-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ayq4ZG4z8Jv/4A8bqI3j35aL9bcllaB/HGsCNNH+cjo1UvukrT0CgqVI5dX8Pa7M psy86U43J8k5xPZ9MigdwQ== 0000892569-98-000940.txt : 19980401 0000892569-98-000940.hdr.sgml : 19980401 ACCESSION NUMBER: 0000892569-98-000940 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOOTHILL INDEPENDENT BANCORP CENTRAL INDEX KEY: 0000718903 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953815805 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11337 FILM NUMBER: 98582340 BUSINESS ADDRESS: STREET 1: 510 S GRAND AVE CITY: GLENDORA STATE: CA ZIP: 91741 BUSINESS PHONE: 9095999351 MAIL ADDRESS: STREET 1: 510 S. GRAND AVENUE CITY: GLENDORA STATE: CA ZIP: 91741 10-K 1 FORM 10-K - FOR THE FISCAL YEAR ENDED 12-31-1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period from ______ to ______ Commission file number 0-11337 -------------------- FOOTHILL INDEPENDENT BANCORP (Exact name of Registrant as specified in its charter) California 95-3815805 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 510 South Grand Avenue, Glendora, California 91741 (Address of principal executive offices) (Zip Code) (909) 599-9351 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Rights to Purchase Common Stock ------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. As of March 9, 1998, the aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $76,241,135. As of March 9, 1998, there were 5,127,342 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III of the Form 10-K is incorporated by reference form the Registrant's Definitive Proxy Statement for its 1997 Annual Meeting which will be filed with the Commission on or before April 30, 1998. -------------------- 2 PART I ITEM 1. BUSINESS Foothill Independent Bancorp (the "Company") is a one-bank holding company which owns all of the capital stock of Foothill Independent Bank, a California state-chartered bank (the "Bank"), that was organized and commenced business operations in 1973. The business of the Bank is carried on as a wholly-owned subsidiary of the Company. The Company, which was organized in 1982, is a California corporation and is registered under the Bank Holding Company Act of 1956, as amended. The Company, like other bank holding companies in the United States, is subject to regulation, supervision and periodic examination by the Board of Governors of the Federal Reserve System (commonly known as the Federal Reserve Board and referred to herein as the "FRB"). See "Supervision and Regulation -- Regulation of the Company." The Bank The Bank was organized as a national banking association under federal law and commenced operations under the name Foothill National Bank on June 1, 1973. The Bank converted from a national banking association to a California state-chartered bank effective July 1, 1979 and changed its name to Foothill Independent Bank. The Bank's accounts are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank became a member of the Federal Reserve System on June 11, 1997. As a California state-chartered bank that is a member of the Federal Reserve System (a "state member bank"), the Bank is subject to regulation, supervision and periodic examination, at the state level, by the California Department of Financial Institutions (the "DFI"), which is the successor to the Superintendent of Banks and, at the Federal level, by the FRB. Prior to June 1997, when the Bank became a member of the Federal Reserve System, the Bank was regulated at the Federal level by the FDIC. The change in its federal bank regulatory agency from the FDIC to the FRB is not expected to have a material effect on the Bank's operations or its financial condition or operating results. See "Supervision and Regulation -- Regulation of the Bank." The Bank presently operates eleven banking offices, one in each of the communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho Cucamonga, Covina, Walnut, Glendale, Corona and Chino, California, and a lending center in West Covina, California, which are located in the area of Southern California that includes the San Gabriel Valley of Los Angeles County and the western portions of San Bernardino and Riverside Counties commonly known as the "Inland Empire." The Glendale office extends the Bank's market areas into the West San Gabriel Valley, approximately 10 miles northeast of Los Angeles. All of the other offices are located further east, ranging from approximately 25 to 45 miles east of Los Angeles. Services Provided by Foothill Independent Bank The Bank's organization and operations have been designed to meet the banking needs of individuals and small-to-medium sized businesses located in the San Gabriel Valley and the Inland Empire in Southern California, where the Bank conducts its operations. The Bank emphasizes personalized service and convenience of banking and attracts banking customers by offering services that are designed to meet the banking requirements of the customers in its communities. Drive-up or walk-up facilities and 24-hour Automated Teller Machines ("ATM's") are available at ten of its banking offices. The Bank also offers a computerized telephone service which enables customers to obtain information concerning their bank deposit accounts telephonically at any time day or night. The Bank offers a full range of commercial banking services including the acceptance of checking and savings deposits, and the making of various types of commercial loans and real estate loans. In addition, the Bank provides safe deposit, collection, travelers checks, notary public and other customary non-deposit banking services. 2 3 Deposits of Foothill Independent Bank ------------------------------------- Deposits represent the Bank's primary source of funds. The following table sets forth the different categories of deposits maintained at the Bank and the number of deposit accounts, the average balance of each account and the aggregate amount of the deposits in each such category, as of December 31, 1997:
Type of Number of Average Account Aggregate Amounts Account Accounts Balance of Deposits - ------- -------- --------------- ----------------- Demand 15,777 $ 8,028 $126,654,000(a) Money market(b) 9,221 $ 13,099 $120,784,000 Savings 9,934 $ 3,231 $ 32,098,000 TCDs(c) 326 $150,503 $ 49,064,000(d) Other Time Deposits(c) 2,965 $ 20,808 $61,696,000(e)
(a) Includes $4,448,000 of municipal and other government agency deposits. (b) Includes "NOW" checking accounts. (c) As used in this Report, the term "TCDs" means time certificates of deposit in denominations greater than $100,000, the term "other time deposits" means certificates of deposits in denominations of $100,000 or less and the term "time deposits" shall mean TCDs and other time deposits, collectively. (d) Includes $5,419,000 of municipal and other government agency deposits. (e) Includes $891,000 of municipal and other government agency deposits. During the twelve months ended December 31, 1997, average demand deposits increased by approximately $14,909,000 or 12.7%; average money market & NOW checking accounts deposits increased by approximately $6,356,000 or 5.3%; average savings deposits increased by approximately $4,705,000 or 10.3%; and average time deposits decreased by approximately $10,324,000 or 9.3%, which was the result of a decrease of $20,100,000 in TCD's and an increase of approximately $9,776,000 in other time deposits. Although there are some public agency depositors that carry large deposits with the Bank, the Bank does not believe it is dependent on a single customer or a few customers for its deposits. Most of the Bank's deposits are obtained from individuals and small and moderate size businesses. This results in relatively small average deposit balances, but makes the Bank less subject to the adverse effect on liquidity which can result from the loss of a substantial depositor. No individual, corporate or public agency depositor accounted for more than approximately 2% of the Bank's total deposits and the five largest deposit accounts represented, collectively, 3.3% of total deposits. 3 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.
Year Ended December 31, ---------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- Average Percent Average Percent Average Percent Balance of Total Balance of Total Balance of Total -------- -------- ------- -------- -------- -------- (Dollars in Thousands) ASSETS Investment Securities Taxable $ 46,050 10.9% $ 38,410 9.7% $ 34,852 9.5% Non-Taxable 7,114 1.7 7,810 1.9 3,671 1.0 Federal Funds Sold 23,673 5.6 20,033 5.0 33,762 9.2 Due from Banks - Time Deposits 4,215 1.0 7,391 1.8 2,789 0.8 Loans 286,438 67.8 278,560 69.4 250,248 67.9 Direct Lease Financing 4,395 1.0 2,205 0.6 2,154 0.6 Reserve for Loan and Lease Losses (4,246) (1.0) (4,012) (1.0) (3,586) (1.0) -------- ----- -------- ----- -------- ----- Net Loans and Leases 286,587 67.8 276,753 69.0 248,816 67.5 -------- ----- -------- ----- -------- ----- Total Interest Earning Assets 367,639 87.0 350,397 87.4 323,890 88.0 Cash and Non-interest Earning Assets 33,548 7.9 29,308 7.3 24,712 6.7 Net Premises, Furniture and Equipment 7,673 1.8 7,477 1.9 6,924 1.9 Other Assets 13,754 3.3 13,726 3.4 13,026 3.4 -------- ----- ------- ----- -------- ----- Total Assets $422,614 100.0% $400,908 100.0% $368,552 100.0% ======== ===== ======== ===== ======== ===== LIABILITIES AND STOCKHOLDERS EQUITY Savings Deposits (1) $151,319 35.% $140,258 35.0% $127,467 34.6% Time Deposits 111,129 26.3 121,453 30.3 127,263 34.5 Long-term Borrowings 147 -- 190 -- 228 0.1 -------- ----- -------- ----- -------- ----- Total Interest-Bearing Liabilities 262,595 62.1 261,901 65.3 254,958 69.2 Demand Deposits 117,711 27.9 102,802 25.7 82,076 22.3 Other Liabilities 3,688 0.9 2,898 0.7 2,148 0.6 -------- ----- -------- ----- -------- ----- Total Liabilities 383,994 90.9 367,601 91.7 339,182 92.1 Stockholders' Equity 38,620 9.1 33,307 8.3 29,370 7.9 -------- ----- -------- ----- -------- ----- Total Liabilities and Stockholders' Equity $422,614 100.0% $400,908 100.0% $368,552 100.0% ======== ===== ======== ===== ======== =====
- ------------------------------- (1) Includes NOW, Super NOW and Money Market Account. 4 5 Interest Rates and Differentials - -------------------------------- The Company's earnings depend primarily upon the difference between the income the Bank generates from its loans and investment securities and the Bank's cost of funds, principally interest paid on savings and time deposits. Interest rates charged on the Bank's loans are affected principally by the demand for loans, the supply of money available for lending purposes, and competitive factors. In turn, these factors are influenced by general economic conditions and other constraints beyond the Company's control, such as Federal economic and tax policies, the general supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board. (See "Business -- Effect of Governmental Policies and Recent Legislation.") Information concerning average interest earning assets and interest bearing liabilities, along with the average interest rates earned and paid thereon is set forth in the following table. Averages were computed based upon daily balances.
Year Ended December 31, ----------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------ ----------------------------- ----------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------ ----------------------------- ----------------------------- (Dollars in Thousands) EARNING ASSETS: - --------------- Investment Securities U.S. Treasury $ 16,610 $ 984 5.9% $ 4,025 $ 236 5.9% $ 10,080 $ 468 4.6% U.S. Government Agencies 26,046 1,460 5.6 31,253 1,743 5.6 22,441 1,445 6.4 Municipal Leases(1) 7,114 596 8.4 7,810 589 7.5 3,671 240 6.5 Other Securities 3,394 201 5.9 3,132 192 6.1 2,331 132 5.7 -------- ------- -------- ------- -------- ------- Total Investment Securities 53,164 3,241 6.1 46,220 2,760 6.0 38,523 2,285 5.9 Federal Funds Sold 23,673 1,274 5.4 20,033 1,070 5.3 33,762 1,944 5.8 Due form Banks - Time Deposits 4,215 241 5.7 7,391 402 5.4 2,789 165 5.9 Loans(2) 286,438 30,231 10.6 278,560 30,939 11.1 250,248 28,872 11.5 Lease Financing(1) 4,395 398 9.1 2,205 185 8.4 2,154 276 12.8 -------- ------- -------- ------- -------- ------- Total Interest-Earning Assets(1) $371,885 $35,385 9.5% $354,409 $35,356 10.0% $327,476 $33,542 10.2% -------- ------- -------- ------- -------- ------- INTEREST BEARING LIABILITIES: - ----------------------------- Domestic Deposits and Borrowed Funds: Savings Deposits(3) $151,319 $ 3,624 2.4% $ 140,258 $ 3,100 2.2% $127,467 $ 2,602 2.0% Time Deposits 111,129 6,099 5.5% 121,453 6,750 5.6% 127,263 7,149 5.6% Long-Term Borrowings 147 15 10.2% 190 19 10.0% 228 35 15.4% -------- ------- -------- ------- -------- ------- Total Interest-Bearing Liabilities $262,595 $ 9,738 3.7% $ 261,901 $ 9,869 3.8% $254,958 $ 9,786 3.8% ======== ======= ========= ======= ======== =======
5 6 The table below shows the net interest earnings and the net yield on average earning assets:
1997 1996 1995 ---- ---- ---- Total Interest Income (1)(2) $ 35,385 $ 35,387 $ 33,542 Total Interest Expense (3) $ 9,738 $ 9,738 $ 9,786 Net Interest Earnings (1)(2) $ 25,647 $ 25,349 $ 23,756 Net Average Earning Assets (2) $371,885 $354,409 $327,450 Net Yield on Average Earning Assets (1)(2) 6.9% 7.2% 7.3% Net Yield on Average Earning Assets (excluding Loan Fees) (1)(2) 6.2% 6.4% 6.6%
(1) Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates which approximate 35.9 for 1997, 37.0 percent for 1996 and 37.1 percent for 1995. (2) Loans, net of unearned discount, do not reflect average reserves for possible loan losses of $5,165,000 in 1997, $4,012,000 in 1996 and $3,586,000 in 1995. Loan fees of $2,556,000 in 1997, $2,891,000 in 1996 and $2,141,000 in 1995 are included in loan interest income. Average loan balances include loans placed on non-accrual status during the period presented, but interest on such loans is excluded. There were twenty-seven non-accruing loans at December 31, 1997, twenty-one at December 31, 1996 and forty-five at December 31, 1995. (3) Includes NOW, Super NOW, and Money Market Deposit Accounts. 6 7 The following table sets forth year-to-year changes in interest earned, including loan fees and interest paid. The net increase (decrease) is segmented into the changes attributable, respectively, to variations in volume and variations in interest rates. Changes in interest earned and interest paid due to both rate and volume have been allocated to the change due to volume and the change due to rate in proportion to the relationship of the absolute dollar amounts of the changes in each.
INVESTMENT SECURITIES ---------- NON- FEDERAL DIRECT TAX- TAX- FUNDS LEASE TIME INTEREST EARNED ON: ABLE ABLE(1) SOLD LOANS(2) FINANCING DEPOSITS TOTAL - ------------------- ---- ---- ---- ----- --------- -------- ----- (In Thousands) 1997 compared to 1996 - Increase (decrease) due to: Volume Changes $ 438 $(52) $ 196 $ 999 $ 197 $(181) $ 1,597 Rate Changes 36 59 8 (1,707) 16 20 (1,568) ----- ---- ----- ------- ----- ----- ------- Net Increase (Decrease) $ 474 $ 7 $ 204 $ (708) $ 213 $(161) $ 29 ===== ==== ===== ======= ===== ===== ======= 1996 compared to 1995 Increase (decrease) due to: Volume Changes $ 206 $373 $(742) $ 3,407 $ 7 $ 251 $ 3,502 Rate Changes (80) (24) (132) (1,340) (98) (14) (1,688) ----- ---- ----- ------- ----- ----- ------- Net Increase (Decrease) $ 126 $349 $(874) $ 2,067 $ (91) $ 237 $ 1,814 ===== ==== ===== ======= ===== ===== =======
SAVINGS OTHER TIME LONG TERM REPURCHASE INTEREST PAID ON: DEPOSITS DEPOSITS BORROWINGS(3) AGREEMENTS TOTAL - ----------------- -------- -------- ------------- ---------- ----- 1997 compared to 1996 - Increase (decrease) due to: Volume Changes $ 254 $(568) $ (4) $ -- $(318) Rate Changes 270 (83) -- -- 187 ------ ----- ----- ----- ----- Net Increase (Decrease) $ 524 $(651) $ (4) $ -- $(131) ====== ===== ===== ===== ===== 1996 compared to 1995 Increase (decrease) due to: Volume Changes $ 273 $(324) $ (16) $ -- $ (67) Rate Changes 225 (75) -- -- 150 ------ ----- ----- ---- ----- Net Increase (Decrease) $ 498 $(399) $ (16) $ -- $ 83 ------ ----- ----- ---- -----
- ---------------------- (1) Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates which approximate 35.9% for 1997 and 37.0% for 1996. (2) Includes a decrease in loan fees of $335,000 in 1997 and an increase of $750,000 in 1996. (3) Long term borrowings in 1997 and 1996 consist of an obligation secured by deed of trust that bears interest at 10.0%. 7 8 INVESTMENT PORTFOLIO - -------------------- The objectives of the Bank's investment policy are to manage interest rate risk, provide adequate liquidity and reinvest in the Bank's market areas, while maximizing earnings with a portfolio of investment-grade securities. Each security purchased is subject to credit and maturity guidelines defined in the investment policy and is reviewed regularly to verify its continued credit- worthiness. Effective January 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 115, " Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and reclassified its investment security portfolio to differentiate between Investment Securities Held-to-Maturity and Investment Securities Available-For-Sale. Previously, the investment securities were carried at cost, adjusted for the accretion of discounts and amortization of premiums. The classification of securities is made by management at the time of acquisition. The following table summarizes the components of investment securities at the dates indicated (in thousands):
December 31, ----------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ------------------------- ------------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ---------- ------------ ------------ ------------ ------------ ------------ INVESTMENT SECURITIES HELD-TO-MATURITY: - --------------------- U. S. Treasury and Agency $ 12,384 $ 12,432 $ 2,796 $ 2,800 $ 19,735 $ 19,815 State and Political Subdivisions 2,476 2,489 2,529 2,538 3,506 3,517 Other Securities 250 250 250 250 250 250 -------- -------- ------- ------- -------- -------- Total Investment Securities $ 15,110 $ 15,171 $ 5,575 $ 5,588 $ 23,491 $ 23,582 ======== ======== ======= ======= ======== ======== INVESTMENT SECURITIES AVAILABLE-FOR-SALE - --------------------- U. S. Treasury and Agency $ 22,956 $ 22,978 $ 31,877 $ 31,800 $ 11,804 $ 11,811 State and Political Subdivisions(1) 4,749 4,763 4,772 4,792 4,434 4,477 Other Securities 3,538 3,218 3,238 2,885 2,707 2,455 -------- -------- ------- ------- -------- -------- Total Investment Securities $ 31,243 $ 30,959 $ 39,887 $ 39,477 $ 18,945 $ 18,743 ======== ======== ======= ======= ======== ========
- ---------------------------- (1) Includes, in 1997 and 1996, non-rated certificates of participation evidencing ownership interests in the California Statewide communities Development Authority - San Joaquin County Limited Obligation Bond Trust with amortized cost values of $4,413,000 and $4,428,000 and market values of $4,427,000 and $4,452,000 at December 31, 1997 and 1996, respectively. 8 9 The following table shows the maturity of investment securities at December 31, 1997, and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 35.9% tax rate) of such securities.
AFTER ONE AFTER FIVE WITHIN BUT WITHIN BUT WITHIN AFTER ONE YEAR FIVE YEARS TEN YEARS TEN YEARS ------------------------ --------------------- --------------------- ------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------------ ----------- ---------- ---------- ---------- ---------- ----------- ------- INVESTMENT SECURITIES HELD-TO-MATURITY: - --------------------- U. S. Treasury and Agencies $ 7,388 5.98% $ 4,996 6.18% $ -- --% $ -- --% State and Political 677 5.80 1,077 5.63 722 4.60 -- -- Other Securities 250 -- -- -- -- -- -- -- -------- ----- ------- ---- ------- ---- ---- ---- $ 8,315 5.78% $ 6,073 6.08% $ 722 4.60% $ -- --% ======== ===== ======= ==== ======= ==== ==== ==== INVESTMENT SECURITIES AVAILABLE-FOR-SALE - --------------------- U.S. Treasury and Agencies $ 7,968 5.54% $ 15,010 5.94% $ -- --% $ -- --% State and Political 421 8.28 2,150 8.43 1,856 8.43 336 5.63 Other Securities 3,218 2.77 -- -- -- -- -- -- -------- ----- -------- ---- ------- ---- ---- ---- $ 11,607 4.87% $ 17,160 6.25% $ 1,856 8.43% $336 5.63% -------- ----- -------- ---- ------- ---- ---- ---- Total Investment Securities $ 19,922 5.25% $ 23,233 6.21% $ 2,578 7.36% $336 5.63% -------- ---- -------- ---- ------- ---- ---- ----
9 10 LOAN PORTFOLIO - -------------- The following table sets forth the amount of loans outstanding at December 31 of each of the years in the five year period ended December 31, 1997.
December 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) TYPES OF LOANS Domestic: Commercial, Financial and Agricultural $ 44,296 $ 40,979 $ 44,801 $ 67,551 $ 46,813 Real Estate Construction 10,895 12,008 32,745 33,155 14,906 Real Estate Mortgage(1) 228,630 231,012 171,321 129,650 112,472 Consumer Loans 6,450 8,157 10,887 15,986 18,606 Lease Financing(2) 4,749 2,864 2,086 3,727 2,189 All other Loans (including overdrafts) 2,203 407 178 112 178 ---------- ----------- ----------- ----------- ----------- Subtotal: 297,223 295,427 262,018 250,181 195,164 Less: Unearned Discount (665) (797) (864) (1,165) (928) Reserve for Loan and Lease Losses (5,165) (4,744) (3,644) (3,145) (2,328) ---------- ----------- ----------- ----------- ----------- Total: $ 291,393 $ 289,886 $ 257,510 $ 245,871 $ 191,908 ========== =========== =========== =========== ===========
- ----------------------- (1) A portion of these loans were made, not for the purpose of financing real properties, but for commercial or agricultural purposes. However, in accordance with the Bank's credit policies, such loans were secured by deeds of trust on real properties and, therefore, are classified as real mortgage loans. (2) Lease financing includes residual values of $0 for 1997; $33,000 for 1996; $322,000 for 1995; $567,000 for 1994 and $1,397,000 for 1993, and is net of unearned income of $694,000 for 1997; $329,000 for 1996; $252,000 for 1995; $391,000 for 1994 and $491,000 for 1993. MATURITIES AND SENSITIVITIES TO INTEREST RATES - ---------------------------------------------- The following table shows the maturities and sensitivities to changes in interest rates on loans outstanding at December 31, 1997.
MATURING ---------------------------------------------------- WITHIN ONE TO AFTER FIVE ONE YEAR FIVE YEARS YEARS TOTAL ----------- ------------------------- ----------- (In Thousands) Domestic: Commercial and Agricultural $ 20,551 $ 21,773 $ 1,972 $ 44,296 Real Estate and Construction 9,405 319 1,171 10,895 Real Estate and Mortgage 36,258 72,958 119,414 228,630 Consumer Loans 2,474 3,488 488 6,450 Lease Financing 152 3,681 916 4,749 All other Loans 957 1,221 25 2,203 ---------- ---------- ---------- ---------- Total $ 69,797 $ 103,440 $ 123,986 $ 297,223 ---------- ---------- ---------- ----------
Of the total amount of loans (exclusive of loans on non-accrual status) outstanding as of December 31, 1997 that had maturities of more than one year, $155,792,000 had predetermined, or fixed, rates of interest and $65,077,000 had floating or adjustable rates of interest. 10 11 ASSET/LIABILITY MANAGEMENT - -------------------------- The table below sets forth information concerning the interest rate sensitivity of the Company's consolidated assets and liabilities as of December 31, 1997. Assets and liabilities are classified by the earliest possible repricing date or maturity, whichever comes first. Generally, when rate-sensitive assets exceed rate-sensitive liabilities, the net interest margin is expected to be positively impacted during periods of increasing interest rates and negatively impacted during periods of decreasing interest rates. When rate-sensitive liabilities exceed rate-sensitive assets generally the net interest margin will be negatively affected during periods of increasing interest rates and positively affected during periods of decreasing interest rates.
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) ASSETS Interest-bearing deposits in banks $ 4,152 $ 4,157 $ -- $ -- $ -- $ 8,309 Investment securities 8,898 9,041 23,233 2,914 1,983 46,069 Federal Funds Sold 30,550 -- -- 30,550 Net loans 20,564 44,332 97,211 123,658 5,628 291,393 Noninterest-earning assets -- -- -- -- 59,387 59,387 --------- --------- --------- --------- --------- --------- Total assets $ 64,164 $ 57,530 $ 120,444 $126,572 $ 66,998 $ 435,708 --------- --------- --------- --------- --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY: Noninterest-bearing deposits $ -- $ -- $ -- $ -- $ 126,503 $ 126,503 Interest-bearing deposits 197,047 56,581 10,015 263,643 Short-term borrowings -- -- -- -- -- -- Long-term borrowings -- -- 123 -- -- 123 Other liabilities -- -- -- -- 3,398 3,398 Stockholders' equity -- -- -- -- 42,041 42,041 --------- ---------- --------- --------- --------- ---------- Total liabilities and stockholders equity $ 197,047 $ 56,581 $ 10,138 $ -- $ 171,942 $ 435,708 --------- ---------- --------- --------- --------- ---------- Interest rate sensitivity gap $(132,883) $ 949 $ 110,306 $ 126,572 $(104,944) $ -- ========= ========== ========= ========= ========= ========== Cumulative interest rate sensitivity gap $(132,883) $ (131,934) $ (21,628) $ 104,944 $ -- $ -- --------- ---------- --------- --------- --------- ----------
11 12 RISK ELEMENTS - ------------- Non-accrual, Past Due and Restructured Loans --------------------------------------------
December 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) Loans More Than 90 Days Past Due(1): Aggregate Loan Amounts: Commercial $ -- $ 500 $ 584 $ 281 $ 92 Real Estate -- 2,328 869 2,117 - Consumer 7 1 3 51 36 Aggregate Leases -- - - - - Troubled Debt Restructurings (2) 2,880 4,787 6,397 1,337 640 Non-Accrual Loans (3) 11,458 11,623 12,620 8,621 9,424 ------- -------- -------- -------- -------- $14,345 $ 19,239 $ 20,473 $ 12,407 $ 10,192 ------- -------- -------- -------- --------
- ---------------------------- (1) Reflects loans for which there has been no payment of interest and/or principal for 90 days or more. (2) Troubled Debt Restructuring are loans which have been renegotiated to provide a deferral of interest or principal. The terms of the restructured loans did not involve any deferrals of interest and interest collected in 1997, 1996, 1995, 1994 and 1993 were the same amounts that would have been collected in accordance with the original terms of the loans. (3) Ordinarily, a loan is placed on non-accrual status (that is, accrual of interest on the loan is discontinued) when the Bank has reason to believe that continued payment of interest and principal is unlikely. There were twenty-seven loans on non-accrual status at December 31, 1997; twenty-one loans at December 31, 1996; forty-five loans at December 31, 1995; sixty loans at December 31, 1994 and thirty-one loans at December 31, 1993. The amount of interest that would have been collected on these loans had they remained current in accordance with their original terms was $981,000 in 1997, $1,488,000 in 1996, $985,000 in 1995, $510,000 in 1994 and $504,000 in 1993. Effective January 1, 1995 the Company adopted Statement of Financial Accounting Standards N. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had no material impact on the Company's consolidated financial statements as the Bank's existing policy of measuring loan impairment is consistent with methods prescribed in these standards. The Bank considers a loan to be impaired when, based upon current information and events, it believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Bank principally evaluates those loans, both performing and non-performing, that are large non-homogenous loans in its commercial and real estate mortgage and construction loan portfolios which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. In general, payment delays of less than 90 days or payment shortfalls of less than 1% are deemed insignificant and would not necessarily result in classification of a loan as impaired. However, management considers all non-accrual loans to be impaired. The Bank does not consider smaller balance, homogenous loans in determining loan impairment. These loans include consumer installment, credit card and direct lease financing. Loans identified as impaired are placed on non-accrual status and are evaluated for write-off, write-down or renegotiation with the borrower. Impaired loans are charged-off when the possibility of collecting the full balance of the loan becomes remote. The reserves set aside for possible losses related to impaired loans totaled approximately, $951,000 for the year ended December 31, 1997 and were included in the Bank's Reserve for Loan Losses at December 31, 1997. The average balance of the impaired loans amounted to approximately $11,808,000 for the year ended December 31, 1997. Cash receipts during 1997 applied to reduce principal balances and recognized as interest income were approximately $6,346,000 and $919,000, respectively. For additional information regarding SFAS 114, see Note 5 to the Company's Consolidated Financial Statements set forth in Part II, Item 8 of this Report. 12 13 Potential Problem Loans - ----------------------- At December 31, 1997, there were no loans on accrual status where there were serious doubts as to the ability of the borrower to comply with then present loan repayment terms. Foreign Outstanding - ------------------- The Bank did not have any loans, acceptances, interest-bearing deposits or other monetary assets of any foreign country. Loan Concentrations - ------------------- The Bank does not have loans made to borrowers who are engaged in similar activities where the aggregate amount of the loans exceeds 10% of their loan portfolio that are not broken out as a separate category in the loan portfolio. Other Interest-Bearing Assets - ----------------------------- The Bank does not have any interest-bearing assets as to which management believes that recovery of principal or interest thereon is at significant risk. 13 14 Summary of Loan and Lease Loss Experience - ----------------------------------------- The following table sets forth an analysis of the Bank's loan and lease loss experience, by category, for the past five years.
Year Ended December 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in Thousands) Average amount of loans and leases outstanding(1) $290,833 $280,765 $252,402 $222,291 $183,401 ======== ======== ======== ======== ======== Loan and lease loss reserve balance at beginning of year $ 4,744 $ 3,644 $ 3,145 $ 2,328 $ 2,168 -------- -------- -------- -------- -------- Charge-Offs: Domestic: Commercial, financial and agricultural (391) (96) (1,414) (1,114) (773) Real Estate-construction - - - - - Real Estate-mortgage (1,191) (1,365) (543) (516) (84) Consumer Loans (64) (142) (109) (207) (94) Lease Financing (21) - - - - -------- -------- -------- -------- -------- (1,667) (1,603) (2,066) (1,837) (951) Foreign: - - - - - -------- -------- -------- -------- -------- Recoveries: Domestic: Commercial, financial and agricultural $ 102 $ 295 $ 284 $ 78 $ 75 Real Estate-construction - - - - 1 Real Estate-mortgage 254 152 186 140 - Consumer Loans 51 56 79 72 10 Lease Financing - - - - - -------- -------- -------- -------- -------- 407 503 549 290 86 Foreign: - - - - - -------- -------- -------- -------- -------- Net Charge-Offs (1,260) (1,100) (1,517) (1,547) (865) Additions charged to operations 1,681 2,200 2,016 2,364 1,025 -------- -------- -------- -------- -------- Loan and lease loss reserve balance at end of year $ 5,165 $ 4,744 $ 3,644 $ 3,145 $ 2,328 ======== ======== ======== ======== ======== Ratios: Net charge-offs during the year to average loans and leases outstanding during the year 0.43% 0.39% 0.60% 0.70% 0.47% Loan loss reserve to total gross loans 1.74% 1.61% 1.39% 1.26% 1.20% Net loan charge-offs to loan loss reserve 24.39% 23.19% 41.63% 49.19% 37.16% Net loan charge-offs to provision for loan losses 74.96% 50.00% 75.25% 65.44% 84.39% Loan loss reserve to non-performing loans(2) 45.05% 32.82% 25.88% 28.41% 24.37%
- -------------------------------- (1) Net of unearned discount. (2) For purposes of this ratio, non-performing loans consist of loans more than 90 days past due and non-accrual loans. Troubled debt restructured loans have been excluded because they are performing in accordance with the revised terms thereof. 14 15 Loans and leases are charged against the reserve for loan and lease losses (the "Loan Loss Reserve") when management believes that the collectability of principal is unlikely. The Loan Loss Reserve is replenished through provisions charged against current period income. The amount of the provision is determined by management based on periodic evaluations of the loan and lease portfolio which result in the establishment of (i) specific reserves for specific problem loans and leases, based on such factors as a deterioration in the financial condition of the borrower, a decline in the value of the assets securing repayment of the loan or payment delinquencies by the borrower, and (ii) general reserves for unidentified potential losses in the loan and lease portfolio, based upon historical experience and periodic evaluations of prevailing and anticipated economic conditions, such as increases in interest rates or the onset of recessionary conditions in the Bank's market areas, which can affect the ability of borrowers to meet their payment obligations to the Bank. Loan charge-offs are, in accordance with applicable accounting principles, applied against the Bank's Loan Loss Reserve. As a consequence, it is necessary for the Bank to replenish the Loan Loss Reserve from time to time, through additional "provisions" charged against operating income, to bring the Reserve back to a level which management deems adequate in light of economic conditions. The relatively higher levels of loan charge-offs in 1995 and 1994 were due primarily to the severity of economic recession in Southern California during those periods. The Recession resulted in an increase in loan delinquencies and defaults by borrowers which forced the Bank, like many other banks in Southern California, to rely more heavily on sales of the assets collateralizing the defaulted loans for their repayment. However, at the same time, the recession caused a decline in the realizable value of such assets, making it more difficult for banks to obtain full recovery of defaulted loans. These circumstances led the Bank, as well as many other banks in Southern California, to reduce the amounts at which the loans of the affected borrowers were carried on its books to amounts which, based on conservative valuation approaches mandated by federal and state banking regulators, could be expected to be recovered from the borrowers or from the sale of the assets collateralizing the loans. The risk of non-payment of loans is an inherent feature of the banking business. That risk varies with the type and purpose of the loan, the collateral which is obtained to secure payment, and ultimately, the creditworthiness of the borrower. In order to minimize this credit risk, the Bank has established lending limits for each of its officers having lending authority, in each case based upon the officer's experience level and prior performance. Whenever a proposed loan by itself, or when aggregated with existing extensions of credit to the same borrower, exceeds the officer's lending limits, the loan must be approved by the Bank's Senior Loan Committee, which is comprised of five to seven senior officers of the Bank and/or by the Loan Committee of the Board of Directors of the Bank. The Bank also maintains a program of periodic review of all existing loans. The Bank's quality control officer reviews a percentage of all loans and leases made for creditworthiness as well as documentation and compliance with the Bank's loan policies. In addition, the Bank has engaged a consulting firm to extensively review the Bank's loan and lease portfolio semi-annually. Under-performing loans and leases identified in the review process are scheduled for in-depth analysis and remedial action. The Reserve for Loan Losses should not be interpreted as an indication that charge-offs will occur in the amounts or proportions shown in the table above, or that the allocation of the Reserve set forth in the table below indicates future charge-off trends. While management believes that the Reserve for Loan Losses is adequate, future additions to the Reserve can be expected as a result of any of a number of factors, including the incurrence of currently unanticipated losses on loans in the loan portfolio due to deterioration in the financial condition of the borrowers. In addition, both Federal and state bank regulatory agencies, as an integral part of their periodic oversight examinations of the Bank, routinely review the Loan Loss Reserve and often recommend additions to the Reserve based on their evaluation of the loan portfolio. See "Supervision and Regulation." 15 16 Allocation of Reserve for Loan Losses ------------------------------------- The Loan Loss Reserve is allocated among the different loan categories, as set forth in the table below, as a result of the differing levels of risk associated with each loan category. The allocation is made based on historical loss experience within each category and management's periodic review of loans in the loan portfolio. However, the reserves allocated to specific loan categories are not the total amounts available for future losses that might occur within such categories because the total reserve is the general reserve applicable to the entire portfolio.
Year Ended December 31, --------------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ----------------------- ----------------------- % of % of % of Reserve Loans to Reserve Loans to Reserve Loans to Loan Total Loan Total Loan Total Losses Loans Losses Loans Losses Loans --------- --------- --------- --------- --------- --------- (Dollars in Thousands) (Dollars in Thousands) Domestic: Commercial, Financial and Agricultural $ 2,128 14.90% $ 1,148 13.87% $ 1,093 17.10% Real Estate-construction 302 3.67% 169 4.06% 194 12.50% Real Estate-mortgage 2,415 76.92% 2,899 78.20% 1,603 65.38% Installment loans to individuals 79 2.17% 77 2.76% 293 4.15% Lease financing 96 1.60% 17 0.97% 13 0.80% Other 145 0.74% 434 0.14% 448 0.07% --------- ------ ------- ------ ------- ------ $ 5,165 100.00% $ 4,744 100.00% $ 3,644 100.00% ========= ====== ======= ====== ======= ======
Year Ended December 31, ---------------------------------------------------- 1994 1993 ----------------------- ----------------------- % of % of Reserve Loans to Reserve Loans to Loan Total Loan Total Losses Loans Losses Loans --------- --------- --------- --------- Domestic: Commercial, Financial and Agricultural $ 1,493 27.00% $1,084 23.99% Real Estate-construction 459 13.25% 189 7.64% Real Estate-mortgage 1,215 51.82% 871 57.63% Installment loans to individuals 210 6.39% 152 9.53% Lease financing 18 1.49% 7 1.12% Other (250) 0.05% 25 0.09% -------- ------ ------ ------ $ 3,145 100.00% $2,328 100.00% ======== ====== ====== ======
16 17 DEPOSITS - -------- The average amount (in thousands) of and the average rate paid on deposits is summarized below:
1997 1996 1995 ----------------------- ----------------------- ----------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate --------- --------- --------- --------- --------- --------- In Domestic Offices: Noninterest bearing demand deposit $117,711 -- $102,802 -- $ 82,076 -- Savings Deposits(1) 151,319 2.39% 140,258 2.21% 127,467 2.00% Time Deposits(2) 111,129 5.49% 121,453 5.56% 127,263 5.60% --------- -------- -------- Total Deposits $380,159 2.56% $364,513 2.70% $336,806 2.90% ========= ======== ========
- -------------------------- (1) Includes NOW, Super NOW, and Money Market Deposit Accounts. (2) Includes time certificates of deposit in denominations greater than and less than $100,000. Set forth below is maturity schedule of domestic time certificates of deposits in denominations greater than $100,000:
DECEMBER 31, 1997 ------------ (In Thousands) Three Months or Less $ 19,921 Over Three through Six Months 8,214 Over Six through Twelve Months 16,780 Over Twelve Months 6,038 -------- $ 50,953 ========
RETURN ON EQUITY AND ASSETS The following table sets forth the ratios of net income to average total assets (return on assets), net income to average equity (return on equity), dividends declared per share to net income per share (dividend payout ratio), and average equity to average total assets (equity to asset ratio). RETURN ON EQUITY AND ASSETS - ---------------------------
1997 1996 1995 ----- ----- ----- Return on Assets 1.07% 1.04% 0.97% Return on Equity 11.70% 12.56% 11.90% Dividend Payout Ratio -- -- Equity to Asset Ratio 9.14% 8.31% 8.13%
17 18 Competition - ----------- The banking business in the Bank's marketing areas is highly competitive. In those areas, the Bank competes for loans and deposits with other commercial banks, including branches of most of California's major banks, many of which have greater financial, marketing and other resources than those of the Bank. Larger commercial banks have greater lending limits than the Bank and offer certain services, such as trust services, which the Bank does not offer directly. Competition is expected to continue to increase as a result of legislation which permits bank holding companies in other states to acquire California banks and bank holding companies. See "Effects of Governmental Polices and Recent Legislation." The Bank also competes with savings and loan associations, finance companies, credit unions, mortgage companies, insurance companies, securities brokerage firms and mutual funds, leasing companies and other financial institutions in its market areas. In competing with other financial institutions, the Bank places emphasis on providing a high level of personal service and convenience to its customers and conducts local advertising and promotional programs and activities in its market areas. Supervision and Regulation - -------------------------- Regulation of the Company ------------------------------------- The Company, as a bank holding company, is subject to regulation under the Bank Holding Company Act (the "BHCA"). The Act requires every bank holding company to obtain the prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or the "FRB") before it may acquire substantially all of the assets of any bank or acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act (the "IBBEA"), bank holding companies are able to acquire banks in states other than the state where their principal banking operations are conducted, whether or not permitted by the laws of the state of any bank sought to be acquired, but subject to the following restrictions: (i) any state may adopt laws precluding acquisitions of any banks that have been in operation for a period of five years or less, and (ii) no such acquisition may be made by bank holding company that controls or, following the proposed acquisition will control, more than 10% of the total amount of deposits of insured depository institutions in the United States or more than 30% of such deposits in that state. Under the BHCA, the Company may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries, except that it may engage in certain activities which, in the opinion of the Federal Reserve Board, are so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Company is also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or a bank holding company unless that company is engaged in activities which the Federal Reserve Board has determined are a proper incident to banking. If a company is engaged in prohibited activities, then the Federal Reserve Board's approval must be obtained before the shares of any such company can be acquired by the Company or before the Company can open new offices. In ruling on applications for approval of acquisitions of shares, the Federal Reserve Board is required to consider whether performance of the activity to be carried on by the proposed subsidiary can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The BHCA does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. In recent years, bank holding companies have encountered increased competition from securities brokerage and investment banking firms, mutual funds and credit card companies that are not subject to regulation to the same extent as bank holding companies and FDIC-insured banks. More recently, foreign banking institutions have begun acquiring domestic securities brokerage and investing banking firms, which has enabled those firms to offer products and services to customers more directly competitive to the products and services traditionally offered by bank holding companies through their banking and bank-related subsidiaries. As a result, the FRB is taking a less restrictive policy in permitting bank holding companies to acquire businesses which, until recently, bank holding companies were not permitted to own, including firms engaged in investment banking, securities brokerage and investment management. Other non-banking businesses that bank holding companies are permitted to acquire include: loan servicing companies; industrial loan companies; real and personal property leasing; acting as an industrial agent, broker, or principal with respect to insurance that is directly related to the extension of credit by the bank holding company or any of its subsidiaries; issuing and selling money orders, savings bonds and travelers checks; performing certain trust company services; real estate and personal property appraisal; data processing services; courier services; management consulting services to nonaffiliated depository institutions; arranging commercial real estate equity financing; providing foreign exchange advisory and transactional services; acting as a futures commission merchant; providing investment advice on financial futures and options on futures; providing consumer financial counseling; providing tax planning and preparation services; providing check guarantee services; engaging in collection agency activities; and operating a credit bureau. 18 19 Under the BHCA, a bank holding company is required to file with the FRB annual reports and such additional information as the FRB may require regarding its business operations and those of its subsidiaries. The FRB also conducts periodic examinations of bank holding companies and their subsidiaries. The FRB also has authority to regulate provisions of certain bank holding company debt. Under the BHCA and regulations adopted by the FRB, subject to certain exceptions, a bank holding company and its subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease, or sale of property or furnishing of services by its banking or other subsidiaries. Exceptions to the anti-tying provisions that have been approved by the FRB permit (i) a bank or bank holding company to offer lower pricing on traditional banking products, such as loans, deposits or trust services, and on securities brokerage services, on the condition that the customer obtain a traditional bank product from an affiliate and (ii) a bank holding company, or a non-bank subsidiary of a bank holding company to offer lower pricing on any of its products or services on the condition that the customer obtain another product or service from the bank holding company or any of its non-bank affiliates, provided that all products or services offered in the package arrangement are separately available for purchase. In connection with its regulation and supervision of bank holding companies, the FRB has established capital maintenance guidelines, under which, on a consolidated basis, a bank holding company must maintain a minimum ratio of total capital (inclusive of loan loss reserves)-to-total assets of not less than 6.0% and a ratio of primary capital to total assets of not less than 5.5%. The FRB utilizes total capital "zones" whereby a banking organization with a ratio of total capital to total assets of less than 6% will be considered undercapitalized, absent extenuating circumstances. Institutions with a total capital ratio of 6-7% may be considered to be adequately capitalized if other financial and managerial factors are satisfactory. Institutions with a total capital ratio in excess of 7% will generally be considered to be adequately capitalized unless there are significant adverse financial and managerial factors present. Regardless of the level of total capital, a banking organization with a primary capital ratio of less than 5.5%% will generally be considered undercapitalized. At December 31, 1997 the Company, on a consolidated basis, had total and primary capital of approximately $45,783,000 and a primary capital-to-asset ratio of approximately 10.57%. Under FRB capital adequacy guidelines, bank holding companies are also required to maintain a minimum level of "qualifying capital" determined on the basis of a holding company's total consolidated weighted risk assets. For purposes of satisfying the FRB guidelines, "qualifying Capital" equals "core capital" plus "supplementary capital" less certain required deductions. Core capital consists of common stock, related surplus and retained earnings (net of treasury stock), perpetual preferred stock in an aggregate amount of up to 25% of total core capital including such stock, and minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital consist of allowances for loan and lease losses in an amount of up to 1.25% of total weighted risk assets, perpetual preferred stock, long-term preferred stock with a maturity of twenty years or more and related surplus (to the extent not included as core capital), certain "hybrid" capital instruments (i.e., instruments having characteristics of both debt and equity), mandatory convertible debt, term subordinated debt and intermediate-term preferred stock in an aggregate amount of up to 50% of core capital (net of goodwill), and perpetual debt. The amounts to be deducted from capital to determine qualifying capital consist of goodwill, which must be deducted from core capital, and investments in certain subsidiaries and reciprocal holdings of capital instruments (i.e., cross-holdings resulting from formal or informal arrangements in which two or more banking organizations swap, exchange or other wise agree to hold each other's capital instruments), 50% of which generally must be deducted from core capital and 50% from supplementary capital. Total weighted risk assets, for purposes of the FRB guidelines, is determined by assigning to one of four risk categories the holding company's consolidated assets and credit equivalent amounts of off-balance sheet items. The dollar amount of the items in each category will then be multiplied by the risk weight assigned to that category (i.e., 0%, 20%, 50% or 100%). The resulting weighted values from each risk category will be added together and the sum of such values will constitute the holding company's total weighted risk assets. Total qualifying capital is divided by total weighted risk assets to determine the holding company's risk-based capital ratio. The guidelines require that all bank holding companies must have a minimum ratio of qualifying capital to total weighted risk assets of 8% and a minimum ratio of core capital-to-total weighted risk assets of 4%. At December 31, 1997, the Company's risk-based capital ratio, determined in accordance with the FRB regulations, was 14.6% which exceeds the minimum ratio required to comply with those regulations. The Company is an affiliate of the Bank and is subject to various legal restrictions which limit the extent to which the Bank can supply funds to the Company. Such restrictions also apply to any non-banking entities which the Company might acquire or become affiliated with in the future. In particular, the Bank is subject to certain restrictions imposed by federal law on any extensions of credit to the Company, on investments in stock or other securities thereof, on the taking of such securities as collateral for loans to borrowers, and on the purchase of assets from the Company. Such restrictions prevent the Company from borrowing from the Bank unless the loans are secured by specified obligations and are limited in amount as to the Company to 10% of the Bank's capital and surplus and as to the Company and all affiliates to an aggregate of 20% of the Bank's capital and surplus. 19 20 The Bank is subject to restrictions applicable to the payment of cash dividends to the Company, which are the principal source of cash available for the payment of dividends by the Company to its shareholders. Under California law, the approval of the California Superintendent of Banks is required before a state-chartered bank, such as the Bank, may declare a dividend which would exceed the lesser of: (i)the Bank's retained earnings or (ii) its net income for the immediately preceding three years (after deducting all dividends paid during that period). At December 31, 1997, the maximum dividend payable by the Bank to the Company under these restrictions would have been $12,264,313. See "Item 5. Dividends" below. However, since cash dividends from bank subsidiaries usually are the primary source of funds for the payment of cash dividends by their bank holding companies, the FRB also restricts the payment of cash dividends by bank holding companies in instances in which such dividends would impose undue pressure on the capital of the subsidiary banks or on the capital position of the holding company. In addition, it is current policy of the Company's Board of Directors to retain earnings to support the continued growth of the Company and the Bank and, in furtherance of that policy, currently, the Company does not pay cash dividends. See "Market for Registrant's Common Stock and Related Stockholder Matters -- Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources" in Part II of this Report. Under the Change in Bank Control Act, persons who intend to acquire control of a bank holding company, acting directly or indirectly or through or in concert with one or more person, generally must give 60 days' prior written notice to the FRB. "Control" exists when the acquiring party has voting control of at least 25 percent of the insured institution's voting power, or the power directly or indirectly, to direct the management or policies of such bank. Under FRB regulations, the power to direct the management or policies of a an holding company is presumed to exist where the acquiring party has ownership, control or the power to vote at least 10 percent of a class of voting securities of the bank holding company, if (i) the bank holding company has any class of voting securities which is registered under Section 12 of the 1934 Act, or (ii) immediately after the transaction no other person will own a greater proportion of that class of voting securities. The statute authorizes the FRB to disapprove the proposed transaction on certain specified grounds. Under California law, bank holding companies, including the Company, are also subject to periodic examination by, and may be required to file reports with, the DFI. However, regulations have not yet been proposed or adopted that provide for such examinations or require the filing of such reports. Regulation of the Bank ---------------------- The Bank is subject to regulation, supervision and regular examination at the state level, by the DFI, and, at the Federal level, by the FRB. The regulations and policies of these agencies affect most aspects of the Bank's business and prescribe permissible types of loans and investments, the amount of required reserves, the requirements for branch offices, the permissible scope of the Bank's activities, and various other requirements. In addition, as part of their regular examinations of the Bank, the DFI and FRB consider and make recommendations with respect to the adequacy of the Bank's capital and the efficacy of lending, investment and other policies established and implemented by the Bank. The Bank is also subject to certain reporting requirements of the DFI and the FRB. The FRB has adopted regulations and a statement of policy which define and establish certain minimum requirements for capital adequacy. Under the regulations, FDIC-insured state member banks are required to maintain a ratio (known as the "leverage capital ratio") of "Tier 1" or "core" capital-to-average total assets of 3% in the case of banks that are financially strong and are not experiencing significant asset growth; and between 4% and 5% in the case of most other banks. However, the FRB has the authority to impose higher leverage ratio requirements where warranted by the risk profile of the bank, as determined by the FRB. As defined in the regulations, "Tier 1" capital consists of common shareholders' equity, less intangible assets and assets classified loss; and "average total assets" consist of total assets, less intangible assets and assets classified loss. At December 31, 1997 the Bank's Tier 1 leverage ratio increased to 9.5% from 8.5% at December 31, 1996. Banks with capital ratios below the minimum do not have adequate capital, and will be subject to appropriate administrative actions, including the issuance by the FRB of a capital directive requiring that the bank restore its capital to minimum required level within a specified period of time and denial of applications for mergers and new branches. Any FDIC-insured bank operating with a leverage capital ratio of less than 3% will be deemed to be operating in an unsafe and unsound condition, and will be subject to appropriate administrative actions. See "Supervision and Regulation -- Regulation of the Bank -- Prompt Corrective Action and Other Enforcement Mechanisms." In addition, under FRB regulations, FDIC-insured state member banks are required to maintain a "risk-based" capital ratio that is determined on the basis of a bank's weighted risk asset base. These requirements are similar to the risk-based capital requirements applicable to the Company (see "Supervision and Regulation -- Regulation of the Company"). The weighted risk asset base is determined on the basis of a bank's assets and certain off-balance sheet items to one of five separate risk categories, after which the aggregate dollar value of the items in each category is multiplied by a risk factor assigned to each specific asset category. After the items in each category have been totaled and multiplied by the category's risk factor, the total of the adjusted capital base is divided by the weighted risk assets to derive the bank's risk-based asset ratio. FDIC-insured banks are required to maintain a ratio of total capital to total risk-weighted assets of 8.0%. At December 31, 1997 the Bank's risk-based capital ratio, determined on the basis of the FRB rules, was approximately 14.3%. 20 21 Federal bank regulatory agencies, including the FRB, have adopted regulations which permit those agencies to take into consideration, when evaluating a bank's capital adequacy, (i) undue concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, and (ii) the bank's interest rate risk exposures (when the interest rate sensitivity of a bank's assets does not match the sensitivity of its liabilities or its off-balance-sheet positions). These factors are to be considered in connection with the safety and soundness examinations that each federal bank regulatory agency periodically conducts of the banks it regulates. If the regulatory agency determines that a bank has an excessive concentration of credit or undue risks from non-traditional activities, or is exposed to undue interest rate risk, the agency may require the bank to maintain a Tier 1 capital ratio above the minimum ratio it would otherwise be required to maintain. As a member bank, the Bank also is subject to certain FRB requirements designed to maintain the safety and soundness of individual banks and the banking system. The FRB periodically conducts examinations of member banks and, based upon its findings, may revalue assets of a member bank and require establishment of specific reserves in amounts equal to the difference between such revaluation and the book value of the assets. In determining the capital that an FDIC-insured bank is required to maintain, the federal bank regulatory agencies do not, in all respects, follow generally accepted accounting principles ("GAAP"). Instead such regulatory agencies have adopted a modified version of GAAP (referred to as "Regulatory Accounting Principles" or "RAP"), which reduce the amount of capital that the bank regulatory agencies will recognize for purposes of determining the capital adequacy of a bank. These principles are subject to periodic change, including possible changes in the definition of capital that could have the effect of requiring banks to increase capital and, therefore, could adversely affect their growth and profitability. Due primarily to increases in loan losses sustained by banks in California during the recent economic recession that particularly impacted California during the period from 1991 to 1995, federal bank regulatory agencies, in evaluating the safety and soundness of the banks that they regulate, heightened the standards by which they evaluate the quality and collectibility of loans and required banks to increase the reserves they maintain for possible loan losses, which determines the ability of a bank to absorb loan losses without unduly affecting its capital position. Increases in reserve requirements usually are effectuated by a charge against current earnings and, therefore, can adversely affect profitability. See, Management's Discussion and Analysis of Financial Condition and Results of Operation" in Part II of this Report. In response to examinations of the Bank in 1995, 1996 and 1997, the Bank increased its loan loss revenues and implemented more stringent credit and loan collection policies. Despite these increases in reserves, the Bank was able to maintain Tier 1 leverage ratios of 9.48% as of December 31, 1997, 8.53% as of December 31, 1996 and 7.77% as of December 31, 1995. Prompt Corrective Action and Other Enforcement Mechanisms. In 1991, --------------------------------------------------------- Congress enacted the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") and in 1992, federal regulations implementing that Act were adopted by the federal bank regulatory agencies. FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of any FDIC-insured bank that it regulates, particularly those which are found to be undercapitalized, as measured by certain minimum capital ratios established under FDICIA. The regulations implementing FDICIA establish five categories in which FDIC-insured banks are placed, based on their respective capital ratios. The following table sets forth each of those five categories and the respective capital ratios which determine the categories in which FDIC-insured banks will be placed:
Total Tier 1 Capital Risk-Based Risk Based Category Capital Ratio Capital Ratio Leverage Ratio -------- ------------- ------------- -------------- 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%
However, an FDIC-insured bank that, based upon its capital ratios, is classified as "well capitalized," "adequately capitalized" or "under- capitalized," may nevertheless be treated as though it were in the next lower category if its federal bank regulatory agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions on its business. The federal bank regulatory agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. If an FDIC-insured bank is undercapitalized, it will be closely monitored by its federal bank regulatory agency. Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee of performance issued by its holding company. Further restrictions and sanctions are required to be imposed on FDIC-insured banks that are critically undercapitalized, which includes either the appointment of a receiver for such a bank or the taking of other remedial actions that are approved by the FDIC, which is responsible for insuring a banking institution's deposits if such institution were to fail. In addition to measures taken under the prompt corrective action provisions, FDIC-insured banks may be subject to potential enforcement actions by federal regulators for unsafe or unsound practices in their businesses or for violations of any law, rule or regulation, or any condition imposed in writing by, or any written agreement that the bank is required to enter into with, the agency. Enforcement actions may include the issuance of directives to increase capital, the requirement that the bank and its directors enter into an informal or a formal agreement requiring corrective actions to be taken, the issuance of a cease-and-desist order that can be judicially enforced and that is required to be publicly disclosed, the imposition of civil money penalties against directors or officers of the bank, the appointment of a conservator or receiver for the bank, the termination of FDIC insurance for its deposits, and the enforcement of any such agreements or orders through injunctions or restraining orders based upon a judicial determination that the FDIC, as the insurer of the banking institutions deposits, would be harmed if such relief was not granted. Additionally, a holding company's inability to serve as a source of financial strength and capital needed by any of its subsidiary banking organizations could serve as a basis for regulatory action against that holding company. Safety and Soundness Standards. FDICIA also implemented certain ------------------------------ specific restrictions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by, and reduces deposit insurance coverage for deposit accounts maintained by employee benefit plans at, undercapitalized institutions, restricts the use of brokered deposits, and limits the aggregate extensions of credit by a depository institution to any of its executive officers, directors, principal shareholders and persons or entities related to any of them. In addition to the statutory limitations, FDICIA was amended in 1994 (i) to authorize federal bank regulatory agencies to establish safety and soundness standards by regulation or by guideline; (ii) to permit these agencies greater flexibility in prescribing asset quality and earnings standards for the banks they regulate; and (iii) to rescind provisions of that Act that had imposed on bank holding companies all of the same standards that are applied to banks. In addition, if a federal bank regulatory agency determines that a banking institution is failing to meet the safety and soundness standards applicable to it, the bank regulatory agency has the authority to require the banking institution to implement a compliance program or to take other remedial actions that the agency believes are necessary or appropriate to remedy the deficiencies identified by the agency. Effects of FDICIA on the Bank. Based on the Bank's capital ratios and ----------------------------- its overall financial condition, the Bank is not subject to any significant operating restrictions under FDICIA. However, in response to the heightened safety and soundness standards made applicable to banks by FDICIA and federal regulatory agencies, the Bank has modified some of its policies and adopted certain procedures that are designed to assure compliance with those standards. Community Reinvestment Act and Other Fair Lending Laws. The Bank is ------------------------------------------------------ subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA requires federal bank regulatory agencies to conduct periodic examinations of the banks they regulate that focus specifically on their efforts in meeting the credit needs of their local communities, including those of individuals residing or operating businesses in low and moderate income neighborhoods. Moreover, under CRA regulations, a federal bank regulatory agency need not find overt discrimination on the part of a bank to find that it has violated the CRA. It also may find a violation from evidence of disparate treatment accorded by the bank to, or evidence of disparate impact from the bank's lending activities, on customers in lower income neighborhoods. The CRA authorizes the imposition of substantive penalties on and corrective measures against a bank that is found to have violated the fair lending laws or CRA regulations. In addition, federal bank regulatory agencies may take compliance with such laws and regulations into account when considering applications by a bank or its bank holding company for authority to acquire other banks, open new bank branches or enter into new lines of business and, in some instances, have refused to approve proposed bank acquisitions in response to complaints and evidence that either the acquiring institution or the institution proposed to be acquired was deficient in complying the CRA or other fair lending laws. Recent Legislation Affecting Competition Among Banks. The Interstate ---------------------------------------------------- Banking and Branching Efficiency Act (the "IBBEA"), not only permits bank holding companies to acquire banks in other states, it also authorizes the merger of banks across state lines, thereby making it possible to create banks with branches in multiple states. Under the IBBEA, however, any state has the right to "opt out" of this feature of the IBBEA and, thereby, preclude interstate banking within its borders. Furthermore, The IBBEA also authorizes a bank to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such "de novo branching." California has enacted legislation (known as the "Caldera, Weggeland, and Killea California Interstate Banking and Branching Act), which permits a bank chartered in a state other than California to acquire, by merger or purchase, a California bank which has been in operation for at least five (5) years, and thereby establish one or more California branch offices. However, this Act prohibits a bank chartered in another state from entering California either by purchasing a branch office of a California bank without purchasing the entire entity or by establishing a de novo California branch office. Proposed Legislation - -------------------- Other legislation and government regulations have been proposed which could also affect the business activities of the Bank and it is likely that additional legislation affecting such business will be introduced in Congress or in state legislatures in the future. The proposed legislation includes wide-ranging proposals to alter the structure, regulation and competitive relationships of the nation's financial institutions, such as proposals to alter the present statutory separation of commercial and investment banking; to permit bank holding companies and banks to engage in certain securities underwriting and distribution activities and certain real estate investment activities; to permit bank holding companies to own or control thrift institutions; to subject banks to increased disclosure and reporting requirements; and to generally expand the range of financial services which can be provided by bank holding companies as well as by other financial institutions. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the present of future business of the Bank may be affected thereby. Effects of Governmental Policies - -------------------------------- A principal determinant of a banking institution's earnings is the difference between the income it generates from its loans and investment securities and the cost of its funds, primarily interest paid on savings and time deposits and other liabilities. The interest rates charged on loans are affected by, and are highly sensitive to, the demand and the supply of money for loans, which are, in turn, directly affected by general economic conditions, the general supply of money in the economy, and the policies of various governmental and regulatory agencies. The earnings and business of the Company are and will be affected by the policies of various regulatory authorities of the Unite States, including the Federal Reserve Board. Important functions of the Federal Reserve Board, in addition to those enumerated under " Supervision and Regulation" above, are to regulate the supply of credit and to deal with general economic conditions within the United States. The monetary policies adopted by the Federal Reserve Board for these purposes influence in various ways the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on earning assets. The Federal Reserve Board has broad powers to, and does, regulate money, credit conditions, and interest rates in order to influence general economic conditions. For example, in times of inflation it has exercised such powers to increase the cost of money which affects (i) the interest rates which the Bank can charge on loans and the interest and yields it can obtain on its investment securities, (ii) the interest which the Bank must pay on deposits and other liabilities, and (iii) the yields on money market investments which compete with the Bank for the funds of the Bank's depositors. These policies, as well as the specific policies of other governmental agencies, have a significant effect upon the overall growth, distribution and yields of the Bank's loans and investments and the interest rates it must pay for time deposits, as well as the extent to which such rates will be attractive to the Bank's customers. At times, such regulations result in the cost of money to the Bank, as well as other banks, increasing at a rate greater than the increase in the rate at which the Bank is able to lend, resulting in a reduction of gross profit margins. At other times, such regulations can result in increases in the spread between the cost of money to the Bank and the price at which the Bank lends, thus potentially increasing its gross profit margins. During 1996 the Federal Reserve Board adopted monetary policies, primarily in response to improving economic conditions and a relative absence of inflationary pressures, that permitted interest rates to decline. Although that interest rate decline did result in moderate reductions in the yields on loans, it contributed to a reduction in the Bank's interest expense, thereby enabling the Bank to increase its net interest income. In 1997, the Federal Reserve Board has sought to stabilize interest rates in order to prevent inflationary pressures from developing in the economy and its monetary policies have had a lesser impact on the Bank's net interest income than in prior years. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Part II of this Report. It is not possible to predict with any certainty, however, the impact of the Federal Reserve Board's monetary policies may have upon the future business and earnings of the Company. 21 22 Employees - --------- At December 31, 1997, the Bank had approximately 205 full-time and 63 part-time employees. 22 23 Executive Officers of the Company - --------------------------------- Set forth below is certain information regarding the executive officers of the Company and the Bank:
Name Age Position with the Company Position with the Bank - ------------------ --- ------------------------- ---------------------- George E. Langley 56 President and Chief President and Chief Executive Officer Executive Officer Tom Kramer 54 Executive Vice President Executive Vice President, and Secretary Chief Credit Officer and Secretary Donna Miltenberger 42 Executive Vice President Executive Vice President and Chief Operating Officer Carol Ann Graf 52 Senior Vice President, Senior Vice President, Chief Chief Financial Officer Financial Officer and and Assistant Secretary Assistant Secretary
All officers hold office at the pleasure of the Board of Directors, except that Mr. Langley is employed under an Employment Agreement with the Bank. George E. Langley. Mr. Langley has been the President and Chief Executive Officer of the Company and the Bank since April 1992. From 1982 to April 1992, Mr. Langley served as the Executive Vice President, Chief Financial Officer and Secretary of the Company and the Bank. From 1976 to 1982 Mr. Langley held various executive positions with the Bank. Tom Kramer. Mr. Kramer was appointed Executive Vice President - Chief Credit Officer of the Bank in April 1994, as well as, Secretary of the Company and Bank in April 1992 and has been an Executive Vice President of the Company since its organization in December 1982. From 1979 to 1982, Mr. Kramer held various executive positions with the Bank, including Senior Vice President Loan Administrator and Assistant Secretary. Donna Miltenberger. Ms. Miltenberger has been an Executive Vice President of the Company since 1996 and Executive Vice President of the Bank since November 1993. She also served as the Chief Administrative Officer of the Bank from 1994 until 1997 when, due to an increase in the scope of her responsibilities, she was appointed to the position of Chief Operating Officer of the Bank. From June 1992 to November 1993, Ms. Miltenberger held the position of Senior Vice President of the Bank. Prior to June 1992, Ms. Miltenberger held various management positions with Chino Valley Bank, in Chino, California, including Executive Vice President - Cashier. Carol Ann Graf. Ms. Graf was appointed Chief Financial Officer of the Company and First Vice President and Chief Financial Officer of the Bank in January 1993 and Senior Vice President and Chief Financial Officer of the Bank in January 1997. From April 1988 to January 1993, Ms. Graf served as Vice President and Comptroller, and from 1984 to April 1988 as Assistant Comptroller, of the Bank. ITEM 2. PROPERTIES The Company's executive offices are located at the Bank's main banking office at 510 South Grand Avenue, Glendora, California. The Bank owns the building and the land on which its main banking office is located; owns the building and leases, under a 20-year ground lease, the land on which its Claremont banking office is located; and occupies its nine other banking offices, and the facilities where its loan center and service center are located, under leases expiring at various dates through 2027. Management believes that the Bank's present facilities are adequate for its present needs and anticipated growth in the foreseeable future. 23 24 ITEM 3. LEGAL PROCEEDINGS There are no pending legal proceedings in which the Company or the Bank is a party or to which any of their respective properties are subject other than ordinary routine litigation incident to the Bank's business, the outcome of which is not expected to be material to the Company or its operations or properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ Stock Market under the symbol FOOT. The following table sets forth the high and low closing sales prices per share of the Company's Common Stock as reported on the NASDAQ Stock Market for all four quarters of 1997 and 1996. On March 9, 1998 the closing per share price was $17.375 and, as of that same date, there were 1,132 record shareholders of the Company.
Trade Prices of Stock Common Stock (1) Dividends Declared ------------------ ------------------ High Low ---- --- 1997(1) - ------- First Quarter $14.00 10.75 $-- Second Quarter 14.25 12.25 10% Third Quarter 15.38 13.50 -- Fourth Quarter 17.50 17.50 -- 1996(1) - ------- First Quarter $ 9.75 7.88 $-- Second Quarter 9.25 8.25 10% Third Quarter 8.75 7.75 -- Fourth Quarter 11.75 8.00 --
- ------------------- (1) Stock prices for the quarterly periods preceding the 10% stock dividends distributed, respectively, on April 5, 1996 to shareholders of record as of March 22, 1996, and on June 20, 1997, to shareholders of record as of June 6, 1997, have not been adjusted to reflect those dividends. 24 25 Dividends - --------- Dividend Policy. Prior to 1995 it has been the Company's policy to pay cash dividends out of internally generated funds that were not required to meet capital and cash requirements or to support growth of the Company's business. Pursuant to that policy, the Company paid cash dividends of $.25 per share in 1984; $.25 per share in 1987; $.37 per share in 1988; $.16 per share in both 1989 and 1990; $.47 per share in 1991; and $.40 per share in each of 1992, 1993, and 1994. In order to take advantage of opportunities to achieve further growth and in order to support that growth through increases in capital, in March 1995 the Board of Directors determined, in accordance with its dividend policy, that the Company should retain its earnings. Accordingly, no cash dividends were paid in 1995, 1996 or 1997. The Board of Directors has determined to continue to retain earnings to support growth in 1998 and, therefore, it is not expected that cash dividends will be paid in 1998. Restrictions Applicable to the Payment of Dividends. The principal source of funds available to the Company for cash dividends, at least until such time, if any, as it may acquire or develop other businesses, is cash dividends from the Bank. Therefore, government regulations, including the laws of the State of California, as they pertain to cash dividends by state chartered banks, will limit the ability of the Company to pay cash dividends for the foreseeable future. California law places a statutory restriction on the amounts of cash dividends a bank may pay to its shareholders. Under that law, dividends declared by the Bank may not exceed, in any calendar year, without approval of the DFI, the lesser of (i) net income of the Bank for the year and retained net income from the preceding two years (after deducting all dividends paid during the period), or (ii) the Bank's retained earnings. However, because the payment of cash dividends has the effect of reducing capital, as a practical matter capital requirements imposed on federally insured banks operate to preclude the payment of cash dividends in amounts that might otherwise be permitted by California law; and the FRB, as part of its supervisory powers, generally requires insured banks to adopt dividend policies which limit the payment of cash dividends much more strictly than do applicable laws. In addition, Section 23(a) of the Federal Reserve Act restricts the Bank from extending credit to the Company unless the loans are secured by specified obligations and are limited in amount to no more than 10% of the banking subsidiary's contributed capital and retained earnings. Rights Dividend - --------------- On February 25, 1997, the Board of Directors of the Company adopted a Rights Agreement (the "Rights Agreement") pursuant to which it declared a dividend distribution of rights (the "Rights") to purchase shares of the Company's common stock and, under certain circumstances, other securities, to the holders of record of the outstanding shares of the Company's common stock. The Rights dividend was made to the holders of record of shares of the Company's common stock at the close of business on March 18, 1997. Each Right entitles the registered holder, on certain events, to purchase from the Company, at an initial exercise price of $48.00 per Right (subject to adjustment), such number of newly issued shares of the Company's common stock or the common stock of the acquiring or surviving company, depending on the type of triggering event, equal to an aggregate market value as of the date of the triggering event of two (2) times the exercise price of the Right. 25 26 ITEM 6. SELECTED FINANCIAL DATA The selected income statement data set forth below for the fiscal years ended December 31, 1997, 1996, and 1995, and the selected balance sheet data as of December 31, 1997 and 1996, are derived from the audited consolidated financial statements of the Company examined by Vavrinek, Trine, Day and Company, certified public accountants, and included elsewhere in this Report and should be read in conjunction with those consolidated financial statements. The selected income statement data for the fiscal year ended December 31, 1994 and 1993, and the selected balance sheet data as of December 31, 1995, 1994 and 1993, are derived from audited consolidated financial statements examined by Vavrinek, Trine, Day and Company which are not included in this Report.
Dollars in Thousands, Except Per Share Data ------------------------------------------------------------- STATEMENT OF INCOME DATA 1997 1996 1995 1994 1993 --------- -------- -------- --------- -------- Interest Income $ 35,028 $ 35,147 $ 33,403 $ 27,690 $ 21,732 Interest Expense 9,738 9,869 9,786 6,206 5,382 Net Interest Income 25,290 25,278 23,617 21,484 16,350 Provision for Possible Loan Losses (1,681) (2,200) (2,016) (2,364) (1,025) Net Interest Income after Provision for Possible Loan Losses 23,609 23,078 21,601 19,120 15,325 Other Income 6,039 5,264 4,687 5,052 5,962 Other (Expense) (22,598) (21,700) (20,625) (18,613) (16,925) Income Before Income Taxes 7,050 6,642 5,663 5,559 4,362 Applicable Income Taxes 2,532 2,459 2,100 2,105 1,335 Net Income Before Cumulative Effect of Change in Accounting for Income Taxes 4,518 4,183 3,563 3,454 3,027 Cumulative Effect of Change in Accounting for Income Taxes -- -- -- -- 126 Net Income 4,518 4,183 3,563 3,454 3,153 Cash Dividends (1) -- -- 1,417 1,310 BALANCE SHEET DATA Investment Securities 46,069 45,052 42,234 30,977 43,953 Loans and Leases (net) 291,393 289,886 257,510 245,871 191,908 Assets 435,708 410,505 395,180 331,262 280,494 Deposits 390,146 370,966 361,114 301,222 253,298 Long Term Debt (2) 123 168 208 245 466 Shareholders' Equity 42,041 36,222 31,042 26,871 24,959 PER COMMON SHARE DATA Income Before Cumulative Effect 0.90 0.86 0.75 0.73 0.68 Cumulative Effect -- -- -- -- 0.03 Net Income-Basic(3)(4) 0.90 0.86 0.75 0.73 0.71 Net Income-Diluted(3)(4) 0.85 0.84 0.73 0.72 0.69 Cash Dividends -- -- -- 0.40 0.40 Book Value (At year-end) 8.22 8.01 7.85 7.57 7.07 Number of Shares used in Per Share Calculation-Basic(3)(4) 5,039,658 4,843,006 4,770,613 4,711,210 4,438,331 Number of Shares used in Per Share Calculation-Diluted(3)(4) 5,308,314 4,999,119 4,905,645 4,793,085 4,583,312
- ------------------ (1) For information regarding restrictions affecting the ability of the Company to pay cash dividends, see Note 14 to the Company's Consolidated Financial Statements. (2) For information regarding long term debt, see Note 10 to the Company's Consolidated Financial Statements. (3) Retroactively adjusted for stock dividends and stock splits. (4) For information regarding the determination of basic and diluted earnings per share, see Note 18 to the Company's Consolidated Financial Statements. 26 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's principal operating subsidiary is Foothill Independent Bank, a California state chartered bank (the "Bank"), which accounts for substantially all of the Company's revenues and income. Accordingly, the following discussion focuses primarily on the operations and financial condition of the Bank. NET INTEREST INCOME Net interest income is a principal determinant of a bank's income. Net interest income represents the difference or "spread" between the interest earned on interest-earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities which in the case of the Company, consist principally of deposits. Net interest income was substantially the same in 1997, as compared to 1996, as a $119,000 decline in interest income was offset by a $131,000 decrease in interest expense. The decline in interest income was due primarily to a decrease of $708,000 in interest and fees earned on loans that was partially offset by increases in interest earned on investment securities and Federal funds sold aggregating $630,000 (see "Years Ended December 31, 1997 and 1996--Interest Income"). The decrease in interest expense in 1997 resulted primarily from a reduction in the average volume of outstanding TCD's. In 1996, net interest income increased by approximately $1,662,000 or 7.0% due primarily to the combined effects of an increase in interest income and a decline in interest paid on TCD's. The increase in interest income was primarily attributable to an 11% increase in the average volume of loans outstanding during 1996 and the decline in interest expense was primarily attributable to a decline in the average volume of outstanding TCD's. RATE SENSITIVITY AND EFFECT ON NET INTEREST INCOME A bank's net interest income is affected by a number of factors including the relative percentages or the "mix" of (i) variable and fixed rate loans in its loan portfolio and (ii) demand and savings deposits, on the one hand, and Time Deposits (including TCD's), on the other hand. As a general rule, a bank with a relatively high percentage of fixed-rate loans will experience a decline in interest income during a period of increasing market rates of interest, because it will be unable to "reprice" its fixed rate loans to offset fully the increase in the rates of interest it must offer to retain maturing Time Deposits and attract new deposits. Similarly, a bank with a high percentage of TCD's in relation to its total deposits generally will experience greater increases in interest expense, and therefore, a decrease in net interest income, during periods of increasing market rates of interest than a bank with a greater percentage of demand and savings deposits which are less sensitive to changes in market rates of interest. By contrast, during a period of declining market rates of interest, a bank with a higher percentage of variable loans, as a general rule, will experience a decline in net interest income because such loans usually contain automatic repricing provisions that are "triggered" by declines in market rates of interest; whereas offsetting reductions in the rates of interest paid on TCD's cannot be implemented until they mature, at which time a bank can seek their renewal at lower rates of interest or allow such deposits to terminate or "run-off" in order to reduce interest expense. The Bank attempts to reduce its exposure to interest rate fluctuations, and thereby at least to maintain and, if possible, to increase its net interest margin or spread by seeking (i) to attract and maintain a significant volume of demand and savings deposits that bear interest at rates that are lower, and that are less sensitive to interest rate fluctuations, than TCD's; and (ii) to match opportunities to "reprice" earning assets, in response to changes in market rates of interest which require or cause repricing of deposits. Beginning in the second half of 1996, the Bank's management elected to allow some of its maturing TCD's to "run-off" and commenced marketing programs designed to attract additional demand and savings deposits. As a result of these efforts, during 1997, the average volume of demand and savings (including money market) deposits increased by $25,993,000 or 10.7% and, at December 31, 1997, such deposits represented 71% of the Bank's total deposits as compared to 68% at December 31, 1996. At the same time, the average volume of TCD's, on which the Bank pays interest at its highest rates, declined by $20,100,000 or 30.3%. Overall, the Bank's net interest margin (i.e., net interest income stated as a percentage of interest income) increased somewhat to 72.2% in 1997 from 71.9% in 1996, and 70.7% in 1995. The ability of the Bank to maintain its net interest margin is not entirely within its control because the interest rates and fees that the Bank is able to charge on loans, and the interest rates it must offer to maintain and attract deposits, are affected by national monetary policies established by the Federal Reserve Board and by competitive conditions in the Bank's market areas. In addition, the effect on a bank's net interest margins of changes in market rates of interest will depend on the types and maturities of its deposits and earning assets. For example, a reduction in interest rates paid on deposits in response to declines in market rates of interest can be 27 28 implemented more quickly in the case of savings deposits and money market accounts than with respect to time deposits as to which a change in interest rates generally cannot be implemented until such deposits mature. In addition, a change in rates of interest paid on deposits may lead consumers to move their deposits from one type of deposit to another or to shift funds from deposits to non-bank investments or from such investments to bank deposit accounts or instruments, which also will affect a bank's net interest margin. In 1997, market rates of interest stabilized, but at the same time competition among banks and other commercial lending institutions increased. The Bank responded to these conditions by lowering interest rates and fees on loans and making an increased number of fixed rate loans. These actions were predicated, in large part, on the relative stability of the interest rate markets and the Bank's success in increasing the volume of less-volatile demand and savings deposits and reducing the volume of TCD's, which enabled the Bank to maintain its net interest income and achieve a modest increase in its net interest margin, despite the lowering of interest rates and loan fees. The increase in the volume of fixed rate loans does expose the Bank to the potential risk of a decline in net interest income in the event market rates of interest were to increase significantly in future periods. However, management believes that the Bank's higher percentage of lower cost and less volatile demand and savings deposits, coupled with increases that occurred in 1997 in the volume of investments and deposits held at other banking institutions, will operate to mitigate any adverse effects that an increase in market rates of interest would otherwise have on the Bank's net interest income. The Bank currently anticipates a relatively stable net interest margin for 1998 based on a number of factors, including (i) the expectation that interest rate markets in the United States will remain relatively stable, (ii) the expectation that there will be increased loan growth in 1998 as a result of stable interest rates, an improving economy in Southern California and new marketing programs being instituted by the Bank, and (iii) the Bank's decision to continue allowing higher interest-bearing TCD's to "run-off" as they mature in 1998. However, competition for new loans is expected to continue to be intense, which will have the effect of limiting the ability of the Bank, as well as other lending institutions, to increase interest rates on loans and there is no assurance that expectations regarding economic conditions in 1998 will prove to be correct. See, "Forward Looking Statements and Uncertainties about Future Performance." YEARS ENDED DECEMBER 31, 1997 AND 1996 - -------------------------------------- INTEREST INCOME Interest income consists of interest and fees earned on outstanding loans, interest on funds held on deposit at other banks and on federal funds sold and income on investments, which consist principally of government securities. In 1997, interest and fee income from loans declined by $708,000 or 2.3% primarily as a result of increased competition among banks and other lending institutions in the Bank's market areas, which led the Bank to lower interest rates and fees on the loans it made in 1997 and which resulted in a slowing of the growth of new loans during the second half of 1997. The decrease in interest and fees on loans was partially offset by increases in interest income earned on investment securities and on Federal funds sold of $426,000 and $204,000, respectively, due primarily to increases in the volume of such investments. INTEREST EXPENSE Interest expense decreased by $131,000 or 1.3% in 1997 as compared to 1996, as reductions in the average volume of TCD's and somewhat lower interest rates largely offset an increase in interest expense attributable to increases in the average volume of savings and money market deposits and other time deposits. PROVISION FOR LOAN AND LEASE LOSSES The Bank follows the practice of maintaining a reserve for possible losses on loans and leases that occur from time to time as an incidental part of the banking business. Write-offs of loans (essentially reductions in the carrying values of non-performing loans due to possible losses on their ultimate recovery) are charged against this reserve (the "Loan Loss Reserve"), which is adjusted periodically to reflect changes in the volume of outstanding loans and in the risk of potential losses due to a deterioration in the condition of borrowers or in the value of property securing non-performing loans or changes in general economic conditions. Additions to the Loan Loss Reserve are made through a charge against income referred to as the "provision for loan and lease losses." During 1997 the Bank made provisions totaling $1,681,000 compared to $2,200,000 during 1996 and, at December 31, 1997 the Loan Loss Reserve was approximately $5,165,000 or 1.7% of total loans and leases outstanding, compared to approximately $4,744,000 or 1.6% of total loans and leases outstanding at December 31, 1996. The decrease in the total of the additions made to the Loan Loss Reserve in 1997 was attributable to declines in the rate of growth in total loans and in the total number of non-performing assets in 1997 as compared to 1996. Net loan charge-offs for 1997 aggregated $1,260,000, representing forty-three hundredths of one percent (0.43%) of average loans and leases outstanding, as compared to net loan charge-offs in 1996 of $1,100,000, which represented thirty-nine one hundredths of one percent (0.39%) of average loans and leases outstanding. The Bank's non-performing loans, which consist primarily of loans for which there have been no payments of principal or interest for more than 90 days, totaled approximately $11,465,000 or 3.9% of total loans at December 31, 1997, as compared to $11,622 or 3.9% of total loans at December 31, 1996 and $12,620,000 or 4.8% of total loans at December 31, 1995. The ratio of the Bank's Loan Loss Reserve to non-performing loans was 45.1% at December 31, 1997, as compared to 40.8% and 28.9% at December 31, 1996 and 1995, respectively. 28 29 OTHER INCOME Other income increased by $776,000 or 14.7% in 1997 compared to 1996, primarily as a result of (i) increases in transaction fees and service charges that were the result of increases in the volume of total deposits and other banking transactions, and (ii) gains on the sale of certain SBA loans. OTHER EXPENSE Non-interest expense, consists primarily of (i) salaries and other employee expenses, (ii) occupancy and furniture and equipment expenses, and (iii) other operating and miscellaneous expenses that include insurance premiums, marketing expenses, data processing costs and charges that are periodically made against income to establish reserves for possible losses on the disposition of real properties acquired on or in lieu of foreclosure of defaulted loans (commonly referred to as "other real estate owned" or "OREO"). Non-interest expense increased by approximately $899,000 or 4.1% in 1997 compared to 1996. Contributing to that increase were expenses associated with a Bank-wide data processing system conversion, which was completed during the second quarter of 1997. While the increase in the total dollar amount of non-interest expense was 4.1%, as a percentage of operating income (net interest income plus other income) the increase in non-interest expense was 1.1%, increasing from 71.0% in 1996 to 72.1% in 1997. INCOME TAXES Income taxes increased by approximately $73,000 or 3.0% during 1967 compared to 1996, primarily as a result of the combined effects of an increase in pre-tax income, and a decrease of 1% in the overall tax rate, in 1997. YEARS ENDED DECEMBER 31, 1996 AND 1995 - -------------------------------------- INTEREST INCOME The increase in interest income of approximately $1,745,000 or 5.2% in 1996 compared to 1995 was due primarily to an increase of $2,067,000 or 7.2% in interest and fees earned on loans that was attributable to an 11% increase in the average volume of the Bank's outstanding loans. The increase in interest and fee income attributable to increased loan volume more than offset the effects on interest income of a decrease in the average volume of federal funds sold, which were reduced to fund new loans and a planned reduction or "run-off" of TCD's. INTEREST EXPENSE Interest expense increased by less than 1% in 1996, as reductions in the average volume of TCD's and slightly lower interest rates largely offset an increase in interest expense attributable to increases in the volume of savings and money market deposits. PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses made in 1996 totaled $2,200,000 compared to $2,016,000 for 1995. Net loan charge-offs for 1996 aggregated $1,100,000, representing thirty-nine hundredths of one percent (0.39%) of average loans and leases outstanding, as compared to net loan charge-offs in 1995 of $1,517,000, which represented sixty-one hundredths of one percent (0.61%) of average loans and leases outstanding. OTHER INCOME Other income increased by $576,000 or 12.3% in 1996 compared to 1995, primarily as a result of increases in transaction fees and service charges that were attributable to increases in the volume of total deposits and other banking transactions. OTHER EXPENSE The Bank's non-interest expense increased by approximately $1,075,000 or 5.2% in 1996 compared to 1995. This increase included a $546,000 increase in salaries and employee benefits and a $412,000 increase in occupancy expenses that were primarily attributable to internal growth in the Bank's assets and operations. 29 30 INCOME TAXES Income taxes increased by approximately $359,000 or 17.1% during 1996 compared to 1995, primarily as a result of the increase in pre-tax income achieved in 1996. FINANCIAL CONDITION The Company's total assets at December 31, 1997 were approximately $25,103,000, or 6.1%, higher than at December 31, 1996. Average total assets for 1997 increased by approximately $22,094,000 to $422,614,000 from $400,520,000 for 1996. These increases were primarily the result of new loan volume and increases in other interest-earning assets, principally cash and balances due from other banks, investment securities and Federal funds sold. The average volume of loans and leases (less reserves) outstanding during 1997 increased by approximately $9,768,000 or 3.5% compared 1996. However, during the second half of 1997, the average volume of loans outstanding increased by only $1,275,000 or 0.4%. The average volume of the Bank's investment securities during 1997 increased by approximately $7,507,000 or 10.2% compared to 1996 figures. The average volume of Federal funds sold increased by 18.2% to $23,673,000 in 1997 from $20,033,000 in 1996. These increases were offset by a 42.9% reduction in the average volume of interest bearing deposits held at other financial institutions during 1997 to $4,215,000 from an average volume of $7,391,000 in 1996. Beginning in 1996, the Bank initiated new marketing programs designed to increase the volume of demand, savings and money market deposits, which are either non-interest bearing or bear interest at rates which are substantially lower than those paid on time deposits. At the same time, management began reducing the interest rates it offered on TCD's to discourage renewals of existing and purchases of new TCD's by customers and, thereby, reduce the volume of those deposits at the Bank. As a result, at December 31, 1997, the volume of demand deposits and savings deposits at the Bank was $27,809,000 higher than at December 31, 1996 and non-interest bearing demand deposits, as a percentage of total deposits, had increased to 32.7% from 29.3% at December 31, 1996. By contrast the volume of TCD's outstanding at December 31, 1997 was $9,483,000, or 16.2%, lower than at December 31, 1996. The Company currently anticipates that there will be modest growth in the Bank's total assets in 1998, which is expected to result from increased lending and deposit activity generated by new marketing programs being instituted by the Bank. LIQUIDITY MANAGEMENT Liquidity management policies attempt to achieve a matching of sources and uses of funds in order to enable the Bank to fund its customers' requirements for loans and deposit withdrawals. In conformity with those policies, the Bank maintains short-term sources of funds to meet periodic increases in loan demand and deposit withdrawals and maturities. At December 31, 1997, the principal source of liquidity consisted of $38,800,000 in cash and demand balances due from banks and $30,550,000 of Federal funds sold which, together, totaled $69,350,000, as compared to $48,573,000 at December 31, 1996. Other sources of liquidity include $30,959,000 in securities available for sale, of which approximately $11,607,000 of such securities mature within one year and $8,309,000 in interest-bearing deposits at other financial institutions, which mature in six months or less. The Bank also has established facilities to borrow Federal Funds from other banks that total $10,100,000 and has an unused line of credit with the Federal Home Loan Bank in the amount of $10,458,000. Furthermore, substantially all of the Bank's installment loans and leases, the amount of which aggregated $11,332,000 at December 31, 1997, require regular installment payments, providing a steady flow of cash funds to the Bank. Accordingly, the Company believes that the Bank has adequate cash and cash equivalent resources to meet any increases in demand for loans and leases and any increase in deposit withdrawals that might occur in the foreseeable future. CAPITAL RESOURCES It is the policy of the Board of Directors to retain earnings to support the growth of the Bank rather than to pay cash dividends. Those earnings were used to open two new banking offices during 1995, and a third office in March of 1996. The Company is evaluating opportunities to expand the Bank's market coverage into areas such as eastern Los Angeles County, western San Bernardino County, north Orange County and north Riverside County, all of which are contiguous to the Bank's existing markets and, subject to obtaining required regulatory approvals, intends to open an additional banking office in one of these areas either late in 1998 or early in 1999. 30 31 During the second quarter of 1997 the Company declared its third 10% stock dividend in three years, which was distributed on June 20, 1997 and for accounting purposes was recorded as a $6,058,000 reduction in retained earnings, offset by a corresponding $6,058,000 increase in the Company's stated capital. As a result of the increase in and the retention of earnings in 1997, the Company's total shareholders' equity increased by approximately $5,819,000 or 16.6% to $42,041,000 at December 31, 1997 from $36,222,000 at December 31, 1996. Net earnings in 1997 represent a return on beginning assets (that is, total assets as of January 1, 1997) of 1.10% and a return on beginning equity (total shareholders' equity as of January 1, 1997) of 12.47%. At December 31, 1997, the Bank's Tier 1 capital ratio was 9.5% compared to 8.5% at December 31, 1996, and as of those same respective dates, the Bank's Tier 1 risk-based capital ratios were 13.1% and 11.1%, and its total risk-based capital ratios of 14.3% and 12.3%, respectively. The risk-based capital ratio is determined by weighting the bank's assets in accordance with certain risk factors and, the higher the risk profile of a bank's assets, the greater is the amount of capital that is required to maintain an adequate risk-based capital ratio, which generally is at least 8%. The Bank's Tier 1 capital and risk-based capital ratios compare favorably with other peer group banks. YEAR 2000 The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. Based on preliminary information, it is currently believed that the costs of addressing potential problems will not have a material adverse impact on the Company's financial position, results of operations or liquidity in future periods. However, if the Company is unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. However, even if the Company is able to resolve any such issues with respect to its computerized information systems, there is no assurance that customers who utilize computer information systems to effectuate banking transactions, or the Company's vendors or financial institutions with which the Company does business, will not encounter problems that could adversely affect the Company's business. --------------------- FORWARD LOOKING INFORMATION AND UNCERTAINTIES REGARDING FUTURE PERFORMANCE This Annual Report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking information, which reflects management's current views of the Company's future financial performance. The forward-looking information is subject to certain risks and uncertainties, including but not limited to the following: Increased Competition. Increased competition from other financial institutions, mutual funds and securities brokerage and investment banking firms that offer competitive loan and investment products, could require the Bank to reduce interest rates and loan fees to attract new loans or to increase interest rates that it offers on time deposits in order to retain existing or attract new deposits, either or both of which could, in turn, reduce interest income and net interest margins. Possible Adverse Changes in Economic Conditions. Adverse changes in local economic conditions could (i) reduce loan demand which could, in turn, reduce interest income and net interest margins; (ii) adversely affect the financial capability of borrowers to meet their loan obligations to the Bank which, in turn, could result in increases in loan losses and require increases in reserves for possible loan losses, thereby adversely affecting earnings; and (iii) lead to reductions in real property values that, due to the Bank's reliance on real property to secure many of its loans, could make it more difficult for the Bank to prevent potential losses on non-performing loans through the sale of such real properties. Possible Adverse Changes in National Economic Conditions and FRB Monetary Policies. Changes in national economic conditions, such as increases in inflation or declines in economic output often prompt changes in Federal Reserve Board monetary policies that could increase the cost of funds to the Bank and reduce net interest margins, particularly if the Bank is unable, due to competitive pressures or the rate insensitivity of earning assets, to effectuate commensurate increases in the rates it is able to charge for new loans. Changes in Regulatory Policies. Changes of federal and state bank regulatory policies, such as increases in capital requirements or in loan loss reserves, or changes in asset/liability ratios, could adversely affect earnings by reducing yields on earning assets or increasing operating costs. Effects of Growth. It is the intention of the Company to take advantage of opportunities to increase the Bank's business, either through acquisitions of other banks or the establishment of new banking offices. If the Bank does acquire any other banks or opens any additional banking offices, it is likely to incur additional operating costs that may adversely affect the Company's operating results, at least on an interim basis until any acquired bank is integrated into the Company's operations or the new banking office achieves profitability. Year 2000. The costs of resolving the Year 2000 problems could prove to be greater than is currently anticipated or efforts to resolve such problems in a timely manner could prove to be unsuccessful. Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Annual Report, or to make predictions based solely on historical financial performance. 31 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Foothill Independent Bancorp and Subsidiaries Independent Auditor's Report............................................33 Consolidated Balance Sheets December 31, 1997 and 1996 .............................................34 Consolidated Statements of Income For the Years Ended December 31, 1997 and 1996 and 1995.................35 Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1997 and 1996 and 1995.................36 Consolidated Statements of Cash Flows For the Years Ended December 31, 1997 and 1996 and 1995.................37 Notes to Consolidated Financial Statements..................................39 32 33 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders Foothill Independent Bancorp and Subsidiaries Glendora, California We have audited the accompanying consolidated balance sheets of Foothill Independent Bancorp and Subsidiaries as of December 31, 1997 and 1996 , and the related consolidated statements of income and changes in stockholders' equity and statements of cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foothill Independent Bancorp and Subsidiaries as of December 31, 1997 and 1996 , and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Vavrinek, Trine, Day & Co., LLP Rancho Cucamonga, California January 23, 1998 33 34 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ---------- ---------- (dollars in thousands) Cash and due from banks (minimum Federal Reserve balance at December 31, 1997, was $11,204) $ 38,800 $ 33,673 Federal funds sold 30,550 14,900 --------- --------- Cash and Cash Equivalents 69,350 48,573 --------- --------- Interest-bearing deposits in other financial institutions 8,309 3,957 Investment securities held-to-maturity (Notes #1C and #2) 15,110 5,575 Investment securities available-for-sale (Notes #1C and #2) 30,959 39,477 Loans, net of unearned income (Notes #1D, #3 and #6) 291,809 291,766 Direct lease financing (Notes #1F and #4) 4,749 2,864 Less reserve for possible loan and lease losses (Notes #1E and #5) (5,165) (4,744) --------- --------- 291,393 289,886 --------- --------- Bank premises and equipment (Notes #1G and #7) 7,704 7,304 Accrued interest 2,654 2,681 Other real estate owned (Notes #1H and #8) 2,906 4,595 Cash surrender value of life insurance 4,041 3,596 Prepaid expenses 1,116 967 Deferred tax asset (Notes #1K and #17) 1,889 1,954 Other assets 277 1,940 --------- --------- Total Assets $ 435,708 $ 410,505 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Demand deposits 126,503 108,670 Savings and NOW deposits 87,952 84,781 Money market deposits 64,931 59,099 Time deposits in denominations of $100,000 or more 49,064 58,547 Other time deposits 61,696 59,869 --------- --------- Total Deposits 390,146 370,966 Accrued employee benefits (Note #13) 1,664 1,417 Accrued interest and other liabilities 1,734 1,732 Long-term debt (Note #10) 123 168 --------- --------- Total Liabilities 393,667 374,283 --------- --------- Stockholders' Equity Common Stock - authorized, 12,500,000 shares without par value; issued and outstanding, 5,111,993 shares in 1997 and 4,520,590 shares in 1996 22,618 15,406 Additional paid-in capital 659 592 Retained earnings 19,062 20,607 Valuation allowance for investments (Notes #1C and #2) (298) (383) --------- --------- Total Stockholders' Equity 42,041 36,222 --------- --------- Total Liabilities and Stockholders' Equity $ 435,708 $ 410,505 ========= =========
The accompanying notes are an integral part of these financial statements. 34 35 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- (dollars in thousands, except per share amounts) INTEREST INCOME Interest and fees on loans (Note #1D) $ 30,231 $ 30,939 $ 28,872 Interest on Investment Securities Taxable 2,645 2,171 2,045 Exempt from federal taxes 382 430 175 Interest on deposits 241 402 165 Interest on federal funds sold 1,274 1,070 1,944 Lease financing income (Note #1F) Taxable 2 13 43 Exempt from federal taxes 253 122 158 -------- -------- -------- 35,028 35,147 33,402 -------- -------- -------- INTEREST EXPENSE Interest on savings and NOW deposits 1,323 1,269 1,211 Interest on money market deposits 2,301 1,831 1,391 Interest on time deposits in denominations of $100,000 or more 2,960 3,302 3,441 Interest on other time deposits 3,139 3,448 3,708 Interest on borrowings 15 19 35 -------- -------- -------- 9,738 9,869 9,786 -------- -------- -------- Net Interest Income 25,290 25,278 23,616 PROVISION FOR POSSIBLE LOAN LOSSES (Note #1E and #5) (1,681) (2,200) (2,016) -------- -------- -------- Net Interest Income After Provision for Possible Loan and Lease Losses 23,609 23,078 21,600 -------- -------- -------- OTHER INCOME Services fees 5,558 4,843 4,300 Gain on sale of SBA loans 157 83 46 Other 325 338 342 -------- -------- -------- 6,040 5,264 4,688 -------- -------- -------- OTHER EXPENSES Salaries and employee benefits 10,348 10,286 9,740 Net occupancy expense of premises 2,120 2,092 1,928 Furniture and equipment expenses 1,752 1,509 1,261 Other expenses (Note #16) 8,379 7,813 7,696 -------- -------- -------- 22,599 21,700 20,625 -------- -------- -------- INCOME BEFORE INCOME TAXES 7,050 6,642 5,663 -------- -------- -------- INCOME TAXES (Notes #1K and #17) Currently payable 2,597 2,805 2,603 Deferred (65) (346) (503) -------- -------- -------- 2,532 2,459 2,100 -------- -------- -------- NET INCOME $ 4,518 $ 4,183 $ 3,563 ======== ======== ======== EARNINGS PER SHARE (Note #18) Basic $ 0.90 $ 0.86 $ 0.75 ======== ======== ======== Diluted $ 0.85 $ 0.84 $ 0.73 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 35 36 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Valuation Number Additional Allowance of Shares Common Paid-in Retained For Outstanding Stock Capital Earnings Investments Total ----------- ------- --------- --------- ----------- --------- (dollars in thousands) BALANCE, JANUARY 1, 1995 3,547,565 $ 7,440 $456 $19,361 $(386) $ 26,871 10% stock dividend (Note #15) 356,433 2,940 (2,940) Cash paid in lieu of fractional shares (3) (3) Exercise of stock options 8,610 52 52 Common stock issued under employee benefit and dividend reinvestment and optional investment plans 43,153 357 357 Net unrealized gain on securities available-for-sale 18 184 202 Net income for the year 3,563 3,563 --------- ------- ---- ------- ---------- -------- BALANCE, DECEMBER 31, 1995 3,955,761 10,789 456 19,999 (202) $ 31,042 10% stock dividend (Note #15) 396,840 3,571 (3,571) Cash paid in lieu of fractional shares (4) (4) Exercise of stock options 130,493 716 136 852 Common stock issued under employee benefit and dividend reinvestment and optional investment plans 37,496 330 330 Net unrealized loss on securities available-for-sale (181) (181) Net income for the year 4,183 4,183 --------- ------- ---- ------- ---------- -------- BALANCE, DECEMBER 31, 1996 4,520,590 15,406 592 20,607 (383) 36,222 10% stock dividend (Note #15) 457,167 6,058 (6,058) Cash paid in lieu of fractional shares (5) (5) Exercise of stock options 86,428 508 67 575 Common stock issued under employee benefit and dividend reinvestment and optional investment plans 47,808 646 646 Net unrealized loss on securities available-for-sale 85 85 Net income for the year 4,518 4,518 --------- ------- ---- ------- ---- ------- BALANCE, DECEMBER 31, 1997 5,111,993 $22,618 $659 $19,062 $(298) $42,041 ========= ======= ==== ======= ===== =======
The accompanying notes are an integral part of these financial statements. 36 37 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 --------- --------- --------- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Interest and fees received $ 34,886 $ 35,262 $ 32,580 Service fees and other income received 5,478 4,771 4,269 Financing revenue received under leases 255 135 201 Interest paid (9,927) (10,117) (9,450) Cash paid to suppliers and employees (19,063) (20,287) (20,235) Income taxes paid (2,390) (2,796) (2,409) --------- --------- --------- Net Cash Provided By Operating Activities 9,239 6,968 4,956 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of held-to-maturity securities 16,272 27,724 28,542 Purchase of held-to-maturity securities (26,073) (9,975) (31,412) Proceeds from maturity of available-for-sale securities 78,806 157,607 35,372 Purchase of available-for-sale securities (69,981) (178,463) (43,404) Proceeds from maturity of deposits in other financial institutions 8,920 5,828 792 Purchase of deposits in other financial institutions (13,272) (3,352) (6,037) Net (increase)/decrease in credit card and revolving credit receivables (655) 22 19 Recoveries on loans previously written off 407 503 549 Net (increase)/decrease in loans (2,853) (39,043) (21,260) Net (increase)/decrease in leases (1,862) (730) 1,746 Capital expenditures (1,719) (1,122) (2,446) Proceeds from sale of other real estate owned 3,250 3,531 4,102 Proceeds from sale of property, plant and equipment 39 71 216 --------- --------- --------- Net Cash Used In Investing Activities (8,721) (37,399) (33,221) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, savings accounts and money market deposits 27,717 29,131 25,313 Net increase/(decrease) in certificates of deposit with maturities of three months or less 7,861 (14,059) 37,758 Net increase/(decrease) in certificates of deposits with maturities of more than three months (16,490) (5,234) (2,965) Proceeds from exercise of stock options 575 852 52 Proceeds from stock issuance 646 330 357 Principal payments on long-term debt (45) (40) (37) Dividends paid (5) (4) (358) --------- --------- --------- Net Cash Provided By Financing Activities 20,259 10,976 60,120 --------- --------- --------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 20,777 (19,455) 31,855 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 48,573 68,028 36,173 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 69,350 $ 48,573 $ 68,028 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 37 38 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------- ------- ------- RECONCILIATION OF NET INCOME TO NET CASH (dollars in thousands) PROVIDED BY OPERATING ACTIVITIES Net Income $ 4,518 $ 4,183 $ 3,563 ------- ------- ------- Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities Depreciation and amortization 1,228 1,044 704 Provision for possible credit losses 1,681 2,200 2,016 Provision for possible OREO losses 405 572 959 Provision for deferred taxes 65 (346) (503) (Gain)loss on sale of equipment 52 (46) Increase/(decrease) in taxes payable 77 10 (442) (Increase)/decrease in other assets 1,640 (767) (335) (Increase)/decrease in interest receivable 27 170 (457) Increase/(decrease) in discounts and premiums 86 80 (165) Increase/(decrease) in interest payable (189) (248) 336 Increase in prepaid expenses (149) (51) (389) Increase/(decrease) in accrued expenses and other liabilities 411 697 (94) Gain on sale of other real estate owned (168) Increase in cash surrender value of life insurance (445) (447) (287) (Gain)/loss on sale of investments and other assets (83) 50 ------- ------- ------- Total Adjustments 4,721 2,785 1,393 ------- ------- ------- Net Cash Provided By Operating Activities $ 9,239 $ 6,968 $ 4,956 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 38 39 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Foothill Independent Bancorp (the "Company") and Subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. A summary of the significant accounting and reporting policies consistently applied in the preparation of the accompanying financial statements follows: A. Principles of Consolidation --------------------------- The consolidated financial statements include the Company and its wholly owned subsidiaries, Foothill Independent Bank ("Bank"), and Foothill BPC, Inc. Intercompany balances and transactions have been eliminated. B. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C. Investment Securities --------------------- Securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity, or to an earlier call, if appropriate, on a straight-line basis. Such securities include those that management intends and has the ability to hold into the foreseeable future. Securities are considered available-for-sale if they would be sold under certain conditions, among these being changes in interest rates, fluctuations in deposit levels or loan demand, or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are not recognized as current income, but rather as an increase or decrease of capital through a separate valuation allowance (net of tax). D. Loans and Interest on Loans --------------------------- Loans are stated at unpaid principal balances, and net of deferred loan fees and unearned discounts. The Bank recognizes loan origination fees to the extent they represent reimbursement for initial direct costs, as income at the time of loan boarding. The excess of fees over costs, if any, is deferred and credited to income over the term of the loan. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to make all payments due according to the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. 39 40 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued E. Provision and Reserve for Loan and Lease Losses ----------------------------------------------- The determination of the balances in the reserves for loan and lease losses is based on an analysis of the respective portfolios and reflects an amount which, in Management's judgment, is adequate to provide for potential losses after giving consideration to the character of the portfolios, current economic conditions, past loss experiences and such other factors as deserve current recognition in estimating losses. The provision for loan and lease losses are charged to expense. F. Direct Lease Financing ---------------------- The investment in lease contracts is recorded using the finance method of accounting. Under the finance method, an asset is recorded in the amount of the total lease payments receivable and estimated residual value, reduced by unearned income. Income, represented by the excess of the total receivable over the cost of the related asset, is recorded in income in decreasing amounts over the term of the contract based upon the principal amount outstanding. The financing lease portfolio consists of equipment with terms from three to seven years. G. Bank Premises, Equipment and Leasehold Improvements --------------------------------------------------- Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred. Depreciation is computed on the straight line basis over the estimated useful lives of the related assets. Depreciation expense is based on the following depreciable lives: buildings (including leasehold premises) 20 to 30 years; leasehold improvements 3 to 20 years; and equipment 3 to 20 years. H. Other Real Estate Owned ----------------------- Other real estate owned, which represents real estate acquired through foreclosure, is stated at the lower of the carrying value of the loan or the estimated fair market value (less selling costs) of the related real estate. Loan balances in excess of the fair market value of the real estate acquired at the date of acquisition are charged against the reserve for loan and lease losses. Any subsequent operating expenses or income and gains or losses on disposition of such properties are charged to current operations. I. Earnings Per Shares (EPS) ------------------------- Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. 40 41 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 J. Consolidated Statements of Cash Flows ------------------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. K. Income Taxes ------------ Provisions for income taxes are based on amounts reported in the statements of income (after exclusion of nontaxable income such as interest on state and municipal securities) and include deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. L. Loan Sales and Servicing ------------------------ Gains and losses from the sale of participating interests in loans guaranteed by the Small Business Administration (SBA) are recognized based on the premium received or discount paid and the cost basis of the portion of the loan sold. The cost basis of the portion of the loan sold was arrived at by allocating the total cost of each loan between the guaranteed portion of the loan sold and the unguaranteed portion of the loan retained, based on their relative fair values. The book value allocated to the unguaranteed portion of the loan, if less than the principal amount, is recorded as a discount on the principal amount retained. The discount is accreted to interest income over the remaining estimated life of the loan. The Bank retains the servicing on the portion of the loans sold and recognizes income on the servicing fees when they are received. M. Current Accounting Pronouncements --------------------------------- In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income." This statement, which is effective for the year ending December 31, 1998, establishes standards of disclosure and financial statement display for reporting comprehensive income and its components. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement changes current practice under SFAS 14 by establishing a new framework on which to base segment reporting (referred to as the management approach) and also requires certain related disclosures about products and services, geographic areas and major customers. The disclosures are required for the year ending December 31, 1998. N. Reclassifications ----------------- Certain reclassifications were made to prior years' presentations to conform to the current year. 41 42 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #2 - INVESTMENT SECURITIES Based upon the guidelines of SFAS No. 115 and management's analysis of securities holdings, the Company's securities were classified as held-to-maturity and available-for-sale, respectively, as follows: o Held-To-Maturity Securities --------------------------- The amortized cost and estimated fair value of held-to-maturity securities were as follows for the dates indicated (in thousands):
December 31, 1997 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) ----------- ------------ ------------ ----------- U.S. Treasury Securities $ 11,385 $ 41 $ 11,426 Securities of Other U.S. Government Agencies 999 7 1,006 Municipal Agencies 2,476 13 2,489 Other Securities 250 250 ----------- ------------ ------------ ----------- Total Held-to-Maturity Securities $ 15,110 $ 61 $ 15,171 =========== ============ ============ ===========
December 31, 1996 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) ----------- ------------ ------------ ----------- U.S. Treasury Securities $ 2,796 $ 5 $ 1 $ 2,800 Municipal Agencies 2,529 10 1 2,538 Other Securities 250 250 ----------- ------------ ------------ ----------- Total Held-to-Maturity Securities $ 5,575 $ 15 $ 2 $ 5,588 =========== ============ ============ ===========
42 43 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #2 - INVESTMENT SECURITIES, Continued o Available-For-Sale Securities ----------------------------- The amortized cost and estimated fair value of available-for-sale securities were as follows for the dates indicated (in thousands):
December 31, 1997 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) ------------ ------------ ------------ ------------ U.S. Treasury Securities $ 7,986 $ 27 $ 8,013 Securities of Other U.S. Government Agencies 14,970 18 $ 23 14,965 Certificates of Participation (b) 4,413 14 4,427 Municipal Agencies 336 336 Other Securities 3,538 320 3,218 ------------ ------------ ------------ ------------ Total Available-for-Sale Carried at Fair Value $ 31,243 $ 59 $ 343 $ 30,959 ============ ============ ============ ============
December 31, 1996 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) ------------ ------------ ------------ ------------ U.S. Treasury Securities $ 1,944 $ 6 $ 1,950 Securities of Other U.S. Government Agencies 29,933 $ 83 29,850 Certificates of Participation (b) 4,428 24 4,452 Municipal Agencies 344 4 340 Other Securities 3,238 353 2,885 ------------ ------------ ------------ ------------ Total Available-for-Sale Carried at Fair Value $ 39,887 $ 30 $ 440 $ 39,477 ============ ============ ============ ============
- ------------------------ (a) The Bank's portfolio of securities primarily consists of investment-grade securities. The fair value of actively-traded securities is determined by the secondary market, while the fair value for non-actively-traded securities is based on independent broker quotations. (b) Non-rated certificates of participation evidencing ownership interest in the California Statewide Communities Development Authority - San Joaquin County Limited Obligation Bond Trust with book values of $4,413,000 and $4,428,000 and market values of $4,427,000 and $4,452,000 at December 31, 1997 and 1996 , respectively. Proceeds from maturities of investment securities held-to-maturity during 1997, were $16,272,000. Proceeds from maturities of investment securities available-for-sale during 1997, were $78,806,000. There were no gains or losses recognized. Included in shareholders' equity at December 31, 1997, is $298,000 of net unrealized losses on investments available-for-sale. 43 44 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #2 - INVESTMENT SECURITIES, Continued Proceeds from maturities of investment securities held-to-maturity during 1996, were $27,724,000. Proceeds from maturities of investment securities available-for-sale during 1996, were $157,607,000. There were no gains or losses recognized. Included in shareholders' equity at December 31, 1996, is $383,000 of net unrealized loss on investments available-for-sale. Securities with a book value of $15,139,000 and $27,384,000 and market value of $15,157,000 and $27,329,000 at December 31, 1997 and 1996 , respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The amortized cost, estimated fair value and average yield of securities at December 31, 1997, by contractual maturity were as follows (in thousands):
Held-to-Maturity Securities ------------------------------------- Maturities Schedule of Securities Amortized Average December 31, 1997 Cost Fair Value Yield (a) - ----------------------------------------- ----------- ----------- ---------- Due in one year or less $ 8,315 $ 8,084 5.96% Due after one year through five years 6,073 6,359 6.08% Due after five through ten years 722 728 4.60% ---------- ---------- ---------- Carried at Book Value $ 15,110 $ 15,171 5.55% ========== ========== ==========
Available-for-Sale Securities ------------------------------------- Amortized Average Cost Fair Value Yield (a) ----------- ----------- ---------- Due in one year or less $ 11,920 $ 11,607 4.31% Due after one year through five years 17,137 17,160 6.25% Due after five through ten years 1,850 1,856 8.43% After ten years 336 336 5.63% ---------- ---------- --------- Carried at Fair Value $ 31,243 $ 30,959 6.16% ========== ========== =========
- ------------------------ (a) The average yield is based on effective rates of book balances at the end of the year. Yields are derived by dividing interest income, adjusted for amortization of premiums and accretion of discounts, by total amortized cost. 44 45 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #3 - LOANS The composition of the loan portfolio at December 31, 1997 and 1996, was as follows (in thousands):
1997 1996 ----------- ----------- Commercial, financial and agricultural $ 43,883 $ 40,980 Real Estate - construction 10,895 11,601 Real Estate - mortgage Commercial 200,502 201,367 Residential 28,541 30,051 Loans to individuals for household, family and other personal expenditures 6,450 8,157 All other loans (including overdrafts) 2,203 407 ---------- ---------- 292,474 292,563 Deferred income on loans (665) (797) ---------- ---------- Loans, Net of Deferred Income $ 291,809 $ 291,766 ---------- ----------
Nonaccruing loans totaled approximately $11,458,000 and $11,622,000 at December 31, 1997 and 1996, respectively. Interest income that would have been recognized on nonaccrual loans if they had performed in accordance with the terms of the loans was approximately $981,000, $1,488,000 and $985,000 for the years ended December 31, 1997, 1996, and 1995, respectively. At December 31, 1997 and 1996, the Bank had approximately $7,000 and $2,829,000 in loans past due 90 days or more in interest or principal and still accruing interest. These loans are collateralized and in the process of collection. NOTE #4 - DIRECT LEASE FINANCING The Bank leases equipment to parties under agreements which range generally from three to seven years. Executory costs are paid by the lessee and leases do not include any contingent rental features. The net investment in direct lease financing at December 31, 1997 and 1996 , consists of the following (in thousands):
1997 1996 --------- --------- Lease payments receivable $ 5,443 $ 3,183 Estimated residual values 33 --------- --------- 5,443 3,216 Unearned income (694) (329) Lease residual balance account (23) --------- --------- $ 4,749 $ 2,864 ========= =========
At December 31, 1997, the Bank had no outstanding lease commitments. 45 46 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #4 - DIRECT LEASE FINANCING, Continued At December 31, 1997, future minimum lease payments receivable under direct financing leases are as follows (in thousands):
Year - ----------------- 1998 $ 1,525 1999 1,329 2000 1,024 2001 767 2002 322 Thereafter 476 --------- 5,443 Less unearned income (694) --------- $ 4,749 =========
NOTE #5 - RESERVE FOR LOAN AND LEASE LOSSES Transactions in the reserve for loan and lease losses are summarized as follows (in thousands):
1997 1996 1995 ---------- ---------- ---------- Balance at beginning of year $ 4,744 $ 3,644 $ 3,145 Recoveries on loans previously charged off 407 503 549 Provision charged to operating expense 1,681 2,200 2,016 Loans charged off (1,667) (1,603) (2,066) ---------- ---------- ---------- Balance at end of year $ 5,165 $ 4,744 $ 3,644 ========== ========== ==========
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan" on January 1, 1995. The statement generally requires those loans identified as "impaired" to be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will not be able to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. The Bank has identified all nonaccruing loans as being impaired loans. The allowance for loan losses related to impaired loans amounted to approximately $951,000 and $485,000 for the years ended December 31, 1997 and 1996, respectively, and is included in the above balances. The average balance of these loans amounted to approximately $11,808,000 and $10,314,000 for the years ended December 31, 1997 and 1996, respectively. Cash receipts during 1997 applied to reduce principal balance and recognized as interest income was approximately $6,346,000 and $919,000, respectively. Cash receipts during 1996 applied to reduce principal balance and recognized as interest income was approximately $2,073,000 and $137,000, respectively. 46 47 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #6 - LOANS TO DIRECTORS AND OFFICERS During prior years, the Bank has granted in the ordinary course of its business, loans to directors, principal shareholders and their associates. All such loans were made under terms which are consistent with the Bank's normal lending policies. An analysis of the activity with respect to such aggregate loans to related parties during 1997 and 1996, is as follows (in thousands):
1997 1996 ---------- --------- Outstanding Balance, Beginning of year $ 41 $ 50 Credit granted, including renewals Repayments and other reductions (41) (9) ---------- --------- Outstanding Balance, End of year $ 0 $ 41 ========== =========
NOTE #7 - BANK PREMISES AND EQUIPMENT Major classifications of bank premises and equipment are summarized as follows (in thousands):
1997 1996 ---------- ---------- Buildings $ 2,424 $ 2,424 Furniture and equipment 7,829 9,331 Leasehold improvements 2,380 2,250 ---------- ---------- 12,633 14,005 Less: Accumulated depreciation and amortization (6,151) (7,923) ---------- ---------- 6,482 6,082 Land 1,222 1,222 ---------- ---------- Total $ 7,704 $ 7,304 ========== ==========
NOTE #8 - OTHER REAL ESTATE OWNED As discussed in Note #1H, Other Real Estate Owned is carried at the estimated fair value of the real estate. An analysis of the transactions for December 31, 1997 and 1996, were as follows (in thousands):
1997 1996 ---------- ---------- Balance, Beginning of year $ 4,595 $ 3,879 Additions 1,798 4,877 Valuation adjustment and other reductions (3,487) (4,161) ---------- ---------- Balance, End of year $ 2,906 $ 4,595 ========== ==========
The balances at December 31, 1997 and 1996, are shown net of reserves. 47 48 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #8 - OTHER REAL ESTATE OWNED, Continued Transactions in the reserve for other real estate owned are summarized for December 31, 1997 and 1996 , were as follows (in thousands):
1997 1996 --------- ------- Balance, Beginning of year $ 1,146 $ 909 Provision charged to other expense 405 572 Charge-offs and other reductions (1,162) (335) --------- ------- Balance, End of year $ 389 $ 1,146 ========= =======
NOTE #9 - DEPOSITS At December 31, 1997, the scheduled maturities of time deposits are as follows: 1998 $ 100,745 1999 8,374 2000 1,503 2001 100 2002 38 ----------- Total $ 110,760 ===========
NOTE #10 - LONG-TERM DEBT The long-term debt consists of one obligation. This note is a secured obligation and bears interest at 10%. Principal and interest are payable monthly in installments of $4,956, beginning October 1, 1990, until maturity at September 1, 2000. The following is a schedule of future payments (in thousands):
Year Principal Interest Total - ----------- --------- ---------- ---------- 1998 $ 49 $ 10 $ 59 1999 55 5 60 2000 19 19 --------- ---------- ---------- $ 123 $ 15 $ 138 ========= ========== ==========
48 49 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #11 - STOCK OPTION PLAN At December 31, 1997, the Bank has a fixed option plan, which is described below. The Bank applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation costs for these plans been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the impact would not have materially affected net income. The Company's 1993 incentive stock option and nonqualified stock option plan approved by the stockholders provide that an aggregate of 997,427 shares (after giving retroactive effect for 10 percent stock dividends) of the Company's unissued common stock may be granted to certain officers, key employees, and directors at prices not less than the fair market value of such shares at dates of grant. Options granted expire within a period of not more than ten years from the date the option is granted. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995, respectively: risk-free rates of 5.70%, 6.17% and 5.35%; dividend yields of 0%, 0% and 1.38%; expected life of five years; and volatility of 34%, 35% and 35%. A summary of the status of the Bank's fixed stock option plan as of December 31, 1997, 1996, and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 ----------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ ---------- ---------- ----------- ---------- ---------- Outstanding, Beginning of year 506,166 $ 6.13 501,176 $ 4.97 333,190 $ 4.65 Granted 290,860 11.48 172,800 7.09 211,250 5.48 Exercised (89,279) 6.22 (156,592) 4.58 (11,193) 4.65 Forfeited (11,721) 7.06 (11,218) 6.05 (32,071) 5.83 ------------ ---------- ---------- Outstanding, End of year 696,026 9.11 506,166 6.13 501,176 4.97 ============ ========== ========== Options exercisable at year end 601,693 8.41 442,267 6.05 417,647 5.63 Weighted average fair value of options granted during the year $ 4.55 $ 3.51 $ 2.76
49 50 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #11 - STOCK OPTION PLAN, Continued The following table summarizes information about fixed stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Outstanding Life Price Exercisable Price ------------- ------------- ---------- ------------- ----------- $5.116 to $5.904 15,372 10.00 $ 5.99 15,372 $ 5.99 $5.116 to $5.904 240,182 10.00 6.44 223,180 6.43 $5.116 to $5.904 151,112 10.00 7.74 127,781 7.74 $6.592 to $6.968 204,160 10.00 10.45 204,160 10.45 $7.182 to $7.500 13,200 10.00 12.16 13,200 12.16 $7.182 to $7.500 67,000 10.00 13.88 16,750 13.88 $8.500 to $8.625 5,000 10.00 15.38 1,250 15.38 --------- -------- $5.116 to $8.625 696,026 10.00 9.11 601,693 8.41 ========= ========
NOTE #12 - DEFINED CONTRIBUTION PLAN (401K) The Company sponsors a defined contribution pension plan that covers all employees with 1,000 or more hours worked in a year. Contributions to the plan are based on the employee's gross salary less the IRS Section 125 flex plan. For the years ending December 31, 1997, 1996, and 1995, the amount of pension expense was $273,000, $138,000, and $112,000, respectively. NOTE #13 - DEFERRED COMPENSATION The Bank maintained a nonqualified, unfunded deferred compensation plan for certain key management personnel whereby they may defer compensation which will then provide for certain payments upon retirement, death, or disability. The plan provides for payments for ten years commencing upon retirement. The plan provides for reduced benefits upon early retirement, disability, or termination of employment. The deferred compensation expense for 1997 was $306,504 ($180,831 net of income taxes), 1996 was $322,488 ($193,493 net of income taxes), and 1995 was $155,000 ($93,000 net of income taxes). 50 51 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #14 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT There are legal limitations on the ability of the Bank to provide funds to the Company. Dividends declared by the Bank may not exceed, in any calendar year, without approval of the California Department of Financial Institutions, net income for the year and the retained net income for the preceding two years. Section 23A of the Federal Reserve Act restricts the Bank from extending credit to the Company and other affiliates amounting to more than 20% of its contributed capital and retained earnings. At December 31, 1996, the combined amount of funds available from these two sources amounted to approximately $20,857,000 or 50% of consolidated stockholders' equity. NOTE #15 - STOCK DIVIDENDS On May 1, 1995, the Bank distributed 356,433 shares of common stock in connection with a 10% stock dividend. As a result of the stock dividend, common stock was increased and retained earnings was decreased by $2,940,000. On January 23, 1996, the Board of Directors declared a 10% stock dividend payable on April 5, 1996, to stockholders of record on March 22, 1996. As a result, the Bank distributed 396,840 shares of common stock and the common stock was increased and retained earnings were decreased by $3,571,000. On March 25, 1997, the Board of Directors declared a 10% percent stock dividend payable on June 20, 1997, to stockholders of record on June 6, 1997. As a result, the Bank distributed 457,167 shares of common stock and the common stock was increased and retained earnings was decreased by $6,058,000. All references in the accompanying financial statements to the number of common shares and per share amounts for 1996 and 1995, have been restated to reflect the stock dividends. NOTE #16 - OTHER EXPENSES The following is a breakdown of other expenses for the years ended December 31, 1997, 1996, and 1995 (in thousands):
1997 1996 1995 --------- --------- --------- Data processing $ 1,051 $ 893 $ 903 Marketing expenses 661 766 809 Office supplies, postage and telephone 1,316 1,050 1,044 Bank insurance 453 454 454 FDIC assessments 139 143 473 Legal fees 802 843 558 Operating losses 86 660 389 OREO expenses and provision for OREO 561 574 1,230 Other 3,310 2,430 1,836 -------- -------- -------- Total $ 8,379 $ 7,813 $ 7,696 ======== ======== ========
51 52 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #17 - INCOME TAXES The provisions for income taxes consist of the following (amounts in thousands):
1997 1996 1995 --------- --------- --------- Tax provision applicable to income before income taxes $ 2,532 $ 2,459 $ 2,100 ========= ========= ========= Federal Income Tax Current 1,766 1,946 1,903 Deferred (9) (234) (425) State Franchise Tax Current 831 859 700 Deferred (56) (112) (78) --------- --------- --------- Total $ 2,532 $ 2,459 $ 2,100 ========= ========= =========
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):
Deferred Tax Assets 1997 1996 --------- --------- Allowance for loan losses due to tax limitations 1,461 1,311 Deferred compensation plan 808 704 Allowance for other real estate owned 152 445 Other assets and liabilities 268 188 Net unrealized depreciation on available-for-sale securities 111 --------- --------- Total Deferred Tax Assets 2,689 2,759 --------- --------- Deferred Tax Liabilities Premises and equipment due to depreciation difference (796) (805) Net unrealized appreciation on available-for-sale securities (4) --------- --------- Net Deferred Tax Assets $ 1,889 $ 1,954 ========= =========
52 53 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #17 - INCOME TAXES, Continued Deferred tax expense results from timing differences in the recognition of revenues and expenses for tax and financial statement purposes. The sources of these differences and the tax effect of each are as follows (in thousands):
1997 1996 1995 ------------------ ------------------ ------------------ Federal State Federal State Federal State -------- -------- ------- -------- -------- -------- Tax effect of Nonaccrual loan interest computed differently on tax returns than for financial statements $ 65 $ 25 $ 8 $ 3 $ (50) $ (18) Direct lease financing 9 7 23 2 Depreciation computed differently on tax returns than for financial statement (6) (3) 24 18 (9) 9 OREO transactions computed differently on tax return than for financial statement 210 83 (24) (9) (191) (33) Deferred compensation plan (85) (19) (70) (27) (75) (24) Provision for loan loss deduction on tax return under amount charged for financial statements purposes (70) (80) (243) (93) (72) (12) Other assets and liabilities (123) (62) 62 (11) (51) (2) -------- -------- ------- -------- -------- -------- Total $ (9) $ (56) $ (234) $ (112) $ (425) $ (78) ======== ======== ======= ======== ======== ========
As a result of the following items, the total tax expenses for 1997, 1996 and 1995, were less than the amount computed by applying the statutory U.S. Federal income tax rate to income before taxes (dollars in thousands):
1997 1996 1995 --------------------- --------------------- --------------------- Percent of Percent of Percent of Pretax Pretax Pretax Amount Income Amount Income Amount Income -------- ----------- -------- ----------- -------- ----------- Federal rate $ 2,397 34.0 $ 2,258 34.0 $ 1,925 34.0 Changes due to State income tax, net of Federal tax benefit 501 7.1 472 7.1 402 7.1 Exempt interest (319) (4.5) (218) (3.3) (154) (3.1) Other (47) (0.7) (53) (0.8) (73) (0.9) ------- -------- ------- -------- ------- ------ Total $ 2,532 35.9 $ 2,459 37.0 $ 2,100 37.1 ======= ======== ======= ======== ======= ======
53 54 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #18 -- EARNINGS PER SHARE (EPS) The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS (amounts in thousands):
1997 1996 1995 ------------------ --------------------- ------------------- Income Shares Income Shares Income Shares -------- -------- ----------- -------- --------- --------- Net income as reported $4,518 $ 4,183 $ 3,563 Shares outstanding at year end 5,112 4,972 4,786 Impact of weighting shares purchased during the year (72) (129) (15) ------- -------- ----------- -------- --------- --------- Used in Basic EPS 4,518 5,040 4,183 4,843 3,563 4,771 Dilutive effect of outstanding stock options 268 156 135 ------ -------- ----------- -------- --------- --------- Used in Dilutive EPS $4,518 5,308 $ 4,183 4,999 $ 3,563 4,906 ====== ======== =========== ======== ========= =========
NOTE #19 - COMMITMENTS AND CONTINGENCIES The Bank leases land and buildings under noncancelable operating leases expiring at various dates through 2014. The following is a schedule of future minimum lease payments based upon obligations at year end (in thousands):
Year - --------------------- 1998 $ 1,057 1999 1,052 2000 1,001 2001 937 2002 713 Succeeding years 1,466 -------- $ 6,226 ========
Total rental expense for the three years ended December 31, 1997, 1996, and 1995, was $1,203,000 $1,064,000, $1,087,000, respectively. The Bank is involved in various litigation. In the opinion of Management and the Company's legal counsel, the disposition of all litigation pending will not have a material effect on the Company's financial statements. 54 55 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #19 - COMMITMENTS AND CONTINGENCIES, Continued In the normal course of business, the Bank is a party to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit and standby commercial letters of credit. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 1997 and 1996 , the Bank had commitments to extend credit of $53,189,000 and $34,461,000, respectively, and obligations under standby letters of credit of $969,900 and $1,088,000, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. NOTE #20 - REGULATORY MATTERS The bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt correct action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. 55 56 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #20 - REGULATORY MATTERS, Continued The Bank's actual capital amounts and ratios are presented in the following table (amounts in thousands):
Capital Needed ----------------------------------------- To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Provisions -------------------- ------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- ---------- ------ ---------- -------- As of December 31, 1997: Total capital to risk-weighted assets $ 45,039 14.3% $ 25,121 8.0% $ 31,401 10.0% Tier 1 capital to risk-weighted assets 41,098 13.1% 12,560 4.0% 18,840 6.0% Tier 1 capital to average assets 41,098 9.5% 17,346 4.0% 21,682 5.0% As of December 31, 1996: Total capital to risk-weighted assets $ 39,206 12.3%$ 25,486 8.0% $ 31,857 10.0% Tier 1 capital to risk-weighted assets 35,214 11.1% 12,743 4.0% 19,114 6.0% Tier 1 capital to average assets 35,214 8.5% 16,550 4.0% 20,687 5.0%
56 57 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of financial instruments at December 31, 1997, (dollars in thousands). FASB Statement 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
December 31, 1997 ------------------------- Carrying Fair Amount Value ----------- ----------- Financial Assets Cash and cash equivalents $ 69,350 $ 69,350 Investment securities and deposits 54,378 54,439 Loans 292,474 293,376 Direct lease financing 4,749 4,773 Financial Liabilities Deposits 390,146 388,770 Long-term debt 123 123 Unrecognized Financial Instruments Commitments to extend credit 53,189 53,189 Standby letters of credit 970 970
The following methods and assumptions were used to estimate the fair value of financial instruments: o Investment Securities --------------------- For U.S. Treasury and U.S. Government Agency securities, fair values are based on market prices. For other investment securities, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities as the basis for a pricing matrix. o Loans ----- The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of the future cash flows expected to be received by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk. 57 58 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued o Deposits -------- The fair value of demand deposits, money market deposits, savings accounts and NOW accounts is defined as the amounts payable on demand at December 31, 1997. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits. o Long-term Debt - Notes Payable ------------------------------ Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. 58 59 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #22 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP (PARENT COMPANY) BALANCE SHEETS
1997 1996 1995 --------- ---------- ---------- (dollars in thousands) ASSETS Cash $ 143 $ 281 $ 195 Investment in subsidiaries 41,173 35,283 30,135 Time certificates of deposit 394 95 Accounts receivable 143 209 37 Loans 13 15 15 Excess of cost over net assets of company acquired (net) 170 212 255 Prepaid and other 5 222 310 --------- --------- -------- Total Assets $ 42,041 $ 36,222 $ 31,042 ========= ========= ======== STOCKHOLDERS' EQUITY Common stock 22,618 15,406 10,789 Additional paid-in capital 659 592 456 Retained earnings 18,764 20,224 19,797 --------- --------- -------- Total Stockholders' Equity 42,041 36,222 31,042 --------- --------- -------- Total Liabilities and Stockholders' Equity $ 42,041 $ 36,222 $ 31,042 ========= ========= ======== STATEMENTS OF INCOME INCOME Equity in undistributed income of subsidiaries $ 4,705 $ 4,328 $ 3,677 Interest and other income 73 6 18 --------- --------- -------- 4,778 4,334 3,695 --------- --------- -------- EXPENSE Amortization and other expenses 334 224 169 --------- --------- -------- Total Operating Income 4,444 4,110 3,526 Tax benefit of parent's operating expenses 74 73 37 --------- --------- -------- Net Income $ 4,518 $ 4,183 $ 3,563 --------- --------- --------
59 60 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #22 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP (PARENT COMPANY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Cash received for tax benefit from Foothill Independent Bank $ 74 $ 72 $ 37 Interest and other income received 73 6 18 Cash paid for operating expenses (9) (266) (138) -------- -------- -------- Net Cash Provided/(Used) By Operating Activities 138 (188) (83) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in loans 2 1 (Purchase)/redemption of deposits in other financial institutions (394) 95 598 Capital contributed to subsidiary (1,100) (1,000) (800) -------- -------- -------- Net Cash Used By Investing Activities (1,492) (905) (201) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (5) (3) (358) Capital stock purchased 646 330 357 Proceeds from exercise of stock options 575 852 52 -------- -------- -------- Net Cash Provided By Financing Activities 1,216 1,179 51 -------- -------- -------- NET INCREASE/(DECREASE) IN CASH (138) 86 (233) CASH, Beginning of year 281 195 428 -------- -------- -------- CASH, End of year $ 143 $ 281 $ 195 ======== ======== ======== RECONCILIATION OF NET INCREASE TO NET CASH PROVIDED BY OPERATING ACTIVITIES NET INCOME $ 4,518 $ 4,183 $ 3,563 -------- -------- -------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Amortization 42 42 42 Undistributed earnings of subsidiaries (4,705) (4,328) (3,677) (Increase)/decrease in accounts receivable 66 (172) (21) Decrease in prepaids and other 217 87 10 -------- -------- -------- Total Adjustments (4,380) (4,371) (3,646) -------- -------- -------- Net Cash Provided/(Used) by Operating Activities $ 138 $ (188) $ (83) ======== ======== ========
60 61 FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE #23 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following quarterly financial information for the Company and its subsidiaries for the two years ended December 31, 1997, is summarized below:
1997 ----------------------------------------------------- First Second Third Fourth ----------- ----------- ----------- ------------ (dollars in thousands, except per share amounts) Summary of Operations Interest income $ 8,368 $ 8,732 $ 8,916 $ 9,012 Interest expense 2,443 2,384 2,442 2,469 Net interest income 5,925 6,348 6,474 6,543 Provision for loan losses 281 50 50 1,300 Net interest income after provision for loan losses 5,644 6,298 6,424 5,243 Other income 1,381 1,432 1,396 1,831 Other expense 5,225 6,106 5,675 5,519 Income before taxes 1,800 1,624 2,145 1,555 Applicable income taxes 667 610 823 506 ----------- ----------- ----------- ------------ Net Income $ 1,133 $ 1,014 $ 1,322 $ 1,049 =========== =========== =========== ============ Earnings Per Share - Basic $ 0.23 $ 0.20 $ 0.24 $ 0.21 =========== =========== =========== ============ Earnings Per Share - Diluted $ 0.22 $ 0.19 $ 0.23 $ 0.19 =========== =========== =========== ============
1996 ----------------------------------------------------- First Second Third Fourth ----------- ----------- ----------- ------------ Summary of Operations Interest income $ 8,764 $ 8,507 $ 9,076 $ 8,800 Interest expense 2,641 2,405 2,329 2,494 Net interest income 6,123 6,102 6,747 6,306 Provision for loan losses 490 535 722 453 Net interest income after provision for loan losses 5,633 5,567 6,025 5,853 Other income 1,246 1,307 1,352 1,359 Other expense 5,553 5,323 5,479 5,345 Income before taxes 1,326 1,551 1,898 1,867 Applicable income taxes 503 598 746 612 ----------- ----------- ----------- ------------ Net Income $ 823 $ 953 $ 1,152 $ 1,255 =========== =========== =========== ============ Earnings Per Share - Basic $ 0.17 $ 0.20 $ 0.24 $ 0.25 =========== =========== =========== ============ Earnings Per Share - Diluted $ 0.17 $ 0.19 $ 0.23 $ 0.25 =========== =========== =========== ============
61 62 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for information regarding the Registrant's executive officers which is included in Part I of this Report, the information called for by Item 10 is incorporated herein by reference from the Company's definitive proxy statement, for the Company's 1998 annual meeting of shareholders, to be filed with the Commission on or before April 30, 1998. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1998 for the Company's 1998 annual shareholders' meeting. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1998 for the Company's 1998 annual shareholders' meeting. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference from the Company's definitive proxy statement to be filed with the Commission on or before April 30, 1998 for the Company's 1998 annual shareholders' meeting. 62 63 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this Form 10-K: (1) Financial Statements: See Index to Financial Statements in Item 8 on Page 32 of this Report. (2) Financial Statement Schedules: All schedules are omitted as the information is not required, is not material or is otherwise furnished. (3) Exhibits: See Index to Exhibits on Page 65 of this Form 10-K. (4) Reports on Form 8-K: None 63 64 POWER OF ATTORNEY Each person whose signature appears below hereby authorizes George E. Langley, Tom Kramer or Carol Ann Graf, individually, as attorney-in-fact, to sign in his behalf and in each capacity stated below, and to file, all amendments and/or supplements to this Annual Report on form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March 1998. FOOTHILL INDEPENDENT BANCORP (Registrant) By: /s/GEORGE E. LANGLEY ------------------------------------- George E. Langley, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following officers and directors of the registrant in the capacities indicated on March 27, 1998 /s/ GEORGE E. LANGLEY President, Chief Executive Officer (Principal - ---------------------------- Executive Officer) and Director George E. Langley /s/ CAROL ANN GRAF Chief Financial Officer (Principal Financial and - ---------------------------- Accounting Officer) Carol Ann Graf /s/ WILLIAM V. LANDECENA Chairman of the Board of Directors - ---------------------------- William V. Landecena /s/ RICHARD A. BARKER Director - ---------------------------- Richard A. Barker /s/ CHARLES G. BOONE Director - ---------------------------- Charles G. Boone /s/ O.L. MESTAD Director - ---------------------------- O. L. Mestad /s/ DOUGLAS F. TESSITOR Director - ---------------------------- Douglas F. Tessitor /s/ MAX E. WILLIAMS Director - ---------------------------- Max E. Williams
64 65 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Page - ------- ------------ 3.1 Articles of Incorporation of Registrant, as amended to date (R-8) 3.2 Bylaws of Registrant (R-1) 4 Specimen Common Stock Certificate for Registrant (R-1) 10.1 Registrant's Incentive Stock Option Plan-1981 (R-2) 10.2 Registrant's Nonqualified and Incentive Stock Option Plan-1983 (R-2) 10.3 Foothill Independent Bank--Glendora Office Ground Lease (R-1) 10.4 Foothill Independent Bank--Rancho Cucamonga Branch Office Lease (R-1) 10.5 Foothill Independent Bank--Ontario (South Euclid) Branch Office Lease (R-1) 10.6 Foothill Independent Bank--Ontario (Grove) Branch Office Lease (R-1) 10.7 Foothill Independent Bank--Upland Branch Office Lease (R-1) 10.8 Foothill Independent Bank--Claremont Branch Office Ground Lease (R-1) 10.11 Foothill Independent Bank--Amendment to Ontario (Grove) Branch Office Lease (R-3) 10.12 Foothill Independent Bank--Deferred Compensation Plan (R-4) 10.13 Agreement and Plan of Reorganization and Merger dated as of December 13, 1985 and amended and restated as of May 16, 1986 among the Company, the Bank and Inland National Bank (R-4) 10.14 Foothill Independent Bank--West Covina Branch Office Lease (R-5) 10.15 Foothill Independent Bank--Walnut Branch Office Lease (R-5) 10.16 Employment Agreement dated as of November 24, 1987 between the Bank and J.T. Waller (R-6) 10.17 Employment Agreement dated as of April 1, 1993 between the Bank and George E. Langley (R-7) 10.18 Foothill Independent Bancorp 1993 Stock Incentive Plan (R-7) 10.19 Employment Agreement dated as of March 31, 1995 between the Bank and George E. Langley (replacing the Employment Agreement entered into as of April 1, 1993) 68 10.20 Employment Agreement dated as of September 30, 1997 between the Bank and George E. Langly (replacing the Employment Agreement dated March 31, 1995) (R- )
65 66
Sequentially Exhibit Numbered Number Page - ------- ------------ 21 Subsidiaries of Registrant 23.1 Consent of Independent Certified Public Accountants with respect to the Financial Statements of the Registrant 23.2 Consent of Independent Certified Public Accountants with respect to the Financial Statements of the Registrant's 401K Plan included as Exhibit 99 to this Report 24.1 Power of Attorney-- (Included on Signature Page) 27.1 Financial Data Sheet as of and for the year ended December 31, 1997 27.2 Restated Financial Data Sheet as of and for the year ended December 31, 1996 27.3 Restated Financial Data Sheet as of and for the year ended December 31, 1995 27.4 Restated Quarterly Financial Data Sheet for quarter ended March 31, 1997. 27.5 Restated Quarterly Financial Data Sheet for quarter ended June 30, 1997. 27.6 Restated Quarterly Financial Data Sheet for quarter ended September 30, 1997. 27.7 Restated Quarterly Financial Data Sheet for quarter ended December 31, 1997. 27.8 Restated Quarterly Financial Data Sheet for quarter ended June 30, 1996. 27.9 Restated Quarterly Financial Data Sheet for quarter ended September 30, 1996. 99.1 Financial Statements of the registrant's 401k Plan (Partners in Your Future) required by Form 11-K, which is being filed as part of this Annual Report pursuant to Rule 15d-21 under the Securities Exchange Act of 1934 Compensation Plan and Arrangements Nonqualified and Incentive Stock Option Plan -- See Exhibit 10.2 above Foothill Independent Bank - Deferred Compensation Plan -- See Exhibit 10.2 above Foothill Independent Bancorp - 1993 Stock Incentive Plan -- See Exhibit 10.18 above Employment Agreement dated as of September 30, 1997 between Foothill Independent Bank and George E. Langley -- See Exhibit 10.20 above
___________________________ (R-1) Incorporated by reference to the same numbered exhibit to Registration Statement on Form S-14 (File No. 2-83329) filed on May 10, 1983. (R-2) Incorporated by reference to the same numbered exhibit to Registration Statement on Form S-8 (File No. 2-89744) filed on March 2, 1984. (R-3) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. (R-4) Incorporated by reference to Exhibit A to the Proxy Statement/Prospectus included in the Company's Registration Statement on Form S-4 (File No. 33-5898) filed on May 22, 1986. (R-5) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986. (R-6) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. (R-7) Incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year-ended December 31, 1992. (R-8) Incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (R-9) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. EX-10.20 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.20 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this 30th day of September 1997, by and between FOOTHILL INDEPENDENT BANK, a California banking corporation (the "Bank"), and GEORGE E. LANGLEY ("Langley"). R E C I T A L S - - - - - - - - A. Langley is currently, and for the past approximately seven (7) years has been, employed as President and Chief Executive Officer of the Bank. Currently, such employment is under an employment agreement dated March 31, 1995 which is scheduled to expire on March 31, 1998, (the "Prior Agreement"). B. The Bank desires to retain Langley as its President and Chief Executive Officer beyond March 31, 1998 and, in order to do so is willing to enter into this Agreement at this time to employ for Langley an additional 3 year period beginning on October 1, 1997 and continuing to and including September 30, 2000, and Langley desires to accept such employment, pursuant to the terms and provisions of this Agreement which shall supersede the Prior Agreement effective on the date hereof. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing premises and the covenants and agreements of the parties hereinafter set forth, the parties hereto agree as follows: 1. EMPLOYMENT For the Employment Term, as hereinafter defined, the Bank hereby agrees to employ Langley as President and Chief Executive Officer of the Bank, and Langley hereby agrees to serve the Bank in such capacities. In this connection, Langley agrees during the Employment Term (i) to devote substantially all of his business time and energies to the business and affairs of the Bank, (ii) to use his best efforts, skills, judgment and abilities to diligently manage the Bank and promote the Bank's interests, (iii) to perform loyally and conscientiously the services and acts customarily performed by a president of an independent bank, and (iv) to perform such other services, in the manner aforesaid, as the Board of Directors of the Bank may from time to time assign to him; provided, however, that such services shall at all times be commensurate with the duties of a president and chief executive of an independent bank. 2. EMPLOYMENT TERM (a) In General. The term of Langley's employment under this Agreement (the "Employment Term") shall commence effective as of October 1, 1997 (the "Effective Date"), and shall continue until the earliest to occur of the following: (i) the death of Langley; or (ii) termination of Langley's employment by the Bank's Board of Directors for Cause (as defined in subsection (b) hereof), or without Cause; or (iii) Langley's resignation or retirement as permitted or called for pursuant to Section 3(g) below, or (iv) September 30, 2000. (b) Definition of "Cause". As used herein, the term "Cause" shall mean (i) Langley's willful and material breach or neglect of the duties or of the obligations required of him 2 expressly by the terms of this Agreement which continues for thirty (30) days after the Board of Directors of the Bank has given written notice to Langley of such breach or neglect stating with specific particularity the nature thereof; or (ii) in the event Langley is charged by any federal, state or local authority with an act of dishonesty, an act involving moral turpitude, an act constituting a felony, or narcotics addiction, or habitual intemperance, and Langley is either convicted or enters a plea of guilty or nolo contendere with respect to any such charge; or (iii) Langley's commission of fraud, embezzlement or misappropriation, whether or not a criminal or civil charge is filed in connection therewith; or (iv) a federal or state bank regulatory agency or court of law issues an order the effect of which is to require Langley's employment or association with the Bank to be terminated and such order has become final and nonappealable. (c) Renewal. Not later than March 31, 2000 the Bank and Langley shall notify each other whether they desire to renew or extend this Agreement and, if so, the parties shall endeavor to reach agreement on terms for extending the Agreement beyond the September 30, 2000 expiration date hereof. 3. COMPENSATION (a) Base Salary. From and after the Effective Date and during the Employment Term, Langley shall receive as base compensation from the Bank an annual salary of Two Hundred Forty-Four Thousand Dollars ($244,000), which shall be payable each year in twenty-four (24) equal semi-monthly installments, each in the amount of Ten Thousand One Hundred Sixty Six and 66/100 Dollars ($10,166.66), on the fifteenth (15th) and last days of each month, or, if any such date falls on a holiday or weekend, the business day next preceding such date. (b) Adjustments to Base Compensation. On October 1, 1998 (the "Adjustment Date"), Langley's base salary, as set forth in subsection 3(a) above, shall be increased for and in the same proportion as the increase, subsequent to September 30, 1997 in the Consumer Price Index for Urban Wage Earners in the Los Angeles-Long Beach Area ("CPI"), but not to exceed twelve percent (12%). On each succeeding anniversary of the Adjustment Date during the Employment Term, Langley's base annual salary, as previously adjusted and in effect on the day immediately preceding such anniversary date, shall be further increased for and in the same proportion as the increase in the CPI during the immediately preceding twelve (12) months, but not to exceed twelve percent (12%). In the event publication of the CPI is discontinued during the Employment Term, the parties shall utilize for purposes hereof such other index or indices as are generally accepted in the business community as being the most equivalent index or indices to the CPI. In addition, subject to the approval of its Board of Directors, the Bank may further increase Langley's basic salary hereunder at any time or times during the term of this Agreement. (c) Incentive Plans and Bonuses. Langley shall be entitled to participate fully and at a level commensurate with his position as President and Chief Executive Officer of the Bank in any incentive compensation, deferred compensation, profit sharing, salary bonus, and stock option, stock purchase or stock ownership plan or plans which may now exist or be adopted hereafter by the Bank or by Foothill Independent Bancorp, which owns 100% of the Bank's Common Stock ("Bancorp"), or any successor to the Bank or the Bancorp. Langley also may be awarded discretionary bonuses by the Board of Directors of the Bank. 2 3 (d) Fringe Benefits. During the Employment Term, the Bank shall (i) provide Langley with, and pay the premiums for, life, medical and disability insurance policies, of the types and in the amounts set forth in Exhibit A hereto, in which Langley shall be the named insured in the case of the life and disability insurance and Langley and his dependents shall be the named insureds under the medical insurance; (ii) furnish Langley other fringe benefits customarily afforded to all executive officers of the Bank, including, but not limited to, paid vacation, which in Langley's case shall be four (4) weeks each calendar year during the Employment Term, and paid sick leave without the loss of either salary or other compensation. (e) Effect of Termination due to Death or without Cause. (i) If Langley's employment is terminated due to the death of Mr. Langley, then, notwithstanding anything to the contrary herein contained, Mr. Langley's spouse shall be entitled receive (i) all of Langley's salary that was accrued but unpaid as of the date of his death, (ii) the bonuses and incentive compensation that Langley would, but for such termination of employment, have received thereafter for or in respect of services rendered by him to the Bank for periods prior to such termination, but in no event less than the result obtained by multiplying the amount of bonus or incentive compensation he received for services rendered to the Bank in the year immediately preceding the year in which his death occurred by a fraction, the numerator of which shall be the number of months that he served during the year of his death (rounded up to the number of whole months) and the denominator of which shall be twelve (12), and (iii) continuing until the third (3rd) anniversary of Mr. Langley's death, dependent coverage, without charge, under the Bank's medical, dental and health insurance programs. (ii) If this Agreement or Langley's employment is terminated prior to September 30, 2000 by the Bank, or any successor thereto, for any reason that does not constitute Cause (as Cause is defined above), then, without limiting any other rights or remedies Langley may have by reason of such termination, then, (A) Langley shall be entitled to receive during the period from the effective date of such termination through the third (3rd) anniversary of the September 30 immediately following the effective date of such termination (the "Severance Period"), the salary and the bonuses and incentive compensation that Langley would, but for such termination, have received during the Severance Period had he remained in the employ of the Bank throughout the Severance Period, but in no event shall the bonus and incentive compensation that is payable for each of such calendar years be less than the bonuses and incentive compensation that he earned for the calendar year immediately preceding the calendar year in which such termination occurs, and (B) Langley and his spouse shall be entitled to continue to participate in the fringe benefit plans and programs in which they were entitled to participate immediately prior to such termination, without charge to them and at the sole expense of the Bank, for a period beginning on the effective date of such termination of employment and ending on the third (3rd) anniversary of the month immediately following the effective date of such termination (the "Post-Termination Benefit Period"), provided, however, that the participation of Langley and his spouse in the Bank's health, dental and vision insurance plan shall continue until the later of the last day of the Post-Termination Benefit Period or Mr. Langley's 65th birthday; and Langley shall have no obligation to seek other employment or otherwise mitigate the obligations of the Bank hereunder or its damages for wrongful termination. Should participation not be allowed in the Company's medical, dental 3 4 and vision plans by any of the current carriers of group coverage, sufficient financial resources will be provided, each year, for Langley to obtain coverage equal to that which was available to him, under the group plan, prior to the termination of his employment. Notwithstanding the foregoing, however, if Langley does obtain employment subsequent to any termination of his employment by the Bank, if and to the extent he and his spouse become eligible to receive comparable fringe benefits, on substantially similar terms from the subsequent employer, then, his right and that of his spouse to continue to participate in the corresponding fringe benefit plans or programs provided by the Bank shall thereupon cease. (f) Change of Ownership. Concurrently herewith, Langley, the Bancorp and the Bank are entering into a Severance Agreement of even date herewith, a copy of which is attached hereto as Exhibit C (the "Severance Agreement"), which sets forth the rights of Langley and the respective obligations of the Bancorp and the Bank upon the occurrence of any of the events or circumstances set forth in such Severance Agreement. The provisions of the Severance Agreement, and not this Agreement, shall govern in the event of a termination of Langley's employment or his resignation of employment which is covered by the provisions of the Severance Agreement. (g) Resignation and Termination with Cause. At any time during the term of this Agreement, Langley may, effective on ninety (90) days prior written notice to the Bank, elect to resign his employment with the Bank, except that any resignation pursuant to the Severance Agreement shall be effective as provided therein. In addition, the Bank may require Langley to resign in the event of his disability, as hereinafter defined. Except in the case of a resignation covered by the Severance Agreement, in the event of any voluntary resignation by Langley, or a resignation required as a result of his disability, or in the event of a termination of Mr. Langley's employment with Cause (as Cause is defined in Section 2(b) above), all salary and bonuses for periods after the effective date of such resignation shall cease. However, if and for so long as Langley, during the period ending on the later of September 30, 2000 or the first anniversary of the effective date of such resignation or termination with Cause, refrains from accepting employment from, and from providing consulting or advisory services to, any competing banking or depository institution (as defined hereinafter), then, for such period (i) Langley and his spouse shall be entitled to participate, without charge to them and at the Bank's sole cost and expense, in all life, medical, dental, vision and disability insurance programs of the Bank or Bancorp in which they were participating at the time notice of such resignation was given by Langley to the Bank or Langley's employment was terminated for Cause; and (ii) only in the event of a resignation to which this Section 3(g) applies, Langley shall continue to be entitled to use the automobile referenced in subsection 4(a) below, without charge. As used herein, the term "disability" shall mean a physical or mental illness or other physical or mental condition which to a significant and substantial extent prevents Langley from performing his duties hereunder for a period of one hundred eighty (180) consecutive days. For purposes hereof, a competing bank or depository institution shall mean any bank, savings and loan association, thrift and loan company or credit union that operates a full service office, at which it makes loans and accepts deposits, located within a 40-mile radius of any banking office being operated by the Bank at the time such resignation or termination for Cause becomes effective. 4. BUSINESS RELATED REQUIREMENTS (a) In order to enable Langley to adequately perform his duties as President and Chief Executive Officer of the Bank, which shall include, but shall not be limited to, representation of 4 5 the Bank at business, civic and social functions and meetings in Southern California, the Bank shall furnish Langley, and Langley shall have the right to exclusive use of, the automobile described in Exhibit B hereto and the Bank shall pay for all expenses associated with or arising from such use during the term hereof, including insurance, gasoline and maintenance costs. (b) The Bank will promptly reimburse Langley for all reasonable business expenses incurred by him in promoting the business of the Bank, including expenditures for business promotion, entertainment and travel, provided that Langley furnishes to the Bank adequate records and other documentary evidence of such costs. 5. OBLIGATIONS OF LANGLEY In addition to performing the duties and obligations enumerated elsewhere herein, Langley agrees as follows: (a) Non-Competition. During the term of this Agreement, Langley shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, engage or participate in any business that is in competition in any manner whatsoever with the business of the Bank. (b) Trade Secrets. Langley, during the term of employment under this Agreement, will have access to and become acquainted with various trade secrets consisting of devices, secret inventions, processes and compilations of information, records and specifications which are owned by the Bank and which are regularly used in the operation of the business of the Bank. Langley shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or any time thereafter, except as required in the course of his employment hereunder. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of the Bank, whether prepared by Langley or otherwise coming into his possession, shall remain the exclusive property of the Bank. 6. REMEDIES (a) Unique Character of Langley's Service. Langley recognizes and acknowledges that the services to be rendered by him to the Bank are of a special and unique character, that the Bank has made a substantial investment in the business with which Langley has been and will be involved, and that the restrictions on Langley's activities as contained in this Agreement are required for the Bank's reasonable protection. Langley agrees that, in the event of a breach of this Agreement by Langley, the Bank, in addition to any other rights or remedies it may possess hereunder, will be entitled, if it so elects, to institute and prosecute proceedings in equity and to obtain injunctive relief to enjoin Langley from engaging in any activity in violation hereof, and to initiate and prosecute proceedings at law in order to recover damages sustained by the Bank as a result of any such violation or breach of this Agreement by Langley. (b) Non-Waiver. Failure on the part of either party to complain of any action or non-action, breach or default on the part of the other, no matter how long the same may continue, shall never be deemed to be a waiver by such party of any of his or its rights or remedies hereunder, at law 5 6 or in equity. Further, it is covenanted and agreed that a waiver at any time of any provision hereof shall not be construed as a waiver at any subsequent time of the same provision. (c) Cumulation of Remedies. Any and all remedies herein expressly conferred upon any party to this Agreement shall be deemed cumulative with, and not exclusive of, any other remedy conferred hereby or by any law, and the exercise of any one remedy shall not preclude the exercise of any other remedy. 7. GENERAL PROVISIONS (a) Notice. Any and all notices or demands in connection with this Agreement ("notice") shall be in writing served either personally, by certified mail, return receipt requested, or by telegraph at the addresses specified hereinbelow or at such other addresses as the parties hereto shall from time to time designate in writing. If any notice is mailed, service shall be conclusively deemed made forty-eight (48) hours after the deposit thereof in the United States mail, postage prepaid, addressed pursuant to the provisions of this Subsection 7(a). If served by telegraph, service shall be conclusively deemed made at the time that the telegraphic agency shall confirm to the sender delivery thereof to the addressee. Addresses for notices are as follows: If to the Bank: Foothill Independent Bank 510 South Grand Avenue Glendora, California 91741 Attention: Chairman of the Board of Directors If to Langley: To Mr. George E. Langley's principal residence, the address of which is set forth in the Bank's employment records. Either party may change his or its address for purposes hereof by giving notice thereof to the other party in the manner hereinabove provided. (b) Entire Agreement. This Agreement, together with the Severance Agreement, constitutes the entire agreement between the parties pertaining to the subject matter hereof, fully supersedes any and all prior agreements or understandings between the parties pertaining to the subject matter of this Agreement and the Severance Agreement and no changes in, additions to or modifications of this Agreement shall be valid unless set forth in writing and signed by each of the parties. Neither this Agreement nor the Severance Agreement, however, supersedes (i) any agreements that the Bank or the Bancorp has entered into with Langley pursuant to any stock option or any incentive or bonus compensation or other employee benefit plans or programs maintained by the Bank or Bancorp or (ii) that certain Indemnification Agreement between the Bancorp and Langley entered into in August 1988. (c) Assignability; Parties in Interest. This Agreement is personal in nature and may not be assigned or transferred, whether voluntarily or by operation of law, except that this Agreement may be assigned voluntarily, in connection with a sale of all or substantially all of the assets 6 7 and the business of the Bank as an entirety, to the purchaser of such assets and business or by operation of law in connection with a merger of the Bank with and into another corporation in which the Bank is not the surviving company in such merger, provided that in each such case, the assignee expressly agrees to assume and to perform fully and faithfully the obligations of the Bank under this Agreement and the obligations of the Bank under the Severance Compensation Agreement. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, heirs and assigns. (d) Captions. The captions used in this Agreement are intended solely for convenience of reference and shall not be deemed in any manner to amplify, limit, modify or otherwise be used in the construction or interpretation of, any of the provisions hereof. (e) Gender. As used in this Agreement, the masculine, feminine or neuter gender, and the singular or plural number, shall be deemed to include the others whenever the context so indicates or requires. (f) Severability. Any provisions of this Agreement which may be prohibited by law or otherwise held invalid shall be ineffective only to the extent of such prohibition or invalidity and shall not invalidate or otherwise render ineffective the remaining provisions of this Agreement. (g) Legal Action and Fees. In the event of any controversy, claim or dispute between the parties hereto arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its or his reasonable expenses, including, but not by way of limitation, reasonable attorneys' fees, from the non-prevailing party. (h) Governing Law. This Agreement, including, but not by way of limitation, its existence, validity, construction and operational effect, and the rights of each of the parties hereto shall be determined in accordance with the laws of the State of California. (i) Duplicate Originals. This Agreement may be fully executed in any number of duplicate originals, all of which shall be considered one and the same Agreement. IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date first above written. THE BANK: FOOTHILL INDEPENDENT BANK By: /s/William V. Landecena ------------------------------ WILLIAM V. LANDECENA, Chairman LANGLEY: /s/George E. Langley ------------------------------ GEORGE E. LANGLEY 7 EX-21 3 SUBSIDIARIES OF REGISTRANT 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. EX-23.1 4 CONSENT OF VAVRINEK, TRINE, DAY & COMPANY 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS To Foothill Independent Bancorp: We consent to the incorporation by reference in Registration Statement No. 2-89744 on Form S-8 filed March 1, 1984, Registration Statement No. 33-57586 on Form S-8 filed January 29, 1993, Registration Statement No. 33-64584 on Form S-8 filed June 17, 1993, and Registration Statement No. 33-83854 on Form S-3 filed September 12, 1994, of our report dated January 23, 1998 on the consolidated financial statements of Foothill Independent Bancorp as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 included at Page of its Annual Report on Form 10-K for the year ended December 31, 1997. /s/ VAVRINEK, TRINE, DAY & COMPANY ----------------------------------- VAVRINEK, TRINE, DAY & COMPANY Certified Public Accountants March 26, 1998 Rancho Cucamonga, California EX-23.2 5 CONSENT OF VAVRINEK, TRINE, DAY & COMPANY 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Foothill Independent Bancorp: We consent to the incorporation by reference of our report dated March 10, 1998, on the financial statements of Foothill Independent Bank Partners in Your Future retirement plan as of December 31, 1997 and 1996, included as part of this Form 10-K into the Registration Statement on Form S-8 (Registration Number 33-57586). /s/ Vavrinek, Trine, Day & Company ---------------------------------- VAVRINEK, TRINE, DAY & COMPANY Certified Public Accountants March 26, 1998 Rancho Cucamonga, California EX-27.1 6 FINANCIAL DATA SHEET AS OF YEAR ENDED DEC.31, 1997
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 12-MOS DEC-31-1997 DEC-31-1997 38,800 8,309 30,550 0 30,959 15,110 15,171 291,809 (4,749) 435,708 393,667 0 3,398 123 0 0 22,618 19,423 435,708 30,231 3,027 1,529 35,028 241 9,738 25,290 1,681 0 22,599 7,050 7,050 0 0 4,518 0.90 0.85 6.2 11,458 7 2,880 0 4,744 1,667 407 5,165 5,165 0 0 For purposes of this Exhibit, Primary means Basic.
EX-27.2 7 RESTATED FINANCIAL DATA SHEET FOR YEAR ENDED 1996
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 12-MOS DEC-31-1996 DEC-31-1996 33,673 3,957 14,900 0 39,477 5,575 5,588 291,766 (4,744) 410,505 370,966 0 3,149 168 0 0 15,406 20,816 410,505 30,939 4,073 135 35,147 9,850 9,869 25,278 2,200 0 21,700 6,642 6,642 0 0 4,183 0.86 .84 6.4 11,623 2,829 4,787 0 3,644 1,603 503 4,744 4,744 0 0 For purposes of this Exhibit, Primary means Basic.
EX-27.3 8 RESTATED FINANCIAL DATA SHEET AS OF YEAR END 1995
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 12-MOS DEC-31-1995 DEC-31-1995 26,278 6,433 41,750 0 18,743 23,491 23,582 (3,644) (3,644) 395,181 361,114 0 2,817 208 0 0 10,788 20,254 395,181 28,872 4,329 202 33,403 9,751 9,786 23,617 2,016 8 20,625 5,663 5,663 0 0 3,563 0.75 0.73 6.8 12,620 1,456 6,398 0 3,145 2,066 548 3,644 3,644 0 0 For purposes of this Exhibit, Primary means Basic.
EX-27.4 9 RESTATED QUARTERLY FINANCIAL DATA SHEET-MAR 31,97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 1997 AND THE STATEMENT OF INCOME OF THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 3-MOS DEC-31-1997 MAR-31-1997 32,762 2,078 23,900 0 43,258 15,941 15,888 281,716 (4,427) 417,867 377,416 0 2,792 157 0 0 15,647 21,855 417,867 7,326 998 44 8,368 2,439 2,443 5,925 281 0 5,225 1,800 1,800 0 0 1,133 .23 .22 0 0 0 0 0 0 0 0 0 0 0 0 For purposes of this Exhibit, Primary means Basic.
EX-27.5 10 RESTATED FINANCIAL DATA SHEET-6 MON ENDED 06-30-97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 6-MOS DEC-31-1997 JUN-30-1997 36,044 3,662 19,600 0 35,631 25,739 25,505 281,587 (4,084) 420,897 379,035 0 2,748 146 0 0 22,080 16,888 420,897 14,798 2,195 107 17,100 4,819 4,827 12,273 331 0 11,331 3,424 3,424 0 0 2,147 .43 .41 0 0 0 0 0 0 0 0 0 0 0 0 For purposes of this Exhibit, Primary means Basic.
EX-27.6 11 RESTATED FINANCIAL DATA SHEET-9 MOS ENDED 09-30-97
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES. 9-MOS DEC-31-1997 SEP-30-1997 35,891 5,935 24,550 0 33,826 19,699 19,506 289,017 (3,942) 427,318 383,019 0 3,582 135 0 0 22,432 18,605 427,318 22,445 2,316 1,255 26,016 7,357 7,269 18,747 381 0 17,006 5,569 5,569 0 0 3,469 .67 .64 0 0 0 0 0 0 0 0 0 0 0 0 For purposes of this Exhibit, Primary means Basic.
EX-27.7 12 RESTATED FINANCIAL DATA SHEET-3 MON ENDED 3-31-96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF MARCH 31, 1996 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 32,107 9,196 20,750 0 40,011 17,225 17,235 266,560 (3,981) 403,088 368,622 0 2,484 199 0 0 14,512 17,271 403,088 7,622 1,110 32 8,764 2,636 2,641 6,123 490 0 5,553 1,326 1,326 0 0 823 .17 .17 0 0 0 0 0 0 0 0 0 0 0 0 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
EX-27.8 13 RESTATED FINANCIAL DATA SHEET 6MON ENDED 06-30-96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF JUNE 30, 1996 AND THE STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 29,871 8,994 14,690 0 40,257 13,076 13,061 267,275 (3,804) 391,436 355,863 0 2,565 189 0 0 14,610 18,209 391,436 14,986 2,225 60 17,271 5,036 5,046 12,225 1,025 0 10,877 2,877 2,877 0 0 1,776 .37 .36 0 0 0 0 0 0 0 0 0 0 0 0 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
EX-27.9 14 RESTATED FINANCIAL DATA SHEET 9MON ENDED 09-30-96
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AND STATEMENT OF INCOME AND THE NOTES THERETO. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 32,334 5,827 22,400 0 25,405 7,777 7,773 294,268 (4,235) 406,379 368,903 0 3,059 179 0 0 14,872 19,366 406,379 23,087 3,167 93 26,347 7,360 7,375 18,972 1,747 0 16,356 4,775 4,775 0 0 2,928 .59 .57 0 0 0 0 0 0 0 0 0 0 0 0 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
EX-99.1 15 401(K) PROFIT SHARING PLAN 1 EXHIBIT 99.1 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN DECEMBER 31, 1997 AND 1996 TABLE OF CONTENTS INDEPENDENT AUDITORS' REPORT.......................................................................1 FINANCIAL STATEMENTS Statements of Net Assets Available for Benefits December 31, 1997 and 1996.....................................................................2 Statements of Changes in Net Assets Available for Benefits For the Year Ended December 31, 1997 and 1996..................................................3 Notes to Financial Statements..................................................................4 SUPPLEMENTARY INFORMATION Schedule of Assets Held for Investment Purposes................................................8
2 INDEPENDENT AUDITORS' REPORT Foothill Independent Bank Partners In Your Future 401(K) Profit Sharing Plan Glendora, California We have audited the accompanying statements of net assets available for benefits of the Foothill Independent Bank Partners In Your Future 401 (K) Profit Sharing Plan as of December 31, 1997 and 1996, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Foothill Independent Bank Partners In Your Future 401 (K) Profit Sharing Plan at December 31, 1997 and 1996, and the changes in its net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedule of Assets Held for Investment Purposes is presented for the purpose of additional analysis and is not a required part of the basic financial statements, but is supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Rancho Cucamonga, California March 10, 1998 -1- 3 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 AND 1996 ASSETS
1997 1996 ---------- ---------- INVESTMENTS AT FAIR MARKET VALUE Mutual funds $1,177,270 $ 876,302 Foothill Independent Bank stock 2,195,789 1,064,272 Money market funds 201,544 176,267 Loan funds 73,041 24,835 ---------- ---------- Total Investments (Note #3) 3,647,644 2,141,676 CASH 289 RECEIVABLES (Note #4) 25,179 18,648 ---------- ---------- Total Assets 3,672,823 2,160,613 LIABILITIES Benefits payable (Note #5) 61,590 45,123 ---------- ---------- NET ASSETS AVAILABLE FOR BENEFITS $3,611,233 $2,115,490 ========== ==========
The accompanying notes are an integral part of these financial statements. -2- 4 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ----------- Additions To Net Assets Attributed To Net unrealized appreciation in fair value of assets $ 703,197 $ 321,484 Interest 10,487 8,096 Dividends 23,180 97,180 Realized gain on sale of assets 230,327 13,172 Other income 2,760 41,732 ----------- ----------- Total Investment Income 969,951 481,664 ----------- ----------- Contributions Employee 487,898 444,768 Employer 285,186 137,763 ----------- ----------- Total Contributions 773,084 582,531 ----------- ----------- Total Additions to Net Assets 1,743,035 1,064,195 Deduction From Net Assets Attributed To Benefits paid directly to participants (233,934) (193,154) Forfeitures (13,358) ----------- ----------- Total Deductions from Net Assets (247,292) (193,154) ----------- ----------- Net Increase in Net Assets 1,495,743 871,041 Net Assets Available for Benefits, Beginning of year 2,115,490 1,244,449 ----------- ----------- Net Assets Available for Benefits, End of year $ 3,611,233 $ 2,115,490 =========== ===========
The accompanying notes are an integral part of these financial statements. -3- 5 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 Note #1 - Description of Plan The following description of the Foothill Independent Bank Partners in Your Future 401(K) Profit Sharing Plan provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. A. General The Plan is a defined contribution plan covering all full-time employees of Foothill Independent Bank (FIB). There is no age or service requirement. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). FIB adopted the Plan effective January 1, 1994. B. Contributions Each year, FIB contributes to the Plan matching contributions equal to a discretionary percentage, to be determined by the Employer, of the participant's salary reductions. Participants may contribute up to 10 percent of their annual wages before bonuses and overtime. C. Participant Accounts Each participant's account is credited with the participant's contribution and allocation of (a) the FIB contributions, and (b) Plan earnings. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's account. D. Vesting Participants are vested in FIB contributions according to the following schedule:
Year of Service Percentage - ------- ---------- 1 Year 25% 2 Years 50% 3 Years 100%
Employee contributions, deferrals and rollovers are immediately 100% vested. No vested benefit may be forfeited. -4- 6 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE #1 - DESCRIPTION OF PLAN, CONTINUED E. Payment of Benefits On termination of service, a participant may receive a lump-sum amount equal to the value of his or her account or may rollover the value of his or her account to another plan. F. Loans to Participants Participants may apply for a loan of up to one-half of total prior contributions. The loans are secured by the accounts of the participant. The loans are available to all participants and bear a reasonable rate of interest. G. Forfeited Accounts At December 31, 1997, forfeited nonvested accounts totaled $13,358. These accounts will be used to reduce future employer contributions. NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The financial statements of the Plan are prepared using the accrual method of accounting. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the plan administrator to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates. Valuation of Assets If available, quoted market prices are used to value investments. Many factors are considered in arriving at fair value. Mutual funds are valued based upon the market unit value of the fund as a whole and not on individual investments of the fund. Tax Status The Trust established under the Plan to hold the Plan's assets is qualified under the appropriate section of the Internal Revenue Code. Accordingly, the Plan's net investment income is exempt from income taxes. The Plan has received a favorable tax determination letter from the Internal Revenue Service and the Plan sponsor believes that the Plan continues to qualify and operate as designed. -5- 7 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE #2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Administration of Plan Assets Contributions made by FIB and its employees are held and managed by a Trustee, which invests the cash received, interest and dividends in accordance with participant's instructions. Distributions to participants are made by the Trustee. The Trustee also administers the payment of principal and interest on participant loans. Certain administrative functions are performed by officers or employees of FIB. No such officer or employee receives additional compensation from the Plan. The administrative and Trustee fees associated with the Plan are paid by FIB and not from the Plan assets. Note #3 - Investments The Plan's investments are held by a bank administered trust fund. The following table presents the fair values of investments. Investments that represent five percent or more of the Plan's net assets are separately identified.
December 31, 1997 December 31, 1996 ------------------------- ------------------------- Cost Basis Fair Value Cost Basis Fair Value ---------- ---------- ---------- ---------- Fair Value of Investments Mutual funds Growth equity fund $ 564,182 $ 555,967 $ 325,590 $ 373,010 Intermediate term bond fund 167,759 169,256 155,256 154,868 Balanced fund 380,633 452,047 308,001 348,424 Foothill Independent Bank stock 1,343,549 2,195,789 802,999 1,064,272 Money market funds 201,544 201,544 176,267 176,267 Loan funds 73,041 73,041 24,835 24,835 ---------- ---------- ---------- ---------- Total Investments $2,730,708 $3,647,644 $1,792,948 $2,141,676 ========== ========== ========== ==========
During 1997 and 1996, the Plan's investments (including investments bought, sold and held during the year) appreciated in value by $703,197 and $321,484 during 1997 and 1996, respectively, as follows:
1997 1996 -------- -------- Net change in Fair Value Mutual funds $ 84,491 $ 38,627 Foothill Independent Bank stock 616,708 282,857 -------- -------- Net Change in Fair Value $703,197 $321,484 ======== ========
-6- 8 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE #4 - RECEIVABLES Receivables at December 31, consist of the following:
1997 1996 ------- ------- Contributions Employer $10,028 $ 4,560 Employee 15,151 14,088 ------- ------- Total Receivables $25,179 $18,648 ======= =======
-7- 9 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE #5 - PENDING BENEFITS PAYABLE As of December 31, payments to participants who have withdrawn from the Plan, but have not yet been paid totaled $61,590 and $45,123 for 1997 and 1996, respectively. NOTE #6 - TERMINATION OF PLAN Although it has not expressed any intent to do so, FIB has the right under the Plan to discontinue its contributions at any time and to terminate the Plan, subject to provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts. -8- 10 FOOTHILL INDEPENDENT BANK PARTNERS IN YOUR FUTURE 401(K) PROFIT SHARING PLAN SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1997 FORM 5500 - SCHEDULE G
Identity of Issue, Borrower, Current Lessor or Similar Party Description of Investment Cost Value ---------------------------- ------------------------- ---------- ---------- Foothill Independent Bank Common stock 131,091 shares $1,343,549 $2,195,789 Union Bank Money Market Fund Money market funds 201,544 units 201,544 201,544 Union Bank Intermediate Term Bond Fund Mutual funds 16,465 units 167,759 169,256 Union Bank Balanced Fund Mutual funds 27,750 units 380,633 452,047 Union Bank Growth Equity Fund Mutual funds 39,180 units 564,182 555,967 Participant Loans Various loans at 8.25% to 10.43% interest 73,041 73,041 ---------- ---------- $2,730,708 $3,647,644 ========== ==========
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