,181 195,164
Less:
Unearned Discount (665) (797) (864) (1,165) (928)
Reserve for Loan and
Lease Losses (5,165) (4,744) (3,644) (3,145) (2,328)
---------- ----------- ----------- ----------- -----------
Total: $ 291,393 $ 289,886 $ 257,510 $ 245,871 $ 191,908
========== =========== =========== =========== ===========
</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 mortgage loans.
(2) Lease financing includes residual values of $0 for 1997; $33,000 for
1996; $322,000 for 1995; $567,000 for 1994 and $1,397,000 for 1993, and
is net of unearned income of $694,000 for 1997; $329,000 for 1996;
$252,000 for 1995; $391,000 for 1994 and $491,000 for 1993.
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, 1997.
<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 $ 20,551 $ 21,773 $ 1,972 $ 44,296
Real Estate and Construction 9,405 319 1,171 10,895
Real Estate and Mortgage 36,258 72,958 119,414 228,630
Consumer Loans 2,474 3,488 488 6,450
Lease Financing 152 3,681 916 4,749
All other Loans 957 1,221 25 2,203
---------- ---------- ---------- ----------
Total $ 69,797 $ 103,440 $ 123,986 $ 297,223
---------- ---------- ---------- ----------
</TABLE>
Of the total amount of loans (exclusive of loans on non-accrual status)
outstanding as of December 31, 1997 that had maturities of more than one year,
$155,792,000 had predetermined, or fixed, rates of interest and $65,077,000 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, 1997. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
Generally, when 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 $ 4,152 $ 4,157 $ -- $ -- $ -- $ 8,309
Investment securities 8,898 9,041 23,233 2,914 1,983 46,069
Federal Funds Sold 30,550 -- -- 30,550
Net loans 20,564 44,332 97,211 123,658 5,628 291,393
Noninterest-earning assets -- -- -- -- 59,387 59,387
--------- --------- --------- --------- --------- ---------
Total assets $ 64,164 $ 57,530 $ 120,444 $126,572 $ 66,998 $ 435,708
--------- --------- --------- --------- --------- ---------
LIABILITIES AND
STOCKHOLDER'S EQUITY:
Noninterest-bearing
deposits $ -- $ -- $ -- $ -- $ 126,503 $ 126,503
Interest-bearing deposits 197,047 56,581 10,015 263,643
Short-term borrowings -- -- -- -- -- --
Long-term borrowings -- -- 123 -- -- 123
Other liabilities -- -- -- -- 3,398 3,398
Stockholders' equity -- -- -- -- 42,041 42,041
--------- ---------- --------- --------- --------- ----------
Total liabilities and
stockholders equity $ 197,047 $ 56,581 $ 10,138 $ -- $ 171,942 $ 435,708
--------- ---------- --------- --------- --------- ----------
Interest rate sensitivity gap $(132,883) $ 949 $ 110,306 $ 126,572 $(104,944) $ --
========= ========== ========= ========= ========= ==========
Cumulative interest rate
sensitivity gap $(132,883) $ (131,934) $ (21,628) $ 104,944 $ -- $ --
--------- ---------- --------- --------- --------- ----------
</TABLE>
11
<PAGE> 12
RISK ELEMENTS
- -------------
Non-accrual, Past Due and Restructured Loans
--------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans More Than 90 Days Past Due(1):
Aggregate Loan Amounts:
Commercial $ -- $ 500 $ 584 $ 281 $ 92
Real Estate -- 2,328 869 2,117 -
Consumer 7 1 3 51 36
Aggregate Leases -- - - - -
Troubled Debt Restructurings (2) 2,880 4,787 6,397 1,337 640
Non-Accrual Loans (3) 11,458 11,623 12,620 8,621 9,424
------- -------- -------- -------- --------
$14,345 $ 19,239 $ 20,473 $ 12,407 $ 10,192
------- -------- -------- -------- --------
</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 1997, 1996, 1995, 1994 and 1993 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-seven loans on non-accrual status at December 31,
1997; twenty-one loans at December 31, 1996; forty-five loans at
December 31, 1995; sixty loans at December 31, 1994 and thirty-one loans
at December 31, 1993. The amount of interest that would have been
collected on these loans had they remained current in accordance with
their original terms was $981,000 in 1997, $1,488,000 in 1996, $985,000
in 1995, $510,000 in 1994 and $504,000 in 1993.
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 loan's
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 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, $951,000 for the year ended December 31,
1997 and were included in the Bank's Reserve for Loan Losses at December 31,
1997. The average balance of the impaired loans amounted to approximately
$11,808,000 for the year ended December 31, 1997. Cash receipts during 1997
applied to reduce principal balances and recognized as interest income were
approximately $6,346,000 and $919,000, 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, 1997, 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,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
and leases outstanding(1) $290,833 $280,765 $252,402 $222,291 $183,401
======== ======== ======== ======== ========
Loan and lease loss reserve
balance at beginning of year $ 4,744 $ 3,644 $ 3,145 $ 2,328 $ 2,168
-------- -------- -------- -------- --------
Charge-Offs:
Domestic:
Commercial, financial
and agricultural (391) (96) (1,414) (1,114) (773)
Real Estate-construction - - - - -
Real Estate-mortgage (1,191) (1,365) (543) (516) (84)
Consumer Loans (64) (142) (109) (207) (94)
Lease Financing (21) - - - -
-------- -------- -------- -------- --------
(1,667) (1,603) (2,066) (1,837) (951)
Foreign: - - - - -
-------- -------- -------- -------- --------
Recoveries:
Domestic:
Commercial, financial
and agricultural $ 102 $ 295 $ 284 $ 78 $ 75
Real Estate-construction - - - - 1
Real Estate-mortgage 254 152 186 140 -
Consumer Loans 51 56 79 72 10
Lease Financing - - - - -
-------- -------- -------- -------- --------
407 503 549 290 86
Foreign: - - - - -
-------- -------- -------- -------- --------
Net Charge-Offs (1,260) (1,100) (1,517) (1,547) (865)
Additions charged to operations 1,681 2,200 2,016 2,364 1,025
-------- -------- -------- -------- --------
Loan and lease loss reserve
balance at end of year $ 5,165 $ 4,744 $ 3,644 $ 3,145 $ 2,328
======== ======== ======== ======== ========
Ratios:
Net charge-offs during
the year to average loans and
leases outstanding during the
year 0.43% 0.39% 0.60% 0.70% 0.47%
Loan loss reserve to total gross
loans 1.74% 1.61% 1.39% 1.26% 1.20%
Net loan charge-offs to loan loss
reserve 24.39% 23.19% 41.63% 49.19% 37.16%
Net loan charge-offs to provision
for loan losses 74.96% 50.00% 75.25% 65.44% 84.39%
Loan loss reserve to
non-performing loans(2) 45.05% 32.82% 25.88% 28.41% 24.37%
</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 and lease
losses (the "Loan Loss Reserve") when management believes that the
collectability of principal is unlikely. The Loan Loss 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.
Loan charge-offs are, in accordance with applicable accounting
principles, applied against the Bank's Loan Loss Reserve. As a consequence, it
is necessary for the Bank to replenish the Loan Loss Reserve from time to time,
through additional "provisions" charged against operating income, to bring the
Reserve back to a level which management deems adequate in light of economic
conditions.
The relatively higher levels of loan charge-offs in 1995 and 1994 were
due primarily to the severity of economic recession in Southern California
during those periods. The Recession resulted in an increase in loan
delinquencies and defaults by borrowers which 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.
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 existing extensions of credit
to the same borrower, exceeds the officer's lending limits, the loan must be
approved by the Bank's Senior Loan Committee, which is comprised of five to
seven senior officers of the Bank and/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 quality control officer reviews a percentage of
all loans and leases made for creditworthiness as well as documentation and
compliance with the Bank's loan policies. In addition, the Bank has engaged a
consulting firm to extensively review the Bank's loan and lease portfolio
semi-annually. Under-performing loans and leases identified in the review
process are scheduled for in-depth analysis and remedial action.
The Reserve for 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 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
bank 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. See "Supervision and Regulation."
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,
---------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
% 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) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, Financial
and Agricultural $ 2,128 14.90% $ 1,148 13.87% $ 1,093 17.10%
Real Estate-construction 302 3.67% 169 4.06% 194 12.50%
Real Estate-mortgage 2,415 76.92% 2,899 78.20% 1,603 65.38%
Installment loans to individuals 79 2.17% 77 2.76% 293 4.15%
Lease financing 96 1.60% 17 0.97% 13 0.80%
Other 145 0.74% 434 0.14% 448 0.07%
--------- ------ ------- ------ ------- ------
$ 5,165 100.00% $ 4,744 100.00% $ 3,644 100.00%
========= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993
----------------------- -----------------------
% 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 $ 1,493 27.00% $1,084 23.99%
Real Estate-construction 459 13.25% 189 7.64%
Real Estate-mortgage 1,215 51.82% 871 57.63%
Installment loans to individuals 210 6.39% 152 9.53%
Lease financing 18 1.49% 7 1.12%
Other (250) 0.05% 25 0.09%
-------- ------ ------ ------
$ 3,145 100.00% $2,328 100.00%
======== ====== ====== ======
</TABLE>
16
<PAGE> 17
DEPOSITS
- --------
The average amount (in thousands) of and the average rate paid on
deposits is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
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 deposit $117,711 -- $102,802 -- $ 82,076 --
Savings Deposits(1) 151,319 2.39% 140,258 2.21% 127,467 2.00%
Time Deposits(2) 111,129 5.49% 121,453 5.56% 127,263 5.60%
--------- -------- --------
Total Deposits $380,159 2.56% $364,513 2.70% $336,806 2.90%
========= ======== ========
</TABLE>
- --------------------------
(1) Includes NOW, Super NOW, and Money Market Deposit Accounts.
(2) Includes time certificates of deposit in denominations greater than and
less than $100,000.
Set forth below is maturity schedule of domestic time certificates of
deposits in denominations greater than $100,000:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
(In Thousands)
<S> <C>
Three Months or Less $ 19,921
Over Three through Six Months 8,214
Over Six through Twelve Months 16,780
Over Twelve Months 6,038
--------
$ 50,953
========
</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).
RETURN ON EQUITY AND ASSETS
- ---------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Return on Assets 1.07% 1.04% 0.97%
Return on Equity 11.70% 12.56% 11.90%
Dividend Payout Ratio -- --
Equity to Asset Ratio 9.14% 8.31% 8.13%
</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 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, securities brokerage firms and mutual funds, 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
- --------------------------
Regulation of the Company
-------------------------------------
The Company, as a bank holding company, is subject to regulation under
the Bank Holding Company Act (the "BHCA"). 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.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency
Act (the "IBBEA"), bank holding companies are able to acquire banks in states
other than the state where their principal banking operations are conducted,
whether or not permitted by the laws of the state of any bank sought to be
acquired, but subject to the following restrictions: (i) any state may adopt
laws precluding acquisitions of any banks that have been in operation for a
period of five years or less, and (ii) no such acquisition may be made by bank
holding company that controls or, following the proposed acquisition will
control, more than 10% of the total amount of deposits of insured depository
institutions in the United States or more than 30% of such deposits in that
state.
Under the BHCA, 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 BHCA does
not place territorial restrictions on the activities of non-bank subsidiaries of
bank holding companies.
In recent years, bank holding companies have encountered increased
competition from securities brokerage and investment banking firms, mutual funds
and credit card companies that are not subject to regulation to the same extent
as bank holding companies and FDIC-insured banks. More recently, foreign banking
institutions have begun acquiring domestic securities brokerage and investing
banking firms, which has enabled those firms to offer products and services to
customers more directly competitive to the products and services traditionally
offered by bank holding companies through their banking and bank-related
subsidiaries. As a result, the FRB is taking a less restrictive policy in
permitting bank holding companies to acquire businesses which, until recently,
bank holding companies were not permitted to own, including firms engaged in
investment banking, securities brokerage and investment management. Other
non-banking businesses that bank holding companies are permitted to acquire
include: loan servicing companies; industrial loan companies; real and
personal property leasing; 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; issuing and selling money
orders, savings bonds and travelers checks; performing certain trust company
services; real estate and personal property appraisal; data processing services;
courier services; management consulting services to nonaffiliated depository
institutions; arranging commercial real estate equity financing; 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.
18
<PAGE> 19
Under the BHCA, a bank holding company is required to file with the FRB
annual reports and such additional information as the FRB may require regarding
its business operations and those of its subsidiaries. The FRB also conducts
periodic examinations of bank holding companies and their subsidiaries. The FRB
also has authority to regulate provisions of certain bank holding company debt.
Under the BHCA and regulations adopted by the FRB, subject to certain
exceptions, 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 by its banking or
other subsidiaries. Exceptions to the anti-tying provisions that have been
approved by the FRB permit (i) a bank or bank holding company to offer lower
pricing on traditional banking products, such as loans, deposits or trust
services, and on securities brokerage services, on the condition that the
customer obtain a traditional bank product from an affiliate and (ii) a bank
holding company, or a non-bank subsidiary of a bank holding company to offer
lower pricing on any of its products or services on the condition that the
customer obtain another product or service from the bank holding company or any
of its non-bank affiliates, provided that all products or services offered in
the package arrangement are separately available for purchase.
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, 1997 the Company, on a consolidated
basis, had total and primary capital of approximately $45,783,000 and a primary
capital-to-asset ratio of approximately 10.57%.
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, 1997, the Company's risk-based
capital ratio, determined in accordance with the FRB regulations, was 14.6%
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, 1997, the maximum dividend payable by the Bank to
the Company under these restrictions would have been $12,264,313. See "Item 5.
Dividends" below. However, since cash dividends from bank subsidiaries usually
are the primary source of funds for the payment of cash dividends by their bank
holding companies, the FRB also restricts the payment of cash dividends by bank
holding companies in instances in which such dividends would impose undue
pressure on the capital of the subsidiary banks or on the capital position of
the holding company. In addition, it is current policy of the Company's Board of
Directors to retain earnings to support the continued growth of the Company and
the Bank and, in furtherance of that policy, currently, the Company does not pay
cash dividends. See "Market for Registrant's Common Stock and Related
Stockholder Matters -- Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources"
in Part II of this Report.
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.
Under California law, bank holding companies, including the Company,
are also subject to periodic examination by, and may be required to file reports
with, the DFI. However, regulations have not yet been proposed or adopted that
provide for such examinations or require the filing of such reports.
Regulation of the Bank
----------------------
The Bank is subject to regulation, supervision and regular examination
at the state level, by the DFI, and, at the Federal level, by the FRB. 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 DFI and FRB 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
DFI and the FRB.
The FRB has adopted regulations and a statement of policy which define
and establish certain minimum requirements for capital adequacy. Under the
regulations, FDIC-insured state 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 FRB has the authority to impose higher leverage ratio
requirements where warranted by the risk profile of the bank, as determined by
the FRB. 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, 1997 the Bank's Tier 1 leverage ratio
increased to 9.5% from 8.5% at December 31, 1996.
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 FRB 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 and new branches. Any FDIC-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. See "Supervision and Regulation -- Regulation of the
Bank -- Prompt Corrective Action and Other Enforcement Mechanisms."
In addition, under FRB regulations, FDIC-insured state member banks are
required to maintain a "risk-based" capital ratio that is determined on the
basis of a bank's weighted risk asset base. These requirements are similar to
the risk-based capital requirements applicable to the Company (see "Supervision
and Regulation -- Regulation of the Company"). 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, 1997 the Bank's risk-based
capital ratio, determined on the basis of the FRB rules, was approximately
14.3%.
20
<PAGE> 21
Federal bank regulatory agencies, including the FRB, have adopted
regulations which permit those agencies to take into consideration, when
evaluating a bank's capital adequacy, (i) undue concentrations of credit risk
and risks from non-traditional activities, as well as an institution's ability
to manage those risks, and (ii) the bank's interest rate risk exposures (when
the interest rate sensitivity of a bank's assets does not match the sensitivity
of its liabilities or its off-balance-sheet positions). These factors are to be
considered in connection with the safety and soundness examinations that each
federal bank regulatory agency periodically conducts of the banks it regulates.
If the regulatory agency determines that a bank has an excessive concentration
of credit or undue risks from non-traditional activities, or is exposed to undue
interest rate risk, the agency may require the bank to maintain a Tier 1 capital
ratio above the minimum ratio it would otherwise be required to maintain.
As a member bank, the Bank also is subject to certain FRB requirements
designed to maintain the safety and soundness of individual banks and the
banking system. The FRB periodically conducts examinations of member banks and,
based upon its findings, may revalue assets of a member bank and require
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets. In determining the capital
that an FDIC-insured bank is required to maintain, the federal bank regulatory
agencies do not, in all respects, follow generally accepted accounting
principles ("GAAP"). Instead such regulatory agencies have adopted a modified
version of GAAP (referred to as "Regulatory Accounting Principles" or "RAP"),
which reduce the amount of capital that the bank regulatory agencies will
recognize for purposes of determining the capital adequacy of a bank. These
principles are subject to periodic change, including possible changes in the
definition of capital that could have the effect of requiring banks to increase
capital and, therefore, could adversely affect their growth and profitability.
Due primarily to increases in loan losses sustained by banks in
California during the recent economic recession that particularly impacted
California during the period from 1991 to 1995, federal bank regulatory
agencies, in evaluating the safety and soundness of the banks that they
regulate, heightened the standards by which they evaluate the quality and
collectibility of loans and required banks to increase the reserves they
maintain for possible loan losses, which determines the ability of a bank to
absorb loan losses without unduly affecting its capital position. Increases in
reserve requirements usually are effectuated by a charge against current
earnings and, therefore, can adversely affect profitability. See, Management's
Discussion and Analysis of Financial Condition and Results of Operation" in Part
II of this Report.
In response to examinations of the Bank in 1995, 1996 and 1997, the
Bank increased its loan loss revenues and implemented more stringent credit and
loan collection policies. Despite these increases in reserves, the Bank was able
to maintain Tier 1 leverage ratios of 9.48% as of December 31, 1997, 8.53% as of
December 31, 1996 and 7.77% as of December 31, 1995.
Prompt Corrective Action and Other Enforcement Mechanisms. In 1991,
---------------------------------------------------------
Congress enacted the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") and in 1992, federal regulations implementing that Act were adopted
by the federal bank regulatory agencies. FDICIA requires each federal banking
agency to take prompt corrective action to resolve the problems of any
FDIC-insured bank that it regulates, particularly those which are found to be
undercapitalized, as measured by certain minimum capital ratios established
under FDICIA. The regulations implementing FDICIA establish five categories in
which FDIC-insured banks are placed, based on their respective capital ratios.
The following table sets forth each of those five categories and the respective
capital ratios which determine the categories in which FDIC-insured banks will
be placed:
<TABLE>
<CAPTION>
Total Tier 1
Capital Risk-Based Risk Based
Category Capital Ratio Capital Ratio Leverage Ratio
-------- ------------- ------------- --------------
<S> <C> <C> <C>
Well-Capitalized 10% 6% 5%
Adequately Capitalized 8% 4% 4%
Undercapitalized Less than: 8% 4% 4%
Significantly
Undercapitalized Less than: 6% 3% 3%
Critically
Undercapitalized: Less than: N/A 2% 2%
</TABLE>
However, an FDIC-insured bank that, based upon its capital ratios, is
classified as "well capitalized," "adequately capitalized" or "under-
capitalized," may nevertheless be treated as though it were in the next lower
category if its federal bank regulatory agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or unsound
practice warrants such treatment. At each successive lower capital category, an
insured depository institution is subject to more restrictions on its business.
The federal bank regulatory agencies, however, may not treat an institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
If an FDIC-insured bank is undercapitalized, it will be closely
monitored by its federal bank regulatory agency. Undercapitalized institutions
must submit an acceptable capital restoration plan with a guarantee of
performance issued by its holding company. Further restrictions and sanctions
are required to be imposed on FDIC-insured banks that are critically
undercapitalized, which includes either the appointment of a receiver for such a
bank or the taking of other remedial actions that are approved by the FDIC,
which is responsible for insuring a banking institution's deposits if such
institution were to fail.
In addition to measures taken under the prompt corrective action
provisions, FDIC-insured banks may be subject to potential enforcement actions
by federal regulators for unsafe or unsound practices in their businesses or for
violations of any law, rule or regulation, or any condition imposed in writing
by, or any written agreement that the bank is required to enter into with, the
agency. Enforcement actions may include the issuance of directives to increase
capital, the requirement that the bank and its directors enter into an informal
or a formal agreement requiring corrective actions to be taken, the issuance of
a cease-and-desist order that can be judicially enforced and that is required to
be publicly disclosed, the imposition of civil money penalties against directors
or officers of the bank, the appointment of a conservator or receiver for the
bank, the termination of FDIC insurance for its deposits, and the enforcement of
any such agreements or orders through injunctions or restraining orders based
upon a judicial determination that the FDIC, as the insurer of the banking
institutions deposits, would be harmed if such relief was not granted.
Additionally, a holding company's inability to serve as a source of financial
strength and capital needed by any of its subsidiary banking organizations could
serve as a basis for regulatory action against that holding company.
Safety and Soundness Standards. FDICIA also implemented certain
------------------------------
specific restrictions and required federal banking regulators to adopt overall
safety and soundness standards for depository institutions related to internal
control, loan underwriting and documentation and asset growth. Among other
things, FDICIA limits the interest rates paid on deposits by, and reduces
deposit insurance coverage for deposit accounts maintained by employee benefit
plans at, undercapitalized institutions, restricts the use of brokered deposits,
and limits the aggregate extensions of credit by a depository institution to any
of its executive officers, directors, principal shareholders and persons or
entities related to any of them.
In addition to the statutory limitations, FDICIA was amended in 1994
(i) to authorize federal bank regulatory agencies to establish safety and
soundness standards by regulation or by guideline; (ii) to permit these agencies
greater flexibility in prescribing asset quality and earnings standards for the
banks they regulate; and (iii) to rescind provisions of that Act that had
imposed on bank holding companies all of the same standards that are applied to
banks.
In addition, if a federal bank regulatory agency determines that a
banking institution is failing to meet the safety and soundness standards
applicable to it, the bank regulatory agency has the authority to require the
banking institution to implement a compliance program or to take other remedial
actions that the agency believes are necessary or appropriate to remedy the
deficiencies identified by the agency.
Effects of FDICIA on the Bank. Based on the Bank's capital ratios and
-----------------------------
its overall financial condition, the Bank is not subject to any significant
operating restrictions under FDICIA. However, in response to the heightened
safety and soundness standards made applicable to banks by FDICIA and federal
regulatory agencies, the Bank has modified some of its policies and adopted
certain procedures that are designed to assure compliance with those standards.
Community Reinvestment Act and Other Fair Lending Laws. The Bank is
------------------------------------------------------
subject to certain fair lending requirements and reporting obligations involving
home mortgage lending operations and Community Reinvestment Act ("CRA")
activities. The CRA requires federal bank regulatory agencies to conduct
periodic examinations of the banks they regulate that focus specifically on
their efforts in meeting the credit needs of their local communities, including
those of individuals residing or operating businesses in low and moderate income
neighborhoods. Moreover, under CRA regulations, a federal bank regulatory agency
need not find overt discrimination on the part of a bank to find that it has
violated the CRA. It also may find a violation from evidence of disparate
treatment accorded by the bank to, or evidence of disparate impact from the
bank's lending activities, on customers in lower income neighborhoods. The CRA
authorizes the imposition of substantive penalties on and corrective measures
against a bank that is found to have violated the fair lending laws or CRA
regulations. In addition, federal bank regulatory agencies may take compliance
with such laws and regulations into account when considering applications by a
bank or its bank holding company for authority to acquire other banks, open new
bank branches or enter into new lines of business and, in some instances, have
refused to approve proposed bank acquisitions in response to complaints and
evidence that either the acquiring institution or the institution proposed to be
acquired was deficient in complying the CRA or other fair lending laws.
Recent Legislation Affecting Competition Among Banks. The Interstate
----------------------------------------------------
Banking and Branching Efficiency Act (the "IBBEA"), not only permits bank
holding companies to acquire banks in other states, it also authorizes the
merger of banks across state lines, thereby making it possible to create banks
with branches in multiple states. Under the IBBEA, however, any state has the
right to "opt out" of this feature of the IBBEA and, thereby, preclude
interstate banking within its borders. Furthermore, The IBBEA also authorizes a
bank to open new branches in a state in which it does not already have banking
operations, if the laws of such state permit such "de novo branching."
California has enacted legislation (known as the "Caldera, Weggeland,
and Killea California Interstate Banking and Branching Act), which permits a
bank chartered in a state other than California to acquire, by merger or
purchase, a California bank which has been in operation for at least five (5)
years, and thereby establish one or more California branch offices. However,
this Act prohibits a bank chartered in another state from entering California
either by purchasing a branch office of a California bank without purchasing the
entire entity or by establishing a de novo California branch office.
Proposed Legislation
- --------------------
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.
Effects of Governmental Policies
- --------------------------------
A principal determinant of a banking institution's earnings is the
difference between the income it generates from 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
affected 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 1996 the Federal Reserve Board adopted monetary policies,
primarily in response to improving economic conditions and a relative absence of
inflationary pressures, that permitted interest rates to decline. Although that
interest rate decline did result in moderate reductions in the yields on loans,
it contributed to a reduction in the Bank's interest expense, thereby enabling
the Bank to increase its net interest income. In 1997, the Federal Reserve Board
has sought to stabilize interest rates in order to prevent inflationary
pressures from developing in the economy and its monetary policies have had a
lesser impact on the Bank's net interest income than in prior years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" in Part II of this Report. It is not possible to predict with any
certainty, however, the impact of the Federal Reserve Board's monetary policies
may have upon the future business and earnings of the Company.
21
<PAGE> 22
Employees
- ---------
At December 31, 1997, the Bank had approximately 205 full-time and 63
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 56 President and Chief President and Chief
Executive Officer Executive Officer
Tom Kramer 54 Executive Vice President Executive Vice President,
and Secretary Chief Credit Officer and
Secretary
Donna Miltenberger 42 Executive Vice President Executive Vice President
and Chief Operating
Officer
Carol Ann Graf 52 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 Company since 1996 and Executive Vice President of the Bank
since November 1993. She also served as the Chief Administrative Officer of the
Bank from 1994 until 1997 when, due to an increase in the scope of her
responsibilities, she was appointed to the position of Chief Operating Officer
of the Bank. 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 leases expiring at various dates through 2027. Management
believes that the Bank's present facilities are adequate for its present needs
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 Stock Market 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 Stock
Market for all four quarters of 1997 and 1996. On March 9, 1998 the closing per
share price was $17.375 and, as of that same date, there were 1,132 record
shareholders of the Company.
<TABLE>
<CAPTION>
Trade Prices of Stock
Common Stock (1) Dividends Declared
------------------ ------------------
High Low
---- ---
<S> <C> <C> <C>
1997(1)
- -------
First Quarter $14.00 10.75 $--
Second Quarter 14.25 12.25 10%
Third Quarter 15.38 13.50 --
Fourth Quarter 17.50 17.50 --
1996(1)
- -------
First Quarter $ 9.75 7.88 $--
Second Quarter 9.25 8.25 10%
Third Quarter 8.75 7.75 --
Fourth Quarter 11.75 8.00 --
</TABLE>
- -------------------
(1) Stock prices for the quarterly periods preceding the 10% stock dividends
distributed, respectively, on April 5, 1996 to shareholders of record as
of March 22, 1996, and on June 20, 1997, to shareholders of record as of
June 6, 1997, have not been adjusted to reflect those dividends.
24
<PAGE> 25
Dividends
- ---------
Dividend Policy. Prior to 1995 it has been the Company's policy to pay
cash dividends out of internally generated funds that were 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, 1996 or 1997. The Board of Directors has determined to continue to
retain earnings to support growth in 1998 and, therefore, it is not expected
that cash dividends will be paid in 1998.
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 DFI,
the lesser 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 FRB, 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 the
Bank 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.
Rights Dividend
- ---------------
On February 25, 1997, the Board of Directors of the Company adopted a
Rights Agreement (the "Rights Agreement") pursuant to which it declared a
dividend distribution of rights (the "Rights") to purchase shares of the
Company's common stock and, under certain circumstances, other securities, to
the holders of record of the outstanding shares of the Company's common stock.
The Rights dividend was made to the holders of record of shares of the
Company's common stock at the close of business on March 18, 1997. Each Right
entitles the registered holder, on certain events, to purchase from the
Company, at an initial exercise price of $48.00 per Right (subject to
adjustment), such number of newly issued shares of the Company's common stock or
the common stock of the acquiring or surviving company, depending on the type of
triggering event, equal to an aggregate market value as of the date of the
triggering event of two (2) times the exercise price of the Right.
25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal years
ended December 31, 1997, 1996, and 1995, and the selected balance sheet data as
of December 31, 1997 and 1996, 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, 1994 and
1993, and the selected balance sheet data as of December 31, 1995, 1994 and
1993, 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 1997 1996 1995 1994 1993
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Interest Income $ 35,028 $ 35,147 $ 33,403 $ 27,690 $ 21,732
Interest Expense 9,738 9,869 9,786 6,206 5,382
Net Interest Income 25,290 25,278 23,617 21,484 16,350
Provision for Possible Loan Losses (1,681) (2,200) (2,016) (2,364) (1,025)
Net Interest Income after Provision
for Possible Loan Losses 23,609 23,078 21,601 19,120 15,325
Other Income 6,039 5,264 4,687 5,052 5,962
Other (Expense) (22,598) (21,700) (20,625) (18,613) (16,925)
Income Before Income Taxes 7,050 6,642 5,663 5,559 4,362
Applicable Income Taxes 2,532 2,459 2,100 2,105 1,335
Net Income Before Cumulative
Effect of Change in Accounting
for Income Taxes 4,518 4,183 3,563 3,454 3,027
Cumulative Effect of Change in
Accounting for Income Taxes -- -- -- -- 126
Net Income 4,518 4,183 3,563 3,454 3,153
Cash Dividends (1) -- -- 1,417 1,310
BALANCE SHEET DATA
Investment Securities 46,069 45,052 42,234 30,977 43,953
Loans and Leases (net) 291,393 289,886 257,510 245,871 191,908
Assets 435,708 410,505 395,180 331,262 280,494
Deposits 390,146 370,966 361,114 301,222 253,298
Long Term Debt (2) 123 168 208 245 466
Shareholders' Equity 42,041 36,222 31,042 26,871 24,959
PER COMMON SHARE DATA
Income Before Cumulative Effect 0.90 0.86 0.75 0.73 0.68
Cumulative Effect -- -- -- -- 0.03
Net Income-Basic(3)(4) 0.90 0.86 0.75 0.73 0.71
Net Income-Diluted(3)(4) 0.85 0.84 0.73 0.72 0.69
Cash Dividends -- -- -- 0.40 0.40
Book Value (At year-end) 8.22 8.01 7.85 7.57 7.07
Number of Shares used in
Per Share Calculation-Basic(3)(4) 5,039,658 4,843,006 4,770,613 4,711,210 4,438,331
Number of Shares used in
Per Share Calculation-Diluted(3)(4) 5,308,314 4,999,119 4,905,645 4,793,085 4,583,312
</TABLE>
- ------------------
(1) For information regarding restrictions affecting the ability of the
Company to pay cash dividends, see Note 14 to the Company's
Consolidated Financial Statements.
(2) For information regarding long term debt, see Note 10 to the Company's
Consolidated Financial Statements.
(3) Retroactively adjusted for stock dividends and stock splits.
(4) For information regarding the determination of basic and diluted
earnings per share, see Note 18 to the Company's Consolidated Financial
Statements.
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 which in the case of the
Company, consist principally of deposits.
Net interest income was substantially the same in 1997, as compared to
1996, as a $119,000 decline in interest income was offset by a $131,000 decrease
in interest expense. The decline in interest income was due primarily to a
decrease of $708,000 in interest and fees earned on loans that was partially
offset by increases in interest earned on investment securities and Federal
funds sold aggregating $630,000 (see "Years Ended December 31, 1997 and
1996--Interest Income"). The decrease in interest expense in 1997 resulted
primarily from a reduction in the average volume of outstanding TCD's.
In 1996, net interest income increased by approximately $1,662,000 or
7.0% due primarily to the combined effects of an increase in interest income and
a decline in interest paid on TCD's. The increase in interest income was
primarily attributable to an 11% increase in the average volume of loans
outstanding during 1996 and the decline in interest expense was primarily
attributable to a decline in the average volume of outstanding TCD's.
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 TCD's in relation to its total deposits generally will experience greater
increases in interest expense, and therefore, a decrease in net interest income,
during periods 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 bear interest at rates that are lower, and that
are less sensitive to interest rate fluctuations, than TCD's; and (ii) to match
opportunities to "reprice" earning assets, 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 some of its 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
1997, the average volume of demand and savings (including money market) deposits
increased by $25,993,000 or 10.7% and, at December 31, 1997, such deposits
represented 71% of the Bank's total deposits as compared to 68% at December 31,
1996. At the same time, the average volume of TCD's, on which the Bank pays
interest at its highest rates, declined by $20,100,000 or 30.3%. Overall, the
Bank's net interest margin (i.e., net interest income stated as a percentage of
interest income) increased somewhat to 72.2% in 1997 from 71.9% in 1996, and
70.7% in 1995.
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates and fees that the Bank is
able to charge on loans, and the interest rates it must offer to maintain and
attract deposits, are affected by national monetary policies established by the
Federal Reserve Board and by competitive conditions in the Bank's market 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 reduction in interest rates paid on deposits in
response to declines in market rates of interest can be
27
<PAGE> 28
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 may 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.
In 1997, market rates of interest stabilized, but at the same time
competition among banks and other commercial lending institutions increased. The
Bank responded to these conditions by lowering interest rates and fees on loans
and making an increased number of fixed rate loans. These actions were
predicated, in large part, on the relative stability of the interest rate
markets and the Bank's success in increasing the volume of less-volatile demand
and savings deposits and reducing the volume of TCD's, which enabled the Bank to
maintain its net interest income and achieve a modest increase in its net
interest margin, despite the lowering of interest rates and loan fees.
The increase in the volume of fixed rate loans does expose the Bank to
the potential risk of a decline in net interest income in the event market rates
of interest were to increase significantly in future periods. However,
management believes that the Bank's higher percentage of lower cost and less
volatile demand and savings deposits, coupled with increases that occurred in
1997 in the volume of investments and deposits held at other banking
institutions, will operate to mitigate any adverse effects that an increase in
market rates of interest would otherwise have on the Bank's net interest income.
The Bank currently anticipates a relatively stable net interest margin
for 1998 based on a number of factors, including (i) the expectation that
interest rate markets in the United States will remain relatively stable, (ii)
the expectation that there will be increased loan growth in 1998 as a result of
stable interest rates, an improving economy in Southern California and new
marketing programs being instituted by the Bank, and (iii) the Bank's decision
to continue allowing higher interest-bearing TCD's to "run-off" as they mature
in 1998. However, competition for new loans is expected to continue to be
intense, which will have the effect of limiting the ability of the Bank, as well
as other lending institutions, to increase interest rates on loans and there is
no assurance that expectations regarding economic conditions in 1998 will prove
to be correct. See, "Forward Looking Statements and Uncertainties about Future
Performance."
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------
INTEREST INCOME
Interest income consists of interest and fees earned on outstanding
loans, interest on funds held on deposit at other banks and on federal funds
sold and income on investments, which consist principally of government
securities. In 1997, interest and fee income from loans declined by $708,000 or
2.3% primarily as a result of increased competition among banks and other
lending institutions in the Bank's market areas, which led the Bank to lower
interest rates and fees on the loans it made in 1997 and which resulted in a
slowing of the growth of new loans during the second half of 1997. The decrease
in interest and fees on loans was partially offset by increases in interest
income earned on investment securities and on Federal funds sold of $426,000 and
$204,000, respectively, due primarily to increases in the volume of such
investments.
INTEREST EXPENSE
Interest expense decreased by $131,000 or 1.3% in 1997 as compared to
1996, as reductions in the average volume of TCD's and somewhat lower interest
rates largely offset an increase in interest expense attributable to increases
in the average volume of savings and money market deposits and other time
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 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 1997 the Bank made provisions totaling $1,681,000 compared to
$2,200,000 during 1996 and, at December 31, 1997 the Loan Loss Reserve was
approximately $5,165,000 or 1.7% of total loans and leases outstanding, compared
to approximately $4,744,000 or 1.6% of total loans and leases outstanding at
December 31, 1996. The decrease in the total of the additions made to the Loan
Loss Reserve in 1997 was attributable to declines in the rate of growth in total
loans and in the total number of non-performing assets in 1997 as compared to
1996.
Net loan charge-offs for 1997 aggregated $1,260,000, representing
forty-three hundredths of one percent (0.43%) of average loans and leases
outstanding, as compared to net loan charge-offs in 1996 of $1,100,000, which
represented thirty-nine one hundredths of one percent (0.39%) 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 $11,465,000 or 3.9% of total loans at December 31,
1997, as compared to $11,622 or 3.9% of total loans at December 31, 1996 and
$12,620,000 or 4.8% of total loans at December 31, 1995. The ratio of the Bank's
Loan Loss Reserve to non-performing loans was 45.1% at December 31, 1997, as
compared to 40.8% and 28.9% at December 31, 1996 and 1995, respectively.
28
<PAGE> 29
OTHER INCOME
Other income increased by $776,000 or 14.7% in 1997 compared to 1996,
primarily as a result of (i) increases in transaction fees and service charges
that were the result of increases in the volume of total deposits and other
banking transactions, and (ii) gains on the sale of certain SBA loans.
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 $899,000 or 4.1% in 1997
compared to 1996. Contributing to that increase were expenses associated with a
Bank-wide data processing system conversion, which was completed during the
second quarter of 1997. While the increase in the total dollar amount of
non-interest expense was 4.1%, as a percentage of operating income (net interest
income plus other income) the increase in non-interest expense was 1.1%,
increasing from 71.0% in 1996 to 72.1% in 1997.
INCOME TAXES
Income taxes increased by approximately $73,000 or 3.0% during 1967
compared to 1996, primarily as a result of the combined effects of an increase
in pre-tax income, and a decrease of 1% in the overall tax rate, in 1997.
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 7.2% 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 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 provision for loan and lease losses made in 1996 totaled $2,200,000
compared to $2,016,000 for 1995. Net loan charge-offs for 1996 aggregated
$1,100,000, representing thirty-nine hundredths of one percent (0.39%) of
average loans and leases outstanding, 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.
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
The Bank's non-interest expense increased by approximately $1,075,000
or 5.2% in 1996 compared to 1995. This increase included a $546,000 increase in
salaries and employee benefits and a $412,000 increase in occupancy expenses
that were primarily attributable to internal growth in the Bank's assets and
operations.
29
<PAGE> 30
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.
FINANCIAL CONDITION
The Company's total assets at December 31, 1997 were approximately
$25,103,000, or 6.1%, higher than at December 31, 1996. Average total assets for
1997 increased by approximately $22,094,000 to $422,614,000 from $400,520,000
for 1996. These increases were primarily the result of new loan volume and
increases in other interest-earning assets, principally cash and balances due
from other banks, investment securities and Federal funds sold.
The average volume of loans and leases (less reserves) outstanding
during 1997 increased by approximately $9,768,000 or 3.5% compared 1996.
However, during the second half of 1997, the average volume of loans outstanding
increased by only $1,275,000 or 0.4%.
The average volume of the Bank's investment securities during 1997
increased by approximately $7,507,000 or 10.2% compared to 1996 figures. The
average volume of Federal funds sold increased by 18.2% to $23,673,000 in 1997
from $20,033,000 in 1996. These increases were offset by a 42.9% reduction in
the average volume of interest bearing deposits held at other financial
institutions during 1997 to $4,215,000 from an average volume of $7,391,000 in
1996.
Beginning in 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 to discourage renewals of
existing and purchases of new TCD's by customers and, thereby, reduce the volume
of those deposits at the Bank. As a result, at December 31, 1997, the volume of
demand deposits and savings deposits at the Bank was $27,809,000 higher than at
December 31, 1996 and non-interest bearing demand deposits, as a percentage of
total deposits, had increased to 32.7% from 29.3% at December 31, 1996. By
contrast the volume of TCD's outstanding at December 31, 1997 was $9,483,000, or
16.2%, lower than at December 31, 1996.
The Company currently anticipates that there will be modest growth in
the Bank's total assets in 1998, which is expected to result from increased
lending and deposit activity generated by new marketing programs being
instituted by the Bank.
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,
1997, the principal source of liquidity consisted of $38,800,000 in cash and
demand balances due from banks and $30,550,000 of Federal funds sold which,
together, totaled $69,350,000, as compared to $48,573,000 at December 31, 1996.
Other sources of liquidity include $30,959,000 in securities available for sale,
of which approximately $11,607,000 of such securities mature within one year and
$8,309,000 in interest-bearing deposits at other financial institutions, which
mature in six months or less. The Bank also has established facilities to borrow
Federal Funds from other banks that total $10,100,000 and has an unused line of
credit with the Federal Home Loan Bank in the amount of $10,458,000.
Furthermore, substantially all of the Bank's installment loans and leases, the
amount of which aggregated $11,332,000 at December 31, 1997, 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
It is the policy of the Board of Directors to retain earnings to
support the growth of the Bank rather than to pay cash dividends. Those earnings
were used to open two new banking offices during 1995, and a third office in
March of 1996. The Company is evaluating opportunities to expand the Bank's
market coverage into areas such as eastern Los Angeles County, western San
Bernardino County, north Orange County and north Riverside County, all of which
are contiguous to the Bank's existing markets and, subject to obtaining required
regulatory approvals, intends to open an additional banking office in one of
these areas either late in 1998 or early in 1999.
30
<PAGE> 31
During the second quarter of 1997 the Company declared its third 10%
stock dividend in three years, which was distributed on June 20, 1997 and for
accounting purposes was recorded as a $6,058,000 reduction in retained earnings,
offset by a corresponding $6,058,000 increase in the Company's stated capital.
As a result of the increase in and the retention of earnings in 1997,
the Company's total shareholders' equity increased by approximately $5,819,000
or 16.6% to $42,041,000 at December 31, 1997 from $36,222,000 at December 31,
1996. Net earnings in 1997 represent a return on beginning assets (that is,
total assets as of January 1, 1997) of 1.10% and a return on beginning equity
(total shareholders' equity as of January 1, 1997) of 12.47%.
At December 31, 1997, the Bank's Tier 1 capital ratio was 9.5% compared
to 8.5% at December 31, 1996, and as of those same respective dates, the Bank's
Tier 1 risk-based capital ratios were 13.1% and 11.1%, and its total risk-based
capital ratios of 14.3% and 12.3%, respectively. 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 risk-based
capital ratios compare favorably with other peer group banks.
YEAR 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, it is currently believed that the costs of addressing
potential problems will not have a material adverse impact on the Company's
financial position, results of operations or liquidity in future periods.
However, if the Company is unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant Year 2000
issues in a timely manner. However, even if the Company is able to resolve any
such issues with respect to its computerized information systems, there is no
assurance that customers who utilize computer information systems to effectuate
banking transactions, or the Company's vendors or financial institutions with
which the Company does business, will not encounter problems that could
adversely affect the Company's business.
---------------------
FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE
This Annual Report, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
information, which reflects management's current views of the Company's future
financial performance. The forward-looking information is subject to certain
risks and uncertainties, including but not limited to the following:
Increased Competition. Increased competition from other financial
institutions, mutual funds and securities brokerage and investment
banking firms that offer competitive loan and investment products,
could require the Bank to reduce interest rates and loan fees to
attract new loans or to increase interest rates that it offers on time
deposits in order to retain existing or attract new deposits, either or
both of which could, in turn, reduce interest income and net interest
margins.
Possible Adverse Changes in Economic Conditions. Adverse changes in
local economic conditions could (i) reduce loan demand which could, in
turn, reduce interest income and net interest margins; (ii) adversely
affect the financial capability of borrowers to meet their loan
obligations to the Bank which, in turn, could result in increases in
loan losses and require increases in reserves for possible loan losses,
thereby adversely affecting earnings; and (iii) lead to reductions in
real property values that, due to the Bank's reliance on real property
to secure many of its loans, could make it more difficult for the Bank
to prevent potential losses on non-performing loans through the sale of
such real properties.
Possible Adverse Changes in National Economic Conditions and FRB
Monetary Policies. Changes in national economic conditions, such as
increases in inflation or declines in economic output often prompt
changes in Federal Reserve Board monetary policies that could increase
the cost of funds to the Bank and reduce net interest margins,
particularly if the Bank is unable, due to competitive pressures or the
rate insensitivity of earning assets, to effectuate commensurate
increases in the rates it is able to charge for new loans.
Changes in Regulatory Policies. Changes of federal and state bank
regulatory policies, such as increases in capital requirements or in
loan loss reserves, or changes in asset/liability ratios, could
adversely affect earnings by reducing yields on earning assets or
increasing operating costs.
Effects of Growth. It is the intention of the Company to take advantage
of opportunities to increase the Bank's business, either through
acquisitions of other banks or the establishment of new banking
offices. If the Bank does acquire any other banks or opens any
additional banking offices, it is likely to incur additional operating
costs that may adversely affect the Company's operating results, at
least on an interim basis until any acquired bank is integrated into
the Company's operations or the new banking office achieves
profitability.
Year 2000. The costs of resolving the Year 2000 problems could prove to
be greater than is currently anticipated or efforts to resolve such
problems in a timely manner could prove to be unsuccessful.
Due to these and other possible 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, or to make predictions based
solely on historical financial performance.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Foothill Independent Bancorp and Subsidiaries
Independent Auditor's Report............................................33
Consolidated Balance Sheets
December 31, 1997 and 1996 .............................................34
Consolidated Statements of Income
For the Years Ended December 31, 1997 and 1996 and 1995.................35
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1996 and 1995.................36
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996 and 1995.................37
Notes to Consolidated Financial Statements..................................39
32
<PAGE> 33
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, 1997 and 1996 , 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, 1997. 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, 1997 and 1996 , and the results of
its operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
January 23, 1998
33
<PAGE> 34
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cash and due from banks (minimum Federal Reserve
balance at December 31, 1997, was $11,204) $ 38,800 $ 33,673
Federal funds sold 30,550 14,900
--------- ---------
Cash and Cash Equivalents 69,350 48,573
--------- ---------
Interest-bearing deposits in other financial institutions 8,309 3,957
Investment securities held-to-maturity (Notes #1C and #2) 15,110 5,575
Investment securities available-for-sale (Notes #1C and #2) 30,959 39,477
Loans, net of unearned income (Notes #1D, #3 and #6) 291,809 291,766
Direct lease financing (Notes #1F and #4) 4,749 2,864
Less reserve for possible loan and
lease losses (Notes #1E and #5) (5,165) (4,744)
--------- ---------
291,393 289,886
--------- ---------
Bank premises and equipment (Notes #1G and #7) 7,704 7,304
Accrued interest 2,654 2,681
Other real estate owned (Notes #1H and #8) 2,906 4,595
Cash surrender value of life insurance 4,041 3,596
Prepaid expenses 1,116 967
Deferred tax asset (Notes #1K and #17) 1,889 1,954
Other assets 277 1,940
--------- ---------
Total Assets $ 435,708 $ 410,505
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits 126,503 108,670
Savings and NOW deposits 87,952 84,781
Money market deposits 64,931 59,099
Time deposits in denominations of $100,000 or more 49,064 58,547
Other time deposits 61,696 59,869
--------- ---------
Total Deposits 390,146 370,966
Accrued employee benefits (Note #13) 1,664 1,417
Accrued interest and other liabilities 1,734 1,732
Long-term debt (Note #10) 123 168
--------- ---------
Total Liabilities 393,667 374,283
--------- ---------
Stockholders' Equity
Common Stock - authorized, 12,500,000 shares without par
value; issued and outstanding, 5,111,993 shares in 1997
and 4,520,590 shares in 1996 22,618 15,406
Additional paid-in capital 659 592
Retained earnings 19,062 20,607
Valuation allowance for investments (Notes #1C and #2) (298) (383)
--------- ---------
Total Stockholders' Equity 42,041 36,222
--------- ---------
Total Liabilities and Stockholders' Equity $ 435,708 $ 410,505
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 35
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(dollars in thousands, except
per share amounts)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1D) $ 30,231 $ 30,939 $ 28,872
Interest on Investment Securities
Taxable 2,645 2,171 2,045
Exempt from federal taxes 382 430 175
Interest on deposits 241 402 165
Interest on federal funds sold 1,274 1,070 1,944
Lease financing income (Note #1F)
Taxable 2 13 43
Exempt from federal taxes 253 122 158
-------- -------- --------
35,028 35,147 33,402
-------- -------- --------
INTEREST EXPENSE
Interest on savings and NOW deposits 1,323 1,269 1,211
Interest on money market deposits 2,301 1,831 1,391
Interest on time deposits in denominations
of $100,000 or more 2,960 3,302 3,441
Interest on other time deposits 3,139 3,448 3,708
Interest on borrowings 15 19 35
-------- -------- --------
9,738 9,869 9,786
-------- -------- --------
Net Interest Income 25,290 25,278 23,616
PROVISION FOR POSSIBLE LOAN LOSSES (Note #1E and #5) (1,681) (2,200) (2,016)
-------- -------- --------
Net Interest Income After Provision
for Possible Loan and Lease Losses 23,609 23,078 21,600
-------- -------- --------
OTHER INCOME
Services fees 5,558 4,843 4,300
Gain on sale of SBA loans 157 83 46
Other 325 338 342
-------- -------- --------
6,040 5,264 4,688
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 10,348 10,286 9,740
Net occupancy expense of premises 2,120 2,092 1,928
Furniture and equipment expenses 1,752 1,509 1,261
Other expenses (Note #16) 8,379 7,813 7,696
-------- -------- --------
22,599 21,700 20,625
-------- -------- --------
INCOME BEFORE INCOME TAXES 7,050 6,642 5,663
-------- -------- --------
INCOME TAXES (Notes #1K and #17)
Currently payable 2,597 2,805 2,603
Deferred (65) (346) (503)
-------- -------- --------
2,532 2,459 2,100
-------- -------- --------
NET INCOME $ 4,518 $ 4,183 $ 3,563
======== ======== ========
EARNINGS PER SHARE (Note #18)
Basic $ 0.90 $ 0.86 $ 0.75
======== ======== ========
Diluted $ 0.85 $ 0.84 $ 0.73
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<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, 1995 3,547,565 $ 7,440 $456 $19,361 $(386) $ 26,871
10% stock dividend (Note #15) 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 #15) 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
10% stock dividend (Note #15) 457,167 6,058 (6,058)
Cash paid in lieu of fractional shares (5) (5)
Exercise of stock options 86,428 508 67 575
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 47,808 646 646
Net unrealized loss on securities
available-for-sale 85 85
Net income for the year 4,518 4,518
--------- ------- ---- ------- ---- -------
BALANCE, DECEMBER 31, 1997 5,111,993 $22,618 $659 $19,062 $(298) $42,041
========= ======= ==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 34,886 $ 35,262 $ 32,580
Service fees and other income received 5,478 4,771 4,269
Financing revenue received under leases 255 135 201
Interest paid (9,927) (10,117) (9,450)
Cash paid to suppliers and employees (19,063) (20,287) (20,235)
Income taxes paid (2,390) (2,796) (2,409)
--------- --------- ---------
Net Cash Provided By Operating Activities 9,239 6,968 4,956
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of held-to-maturity securities 16,272 27,724 28,542
Purchase of held-to-maturity securities (26,073) (9,975) (31,412)
Proceeds from maturity of available-for-sale securities 78,806 157,607 35,372
Purchase of available-for-sale securities (69,981) (178,463) (43,404)
Proceeds from maturity of deposits in other
financial institutions 8,920 5,828 792
Purchase of deposits in other financial institutions (13,272) (3,352) (6,037)
Net (increase)/decrease in credit card and revolving
credit receivables (655) 22 19
Recoveries on loans previously written off 407 503 549
Net (increase)/decrease in loans (2,853) (39,043) (21,260)
Net (increase)/decrease in leases (1,862) (730) 1,746
Capital expenditures (1,719) (1,122) (2,446)
Proceeds from sale of other real estate owned 3,250 3,531 4,102
Proceeds from sale of property, plant and equipment 39 71 216
--------- --------- ---------
Net Cash Used In Investing Activities (8,721) (37,399) (33,221)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
savings accounts and money market deposits 27,717 29,131 25,313
Net increase/(decrease) in certificates of deposit
with maturities of three months or less 7,861 (14,059) 37,758
Net increase/(decrease) in certificates of deposits
with maturities of more than three months (16,490) (5,234) (2,965)
Proceeds from exercise of stock options 575 852 52
Proceeds from stock issuance 646 330 357
Principal payments on long-term debt (45) (40) (37)
Dividends paid (5) (4) (358)
--------- --------- ---------
Net Cash Provided By Financing Activities 20,259 10,976 60,120
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 20,777 (19,455) 31,855
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 48,573 68,028 36,173
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 69,350 $ 48,573 $ 68,028
========= ========= =========
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
RECONCILIATION OF NET INCOME TO NET CASH (dollars in thousands)
PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 4,518 $ 4,183 $ 3,563
------- ------- -------
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Depreciation and amortization 1,228 1,044 704
Provision for possible credit losses 1,681 2,200 2,016
Provision for possible OREO losses 405 572 959
Provision for deferred taxes 65 (346) (503)
(Gain)loss on sale of equipment 52 (46)
Increase/(decrease) in taxes payable 77 10 (442)
(Increase)/decrease in other assets 1,640 (767) (335)
(Increase)/decrease in interest receivable 27 170 (457)
Increase/(decrease) in discounts and premiums 86 80 (165)
Increase/(decrease) in interest payable (189) (248) 336
Increase in prepaid expenses (149) (51) (389)
Increase/(decrease) in accrued expenses and other
liabilities 411 697 (94)
Gain on sale of other real estate owned (168)
Increase in cash surrender value of life insurance (445) (447) (287)
(Gain)/loss on sale of investments and other assets (83) 50
------- ------- -------
Total Adjustments 4,721 2,785 1,393
------- ------- -------
Net Cash Provided By Operating Activities $ 9,239 $ 6,968 $ 4,956
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 are 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 valuation
allowance (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.
39
<PAGE> 40
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 reserve 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. Earnings Per Shares (EPS)
-------------------------
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
40
<PAGE> 41
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
J. 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.
K. 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 tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
L. Loan Sales and Servicing
------------------------
Gains and losses from the sale of participating interests in loans
guaranteed by the Small Business Administration (SBA) are recognized 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.
M. Current Accounting Pronouncements
---------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement, which is effective
for the year ending December 31, 1998, establishes standards of disclosure
and financial statement display for reporting comprehensive income and its
components.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This statement changes current practice under SFAS 14 by establishing a new
framework on which to base segment reporting (referred to as the management
approach) and also requires certain related disclosures about products and
services, geographic areas and major customers. The disclosures are required
for the year ending December 31, 1998.
N. Reclassifications
-----------------
Certain reclassifications were made to prior years' presentations to conform
to the current year.
41
<PAGE> 42
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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):
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 11,385 $ 41 $ 11,426
Securities of Other U.S.
Government Agencies 999 7 1,006
Municipal Agencies 2,476 13 2,489
Other Securities 250 250
----------- ------------ ------------ -----------
Total Held-to-Maturity Securities $ 15,110 $ 61 $ 15,171
=========== ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
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
=========== ============ ============ ===========
</TABLE>
42
<PAGE> 43
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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):
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 7,986 $ 27 $ 8,013
Securities of Other U.S.
Government Agencies 14,970 18 $ 23 14,965
Certificates of Participation (b) 4,413 14 4,427
Municipal Agencies 336 336
Other Securities 3,538 320 3,218
------------ ------------ ------------ ------------
Total Available-for-Sale
Carried at Fair Value $ 31,243 $ 59 $ 343 $ 30,959
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
- ------------------------
(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 $4,413,000 and
$4,428,000 and market values of $4,427,000 and $4,452,000 at December
31, 1997 and 1996 , respectively.
Proceeds from maturities of investment securities held-to-maturity during 1997,
were $16,272,000. Proceeds from maturities of investment securities
available-for-sale during 1997, were $78,806,000. There were no gains or losses
recognized. Included in shareholders' equity at December 31, 1997, is $298,000
of net unrealized losses on investments available-for-sale.
43
<PAGE> 44
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 1996,
were $27,724,000. Proceeds from maturities of investment securities
available-for-sale during 1996, were $157,607,000. There were no gains or losses
recognized. Included in shareholders' equity at December 31, 1996, is $383,000
of net unrealized loss on investments available-for-sale.
Securities with a book value of $15,139,000 and $27,384,000 and market value of
$15,157,000 and $27,329,000 at December 31, 1997 and 1996 , 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, 1997, by contractual maturity were as follows (in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Securities
-------------------------------------
Maturities Schedule of Securities Amortized Average
December 31, 1997 Cost Fair Value Yield (a)
- ----------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Due in one year or less $ 8,315 $ 8,084 5.96%
Due after one year through five years 6,073 6,359 6.08%
Due after five through ten years 722 728 4.60%
---------- ---------- ----------
Carried at Book Value $ 15,110 $ 15,171 5.55%
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale Securities
-------------------------------------
Amortized Average
Cost Fair Value Yield (a)
----------- ----------- ----------
<S> <C> <C> <C>
Due in one year or less $ 11,920 $ 11,607 4.31%
Due after one year through five years 17,137 17,160 6.25%
Due after five through ten years 1,850 1,856 8.43%
After ten years 336 336 5.63%
---------- ---------- ---------
Carried at Fair Value $ 31,243 $ 30,959 6.16%
========== ========== =========
</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.
44
<PAGE> 45
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 1997 and 1996, was as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial, financial and agricultural $ 43,883 $ 40,980
Real Estate - construction 10,895 11,601
Real Estate - mortgage
Commercial 200,502 201,367
Residential 28,541 30,051
Loans to individuals for household, family
and other personal expenditures 6,450 8,157
All other loans (including overdrafts) 2,203 407
---------- ----------
292,474 292,563
Deferred income on loans (665) (797)
---------- ----------
Loans, Net of Deferred Income $ 291,809 $ 291,766
---------- ----------
</TABLE>
Nonaccruing loans totaled approximately $11,458,000 and $11,622,000 at December
31, 1997 and 1996, 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 $981,000, $1,488,000 and $985,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
At December 31, 1997 and 1996, the Bank had approximately $7,000 and $2,829,000
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, 1997 and 1996 , consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Lease payments receivable $ 5,443 $ 3,183
Estimated residual values 33
--------- ---------
5,443 3,216
Unearned income (694) (329)
Lease residual balance account (23)
--------- ---------
$ 4,749 $ 2,864
========= =========
</TABLE>
At December 31, 1997, the Bank had no outstanding lease commitments.
45
<PAGE> 46
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #4 - DIRECT LEASE FINANCING, Continued
At December 31, 1997, future minimum lease payments receivable under direct
financing leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year
- -----------------
<S> <C>
1998 $ 1,525
1999 1,329
2000 1,024
2001 767
2002 322
Thereafter 476
---------
5,443
Less unearned income (694)
---------
$ 4,749
=========
</TABLE>
NOTE #5 - RESERVE FOR LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 4,744 $ 3,644 $ 3,145
Recoveries on loans previously charged off 407 503 549
Provision charged to operating expense 1,681 2,200 2,016
Loans charged off (1,667) (1,603) (2,066)
---------- ---------- ----------
Balance at end of year $ 5,165 $ 4,744 $ 3,644
========== ========== ==========
</TABLE>
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
$951,000 and $485,000 for the years ended December 31, 1997 and 1996,
respectively, and is included in the above balances. The average balance of
these loans amounted to approximately $11,808,000 and $10,314,000 for the years
ended December 31, 1997 and 1996, respectively. Cash receipts during 1997
applied to reduce principal balance and recognized as interest income was
approximately $6,346,000 and $919,000, respectively. Cash receipts during 1996
applied to reduce principal balance and recognized as interest income was
approximately $2,073,000 and $137,000, respectively.
46
<PAGE> 47
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 1997 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Outstanding Balance, Beginning of year $ 41 $ 50
Credit granted, including renewals
Repayments and other reductions (41) (9)
---------- ---------
Outstanding Balance, End of year $ 0 $ 41
========== =========
</TABLE>
NOTE #7 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Buildings $ 2,424 $ 2,424
Furniture and equipment 7,829 9,331
Leasehold improvements 2,380 2,250
---------- ----------
12,633 14,005
Less: Accumulated depreciation and amortization (6,151) (7,923)
---------- ----------
6,482 6,082
Land 1,222 1,222
---------- ----------
Total $ 7,704 $ 7,304
========== ==========
</TABLE>
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,
1997 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Balance, Beginning of year $ 4,595 $ 3,879
Additions 1,798 4,877
Valuation adjustment and other reductions (3,487) (4,161)
---------- ----------
Balance, End of year $ 2,906 $ 4,595
========== ==========
</TABLE>
The balances at December 31, 1997 and 1996, are shown net of reserves.
47
<PAGE> 48
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #8 - OTHER REAL ESTATE OWNED, Continued
Transactions in the reserve for other real estate owned are summarized for
December 31, 1997 and 1996 , were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
Balance, Beginning of year $ 1,146 $ 909
Provision charged to other expense 405 572
Charge-offs and other reductions (1,162) (335)
--------- -------
Balance, End of year $ 389 $ 1,146
========= =======
</TABLE>
NOTE #9 - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1998 $ 100,745
1999 8,374
2000 1,503
2001 100
2002 38
-----------
Total $ 110,760
===========
</TABLE>
NOTE #10 - 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):
<TABLE>
<CAPTION>
Year Principal Interest Total
- ----------- --------- ---------- ----------
<S> <C> <C> <C>
1998 $ 49 $ 10 $ 59
1999 55 5 60
2000 19 19
--------- ---------- ----------
$ 123 $ 15 $ 138
========= ========== ==========
</TABLE>
48
<PAGE> 49
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #11 - STOCK OPTION PLAN
At December 31, 1997, 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 997,427 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 1997, 1996
and 1995, respectively: risk-free rates of 5.70%, 6.17% and 5.35%; dividend
yields of 0%, 0% and 1.38%; expected life of five years; and volatility of 34%,
35% and 35%.
A summary of the status of the Bank's fixed stock option plan as of December 31,
1997, 1996, and 1995, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ---------------------
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 506,166 $ 6.13 501,176 $ 4.97 333,190 $ 4.65
Granted 290,860 11.48 172,800 7.09 211,250 5.48
Exercised (89,279) 6.22 (156,592) 4.58 (11,193) 4.65
Forfeited (11,721) 7.06 (11,218) 6.05 (32,071) 5.83
------------ ---------- ----------
Outstanding, End of year 696,026 9.11 506,166 6.13 501,176 4.97
============ ========== ==========
Options exercisable at year end 601,693 8.41 442,267 6.05 417,647 5.63
Weighted average fair value
of options granted during
the year $ 4.55 $ 3.51 $ 2.76
</TABLE>
49
<PAGE> 50
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #11 - STOCK OPTION PLAN, Continued
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<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 15,372 10.00 $ 5.99 15,372 $ 5.99
$5.116 to $5.904 240,182 10.00 6.44 223,180 6.43
$5.116 to $5.904 151,112 10.00 7.74 127,781 7.74
$6.592 to $6.968 204,160 10.00 10.45 204,160 10.45
$7.182 to $7.500 13,200 10.00 12.16 13,200 12.16
$7.182 to $7.500 67,000 10.00 13.88 16,750 13.88
$8.500 to $8.625 5,000 10.00 15.38 1,250 15.38
--------- --------
$5.116 to $8.625 696,026 10.00 9.11 601,693 8.41
========= ========
</TABLE>
NOTE #12 - 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, 1997, 1996, and 1995, the amount of pension
expense was $273,000, $138,000, and $112,000, respectively.
NOTE #13 - 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 1997 was $306,504 ($180,831
net of income taxes), 1996 was $322,488 ($193,493 net of income taxes), and 1995
was $155,000 ($93,000 net of income taxes).
50
<PAGE> 51
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #14 - 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 California Department of Financial Institutions, 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
$20,857,000 or 50% of consolidated stockholders' equity.
NOTE #15 - 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, the
Bank distributed 396,840 shares of common stock and the common stock was
increased and retained earnings were decreased by $3,571,000. On March 25, 1997,
the Board of Directors declared a 10% percent stock dividend payable on June 20,
1997, to stockholders of record on June 6, 1997. As a result, the Bank
distributed 457,167 shares of common stock and the common stock was increased
and retained earnings was decreased by $6,058,000. All references in the
accompanying financial statements to the number of common shares and per share
amounts for 1996 and 1995, have been restated to reflect the stock dividends.
NOTE #16 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31,
1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Data processing $ 1,051 $ 893 $ 903
Marketing expenses 661 766 809
Office supplies, postage and telephone 1,316 1,050 1,044
Bank insurance 453 454 454
FDIC assessments 139 143 473
Legal fees 802 843 558
Operating losses 86 660 389
OREO expenses and provision for OREO 561 574 1,230
Other 3,310 2,430 1,836
-------- -------- --------
Total $ 8,379 $ 7,813 $ 7,696
======== ======== ========
</TABLE>
51
<PAGE> 52
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #17 - INCOME TAXES
The provisions for income taxes consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax provision applicable to income
before income taxes $ 2,532 $ 2,459 $ 2,100
========= ========= =========
Federal Income Tax
Current 1,766 1,946 1,903
Deferred (9) (234) (425)
State Franchise Tax
Current 831 859 700
Deferred (56) (112) (78)
--------- --------- ---------
Total $ 2,532 $ 2,459 $ 2,100
========= ========= =========
</TABLE>
The following is a summary of the components of the deferred tax assets accounts
recognized in the accompanying statements of financial condition as of December
31 (amounts in thousands):
<TABLE>
<CAPTION>
Deferred Tax Assets 1997 1996
--------- ---------
<S> <C> <C>
Allowance for loan losses due to tax
limitations 1,461 1,311
Deferred compensation plan 808 704
Allowance for other real estate owned 152 445
Other assets and liabilities 268 188
Net unrealized depreciation on
available-for-sale securities 111
--------- ---------
Total Deferred Tax Assets 2,689 2,759
--------- ---------
Deferred Tax Liabilities
Premises and equipment due to depreciation
difference (796) (805)
Net unrealized appreciation on
available-for-sale securities (4)
--------- ---------
Net Deferred Tax Assets $ 1,889 $ 1,954
========= =========
</TABLE>
52
<PAGE> 53
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #17 - 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>
1997 1996 1995
------------------ ------------------ ------------------
Federal State Federal State Federal State
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tax effect of
Nonaccrual loan interest computed
differently on tax returns than
for financial statements $ 65 $ 25 $ 8 $ 3 $ (50) $ (18)
Direct lease financing 9 7 23 2
Depreciation computed differently
on tax returns than for financial
statement (6) (3) 24 18 (9) 9
OREO transactions computed differently
on tax return than for financial
statement 210 83 (24) (9) (191) (33)
Deferred compensation plan (85) (19) (70) (27) (75) (24)
Provision for loan loss deduction on tax
return under amount charged for
financial statements purposes (70) (80) (243) (93) (72) (12)
Other assets and liabilities (123) (62) 62 (11) (51) (2)
-------- -------- ------- -------- -------- --------
Total $ (9) $ (56) $ (234) $ (112) $ (425) $ (78)
======== ======== ======= ======== ======== ========
</TABLE>
As a result of the following items, the total tax expenses for 1997, 1996 and
1995, 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>
1997 1996 1995
--------------------- --------------------- ---------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $ 2,397 34.0 $ 2,258 34.0 $ 1,925 34.0
Changes due to State income tax,
net of Federal tax benefit 501 7.1 472 7.1 402 7.1
Exempt interest (319) (4.5) (218) (3.3) (154) (3.1)
Other (47) (0.7) (53) (0.8) (73) (0.9)
------- -------- ------- -------- ------- ------
Total $ 2,532 35.9 $ 2,459 37.0 $ 2,100 37.1
======= ======== ======= ======== ======= ======
</TABLE>
53
<PAGE> 54
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #18 -- EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------ --------------------- -------------------
Income Shares Income Shares Income Shares
-------- -------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income as reported $4,518 $ 4,183 $ 3,563
Shares outstanding at year end 5,112 4,972 4,786
Impact of weighting shares
purchased during the year (72) (129) (15)
------- -------- ----------- -------- --------- ---------
Used in Basic EPS 4,518 5,040 4,183 4,843 3,563 4,771
Dilutive effect of outstanding
stock options 268 156 135
------ -------- ----------- -------- --------- ---------
Used in Dilutive EPS $4,518 5,308 $ 4,183 4,999 $ 3,563 4,906
====== ======== =========== ======== ========= =========
</TABLE>
NOTE #19 - 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):
<TABLE>
<CAPTION>
Year
- ---------------------
<S> <C>
1998 $ 1,057
1999 1,052
2000 1,001
2001 937
2002 713
Succeeding years 1,466
--------
$ 6,226
========
</TABLE>
Total rental expense for the three years ended December 31, 1997, 1996, and
1995, was $1,203,000 $1,064,000, $1,087,000, respectively.
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.
54
<PAGE> 55
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #19 - COMMITMENTS AND CONTINGENCIES, Continued
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, 1997 and 1996 , the Bank had commitments to extend credit of
$53,189,000 and $34,461,000, respectively, and obligations under standby letters
of credit of $969,900 and $1,088,000, 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.
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 #20 - 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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
55
<PAGE> 56
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #20 - REGULATORY MATTERS, Continued
The Bank's actual capital amounts and ratios are presented in the following
table (amounts 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, 1997:
Total capital to risk-weighted assets $ 45,039 14.3% $ 25,121 8.0% $ 31,401 10.0%
Tier 1 capital to risk-weighted assets 41,098 13.1% 12,560 4.0% 18,840 6.0%
Tier 1 capital to average assets 41,098 9.5% 17,346 4.0% 21,682 5.0%
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%
</TABLE>
56
<PAGE> 57
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1997, (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, 1997
-------------------------
Carrying Fair
Amount Value
----------- -----------
<S> <C> <C>
Financial Assets
Cash and cash equivalents $ 69,350 $ 69,350
Investment securities and deposits 54,378 54,439
Loans 292,474 293,376
Direct lease financing 4,749 4,773
Financial Liabilities
Deposits 390,146 388,770
Long-term debt 123 123
Unrecognized Financial Instruments
Commitments to extend credit 53,189 53,189
Standby letters of credit 970 970
</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.
57
<PAGE> 58
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #21 - 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,
1997. 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 Long-term Debt - 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.
58
<PAGE> 59
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #22 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT
BANCORP (PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash $ 143 $ 281 $ 195
Investment in subsidiaries 41,173 35,283 30,135
Time certificates of deposit 394 95
Accounts receivable 143 209 37
Loans 13 15 15
Excess of cost over net assets of company acquired (net) 170 212 255
Prepaid and other 5 222 310
--------- --------- --------
Total Assets $ 42,041 $ 36,222 $ 31,042
========= ========= ========
STOCKHOLDERS' EQUITY
Common stock 22,618 15,406 10,789
Additional paid-in capital 659 592 456
Retained earnings 18,764 20,224 19,797
--------- --------- --------
Total Stockholders' Equity 42,041 36,222 31,042
--------- --------- --------
Total Liabilities and Stockholders' Equity $ 42,041 $ 36,222 $ 31,042
========= ========= ========
STATEMENTS OF INCOME
INCOME
Equity in undistributed income of subsidiaries $ 4,705 $ 4,328 $ 3,677
Interest and other income 73 6 18
--------- --------- --------
4,778 4,334 3,695
--------- --------- --------
EXPENSE
Amortization and other expenses 334 224 169
--------- --------- --------
Total Operating Income 4,444 4,110 3,526
Tax benefit of parent's operating expenses 74 73 37
--------- --------- --------
Net Income $ 4,518 $ 4,183 $ 3,563
--------- --------- --------
</TABLE>
59
<PAGE> 60
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #22 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT
BANCORP (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received for tax benefit from Foothill Independent Bank $ 74 $ 72 $ 37
Interest and other income received 73 6 18
Cash paid for operating expenses (9) (266) (138)
-------- -------- --------
Net Cash Provided/(Used) By Operating Activities 138 (188) (83)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 2 1
(Purchase)/redemption of deposits in other financial institutions (394) 95 598
Capital contributed to subsidiary (1,100) (1,000) (800)
-------- -------- --------
Net Cash Used By Investing Activities (1,492) (905) (201)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (5) (3) (358)
Capital stock purchased 646 330 357
Proceeds from exercise of stock options 575 852 52
-------- -------- --------
Net Cash Provided By Financing Activities 1,216 1,179 51
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH (138) 86 (233)
CASH, Beginning of year 281 195 428
-------- -------- --------
CASH, End of year $ 143 $ 281 $ 195
======== ======== ========
RECONCILIATION OF NET INCREASE TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET INCOME $ 4,518 $ 4,183 $ 3,563
-------- -------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization 42 42 42
Undistributed earnings of subsidiaries (4,705) (4,328) (3,677)
(Increase)/decrease in accounts receivable 66 (172) (21)
Decrease in prepaids and other 217 87 10
-------- -------- --------
Total Adjustments (4,380) (4,371) (3,646)
-------- -------- --------
Net Cash Provided/(Used) by Operating Activities $ 138 $ (188) $ (83)
======== ======== ========
</TABLE>
60
<PAGE> 61
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #23 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the Company and its
subsidiaries for the two years ended December 31, 1997, is summarized below:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- ------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $ 8,368 $ 8,732 $ 8,916 $ 9,012
Interest expense 2,443 2,384 2,442 2,469
Net interest income 5,925 6,348 6,474 6,543
Provision for loan losses 281 50 50 1,300
Net interest income after provision
for loan losses 5,644 6,298 6,424 5,243
Other income 1,381 1,432 1,396 1,831
Other expense 5,225 6,106 5,675 5,519
Income before taxes 1,800 1,624 2,145 1,555
Applicable income taxes 667 610 823 506
----------- ----------- ----------- ------------
Net Income $ 1,133 $ 1,014 $ 1,322 $ 1,049
=========== =========== =========== ============
Earnings Per Share - Basic $ 0.23 $ 0.20 $ 0.24 $ 0.21
=========== =========== =========== ============
Earnings Per Share - Diluted $ 0.22 $ 0.19 $ 0.23 $ 0.19
=========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- ------------
<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
=========== =========== =========== ============
Earnings Per Share - Basic $ 0.17 $ 0.20 $ 0.24 $ 0.25
=========== =========== =========== ============
Earnings Per Share - Diluted $ 0.17 $ 0.19 $ 0.23 $ 0.25
=========== =========== =========== ============
</TABLE>
61
<PAGE> 62
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 1998 annual meeting of shareholders, to be filed
with the Commission on or before April 30, 1998.
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 30, 1998 for the Company's 1998 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 30, 1998 for the Company's 1998 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 30, 1998 for the Company's 1998 annual shareholders' meeting.
62
<PAGE> 63
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 32 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 65 of this Form 10-K.
(4) Reports on Form 8-K:
None
63
<PAGE> 64
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 capacity 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 or 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 1998.
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, 1998
<TABLE>
<S> <C>
/s/ GEORGE E. LANGLEY President, Chief Executive Officer (Principal
- ---------------------------- Executive Officer) and Director
George E. Langley
/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/ DOUGLAS F. TESSITOR Director
- ----------------------------
Douglas F. Tessitor
/s/ MAX E. WILLIAMS Director
- ----------------------------
Max E. Williams
</TABLE>
64
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
- ------- ------------
<S> <C> <C>
3.1 Articles of Incorporation of Registrant, as amended to date (R-8)
3.2 Bylaws of Registrant (R-1)
4 Specimen Common Stock Certificate for Registrant (R-1)
10.1 Registrant's Incentive Stock Option Plan-1981 (R-2)
10.2 Registrant's Nonqualified and Incentive Stock Option Plan-1983 (R-2)
10.3 Foothill Independent Bank--Glendora Office Ground Lease (R-1)
10.4 Foothill Independent Bank--Rancho Cucamonga Branch Office Lease (R-1)
10.5 Foothill Independent Bank--Ontario (South Euclid) Branch Office Lease (R-1)
10.6 Foothill Independent Bank--Ontario (Grove) Branch Office Lease (R-1)
10.7 Foothill Independent Bank--Upland Branch Office Lease (R-1)
10.8 Foothill Independent Bank--Claremont Branch Office Ground Lease (R-1)
10.11 Foothill Independent Bank--Amendment to Ontario (Grove)
Branch Office Lease (R-3)
10.12 Foothill Independent Bank--Deferred Compensation Plan (R-4)
10.13 Agreement and Plan of Reorganization and Merger dated as of
December 13, 1985 and amended and restated as of May 16, 1986
among the Company, the Bank and Inland National Bank (R-4)
10.14 Foothill Independent Bank--West Covina Branch Office Lease (R-5)
10.15 Foothill Independent Bank--Walnut Branch Office Lease (R-5)
10.16 Employment Agreement dated as of November 24, 1987 between
the Bank and J.T. Waller (R-6)
10.17 Employment Agreement dated as of April 1, 1993 between the Bank and
George E. Langley (R-7)
10.18 Foothill Independent Bancorp 1993 Stock Incentive Plan (R-7)
10.19 Employment Agreement dated as of March 31, 1995 between the Bank
and George E. Langley (replacing the Employment Agreement entered into
as of April 1, 1993) 68
10.20 Employment Agreement dated as of September 30, 1997 between the Bank and
George E. Langly (replacing the Employment Agreement dated March 31, 1995) (R- )
</TABLE>
65
<PAGE> 66
<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)
27.1 Financial Data Sheet as of and for the year ended December 31, 1997
27.2 Restated Financial Data Sheet as of and for the year ended December 31, 1996
27.3 Restated Financial Data Sheet as of and for the year ended December 31, 1995
27.4 Restated Quarterly Financial Data Sheet for quarter ended March 31, 1997.
27.5 Restated Quarterly Financial Data Sheet for quarter ended June 30, 1997.
27.6 Restated Quarterly Financial Data Sheet for quarter ended September 30, 1997.
27.7 Restated Quarterly Financial Data Sheet for quarter ended December 31, 1997.
27.8 Restated Quarterly Financial Data Sheet for quarter ended June 30, 1996.
27.9 Restated Quarterly Financial Data Sheet for quarter ended September 30, 1996.
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 September 30, 1997 between Foothill Independent Bank and
George E. Langley -- See Exhibit 10.20 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.
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 30th day of September 1997, by and between FOOTHILL INDEPENDENT BANK, a
California banking corporation (the "Bank"), and GEORGE E. LANGLEY ("Langley").
R E C I T A L S
- - - - - - - -
A. Langley is currently, and for the past approximately seven (7) years
has been, employed as President and Chief Executive Officer of the Bank.
Currently, such employment is under an employment agreement dated March 31, 1995
which is scheduled to expire on March 31, 1998, (the "Prior Agreement").
B. The Bank desires to retain Langley as its President and Chief
Executive Officer beyond March 31, 1998 and, in order to do so is willing to
enter into this Agreement at this time to employ for Langley an additional 3
year period beginning on October 1, 1997 and continuing to and including
September 30, 2000, and Langley desires to accept such employment, pursuant to
the terms and provisions of this Agreement which shall supersede the Prior
Agreement effective on the date hereof.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants and agreements of the parties hereinafter set forth, the parties
hereto agree as follows:
1. EMPLOYMENT
For the Employment Term, as hereinafter defined, the Bank hereby
agrees to employ Langley as President and Chief Executive Officer of the Bank,
and Langley hereby agrees to serve the Bank in such capacities. In this
connection, Langley agrees during the Employment Term (i) to devote
substantially all of his business time and energies to the business and affairs
of the Bank, (ii) to use his best efforts, skills, judgment and abilities to
diligently manage the Bank and promote the Bank's interests, (iii) to perform
loyally and conscientiously the services and acts customarily performed by a
president of an independent bank, and (iv) to perform such other services, in
the manner aforesaid, as the Board of Directors of the Bank may from time to
time assign to him; provided, however, that such services shall at all times be
commensurate with the duties of a president and chief executive of an
independent bank.
2. EMPLOYMENT TERM
(a) In General. The term of Langley's employment under this
Agreement (the "Employment Term") shall commence effective as of October 1, 1997
(the "Effective Date"), and shall continue until the earliest to occur of the
following: (i) the death of Langley; or (ii) termination of Langley's employment
by the Bank's Board of Directors for Cause (as defined in subsection (b)
hereof), or without Cause; or (iii) Langley's resignation or retirement as
permitted or called for pursuant to Section 3(g) below, or (iv) September 30,
2000.
(b) Definition of "Cause". As used herein, the term "Cause" shall
mean (i) Langley's willful and material breach or neglect of the duties or of
the obligations required of him
<PAGE> 2
expressly by the terms of this Agreement which continues for thirty (30) days
after the Board of Directors of the Bank has given written notice to Langley of
such breach or neglect stating with specific particularity the nature thereof;
or (ii) in the event Langley is charged by any federal, state or local authority
with an act of dishonesty, an act involving moral turpitude, an act constituting
a felony, or narcotics addiction, or habitual intemperance, and Langley is
either convicted or enters a plea of guilty or nolo contendere with respect to
any such charge; or (iii) Langley's commission of fraud, embezzlement or
misappropriation, whether or not a criminal or civil charge is filed in
connection therewith; or (iv) a federal or state bank regulatory agency or court
of law issues an order the effect of which is to require Langley's employment or
association with the Bank to be terminated and such order has become final and
nonappealable.
(c) Renewal. Not later than March 31, 2000 the Bank and Langley
shall notify each other whether they desire to renew or extend this Agreement
and, if so, the parties shall endeavor to reach agreement on terms for extending
the Agreement beyond the September 30, 2000 expiration date hereof.
3. COMPENSATION
(a) Base Salary. From and after the Effective Date and during the
Employment Term, Langley shall receive as base compensation from the Bank an
annual salary of Two Hundred Forty-Four Thousand Dollars ($244,000), which shall
be payable each year in twenty-four (24) equal semi-monthly installments, each
in the amount of Ten Thousand One Hundred Sixty Six and 66/100 Dollars
($10,166.66), on the fifteenth (15th) and last days of each month, or, if any
such date falls on a holiday or weekend, the business day next preceding such
date.
(b) Adjustments to Base Compensation. On October 1, 1998 (the
"Adjustment Date"), Langley's base salary, as set forth in subsection 3(a)
above, shall be increased for and in the same proportion as the increase,
subsequent to September 30, 1997 in the Consumer Price Index for Urban Wage
Earners in the Los Angeles-Long Beach Area ("CPI"), but not to exceed twelve
percent (12%). On each succeeding anniversary of the Adjustment Date during the
Employment Term, Langley's base annual salary, as previously adjusted and in
effect on the day immediately preceding such anniversary date, shall be further
increased for and in the same proportion as the increase in the CPI during the
immediately preceding twelve (12) months, but not to exceed twelve percent
(12%). In the event publication of the CPI is discontinued during the Employment
Term, the parties shall utilize for purposes hereof such other index or indices
as are generally accepted in the business community as being the most equivalent
index or indices to the CPI. In addition, subject to the approval of its Board
of Directors, the Bank may further increase Langley's basic salary hereunder at
any time or times during the term of this Agreement.
(c) Incentive Plans and Bonuses. Langley shall be entitled to
participate fully and at a level commensurate with his position as President and
Chief Executive Officer of the Bank in any incentive compensation, deferred
compensation, profit sharing, salary bonus, and stock option, stock purchase or
stock ownership plan or plans which may now exist or be adopted hereafter by the
Bank or by Foothill Independent Bancorp, which owns 100% of the Bank's Common
Stock ("Bancorp"), or any successor to the Bank or the Bancorp. Langley also may
be awarded discretionary bonuses by the Board of Directors of the Bank.
2
<PAGE> 3
(d) Fringe Benefits. During the Employment Term, the Bank shall
(i) provide Langley with, and pay the premiums for, life, medical and disability
insurance policies, of the types and in the amounts set forth in Exhibit A
hereto, in which Langley shall be the named insured in the case of the life and
disability insurance and Langley and his dependents shall be the named insureds
under the medical insurance; (ii) furnish Langley other fringe benefits
customarily afforded to all executive officers of the Bank, including, but not
limited to, paid vacation, which in Langley's case shall be four (4) weeks each
calendar year during the Employment Term, and paid sick leave without the loss
of either salary or other compensation.
(e) Effect of Termination due to Death or without Cause.
(i) If Langley's employment is terminated due to the death
of Mr. Langley, then, notwithstanding anything to the contrary herein
contained, Mr. Langley's spouse shall be entitled receive (i) all of
Langley's salary that was accrued but unpaid as of the date of his
death, (ii) the bonuses and incentive compensation that Langley would,
but for such termination of employment, have received thereafter for or
in respect of services rendered by him to the Bank for periods prior to
such termination, but in no event less than the result obtained by
multiplying the amount of bonus or incentive compensation he received
for services rendered to the Bank in the year immediately preceding the
year in which his death occurred by a fraction, the numerator of which
shall be the number of months that he served during the year of his
death (rounded up to the number of whole months) and the denominator of
which shall be twelve (12), and (iii) continuing until the third (3rd)
anniversary of Mr. Langley's death, dependent coverage, without charge,
under the Bank's medical, dental and health insurance programs.
(ii) If this Agreement or Langley's employment is
terminated prior to September 30, 2000 by the Bank, or any successor
thereto, for any reason that does not constitute Cause (as Cause is
defined above), then, without limiting any other rights or remedies
Langley may have by reason of such termination, then, (A) Langley shall
be entitled to receive during the period from the effective date of such
termination through the third (3rd) anniversary of the September 30
immediately following the effective date of such termination (the
"Severance Period"), the salary and the bonuses and incentive
compensation that Langley would, but for such termination, have received
during the Severance Period had he remained in the employ of the Bank
throughout the Severance Period, but in no event shall the bonus and
incentive compensation that is payable for each of such calendar years
be less than the bonuses and incentive compensation that he earned for
the calendar year immediately preceding the calendar year in which such
termination occurs, and (B) Langley and his spouse shall be entitled to
continue to participate in the fringe benefit plans and programs in
which they were entitled to participate immediately prior to such
termination, without charge to them and at the sole expense of the Bank,
for a period beginning on the effective date of such termination of
employment and ending on the third (3rd) anniversary of the month
immediately following the effective date of such termination (the
"Post-Termination Benefit Period"), provided, however, that the
participation of Langley and his spouse in the Bank's health, dental and
vision insurance plan shall continue until the later of the last day of
the Post-Termination Benefit Period or Mr. Langley's 65th birthday; and
Langley shall have no obligation to seek other employment or otherwise
mitigate the obligations of the Bank hereunder or its damages for
wrongful termination. Should participation not be allowed in the
Company's medical, dental
3
<PAGE> 4
and vision plans by any of the current carriers of group coverage,
sufficient financial resources will be provided, each year, for Langley
to obtain coverage equal to that which was available to him, under the
group plan, prior to the termination of his employment. Notwithstanding
the foregoing, however, if Langley does obtain employment subsequent to
any termination of his employment by the Bank, if and to the extent he
and his spouse become eligible to receive comparable fringe benefits, on
substantially similar terms from the subsequent employer, then, his
right and that of his spouse to continue to participate in the
corresponding fringe benefit plans or programs provided by the Bank
shall thereupon cease.
(f) Change of Ownership. Concurrently herewith, Langley, the
Bancorp and the Bank are entering into a Severance Agreement of even date
herewith, a copy of which is attached hereto as Exhibit C (the "Severance
Agreement"), which sets forth the rights of Langley and the respective
obligations of the Bancorp and the Bank upon the occurrence of any of the events
or circumstances set forth in such Severance Agreement. The provisions of the
Severance Agreement, and not this Agreement, shall govern in the event of a
termination of Langley's employment or his resignation of employment which is
covered by the provisions of the Severance Agreement.
(g) Resignation and Termination with Cause. At any time during
the term of this Agreement, Langley may, effective on ninety (90) days prior
written notice to the Bank, elect to resign his employment with the Bank, except
that any resignation pursuant to the Severance Agreement shall be effective as
provided therein. In addition, the Bank may require Langley to resign in the
event of his disability, as hereinafter defined. Except in the case of a
resignation covered by the Severance Agreement, in the event of any voluntary
resignation by Langley, or a resignation required as a result of his disability,
or in the event of a termination of Mr. Langley's employment with Cause (as
Cause is defined in Section 2(b) above), all salary and bonuses for periods
after the effective date of such resignation shall cease. However, if and for so
long as Langley, during the period ending on the later of September 30, 2000 or
the first anniversary of the effective date of such resignation or termination
with Cause, refrains from accepting employment from, and from providing
consulting or advisory services to, any competing banking or depository
institution (as defined hereinafter), then, for such period (i) Langley and his
spouse shall be entitled to participate, without charge to them and at the
Bank's sole cost and expense, in all life, medical, dental, vision and
disability insurance programs of the Bank or Bancorp in which they were
participating at the time notice of such resignation was given by Langley to the
Bank or Langley's employment was terminated for Cause; and (ii) only in the
event of a resignation to which this Section 3(g) applies, Langley shall
continue to be entitled to use the automobile referenced in subsection 4(a)
below, without charge. As used herein, the term "disability" shall mean a
physical or mental illness or other physical or mental condition which to a
significant and substantial extent prevents Langley from performing his duties
hereunder for a period of one hundred eighty (180) consecutive days. For
purposes hereof, a competing bank or depository institution shall mean any bank,
savings and loan association, thrift and loan company or credit union that
operates a full service office, at which it makes loans and accepts deposits,
located within a 40-mile radius of any banking office being operated by the Bank
at the time such resignation or termination for Cause becomes effective.
4. BUSINESS RELATED REQUIREMENTS
(a) In order to enable Langley to adequately perform his duties
as President and Chief Executive Officer of the Bank, which shall include, but
shall not be limited to, representation of
4
<PAGE> 5
the Bank at business, civic and social functions and meetings in Southern
California, the Bank shall furnish Langley, and Langley shall have the right to
exclusive use of, the automobile described in Exhibit B hereto and the Bank
shall pay for all expenses associated with or arising from such use during the
term hereof, including insurance, gasoline and maintenance costs.
(b) The Bank will promptly reimburse Langley for all reasonable
business expenses incurred by him in promoting the business of the Bank,
including expenditures for business promotion, entertainment and travel,
provided that Langley furnishes to the Bank adequate records and other
documentary evidence of such costs.
5. OBLIGATIONS OF LANGLEY
In addition to performing the duties and obligations enumerated
elsewhere herein, Langley agrees as follows:
(a) Non-Competition. During the term of this Agreement, Langley
shall not, directly or indirectly, either as an employee, employer, consultant,
agent, principal, partner, stockholder, corporate officer, director or in any
other individual or representative capacity, engage or participate in any
business that is in competition in any manner whatsoever with the business of
the Bank.
(b) Trade Secrets. Langley, during the term of employment under
this Agreement, will have access to and become acquainted with various trade
secrets consisting of devices, secret inventions, processes and compilations of
information, records and specifications which are owned by the Bank and which
are regularly used in the operation of the business of the Bank. Langley shall
not disclose any of the aforesaid trade secrets, directly or indirectly, or use
them in any way, either during the term of this Agreement or any time
thereafter, except as required in the course of his employment hereunder. All
files, records, documents, drawings, specifications, equipment and similar items
relating to the business of the Bank, whether prepared by Langley or otherwise
coming into his possession, shall remain the exclusive property of the Bank.
6. REMEDIES
(a) Unique Character of Langley's Service. Langley recognizes and
acknowledges that the services to be rendered by him to the Bank are of a
special and unique character, that the Bank has made a substantial investment in
the business with which Langley has been and will be involved, and that the
restrictions on Langley's activities as contained in this Agreement are required
for the Bank's reasonable protection. Langley agrees that, in the event of a
breach of this Agreement by Langley, the Bank, in addition to any other rights
or remedies it may possess hereunder, will be entitled, if it so elects, to
institute and prosecute proceedings in equity and to obtain injunctive relief to
enjoin Langley from engaging in any activity in violation hereof, and to
initiate and prosecute proceedings at law in order to recover damages sustained
by the Bank as a result of any such violation or breach of this Agreement by
Langley.
(b) Non-Waiver. Failure on the part of either party to complain
of any action or non-action, breach or default on the part of the other, no
matter how long the same may continue, shall never be deemed to be a waiver by
such party of any of his or its rights or remedies hereunder, at law
5
<PAGE> 6
or in equity. Further, it is covenanted and agreed that a waiver at any time of
any provision hereof shall not be construed as a waiver at any subsequent time
of the same provision.
(c) Cumulation of Remedies. Any and all remedies herein expressly
conferred upon any party to this Agreement shall be deemed cumulative with, and
not exclusive of, any other remedy conferred hereby or by any law, and the
exercise of any one remedy shall not preclude the exercise of any other remedy.
7. GENERAL PROVISIONS
(a) Notice. Any and all notices or demands in connection with
this Agreement ("notice") shall be in writing served either personally, by
certified mail, return receipt requested, or by telegraph at the addresses
specified hereinbelow or at such other addresses as the parties hereto shall
from time to time designate in writing. If any notice is mailed, service shall
be conclusively deemed made forty-eight (48) hours after the deposit thereof in
the United States mail, postage prepaid, addressed pursuant to the provisions of
this Subsection 7(a). If served by telegraph, service shall be conclusively
deemed made at the time that the telegraphic agency shall confirm to the sender
delivery thereof to the addressee. Addresses for notices are as follows:
If to the Bank:
Foothill Independent Bank
510 South Grand Avenue
Glendora, California 91741
Attention: Chairman of the Board of Directors
If to Langley:
To Mr. George E. Langley's principal residence, the
address of which is set forth in the Bank's employment
records.
Either party may change his or its address for purposes hereof by giving notice
thereof to the other party in the manner hereinabove provided.
(b) Entire Agreement. This Agreement, together with the Severance
Agreement, constitutes the entire agreement between the parties pertaining to
the subject matter hereof, fully supersedes any and all prior agreements or
understandings between the parties pertaining to the subject matter of this
Agreement and the Severance Agreement and no changes in, additions to or
modifications of this Agreement shall be valid unless set forth in writing and
signed by each of the parties. Neither this Agreement nor the Severance
Agreement, however, supersedes (i) any agreements that the Bank or the Bancorp
has entered into with Langley pursuant to any stock option or any incentive or
bonus compensation or other employee benefit plans or programs maintained by the
Bank or Bancorp or (ii) that certain Indemnification Agreement between the
Bancorp and Langley entered into in August 1988.
(c) Assignability; Parties in Interest. This Agreement is
personal in nature and may not be assigned or transferred, whether voluntarily
or by operation of law, except that this Agreement may be assigned voluntarily,
in connection with a sale of all or substantially all of the assets
6
<PAGE> 7
and the business of the Bank as an entirety, to the purchaser of such assets and
business or by operation of law in connection with a merger of the Bank with and
into another corporation in which the Bank is not the surviving company in such
merger, provided that in each such case, the assignee expressly agrees to assume
and to perform fully and faithfully the obligations of the Bank under this
Agreement and the obligations of the Bank under the Severance Compensation
Agreement. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
heirs and assigns.
(d) Captions. The captions used in this Agreement are intended
solely for convenience of reference and shall not be deemed in any manner to
amplify, limit, modify or otherwise be used in the construction or
interpretation of, any of the provisions hereof.
(e) Gender. As used in this Agreement, the masculine, feminine or
neuter gender, and the singular or plural number, shall be deemed to include the
others whenever the context so indicates or requires.
(f) Severability. Any provisions of this Agreement which may be
prohibited by law or otherwise held invalid shall be ineffective only to the
extent of such prohibition or invalidity and shall not invalidate or otherwise
render ineffective the remaining provisions of this Agreement.
(g) Legal Action and Fees. In the event of any controversy, claim
or dispute between the parties hereto arising out of or relating to this
Agreement, the prevailing party shall be entitled to recover its or his
reasonable expenses, including, but not by way of limitation, reasonable
attorneys' fees, from the non-prevailing party.
(h) Governing Law. This Agreement, including, but not by way of
limitation, its existence, validity, construction and operational effect, and
the rights of each of the parties hereto shall be determined in accordance with
the laws of the State of California.
(i) Duplicate Originals. This Agreement may be fully executed in
any number of duplicate originals, all of which shall be considered one and the
same Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date first above written.
THE BANK: FOOTHILL INDEPENDENT BANK
By: /s/William V. Landecena
------------------------------
WILLIAM V. LANDECENA, Chairman
LANGLEY:
/s/George E. Langley
------------------------------
GEORGE E. LANGLEY
7
<PAGE> 1
EXHIBIT 21
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.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
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, Registration Statement No. 33-64584 on Form
S-8 filed June 17, 1993, and Registration Statement No. 33-83854 on Form
S-3 filed September 12, 1994, of our report dated January 23, 1998 on the
consolidated financial statements of Foothill Independent Bancorp as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 included at Page of its Annual Report on Form 10-K for the year ended
December 31, 1997.
/s/ VAVRINEK, TRINE, DAY & COMPANY
-----------------------------------
VAVRINEK, TRINE, DAY & COMPANY
Certified Public Accountants
March 26, 1998
Rancho Cucamonga, California
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Foothill Independent Bancorp:
We consent to the incorporation by reference of our report dated March 10, 1998,
on the financial statements of Foothill Independent Bank Partners in Your Future
retirement plan as of December 31, 1997 and 1996, 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, 1998
Rancho Cucamonga, California
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997, 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 38,800
<INT-BEARING-DEPOSITS> 8,309
<FED-FUNDS-SOLD> 30,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,959
<INVESTMENTS-CARRYING> 15,110
<INVESTMENTS-MARKET> 15,171
<LOANS> 291,809
<ALLOWANCE> (4,749)
<TOTAL-ASSETS> 435,708
<DEPOSITS> 393,667
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,398
<LONG-TERM> 123
0
0
<COMMON> 22,618
<OTHER-SE> 19,423
<TOTAL-LIABILITIES-AND-EQUITY> 435,708
<INTEREST-LOAN> 30,231
<INTEREST-INVEST> 3,027
<INTEREST-OTHER> 1,529
<INTEREST-TOTAL> 35,028
<INTEREST-DEPOSIT> 241
<INTEREST-EXPENSE> 9,738
<INTEREST-INCOME-NET> 25,290
<LOAN-LOSSES> 1,681
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,599
<INCOME-PRETAX> 7,050
<INCOME-PRE-EXTRAORDINARY> 7,050
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,518
<EPS-PRIMARY> 0.90<F1>
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 6.2
<LOANS-NON> 11,458
<LOANS-PAST> 7
<LOANS-TROUBLED> 2,880
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,744
<CHARGE-OFFS> 1,667
<RECOVERIES> 407
<ALLOWANCE-CLOSE> 5,165
<ALLOWANCE-DOMESTIC> 5,165
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<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>
<RESTATED>
<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> 0.86<F1>
<EPS-DILUTED> .84
<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
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES
THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 26,278
<INT-BEARING-DEPOSITS> 6,433
<FED-FUNDS-SOLD> 41,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,743
<INVESTMENTS-CARRYING> 23,491
<INVESTMENTS-MARKET> 23,582
<LOANS> (3,644)
<ALLOWANCE> (3,644)
<TOTAL-ASSETS> 395,181
<DEPOSITS> 361,114
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,817
<LONG-TERM> 208
0
0
<COMMON> 10,788
<OTHER-SE> 20,254
<TOTAL-LIABILITIES-AND-EQUITY> 395,181
<INTEREST-LOAN> 28,872
<INTEREST-INVEST> 4,329
<INTEREST-OTHER> 202
<INTEREST-TOTAL> 33,403
<INTEREST-DEPOSIT> 9,751
<INTEREST-EXPENSE> 9,786
<INTEREST-INCOME-NET> 23,617
<LOAN-LOSSES> 2,016
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 20,625
<INCOME-PRETAX> 5,663
<INCOME-PRE-EXTRAORDINARY> 5,663
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,563
<EPS-PRIMARY> 0.75<F1>
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 6.8
<LOANS-NON> 12,620
<LOANS-PAST> 1,456
<LOANS-TROUBLED> 6,398
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,145
<CHARGE-OFFS> 2,066
<RECOVERIES> 548
<ALLOWANCE-CLOSE> 3,644
<ALLOWANCE-DOMESTIC> 3,644
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 1997 AND THE STATEMENT OF INCOME OF
THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 32,762
<INT-BEARING-DEPOSITS> 2,078
<FED-FUNDS-SOLD> 23,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,258
<INVESTMENTS-CARRYING> 15,941
<INVESTMENTS-MARKET> 15,888
<LOANS> 281,716
<ALLOWANCE> (4,427)
<TOTAL-ASSETS> 417,867
<DEPOSITS> 377,416
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,792
<LONG-TERM> 157
0
0
<COMMON> 15,647
<OTHER-SE> 21,855
<TOTAL-LIABILITIES-AND-EQUITY> 417,867
<INTEREST-LOAN> 7,326
<INTEREST-INVEST> 998
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 8,368
<INTEREST-DEPOSIT> 2,439
<INTEREST-EXPENSE> 2,443
<INTEREST-INCOME-NET> 5,925
<LOAN-LOSSES> 281
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,225
<INCOME-PRETAX> 1,800
<INCOME-PRE-EXTRAORDINARY> 1,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,133
<EPS-PRIMARY> .23<F1>
<EPS-DILUTED> .22
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES
THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 36,044
<INT-BEARING-DEPOSITS> 3,662
<FED-FUNDS-SOLD> 19,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35,631
<INVESTMENTS-CARRYING> 25,739
<INVESTMENTS-MARKET> 25,505
<LOANS> 281,587
<ALLOWANCE> (4,084)
<TOTAL-ASSETS> 420,897
<DEPOSITS> 379,035
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,748
<LONG-TERM> 146
0
0
<COMMON> 22,080
<OTHER-SE> 16,888
<TOTAL-LIABILITIES-AND-EQUITY> 420,897
<INTEREST-LOAN> 14,798
<INTEREST-INVEST> 2,195
<INTEREST-OTHER> 107
<INTEREST-TOTAL> 17,100
<INTEREST-DEPOSIT> 4,819
<INTEREST-EXPENSE> 4,827
<INTEREST-INCOME-NET> 12,273
<LOAN-LOSSES> 331
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,331
<INCOME-PRETAX> 3,424
<INCOME-PRE-EXTRAORDINARY> 3,424
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,147
<EPS-PRIMARY> .43<F1>
<EPS-DILUTED> .41
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,891
<INT-BEARING-DEPOSITS> 5,935
<FED-FUNDS-SOLD> 24,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,826
<INVESTMENTS-CARRYING> 19,699
<INVESTMENTS-MARKET> 19,506
<LOANS> 289,017
<ALLOWANCE> (3,942)
<TOTAL-ASSETS> 427,318
<DEPOSITS> 383,019
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,582
<LONG-TERM> 135
0
0
<COMMON> 22,432
<OTHER-SE> 18,605
<TOTAL-LIABILITIES-AND-EQUITY> 427,318
<INTEREST-LOAN> 22,445
<INTEREST-INVEST> 2,316
<INTEREST-OTHER> 1,255
<INTEREST-TOTAL> 26,016
<INTEREST-DEPOSIT> 7,357
<INTEREST-EXPENSE> 7,269
<INTEREST-INCOME-NET> 18,747
<LOAN-LOSSES> 381
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,006
<INCOME-PRETAX> 5,569
<INCOME-PRE-EXTRAORDINARY> 5,569
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,469
<EPS-PRIMARY> .67<F1>
<EPS-DILUTED> .64
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 1996 AND THE STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES
THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 32,107
<INT-BEARING-DEPOSITS> 9,196
<FED-FUNDS-SOLD> 20,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,011
<INVESTMENTS-CARRYING> 17,225
<INVESTMENTS-MARKET> 17,235
<LOANS> 266,560
<ALLOWANCE> (3,981)
<TOTAL-ASSETS> 403,088
<DEPOSITS> 368,622
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,484
<LONG-TERM> 199
0
0
<COMMON> 14,512
<OTHER-SE> 17,271
<TOTAL-LIABILITIES-AND-EQUITY> 403,088
<INTEREST-LOAN> 7,622
<INTEREST-INVEST> 1,110
<INTEREST-OTHER> 32
<INTEREST-TOTAL> 8,764
<INTEREST-DEPOSIT> 2,636
<INTEREST-EXPENSE> 2,641
<INTEREST-INCOME-NET> 6,123
<LOAN-LOSSES> 490
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,553
<INCOME-PRETAX> 1,326
<INCOME-PRE-EXTRAORDINARY> 1,326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 823
<EPS-PRIMARY> .17<F1>
<EPS-DILUTED> .17
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF JUNE 30, 1996 AND THE STATEMENT OF INCOME FOR
THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 29,871
<INT-BEARING-DEPOSITS> 8,994
<FED-FUNDS-SOLD> 14,690
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,257
<INVESTMENTS-CARRYING> 13,076
<INVESTMENTS-MARKET> 13,061
<LOANS> 267,275
<ALLOWANCE> (3,804)
<TOTAL-ASSETS> 391,436
<DEPOSITS> 355,863
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,565
<LONG-TERM> 189
0
0
<COMMON> 14,610
<OTHER-SE> 18,209
<TOTAL-LIABILITIES-AND-EQUITY> 391,436
<INTEREST-LOAN> 14,986
<INTEREST-INVEST> 2,225
<INTEREST-OTHER> 60
<INTEREST-TOTAL> 17,271
<INTEREST-DEPOSIT> 5,036
<INTEREST-EXPENSE> 5,046
<INTEREST-INCOME-NET> 12,225
<LOAN-LOSSES> 1,025
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,877
<INCOME-PRETAX> 2,877
<INCOME-PRE-EXTRAORDINARY> 2,877
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776
<EPS-PRIMARY> .37<F1>
<EPS-DILUTED> .36
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES
THERETO.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 32,334
<INT-BEARING-DEPOSITS> 5,827
<FED-FUNDS-SOLD> 22,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,405
<INVESTMENTS-CARRYING> 7,777
<INVESTMENTS-MARKET> 7,773
<LOANS> 294,268
<ALLOWANCE> (4,235)
<TOTAL-ASSETS> 406,379
<DEPOSITS> 368,903
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,059
<LONG-TERM> 179
0
0
<COMMON> 14,872
<OTHER-SE> 19,366
<TOTAL-LIABILITIES-AND-EQUITY> 406,379
<INTEREST-LOAN> 23,087
<INTEREST-INVEST> 3,167
<INTEREST-OTHER> 93
<INTEREST-TOTAL> 26,347
<INTEREST-DEPOSIT> 7,360
<INTEREST-EXPENSE> 7,375
<INTEREST-INCOME-NET> 18,972
<LOAN-LOSSES> 1,747
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,356
<INCOME-PRETAX> 4,775
<INCOME-PRE-EXTRAORDINARY> 4,775
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,928
<EPS-PRIMARY> .59<F1>
<EPS-DILUTED> .57
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
DECEMBER 31, 1997 AND 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT.......................................................................1
FINANCIAL STATEMENTS
Statements of Net Assets Available for Benefits
December 31, 1997 and 1996.....................................................................2
Statements of Changes in Net Assets Available for Benefits
For the Year Ended December 31, 1997 and 1996..................................................3
Notes to Financial Statements..................................................................4
SUPPLEMENTARY INFORMATION
Schedule of Assets Held for Investment Purposes................................................8
</TABLE>
<PAGE> 2
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, 1997 and 1996, 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, 1997 and 1996, 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.
Rancho Cucamonga, California
March 10, 1998
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<PAGE> 3
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
INVESTMENTS AT FAIR MARKET VALUE
Mutual funds $1,177,270 $ 876,302
Foothill Independent Bank stock 2,195,789 1,064,272
Money market funds 201,544 176,267
Loan funds 73,041 24,835
---------- ----------
Total Investments (Note #3) 3,647,644 2,141,676
CASH 289
RECEIVABLES (Note #4) 25,179 18,648
---------- ----------
Total Assets 3,672,823 2,160,613
LIABILITIES
Benefits payable (Note #5) 61,590 45,123
---------- ----------
NET ASSETS AVAILABLE FOR BENEFITS $3,611,233 $2,115,490
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Additions To Net Assets Attributed To
Net unrealized appreciation in fair value of assets $ 703,197 $ 321,484
Interest 10,487 8,096
Dividends 23,180 97,180
Realized gain on sale of assets 230,327 13,172
Other income 2,760 41,732
----------- -----------
Total Investment Income 969,951 481,664
----------- -----------
Contributions
Employee 487,898 444,768
Employer 285,186 137,763
----------- -----------
Total Contributions 773,084 582,531
----------- -----------
Total Additions to Net Assets 1,743,035 1,064,195
Deduction From Net Assets Attributed To
Benefits paid directly to participants (233,934) (193,154)
Forfeitures (13,358)
----------- -----------
Total Deductions from Net Assets (247,292) (193,154)
----------- -----------
Net Increase in Net Assets 1,495,743 871,041
Net Assets Available for Benefits, Beginning of year 2,115,490 1,244,449
----------- -----------
Net Assets Available for Benefits, End of year $ 3,611,233 $ 2,115,490
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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.
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<PAGE> 6
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 rollover 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.
G. Forfeited Accounts
At December 31, 1997, forfeited nonvested accounts totaled $13,358. These
accounts will be used to reduce future employer contributions.
NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Plan are prepared using the accrual method of
accounting.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the plan administrator to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results may differ from those estimates.
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.
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<PAGE> 7
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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, 1997 December 31, 1996
------------------------- -------------------------
Cost Basis Fair Value Cost Basis Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fair Value of Investments
Mutual funds
Growth equity fund $ 564,182 $ 555,967 $ 325,590 $ 373,010
Intermediate term bond fund 167,759 169,256 155,256 154,868
Balanced fund 380,633 452,047 308,001 348,424
Foothill Independent Bank stock 1,343,549 2,195,789 802,999 1,064,272
Money market funds 201,544 201,544 176,267 176,267
Loan funds 73,041 73,041 24,835 24,835
---------- ---------- ---------- ----------
Total Investments $2,730,708 $3,647,644 $1,792,948 $2,141,676
========== ========== ========== ==========
</TABLE>
During 1997 and 1996, the Plan's investments (including investments bought, sold
and held during the year) appreciated in value by $703,197 and $321,484 during
1997 and 1996, respectively, as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net change in Fair Value
Mutual funds $ 84,491 $ 38,627
Foothill Independent Bank stock 616,708 282,857
-------- --------
Net Change in Fair Value $703,197 $321,484
======== ========
</TABLE>
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<PAGE> 8
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE #4 - RECEIVABLES
Receivables at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Contributions
Employer $10,028 $ 4,560
Employee 15,151 14,088
------- -------
Total Receivables $25,179 $18,648
======= =======
</TABLE>
-7-
<PAGE> 9
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 $61,590 and $45,123 for 1997 and 1996,
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.
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<PAGE> 10
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1997
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 131,091 shares $1,343,549 $2,195,789
Union Bank Money Market Fund Money market funds 201,544 units 201,544 201,544
Union Bank Intermediate Term
Bond Fund Mutual funds 16,465 units 167,759 169,256
Union Bank Balanced Fund Mutual funds 27,750 units 380,633 452,047
Union Bank Growth Equity Fund Mutual funds 39,180 units 564,182 555,967
Participant Loans Various loans at 8.25% to
10.43% interest 73,041 73,041
---------- ----------
$2,730,708 $3,647,644
========== ==========
</TABLE>
-9-
