<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, 1999
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
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FOOTHILL INDEPENDENT BANCORP
(Exact name of Registrant as specified in its charter)
California 95-3815805
(State or other jurisdiction (I.R.S. Employer
of 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 7, 2000 the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $57,087,541.
As of March 7, 2000, there were 5,772,614 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference form the
Registrant's Definitive Proxy Statement for its 2000 Annual Meeting which will
be filed with the Commission on or before May 1, 2000.
<PAGE> 2
PART I
ITEM 1. BUSINESS
Foothill Independent Bancorp (the "Company") is a one-bank holding
company which owns all of the capital stock of Foothill Independent Bank, a
California state-chartered bank (the "Bank"), that was organized and commenced
business operations in 1973. The business of the Bank is carried on as a
wholly-owned subsidiary of the Company. The Company, which was organized in
1982, is a California corporation and is registered under the Bank Holding
Company Act of 1956, as amended. The Company, like other bank holding companies
in the United States, is subject to regulation, supervision and periodic
examination by the Board of Governors of the Federal Reserve System (commonly
known as the Federal Reserve Board and referred to herein as the "FRB"). See
"Supervision and Regulation - Regulation of the Company."
THE BANK
The Bank was organized as a national banking association under federal
law and commenced operations under the name Foothill National Bank on June 1,
1973. The Bank converted from a national banking association to a California
state-chartered bank effective July 1, 1979 and changed its name to Foothill
Independent Bank. The Bank's accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank became a member of the Federal Reserve
System on June 11, 1997.
As a California state-chartered bank that is a member of the Federal
Reserve System (a "state member bank"), the Bank is subject to regulation,
supervision and periodic examination, at the state level, by the California
Department of Financial Institutions (the "DFI"), which is the successor to the
Superintendent of Banks and, at the Federal level, by the FRB. Prior to June
1997, when the Bank became a member of the Federal Reserve System, the Bank was
regulated at the Federal level by the FDIC. The change in its federal bank
regulatory agency from the FDIC to the FRB is not expected to have a material
effect on the Bank's operations or its financial condition or operating results.
See "Supervision and Regulation - Regulation of the Bank."
The Bank presently operates eleven banking offices, one in each of the
communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho
Cucamonga, Covina, Glendale, Corona, Chino, and Monrovia California, which are
located in the area of Southern California that includes the San Gabriel Valley
of Los Angeles County and the western portions of San Bernardino and Riverside
Counties commonly known as the "Inland Empire." The Glendale office, which was
opened in March 1995, extends the Bank's market areas into the West San Gabriel
Valley, approximately 10 miles northeast of Los Angeles. All of the other
offices are located further east, approximately 25 to 45 miles east of Los
Angeles.
SERVICES PROVIDED BY FOOTHILL INDEPENDENT BANK
The Bank's organization and operations have been designed to meet the
banking needs of individuals and small-to-medium 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, 1999:
<TABLE>
<CAPTION>
Type of Number of Average Account Aggregate Amounts
Account Accounts Balance of Deposits
------- --------- --------------- -----------------
<S> <C> <C> <C>
Demand ............... 14,955 $ 8,902.00 $133,132,000(1)
Money Market(2) ...... 9,021 $ 15,451.00 $139,379,000
Savings .............. 9,756 $ 3,573.00 $ 34,860,000
TCDs(3) .............. 233 $157,974.25 $ 36,808,000(4)
Other Time Deposits(3) 2,720 $ 19,522.79 $ 53,102,000(5)
</TABLE>
- ----------
(1) Includes $1,511,000 of municipal and other government agency deposits.
(2) Includes "NOW" checking accounts.
(3) 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.
(4) Includes $356,000 of municipal and other government agency deposits.
(5) Includes $139,000 of municipal and other government agency deposits.
During the twelve months ended December 31, 1999, average demand
deposits increased by approximately $7,413,000 or 5.5%; average money market &
NOW checking accounts deposits increased by approximately $12,272,000 or 9.0%;
average savings deposits increased by approximately $2,234,000 or 6.6%; and
average time deposits decreased by approximately $18,808,000 or 16.8%, which was
the result of a decrease of $13,183,000 in TCD's in denominations of $100,000 or
more and an decrease of approximately $4,825,000 in TCD's of less than $100,000
( other time deposits").
Although there are some public agency depositors that carry large
deposits with the Bank, the Bank does not believe it is dependent on a single
customer or a few customers for its deposits. Most of the Bank's deposits are
obtained from individuals and small and moderate size businesses. This results
in relatively small average deposit balances, but makes the Bank less subject to
the adverse effect on liquidity which can result from the loss of a substantial
depositor. No individual, corporate or public agency depositor accounted for
more than approximately 2% of the Bank's total deposits and the five largest
deposit accounts represented, collectively 4% 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,
--------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
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 ........................ $ 56,083 12.0% $ 53,808 11.7% $ 46,050 10.9%
Non-Taxable .................... 6,454 1.4 6,846 1.5 7,114 1.7
Federal Funds Sold & Repos ........ 18,071 3.9 30,219 6.6 23,673 5.6
Due from Banks - Time Deposits .... 16,306 3.5 11,787 2.5 4,215 1.0
Loans ............................. 324,553 69.5 306,381 66.8 286,438 67.8
Direct Lease Financing ............ 2,835 0.6 4,086 0.9 4,395 1.0
Reserve for Loan and
Lease Losses ................... (5,865) (1.3) (5,252) (1.1) (4,246) (1.0)
--------- ----- --------- ----- --------- -----
Net Loans and Leases .............. 321,523 68.8 305,215 66.6 286,587 67.8
--------- ----- --------- ----- --------- -----
Total Interest Earning
Assets .......................... 418,437 89.6 407,875 88.9 367,639 87.0
Cash and Non-interest Earning
Assets .......................... 26,300 5.6 30,746 6.7 33,548 7.9
Net Premises, Furniture and
Equipment ....................... 6,888 1.5 7,392 1.6 7,673 1.8
Other Assets ...................... 15,403 3.3 12,982 2.8 13,754 3.3
--------- ----- --------- ----- --------- -----
Total Assets .................. $ 467,028 100.0% $ 458,995 100.0% $ 422,614 100.0%
========= ===== ========= ===== ========= =====
Liabilities And Stockholders Equity
Savings Deposits(1) ............... $ 184,122 39.4% $ 169,617 37.0% $ 151,319 35.8%
Time Deposits ..................... 88,848 19.0 106,855 23.3 111,129 26.3
Short-term Borrowings ............. 351 0.1 0 0 --
Long-term Borrowings .............. 49 -- 101 -- 147 --
--------- ----- --------- ----- --------- -----
Total Interest-Bearing
Liabilities .................. 273,370 58.5 276,573 60.3 262,595 62.1
Demand Deposits ................... 141,554 30.3 134,141 29.2 117,711 27.9
Other Liabilities ................. 3,804 0.9 3,532 0.8 3,688 0.9
--------- ----- --------- ----- --------- -----
Total Liabilities .............. 418,728 89.7 414,246 90.3 383,994 90.9
Stockholders' Equity .............. 48,300 10.3 44,749 9.7 38,620 9.1
--------- ----- --------- ----- --------- -----
Total Liabilities and
Stockholders' Equity .......... $ 467,028 100.0% $ 458,995 100.0% $ 422,614 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
- ----------
(1) Includes NOW, Super NOW and Money Market Account.
4
<PAGE> 5
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,
--------------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ----------------------
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............ $3,997 $3,950 $8,997 $9,054 $12,384 $12,432
State and Political Subdivisions.... 1,062 1,045 1,580 1,604 2,476 2,489
Other Securities.................... 2,250 2,250 2,250 2,250 250 250
------- ------- ------- ------- ------- -------
Total Investment Securities...... $7,309 $7,245 $12,827 $12,908 $15,110 $15,171
====== ====== ======= ======= ======= =======
Investment Securities
Available-For-Sale:
U.S. Treasury and Agency............ $44,275 $43,601 $65,444 $65,620 $22,956 $22,978
State and Political Subdivisions.... 5,029 5,065 5,057 5,079 4,749 4,763
Other Securities.................... 6,019 5,573 21,415 21,128 3,538 3,218
------- ------- ------- ------- ------- -------
Total Investment Securities...... $55,323 $54,239 $91,916 $91,827 $31,243 $30,959
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) Includes, in 1999 and 1998, 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 $3,961,000 and $3,980,000 and market values
of $4,044,000 and $3,988,000 at December 31, 1999 and 1998, respectively.
The following table shows the maturity of investment securities at
December 31, 1999, and the weighted average yields (for tax-exempt obligations
on a fully taxable basis assuming a 36.9% tax rate) of such securities.
5
<PAGE> 6
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------------- ------------------ ------------------ ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Held-To-Maturity:
U.S. Treasury and Agency ...... $ 2,000 5.48% $ 1,997 5.65% $ -- --% $ -- --%
State and Political
Subdivisions ................. 140 6.45% 922 6.87% -- --
Other Securities .............. 2,250 -- -- -- -- -- -- --
------- ---- ------- ---- ------ ----- ----- ---
Total Investment Securities.... $ 4,390 5.54% 2,919 6.01% -- --% -- --%
======= ==== ======= ==== ====== ===== ===== ===
Investment Securities
Available-For-Sale:
U.S. Treasury and Agency ...... $12,085 6.09% $30,064 6.23% $1,452 10.75% $ -- --%
State and Political ........... -- -- 3,178 8.96% 1,887 7.48 -- --
Subdivisions
Other Securities .............. $ 1,590 -- 3,983 5.91% -- -- -- --
------- ---- ------- ---- ------ ----- ----- ---
Total Investment Securities.... $13,675 5.30% 37,225 6.31% 3,339 7.98% -- --
===
$18,065 5.36% $40,144 6.29% $3,339 7.98% -- --%
======= ==== ======= ==== ====== ===== ===== ===
</TABLE>
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,
1999.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Types Of Loans
Domestic:
Commercial, Financial
and Agricultural ................... $ 41,091 $ 42,106 $ 44,296 $ 40,979 44,801
Real Estate Construction ............ 11,144 15,602 10,895 12,008 32,745
Real Estate Mortgage(1) ............. 283,735 224,530 228,630 231,012 171,321
Consumer Loans ...................... 5,916 7,011 6,450 8,157 10,887
Lease Financing(2) .................. 2,341 3,704 4,749 2,864 2,086
All other Loans
(including overdrafts) ............. 1,707 2,169 2,203 407 178
--------- --------- --------- --------- ---------
Subtotal: ........................... 339,533 295,122 297,223 295,427 262,018
Less:
Unearned Discount .................. (299) (539) (665) (797) (864)
--------- --------- --------- --------- ---------
Reserve for Loan and Lease Losses .. (6,102) (5,576) (5,165) (4,744) (3,644)
--------- --------- --------- --------- ---------
Total ................................. $ 339,533 $ 289,007 $ 291,393 $ 289,886 $ 257,510
========= ========= ========= ========= =========
</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 1999; $0 for 1998; $0
for 1997; $33,000 for 1996 and $322,000 for 1995, and is net of unearned
income of $248,000 for 1999; $249,000 for 1998; $694,000 for 1997; $329,000
for 1996 and $252,000 for 1995.
6
<PAGE> 7
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, 1999.
<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 .... $ 26,131 $ 9,536 $ 5,424 $ 41,091
Real Estate and Construction ... 8,052 -- 3,092 11,144
Real Estate and Mortgage ....... 65,806 60,779 157,150 283,735
Consumer Loans ................. 1,929 3,386 601 5,916
Lease Financing ................ 217 2,124 -- 2,341
All other Loans ................ 1,528 168 11 1,707
-------- ------- -------- --------
Total ........................ $103,663 $75,993 $166,278 $345,934
======== ======= ======== ========
</TABLE>
Of the total amount of loans (exclusive of loans on non-accrual status)
outstanding as of December 31, 1999 that had maturities of more than one year,
$214,881,000 had predetermined, or fixed, rates of interest and $23,427,000 had
floating or adjustable rates of interest.
RISK ELEMENTS
NON-ACCRUAL, RESTRUCTURED AND PAST DUE LOANS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans More Than 90 Days Past Due(1):
Aggregate Loan Amounts:
Commercial ...................... $ 148 $ 8 $ -- $ 500 $ 584
Real Estate ..................... 50 -- -- 2,328 869
Consumer ........................ 4 12 7 1 3
Aggregate Leases ................ -- 17 -- -- --
Troubled Debt Restructurings(2) .... 1,780 3,042 2,880 4,787 6,397
Non-Accrual Loans(3) ............... 6,068 6,347 11,458 11,623 12,620
------ ------- ------- ------- -------
$8,050 $ 9,426 $14,345 $19,239 $20,473
====== ======= ======= ======= =======
</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
1999, 1998, 1997, 1996 and 1995 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
fourteen loans on non-accrual status at December 31, 1999; sixteen loans at
December 31, 1998; twenty-seven loans at December 31, 1997; twenty-one
loans at December 31, 1996 and forty-five loans at December 31, 1995. The
amount of interest that would have been collected on these loans had they
remained current in accordance with their original terms was $819,000 in
1999, $967,000 in 1998, $981,000 in 1997, $1,488,000 in 1996 and $985,000
in 1995.
7
<PAGE> 8
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, $1,638,000 for the year ended
December 31, 1999 and were included in the Bank's Reserve for Loan Losses at
December 31, 1999. The average balance of the impaired loans amounted to
approximately $8,111,000 for the year ended December 31, 1999. Cash receipts
during 1999 applied to reduce principal balances and recognized as interest
income were approximately
8
<PAGE> 9
$452,000 and $528,000, 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, 1999, 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.
9
<PAGE> 10
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,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans
and leases outstanding(1) .. $ 327,388 $ 310,467 $ 290,833 $ 280,765 $ 252,402
========= ========= ========= ========= =========
Loan and lease loss reserve
balance at beginning of
year ....................... $ 5,576 $ 5,165 $ 4,744 $ 3,644 $ 3,145
--------- --------- --------- --------- ---------
Charge-Offs:
Domestic:
Commercial, financial
and agricultural ......... (112) (423) (391) (96) (1,414)
Real Estate-construction .. -- -- -- -- --
Real Estate-mortgage ....... (45) (274) (1,191) (1,365) (543)
Consumer Loans ............. (39) (45) (64) (142) (109)
Lease Financing ............ -- -- (21) -- --
Other ...................... -- (127) -- -- --
--------- --------- --------- --------- ---------
............................... (196) (869) (1,667) (1,603) (2,066)
Foreign: .................. -- -- -- -- --
--------- --------- --------- --------- ---------
Recoveries:
Domestic:
Commercial, financial
and agricultural .......... $ 44 $ 202 $ 102 $ 295 $ 284
Real Estate-construction .. -- -- -- -- --
Real Estate-mortgage ....... 188 300 254 152 186
Consumer Loans ............. 5 3 51 56 79
Lease Financing ........... -- -- -- -- --
--------- --------- --------- --------- ---------
............................... 237 505 407 503 549
Foreign: ..................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net Charge-Offs: .............. 41 (364) (1,260) (1,100) (1,517)
Additions charged to
operations ................... 485 775 1,681 2,200 2,016
--------- --------- --------- --------- ---------
Loan and lease loss reserve
balance at end of year ....... $ 6,102 $ 5,576 $ 5,165 $ 4,744 $ 3,644
========= ========= ========= ========= =========
Ratios:
Net charge-offs during
the year to average loans and
leases outstanding during the
year ......................... -0.01% 0.12% 0.43% 0.39% 0.60%
Loan loss reserve to total
gross loans .................. 1.76% 1.89% 1.74% 1.61% 1.39%
Net loan charge-offs to loan
loss reserve ................. -0.67% 6.53% 24.39% 23.19% 41.63%
Net loan charge-offs to
provision for loan losses .... -8.45% 46.97% 74.96% 50.00% 75.25%
Loan loss reserve to
non-performing loans(2) ...... 97.32% 87.34% 45.05% 32.82% 25.88%
</TABLE>
- ----------
(1) Net of unearned discount.
(2) For purposes of this ratio, non-performing loans consist of loans more than
90 days past due and non-accrual loans. Troubled debt restructured loans
have been excluded because they are performing in accordance with the
revised terms thereof.
10
<PAGE> 11
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.
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Loan and Lease Losses."
The Loan Loss Reserve 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 Loan Loss Reserve
is adequate, future additions to the Loan Loss 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.
11
<PAGE> 12
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,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
% of % of % of
Reserve Loans to Reserve Loans to Reserve Loans to
Loan Total Loan Total Loan Total
Losses Loans Losses Loans Losses Loans
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, Financial and Agricultural $4,854 11.88% $3,745 14.27% $2,128 14.90%
Real Estate-construction ............. 68 3.22% 91 5.29% 302 3.67%
Real Estate-mortgage ................. 1,125 82.02% 1,630 76.08% 2,415 76.92%
Installment loans to individuals ..... 30 1.71% 76 2.38% 79 2.17%
Lease financing ...................... 25 0.68% 34 1.26% 96 1.60%
Other ................................ -- 0.48% -- 0.72% 145 0.74%
------ ------ ------ ------ ------ ------
$6,102 100.00% $5,576 100.00% $5,165 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995
---------------------- ---------------------
% of % of
Reserve Loans to Reserve Loans to
Loan Total Loan Total
Losses Loans Losses Loans
------- -------- ------- --------
Domestic:
Commercial, Financial and Agricultural $1,148 13.87% $1,093 17.10%
Real Estate-construction ............. 169 4.06% 194 12.50%
Real Estate-mortgage ................. 2,899 78.20% 1,603 65.38%
Installment loans to individuals ..... 77 2.76% 293 4.15%
Lease financing ...................... 17 0.97% 13 0.80%
Other ................................ 434 0.14% 448 0.07%
------ ------ ------ ------
$4,744 100.00% $3,644 100.00%
====== ====== ====== ======
</TABLE>
12
<PAGE> 13
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
Both federal and state law extensively regulate bank holding companies.
This regulation is intended primarily for the protection of depositors and the
deposit insurance fund and not for the benefit of shareholders of the Company.
Set forth below is a summary description of the material laws and regulations
which relate to the operations of the banks and will relate to the operations of
the Company. The description does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms
affecting the financial services industry have been discussed and evaluated by
Congress. These proposals include legislation to revise the Glass-Steagall Act
and the Bank Holding Company Act, and to expand permissible activities for
banks, principally to facilitate the convergence of commercial and investment
banking. Certain proposals also sought to expand insurance activities of banks.
It is unclear whether any of these proposals, or any form of them, will be
introduced in the next Congress and become law. Consequently, it is not possible
to determine what effect, if any, they may have on The Company and the banks
that it will own.
The Company
The Company is a registered bank holding company. It is subject to
regulation under the Bank Holding Company Act. The Company will be required to
file with the Federal Reserve Board periodic reports and such additional
information as the Federal Reserve Board may require pursuant to the Bank
Holding Company Act. The Federal Reserve Board may conduct examinations of the
Company and its subsidiaries, which will include the banks.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. The Federal Reserve Board may also require the
Company to file written notice and obtain approval prior to purchasing or
redeeming its equity securities.
Under the Bank Holding Company Act and regulations adopted by the
Federal Reserve Board, a bank holding company and its nonbanking subsidiaries
are prohibited from requiring tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Further, the Federal Reserve Board requires the Company to maintain capital at
or above stated levels.
The Company must obtain the prior approval of the Federal Reserve Board
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank holding
company. The Federal Reserve Board must also give advance approval for the
merger or consolidation of the Company and another bank holding company.
The Company will be prohibited by the Bank Holding Company Act, except
in statutorily prescribed instances, from acquiring direct or indirect ownership
or control of more than 5% of the outstanding voting shares of any company that
is not a bank or bank holding company and from engaging directly or indirectly
in activities other than those of banking,
13
<PAGE> 14
managing or controlling banks or furnishing services to its subsidiaries.
However, the Company, subject to the prior approval of the Federal Reserve
Board, may engage in any, or acquire shares of companies engaged in, activities
that are deemed by the Federal Reserve Board to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
The Company also is a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries, including the Bank, are subject to examination by, and may be
required to file reports with, the California Department of Financial
Institutions.
The Bank
The Bank is a California chartered bank and a member of the Federal
Reserve Bank of San Francisco. As such it is subject to primary supervision,
periodic examination and regulation by the California Commissioner of Financial
Institutions and the Federal Reserve Board. To a lesser extent, the Bank is also
subject to regulations promulgated by the Federal Deposit Insurance Corporation,
which insures its deposits. If, as a result of an examination of the banks, the
Federal Reserve Board should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to the Federal Reserve Board. These remedies include the power to
enjoin "unsafe or unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the Bank, to assess civil monetary penalties,
to remove officers and directors and ultimately to terminate the Bank's deposit
insurance, which for a California chartered bank would result in a revocation of
the Bank's charter. The California Commissioner of Financial Institution has
many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain capital at or above
stated levels.
Dividends and Other Transfers of Funds
Dividends from the Bank constitutes the principal source of income to
the Company. The Company is a legal entity separate and distinct from the Bank.
The Bank is subject to various statutory and regulatory restrictions on its
ability to pay dividends, and is subject to restrictions on the payment of
dividends to the Company. In addition, the California Department of Financial
Institutions and the Federal Reserve Board have the authority to prohibit the
Bank from paying dividends, depending upon the Bank's financial condition, if
the payment is deemed to constitute an unsafe or unsound practice.
The Federal Reserve Board and the California Commissioner of Financial
Institutions also have authority to prohibit banks from engaging in activities
that, in their opinion, constitute unsafe or unsound practices in conducting its
business. It is possible, depending upon the financial condition of a bank and
other factors, that the Federal Reserve Board and the Commissioner could assert
that the payment of dividends or other payments might, under some circumstances,
be such an unsafe or unsound practice. Further, the Federal Reserve Board has
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction. Compliance
with the standards set forth in those guidelines and the restrictions that are
or may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which the Bank or the Company may pay. An
insured
14
<PAGE> 15
depository institution is prohibited from paying management fees to any
controlling persons or, with limited exceptions, making capital distributions if
after the transaction the institution would be undercapitalized. Please refer to
"-- Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and
"-- Capital Standards" for a discussion of these additional restrictions on
capital distributions.
The Bank is subject to restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities of the Company, the taking of such securities as
collateral for loans, and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and any affiliates of the Bank
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate are limited,
individually, to 10% of the Bank's capital and surplus (as defined by federal
regulations), and such secured loans and investments are limited, in the
aggregate, to 20% of the Bank's capital and surplus. California law also imposes
restrictions with respect to transactions involving the Company and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on any bank under the prompt corrective action
provisions of federal law.
Capital Standards
The Federal Reserve Board has adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%. In addition to the risked-based
guidelines, federal banking regulators require banking organizations to maintain
a minimum amount of Tier 1 capital to total assets, referred to as the leverage
ratio. For a banking organization rated in the highest of the five categories
used by regulators to rate banking organizations, the minimum leverage ratio of
Tier 1 capital to total assets must be 3%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the federal regulatory agencies have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository
institutions, including but not limited to those institutions that fall below
one or more prescribed minimum capital ratios. Each federal banking agency has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on its capital ratios:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The following table sets
forth the capital ratios that determine in which category a banking organization
will be placed:
<TABLE>
<CAPTION>
Total Tier 1
Risk-Based Capital Risk-Based
Capital Category 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>
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking 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
15
<PAGE> 16
more restrictions. The federal banking agencies, however, may not treat a
significantly undercapitalized institution as critically undercapitalized unless
its capital ratio actually warrants such treatment.
At December 31, 1999, the Bank exceeded the required ratios for
classification as and was deemed for regulatory purposes to be a "well
capitalized" institution.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist
the federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to the following:
o internal controls, information systems and internal audit
systems,
o loan documentation,
o credit underwriting,
o asset growth,
o earnings, and
o compensation, fees and benefits. In addition, the federal
banking agencies have also adopted safety and soundness
guidelines with respect to asset quality and earnings
standards.
These guidelines provide six standards for establishing and maintaining
a system to identify problem assets and prevent those assets from deteriorating.
Under these standards, an insured depository institution should do the
following:
o conduct periodic asset quality reviews to identify problem
assets,
o estimate the inherent losses in problem assets and establish
reserves that are sufficient to absorb estimated losses,
o compare problem asset totals to capital,
o take appropriate corrective action to resolve problem assets,
o consider the size and potential risks of material asset
concentrations, and
o provide periodic asset quality reports with adequate
information for management and the board of directors to
assess the level of asset risk.
These new guidelines also establish standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves.
Premiums for Deposit Insurance
The Bank Insurance Fund of the Federal Deposit Insurance Corporation
insures the Bank's deposit accounts, up to the maximum permitted by law. The
Federal Deposit Insurance Corporation may terminate insurance of deposits upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue
16
<PAGE> 17
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the Federal Deposit Insurance Corporation or the
institution's primary regulator.
The Federal Deposit Insurance Corporation charges an annual assessment
for the insurance of deposits, which as of December 31, 1998, ranged from 0 to
27 basis points per $100 of insured deposits, based on the risk a particular
institution poses to its deposit insurance fund. The risk classification is
based on an institution's capital group and supervisory subgroup assignment.
Pursuant to the Economic Growth and Paperwork Reduction Act, at January 1, 1997,
the banks began paying, in addition to their normal deposit insurance premium as
a member of the Bank Insurance Fund, an amount equal to approximately 1.3 basis
points per $100 of insured deposits toward the retirement of the Financing
Corporation bonds issued in the 1980s to assist in the recovery of the savings
and loan industry. Members of the Savings Association Insurance Fund, by
contrast, pay, in addition to their normal deposit insurance premium,
approximately 6.4 basis points. Under the Paperwork Reduction Act, the Federal
Deposit Insurance Corporation is not permitted to establish Savings Association
Insurance Fund assessment rates that are lower than comparable Bank Insurance
Fund assessment rates. Beginning no later than January 1, 2000, the rate paid to
retire the Financing Corporation Bonds will be equal for members of the Bank
Insurance Fund and the Savings Association Insurance Fund. The Paperwork
Reduction Act also provided for the merging of the Bank Insurance Fund and the
Savings Association Insurance Fund by January 1, 1999 provided there were no
financial institutions still chartered as savings associations at that time.
However, as of January 1, 1999, there were still financial institutions
chartered as savings associations. Should the insurance funds be merged before
January 1, 2000, the rate paid by all members of this new fund to retire the
Financing Corporation Bonds would be equal.
Interstate Banking and Branching
The Bank Holding Company Act permits bank holding companies from any
state to acquire banks and bank holding companies located in any other state,
subject to conditions, including nationwide- and state-imposed concentration
limits. subject to certain restrictions, the Bank has the ability to acquire, by
acquisition or merger, branches outside its home state. The establishment of new
interstate branches also is possible in those states with laws that expressly
permit it. Interstate branches are subject to laws of the states in which they
are located. Competition may increase further as banks branch across state lines
and enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act activities. The Community Reinvestment Act generally requires
the federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low- and
moderate-income neighborhoods. A Bank may be subject to substantial penalties
and corrective measures for a violation of fair lending laws. The federal
banking agencies may take compliance with those laws and Community Reinvestment
Act obligations into account when regulating and supervising other activities.
A bank's compliance with its Community Reinvestment Act obligations is
based on a performance-based evaluation system which bases Community
Reinvestment Act ratings on an institution's lending service and investment
performance. When a bank holding company applies for approval to acquire a bank
or other bank holding company, the Federal Reserve Board will review the
assessment of each subsidiary bank of the applicant bank holding company, and
those records may be the basis for denying the application. In its most recent
regulatory examination, the Bank was rated satisfactory in complying with its
Community Reinvestment Act, or CRA, obligations.
Comprehensive Bank Reform Litigation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Gramm Act"). The Gramm Act is expected to have a
major impact on cross-industry mergers, customer privacy and lending to
lower-income communities. The Gramm Act repeals the Glass Steagal Act of 1937,
which separated commercial and investment banking, and eliminates the Bank
Holding Company Act's prohibition on insurance underwriting activities. The
Gramm Act allows both holding company subsidiaries and national bank operating
subsidiaries to offer a wide range of new financial services, including
insurance or securities sales. However, real estate development and insurance
underwriting would be restricted to affiliates and cannot be performed by bank
operating subsidiaries. State laws will govern insurance sales, but states
cannot discriminate against national banks by preventing national banks from
conducting insurance activities that nonbanks may conduct. The Gramm Act bars a
bank holding company from merging with insurance or securities firms, or
embarking on
17
<PAGE> 18
new powers, if any of its banks earned less than a "satisfactory" CRA rating in
its most recent examination. The Gramm Act also provides that customers will
have the right to prevent banks from sharing information with third parties. The
Gramm Act is expected to further increase competition in providing financial
services.
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.
During 1999, there was a gradual increase in interest rates, which
increased the Bank's yields on loans as well as the Bank's interest expense. The
increase in the Bank's interest expense was offset by decreases in the volume of
time certificates of deposit, on which the Bank pays its highest rates of
interest. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation" in Part II of this Report. The Company expects interest
rates to continue to increase in the near future.
Employees
At December 31, 1999, the Bank had approximately 184 full-time and 62
part-time employees.
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 59 President and Chief Executive Officer President and Chief Executive Officer
Donna Miltenberger 44 Executive Vice President Executive Vice President and Chief
Operating Officer
Tom Kramer 56 Executive Vice President and Secretary Executive Vice President, Chief Credit
Officer and Secretary
Carol Ann Graf 54 Senior Vice President, Chief Financial Senior Vice President, Chief Financial
Officer and Assistant Secretary Officer and Assistant Secretary
</TABLE>
18
<PAGE> 19
All officers hold office at the pleasure of the Board of Directors,
except that Mr. Langley is employed under an Employment Agreement with the Bank.
George E. Langley. Mr. Langley has been the President and Chief
Executive Officer of the Company and the Bank since April 1992. From 1982 to
April 1992, Mr. Langley served as the Executive Vice President, Chief Financial
Officer and Secretary of the Company and the Bank. From 1976 to 1982, Mr.
Langley held various executive positions with the Bank.
Donna Miltenberger. Ms. Miltenberger has been an Executive Vice
President of the Company since 1996 and Executive Vice President of the Bank
since November 1993. She also served as the Chief Administrative Officer of the
Bank from 1994 until 1997 when, due to an increase in the scope of her
responsibilities, she was appointed to the position of Chief Operating Officer
of the Bank. From June 1992 to November 1993, Ms. Miltenberger held the position
of Senior Vice President of the Bank. Prior to June 1992, Ms. Miltenberger held
various management positions with Chino Valley Bank, in Chino, California,
including Executive Vice President - Cashier.
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 2014. 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 respective properties are subject other than
ordinary routine litigation incident to the Bank's business, the outcome of
which is not expected to be material to the Company or its operations or
properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE> 20
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 1999 and 1998. On March
29, 2000 the closing per share price was $10.125 and, as of that same date,
there were 1,168 record shareholders of the Company.
<TABLE>
<CAPTION>
Trade Prices of Stock Cash
Common Stock(1) Dividends Declared Dividends Declared
------------------------ ------------------ ------------------
High Low
-------- -------
<S> <C> <C> <C> <C>
1999
First Quarter......... $15.8750 14.5000 -- --
Second Quarter........ 15.3750 13.1250 -- 0.25
Third Quarter......... 13.8125 11.8750 -- --
Fourth Quarter........ 14.1250 11.7500 -- 0.08
1998(1)
First Quarter......... $16.4130 14.3480 -- --
Second Quarter........ 18.2610 15.4640 15% --
Third Quarter......... 16.1250 10.2500 -- --
Fourth Quarter........ 15.2500 9.2500 -- --
</TABLE>
- ----------
(1) Stock prices for the quarterly period preceding the 15% dividend to
shareholders of record June 15, 1998 which was paid on July 7, 1998, have
been adjusted to reflect that dividend.
DIVIDENDS AND REPURCHASES OF SHARES
Dividend Policy
Prior to 1995 it has been the Company's policy to pay cash dividends
out of internally generated funds that were not required to meet capital and
cash requirements or to support growth of the Company's business. Pursuant to
that policy, the Company paid cash dividends of $.25 per share in 1984; $.25 per
share in 1987; $.37 per share in 1988; $.16 per share in both 1989 and 1990;
$.47 per share in 1991; and $.40 per share in each of 1992, 1993, and 1994.
In order to take advantage of opportunities to achieve further growth
and in order to support that growth through increases in capital, in March 1995
the Board of Directors determined, in accordance with its dividend policy, that
the Company should retain its earnings. Accordingly, no cash dividends were paid
in 1995, 1996, 1997 or 1998.
In March 1999, the Board declared a $.25 per share cash dividend that
was paid on April 15, 1999 to shareholders of record as of April 5, 1999 and, in
September of 1999, the Board modified the dividend policy to provide for the
payment of quarterly cash dividends. Pursuant to that policy, cash dividends of
$.08 per share were paid in the fourth quarter of 1999 and the first quarter of
2000, respectively. It is anticipated that similar cash dividends will be paid
in the second, third and fourth quarters of 2000.
Stock Repurchases
On October 21, 1998, the Company announced that the Board of Directors
had authorized a program for repurchases of up to 300,000 shares, or 5%, of its
outstanding Common Stock. Repurchases may be made in the open market or in block
purchases or in privately negotiated transactions in compliance with Securities
and Exchange Commission guidelines. All shares repurchased will be retired and
cancelled. As of March 6, 2000, the Company had repurchased 274,042 shares at a
total cost of $3,810,450.
Additionally, on February 28, 2000 the Company announced that the Board
of Directors had authorized the repurchase of an additional 5%, or 300,000
shares, of its outstanding Common Stock. Repurchases may be made in the open
market or in block purchases or in privately negotiated transactions in
compliance with Securities and Exchange Commission guidelines. All shares
repurchased will be retired and cancelled.
Restrictions Applicable to the Payment of Dividends
The principal source of funds available to the Company for cash
dividends and share repurchases, at least until such time, if any, as it may
acquire or develop other businesses, is cash dividends from the Bank. Therefore,
government regulations, including the laws of the State of California, as they
pertain to cash dividends by state chartered banks, will limit the ability of
the Company to pay cash dividends for the foreseeable future. California law
places a statutory restriction on the amounts of
20
<PAGE> 21
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 lesser of (i) net income of the Bank
for the year and retained net income from the preceding two years (after
deducting all dividends paid during the period), or (ii) the Bank's retained
earnings. However, because the payment of cash dividends has the effect of
reducing capital, as a practical matter capital requirements imposed on
federally insured banks operate to preclude the payment of cash dividends in
amounts that might otherwise be permitted by California law; and the Federal
bank regulatory agencies, as part of their 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.
The Rights dividend was made to holders of record of shares of the
Company's common stock at the close of business on March 18, 1997. Each Right
entitles the registered holder, on certain events, to purchase from the Company,
at an initial exercise price of $48.00 per Right (subject to adjustment), such
number of newly issued shares of the Company's common stock or the common stock
of the acquiring or surviving company, depending on the type of triggering
event, equal to an aggregate market value as of the date of the triggering event
of two (2) times the exercise price of the Right.
21
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal years
ended December 31, 1999, 1998, and 1995, and the selected balance sheet data as
of December 31, 1999 and 1998, are derived from the audited consolidated
financial statements of the Company examined by Vavrinek, Trine, Day and
Company, L.L.P, 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, 1996 and 1995, and the selected balance sheet data as of December
31, 1997, 1996 and 1995, are derived from audited consolidated financial
statements examined by Vavrinek, Trine, Day and Company, L.L.P. which are not
included in this Report.
<TABLE>
<CAPTION>
Dollars in Thousands, Except Per Share Data
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement Of Income Data
Interest Income .............. $ 35,551 $ 36,237 $ 35,028 $ 35,147 $ 33,402
Interest Expense ............. 8,333 9,827 9,738 9,869 9,786
Net Interest Income .......... 27,218 26,410 25,290 25,278 23,616
Provision for Possible Loan
Losses .................... (485) (775) (1,681) (2,200) (2,016)
Net Interest Income after
Provision for Possible Loan
Losses .................... 26,733 25,635 23,609 23,078 21,600
Other Income ................. 4,521 5,086 6,040 5,264 4,688
Other Expense ................ (21,342) (25,573) (22,599) (21,700) (20,625)
Income Before Income Taxes ... 9,912 8,148 7,050 6,642 5,663
Applicable Income Taxes ...... 3,662 3,084 2,532 2,459 2,100
Net Income ................ 6,250 5,064 4,518 4,183 3,563
Cash Dividends(1) ............ 0.33 -- -- -- --
Balance Sheet Data
Investment Securities ........ 63,324 106,245 46,069 45,052 42,234
Loans and Leases (net) ....... 339,533 289,007 291,393 289,886 257,510
Assets ....................... 458,676 469,077 435,708 410,505 395,181
Deposits ..................... 397,264 416,665 390,146 370,966 361,114
Other Debt(2) ................ 8,819 74 123 168 208
Shareholders' Equity ......... 48,439 48,379 42,041 36,222 31,042
Per Common Share Data
Net Income - Basic(3)(4) ..... 1.06 0.85 0.78 0.75 0.65
Net Income - Diluted(3)(4) ... 1.00 0.80 0.74 0.73 0.63
Cash Dividends ............... 0.33 -- -- -- --
Book Value (At year-end)(3) .. 8.39 8.08 7.15 6.34 5.64
Number of Shares used in
Per Share Calculation-Basic(3)
(4) ......................... 5,886,164 5,946,908 5,795,070 5,568,502 5,470,895
</TABLE>
- ------------------
(1) For information regarding restrictions affecting the ability of the
Company to pay cash dividends, see Note 13 to the Company's
Consolidated Financial Statements.
(2) For information regarding other debt, see Note 9 to the Company's
Consolidated Financial Statements.
(3) Retroactively adjusted for stock dividends and stock splits.
(4) For information regarding the determination of basic and diluted
earnings per share, see Note 17 to the Company's Consolidated Financial
Statements.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with our audited
consolidated financial statements, and the footnotes thereto, contained
elsewhere in this report and the statements regarding forward-looking
information and the uncertainties that could affect our future performance
described below in this Report.
Our principal operating subsidiary is Foothill Independent Bank, which
is a California state chartered bank (the "Bank"), which accounts for
substantially all of our revenues and income. Accordingly, the following
discussion focuses primarily on the Bank's operations and financial condition.
RESULTS OF OPERATIONS
OVERVIEW
In 1999, we generated net earnings of $6,250,000, an increase of
$1,186,000, or 23%, over net earnings for 1998. That increase was due primarily
to an increase in net interest income and reductions in interest expense and in
non-interest expenses. As indicated in the following table, net earnings for
1999 represent a return on average assets of 1.34% and a return on average
equity of 12.94%, compared to 1.10 % and 11.32%, respectively, for 1998.
1999 1998 1997
---- ---- ----
Return on Assets............ 1.34% 1.10% 1.07%
Return on Equity............ 12.94% 11.32% 11.70%
Dividend Payout Ratio....... 31.13% -- --
Equity to Asset Ratio....... 10.34% 9.75% 9.14%
NET INTEREST INCOME
Net interest income is a principal determinant of a bank's income. Net
interest income represents the difference or "spread" between the interest
earned on interest-earning assets, such as loans and investment securities, and
the interest paid on interest-bearing liabilities, principally deposits. Net
interest income increased by $808,000, or 3.1%, in 1999 as compared to 1998. The
increase was primarily attributable to a decrease in interest expense that more
than offset a modest decrease in interest income. The decrease in interest
expense was due primarily to decreases in the volume of time certificates of
deposit ("time deposits"), including those in denominations of $100,000 or more
("TCD's"), on which the Bank pays its highest rates of interest. The decrease in
interest income was primarily due to decreases in interest earned on federal
funds sold and interest and fees on loans.
23
<PAGE> 24
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,
---------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ----------------------------- ------------------------------
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 .............. $ 7,308 $ 421 5.8% $ 15,896 $ 950 6.0% $ 16,610 $ 984 5.9%
U.S. Government Agencies ... 45,485 2,701 5.9 34,564 1,974 5.7 26,046 1,460 5.6
Municipal Leases(1) ........ 6,454 550 8.5 6,788 584 8.6 7,114 596 8.4
Other Securities ........... 3,290 195 5.9 3,546 257 7.2 3,394 201 5.9
-------- ------- -------- ------- -------- -------
Total Investment Securities 62,537 3,867 6.2 60,794 3,765 6.2 53,164 3,241 6.1
Federal Funds Sold ........... 18,071 901 5.0 30,219 1,560 5.2 23,673 1,274 5.4
Due form Banks - Time Deposits 16,306 849 5.2 11,787 662 5.6 4,215 241 5.7
Loans(2) ..................... 324,553 30,072 9.3 306,381 30,232 9.9 286,438 30,231 10.6
Lease Financing(1) ........... 2,835 272 9.6 4,086 384 9.4 4,395 398 9.1
-------- ------- -------- ------- -------- -------
Total Interest-Earning
Assets(1) .................. $424,302 $35,961 8.5 $413,267 $36,603 8.9% $371,885 $35,385 9.5%
======== ======= ======== ======= ======== =======
Interest Bearing Liabilities:
Domestic Deposits and
Borrowed Funds:
Savings Deposits(3)....... $184,122 $4,325 2.3% $169,617 $4,232 2.5% $151,319 $3,624 2.4%
Time Deposits............. 88,848 3,892 4.5% 106,855 5,585 5.2% 111,129 6,099 5.5%
Short-Term borrowings 351 21 6.0% -- -- -- -- -- --
Long-Term borrowings...... 49 5 10.2% 101 10 9.9% 147 15 10.2%
-------- ------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities.............. $273,370 $8,333 3.0% $276,573 $9,827 3.6% $262,595 $9,738 3.7%
======== ======= ======== ======= ======== =======
</TABLE>
The table below shows the net interest earnings and the net yield on average
earning assets:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
($ in thousands)
<S> <C> <C> <C>
Total Interest Income(1)(2).................... $ 35,961 $ 36,603 $ 35,385
Total Interest Expense(3)...................... $ 8,333 $ 9,827 $ 9,738
Net Interest Earnings(1)(2).................... $ 27,628 $ 26,776 $ 25,647
Net Average Earning Assets(2).................. $424,302 $413,267 $371,885
Net Yield on Average Earning Assets(1)(2)...... 6.5% 6.5% 6.9%
Net Yield on Average Earning Assets
(excluding Loan Fees)(1)(2)................... 6.1% 6.0% 6.4%
</TABLE>
- ----------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate 36.9
percent for 1999, 37.8 percent for 1998 and 35.9 percent for 1997.
(2) Loans, net of unearned discount, do not reflect average reserves for
possible loan losses of $5,865,000 in 1999, $5,252,000 in 1998 and
$5,165,000 in 1997. Loan fees of $1,846,000 in 1999, $1,925,000 in 1998
and $2,556,000 in 1997 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
fourteen non-accruing loans at December 31, 1999, sixteen at December
31, 1998 and twenty-seven at December 31, 1997.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
24
<PAGE> 25
RATE SENSITIVITY, MARKET RISK AND NET INTEREST MARGINS
Rate Sensitivity
Like other banks and bank holding companies, our margins (that is, the
difference between yields we are able to realize on loans and other interest
earning assets and the interest we pay on deposits) are affected by a number of
factors including the relative percentages or the "mix" of (i) our assets,
between loans, on the one hand, on which we are able to obtain higher rates of
interest, and investment securities, federal funds sold and funds held in
interest-bearing deposits with other financial institutions, on the other hand,
on which yields generally are lower; (ii) variable and fixed rate loans in our
loan portfolio; and (iii) demand and savings deposits, on the one hand, and time
deposits on the other hand. As a general rule, a bank with a relatively high
percentage of fixed-rate loans will experience a decline in net interest margins
during a period of increasing market rates of interest, because it will be
unable to "reprice" its fixed rate loans to fully offset the increase in the
rates of interest it must offer to retain maturing time deposits and attract new
deposits; but will generally experience an increase in its net interest margin
during periods of declining rates of interest, because yields on fixed interest
loans will continue unchanged, while the costs of deposits will decline.
Similarly, a bank with a high percentage of time deposits generally will
experience greater increases in interest expense and, therefore, a decrease in
net interest margins, 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
margins 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.
Market Risk
Market risk is the risk of loss to future earnings, to fair values of
assets or to future cash flows that may result from changes in the price or
value of a financial instrument. The value of a financial instrument may changes
as a result of changes in interest rate and other market conditions. Market risk
is attributed to all market risk sensitive financial instruments, including
loans and investment securities, deposits and borrowings, We do not engage in
trading activities or participate in foreign currency transactions for our own
account. Accordingly, our exposure to market risk is primarily a function of our
asset and liability management activities and of changes in market rates of
interest that can cause or require increases in the rates we pay on deposits
that may take effect more rapidly or may be greater than the increases in the
interest rates we are able to charge on loans and the yields that we can realize
on our investments. The extent of that market risk, depends on a number of
variables, including the sensitivity to changes in market interest rates and the
maturities of our interest earning assets and our deposits. See "Rate
Sensitivity" above.
25
<PAGE> 26
We use a dynamic simulation model to forecast the anticipated impact of
changes in market interest rates on our net interest income. That model is used
to assist management in evaluating, and in determining and adjusting strategies
designed to reduce, our exposure to these market risks, which may include, for
example, changing the mix of earning assets or interest-bearing deposits. See
Note 21 to our Consolidated Financial Statements for further information with
respect to that dynamic simulation model that, based on certain assumptions,
attempts to quantify the impact that simulated upward and downward interest rate
changes would have on our net interest income.
The following reflects the Company's net interest income sensitivity
analysis as of December 31, 1999:
<TABLE>
<CAPTION>
Market Value
Simulated Estimated Net Interest ------------------------------
Rate Changes Income Sensitivity Assets Liabilities
----------------- ---------------------------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
+200 basis points 7.13% $437,849 $406,809
-200 basis points 5.65% $477,022 $408,201
</TABLE>
The estimated 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.
Net Interest Margin in 1999
We attempt to reduce our exposure to market risks associated with
interest rate fluctuations and, thereby, at least to maintain and, if possible,
to increase our net interest margin or spread by seeking (i) to attract and
maintain a significant volume of demand and savings deposits that are not as
sensitive to interest rate fluctuations as are TCD's and other time deposits,
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. During 1999, we allowed maturing TCDs to "run-off",
rather than seeking their renewal, and we also continued marketing programs
designed to attract additional demand and savings deposits. As a result, the
average volume of demand and savings (including money market) deposits increased
by $21,918,000 or 7.2%, during 1999 compared to 1998, and, at December 31, 1999
such deposits represented 78.6% of the Bank's average volume of total deposits,
as compared to 74.0% at December 31, 1998. As a result, our net interest margin
26
<PAGE> 27
continued to exceed the average net interest margin for California based,
publicly traded banks and bank holding companies with assets ranging from
$300-to-$500 million (the "Peer Group Banks").
At the same time, we experienced an increase in loan demand in 1999
compared to 1998. Consequently, the mix of average earning assets shifted back
to a somewhat higher percentage of loans and leases and a somewhat lower
percentage of lower yielding investment securities, federal funds sold and funds
held in interest bearing deposits with other financial institutions which, in
1999, accounted for 26.4% of average earning assets compared to 28.2% in 1998.
The combination of this change in the mix of average earning assets and
reductions in interest expense enabled us to increase our 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, 1999 to 6.51%
compared to 6.49% at December 31, 1998.
The ability to maintain our net interest margin is not entirely within
our control because the interest rates we are able to charge on loans and the
interest rates we must offer to maintain and attract deposits are affected by
national monetary policies established and implemented by the Federal Reserve
Board and by competitive conditions in our service areas. In addition, the
effect on a bank's net interest margins of changes in market rates of interest
will depend on the types and maturities of its deposits and earning assets. For
example, a change in interest rates paid on deposits in response to changes in
market rates of interest can be implemented more quickly in the case of savings
deposits and money market accounts than with respect to time deposits as to
which a change in interest rates generally cannot be implemented until such
deposits mature. In addition, a change in rates of interest paid on deposits can
and often does lead consumers to move their deposits from one type of deposit to
another or to shift funds from deposits to non-bank investments or from such
investments to bank deposit accounts or instruments, which also will affect a
bank's net interest margin.
27
<PAGE> 28
The following table sets forth changes in interest earned, including
loan fees, and interest paid in each of the years ended December 31, 1999 and
1998. 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
able able(1) Sold Loans(2) Financing Deposits Total
---- ------- ------- -------- --------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Earned on:
1999 compared to 1998 -
Increase (decrease) due
to:
Volume Changes $ 123 $ (44) $(608) $ 1,912 $(120) $ 238 $ 1,501
Rate Changes 13 10 (51) (2,072) 8 (51) (2,143)
----- ----- ----- ------- ----- ------ -------
Net Increase (Decrease) $ 136 $ (34) $(659) $ (160) $(112) $ 187 $ (642)
===== ===== ===== ======= ===== ====== =======
1998 compared to 1997 -
Increase (decrease) due
to:
Volume Changes $ 467 $ (33) $ 340 2,206 $ (29) $ 425 $ 3,376
Rate Changes 69 21 (54) (2,205) 15 (4) (2,158)
----- ----- ----- ------- ----- ------ -------
Net Increase (Decrease) $ 536 $ (12) $ 286 $ 1 $ (14) $ 421 $ 1,218
===== ===== ===== ======= ===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Savings Other Time Long Term Repurchase Short Term
Deposits Deposits Borrowings(3) Agreements Borrowings(4) Total
-------- ---------- ---------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Paid On:
1999 compared to 1998 -
Increase (decrease) due to:
Volume Changes $ 350 $ (868) $ (5) $ 21 $ 21 $ (502)
Rate Changes (257) (735) -- -- -- (992)
----- ------- ------- ------ ---- -------
Net Increase (Decrease) $ 93 $(1,603) $ (5) $ 21 $ 21 $(1,494)
===== ======= ======= ====== ==== =======
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
===== ======= ======= ====== ==== =======
</TABLE>
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate
36.9% for 1999 and 37.8% for 1998.
(2) Includes a decrease in loan fees of $79,000 for 1999 and a decrease of
$631,000 in 1998.
(3) Long term borrowings in 1999 and 1998 consist of an obligation secured
by deed of trust that bears interest at 10.0%.
(4) Short term borrowings in 1999 consist of an obligation secured by a
blanket lien on certain real estate loans that bears interest at 6.12%.
The Bank currently anticipates that market interest rates will increase
in 2000, as compared to 1999. The Bank also has recently instituted new
marketing programs designed to increase its loan volume and, if those programs
prove to be successful, the Bank expects to increase time deposits to fund a
portion of the increases in outstanding loans. However, the Bank believes that
its net interest margin in 2000 will remain at approximately the same level as
in 1999, because it expects that the resulting increases in interest expense
will be largely offset by increases in yields on loans and other interest
earning assets in response to the increases in market rates of interest and the
anticipated increases in loan volume. However, there are a number of
uncertainties and risks that could adversely affect our net interest margin in
2000, 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, (ii)
the possibility of adverse changes in economic conditions and (iii) higher than
currently anticipated increases in prevailing market rates of interest.
28
<PAGE> 29
PROVISION FOR LOAN AND LEASE LOSSES
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. To provide for timely recognition of potential loan losses, we
maintain a reserve for possible loan losses (the "Loan Loss Reserve").
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 the Loan Loss Reserve when management determines that the
collectibility of such loans is unlikely. The Loan Loss Reserve is adjusted
periodically to reflect changes in (i) the volume of outstanding loans, and (ii)
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 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 1999 we made provisions totaling $475,000 as compared to $775,000 during
1998 and, at December 31, 1999 the Loan Loss Reserve was approximately
$6,102,000 or 1.76% of total loans and leases outstanding, compared to
approximately $5,576,000 or 1.89% of total loans and leases outstanding at
December 31, 1998. The decrease in the additions made to the Loan Loss Reserve
in 1999 were attributable primarily to a decline in the total number of
non-performing assets in 1999 as compared to 1998.
In 1998, provisions for loan and lease losses totaled $775,000 as
compared to $1,681,000 in 1997. That reduction was primarily attributable to a
decline in the total number of non-performing assets in 1998 as compared to
1997.
Our 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 to $6,270,000 or 1.8% of total loans at December 31, 1999, as compared
to $6,383,000 or 2.2% of total loans at December 31, 1998 and $11,465,000 or
3.9% of total loans at December 31, 1997. The ratio of the Loan Loss Reserve to
non-performing loans was 97.3% at December 31, 1999, as compared to 87.3% and
45.1% at December 31, 1998 and 1997, respectively.
In 1999, recoveries of previously "charged-off" loans exceeded loan
charge-offs by $41,000. By contrast, during 1998 charge-offs exceeded recoveries
by $364,000, which represented twelve hundredths of one percent (0.12%) of
average loans and leases outstanding and, in 1997, charge-offs exceeded
recoveries by $1,260,000, which represented forty-five hundredths of one percent
(0.45%) of average loans and leases outstanding.
29
<PAGE> 30
Although loan losses are an incidental part of the banking business
and, as a result, the Bank will continue to make provisions for future loan
losses to maintain an adequate Loan Loss Reserve, the Bank currently anticipates
that, if there is no adverse change in economic conditions, the provision it
will be required to make in 2000 for future loan losses will largely be
determined by and will largely be a function of changes in the volume of its
outstanding loans. See "Business -- Supervision and Regulation."
OTHER INCOME
In 1999, other income declined by $273,000 or 5.7% as compared to 1997.
The decline was primarily attributable to decreases in transaction fees and
service charges and other banking transactions.
In 1998, other income declined by $954,000 or 15.6% as compared to
1997, primarily as a result of decreases in transaction fees and service charges
and other banking transactions, and 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.
OTHER EXPENSE
Other expense (also often referred to as "non-interest expense"),
consists primarily of (i) salaries and other employee expenses, (ii) occupancy
and furniture and equipment expenses, and (iii) other operating and
miscellaneous expenses that include insurance premiums, marketing expenses, data
processing costs, professional expenses, and charges that are periodically made
to establish reserves for possible losses on the disposition or declines in
market values of real properties acquired on or in lieu of foreclosure of
defaulted loans (commonly referred to as "other real estate owned" or "OREO").
In order to attract a higher volume of non-interest bearing demand and
lower cost savings and money market deposits and, thereby, improve our net
interest margin, it has been our policy to provide a much higher level of
personal service to our customers than the level of services that are provided
by many of our competitors. Although this practice has caused us to incur a
higher level of non-interest expense than many other of our Peer Group Banks, we
believe that this practice has enabled us to generate increases in net interest
income and, as a result, our net interest margin continues to exceed the average
net interest margin of the Peer Group Banks with which we compete.
Nevertheless, during the second half of 1998 and continuing through
1999, we implemented a number of cost reduction programs designed to reduce
non-interest expenses and, thereby increase operating efficiencies, without
adversely affecting the quality of service we provide to our customers. As a
result of those programs, in 1999, we reduced our operating expenses by $939,000
compared to 1998. That expense reduction was accomplished in spite of
non-recurring expenses incurred in connection with an election contest at our
Annual Shareholders Meeting held in May 1999. Those expense reductions resulted
in an improvement in our efficiency ratio (that is, basically, the ratio of
non-interest expense to the sum of our net interest income and other income) to
67.2% from 69.8% in 1998. In 1998, our 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.
During 2000 we intend to continue to take advantage of opportunities to
reduce non-interest expense without sacrificing the quality or level of service
that we are able to provide to our customers.
INCOME TAXES
In 1999 income taxes increased by approximately $1,186,000 or 23.4% as
compared to 1998, primarily as a result of the increase in pre-tax income. 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 our overall combined federal and state income tax rate.
30
<PAGE> 31
FINANCIAL CONDITION
Our average total assets increased during 1999 by approximately
$8,033,000 , or 1.8%, when compared to average total assets for 1998. However,
total assets at December 31, 1999 were $10,401,000, or 2.2%, lower than total
assets at December 31, 1999. Contributing to the increases in average assets
were increases of $15,479,000, or 5.2%, in the average loans and leases
outstanding and $9,238,000, or 12.2%, in the average volume of investment
securities. Those increases were offset somewhat by a $18,420,000 reduction in
the average volume of federal funds sold and a $628,000 reduction in the average
volume other real estate owned as a result of sales of real properties
previously acquired in connection with foreclosures of defaulted loans. As a
result of those sales, other real estate owned stood at $1,714,000 at December
31, 1999.
We instituted marketing programs designed to increase our loan volume
and we are continuing with our programs designed to increase the volume of
demand, savings and money market deposits, that are either non-interest bearing
or bear interest at rates which are substantially lower than those paid on time
deposits. At the same time, during most of 1999 we kept the interest rates we
offer 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, during 1999 the average
volume of demand and savings deposits was $21,918,000, or 7.2%, higher than the
average for 1998 and average non-interest bearing demand deposits, as a
percentage of average total deposits, increased to 34.1% from 32.6% in 1998. By
contrast the average volume of TCD's and other time deposits was $17,735,000, or
16.6%, lower in 1999 than the average for 1998.
The average amounts (in thousands) of and the average rates paid on
deposits in each of 1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- --------------------------
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.................. $ 141,554 -- $134,141 -- $117,711 --
Savings Deposits(1)......... 184,122 2.35% 169,617 2.50% 151,319 2.39%
Time Deposits(2)............ 88,848 4.48% 106,855 5.23% 111,129 5.49%
-------- -------- -------
Total Deposits....... $ 414,524 2.00% $410,613 2.39% $380,159 2.56%
========= ======== ========
</TABLE>
- ----------
(1) Includes NOW, Super NOW, and Money Market Deposit Accounts.
(2) Includes time certificates of deposit in denominations greater than and
less than $100,000.
31
<PAGE> 32
Set forth below is maturity schedule of domestic time certificates of
deposits of $100,000 or more as of December 31, 1999:
(In Thousands)
Three Months or Less.................................... $14,658
Over Three through Six Months........................... 9,917
Over Six through Twelve Months.......................... 10,901
Over Twelve Months...................................... 4,932
------
$40,408
======
We currently anticipate that there will be modest growth in the Bank's
total assets in the year 2000, which is expected to result from increased
lending and deposit activity generated by new sales programs being instituted by
the Bank.
LIQUIDITY MANAGEMENT
Liquidity management policies attempt to achieve a matching of sources
and uses of funds in order to enable us to fund our customers' requirements for
loans and for deposit withdrawals. In conformity with those policies, we
maintain a number of short-term sources of funds to meet periodic increases in
loan demand and deposit withdrawals and maturities. At December 31, 1999, the
principal sources of liquidity consisted of $23,262,000 in cash and demand
balances due from other banks, $3,600,000 of Federal funds sold, and $1,000,000
in short-term (maturities of 45 days or less) commercial paper, which, together,
totaled $27,862,000. Other sources of liquidity include $56,015,000 in
securities available for sale, of which approximately $15,381,000 of such
securities mature within one year, $2,140,000 in securities held to maturity
which mature within one year, and $7,919,000 in interest-bearing deposits at
other financial institutions, which mature in 6 months or less. We also have
established loan facilities that would enable us to borrow up to $10,100,000 of
Federal funds from other banks and we recently received approval from the
Federal Reserve Bank of San Francisco to establish an account that will also
allow us to borrow at their discount window should the need arise. In addition,
we have line of credit with the Federal Home Loan Bank in the amount of
approximately $8,800,000. We drew on that line of credit and used the $8,800,000
at the end of December 1999 to increase our liquidity in anticipation of
possible increased deposit withdrawals as a result of widely expected Y2K
problems that never materialized. That $8,800,000 was subsequently repaid on
January 31, 2000. Furthermore, substantially all of the Bank's installment loans
and leases, the amount of which aggregated $7,623,000 at December 31, 1999,
require regular installment payments from customers, providing us with a steady
flow of cash funds. Accordingly, we believe that we have 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.
The table below sets forth information concerning the interest rate
sensitivity of the Company's consolidated assets and liabilities as of December
31, 1999. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
32
<PAGE> 33
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 ............... $ 5,938 $ 1,981 $ -- $ -- $ -- $ 7,919
Investment securities ............................ 37,934 10,135 11,779 1,700 1,776 63,324
Federal Funds Sold ............................... 3,600 -- -- -- -- 3,600
Net loans ........................................ 90,953 6,309 99,420 142,851 -- 339,533
Noninterest-earning assets ....................... -- -- -- -- 44,300 44,300
--------- --------- --------- -------- --------- --------
Total assets ..................................... $ 138,425 $ 18,425 $ 111,199 $144,551 $ 46,076 $458,676
--------- --------- --------- -------- --------- --------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits ..................... $ -- $ -- $ -- $ -- $ 133,115 $133,115
Interest-bearing deposits ........................ 216,241 40,223 7,685 -- -- 264,149
Short-term borrowings ............................ 8,800 -- -- -- -- 8,800
Long-term borrowings ............................. -- 19 -- -- -- 19
Other liabilities ................................ -- -- -- -- 4,154 4,154
Stockholders' equity ............................. -- -- -- -- 48,439 48,439
--------- --------- --------- -------- --------- --------
Total liabilities
and stockholders equity ......................... $ 225,041 $ 40,242 $ 7,685 $ -- $ 185,708 $458,676
--------- --------- --------- -------- --------- --------
Interest rate sensitivity gap .................... $ (86,616) $ (21,817) $ 103,514 $144,551 $(139,632) $ --
========= ========= ========= ======== ========= =========
Cumulative interest rate sensitivity gap ......... $ (86,616) $(108,433) $ (4,919) $139,632 $ -- $
========= ========= ========= ======== ========= =========
</TABLE>
CAPITAL RESOURCES
During the period from 1995 to 1999, it was the policy of our Board of
Directors to retain earnings to meet capital requirements under applicable
government regulations and to support our growth. During that period we opened
four new banking offices, all of which have contributed to our increased
profitability, and at the same time we increased our capital to levels well
above regulatory requirements.
It is the Board's current policy to retain a substantial portion of our
earnings to support further growth and we plan to continue to evaluate and
explore opportunities to expand 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 our existing markets.
However, the increases in earnings achieved in 1997 and 1998 caused our
capital ratios to increase even further in relation to regulatory capital
requirements and caused our return on average equity to remain relatively fixed
despite those increases in earnings. As a result, in 1998, our Board of
Directors authorized an open market stock repurchase program to be funded out of
earnings. Between the commencement of that program in late 1998 and December 31,
1999, we had purchased a total of 257,242 shares of our common stock for an
aggregate price of approximately $3,604,600. In addition, in March 1999, the
Board declared a $.25 per share cash dividend that was paid on April 15, 1999 to
shareholders or record as of April 5, 1999 and, in September of 1999, the Board
modified our the dividend policy to provide for the payment of quarterly cash
dividends. Pursuant to that policy, cash dividends of $.08 per share were paid
in the fourth quarter of 1999 and the first quarter of 2000, respectively. It is
anticipated that similar cash dividends will be paid in the second, third and
fourth quarters of 2000.
At December 31, 1999, our Bank's Tier 1 leverage ratio and Tier 1
risk-based capital ratio were 10.3% and 12.82%, respectively, which were
significantly in excess of minimum bank regulatory requirements. Our Company's
consolidated Tier 1 risk-based capital ratio was 12.97%. 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
33
<PAGE> 34
capital that is required to maintain an adequate risk-based capital ratio, which
generally is at least 8%. Our Bank's Tier 1 capital and risk-based capital
ratios compare favorably with those of the Peer Group Banks.
Under accounting principles that address the financial reporting
requirements for investments in certain equity and debt securities held by
financial institutions, any unrealized gain on such securities is required to be
credited to, and any unrealized losses are required to be charged against,
stockholders' equity. At December 31, 1999, we recorded valuation reserve for
unrealized losses on such securities aggregating approximately $837,000. The
greatest portion of this amount is related to certain investments in mutual
funds, which are classified as investments in marketable equity securities, but
which we have held for several years and intend to continue to hold for the
foreseeable future.
YEAR 2000.
We worked hard to resolve the potential impact of the Year 2000 ("Y2K")
on the processing of date-sensitive information by the Company's computerized
information systems and we passed the century date change without any incurring
any problems. The costs of addressing potential Y2K problems did not have a
material adverse impact on the Company's financial position or results of
operations.
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 certain 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 time deposits, either or both of which could, in turn,
reduce interest income and net interest margins.
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 which, in turn,
could result in increases in loan losses and require increases in reserves for
possible loan losses, thereby adversely affecting earnings; and (iii) lead to
reductions in real property values that, due to our reliance on real property to
secure many of our loans, could make it more difficult for us to prevent losses
from being incurred on non-performing loans through the sale of such real
properties.
Possible Adverse Changes in National Economic Conditions and FRB
Monetary Policies. Changes in national economic conditions, such as increases in
inflation or declines in economic output often prompt changes in Federal Reserve
Board monetary policies that could increase the cost of funds to us and reduce
net interest margins, particularly if we are unable, due to competitive
pressures or the rate insensitivity of earning assets, to effectuate
commensurate increases in the rates we are 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 yields on earning assets or increasing operating costs.
Effects of Growth. It is our intention to take advantage of
opportunities to increase our business, either through acquisitions of other
banks, the establishment of new banking offices or the offering of new products
or services to our customers. If we do acquire any other banks or open any
additional banking offices or begin offering new products or services, we are
likely to incur additional operating costs that may adversely affect our
operating results, at least on an interim basis.
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.
34
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Foothill Independent Bancorp and Subsidiaries:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets at December 31, 1999 and 1998 . . . . . . . . 37
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . .38
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997 . . . . . . . . . . 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . .40
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 42
35
<PAGE> 36
INDEPENDENT AUDITORS' 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, 1999 and 1998, and the
related consolidated statements of income and changes in stockholders' equity
and statements of cash flows for the three years ended December 31, 1999. 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, 1999 and 1998, and the results of
its operations and cash flows for the three years ended December 31, 1999, in
conformity with generally accepted accounting principles.
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
February 18, 2000
36
<PAGE> 37
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash and due from banks (no minimum Federal Reserve
balance was required at December 31, 1999) $ 23,262 $ 24,482
Federal funds sold 3,600 13,000
--------- ---------
Total Cash and Cash Equivalents 26,862 37,482
--------- ---------
Interest-bearing deposits in other financial institutions 7,919 15,043
Investment securities held-to-maturity (Notes #1E and #2) 7,309 12,827
Investment securities available-for-sale (Notes #1E and #2) 54,239 91,827
--------- ---------
Total Investments 69,467 119,697
--------- ---------
Federal Home Loan Bank stock, at cost 1,547 1,389
--------- ---------
Loans, net of unearned income (Notes #1F and #3) 343,294 290,879
Direct lease financing (Notes #1H and #4) 2,341 3,704
Less allowance for possible credit
losses (Notes #1G and #5) (6,102) (5,576)
--------- ---------
Total Loans 339,533 289,007
--------- ---------
Bank premises and equipment (Notes #1I and #6) 6,779 6,970
Other real estate owned (Notes #1J and #7) 1,714 2,876
Cash surrender value of life insurance 4,997 4,578
Deferred tax asset (Notes #1L and #16) 2,412 2,386
Federal Reserve Bank stock, at cost 229 202
Accrued interest and other assets 5,136 4,490
--------- ---------
Total Assets $ 458,676 $ 469,077
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits 133,115 139,939
Savings and NOW deposits 101,839 99,198
Money market deposits 72,400 79,744
Time deposits in denominations of $100,000 or more 40,408 58,066
Other time deposits 49,502 39,717
--------- ---------
Total Deposits 397,264 416,664
Accrued employee benefits (Note #10, #11 and #12) 2,002 1,836
Accrued interest and other liabilities 2,152 2,124
Other debt (Note #9) 8,819 74
--------- ---------
Total Liabilities 410,237 420,698
--------- ---------
Commitments and Contingencies (Note #18)
Stockholders' Equity
Common Stock - authorized, 12,500,000 shares without par
value; issued and outstanding, 5,772,614 shares in 1999
and 5,985,242 shares in 1998 36,415 36,057
Additional paid-in capital 963 963
Retained earnings 11,898 11,516
Accumulated other comprehensive income (Notes #1E and #2) (837) (157)
--------- ---------
Total Stockholders' Equity 48,439 48,379
--------- ---------
Total Liabilities and Stockholders' Equity $ 458,676 $ 469,077
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1F) $ 29,209 $ 29,501 $ 30,231
Interest on Investment Securities
Taxable 4,454 3,912 2,645
Exempt from federal taxes 347 363 382
Interest on deposits 849 662 241
Interest on federal funds sold 520 1,560 1,274
Lease financing income (Note #1H)
Taxable 2
Exempt from federal taxes 172 239 253
-------- -------- --------
Total Interest Income 35,551 36,237 35,028
-------- -------- --------
INTEREST EXPENSE
Interest on savings and NOW deposits 1,542 1,427 1,323
Interest on money market deposits 2,783 2,805 2,301
Interest on time deposits in denominations
of $100,000 or more 1,530 2,521 2,960
Interest on other time deposits 2,452 3,064 3,139
Interest on borrowings 26 10 15
-------- -------- --------
Total Interest Expense 8,333 9,827 9,738
-------- -------- --------
NET INTEREST INCOME 27,218 26,410 25,290
PROVISION FOR POSSIBLE CREDIT LOSSES (Note #1G and #5) (485) (775) (1,681)
-------- -------- --------
Net Interest Income After Provision
for Possible Credit Losses 26,733 25,635 23,609
-------- -------- --------
OTHER INCOME
Services fees 4,346 4,982 5,558
Gain on sale of SBA loans 115 32 157
Other 60 72 325
-------- -------- --------
4,521 5,086 6,040
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 9,984 10,579 10,348
Net occupancy expense of premises 2,131 2,158 2,120
Furniture and equipment expenses 1,647 1,715 1,752
Other expenses (Note #15) 7,580 8,121 8,379
-------- -------- --------
21,342 22,573 22,599
-------- -------- --------
INCOME BEFORE INCOME TAXES 9,912 8,148 7,050
-------- -------- --------
INCOME TAXES (Notes #1L and #16)
Currently payable 3,688 3,581 2,597
Deferred (26) (497) (65)
-------- -------- --------
3,662 3,084 2,532
-------- -------- --------
NET INCOME $ 6,250 $ 5,064 $ 4,518
======== ======== ========
EARNINGS PER SHARE (Note #17)
Basic $ 1.06 $ 0.85 $ 0.78
======== ======== ========
Diluted $ 1.00 $ 0.80 $ 0.74
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 39
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<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, 1997 4,520,590 $ 15,406 $ 592 $20,607 $ (383) $36,222
10% stock dividend (Note #14) 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
Net unrealized security holding gains
on available-for-sale securities
(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 #14) 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
Net unrealized security holding gains
on available-for-sale securities
(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
Cash Dividend (2,408) (2,408)
Exercise of stock options 17,579 124 124
Common stock issued under employee
benefit and dividend reinvestment
and optional investment plans 17,035 234 234
Common stock repurchased,
cancelled and retired (247,242) (3,460) (3,460)
COMPREHENSIVE INCOME:
Net income $ 6,250 6,250 6,250
Net unrealized depreciation
on available-for-sale securities
(Net of taxes of $305) (680) (680) (680)
-------
TOTAL COMPREHENSIVE INCOME $ 5,570
----------- -------- -------- ======= ------- ------- -------
BALANCE, DECEMBER 31, 1999 5,772,614 $ 36,415 $ 963 $11,898 $ (837) $48,439
=========== ======== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 40
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- --------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 35,326 $ 35,733 $ 34,886
Service fees and other income received 4,105 4,550 5,478
Financing revenue received under leases 172 239 255
Interest paid (8,463) (9,929) (9,927)
Cash paid to suppliers and employees (19,909) (22,227) (19,063)
Income taxes paid (3,881) (3,190) (2,390)
----------- --------- --------
Net Cash Provided By Operating Activities 7,350 5,176 9,239
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of held-to-maturity securities 11,563 7,854 16,272
Purchase of held-to-maturity securities (6,041) (5,498) (26,073)
Proceeds from maturity of available-for-sale securities 2,110,841 161,815 78,806
Purchase of available-for-sale securities (2,074,411) (224,134) (69,981)
Proceeds from maturity of deposits in other financial institutions 40,580 20,482 8,920
Purchase of deposits in other financial institutions (33,456) (27,216) (13,272)
Net (increase)/decrease in credit card and revolving credit receivables 356 241 (655)
Recoveries and deferred recoveries on loans previously written off 102 865 407
Net (increase)/decrease in loans (53,181) (222) (2,853)
Net (increase)/decrease in leases 1,363 1,045 (1,862)
Capital expenditures (1,130) (681) (1,719)
Proceeds from sale of other real estate owned 1,139 732 3,250
Proceeds from sale of property, plant and equipment 30 73 39
----------- --------- --------
Net Cash Used In Investing Activities (2,245) (64,644) (8,721)
----------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in demand deposits, NOW accounts,
savings accounts and money market deposits (11,548) 39,493 27,717
Net increase/(decrease) in certificates of deposit
with maturities of three months or less (7,391) 318 7,861
Net increase/(decrease) in certificates of deposits
with maturities of more than three months (482) (13,295) (16,490)
Net increase/(decrease) in short term borrowing 8,800
Proceeds from exercise of stock options 124 1,018 575
Proceeds from stock issuance 234 256 646
Principal payments on long-term debt (55) (49) (45)
Dividends paid (1,947) (9) (5)
Stock repurchased and retired (3,460) (132)
----------- --------- --------
Net Cash Provided (Used) By Financing Activities (15,725) 27,600 20,259
----------- --------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (10,620) (31,868) 20,777
CASH AND CASH EQUIVALENTS, Beginning of Year 37,482 69,350 48,573
----------- --------- --------
CASH AND CASH EQUIVALENTS, End of Year $ 26,862 $ 37,482 $ 69,350
=========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE> 41
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
RECONCILIATION OF NET INCOME TO NET CASH (dollars in thousands)
<S> <C> <C> <C>
PROVIDED BY OPERATING ACTIVITIES
Net Income $ 6,250 $ 5,064 $ 4,518
------- ------- -------
Adjustments to Reconcile Net Income to Net
Cash Provided By Operating Activities
Depreciation and amortization 1,288 1,289 1,228
Provision for possible credit losses 485 775 1,681
Provision for possible OREO losses (23) 350 405
Provision for deferred taxes (26) (16) 65
Loss on sale of equipment 3 53 52
Increase/(decrease) in taxes payable 402 (90) 77
(Increase)/decrease in other assets (59) 11 1,640
(Increase)/decrease in interest receivable (37) (237) 27
Increase/(decrease) in discounts and premiums (16) (28) 86
Increase/(decrease) in interest payable (130) (102) (189)
Increase in prepaid expenses (419) (656) (149)
Increase/(decrease) in accrued expenses and other liabilities 51 (616) 411
Gain on sale of other real estate owned (168) (52)
Increase in cash surrender value of life insurance (419) (537) (445)
Gain on sale of investments and other assets (32)
------- ------- -------
Total Adjustments 1,100 112 4,721
------- ------- -------
Net Cash Provided By Operating Activities $ 7,350 $ 5,176 $ 9,239
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 42
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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. Nature of Operations
The Bank has been organized as a single operating segment and operates
eleven branches in various locations in Southern California. The Banks
primary source of revenue is from providing loans to customers, who are
predominately small and middle market businesses and individuals.
C. 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.
D. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold. Generally, federal funds
are sold for one day periods.
Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of
their deposits as reserves in cash or on deposit with the Federal
Reserve Bank. The Bank complied with the reserve requirements as of
December 31, 1999.
42
<PAGE> 43
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
E. 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 excluded
from net income and reported as an amount net of taxes as a separate
component of other comprehensive income included in shareholders'
equity.
F. Loans and Interest on Loans
Loans are stated at unpaid principal balances, 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.
G. Provision and Allowance 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.
H. 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.
43
<PAGE> 44
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
I. Bank Premises, Equipment and Leasehold Improvements
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from
three to twenty years for furniture and fixtures and twenty to thirty
for buildings. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the
improvements or the remaining lease term, whichever is shorter.
Expenditures for betterments or major repairs are capitalized and those
for ordinary repairs and maintenance are charged to operations as
incurred.
J. 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.
K. 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.
L. 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.
M. Comprehensive Income
Beginning in 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires the
disclosure of comprehensive income and its components. Changes in
unrealized gain (loss) on available-for-sale securities net of income
taxes is the only component of accumulated other comprehensive income
for the Bank.
44
<PAGE> 45
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
N. 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.
O. Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS No. 123), "Accounting
for Stock-Based Compensation," encourages, but does not require,
companies to record compensation costs for stock-based employee
compensation plans at fair value. The Bank has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations.
Accordingly, compensation costs for stock options is measured as the
excess, if any, of the quoted market price of the banks stock at the
date of the grant over the amount an employee must pay to acquire the
stock. The pro forma effects of adoption are disclosed in Note #10.
P. 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 was originally effective for 2000. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivatives Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement No.
133". This Statement establishes the effective date of SFAS 133 for
2001 and is not expected to have a material impact on the Bank's
financial statements.
Q. 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, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES
Based upon the guidelines of Statement of Financial Accounting Standard (SFAS)
No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and
management's analysis of securities holdings, the Company's securities were
classified as held-to-maturity and available-for-sale, respectively, as follows:
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, 1999
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $2,997 $ 1 $ 11 $2,987
Securities of Other U.S.
Government Agencies 1,000 37 963
Municipal Agencies 1,062 17 1,045
Other Securities 2,250 2,250
------ ------ ------ ------
Total Held-to-Maturity Securities $7,309 $ 1 $ 65 $7,245
====== ====== ====== ======
</TABLE>
<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 $ 0 $12,908
======= ====== ====== =======
</TABLE>
46
<PAGE> 47
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES, Continued
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, 1999
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (a)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities of Other U.S.
Government Agencies $44,275 $ 674 $43,601
Certificates of Participation (b) 3,961 $ 83 4,044
Municipal Agencies 1,068 47 1,021
Other Securities 6,019 446 5,573
------- ---- ------- -------
Total Available-for-Sale
Carried at Fair Value $55,323 $ 83 $ 1,167 $54,239
======= ==== ======= =======
</TABLE>
<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 21,415 287 21,128
------- ---- ------ -------
Total Available-for-Sale
Carried at Fair Value $91,916 $208 $ 297 $91,827
======= ==== ======= =======
</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 $3,961,000 and $3,980,000 and market
values of $4,044,000 and $3,988,000 at December 31, 1999 and
1998, respectively.
47
<PAGE> 48
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 1999,
were $11,563,000. Proceeds from maturities of investment securities
available-for-sale during 1999, were $2,110,841,000. There were no gains or
losses recognized.
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.
Securities with a book value of $11,898,000 and $14,402,000 and market value of
$11,893,000 and $14,471,000 at December 31, 1999 and 1998, 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, 1999, by contractual maturity were as follows (in thousands):
<TABLE>
<CAPTION>
Held-to-Maturity Securities
----------------------------------
Maturities Schedule of Securities Amortized Average
December 31, 1999 Cost Fair Value Yield (a)
- --------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Due in one year or less $4,390 $4,391 5.54%
Due after one year through five years 2,919 2,854 6.01%
------ ------ ----
Carried at Amortized Cost $7,309 $7,245 5.78%
====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale Securities
----------------------------------
Amortized Average
Cost Fair Value Yield (a)
--------- ---------- ---------
<S> <C> <C> <C>
Due in one year or less $14,169 $13,675 5.30%
Due after one year through five years 37,753 37,225 6.31%
Due after five through ten years 3,401 3,339 7.98%
------- ------- ----
Carried at Fair Value $55,323 $54,239 6.53%
======= ======= ====
</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, 1999, 1998 AND 1997
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 1999 and 1998, was as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Commercial, financial and agricultural $ 43,676 $ 44,525
Real Estate - construction 11,144 15,602
Real Estate - mortgage
Commercial 249,604 194,381
Residential 31,546 28,382
Loans to individuals for household, family
and other personal expenditures 5,916 7,010
All other loans (including overdrafts) 1,707 1,518
--------- ---------
343,593 291,418
Deferred income on loans (299) (539)
--------- ---------
Loans, Net of Deferred Income $ 343,294 $ 290,879
========= =========
</TABLE>
Nonaccruing loans totaled approximately $6,068,000 and $6,347,000 at December
31, 1999 and 1998, 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 $819,000, $967,000 and $981,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
At December 31, 1999 and 1998, the Bank had approximately $405,000 and $36,000
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, 1999 and 1998, consists of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Lease payments receivable $ 2,589 $ 3,953
Unearned income (248) (249)
------- -------
$ 2,341 $ 3,704
======= =======
</TABLE>
At December 31, 1999, the Bank had no outstanding lease commitments.
49
<PAGE> 50
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #4 - DIRECT LEASE FINANCING, Continued
At December 31, 1999, future minimum lease payments receivable under direct
financing leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year
- ---------------------
<S> <C>
2000 $1,024
2001 767
2002 322
2003 270
2004 140
Thereafter 66
------
2,589
Less unearned income (248)
------
$2,341
======
</TABLE>
NOTE #5 - ALLOWANCE FOR LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance, Beginning of Year $ 5,576 $ 5,165 $ 4,744
Recoveries on loans previously charged off 237 505 407
Provision charged to operating expense 485 775 1,681
Loans charged off (196) (869) (1,667)
------- ------- -------
Balance, End of Year $ 6,102 $ 5,576 $ 5,165
======= ======= =======
</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 $1,638,000 and $1,363,000 for the years ended December
31, 1999 and 1998, respectively, and is included in the above balances. The
average balance of these loans amounted to approximately $8,111,000 and
$8,444,000 for the years ended December 31, 1999 and 1998, respectively. Cash
receipts during 1999 applied to reduce principal balance and recognized as
interest income was approximately $452,000 and $528,000, respectively. Cash
receipts during 1998 applied to reduce principal balance and recognized as
interest income was approximately $5,780,000 and $547,000, respectively.
50
<PAGE> 51
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #6 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Buildings $ 2,424 $ 2,424
Furniture and equipment 8,677 8,042
Leasehold improvements 2,944 2,490
-------- --------
14,045 12,956
Less: Accumulated depreciation and amortization (8,478) (7,208)
-------- --------
5,567 5,748
Land 1,212 1,222
-------- --------
Total $ 6,779 $ 6,970
======== ========
</TABLE>
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>
2000 $ 1,388
2001 1,295
2002 1,171
2003 1,165
2004 1,148
Succeeding years 4,520
--------
$ 10,687
========
</TABLE>
Total rental expense for the three years ended December 31, 1999, 1998, and
1997, was $1,246,000 $1,231,000, $1,203,000, respectively.
51
<PAGE> 52
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #7 - OTHER REAL ESTATE OWNED
As discussed in Note #1I, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An analysis of the transactions for December 31,
1999 and 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance, Beginning of Year $ 2,876 $ 2,906
Additions 3,094
Valuation adjustments and other reductions (1,162) (3,124)
------- -------
Balance, End of Year $ 1,714 $ 2,876
======= =======
</TABLE>
The balances at December 31, 1999 and 1998 are shown net of reserves of $387,000
and $503,000, respectively.
Transactions in the reserve for other real estate owned are summarized for
December 31, 1999 and 1998 as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Balance, Beginning of Year $ 503 $ 389
Provision charged to operating expense 23 350
Charge-offs and other reductions (139) (236)
----- -----
Balance, End of Year $ 387 $ 503
===== =====
</TABLE>
NOTE #8 - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows
(in thousands):
<TABLE>
<S> <C>
2000 $ 82,127
2001 7,576
2002 157
2003 11
2004 39
--------
Total $ 89,910
========
</TABLE>
52
<PAGE> 53
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #9 - OTHER DEBT
Other debt includes a short term borrowing of $8,800,000 as a fixed rate and
advance from the Federal Home Loan Bank of San Francisco with a due date of
January 31, 2000 interest payable at 6.12%. The other debt also consists of one
obligation in the amount of $19,000. 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.
NOTE #10 - STOCK OPTION PLAN
The Bank has a fixed option plan, which is described below. The Bank applies APB
Opinion No. 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 1999, 1998
and 1997, respectively: risk-free rates of 4.67%, 5.70% and 6.17%; dividend
yields of 2%, 0% and 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,
1999, 1998 and 1997 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ----------------------- -----------------------
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 758,861 $ 8.49 780,410 $ 7.92 582,091 $ 6.13
Granted 64,700 13.12 92,800 15.42 314,469 11.48
Exercised (17,579) (7.05) (86,687) (8.14) (102,671) 6.22
Forfeited (16,887) (13.95) (27,662) (11.17) (13,479) 7.06
--------- --------- --------
Outstanding, End of Year 789,095 8.84 758,861 8.49 780,410 9.11
========= ========= ========
Options exercisable at year end 717,887 8.27 652,793 7.61 508,607 5.26
Weighted average fair value
of options granted during
the year $ 4.36 $ 5.86 $ 3.51
</TABLE>
53
<PAGE> 54
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #10 - STOCK OPTION PLAN - Continued
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<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 $5.93 242,544 4.59 $ 5.58 242,544 $ 5.58
$6.72 to $6.82 135,194 6.54 6.73 134,868 6.73
$8.96 to $9.10 203,157 7.08 9.09 203,157 9.09
$10.57 to $11.88 29,875 8.33 10.94 23,625 10.93
$12.00 to $13.88 88,400 8.46 12.49 72,010 12.50
$14.00 to $15.88 74,425 8.80 15.60 30,183 15.70
$17.50 15,500 8.60 17.50 11,500 18.00
------- -------
$5.21 to $17.50 789,095 6.62 8.84 717,887 8.27
======= =======
</TABLE>
Had the bank determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Bank's net income would have
been reduced to the following pro forma amounts (in thousands, except per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 6,250 $ 5,064 $ 4,518
Pro forma 6,005 4,710 4,324
Per share data:
Net income - Basic
As reported $ 1.06 $ 0.85 $ 0.78
Pro forma $ 1.02 $ 0.79 $ 0.75
Net income - diluted
As reported $ 1.00 $ 0.80 $ 0.74
Pro forma $ 0.96 $ 0.74 $ 0.71
</TABLE>
NOTE #11 - DEFINED CONTRIBUTION PLAN (401K)
The Company sponsors a defined contribution pension plan that covers all
employees with 1,000 or more hours worked in a year. Contributions to the plan
are based on the employee's gross salary less the IRS Section 125 flex plan. For
the years ending December 31, 1999, 1998, and 1997, the amount of pension
expense was $259,000, $270,000, and $273,000, respectively.
54
<PAGE> 55
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #12 - DEFERRED COMPENSATION
The Bank maintained a nonqualified, unfunded deferred compensation plan for
certain key management personnel whereby they may defer compensation which will
then provide for certain payments upon retirement, death, or disability. The
plan provides for payments for ten years commencing upon retirement. The plan
provides for reduced benefits upon early retirement, disability, or termination
of employment. The deferred compensation expense for 1999 was $324,000 ($190,836
net of income taxes), 1998 was $328,970 ($194,085 net of income taxes), and 1997
was $306,504 ($180,831 net of income taxes).
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the 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, 1999, the combined amount of funds available
from these two sources amounted to approximately $32,822,000 or 68% consolidated
stockholders' equity.
NOTE #14 - STOCK DIVIDENDS
On March 25, 1997, the Board of Directors declared a 10% 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% 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
1998 and 1997 have been restated to reflect the stock dividends.
55
<PAGE> 56
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #15 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31,
1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Data processing $ 970 $ 934 $1,051
Marketing expenses 1,109 707 661
Office supplies, postage and telephone 1,136 1,162 1,316
Bank insurance 562 582 453
Supervisory assessments 94 108 139
Legal fees 950 683 802
Operating losses 71 142 86
OREO expenses 140 586 561
Other 2,548 3,217 3,310
------ ------ ------
Total $7,580 $8,121 $8,379
====== ====== ======
</TABLE>
NOTE #16 - INCOME TAXES
The provisions for income taxes consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Tax provision applicable to income
before income taxes $ 3,662 $ 3,084 $ 2,532
======= ======= =======
Federal Income Tax
Current 2,621 2,520 1,766
Deferred (49) (366) (9)
State Franchise Tax
Current 1,067 1,061 831
Deferred 23 (131) (56)
------- ------- -------
Total $ 3,662 $ 3,084 $ 2,532
======= ======= =======
</TABLE>
56
<PAGE> 57
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #16 - 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>
1999 1998
------- -------
<S> <C> <C>
Deferred Tax Assets
Allowance for loan losses due to tax limitations $ 1,709 $ 1,764
Deferred compensation plan 863 867
Allowance for other real estate owned 38 217
Other assets and liabilities 184 356
Net unrealized loss on available-for-sale securities 246
------- -------
Total Deferred Tax Assets 3,040 3,204
Deferred Tax Liabilities
Premises and equipment due to depreciation difference (628) (732)
Net unrealized appreciation on available-for-sale securities (86)
------- -------
Net Deferred Tax Assets $ 2,412 $ 2,386
======= =======
</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>
1999 1998 1997
----------------- ----------------- -----------------
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 $ (30) $ (6) $ 74 $ 26 $ 65 $ 25
Direct lease financing (254) (78)
Depreciation computed differently
on tax returns than for financial statements (78) (23) (34) (12) (6) (3)
OREO transactions computed differently
on tax return than for financial statements 134 45 (48) (17) 210 83
Deferred compensation plan 3 1 (43) (15) (85) (19)
Provision for loan loss deduction on tax
return under amount charged for
financial statements purposes 38 20 (223) (80) (70) (80)
Other assets and liabilities 138 64 (92) (33) (123) (62)
----- ---- ----- ----- ---- ----
Total $ (49) $ 23 $(366) $(131) $ (9) $(56)
===== ==== ===== ===== ==== ====
</TABLE>
57
<PAGE> 58
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #16 - INCOME TAXES, Continued
As a result of the following items, the total tax expenses for 1999, 1998 and
1997, 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>
1999 1998 1997
--------------------- --------------------- ----------------------
Percent of Percent of Percent of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $ 3,370 34.0 $ 2,770 34.0 $ 2,397 34.0
Changes due to State income tax,
net of Federal tax benefit 704 7.1 579 7.1 501 7.1
Exempt interest (438) (4.5) (296) (3.6) (319) (4.5)
Other 26 0.3 31 0.3 (47) (0.7)
------- ------ ------- ------ ------- ------
Total $ 3,662 36.9 $ 3,084 37.8 $ 2,532 35.9
======= ====== ======= ====== ======= ======
</TABLE>
NOTE #17 - 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>
1999 1998 1997
------------------ ----------------- -----------------
Income Shares Income Shares Income Shares
------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net income as reported $ 6,250 $ 5,064 $4,518
Shares outstanding at year end 5,773 5,985 5,878
Impact of weighting shares
purchased during the year 113 (38) (83)
------- ------ ------- ------ ------ ------
Used in Basic EPS 6,250 5,886 5,064 5,947 4,518 5,795
Dilutive effect of outstanding
stock options 367 423 265
------- ------ ------- ------ ------ ------
Used in Dilutive EPS $ 6,250 6,253 $ 5,064 6,370 $4,518 6,060
======= ====== ======= ====== ====== ======
</TABLE>
58
<PAGE> 59
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #18 - COMMITMENTS AND CONTINGENCIES
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, 1999 and 1998 , the Bank had commitments to extend credit of
$48,503,000 and $48,807,000, respectively, and obligations under standby letters
of credit of $644,000 and $2,142,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing commercial
properties, residential properties and properties under construction.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
NOTE #19 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt 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. The most recent notification from the federal
regulators categorized the bank as well capitalized under the regulatory
framework for prompt corrective action.
59
<PAGE> 60
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #19 - REGULATORY MATTERS - Continued
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, 1999, 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, 1999:
Total capital to risk-weighted assets $53,163 14.2% $30,033 8.0% $37,542 10.0%
Tier 1 capital to risk-weighted assets 48,453 12.9% 15,017 4.0% 22,525 6.0%
Tier 1 capital to average assets 48,453 10.4% 18,689 4.0% 23,361 5.0%
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%
</TABLE>
60
<PAGE> 61
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1999, (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. Fair value estimates are made at a specific point
and time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire holding of a
particular financial instrument. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based
on judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgement, and therefore can not be determined with precision.
Changes and assumptions could significantly affect the estimates.
<TABLE>
<CAPTION>
December 31, 1999
------------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Financial Assets
Cash and cash equivalents $ 26,862 $ 26,862
Investment securities and deposits 71,243 71,244
Loans 343,593 346,649
Direct lease financing 2,341 2,346
Cash surrender value 4,997 4,997
Financial Liabilities
Deposits 397,264 397,676
Other debt 8,819 8,822
Unrecognized Financial Instruments
Commitments to extend credit 48,503 48,503
Standby letters of credit 644 644
</TABLE>
The following methods and assumptions were used to estimate the fair value of
financial instruments:
- - 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.
- - 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, 1999, 1998 AND 1997
NOTE #20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
- - 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,
1998. 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.
- - 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, 1999, 1998 AND 1997
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash $ 704 $ 261 $ 143
Investment in subsidiaries 47,785 47,475 41,173
Time certificates of deposit 0 97 394
Accounts receivable 317 413 143
Loans 0 0 13
Excess of cost over net assets of company acquired (net) 85 128 170
Prepaid and other 11 5 5
------- ------- -------
Total Assets $48,902 $48,379 $42,041
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 463
-------
STOCKHOLDERS' EQUITY
Common stock $36,415 36,057 22,618
Additional paid-in capital 963 963 659
Retained earnings 11,061 11,359 18,764
------- ------- -------
Total Stockholders' Equity 48,439 48,379 42,041
------- ------- -------
Total Liabilities and Stockholders Equity 48,902 48,379 42,041
======= ======= =======
STATEMENTS OF INCOME
Income
Equity in undistributed income of subsidiaries $ 989 $ 5,261 $ 4,705
Dividends received from Foothill Independent Bank 5,750
Interest and other income 18 73
------- ------- -------
6,739 5,279 4,778
------- ------- -------
EXPENSE
Amortization and other expenses 806 323 334
------- ------- -------
Total Operating Income 5,933 4,956 4,444
Tax benefit of parent's operating expenses 317 108 74
------- ------- -------
Net Income $ 6,250 $ 5,064 $ 4,518
======= ======= =======
</TABLE>
63
<PAGE> 64
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received for tax benefit from Foothill Independent Bank $ 317 $ 108 $ 74
Dividends received from Foothill Independent Bank 5,750
Interest and other income received 96 18 73
Cash paid for operating expenses (770) (551) (9)
------- ------- -------
Net Cash Provided/(Used) By Operating Activities 5,393 (425) 138
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 13 2
(Purchase)/redemption of deposits in other financial institutions 97 297 (394)
Capital contributed to subsidiary (900) (1,100)
------- ------- -------
Net Cash Provided/(Used) By Investing Activities 97 (590) (1,492)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,945) (9) (5)
Capital stock purchased 234 256 646
Proceeds from exercise of stock options 124 1,018 575
Capital stock repurchased (3,460) (132)
------- ------- -------
Net Cash Provided (Used) By Financing Activities (5,047) 1,133 1,216
------- ------- -------
NET INCREASE/(DECREASE) IN CASH 443 118 (138)
CASH, Beginning of Year 261 143 281
------- ------- -------
CASH, End of Year $ 704 $ 261 $ 143
======= ======= =======
RECONCILIATION OF NET INCREASE TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET INCOME $ 6,250 $ 5,064 $ 4,518
------- ------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Amortization 42 42 42
Undistributed earnings of subsidiaries (989) (5,261) (4,705)
(Increase)/decrease in accounts receivable 96 (270) 66
(Increase) Decrease in prepaids expenses (6) 217
------- ------- -------
Total Adjustments (857) (5,489) (4,380)
------- ------- -------
Net Cash Provided/(Used) by Operating Activities $ 5,393 $ (425) $ 138
======= ======= =======
</TABLE>
64
<PAGE> 65
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #22 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the Company and its
subsidiaries for the two years ended December 31, 1999 and 1998, is summarized
below:
<TABLE>
<CAPTION>
1999
------------------------------------------------
First Second Third Fourth
------ ------ ------ ------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $8,677 $8,993 $8,837 $9,044
Interest expense 2,126 2,060 2,098 2,049
Net interest income 6,551 6,933 6,739 6,995
Provision for loan losses 156 124 205
Net interest income after provision
for loan losses 6,395 6,809 6,534 6,995
Other income 1,189 1,249 1,125 958
Other expense 5,209 5,606 5,092 5,435
Income before taxes 2,375 2,452 2,567 2,518
Applicable income taxes 867 895 937 963
------ ------ ------ ------
Net Income $1,508 $1,557 $1,630 $1,555
====== ====== ====== ======
Earnings Per Share - Basic $ 0.25 $ 0.26 $ 0.28 $ 0.27
====== ====== ====== ======
Earnings Per Share - Diluted $ 0.24 $ 0.25 $ 0.26 $ 0.25
====== ====== ====== ======
</TABLE>
<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>
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, for the Company's 2000 annual meeting of shareholders, to be filed
with the Commission on or before May 1, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before May 1, 2000 for the Company's 2000 annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before May 1, 2000 for the Company's 2000 annual shareholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before May 1, 2000 for the Company's 2000 annual shareholders' meeting.
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
35 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 69 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 28th day of
March 2000.
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 28, 2000.
/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 L. MILTENBERGER Executive Vice President and Director
- -------------------------
Donna L. Miltenberger
/s/ WILLIAM V. LANDECENA Chairman of the Board of Directors
- -------------------------
William V. Landecena
/s/ RICHARD GALICH Director
- -------------------------
Richard Galich
/s/ O. L. MESTAD Director
- -------------------------
O. L. Mestad
/s/GEORGE SELLERS Director
- -------------------------
George Sellers
/s/ MAX E. WILLIAMS Director
- -------------------------
Max E. Williams
S-1
<PAGE> 69
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.4 Amendment of Bylaws adopted February 15, 2000
relating to nominating and shareholder proposal
procedures
21 Subsidiaries
23.1 Consent of Independent Certified Public Accountants
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 3.4
Section 11. Nominations and Elections of Directors.
(a) Nominations for the election of directors shall be made
by a nominating committee of the Board of Directors if then constituted pursuant
to these Bylaws, or if no nominating committee has been constituted, by the
Board of Directors. Any shareholder who desires that such committee or the Board
of Directors consider any person for nomination by the Board of Directors as a
candidate for election to the Board of Directors may send a written notice to
the Secretary of the corporation, at the Corporation's principal executive
offices, that identifies such proposed nominee or nominees and contains the
information set forth below in clauses (i) through (vi) this Subsection 11(a).
In addition, any shareholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at an
annual meeting of shareholders, but only if written notice of such shareholder's
intent to make such nomination or nominations has been received by the Secretary
of the corporation not less than sixty (60) nor more than ninety (90) days prior
to the first anniversary of the preceding year's annual meeting of shareholders.
In the event that the date of the annual meeting of shareholders is advanced or
delayed by more than thirty (30) days from such anniversary, notice by the
shareholder to be timely must be received by the Secretary of the corporation
not earlier than the seventy-fifth (75th) day prior to such annual meeting and
not later than the close of business on the later of the forty-fifth (45th) day
prior to such annual meeting or the tenth (10th) day following the day on which
notice of the changed date of the annual meeting was mailed or public disclosure
thereof was made by the corporation, whichever first occurs. Each such notice by
a shareholder shall set forth: (i) the name and address of the shareholder who
intends to make the nomination and of the person or persons to be nominated;
(ii) a representation that the shareholder is a holder of record of stock of the
corporation entitled to vote and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice; (iii) a
description of all arrangements or understandings between the shareholder or any
person that directly or indirectly through one or more intermediaries controls,
or is controlled by, or is under common control with, such shareholder (an
"Affiliate" of such shareholder) and each nominee and any other person or
persons (naming such person or persons) relating to the nomination or
nominations; (iv) the class, series and number of shares of the corporation that
are owned by such shareholder and the person to be nominated as of the date of
such shareholder's notice and by any other shareholders known by such
shareholder to be supporting such nominees as of the date of such shareholder's
notice; (v) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission for a
meeting of shareholders at which directors are to be elected; and (vi) the
written consent of each nominee to serve as a director of the corporation if so
elected. Any shareholder who desires to nominate one or more persons for
election as directors at an annual meeting of shareholders also shall comply
with all applicable requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations thereunder, with
respect to the matters set forth in this Section 11.
(b) In addition, in the event the corporation calls a
special meeting of shareholders for the purpose of electing one or more
directors, any shareholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at a
special meeting only if written notice of such shareholder's intent to make such
nomination or nominations, setting forth the information and complying with the
form described in the immediately preceding paragraph, has been received by the
Secretary of the corporation not earlier than the ninetieth day prior to such
special meeting and not later than the close of business on the later of (i) the
sixtieth (60th) day prior to such special meeting or (ii) the tenth (10th) day
following the day on which notice of the date of the special meeting was mailed
or public disclosure thereof was made by the corporation, whichever comes first.
<PAGE> 2
The shareholder also shall comply with all applicable requirements of the
Exchange Act, and the rules and regulations thereunder, with respect to the
matters set forth in this Section 2.11.
(c) No person who is proposed to be nominated by a
shareholder at an annual shareholders meeting or a special meeting of
shareholders called by the corporation for purposes of electing directors, shall
be eligible for election as a director of the corporation at such meeting unless
nominated in accordance with the applicable procedures set forth in this Section
2.11. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this Section 2.11, and if he or she should so
determine, the defective nomination shall be disregarded.
Section 12. Proposals of Shareholders.
(a) At any meeting of the shareholders, only such business
shall be conducted as shall have been properly brought before such meeting. To
be brought properly before an annual meeting of shareholders, business must be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, otherwise properly brought before the
meeting by or at the direction of the Board of Directors or the chairman of the
meeting, or otherwise properly brought before the meeting by a shareholder. For
business to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a shareholder's notice must be received no less
than sixty (60) days nor more than ninety (90) days prior to the first
anniversary of the preceding year's annual meeting of shareholders; provided,
however, that in the event that the date of the annual meeting is advanced or
delayed by more than thirty (30) days from such anniversary, notice by the
shareholder, to be timely, must be received not earlier than the ninetieth day
prior to the changed date of the annual meeting of shareholders and not later
than the close of business on the later of the forty-fifth (45th) day prior to
such changed date of the annual meeting or the tenth day following the date on
which notice of the date of the annual meeting was mailed or public disclosure
thereof was made, whichever first occurs. Each such notice shall set forth as to
each matter the shareholder proposes to bring before the annual meeting of
shareholders: (i) a brief description of the business desired to be brought
before the annual meeting of shareholders and the reasons for conducting such
business at such meeting, (ii) the name and address, as they appear on the
corporation's books, of the shareholder proposing such business, (iii) the
class, series, and number of shares of the corporation that are beneficially
owned by the shareholder, and (iv) any material interest of the shareholder or
any Affiliate of the shareholder in such business. The shareholder also shall
comply with all applicable requirements of the Exchange Act, and the rules and
regulations thereunder, with respect to the matters set forth in this Section
12.
(b) To be properly brought before a special meeting,
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors or (ii)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or the chairman of the meeting. No other business may be
brought before a special meeting by shareholders.
(c) No business shall be conducted at any meeting of the
shareholders except in accordance with the procedures set forth in this Section
12. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 12, and if he or she
should so determine, any such business not properly brought before the meeting
shall not be transacted. Nothing herein shall be deemed to affect any rights of
shareholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or any successor
provision.
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 February 18, 2000 on the
consolidated financial statements of Foothill Independent Bancorp as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999 included at Page 35 of its Annual Report on Form 10-K for the year
ended December 31, 1999.
/s/ VAVRINEK, TRINE, DAY & CO.,LLP
-----------------------------------------
VAVRINEK, TRINE, DAY & CO., LLP
Certified Public Accountants
March 28, 2000
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, 1999 AND THE STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999, 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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 23,262
<INT-BEARING-DEPOSITS> 7,919
<FED-FUNDS-SOLD> 3,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,239
<INVESTMENTS-CARRYING> 7,309
<INVESTMENTS-MARKET> 7,245
<LOANS> 345,635
<ALLOWANCE> (6,102)
<TOTAL-ASSETS> 458,676
<DEPOSITS> 397,264
<SHORT-TERM> 8,800
<LIABILITIES-OTHER> 4,173
<LONG-TERM> 0
0
0
<COMMON> 36,415
<OTHER-SE> 12,024
<TOTAL-LIABILITIES-AND-EQUITY> 458,676
<INTEREST-LOAN> 29,381
<INTEREST-INVEST> 4,801
<INTEREST-OTHER> 1,369
<INTEREST-TOTAL> 35,551
<INTEREST-DEPOSIT> 849
<INTEREST-EXPENSE> 8,333
<INTEREST-INCOME-NET> 27,218
<LOAN-LOSSES> 485
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,342
<INCOME-PRETAX> 9,912
<INCOME-PRE-EXTRAORDINARY> 9,912
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,250
<EPS-BASIC> 1.06<F1>
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 6.50
<LOANS-NON> 6,068
<LOANS-PAST> 202
<LOANS-TROUBLED> 1,780
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,576
<CHARGE-OFFS> 196
<RECOVERIES> 485
<ALLOWANCE-CLOSE> 6,102
<ALLOWANCE-DOMESTIC> 6,102
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
