<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, 1998
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 19, 1999, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $78,466,972.50.
As of March 19, 1999, there were 5,923,263 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 which is expected to be filed with the
Commission by April 30, 1999.
----------
Page 1 of __ Pages
Exhibit Index on Sequentially numbered Page __
<PAGE> 2
PART I
ITEM 1. BUSINESS
Foothill Independent Bancorp (the "Company") is a one-bank holding
company which owns all of the capital stock of Foothill Independent Bank, a
California state-chartered bank (the "Bank"). The business of the Bank is
carried on as a wholly-owned subsidiary of the Company. The Company 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 is engaged in the commercial banking business. It provides a
wide range of commercial banking and related services, including the acceptance
of deposits and the making of loans, that have been designed to meet the banking
needs of individuals residing and businesses located primarily 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 Bank's deposit 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 commercial 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 10 banking offices that are located in the
communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho
Cucamonga, Covina, Glendale, Corona and Chino, California, that are within
10-to-45 miles east of the City of Los Angeles. An eleventh banking office, to
be located in the city of Monrovia, is scheduled to be opened in April 1999.
During 1998, the Bank closed its City of Walnut banking office, which
was its smallest banking office, primarily because the opportunities for further
growth in that area had become quite limited. The deposit accounts and lending
relationships at that banking office were transferred to other nearby offices of
the Bank and the closure of the Walnut office did not have any material impact
on the Company's operating results.
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 all 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, 1998:
<TABLE>
<CAPTION>
Type of Number of Average Account Aggregate Amounts
Account Accounts Balance of Deposits
------- --------- --------------- -----------------
<S> <C> <C> <C>
Demand 16,155 $ 8,662 $139,939,000(a)
Money Market(b) 9,261 $ 15,656 $144,988,000
Savings 10,084 $ 3,367 $ 33,954,000
TCDs(c) 295 $196,834 $ 58,066,000(d)
Other Time Deposits(c) 2,877 $ 13,805 $ 39,717,000(e)
</TABLE>
- ----------
(a) Includes $1,288,000 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 $1,291,000 of municipal and other government agency
deposits.
(e) Includes $424,000 of municipal and other government agency
deposits.
During the twelve months ended December 31, 1998, average demand
deposits increased by approximately $16,456,000 or 14.0%; average money market &
NOW checking accounts deposits increased by approximately $17,655,000 or 14.9%;
average savings deposits increased by approximately $733,000 or 2.2%; and
average time deposits decreased by approximately $4,457,000 or 4.0%, which was
the result of a decrease of $758,000 in TCD's and a decrease of approximately
$3,699,000 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 5% 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,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ -----------------------
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 $ 53,808 11.7% $ 46,050 10.9% $ 38,410 9.7%
Non-Taxable 6,846 1.5 7,114 1.7 7,810 1.9
Federal Funds Sold & Repos 30,219 6.6 23,673 5.6 20,033 5.0
Due from Banks - Time Deposits 11,787 2.5 4,215 1.0 7,391 1.8
Loans 306,381 66.8 286,438 67.8 278,560 69.4
Direct Lease Financing 4,086 0.9 4,395 1.0 2,205 0.6
Reserve for Loan and Lease Losses (5,252) (1.1) (4,246) (1.0) (4,012) (1.0)
---------- ----- ---------- ----- ---------- -----
Net Loans and Leases 305,215 66.6 286,587 67.8 276,753 69.0
---------- ----- ---------- ----- ---------- -----
Total Interest Earning Assets 407,875 88.9 367,639 87.0 350,397 87.4
Cash and Non-interest Earning Assets 30,746 6.7 33,548 7.9 29,308 7.3
Net Premises, Furniture and Equipment 7,392 1.6 7,673 1.8 7,477 1.9
Other Assets 12,982 2.8 13,754 3.3 13,726 3.4
---------- ----- ---------- ----- ---------- -----
Total Assets $ 458,995 100.0% $ 422,614 100.0% $ 400,908 100.0%
========== ===== ========== ===== ========== =====
LIABILITIES AND STOCKHOLDERS EQUITY
Savings Deposits (1) $ 169,617 37.0% $ 151,319 33.0% $ 140,258 33.2%
Time Deposits 106,855 23.3 111,129 24.2 121,453 28.7
Long-term Borrowings 101 - 147 - 190 -
---------- ----- ---------- ----- ---------- -----
Total Interest-Bearing Liabilities 276,573 60.3 262,595 57.2 261,901 61.9
Demand Deposits 134,141 29.2 117,711 25.6 102,802 24.4
Other Liabilities 3,532 0.8 3,688 0.8 2,898 0.7
---------- ----- ---------- ----- ---------- -----
Total Liabilities 414,246 90.3 383,994 83.6 367,601 87.0
Stockholders' Equity 44,749 9.7 38,620 8.4 33,307 7.9
---------- ----- ---------- ----- ---------- -----
Total Liabilities and
Stockholders' Equity $ 458,995 100.0% $ 422,614 92.0% $ 400,908 94.9%
========== ===== ========== ===== ========== =====
</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 receives from its loan portfolio 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, 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,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ -----------------------------
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............. $ 15,896 $ 950 6.0% $ 16,610 $ 984 5.9% $ 4,025 $ 236 5.9%
U.S. Government Agencies.. 34,564 1,974 5.7 26,046 1,460 5.6 31,253 1,743 5.6
Municipal Leases(1)....... 6,788 584 8.6 7,114 596 8.4 7,810 589 7.5
Other Securities.......... 3,546 257 7.2 3,394 201 5.9 3,132 192 6.1
--------- ------- --------- ------- -------- -------
Total Investment
Securities.............. 60,794 3,765 6.2 53,164 3,241 6.1 46,220 2,760 6.0
Federal Funds Sold.......... 30,219 1,560 5.2 23,673 1,274 5.4 20,033 1,070 5.3
Due form Banks - Time
Deposits................... 11,787 662 5.6 4,215 241 5.7 7,391 402 5.4
Loans(2).................... 306,381 30,232 9.9 286,438 30,231 10.6 278,560 30,939 11.1
Lease Financing(1))......... 4,086 384 9.4 4,395 398 9.1 2,205 185 8.4
--------- ------- --------- ------- -------- -------
Total Interest-Earning
Assets(1).................. $ 413,267 $36,603 8.9% $ 371,885 $35,385 9.5% $354,409 $35,356 10.0%
========= ======= ========= ======= ======== =======
INTEREST BEARING LIABILITIES
Domestic Deposits and
Borrowed Funds:
Savings Deposits(3)....... $ 169,617 $ 4,232 2.5% $ 151,319 $ 3,624 2.4% $140,258 $ 3,100 2.2%
Time Deposits............. 106,855 5,585 5.2% 111,129 6,099 5.5% 121,453 6,750 5.6%
Long-Term borrowings...... 101 10 9.9% 147 15 10.2% 190 19 10.0%
--------- ------- --------- ------- -------- -------
Total Interest-Bearing
Liabilities............. $ 276,573 $ 9,827 3.6% $ 262,595 $ 9,738 3.7% $261,901 $ 9,869 3.8%
========= ======= ========= ======= ======== =======
</TABLE>
The table below shows the net interest earnings and the net yield on
average earning assets:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Total Interest Income(1)(2)............................................... $ 36,603 $ 35,385 $ 35,387
Total Interest Expense(3)................................................. $ 9,827 $ 9,738 $ 9,738
Net Interest Earnings(1)(2)............................................... $ 26,776 $ 25,647 $ 25,349
Net Average Earning Assets(2)............................................. $413,267 $371,885 $354,409
Net Yield on Average Earning Assets(1)(2)................................. 6.5% 6.9% 7.2%
Net Yield on Average Earning Assets (excluding Loan Fees)(1)(2)........... 6.0% 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 37.8
percent for 1998, 35.9 percent for 1997 and 37.0 percent for 1996.
(2) Loans, net of unearned discount, do not reflect average reserves for
possible loan losses of $5,252,000 in 1998, $5,165,000 in 1997 and
$4,012,000 in 1996. Loan fees of $1,925,000 in 1998, $2,556,000 in 1997
and $2,891,000 in 1996 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
sixteen non-accruing loans at December 31, 1998, twenty-seven at
December 31, 1997 and twenty-one at December 31, 1996.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
5
<PAGE> 6
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
- ------------------- ---- ------- ------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
1998 compared to 1997 -
Increase (decrease) due to:
Volume Changes $467 $ (33) $ 340 $ 2,206 $ (29) $ 425
Rate Changes 69 21 (54) (2,205) 15 (4)
---- ------- ------- ------- ------- -------
Net Increase (Decrease) $536 $ (12) $ 286 $ 1 $ (14) $ 421
==== ======= ======= ======= ======= =======
1997 compared to 1996 -
Increase (decrease) due to:
Volume Changes $438 $ (52) $ 196 999 $ 197 $ (181)
Rate Changes 36 59 8 (1,707) 16 20
---- ------- ------- ------- ------- -------
Net Increase (Decrease) $474 $ 7 $ 204 (708) $ 213 $ (161)
==== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SAVINGS OTHER TIME LONG TERM REPURCHASE
INTEREST PAID ON: DEPOSITS DEPOSITS BORROWINGS(3) AGREEMENTS TOTAL
- ----------------- -------- ---------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C>
1998 compared to 1997 -
Increase (decrease) due to:
Volume Changes $ 452 $(230) $ (5) $ -- $ 217
Rate Changes 156 (284) -- -- (128)
----- ----- ----- ---- -----
Net Increase (Decrease) $ 608 $(514) $ (5) $ -- $ 89
===== ===== ===== ==== =====
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)
===== ===== ===== ==== =====
</TABLE>
- ----------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate
37.8% for 1998 and 35.9% for 1997.
(2) Includes a decrease in loan fees of $631,000 in 1998 and a decrease of
$350,000 in 1997.
(3) Long term borrowings in 1998 and 1997 consist of an obligation secured
by deed of trust that bears interest at 10.0%.
6
<PAGE> 7
Investment Portfolio
The objectives of the Bank's investment policy is 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 the credit and maturity guidelines defined in
the investment policy and is reviewed regularly to verify its continued credit
worthiness.
Effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and reclassified its investment security
portfolio to differentiate between Investment Securities Held-to-Maturity and
Investment Securities Available-For-Sale. Previously, the investment securities
were carried at cost, adjusted for the accretion of discounts and amortization
of premiums. The classification of securities is made by management at the time
of acquisition.
The following table summarizes the components of the Company's
investment securities at the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
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 $ 8,997 $ 9,054 $12,384 $12,432 $ 2,796 $ 2,800
State and Political
Subdivisions 1,580 1,604 2,476 2,489 2,529 2,538
Other Securities 2,250 2,250 250 250 250 250
------- ------- ------- ------- ------- -------
Total Investment
Securities $12,827 $12,908 $15,110 $15,171 $ 5,575 $ 5,588
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
U. S. Treasury and
Agency $65,444 $65,620 $22,956 $22,978 $31,877 $31,800
State and Political
Subdivisions 5,057 5,079 4,749 4,763 4,772 4,792
Other Securities 23,006 22,719 3,538 3,218 3,238 2,885
------- ------- ------- ------- ------- -------
Total Investment
Securities $93,507 $93,418 $31,243 $30,959 $39,887 $39,477
======= ======= ======= ======= ======= =======
</TABLE>
- ----------
(1) Includes, in 1998 and 1997, 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 $3,980,000 and $4,413,000 and
market values of $3,988,000 and $4,427,000 at December 31, 1998 and
1997, respectively.
7
<PAGE> 8
The following table shows the maturity of investment securities at
December 31, 1998, and the weighted average yields (for tax-exempt obligations
on a fully taxable basis assuming a 37.8% 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> <C> <C>
INVESTMENT SECURITIES
HELD-TO-MATURITY:
U. S. Treasury and
Agencies $ 6,997 6.04% $ 2,000 5.52% $ -- --% $ -- --%
State and Political 518 6.30% 1,062 0.068 -- --
Other Securities 2,250 -- -- -- -- -- -- --
------- ---- ------- ----- ------- ----- ------ ----
Total Investment
Securities $ 9,765 6.05% $ 3,062 5.96% $ -- --% $ -- --%
======= ==== ======= ===== ======= ===== ====== ====
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
U. S. Treasury and
Agencies $33,053 5.78% $32,567 5.74% $ -- --% $ -- --%
State and Political -- -- 4,318 0.089 761 4.51% -- --
Other Securities 22,719 -- -- -- -- -- -- --
------- ---- ------- ----- ------- ----- ------ ----
$55,772 5.76% $36,885 6.09% $ 761 4.51% $ -- --%
------- ---- ------- ----- ------- ----- ------ ----
Total Investment
Securities $65,537 5.80% $39,947 6.08% $ 761 4.51% $ -- --%
======= ==== ======= ===== ======= ===== ====== ====
</TABLE>
8
<PAGE> 9
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,
1998.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
TYPES OF LOANS (In Thousands)
- -------------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial, Financial
and Agricultural $ 42,106 $ 44,296 $ 40,979 $ 44,801 $ 67,551
Real Estate Construction 15,602 10,895 12,008 32,745 33,155
Real Estate Mortgage(1) 224,530 228,630 231,012 171,321 129,650
Consumer Loans 7,011 6,450 8,157 10,887 15,986
Lease Financing(2) 3,704 4,749 2,864 2,086 3,727
All other Loans
(including overdrafts) 2,169 2,203 407 178 112
--------- --------- --------- --------- ---------
Subtotal: 295,122 297,223 295,427 262,018 250,181
Less:
Unearned Discount (539) (665) (797) (864) (1,165)
Reserve for Loan and Lease Losses (5,576) (5,165) (4,744) (3,644) (3,145)
--------- --------- --------- --------- ---------
Total: $ 289,007 $ 291,393 $ 289,886 $ 257,510 $ 245,871
========= ========= ========= ========= =========
</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 1998; $0 for 1997;
$33,000 for 1996; $322,000 for 1995 and $567,000 for 1994, and is net
of unearned income of $249,000 for 1998; $694,000 for 1997; $329,000
for 1996; $252,000 for 1995 and $391,000 for 1994.
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, 1998.
<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 $ 31,265 $ 8,443 $ 2,398 $ 42,106
Real Estate and Construction 11,991 -- 3,611 15,602
Real Estate and Mortgage 64,107 60,586 99,837 224,530
Consumer Loans 3,027 3,394 590 7,011
Lease Financing 129 3,360 215 3,704
All other Loans 1,600 558 11 2,169
-------- -------- -------- --------
Total $112,119 $ 76,341 $106,662 $295,122
======== ======== ======== ========
</TABLE>
Of the total amount of loans (exclusive of loans on non-accrual status)
outstanding as of December 31, 1998 that had maturities of more than one year,
$78,368,000 had predetermined, or fixed, rates of interest and $99,227,000 had
floating or adjustable rates of interest.
9
<PAGE> 10
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, 1998. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
Generally, where rate-sensitive assets exceed rate-sensitive
liabilities, the net interest margin is expected to be positively impacted
during periods of increasing interest rates and negatively impacted during
periods of decreasing interest rates. When rate-sensitive liabilities exceed
rate-sensitive assets generally the net interest margin will be negatively
affected during periods of increasing interest rates and positively affected
during periods of decreasing interest rates.
<TABLE>
<CAPTION>
Over Three Over One
Three Through Year Over Non-
Months Twelve Through Five Interest
or Less Months Five Years Years Bearing Total
--------- --------- ---------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits in banks $ 6,435 $ 8,608 $ $ -- $ $ 15,043
Investment securities 35,751 28,195 39,947 761 1,591 106,245
Federal Funds Sold 13,000 -- -- 13,000
Net loans 100,480 9,828 72,616 105,851 232 289,007
Noninterest-earning assets -- -- -- -- 45,782 45,782
--------- --------- --------- --------- --------- ---------
Total assets $ 155,666 $ 46,631 $ 112,563 $ 106,612 $ 47,605 $ 469,077
--------- --------- --------- --------- --------- ---------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits $ -- $ -- $ -- $ -- $ 139,939 $ 139,939
Interest-bearing deposits 221,718 48,292 6,715 276,725
Short-term borrowings -- -- -- -- -- --
Long-term borrowings -- 55 19 -- -- 74
Other liabilities -- -- -- -- 3,960 3,960
Stockholders' equity -- -- -- -- 48,379 48,379
--------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders equity $ 221,718 $ 48,347 $ 6,734 $ -- $ 192,278 $ 469,077
--------- --------- --------- --------- --------- ---------
Interest rate sensitivity gap $ (66,052) $ (1,716) $ 105,829 $ 106,612 $(144,673) $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity gap $ (66,052) $ (67,768) $ 38,061 $ 144,673 $ -- $
========= ========= ========= ========= ========= =========
</TABLE>
10
<PAGE> 11
The Company's management also utilizes the results of a dynamic
simulation model to quantify the estimated impact of sustained changes in
interest rates on the interest expected to be earned on all interest earning
assets and the interest that will be paid on all interest bearing liabilities,
to arrive at an estimate of the effects of the interest rate changes on net
interest income. This sensitivity analysis is compared to policy limits which
specify a maximum tolerance level for net interest income exposure over a one
year horizon assuming no balance sheet growth, given both a 200 basis point
upward and downward shift in interest rates. A parallel and pro rate shift in
rates over a 12-month period is assumed.
The following reflects the Company's net interest income sensitivity
analysis as of December 31, 1998:
<TABLE>
<CAPTION>
Estimated Net Market Value
Interest Income ------------------------
Simulated Rate Changes Sensitivity Assets Liabilities
---------------------- --------------- -------- -----------
<S> <C> <C> <C>
+200 basis points -7.82% $451,298 $416,459
-200 basis points +2.16% $490,138 $418,039
</TABLE>
As indicated in above table, the simulation model predicts that a 200
basis point increase in interest rates would result in a 7.82% decline in net
interest income, based primarily on the assumptions that interest rates paid on
deposits would increase immediately, whereas interest rates paid by borrowers on
outstanding variable rate loans would increase more gradually and interest paid
on fixed rate loans would not increase. By contrast, the simulation model
predicts that a 200 basis point decline in interest rates would result in a
2.16% increase in net interest income, primarily on the assumption that such a
decline would result in a reduction in interest paid on deposits, that would
more than offset the decrease in interest income from variable rate loans. The
estimated net interest income sensitivity does not necessarily represent a
Company forecast and the results may not be indicative of actual changes to the
Company's net interest income. These estimates are based upon a number of
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, pricing strategies on
loans and deposits, replacement of asset and liability cashflows, and other
assumptions. While the assumptions used are based on current economic and local
market conditions, there is not assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change.
Risk Elements
Non-accrual, Past Due and Restructured Loans
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans More Than 90 Days
Past Due(1):
Aggregate Loan Amounts:
Commercial................... $ 8 $ -- $ 500 $ 584 $ 281
Real Estate.................. -- -- 2,328 869 2,117
Consumer..................... 12 7 1 3 51
Aggregate Leases............. 17 -- -- -- --
Troubled Debt Restructurings (2). 3,042 2,880 4,787 6,397 1,337
Non-Accrual Loans (3)............ 6,347 11,458 11,623 12,620 8,621
------- ------- ------- ------- -------
$ 9,426 $14,345 $19,239 $20,473 $12,407
======= ======= ======= ======= =======
</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 1998, 1997, 1996, 1995 and 1994 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 sixteen loans on non-accrual status at December 31, 1998;
twenty-seven loans at December 31, 1997; twenty-one loans at December
31, 1996; forty-five loans at December 31, 1995 and sixty loans at
December 31, 1994. The amount of interest that would have been
collected on these loans had they remained current in accordance with
their original terms was $967,000 in 1998, $981,000 in 1997, $1,488,000
in 1996, $985,000 in 1995 and $510,000 in 1994.
11
<PAGE> 12
Effective January 1, 1995 the Company adopted Statement of Financial
Accounting Standards N. 114, "Accounting by Creditors for Impairment of a Loan"
(SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e., both
principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (I) the present value
of the expected future cash flows of the impaired loan discounted at the loans'
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had
no material impact on the Company's consolidated financial statements as the
Bank's existing policy of measuring loan impairment is consistent with methods
prescribed in these standards.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that it will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In determining impairment, the Bank principally evaluates those
loans, both performing and non-performing, that are large non-homogenous loans
in its commercial and real estate mortgage and construction loan portfolios
which exhibit, among other characteristics, high loan-to-value ratios, low
debt-coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. In general, payment delays of less
than 90 days or payment shortfalls of less than 1% are deemed insignificant and
would not necessarily result in classification of a loan as impaired. However,
management considers all non-accrual loans to be impaired. The Bank does not
consider all non-accrual loans to be impaired.. The Bank does not consider
smaller balance, homogenous loans in determining loan impairment. These loans
include consumer installment, credit card and direct lease financing.
Loans identified as impaired are placed on non-accrual status and are
evaluated for write-off, write-down or renegotiations 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, $1,363,000 for the year ended
December 31, 1998 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 $10,530,000 for the year ended December 31, 1998. Cash receipts
during 1998 applied to reduce principal balances and recognized as interest
income were approximately $5,780,,000 and $547,000, 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.
Potential Problem Loans
At December 31, 1998, 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.
12
<PAGE> 13
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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans and Agricultural and leases
outstanding(1)...................................... $ 310,467 $ 290,833 $ 280,765 $ 252,402 $ 222,291
========= ========= ========= ========= =========
Loan and lease loss reserve balance at
beginning of year................................... $ 5,165 $ 4,744 $ 3,644 $ 3,145 $ 2,328
--------- --------- --------- --------- ---------
Charge-Offs:
Domestic:
Commercial, financial and agricultural........... (423) (391) (96) (1,414) (1,114)
Real Estate-construction......................... -- -- -- -- --
Real Estate-mortgage............................. (274) (1,191) (1,365) (543) (516)
Consumer Loans................................... (45) (64) (142) (109) (207)
Lease Financing.................................. (21) -- -- --
Other............................................ (127)
--------- --------- --------- --------- ---------
(869) (1,667) (1,603) (2,066) (1,837)
Foreign:........................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Recoveries:
Domestic:
Commercial, financial and agricultural........... $ 202 $ 102 $ 295 $ 284 $ 78
Real Estate-construction......................... -- -- -- -- --
Real Estate-mortgage............................. 300 254 152 186 140
Consumer Loans................................... 3 51 56 79 72
Lease Financing.................................. -- -- -- -- --
--------- --------- --------- --------- ---------
505 407 503 549 290
Foreign:........................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net Charge-Offs...................................... (364) (1,260) (1,100) (1,517) (1,547)
Additions charged to operations...................... 775 1,681 2,200 2,016 2,364
--------- --------- --------- --------- ---------
Loan and lease loss reserve balance at end of year... $ 5,576 $ 5,165 $ 4,744 $ 3,644 $ 3,145
========= ========= ========= ========= =========
Ratios:
Net charge-offs during the year to average loans
and leases outstanding during the year............ 0.12% 0.43% 0.39% 0.60% 0.70%
Loan loss reserve to total gross loans............. 1.89% 1.74% 1.61% 1.39% 1.26%
Net loan charge-offs to loan loss reserve.......... 6.53% 24.39% 23.19% 41.63% 49.19%
Net loan charge-offs to provision for loan losses.. 46.97% 74.96% 50.00% 75.25% 65.44%
Loan loss reserve to non-performing loans(2)....... 87.85% 45.05% 32.82% 25.88% 28.41%
</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 restructured
loans have been excluded because they are performing in accordance with
the revised terms thereof.
13
<PAGE> 14
Loans and leases are charged against the reserve for loan 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 and result in a reduction in the amount of 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 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 changes in the incurrence of
currently unanticipated losses on loans in the loan portfolio due to
deterioration in the financial condition of the borrowers. In addition, both
Federal and state banking regulatory agencies, as an integral part of their
periodic oversight examinations of the Bank, routinely review the Loan Loss
Reserve and often recommend additions to the Reserve based on their evaluation
of the loan portfolio. See "Supervision and Regulation."
14
<PAGE> 15
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,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ------------------
% 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 $ 3,745 14.27% $ 2,128 14.90% $ 1,148 13.87%
Real Estate-construction 91 5.29% 302 3.67% 169 4.06%
Real Estate-mortgage 1,630 76.08% 2,415 76.92% 2,899 78.20%
Installment loans to individuals 76 2.38% 79 2.17% 77 2.76%
Lease financing 34 1.26% 96 1.60% 17 0.97%
Other -- 0.72% 145 0.74% 434 0.14%
------- ------ ------- ------ ------- ------
$ 5,576 100.00% $ 5,165 100.00% $ 4,744 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1994
-------------------- --------------------
% 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 $ 1,093 17.10% $ 1,493 27.00%
Real Estate-construction 194 12.50% 459 13.25%
Real Estate-mortgage 1,603 65.38% 1,215 51.82%
Installment loans to individuals 293 4.15% 210 6.39%
Lease financing 13 0.80% 18 1.49%
Other 448 0.07% (250) 0.05%
------- ------ ------- ------
$ 3,644 100.00% $ 3,145 100.00%
======= ====== ======= ======
</TABLE>
15
<PAGE> 16
Deposits
The average amount (in thousands) of and the average rate paid on
deposits is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
In Domestic Offices:
Noninterest bearing demand
deposits $134,141 -- $117,711 -- $102,802 --
Savings Deposits(1) 169,617 2.50% 151,319 2.39% 140,258 2.21%
Time Deposits(2) 106,855 5.23% 111,129 5.49% 121,453 5.56%
-------- -------- --------
Total Deposits $410,613 2.39% $410,613 2.56% $364,513 2.70%
======== ======== ========
</TABLE>
- ----------
(1) Includes NOW, Super NOW, and Money Market Deposit Accounts.
(2) Includes time crtificates of deposit in denominations greater than and
less than $100,000.
Set forth below is maturity schedule of domestic time certificates of
deposits of $100,000 or more:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(In Thousands)
<S> <C>
Three Months or Less $20,589
Over Three through Six Months 8,208
Over Six through Twelve Months 10,994
Over Twelve Months 3,268
-------
$43,059
=======
</TABLE>
Return on Equity and Assets
The following table sets forth the ratios of net income to average
total assets (return on assets), net income to average equity (return on
equity), dividends declared per share to net income per share (dividend payout
ratio), and average equity to average total assets (equity to asset ratio).
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on Assets 1.10% 1.07% 1.04%
Return on Equity 11.32% 11.70% 12.56%
Dividend Payout Ratio -- -- --
Equity to Asset Ratio 9.75% 9.14% 8.31%
</TABLE>
16
<PAGE> 17
Competition
The banking business in the Bank's marketing areas is highly
competitive. In those areas, the Bank competes for loans and deposits with other
commercial banks, including branches of most of California's major banks, many
of which have greater financial, marketing and other resources than those of the
Bank. Larger commercial banks have greater lending limits than the Bank and
offer certain services, such as trust services, which the Bank does not offer
directly. Competition is expected to continue to increase as a result of
legislation passed in California in 1986 which permits bank holding companies in
other states to acquire California banks and bank holding companies. See
"Effects of Governmental Polices and Recent Legislation." The Bank also competes
with savings and loan associations, finance companies, credit unions, mortgage
companies, insurance companies, brokerage firms, leasing companies and other
financial institutions in its market areas. In competing with other financial
institutions, the Bank places emphasis on providing a high level of personal
service and convenience to its customers and conducts local advertising and
promotional programs and activities in its market areas.
Supervision and Regulation
Regulation of the Company
The Company, as a bank holding company, is subject to
regulation under the Bank Holding Company Act (the "Act"). The Act requires
every bank holding company to obtain the prior approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board" or the
FRB") before it may acquire substantially all of the assets of any bank or
acquire ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank.
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 operations for
a period of five years or less, and (ii) no such acquisition may be made by a
bank holding company that controls or, following the proposed acquisition will
control, more than 10% of the total amount of deposits or 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 Federal Reserve Board has followed for some time a
restrictive policy in permitting the entry or expansion of bank holding
companies and other bank affiliates into domestic and foreign banking and
banking-related activities. The act does not place territorial restrictions on
the activities of non-bank subsidiaries of bank holding companies.
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 FIDC-insured banks. More recently,
foreign banking institutions have begun acquiring domestic securities brokerage
and investment 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,
17
<PAGE> 18
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 properly 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.
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 such 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 non-bank subsidiary of a bank holding 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, 1998 the Company, on a consolidated
basis, had total and primary capital of approximately $52,405,000 and a primary
capital-to-asset ratio of approximately 11.17%.
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
18
<PAGE> 19
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, 1998, the
Company's risk-based capital ratio, determined in accordance with the FRB
regulations, was 15.4% which exceeds the minimum ratio required to comply with
those regulations.
The Company is an affiliate of the Bank and is subject to
various legal restrictions which limit the extent to which the Bank can supply
funds to the Company. Such restrictions also apply to any non-banking entities
which the Company might acquire or become affiliated with in the future. In
particular, the Bank is subject to certain restrictions imposed by federal law
on any extensions of credit to the Company, on investments in stock or other
securities thereof, on the taking of such securities as collateral for loans to
borrowers, and on the purchase of assets from the Company. Such restrictions
prevent the Company from borrowing from the Bank unless the loans are secured by
specified obligations and are limited in amount as to the Company to 10% of the
Bank's capital and surplus and as to the Company and all affiliates to an
aggregate of 20% of the Bank's capital and surplus.
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, 1998, the maximum dividend
payable by the Bank to the Company under these restrictions would have been
$14,325,667. See "Item 5. - Dividends" below. However, since cash dividends from
bank subsidiaries usually are the primary source of funds for the payment of ash
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
19
<PAGE> 20
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, 1998 the Bank's
Tier 1 leverage ratio increased to 10.0% from 9.5% at December 31, 1997.
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,
1998 the Bank's risk-based capital ratio, determined on the basis of the FRB
rules, was approximately 15.1%.
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 he 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
20
<PAGE> 21
regulatory agencies, in evaluating the safety and soundness of the banks that
they regulate, heightened the standards by which they evaluate the quality and
collectability 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, 1997,
and 1998, the Bank increased its loan loss revenues and implemented more
stringent credit and loan collection policies. Despite the increases in
reserves, the Bank was able to maintain Tier 1 leverage ratios of 9.98% as of
December 31, 1998, 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> <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>
The Bank has been classified, under FDICIA as a
"Well-Capitalized" institution because its capital ratios exceed, and its
leverage ratio is better than, the ratios that, under FIDICIA regulations, must
be met to be so classified.
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 restriction 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.
21
<PAGE> 22
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 institution 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 broker 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 assert 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 with the CRA or other fair lending laws.
22
<PAGE> 23
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 authorized 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 (knows 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 lease 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 or 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 or future business of the Bank may be affected thereby.
Effects of Governmental Policies
A principal determinant of a bank'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 effected by, and are highly
sensitive to, the demand and the supply of money for loans, which are, in turn,
directly affected by general economic conditions, the general supply of money in
the economy, and the policies of various governmental and regulatory agencies.
The earnings and business of the Company are and will be affected by
the policies of various regulatory authorities of the Unite States, including
the Federal Reserve Board. Important functions of the Federal Reserve Board, in
addition to those enumerated under " Supervision and Regulation" above, are to
regulate the supply of credit and to deal with general economic conditions
within the United States. The monetary policies adopted by the Federal Reserve
Board for these purposes influence in various ways the overall level of
investments, loans, other extensions of credit and deposits, and the interest
rates paid on liabilities and received on earning assets.
The Federal Reserve Board has broad powers to, and does, regulate
money, credit conditions, and interest rates in order to influence general
economic conditions. For example, in times of inflation it has exercised such
powers to increase the cost of money which affects (i) the interest rates which
the Bank can charge on loans and the interest and yields it can obtain on its
investment securities, (ii) the interest which the Bank must pay on deposits and
other liabilities, and (iii) the yields on money market investments which
compete with the Bank for the funds of the Bank's depositors. These policies, as
well as the specific policies of other governmental agencies, have a significant
effect upon the overall growth, distribution and yields of the Bank's loans and
investments and the interest rates it must pay for time deposits, as well as the
extent to which such rates will be attractive to the Bank's customers. At times,
such regulations result in the cost of money to the Bank, as well as other
banks, increasing at a rate greater than the increase in the rate at which the
Bank is able to lend, resulting in a reduction of gross profit margins. At other
times, such regulations can result in increases in the spread between the cost
of money to the Bank and the price at which the Bank lends, thus potentially
increasing its gross profit margins.
23
<PAGE> 24
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
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 actions upon the future business and
earnings of the Company.
Employees
At December 31, 1998, the Company had approximately 186 full-time and
69 part-time employees, as compared to 205 full-time and 63 part-time employees
at December 31, 1997. The reduction in the number of full time employees was the
result of a cost reduction program implemented by the Company in 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II of this Report.
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 58 President and Chief President and Chief
Executive Officer Executive Officer
Donna Miltenberger 43 Executive Vice President Executive Vice President
and Chief Operating
Officer
Tom Kramer 55 Executive Vice President Executive Vice President,
and Secretary Chief Credit Officer and
Secretary
Carol Ann Graf 53 Senior Vice President, Senior Vice President,
Chief Financial Officer Chief Financial Officer
and Assistant Secretary and 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.
24
<PAGE> 25
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.
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
Company and the Bank from 1994 until 1997 when, due to an increase in the scope
of her responsibilities, she was appointed to the positions of Chief Operating
Officer of the Company and 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.
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.
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 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 purposes and anticipated growth
in the foreseeable future.
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 properties are subject other than
litigation, 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.
25
<PAGE> 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
System under the symbol "FOOT". The following table sets forth the high and low
closing sales prices per share of the Company's Common Stock as reported on the
NASDAQ National Market System for all four quarters of 1998 and 1997. On March
18, 1999 the closing per share price was $15.125 and, as of that same date,
there were 1,140 record shareholders of the Company.
<TABLE>
<CAPTION>
Trade Prices of Stock
Common Stock (1) Dividends Declared
------------------ ------------------
High Low
------ -----
<S> <C> <C> <C>
1998(1)
First Quarter $16.41 14.35 --
Second Quarter 18.26 15.46 15%
Third Quarter 16.13 10.25 --
Fourth Quarter 15.25 9.25 --
1997(1)
First Quarter $11.07 9.50 --
Second Quarter 11.96 10.18 10%
Third Quarter 13.37 11.09 --
Fourth Quarter 15.22 12.83 --
</TABLE>
- ----------
(1) Stock prices for the quarterly periods preceding the 10% stock dividend
to shareholders of record June 6, 1997 which was paid on June 20, 1997
and the 15% dividend to shareholders of record June 15, 1998 which was
paid on July 7, 1998, have been adjusted to reflect those dividends.
26
<PAGE> 27
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 regulatory
requirements for capital and cash requirements needed to sustain the Company's
business. Pursuant to that policy, the Company paid cash dividends of $.47 per
share in 1991; and $.40 per share in each of 1992, 1993 and 1994.
In March 1995, the Board of Directors decided that earnings should be
retained to increase capital and, thereby, enable the Bank to take advantage of
opportunities to achieve additional growth. As a result, the Board of Directors
adopted a new dividend policy that no cash dividends would be paid until such
time as the Bank's capital exceeded its requirements for growth. In conformity
with that policy, no cash dividends were paid in 1995, 1996, 1997 or 1998.
However, since 1995, as a result of the increases in capital, the Bank has been
able to open three new banking offices and thereby increase its income and
profitability and has received bank regulatory approvals to open a fourth new
office, in the city of Monrovia, in April 1999.
On March 18, 1999, the Board of Directors declared a $.25 per share
cash dividend payable on April 15, 1999 to shareholders of record April 5, 1999.
The Board determined that, in accordance with the dividend policy, it had become
appropriate to pay the cash dividend because: (i) the Company's capital had
grown to an amount in excess of its capital requirements due primarily to the
growth in the Company's earnings in 1998 and 1997, and (ii) improvements in the
quality of the Bank's loan portfolio which have added to the financial strength
of the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Part II of this Report.
Stock Repurchases
On October 21, 1998, the Company announced that the Board of Directors
authorized an open market stock repurchase program, in accordance with
Securities and Exchange Commission rules, with the objective of purchasing up to
300,000 shares, or 5%, of the Company's outstanding shares of Common Stock. As
of March 19, 1999, the Company had repurchased 78,430 shares at a total cost of
approximately $1,195,010.
Restrictions Applicable to Cash Dividends and Stock Repurchases
The principal source of funds available to the Company for cash
dividends or stock repurchases is cash dividends from the Bank. Therefore,
government regulations, including the laws of the State of California, as they
pertain to cash dividends by state chartered banks, will limit the ability of
the Company to pay cash dividends for the foreseeable future. California law
places a statutory restriction on the amounts of cash dividends a bank may pay
to its shareholders. Under that law, dividends declared by the Bank may not
exceed, in any calendar year, without approval of the California Superintendent
of Banks, the lessor of (i) net income of the Bank for the year and retained net
income from the preceding two years (after deducting all dividends paid during
the period), or (ii) the Bank's retained earnings. However, because the payment
of cash dividends has the effect of reducing capital, as a practical matter
capital requirements imposed on federally insured banks operate to preclude the
payment of cash dividends in amounts that might otherwise be permitted by
California law; and the FDIC, as part of its supervisory powers, generally
requires insured banks to adopt dividend policies which limit the payment of
cash dividends much more strictly than do applicable laws.
In addition, Section 23(a) of the Federal Reserve Act restricts any
banking subsidiary of the Company from extending credit to the Company unless
the loans are secured by specified obligations and are limited in amount to no
more than 10% of the banking subsidiary's contributed capital and retained
earnings.
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.
Each Right entitles the registered holder of shares of Company common stock, on
certain events, to purchase from the Company, at an initial exercise price of
$48.00
27
<PAGE> 28
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.
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal years
ended December 31, 1998, 1997, and 1996, and the selected balance sheet data as
of December 31, 1998 and 1997, 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, 1995 and
1994, and the selected balance sheet data as of December 31, 1996, 1995 and
1994, 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 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest Income $ 36,237 $ 35,028 $ 35,147 $ 33,402 $ 27,690
Interest Expense 9,827 9,738 9,869 9,786 6,206
Net Interest Income 26,410 25,290 25,278 23,616 21,484
Provision for Possible Loan Losses (775) (1,681) (2,200) (2,016) (2,363)
Net Interest Income after Provision
for Possible Loan Losses 25,635 23,609 23,078 21,600 19,121
Other Income 5,086 6,040 5,264 4,688 5,052
Other Expense (25,573) (22,599) (21,700) (20,625) (18,613)
Income Before Income Taxes 8,148 7,050 6,642 5,663 5,560
Applicable Income Taxes 3,084 2,532 2,459 2,100 2,106
Net Income 5,064 4,518 4,183 3,563 3,454
Cash Dividends (1) -- -- -- -- 1,416
BALANCE SHEET DATA
Investment Securities 106,245 46,069 45,052 42,234 30,977
Loans and Leases (net) 289,007 291,393 289,886 257,510 245,870
Assets 469,077 435,708 410,505 395,181 331,261
Deposits 416,665 390,146 370,966 361,114 301,222
Long Term Debt (2) 74 123 168 208 245
Shareholders' Equity 48,379 42,041 36,222 31,042 26,871
PER COMMON SHARE DATA
Net Income - Basic(3) (4) 0.85 0.78 0.75 0.65 0.64
Net Income - Diluted(3) (4) 0.80 0.74 0.73 0.63 0.63
Cash Dividends -- -- -- -- 0.40
Book Value (At year-end) (3) 8.08 7.15 6.34 5.64 4.95
Number of Shares used in
Per Share Claculation - Basic(3) (4) 5,946,908 5,795,070 5,568,502 5,470,895 5,416,220
Number of Shares used in
Per Share Caculation - Diluted(3) (4) 6,369,793 6,060,290 5,730,733 5,655,762 5,482,922
</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. For
information regarding the determination of basic and diluted earnings
per share, see Note 18 to the Company's Consolidated Financial
Statements.
28
<PAGE> 29
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. In 1998 the Bank achieved an increase
of $1,209,000 notwithstanding the fact that yields on interest earning assets
were declining in response to interest rate reductions by the Board of Governors
of the Federal Reserve System (the "FRB") and increased competition for loans.
Contributing to the increase in net interest income were volume-related
increases in interest earned on investment securities, interest-bearing deposits
and Federal funds sold that totaled $1,955,000. Those increases were partially
offset by declines in interest and fees earned on loans and volume related
increases in interest paid on deposits. See "Years Ended December 31, 1998 and
1997--Interest Income".
In 1997, net interest income was substantially the same as 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 on loans that was partially offset by
volume-related increases in interest earned on investment securities and other
earning assets. The decrease in interest expense in 1997 resulted from a
reduction in the average volume of outstanding time certificates of deposits in
denominations of more than $100,000 ("TCDs") and increases in the volume of
non-interest bearing demand deposits.
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 TCDs, on the other hand ("time deposits"), on
which banks pay higher rates of interest than on demand or savings accounts. 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 TCDs 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 often contain automatic repricing provisions that
are "triggered" by declines in market rates of interest; whereas offsetting
reductions in the rates of interest paid on TCDs cannot be implemented until
they mature, at which time a bank can seek their renewal at lower rates of
interest or allow such deposits to terminate or "run-off" in order to reduce
interest expense.
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its net interest
margin or spread by seeking (i) to attract and maintain a significant volume of
demand and savings deposits that are not as sensitive to interest rate
fluctuations as are TCDs, and (ii) to match opportunities to "reprice" earning
assets, particularly loans, in response to changes in market rates of interest
which require or cause repricing of deposits. The Bank's management has elected
to allow maturing TCDs to "run-off" and has marketing programs in place designed
to attract additional demand and savings deposits. As a result of these efforts,
during 1998, the average volume of demand and savings (including money market)
deposits increased by $34,754,000 or 12.9% and, at December 31, 1998, such
deposits represented 76.5% of the Bank's total deposits as compared to 71.6% at
December 31, 1997. However, at the same time, the Bank has experienced a
somewhat slower growth in loan demand in 1998 compared to 1997 that is
attributable, in large measure, to refinancings of existing loans in response to
declines in prevailing interest rates and increased competition in Southern
California. Consequently, even though average earning assets increased in 1998
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<PAGE> 30
as compared to 1997, the mix of those assets has shifted to a somewhat higher
percentage of lower yielding investment securities, federal funds sold and funds
held in interest bearing deposits with other financial institutions. In 1998
those interest-earning assets accounted for 28.2% of average earning assets
compared to 23.0% in 1997. The combination of changes in the mix of average
earning assets together with somewhat lower interest rates has caused a decline
in the Bank's net interest margin (i.e., tax-adjusted net interest income stated
as a percentage of average interest-earning assets) for the twelve months ended
December 31, 1998 to 6.49% compared to 6.90% at December 31, 1997. However, the
Bank achieved increases in its net interest margin in the third and fourth
quarters of 1998 to 6.47% and 6.49%, respectively, from 6.33% at June 30, 1998,
due primarily to the additional demand and savings deposits that the Bank was
able to attract by means of its marketing programs in 1998.
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates the Bank is able to
charge on loans and the interest rates it must offer to maintain and attract
deposits are affected by national monetary policies established and implemented
by the FRB and by competitive conditions in the Bank's service areas. In
addition, the effect on a bank's net interest margins of changes in market rates
of interest will depend on the types and maturities of its deposits and earning
assets. For example, a change in interest rates paid on deposits in response to
changes in market rates of interest can be implemented more quickly in the case
of savings deposits and money market accounts than with respect to time deposits
as to which a change in interest rates generally cannot be implemented until
such deposits mature. In addition, a change in rates of interest paid on
deposits 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.
The Bank currently anticipates a stable net interest margin for 1999
due to a number of factors, including (i) a continued stabilizing in market
rates of interest, (ii) anticipated increases in loan growth which is expected
to result from stable interest rates, an improving economy in Southern
California and new loan marketing programs being instituted by the Bank, and
(iii) the decision of management to allow TCDs, on which the Bank pays interest
at rates higher than other types of deposits, to "run-off" rather than to renew
them. However, there are a number of uncertainties and risks that could
adversely affect the Bank's net interest margin in 1999, including (i) increased
competition in the Bank's market areas, both from banks and other types of
financial institutions as well as from securities brokerage firms and mutual
funds that offer competing investment products and (ii) the possibility of
adverse changes in economic conditions or changes in market rates of interest.
INTEREST INCOME
Interest income consists of interest and fees earned on outstanding
loans, interest on deposits and on federal funds sold and income on investments,
which consist principally of government securities.
In 1998, interest income increased by $1,209,000 as compared to 1997.
In 1997, interest income decreased by approximately $119,000 as compared to
1996.
The increase in interest income in 1998 was primarily attributable to
increases in the volume of investment securities, interest-bearing deposits at
other financial institutions and Federal funds sold which, together, generated
increases in interest income totaling $1,955,000. Those increases were partially
offset by a $744,000 or 2.4% decline in interest and fee income from loans and
leases due primarily to a decrease in the average volume of loans and leases
outstanding and, to a lesser extent, a decline in market rates of interest that
reduced the Bank's yields on outstanding variable rate loans.
The decrease in interest income in 1997 was due primarily to a decline
in loan demand in the second half of 1997 coupled with a decline in market rates
of interest that reduced the Bank's yields on outstanding variable rate loans,
and more than offset volume related increases in interest earned on investments
in securities and Federal funds sold.
INTEREST EXPENSE
Notwithstanding increases in the average volume of deposits of 8% in
1998 and 4% in 1997, the Bank was able to limit the increase in interest expense
to $89,000 (less than 1%) in 1998, as compared to 1997; and to reduce interest
expense in 1997 by $131,000, or 1.22%, as compared 1996.
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<PAGE> 31
Interest savings in 1998 resulting from the non-renewal of TCDs,
coupled with somewhat lower market rates of interest, substantially offset
increases in interest expense attributable to increases in the volume of savings
and money market deposits. Another contributing factor was a 14% increase in the
volume of non-interest bearing demand deposits generated largely by the Bank's
marketing programs in 1998.
The decrease in interest expense in 1997 also was the result of
increases in the volume of demand, savings and money market deposits, coupled
with somewhat lower market rates of interest, which enabled management to permit
a run off of more expensive TCDs 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"). That
Reserve 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 1998 the Bank made provisions totaling $775,000 as
compared to $1,681,000 during 1997 and, at December 31, 1998 the Loan Loss
Reserve was approximately $5,576,000 or 1.89% of total loans and leases
outstanding, compared to approximately $5,165,000 or 1.74% of total loans and
leases outstanding at December 31, 1997. The decrease in the additions made to
the Loan Loss Reserve in 1998 was attributable primarily to a decline in the
total number of non-performing assets in 1998 as compared to 1997.
In 1997, provisions for loan and lease losses totaled $1,681,000 as
compared to $2,200,000 in 1996. That reduction was primarily attributable to a
decline in the total number of non-performing assets in 1997 as compared to
1996.
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, declined significantly to approximately $6,383,000 or 2.2% of total loans
outstanding at December 31, 1998, as compared to $11,465,000 or 3.9% of total
loans outstanding at December 31, 1997 and $11,622,000 or 3.9% of total loans
outstanding at December 31, 1996. The ratio of the Bank's Loan Loss Reserve to
non-performing loans was 87.3% at December 31, 1998, as compared to 45.1% and
40.8% at December 31, 1997 and 1996, respectively.
Net loan charge-offs in 1998 aggregated $364,000, representing twelve
hundredths of one percent (0.12%) of average loans and leases outstanding, as
compared to net loan charge-offs of $1,260,000 in 1997 and $1,100,000 in 1996,
which represented 0.45% and 0.39%, respectively, of average loans and leases
outstanding in those respective years.
OTHER INCOME
In 1998, other income declined by $954,000 or 15.6% as compared to
1997. The decline was primarily attributable to (i) decreases in transaction
fees and service charges and other banking transactions, and (ii) one-time gains
made in the first and second quarters of 1997 on the sale of foreclosed
properties and SBA loans, for which no corresponding sales were made in 1998.
In 1997, other income increased by $776,000 or 14.7% as compared to
1996, 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 and gains on the sale of certain SBA loans.
OTHER EXPENSE
Other expense (which also is commonly referred to as "non-interest
expense"), consists primarily of (i) salaries and other employee expenses, (ii)
occupancy and equipment and furniture expenses, and (iii) other operating and
miscellaneous expenses that include insurance premiums, marketing expenses, data
processing costs, professional fees, and charges that are periodically made 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"). In addition, in the second and third
quarters of 1998, non-interest expense included charges
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<PAGE> 32
totaling $300,000 made to establish a reserve for potential expenses associated
with Year 2000 ("Y2K") compliance issues.
In 1998, non-interest expense decreased by approximately $26,000 or
0.1% as compared to 1997, due primarily to decreases in equipment and furniture
expenses and in other (or miscellaneous) expenses. In 1997, the Bank's
non-interest expense increased by approximately $898,000 or 4.1% as compared to
1996, due primarily to expenses associated with a Bank-wide data processing
system conversion, which was completed during the second quarter of 1997.
During 1998, the Company implemented cost reduction programs to reduce
non-operating expenses and improve its operating efficiency. As a result, in
1998, the Bank's efficiency ratio (total non-interest expense stated as a
percentage of tax adjusted net interest income plus other income) improved to
69.8% from 71.0% in 1997. Moreover, reflecting the positive effects of the cost
reduction programs implemented during the first half of 1998, the Bank's
efficiency ratio improved to an even greater extent in the second half of 1998,
during which period that ratio was 67.39%. The Company also expects a further
improvement in the Bank's efficiency ratio in 1999 (after excluding one-time
costs of the opening a new branch office in Monrovia, California, scheduled for
April 1999).
The Bank's efficiency ratio is admittedly not as favorable as the
average efficiency ratio of other California based banks with assets ranging
from $300 to $500 million (the "peer group banks"). However, this is due
primarily to management's policy of providing a much higher level of personal
service to its customers in order to attract a higher volume of non-interest
bearing demand, and lower cost savings, deposits and, thereby, improve the
Bank's net interest margin. Accordingly, the Bank's efficiency ratio should be
considered in the context of the Bank's net interest margin, which, for the nine
months ended September 30, 1998 (the latest date as of which information is
available), was 6.53% compared to the average net interest margin of the peer
group banks of 5.38%.
INCOME TAXES
In 1998, income taxes increased by approximately $552,000 or 21.8% as
compared to 1997, primarily as a result of the increase in pre-tax income and a
1.9% increase in the overall tax rate. In 1997 income taxes increased by
approximately $73,000 or 21.8% as compared to 1996, primarily as a result of the
increase in pre-tax income in 1997, which more than offset the effects of a 1%
decrease in the overall tax rate.
FINANCIAL CONDITION
The Company's total assets were approximately $33,369,000 or 7.6%
higher at December 31, 1998 than at December 31, 1997. Average total assets for
1998 increased by approximately $36,702,000 to $458,995,000 from $422,614,000
for 1997. Contributing to this increase were increases of $10,322,000, or 3.6%,
in the average loans and leases outstanding; (ii) $18,260,000, or 31.7%, in the
average volume of investment securities; and (iii) $29,014,000, or 22.6%, in the
average volume of Federal funds sold. Those increases were offset somewhat by a
$2,802,000 reduction in the average volume cash and due from banks and a
$1,589,000 reduction in other real estate owned as a result of sales of real
properties previously acquired in connection with foreclosures of defaulted
loans.
The Bank has instituted marketing programs that are designed to
increase the volume of loans that it makes and is continuing with its 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 has kept the interest rates it offers on TCDs, as well as on other
time deposits, at slightly lower rates than the average market rates to
discourage renewals, and in that manner reduce the volume, of those deposits at
the Bank. As a result, at December 31, 1998, the volume of demand deposits and
savings deposits at the Bank was $39,495,000 higher than at December 31, 1997
and non-interest bearing demand deposits, as a percentage of total deposits, had
increased to 33.6% from 32.4% at December 31, 1997. By contrast the volume of
TCDs outstanding at December 31, 1998 was $12,977,000 or 11.7% lower than at
December 31, 1997.
The Company currently anticipates that there will be modest growth in
the Bank's total assets in 1999, which is expected to result from increased
lending and deposit activity generated by new marketing programs being
instituted by the Bank and by the opening of a new branch office in Monrovia,
California, scheduled for April 1999.
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<PAGE> 33
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 for 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,
1998, the principal source of liquidity consisted of $24,482,000 in cash and
demand balances due from other banks, $13,000,000 of Federal funds sold,
$14,364,000 in short-term (maturities of 45 days or less) commercial paper and
$5,000,000 in an overnight repurchase agreement, which, together, totaled
$56,846,000 as compared to $69,350,000 at December 31, 1997. Other sources of
liquidity include $74,054,000 in securities available for sale, of which
approximately $38,613,000 of such securities mature within one year and
$15,043,000 in interest-bearing deposits at other financial institutions, which
mature in 6 months or less. The Bank also has established facilities to borrow
Federal Funds from other banks that total $10,100,000 and has an unused line of
credit with the Federal Home Loan Bank in the amount of approximately
$10,000,000. Furthermore, substantially all of the Bank's installment loans and
leases, the amount of which aggregated $7,010,000 at December 31, 1998, require
regular installment payments from customers, 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 meet
capital requirements under applicable government regulations and to support the
growth of the Bank. The Board of Directors will consider paying cash dividends
to the extent that earnings exceed those capital and growth requirements. The
retention of earnings made it possible for the Bank to open two new banking
offices during 1995, and a third new banking office in 1996, all of which
contributed to the Company's profitability in 1998 and at the same time enabled
it to maintain its capital adequacy ratios well above regulatory requirements.
The Company anticipates the opening of an additional banking office, in
Monrovia, California, in April of 1999 and continues to evaluate opportunities
to expand the Bank's presence into areas such as eastern Los Angeles County,
western San Bernardino County, north Orange County and northern Riverside
County, all of which are contiguous to the Bank's existing markets. Management
believes that the merger and consolidation of a number of banking institutions
that occurred in those areas in 1997 have created opportunities for the Company
to increase its market share. The Company took advantage of those opportunities
within its existing market areas in 1998 during which the Bank established a
substantial number of new customer relationships and increased the volume of its
demand, savings and money market deposit balances by more than $39,000,000 in
the aggregate. Management believes that there are still expansion and growth
opportunities that it intends to pursue in 1999.
At the same time, the increases in earnings achieved by the Bank in
1998 and 1997 have caused the Bank's capital ratios to increase in relation to
regulatory requirements and to cause its return on average equity to remain
relatively fixed despite the increase in earnings. As a result, in 1998, the
Company's Board of Directors authorized an open market stock repurchase program
to be funded out of earnings to purchase up to 5% of the Company's outstanding
shares. As of March 19, 1999, the Company had repurchased 78,430 shares at a
total cost of approximately $1,195,010.
In March 1999, the Board of Directors also declared a $.25 per share
cash dividend payable on April 15, 1999 to shareholders of record April 5, 1999.
The cash dividend was made possible by the substantial increases in earnings
achieved in 1997 and 1998, which caused capital to increase above the capital
requirements of the Company and the Bank, and (ii) improvements in the quality
of the Bank's loan portfolio which have added to the financial strength of the
Company. See "Market for the Registrant's Common Stock and Related Stockholder
Matters -- Dividends" in Part II of this Report.
During the second quarter of 1998 the Company declared a 15% stock
dividend to shareholders of record on June 15, 1998. This 15% stock dividend
follows three years of consecutive 10% stock dividends. The 15% stock dividend
was distributed on July 7, 1998 and for accounting purposes was recorded as a
$12,469,000 reduction in retained earnings, offset by a corresponding
$12,469,000 increase in the Company's stated capital.
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<PAGE> 34
As a result of the increase in and the retention of earnings in 1998,
but after giving effect to stock repurchases in 1998, the Company's total
shareholders' equity increased by approximately $6,338,000 or 15.1% to
$48,379,000 at December 31, 1998 from $42,041,000 at December 31, 1997. Net
earnings in 1998 represent a return on beginning assets (that is, total assets
as of January 1, 1998) of 1.16% and a return on beginning equity (total
shareholders' equity as of January 1, 1998) of 12.05%.
At December 31, 1998, the Bank's Tier 1 capital ratio was 10.0%
compared to 9.5% at December 31, 1997, and as of those same respective dates,
the Bank's Tier 1 risk-based capital ratios were 13.9% and 13.1%, with total
risk-based capital ratios of 15.1% and 14.3%, 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 government regulations generally define as 8%.
The Bank's Tier 1 capital and risk-based capital ratios compare favorably with
other peer group banks.
Under applicable accounting principles, the Company is required to
report the unrealized gain or loss on securities that are held for sale and on
certain other equity securities. Since any such gains or losses are unrealized,
and any actual gain or loss will not be determined unless and until there is a
sale or other disposition of the securities, any unrealized gain is required to
be credited to, and any unrealized losses are required to be charged against,
stockholders' equity, rather than being reflected as income or loss for income
statement purposes. At December 31, 1998, the Company recorded a net valuation
deficit for unrealized losses on such securities aggregating approximately
$157,000.
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 ("Y2K") 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 computer systems that have
date-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.
The Company initiated its Y2K compliance program in late 1997. During the first
phase of that program, the Company identified the internal computer systems that
required upgrading or corrections to make them Y2K compliant. The Company
completed the upgrades and corrections designed to make those systems Y2K
compliant and commenced the testing phase of its Y2K compliance program in late
1998. The Company expects to complete the Y2K testing phase by June 30, 1999,
thereby giving it time to correct any remaining Y2K problems that are discovered
as a result of the testing. The costs of implementing and completing the
Company's Y2K compliance program are not expected to be material.
The Company also has developed a business resumption contingency plan
under which the Company has obtained a back-up host site for local data
processing and has arranged for back-up computer processing services from a
third party vendor that can provide the Company with the ability to continue
the processing of transactions with its customers in the event of a failure of
any of its computer systems due to any Y2K problems. This third party data
processing vendor has confirmed to the Company that its computer systems will
be Y2K compliant prior to the end of 1999. Accordingly, the Company currently
believes that it is unlikely to encounter any material adverse effects on its
business or results of operations due to the Y2K problem.
The Company currently expects that the computer systems of most of its
third party service providers and vendors, including phone and other utilities
and other financial institutions that provide services to the Company or its
customers, and those of the Company's customers that rely heavily on computer
systems in transacting business with the Company, will be Y2K compliant prior
to the beginning of 2000. This expectation is based on confirmations from such
third party service providers, vendors and customers, and, in certain
instances, testing conducted by the Company with its larger vendors.
However, even if the testing of the Company's computer systems and
those of third party providers and vendors is successfully completed, system
failures and disruptions could still occur due to the Y2K problem, either at
the Company or at third party service providers to, or vendors or customers of
the Company. In that event, the level of service that the Company could provide
to its customers and, therefore, also its results of operations, could be
adversely affected.
DERIVATIVE INSTRUMENTS AND MARKET RISKS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This new standard is effective for 2000 and is not
expected to have a material impact on the Bank's financial condition or
operating results.
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 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
deposits, either or both of which could, in turn, reduce interest
income and net interest margins.
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<PAGE> 35
Possible Adverse Changes in Local 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 could make it more difficult
for the Bank to prevent potential losses on non-performing loans
through the sale of real properties that provide security for those
loans.
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 FRB 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 on existing or 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 the income that the Company is
able to realize on the loans and investments it makes or by 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, such as the office planned for the city of
Monrovia, 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 is able to achieve profitability.
Year 2000. The costs of resolving potential Y2K data
processing 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
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Foothill Independent Bancorp and Subsidiaries:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Balance Sheets at December 31, 1998 and 1997 . . . . . . . 38
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . 39
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 . . . . . . . . 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . 41
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 43
</TABLE>
36
<PAGE> 37
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of
its operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
January 22, 1999
37
<PAGE> 38
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash and due from banks (no minimum Federal Reserve
balance was required at December 31, 1998) $ 24,482 $ 38,800
Federal funds 13,000 30,550
--------- ---------
Cash and Cash Equivalents 37,482 69,350
--------- ---------
Interest-bearing deposits in other financial institutions 15,043 8,309
Investment securities held-to-maturity (Notes #1C and #2) 12,827 15,110
Investment securities available-for-sale (Notes #1C and #2) 93,418 30,959
Loans, net of unearned income (Notes #1D, #3 and #6) 290,879 291,809
Direct lease financing (Notes #1F and #4) 3,704 4,749
Less reserve for possible credit
losses (Notes #1E and #5) (5,576) (5,165)
--------- ---------
289,007 291,393
--------- ---------
Bank premises and equipment (Notes #1G and #7) 6,970 7,704
Other real estate owned (Notes #1H and #8) 2,876 2,906
Cash surrender value of life insurance 4,578 4,041
Deferred tax asset (Notes #1K and #17) 2,386 1,889
Accrued interest and other assets 4,490 4,047
--------- ---------
Total Assets $ 469,077 $ 435,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits 139,939 126,503
Savings and NOW deposits 99,198 87,952
Money market deposits 79,744 64,931
Time deposits in denominations of $100,000 or more 58,066 49,064
Other time deposits 39,717 61,696
--------- ---------
Total Deposits 416,664 390,146
Accrued employee benefits (Note #13) 1,836 1,664
Accrued interest and other liabilities 2,124 1,734
Long-term debt (Note #10) 74 123
--------- ---------
Total Liabilities 420,698 393,667
--------- ---------
Stockholders' Equity
Common Stock - authorized, 12,500,000 shares
without par value; issued and
outstanding, 5,985,242 shares in 1998
and 5,111,993 shares in 1997 36,057 22,618
Additional paid-in capital 963 659
Retained earnings 11,516 19,062
Accumulated other comprehensive income (Notes #1C and #2) (157) (298)
--------- ---------
Total Stockholders' Equity 48,379 42,041
--------- ---------
Total Liabilities and Stockholders' Equity $ 469,077 $ 435,708
========= =========
</TABLE>
38
<PAGE> 39
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1D) $ 29,501 $ 30,231 $ 30,939
Interest on Investment Securities
Taxable 3,912 2,645 2,171
Exempt from federal taxes 363 382 430
Interest on deposits 662 241 402
Interest on federal funds sold 1,560 1,274 1,070
Lease financing income (Note #1F)
Taxable 2 13
Exempt from federal taxes 239 253 122
-------- -------- --------
36,237 35,028 35,147
-------- -------- --------
INTEREST EXPENSE
Interest on savings and NOW deposits 1,427 1,323 1,269
Interest on money market deposits 2,805 2,301 1,831
Interest on time deposits in denominations
of $100,000 or more 2,521 2,960 3,302
Interest on other time deposits 3,064 3,139 3,448
Interest on borrowings 10 15 19
-------- -------- --------
9,827 9,738 9,869
-------- -------- --------
Net Interest Income 26,410 25,290 25,278
PROVISION FOR POSSIBLE CREDIT LOSSES (Note #1E and #5) (775) (1,681) (2,200)
-------- -------- --------
Net Interest Income After Provision
for Possible Credit Losses 25,635 23,609 23,078
-------- -------- --------
OTHER INCOME
Services fees 4,982 5,558 4,843
Gain on sale of SBA loans 32 157 83
Other 72 325 338
-------- -------- --------
5,086 6,040 5,264
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 10,579 10,348 10,286
Net occupancy expense of premises 2,158 2,120 2,092
Furniture and equipment expenses 1,715 1,752 1,509
Other expenses (Note #16) 8,121 8,379 7,813
-------- -------- --------
22,573 22,599 21,700
-------- -------- --------
INCOME BEFORE INCOME TAXES 8,148 7,050 6,642
-------- -------- --------
INCOME TAXES (Notes #1K and #17)
Currently payable 3,581 2,597 2,805
Deferred (497) (65) (346)
-------- -------- --------
3,084 2,532 2,459
-------- -------- --------
NET INCOME $ 5,064 $ 4,518 $ 4,183
======== ======== ========
EARNINGS PER SHARE (Note #18)
Basic $ 0.85 $ 0.78 $ 0.75
======== ======== ========
Diluted $ 0.80 $ 0.74 $ 0.73
======== ======== ========
</TABLE>
39
<PAGE> 40
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Number Additional Other
of Shares Common Paid-in Comprehensive Retained Comprehensive
Outstanding Stock Capital Income Earnings Income Total
----------- ------ ----------- ------------- ----------- ------------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 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
COMPREHENSIVE INCOME:
Net income $4,183 4,183 4,183
Unrealized security holding
losses (Net of taxes of $106) (181) (181) (181)
------
TOTAL COMPREHENSIVE INCOME $4,002
----------- ------- ----- ====== -------- ------ -------
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
COMPREHENSIVE INCOME:
Net income $4,518 4,518 4,518
Unrealized security holding
gains (Net of taxes of $47) 85 85 85
------
TOTAL COMPREHENSIVE INCOME $4,603
----------- ------- ----- ====== -------- ------ -------
BALANCE, DECEMBER 31, 1997 5,111,993 22,618 659 19,062 (298) 42,041
15% stock dividend (Note #15) 779,314 12,469 (12,469)
Cash paid in lieu of fractional
shares (9) (9)
Exercise of stock options 86,687 714 304 1,018
Common stock issued under
employee benefit and dividend
reinvestment and optional
investment plans 16,248 256 256
Common stock repurchased,
cancelled and retired (9,000) (132) (132)
COMPREHENSIVE INCOME:
Net income $5,064 5,064 5,064
Unrealized security holding
gains (Net of taxes of $86) 141 141 141
------
TOTAL COMPREHENSIVE INCOME $5,205
----------- ------- ----- ====== -------- ------ -------
BALANCE, DECEMBER 31, 1998 5,985,242 $36,057 $ 963 $ 11,516 $ (157) $48,379
=========== ======= ===== ======== ====== =======
</TABLE>
40
<PAGE> 41
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 35,733 $ 34,886 $ 35,262
Service fees and other income received 4,550 5,478 4,771
Financing revenue received under leases 239 255 135
Interest paid (9,929) (9,927) (10,117)
Cash paid to suppliers and employees (22,227) (19,063) (20,287)
Income taxes paid (3,190) (2,390) (2,796)
--------- --------- ---------
Net Cash Provided By Operating Activities 5,176 9,239 6,968
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of held-to-maturity securities 7,854 16,272 27,724
Purchase of held-to-maturity securities (5,498) (26,073) (9,975)
Proceeds from maturity of available-for-sale securities 161,815 78,806 157,607
Purchase of available-for-sale securities (224,134) (69,981) (178,463)
Proceeds from maturity of deposits in other financial institutions 20,482 8,920 5,828
Purchase of deposits in other financial institutions (27,216) (13,272) (3,352)
Net (increase)/decrease in credit card and revolving credit receivables 241 (655) 22
Recoveries on loans previously written off 865 407 503
Net (increase)/decrease in loans (222) (2,853) (39,043)
Net (increase)/decrease in leases 1,045 (1,862) (730)
Capital expenditures (681) (1,719) (1,122)
Proceeds from sale of other real estate owned 732 3,250 3,531
Proceeds from sale of property, plant and equipment 73 39 71
Stock repurchased and retired (132)
--------- --------- ---------
Net Cash Used In Investing Activities (64,776) (8,721) (37,399)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
savings accounts and money market deposits 39,493 27,717 29,131
Net increase/(decrease) in certificates of deposit
with maturities of three months or less 318 7,861 (14,059)
Net increase/(decrease) in certificates of deposits
with maturities of more than three months (13,295) (16,490) (5,234)
Proceeds from exercise of stock options 1,018 575 852
Proceeds from stock issuance 256 646 330
Principal payments on long-term debt (49) (45) (40)
Dividends paid (9) (5) (4)
--------- --------- ---------
Net Cash Provided By Financing Activities 27,732 20,259 10,976
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (31,868) 20,777 (19,455)
CASH AND CASH EQUIVALENTS, Beginning of Year 69,350 48,573 68,028
--------- --------- ---------
CASH AND CASH EQUIVALENTS, End of Year $ 37,482 $ 69,350 $ 48,573
========= ========= =========
</TABLE>
41
<PAGE> 42
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Income $ 5,064 $ 4,518 $ 4,183
------- ------- -------
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Depreciation and amortization 1,289 1,228 1,044
Provision for possible credit losses 775 1,681 2,200
Provision for possible OREO losses 350 405 572
Provision for deferred taxes (16) 65 (346)
(Gain)loss on sale of equipment 53 52 (46)
Increase/(decrease) in taxes payable (90) 77 10
(Increase)/decrease in other assets 11 1,640 (767)
(Increase)/decrease in interest receivable (237) 27 170
Increase/(decrease) in discounts and premiums (28) 86 80
Increase/(decrease) in interest payable (102) (189) (248)
Increase in prepaid expenses (656) (149) (51)
Increase/(decrease) in accrued expenses and other liabilities (616) 411 697
Gain on sale of other real estate owned (52) (168)
Increase in cash surrender value of life insurance (537) (445) (447)
(Gain)/loss on sale of investments and other assets (32) (83)
------- ------- -------
Total Adjustments 112 4,721 2,785
------- ------- -------
Net Cash Provided By Operating Activities $ 5,176 $ 9,239 $ 6,968
======= ======= =======
</TABLE>
42
<PAGE> 43
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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.
43
<PAGE> 44
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
E. Provision and Reserve for Credit Losses
The determination of the balances in the reserves for credit 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 credit losses is 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 Share (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.
44
<PAGE> 45
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, Continued
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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard is effective for
2000 and is not expected to have a material impact on the Bank's financial
statements.
N. Reclassifications
Certain reclassifications were made to prior years' presentations to conform
to the current year.
45
<PAGE> 46
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #2 - INVESTMENT SECURITIES
Based upon the guidelines of Statement of Financial Accounting Standard (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, 1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 6,998 $ 44 $ 7,042
Securities of Other U.S.
Government Agencies 1,999 13 2,012
Municipal Agencies 1,580 24 1,604
Other Securities 2,250 2,250
------- ------- ------- -------
Total Held-to-Maturity Securities $12,827 $ 81 $12,908
======= ======= ======= =======
</TABLE>
<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>
46
<PAGE> 47
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 4,999 $ 36 $ 5,035
Securities of Other U.S.
Government Agencies 60,445 150 $ 10 60,585
Certificates of Participation (b) 3,980 8 3,988
Municipal Agencies 1,077 14 1,091
Other Securities 23,006 287 22,719
------- ------- ------- -------
Total Available-for-Sale
Carried at Fair Value $93,507 $ 208 $ 297 $93,418
======= ======= ======= =======
</TABLE>
<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>
(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 $3,980,000 and $4,413,000
and market values of $3,988,000 and $4,427,000 at December 31, 1998 and
199 , respectively.
47
<PAGE> 48
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 1998,
were $7,854,000. Proceeds from maturities of investment securities
available-for-sale during 1998, were $161,815,000. There were no gains or losses
recognized. Included in shareholders' equity at December 31, 1998, is $157,000
of net unrealized losses on investments available-for-sale.
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.
Securities with a book value of $14,402,000 and $155,139,000 and market value of
$14,471,000 and $15,157,000 at December 31, 1998 and 1997 , 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, 1998, by contractual maturity were as follows (in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Securities
-----------------------------------
Maturities Schedule of Securities Amortized Average
December 31, 1998 Cost Fair Value Yield (a)
- ------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Due in one year or less $ 9,765 $ 9,801 6.05%
Due after one year through five years 3,062 3,107 5.96%
------- ------- ----
Carried at Amortized Cost $12,827 $12,908 6.01%
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------------
Amortized Average
Cost Fair Value Yield (a)
--------- ---------- ---------
<S> <C> <C> <C>
Due in one year or less $55,977 $55,772 5.76%
Due after one year through five years 36,780 36,885 6.09%
Due after five through ten years 750 761 4.51%
------- ------- ----
Carried at Fair Value $93,507 $93,418 5.45%
======= ======= ====
</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.
48
<PAGE> 49
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 1998 and 1997, was as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Commercial, financial and agricultural $ 44,525 $ 43,883
Real Estate - construction 15,602 10,895
Real Estate - mortgage
Commercial 194,381 200,502
Residential 28,382 28,541
Loans to individuals for household, family
and other personal expenditures 7,010 6,450
All other loans (including overdrafts) 1,518 2,203
--------- ---------
291,418 292,474
Deferred income on loans (539) (665)
--------- ---------
Loans, Net of Deferred Income $ 290,879 $ 291,809
========= =========
</TABLE>
Nonaccruing loans totaled approximately $6,347,000 and $11,458,000 at December
31, 1998 and 1997, 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 $967,000, $981,000 and $1,488,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998 and 1997, the Bank had approximately $36,000 and $7,000 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, 1998 and 1997, consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Lease payments receivable $ 3,953 $ 5,443
Unearned income (249) (694)
------- -------
$ 3,704 $ 4,749
======= =======
</TABLE>
At December 31, 1998, the Bank had no outstanding lease commitments.
49
<PAGE> 50
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #4 - DIRECT LEASE FINANCING, Continued
At December 31, 1998, future minimum lease payments receivable under direct
financing leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year
---------------------
<S> <C>
1999 $1,329
2000 1,024
2001 767
2002 322
2003 270
Thereafter 241
-------
3,953
Less unearned income (249)
-------
$3,704
=======
</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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance, Beginning of Year $ 5,165 $ 4,744 $ 3,644
Recoveries on loans previously charged off 505 407 503
Provision charged to operating expense 775 1,681 2,200
Loans charged off (869) (1,667) (1,603)
------- ------- -------
Balance, End of Year $ 5,576 $ 5,165 $ 4,744
======= ======= =======
</TABLE>
SFAS No. 114, (as amended by SFAS No. 118), "Accounting by Creditors for
Impairment of a Loan" 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 and troubled debt restructurings
as being impaired loans. The allowance for loan losses related to impaired loans
amounted to approximately $1,363,000 and $951,000 for the years ended December
31, 1998 and 1997, respectively, and is included in the above balances. The
average balance of these loans amounted to approximately $8,444,000 and
$11,808,000 for the years ended December 31, 1998 and 1997, respectively. Cash
receipts during 1998 applied to reduce principal balance and recognized as
interest income was approximately $5,780,000 and $547,000, respectively. Cash
receipts during 1997 applied to reduce principal balance and recognized as
interest income was approximately $6,346,000 and $919,000, respectively.
50
<PAGE> 51
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 1998 and 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Outstanding Balance, Beginning of Year -- $ 41
Credit granted, including renewals -- --
Repayments and other reductions -- (41)
---- ----
Outstanding Balance, End of Year -- $ 0
==== ====
</TABLE>
NOTE #7 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Buildings $ 2,424 $ 2,424
Furniture and equipment 8,042 7,829
Leasehold improvements 2,490 2,380
-------- --------
12,956 12,633
Less: Accumulated depreciation and amortization (7,208) (6,151)
-------- --------
5,748 6,482
Land 1,222 1,222
-------- --------
Total $ 6,970 $ 7,704
======== ========
</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,
1998 and 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance, Beginning of Year $ 2,906 $ 4,595
Additions 3,094 1,798
Valuation adjustments and other reductions (3,124) (3,487)
------- -------
Balance, End of Year $ 2,876 $ 2,906
======= =======
</TABLE>
The balances at December 31, 1998 and 1997 are shown net of reserves of $503,000
and $389,000, respectively.
51
<PAGE> 52
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #8 - OTHER REAL ESTATE OWNED, Continued
Transactions in the reserve for other real estate owned are summarized for
December 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance, Beginning of Year $ 389 $ 1,146
Provision charged to other expense 391 405
Charge-offs and other reductions (277) (1,162)
------- -------
Balance, End of Year $ 503 $ 389
======= =======
</TABLE>
NOTE #9 - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $91,046
2000 6,268
2001 422
2002 37
2003 10
-------
Total $97,783
=======
</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>
1999 $55 $ 5 $60
2000 19 19
--- --- ---
$74 $ 5 $79
=== === ===
</TABLE>
52
<PAGE> 53
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #11 - STOCK OPTION PLAN
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.
The Company's 1993 incentive stock option and nonqualified stock option plan
approved by the stockholders provide that an aggregate of 1,147,041 shares
(after giving retroactive effect for 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 1998, 1997
and 1996, respectively: risk-free rates of 4.67%, 5.70% and 6.17%; dividend
yields of 0%; expected life of five years; and volatility of 34%, 34% and 35%.
A summary of the status of the Bank's fixed stock option plan as of December 31,
1998, 1997, and 1996, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- -------------------
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 780,410 $ 7.92 582,091 $ 6.13 576,352 $ 4.32
Granted 92,800 15.42 314,469 11.48 198,721 6.17
Exercised (86,687) (8.14) (102,671) 6.22 (180,081) 3.98
Forfeited (27,662) (11.17) (13,479) 7.06 (12,901) 5.26
------- -------- -------
Outstanding, End of Year 758,861 8.49 780,410 9.11 582,091 5.33
======= ======== =======
Options exercisable at year end 652,793 7.61 508,607 5.26 442,267 4.90
Weighted average fair value
of options granted during
the year $ 5.86 $ 3.51 $ 3.51
</TABLE>
53
<PAGE> 54
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #11 - STOCK OPTION PLAN, Continued
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<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>
$5.21 to $5.92 254,716 5.69 $ 5.58 254,716 $ 5.58
$6.72 to $6.82 137,565 7.53 6.73 131,708 6.43
$8.96 to $9.10 205,055 8.07 9.09 198,925 7.74
$10.57 to $11.75 25,150 9.06 10.76 13,275 10.45
$12.05 to $13.37 60,375 8.67 12.19 40,844 12.16
$15.88 to $17.50 76,000 9.49 16.12 13,325 15.38
------- -------
$5.21 to $17.50 758,861 7.40 8.49 652,793 8.41
======= =======
</TABLE>
Had the bank determined compensation cost based on the fair value at the grant
date for its stock options under No. 123, the Bank's net income would have been
reduced to the following pro forma amount (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 5,064 $ 4,518 $ 4,183
Pro forma 4,710 4,324 4,153
Per share data:
Net income - Basic
As reported $ 0.85 $ 0.78 $ 0.75
Pro forma $ 0.79 $ 0.75 $ 0.75
Net income - diluted
As reported $ 0.80 $ 0.74 $ 0.73
Pro forma $ 0.74 $ 0.71 $ 0.72
</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, 1998, 1997, and 1996, the amount of pension
expense was $270,000, $273,000, and $138,000, respectively.
54
<PAGE> 55
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 1998 was $328,970 ($194,085
net of income taxes), 1997 was $306,504 ($180,831 net of income taxes), and 1996
was $322,488 ($193,493 net of income taxes).
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 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, 1998, the combined amount of funds available
from these two sources amounted to approximately $23,887,000 or 49% of
consolidated stockholders' equity.
NOTE #15 - STOCK DIVIDENDS
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. On April 16, 1998, the Board
of Directors declared a 15 percent stock dividend payable on July 7, 1998, to
stockholders of record on June 15, 1998. As a result, the Bank distributed
779,314 shares of common stock and the common stock was increased and retained
earnings was decreased by $12,469,000. All references in the accompanying
financial statements to the number of common shares and per share amounts for
1997 and 1996 have been restated to reflect the stock dividends.
55
<PAGE> 56
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #16 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31,
1998, 1997, and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Data processing $ 934 $1,051 $ 893
Marketing expenses 707 661 766
Office supplies, postage and telephone 1,162 1,316 1,050
Bank insurance 582 453 454
Supervisory assessments 108 139 143
Legal fees 683 802 843
Operating losses 142 86 660
OREO expenses 586 561 574
Other 3,217 3,310 2,430
------ ------ ------
Total $8,121 $8,379 $7,813
====== ====== ======
</TABLE>
NOTE #17 - INCOME TAXES
The provisions for income taxes consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Tax provision applicable to income
before income taxes $ 3,084 $ 2,532 $ 2,459
======= ======= =======
Federal Income Tax
Current 2,520 1,766 1,946
Deferred (366) (9) (234)
State Franchise Tax
Current 1,061 831 859
Deferred (131) (56) (112)
------- ------- -------
Total $ 3,084 $ 2,532 $ 2,459
======= ======= =======
</TABLE>
56
<PAGE> 57
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #17 - INCOME TAXES, Continued
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 1998 1997
------- -------
<S> <C> <C>
Allowance for loan losses due to tax limitations $ 1,764 $ 1,461
Deferred compensation plan 867 808
Allowance for other real estate owned 217 152
Other assets and liabilities 356 268
------- -------
Total Deferred Tax Assets 3,204 2,689
Deferred Tax Liabilities
Premises and equipment due to depreciation difference (732) (796)
Net unrealized appreciation on available-for-sale securities (86) (4)
======= =======
Net Deferred Tax Assets $ 2,386 $ 1,889
======= =======
</TABLE>
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>
1998 1997 1996
------------------- ------------------- -------------------
Federal State Federal State Federal State
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Tax effect of
Nonaccrual loan interest computed
differently on tax returns than
for financial statements $ 74 $ 26 $ 65 $ 25 $ 8 $ 3
Direct lease financing 9 7
Depreciation computed differently
on tax returns than for financial statements (34) (12) (6) (3) 24 18
OREO transactions computed differently
on tax return than for financial statements (48) (17) 210 83 (24) (9)
Deferred compensation plan (43) (15) (85) (19) (70) (27)
Provision for loan loss deduction on tax
return under amount charged for
financial statements purposes (223) (80) (70) (80) (243) (93)
Other assets and liabilities (92) (33) (123) (62) 62 (11)
----- ----- ----- ----- ----- -----
Total $(366) $(131) $ (9) $ (56) $(234) $(112)
===== ===== ===== ===== ===== =====
</TABLE>
57
<PAGE> 58
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #17 - INCOME TAXES, Continued
As a result of the following items, the total tax expenses for 1998, 1997 and
1996, 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>
1998 1997 1996
----------------------- ---------------------- -----------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $ 2,770 34.0 $ 2,397 34.0 $ 2,258 34.0
Changes due to State income tax,
net of Federal tax benefit 579 7.1 501 7.1 472 7.1
Exempt interest (296) (3.6) (319) (4.5) (218) (3.3)
Other 31 0.3 (47) (0.7) (53) (0.8)
------- ---- ------- ---- ------- ----
Total $ 3,084 37.8 $ 2,532 35.9 $ 2,459 37.0
======= ==== ======= ==== ======= ====
</TABLE>
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>
1998 1997 1996
------------------ ------------------ -----------------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ----------- ------
<S> <C> <C> <C>
Net income as reported $5,064 $4,518 $ 4,183
Shares outstanding at year end 5,985 5,878 5,718
Impact of weighting shares
purchased during the year (38) (83) (149)
------ ----- ------ ----- ----------- -----
Used in Basic EPS 5,064 5,947 4,518 5,795 4,183 5,569
Dilutive effect of outstanding
stock options 423 265 162
------ ----- ------ ----- ----------- -----
Used in Dilutive EPS $5,064 6,370 $4,518 6,060 $ 4,183 5,731
====== ===== ====== ===== =========== =====
</TABLE>
58
<PAGE> 59
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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>
1999 $ 1,223
2000 1,178
2001 1,163
2002 1,019
2003 1,017
Succeeding years 4,856
-------
$10,456
=======
</TABLE>
Total rental expense for the three years ended December 31, 1998, 1997, and
1996, was $1,231,000 $1,203,000, $1,064,000, 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.
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, 1998 and 1997 , the Bank had commitments to extend credit of
$48,807,000 and $53,189,000, respectively, and obligations under standby letters
of credit of $2,142,000 and $969,000, 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.
59
<PAGE> 60
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 corrective 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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are presented in the following
table (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, 1998:
Total capital to risk-weighted assets $51,576 15.1% $27,277 8.0% $34,096 10.0%
Tier 1 capital to risk-weighted assets 47,298 13.9% 13,639 4.0% 20,458 6.0%
Tier 1 capital to average assets 47,298 10.0% 18,962 4.0% 23,702 5.0%
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%
</TABLE>
60
<PAGE> 61
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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, 1998, (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, 1998
----------------------
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Financial Assets
Cash and cash equivalents $ 37,482 $ 37,482
Investment securities and deposits 121,288 121,369
Loans 291,418 299,380
Direct lease financing 3,704 3,590
Financial Liabilities
Deposits 416,664 415,302
Long-term debt 74 49
Unrecognized Financial Instruments
Commitments to extend credit 48,807 48,807
Standby letters of credit 2,142 2,142
</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.
61
<PAGE> 62
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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.
62
<PAGE> 63
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #22 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash $ 261 $ 143 $ 281
Investment in subsidiaries 47,475 41,173 35,283
Time certificates of deposit 97 394
Accounts receivable 413 143 209
Loans 13 15
Excess of cost over net assets of company acquired (net) 128 170 212
Prepaid and other 5 5 222
------- ------- -------
Total Assets $48,379 $42,041 $36,222
======= ======= =======
STOCKHOLDERS' EQUITY
Common stock 36,057 22,618 15,406
Additional paid-in capital 963 659 592
Retained earnings 11,359 18,764 20,224
------- ------- -------
Total Stockholders' Equity 48,379 42,041 36,222
======= ======= =======
STATEMENTS OF INCOME
INCOME
Equity in undistributed income of subsidiaries $ 5,261 $ 4,705 $ 4,328
Interest and other income 18 73 6
------- ------- -------
5,279 4,778 4,334
------- ------- -------
EXPENSE
Amortization and other expenses 323 334 224
------- ------- -------
Total Operating Income 4,956 4,444 4,110
Tax benefit of parent's operating expenses 108 74 73
------- ------- -------
Net Income $ 5,064 $ 4,518 $ 4,183
======= ======= =======
</TABLE>
63
<PAGE> 64
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE #22 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received for tax benefit from Foothill Independent Bank $ 108 $ 74 $ 72
Interest and other income received 18 73 6
Cash paid for operating expenses (551) (9) (266)
------- ------- -------
Net Cash Provided/(Used) By Operating Activities (425) 138 (188)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 13 2
(Purchase)/redemption of deposits in other financial institutions 297 (394) 95
Capital contributed to subsidiary (900) (1,100) (1,000)
Capital stock repurchased (132)
------- ------- -------
Net Cash Used By Investing Activities (722) (1,492) (905)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (9) (5) (3)
Capital stock purchased 256 646 330
Proceeds from exercise of stock options 1,018 575 852
------- ------- -------
Net Cash Provided By Financing Activities 1,265 1,216 1,179
------- ------- -------
NET INCREASE/(DECREASE) IN CASH 118 (138) 86
CASH, Beginning of Year 143 281 195
------- ------- -------
CASH, End of Year $ 261 $ 143 $ 281
======= ======= =======
RECONCILIATION OF NET INCREASE TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET INCOME $ 5,064 $ 4,518 $ 4,183
------- ------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization 42 42 42
Undistributed earnings of subsidiaries (5,261) (4,705) (4,328)
(Increase)/decrease in accounts receivable (270) 66 (172)
Decrease in prepaids and other 217 87
------- ------- -------
Total Adjustments (5,489) (4,380) (4,371)
------- ------- -------
Net Cash Provided/(Used) by Operating Activities $ (425) $ 138 $ (188)
======= ======= =======
</TABLE>
<PAGE> 65
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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, 1998, is summarized below:
<TABLE>
<CAPTION>
1998
---------------------------------------
First Second Third Fourth
------ ------ ------ ------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $8,576 $8,976 $9,401 $9,284
Interest expense 2,425 2,497 2,537 2,368
Net interest income 6,151 6,479 6,864 6,916
Provision for loan losses 275 100 200 200
Net interest income after provision
for loan losses 5,876 6,379 6,664 6,716
Other income 1,235 1,300 1,284 1,267
Other expense 5,540 5,708 5,699 5,626
Income before taxes 1,571 1,971 2,249 2,357
Applicable income taxes 567 737 827 953
------ ------ ------ ------
Net Income $1,004 $1,234 $1,422 $1,404
====== ====== ====== ======
Earnings Per Share - Basic $ 0.17 $ 0.21 $ 0.24 $ 0.23
====== ====== ====== ======
Earnings Per Share - Diluted $ 0.16 $ 0.19 $ 0.23 $ 0.22
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------
First Second Third Fourth
------ ------ ------ ------
<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 $ 0.20 $ 0.17 $ 0.23 $ 0.18
====== ====== ====== ======
Earnings Per Share - Diluted $ 0.19 $ 0.16 $ 0.22 $ 0.17
====== ====== ====== ======
</TABLE>
65
<PAGE> 66
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 that is expected be filed with the Commission by April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement that is expected be filed with the
Commission by April 30, 1999.
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 that is expected be filed with the
Commission by April 30, 1999.
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 that is expected be filed with the
Commission by April 30, 1999.
66
<PAGE> 67
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
36 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 E-1 of this Form 10-K.
(4) Reports on Form 8-K:
None
67
<PAGE> 68
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 23rd day of
March 1999.
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 23, 1999
<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/ DONNA MILTENBERGER Executive Vice President and Director
- -----------------------------
Donna Miltenberger
/s/ WILLIAM V. LANDECENA Chairman of the Board of Directors
- -----------------------------
William V. Landecena
/s/ CHARLES BOONE Director
- -----------------------------
Charles Boone
/s/ RICHARD GALICH Director
- -----------------------------
Richard Galich
/s/ O. L. MESTAD Director
- -----------------------------
O. L. Mestad
/s/ GEORGE SELLERS Director
- -----------------------------
George Sellers
/s/ DOUGLAS TESSITOR Director
- -----------------------------
Douglas Tessitor
/s/ MAX E. WILLIAMS Director
- -----------------------------
Max E. Williams
</TABLE>
S-1
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------ ------------
<C> <S> <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) (R-9)
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-10)
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
</TABLE>
E-1
<PAGE> 70
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------ ------------
<C> <S> <C>
24.1 Power of Attorney -- (Included on Signature Page) --
27 Financial Data Sheet as of and for the year ended December 31, 1998
99 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.
(R-10) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
E-2
<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, and Registration Statement No. 33-83854 on
Form S-3 filed September 12, 1994, of our report dated January 22, 1999 on the
consolidated financial statements of Foothill Independent Bancorp as of December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998 included at Page 37 of its Annual Report on Form 10-K for the year
ended December 31, 1998.
/s/ VAVRINEK, TRINE, DAY & COMPANY
----------------------------------
VAVRINEK, TRINE, DAY & COMPANY
Certified Public Accountants
March 23, 1999
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 8, 1999,
on the financial statements of Foothill Independent Bank Partners in Your Future
retirement plan as of December 31, 1998 and 1997, 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 23, 1999
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, 1998 AND THE STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998, 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,482
<INT-BEARING-DEPOSITS> 15,043
<FED-FUNDS-SOLD> 13,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93,418
<INVESTMENTS-CARRYING> 12,827
<INVESTMENTS-MARKET> 12,908
<LOANS> 294,583
<ALLOWANCE> (5,576)
<TOTAL-ASSETS> 469,077
<DEPOSITS> 416,664
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,034
<LONG-TERM> 0
0
0
<COMMON> 36,057
<OTHER-SE> 12,322
<TOTAL-LIABILITIES-AND-EQUITY> 469,077
<INTEREST-LOAN> 29,740
<INTEREST-INVEST> 4,275
<INTEREST-OTHER> 2,222
<INTEREST-TOTAL> 36,237
<INTEREST-DEPOSIT> 662
<INTEREST-EXPENSE> 9,827
<INTEREST-INCOME-NET> 26,410
<LOAN-LOSSES> 775
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,573
<INCOME-PRETAX> 8,148
<INCOME-PRE-EXTRAORDINARY> 8,148
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,064
<EPS-PRIMARY> 0.85<F1>
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 6.5
<LOANS-NON> 6,347
<LOANS-PAST> 37
<LOANS-TROUBLED> 3,042
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,165
<CHARGE-OFFS> 869
<RECOVERIES> 505
<ALLOWANCE-CLOSE> 5,576
<ALLOWANCE-DOMESTIC> 5,576
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<PAGE> 1
Exhibit 99
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
============================================================
FINANCIAL STATEMENTS
and
SUPPLEMENTARY INFORMATION
DECEMBER 31, 1998 AND 1997
with
INDEPENDENT AUDITORS' REPORT
============================================================
<PAGE> 2
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT...................................................1
FINANCIAL STATEMENTS
Statements of Net Assets Available for Benefits
December 31, 1998 .........................................................2
Statements of Net Assets Available for Benefits
December 31, 1997..........................................................3
Statements of Changes in Net Assets Available for Benefits
For the Year Ended December 31, 1998 and 1997..............................4
Notes to Financial Statements..............................................5
SUPPLEMENTARY INFORMATION
Schedule of Assets Held for Investment Purposes............................9
<PAGE> 3
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, 1998 and 1997, 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, 1998 and 1997, 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 8, 1999
-1-
<PAGE> 4
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------------
Foothill Highmark Highmark
Independent Highmark Highmark Intermediate- Diversified
Bank Growth Balanced Term Money
Stock Fund Fund Bond Fund Market Fund Other Total
----------- -------- -------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CASH $ 33,830 $ 33,830
-------- ----------
INVESTMENTS FAIR VALUE
Shares of registered investment
companies:
Foothill Independent Bank stock $ 2,492,227 2,492,227
Mutual funds $755,427 $ 537,582 $ 199,100 1,492,109
Money market funds $ 205,450 205,450
Loans to participants 97,799 97,799
----------- -------- --------- --------- --------- --------- ----------
2,492,227 755,427 537,582 199,100 205,450 97,799 4,287,585
----------- -------- --------- --------- --------- --------- ----------
RECEIVABLES (Note #4)
Employer's contribution 24,114 24,114
Participant's contribution 14,997 14,997
----------- -------- --------- --------- --------- --------- ----------
39,111 39,111
NET ASSETS AVAILABLE FOR BENEFITS $ 2,492,227 $755,427 $ 537,582 $ 199,100 $ 205,450 $170,740 $4,360,526
=========== ======== ========= ========= ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS WITH FUND INFORMATION
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------------------
Foothill Highmark Highmark
Independent Highmark Highmark Intermediate- Diversified
Bank Growth Balanced Term Money
Stock Fund Fund Bond Fund Market Fund Other Total
----------- -------- -------- ------------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INVESTMENTS FAIR VALUE
Shares of registered
investment companies:
Foothill Independent Bank stock $ 2,195,788 $ 2,195,788
Mutual funds $ 555,967 $452,047 $ 169,256 1,177,270
Money market funds $ 201,544 201,544
Loans to participants $ 73,042 73,042
----------- --------- -------- --------- ---------- ------- -----------
2,195,788 555,967 452,047 169,256 201,544 73,042 3,647,644
RECEIVABLES (Note #4)
Employer's contribution 10,028 10,028
Participant's contribution 15,151 15,151
----------- --------- -------- --------- ---------- ------- -----------
25,179 25,179
TOTAL ASSETS
LIABILITIES
Accounts payable 61,590 61,590
----------- --------- -------- --------- ---------- ------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $ 2,195,788 $ 555,967 $452,047 $ 169,256 $ 201,544 $36,631 $ 3,611,233
=========== ========== ======== ========= ========= ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------------
Foothill Highmark Highmark
Independent Highmark Highmark Intermediate- Diversified
Bank Growth Balanced Term Money
Stock Fund Fund Bond Fund Market Fund Other
------------ --------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONS
Additions to net assets
attributed to:
Investment income
Net appreciation in fair
value of instruments $ (269,507) $ 129,441 $ 14,293 $ 2,896
Interest 1,868 1,951 865 $ 11,003 $ 1,376
Dividends 324,596 115 13,233 10,647
Other 50,881 20,773 2 2,689 4
---------- --------- --------- ---------- --------- --------
55,089 182,305 50,250 14,410 13,692 1,380
CONTRIBUTIONS
Employer's 289,946
Participant's 130,968 95,839 33,823 41,673 140,171
Participant's rollovers 4,628 4,068 2,443 2,165 32,416
---------- --------- --------- ---------- --------- --------
0 135,596 99,907 36,266 43,838 462,533
---------- --------- --------- ---------- --------- --------
Total Additions 55,089 317,901 150,157 50,676 57,530 463,913
---------- --------- --------- ---------- --------- --------
DEDUCTIONS
Deductions from net assets
attributed to:
Benefits paid to
participants 174,823 99,085 42,731 5,943 41,081 (50,638)
Forfeitures 10,930 145 41 39 609
Other distributions (504,416) 12,679 8,252 6,804 497,865
---------- --------- --------- ---------- --------- --------
Total Deductions (318,663) 111,909 51,024 12,786 41,690 447,227
---------- --------- --------- ---------- --------- --------
Net increase prior to
interfund transfers 373,752 205,992 99,133 37,890 15,840 16,686
Interfund transfers (77,313) (6,532) (13,598) (8,046) (11,934) 117,423
---------- --------- --------- ---------- --------- --------
296,439 199,460 85,535 29,844 3,906 134,109
---------- --------- --------- ---------- --------- --------
NET ASSETS AVAILABLE FOR
BENEFITS
Beginning of year 2,195,788 555,967 452,047 169,256 201,544 36,631
---------- --------- --------- ---------- --------- --------
End of year $2,492,227 $ 755,427 $ 537,582 $ 199,100 $ 205,450 $170,740
========== ========= ========= ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------- ----------
Total
---------
<S> <C> <C>
ADDITIONS
Additions to net assets
attributed to:
Investment income
Net appreciation in fair
value of instruments $ (122,877) $ 933,524
Interest 17,063 10,487
Dividends 348,591 23,180
Other 74,349 2,760
---------- ----------
317,126 969,951
CONTRIBUTIONS
Employer's 289,946 487,898
Participant's 442,474 285,186
Participant's rollovers 45,720
---------- ----------
778,140 773,084
---------- ----------
Total Additions 1,095,266 1,743,035
---------- ----------
DEDUCTIONS
Deductions from net assets
attributed to:
Benefits paid to
participants 313,025 233,934
Forfeitures 11,764 13,358
Other distributions 21,184
---------- ----------
Total Deductions 345,973 247,292
---------- ----------
Net increase prior to
interfund transfers 749,293 1,495,743
Interfund transfers
---------- ----------
749,293 1,495,743
---------- ----------
NET ASSETS AVAILABLE FOR
BENEFITS
Beginning of year 3,611,233 2,115,490
---------- ----------
End of year $4,360,526 $3,611,233
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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 15% 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 vested account.
D. Vesting
Participants are vested in FIB contributions according to the following
schedule:
Year of
Service Percentage
------------ ----------
1 Year 25%
2 Years 50%
3 Years 100%
Employee contributions, deferrals and rollovers are immediately 100% vested.
No vested benefit may be forfeited.
-5-
<PAGE> 8
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE #1 - DESCRIPTION OF PLAN, Continued
E. Payment of Benefits
On termination of service, a participant may elect to receive either a
lump-sum amount equal to the value of the participant's vested in interest
in his or her account. Participants with vested balances greater than $3,500
may opt to leave the balance with the 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, 1998, forfeited non-vested accounts totaled $11,764. These
accounts will be used to reduce future employer contributions.
NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accounting
The financial statements of the Plan are prepared using the accrual method
of accounting.
B. 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.
C. Valuation of Assets
The Plan's investments are stated at fair value. Shares of registered
investment companies are valued at quoted market prices which represent the
net asset value of shares held by the Plan at year-end. The Company stock is
valued at its quoted market price. Participant notes receivable are valued
at cost which approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis.
Interest income is recorded on the accrual basis. Dividends are recorded on
the ex-dividend date.
-6-
<PAGE> 9
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
D. 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.
E. 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 - RECEIVABLES
Receivables at December 31, consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Contributions
Employer $ 24,114 $ 10,028
Participants 14,997 15,151
-------- --------
Total Receivables $ 39,111 $ 25,179
======== ========
</TABLE>
NOTE #4 - PENDING BENEFITS PAYABLE
As of December 31, payments to participants who have withdrawn from the Plan,
but have not yet been paid totaled $227,733 and $61,596 for 1998 and 1997,
respectively. The Plan changed its methodology for accounting for these payments
during 1998. Benefits payable to withdrawn participants are included in the
total Net Assets Available for Payment.
-7-
<PAGE> 10
NOTE #5 - 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.
-8-
<PAGE> 11
====================================
SUPPLEMENTARY INFORMATION
====================================
<PAGE> 12
FOOTHILL INDEPENDENT BANK
PARTNERS IN YOUR FUTURE
401(K) PROFIT SHARING PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1998 AND 1997
<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, 166,148 shares $1,960,860 $2,492,227
Highmark Money Market Fund Money market funds 205,450 units 205,450 205,450
Highmark Growth Equity Fund Mutual funds 43,591 units 640,795 755,427
Highmark Balanced Fund Mutual funds 32,056 units 460,532 537,582
Highmark Intermediate Term
Bond Fund Mutual funds 19,071 units 195,387 199,100
Participant Loans Various loans at 8.25% to
10.43% interest 97,799 97,799
---------- ----------
$3,560,823 $4,287,585
========== ==========
</TABLE>
Page 1
<PAGE> 13
Assets Held
<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, 166,148 shares $1,960,860 $2,492,227
Highmark Money Market Fund Money market funds 205,450 units 205,450 205,450
Highmark Growth Equity Fund Mutual funds 43,591 units 640,795 755,427
Highmark Balanced Fund Mutual funds 32,056 units 460,532 537,582
Highmark Intermediate Term
Bond Fund Mutual funds 19,071 units 195,387 199,100
Participant Loans Various loans at 8.25% to
10.43% interest 97,799 97,799
---------- ----------
$3,560,823 $4,287,585
========== ==========
</TABLE>
