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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO 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 incorporation or organization) (I.R.S. Employer Identification No.)
510 South Grand Avenue, Glendora, California 91741
(Address of principal executive offices) (Zip Code)
(909) 599-9351
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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 [ ].
As of March 22, 1996, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $30,781,855. .
As of March 22, 1996, there were 3,973,131 shares of Common Stock were
outstanding. On April 5, 1996 the number of outstanding shares of Common Stock
will increase to 4,370,435 as a result of a 10% stock dividend that is payable
on that date to shareholders of record as of March 22, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 1996 Annual Meeting which will
be filed with the Commission on or before April 29, 1996.
-----------------------------------------
Page 1 of 87 Pages
Exhibit Index on Sequentially numbered Page 66
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 chartered bank (the "Bank"), that was organized and commenced
business operations in 1973. The business of the Bank is carried on as a
wholly-owned subsidiary of the Company. The Company, which was organized in
1982, is a California corporation and is registered under the Bank Holding
Company Act of 1956, as amended.
The Bank
The Bank was organized as a national banking association under federal
law and commenced operations under the name Foothill National Bank on June 1,
1973. The Bank converted from a national banking association to a California
state-chartered bank effective July l, 1979 and changed its name to Foothill
Independent Bank. The Bank's accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is not a member of the Federal Reserve
System.
The Bank presently operates eleven banking offices, one in each of the
communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho
Cucamonga, Covina, Walnut, Glendale, Corona and Chino, California, and a lending
center in West Covina, California, which are located in the area of Southern
California that includes the San Gabriel Valley of Los Angeles County and the
western portions of San Bernardino and Riverside Counties commonly known as
the Inland Empire. The Glendale office, which was opened in March 1995,
extends the Bank's market areas into the west San Gabriel Valley, approximately
10 miles northeast of Los Angeles. All of the other offices are located further
east, approximately 25 to 45 miles east of Los Angeles.
Services Provided by Foothill Independent Bank
The Bank's organization and operations have been designed to meet the
banking needs of individuals and small-to-medium 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 nine 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. As of December
31, 1995, the Bank had approximately 14,758 demand deposit accounts representing
aggregate deposits of approximately $96,709,000 with an average account balance
of $5,867; approximately 8,450 accounts representing approximately $94,500,000
in money market checking accounts with an average account balance of $11,498;
approximately 9,599 accounts representing approximately $32,427,000 in savings
deposits with an average account balance of $3,382; and approximately 3,491
accounts representing approximately $137,699,000 in time deposits ("TCD's") with
an average account balance of $39,374. Of the total deposits at December 31,
1995, $61,921,000 were TCD's in denominations of $100,000 or more and
$23,257,000 were municipal and other governmental deposits, both time and
demand.
During the twelve months ended December 31, 1995, average demand
deposits increased by approximately $13,393,000 or 19.5%; average money market
checking account deposits increased by approximately $3,809,000 or 8.9%; average
savings deposits remained substantially unchanged; and average time deposits
increased by approximately $35,778,000 or 39.1%, which was the result primarily
of an increase of $15,188,000 in TCD's in denominations of $100,000 or more and
an increase of approximately $20,590,000 in TCD's of less than $100,000 ("other
time deposits").
Although there are some public agency depositors that carry large
deposits with the Bank, the Bank does not believe it is dependent on a single
customer or a few customers for its deposits. Most of the Bank's deposits are
obtained from individuals and small and moderate size businesses. This results
in relatively small average deposit balances, but makes the Bank less subject to
the adverse effect on liquidity which can result from the loss of a substantial
depositor. With the exception of a public agency with $7,500,000 of time
deposits, as of December 31, 1995 no individual, corporate or public agency
depositor accounted for more than approximately 2% of the Bank's total deposits
and the five largest deposit accounts represented, collectively, 4.7% 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,
------------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
ASSETS
Investment Securities
Taxable . . . . . . $ 34,809 9.5% $ 34,322 11.0% $ 39,185 14.1%
Non-Taxable . . . . 3,679 1.0 2,698 0.9 6,384 2.3
Federal Funds Sold . . 33,762 9.2 12,384 4.0 8,653 3.1
Due from Banks -
Time Deposits . . . 2,798 0.8 1,534 0.5 2,781 1.0
Loans . . . . . . . . 250,248 68.0 220,196 70.6 178,606 64.3
Direct Lease Financing 2,154 0.6 2,095 0.7 8,330 3.0
Reserve for Loan and
Lease Losses . . . (3,586) (1.0) (2,432) (0.8) (2,205) (0.8)
---------- ----- ----------- ----- ---------- -----
Net Loans and Leases . 248,816 67.6 219,859 70.5 184,731 66.5
Total Interest
Earning Assets . 323,864 88.1 270,797 86.9 241,734 87.0
Cash and Non-interest
Earning Assets . . 24,712 6.6 23,288 7.5 20,834 7.5
Net Premises, Furniture
and Equipment . . . 6,924 1.9 7,656 2.5 5,450 2.0
Other Assets . . . . . 12,763 3.4 10,133 3.1 9,915 3.5
---------- ----- ----------- ----- ---------- -----
Total Assets . . . $ 368,263 100.0% $ 311,874 100.0% $ 277,933 100.0%
========== ===== =========== ===== ========== =====
LIABILITIES AND
STOCKHOLDERS' EQUITY
Savings Deposits (1) . $ 127,467 34.6% $ 123,659 39.7% $ 112,628 40.5%
Time Deposits . . . . . 127,263 34.6 91,485 29.3 84,278 30.3
Long-term Borrowings . 228 0.1 294 0.1 540 0.2
Total Interest-Bearing
Liabilities . . 254,958 69.3 215,438 69.1 197,446 71.0
Demand Deposits . . . . 82,076 22.3 68,683 22.0 55,979 20.1
Other Liabilities . . . 1,297 0.4 1,836 0.6 1,530 0.6
---------- ----- ----------- ----- ---------- -----
Total Liabilities . 338,331 92.0 285,957 91.7 254,955 91.7
Stockholders' Equity . 29,932 8.0 25,917 8.3 22,978 8.3
---------- ----- ----------- ----- ---------- -----
Total Liabilities
Stockholders' Equity $ 368,263 100.0% $ 311,874 100.0% $ 277,933 100.0%
========== ===== =========== ===== ========== =====
- ---------------
(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 receives from its loan portfolio and investment securities and
the Bank's cost of funds, principally interest paid on savings and time
deposits. Interest rates charged on the Bank's loans are affected principally by
the demand for loans, the supply of money available for lending purposes, and
competitive factors. In turn, these factors are influenced by general economic
conditions and other constraints beyond the Company's control, such as Federal
economic and tax policies, general supply of money in the economy, governmental
budgetary actions, and the actions of the Federal Reserve Board. (See
"Business--Effects 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,
---------------------------------------------------------------------------------
1995 1994
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
EARNING ASSETS:
Investment Securities
U.S. Treasury . . . . . . $ 10,080 $ 468 4.6% $ 30,986 $ 1,080 3.5%
U.S. Government
Agencies . . . . . . . 22,467 1,445 6.4 1,609 227 14.1
Municipal Leases(1) . . . 3,679 240 6.5 2,698 131 4.9
Other Securities . . . . 2,262 132 5.8 1,727 138 8.0
----------- ----------- ---------- ----------
Total Investment
Securities . . . . 38,488 2,285 5.9 37,020 1,576 4.3
Federal Funds Sold . . . . . 33,762 1,944 5.8 12,384 524 4.2
Due from Banks - Time
Deposits . . . . . . . . 2,798 165 5.9 1,534 60 3.9
Loans (2) . . . . . . . . . . 250,248 28,872 11.5 220,196 25,348 11.5
Lease Financing(1) . . . . . 2,154 276 12.8 2,095 299 14.3
----------- ----------- ---------- ----------
Total Interest-Earning
Assets (1) . . . . . . $ 327,450 $ 33,542 10.2% $ 273,229 $ 27,807 10.2%
=========== =========== ========== ==========
Year Ended December 31,
-------------------------------------
1993
-------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
EARNING ASSETS:
Investment Securities
U.S. Treasury . . . . . . $ 35,273 $ 1,445 4.1%
U.S. Government
Agencies . . . . . . . 2,077 75 3.6
Municipal Leases(1) . . . 6,384 623 9.8
Other Securities . . . . 1,835 143 7.8
----------- -----------
Total Investment
Securities . . . . 45,569 2,286 5.0
Federal Funds Sold . . . . . 8,653 252 2.9
Due from Banks - Time
Deposits . . . . . . . . 2,781 100 3.6
Loans (2) . . . . . . . . . . 178,606 18,688 10.5
Lease Financing(1) . . . . . 8,330 681 8.2
----------- -----------
Total Interest-Earning
Assets (1) . . . . . . $ 243,939 $ 22,007 9.0%
=========== ===========
5
6
Year Ended December 31,
---------------------------------------------------------------------------------
1995 1994
------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
INTEREST BEARING LIABILITIES:
Domestic Deposits and
Borrowed Funds:
Savings Deposits (3) . $ 127,467 $ 2,602 2.0% $ 123,659 $ 2,160 1.7%
Time Deposits . . . . 127,263 7,149 5.6 91,485 3,876 4.2
Long-Term Borrowings . 228 35 15.4 294 170 57.8
Repurchase Agreements -- -- -- -- -- --
=========== =========== ========== ==========
Total Interest-Bearing
Liabilities . . . . . $ 254,958 $ 9,786 3.8% $ 215,438 $ 6,206 2.9%
=========== =========== ========== ==========
Year Ended December 31,
-------------------------------------
1993
-------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
INTEREST BEARING LIABILITIES:
Domestic Deposits and
Borrowed Funds:
Savings Deposits (3) . $ 112,628 $ 2,055 1.8%
Time Deposits . . . . 84,278 3,280 3.9
Long-Term Borrowings . 540 47 8.7
Repurchase Agreements -- -- --
=========== ===========
Total Interest-Bearing
Liabilities . . . . . $ 197,446 $ 5,382 2.7%
=========== ===========
The table below shows the net interest earnings and the net yield on
average earning assets:
\
1995 1994 1993
---- ---- ----
Total Interest Income (1)(2) . . . . . . . . . $ 33,542 $ 27,807 $ 22,007
Total Interest Expense (3) . . . . . . . . . . $ 9,786 $ 6,206 $ 5,382
Net Interest Earnings (1)(2) . . . . . . . . . $ 23,756 $ 21,601 $ 16,625
Net Average Earning Assets . . . . . . . . . . $ 327,450 $ 273,229 $ 243,939
Net Yield on Average Earning Assets (1)(2) . . 7.3% 7.9% 6.8%
Net Yield on Average Earning Assets
(excluding Loan Fees) (1)(2) . . . . . . . 6.6% 6.7% 6.0%
- ---------------
(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 37.1
percent for 1995, 37.9 percent for 1994 and 30.6 percent for 1993.
(2) Loans, net of unearned discount, do not reflect average reserves for
possible loan losses of $3,586,000 in 1995, $2,432,000 in 1994 and
$2,205,000 in 1993. Loan fees of $2,141,000 in 1995, $3,372,000 in 1994 and
$1,965,000 in 1993 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 forty-five
non-accruing loans at December 31, 1995, sixty at December 31, 1994 and
thirty-one at December 31, 1993.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
6
7
The following table sets forth the changes in interest earned,
including loan fees, and interest paid. The net increase (decrease) is segmented
into the change attributable to variations in volume and variations in interest
rates. Changes in interest earned and interest paid due to both rate and volume
have been allocated to the change due to volume and the change due to rate in
proportion to the relationship of the absolute dollar amounts of the changes in
each.
INVESTMENT
SECURITIES
----------------
NON- FEDERAL DIRECT
TAX- TAX- FUNDS LEASE FIN- TIME
INTEREST EARNED ON: ABLE ABLE(1) SOLD LOANS(2) ANCING(3) DEPOSITS TOTAL
- ------------------- ---- ------- ---- -------- --------- -------- -----
(In Thousands)
1995 compared to 1994 -
Increase (decrease) due to:
Volume Changes $ 21 $ 121 $ 1,175 $ 2,326 $ 8 $ 65 $ 3,716
Rate Changes 579 (12) 245 1,198 (31) 40 2,019
------- ------ ------- --------- ------- ------- --------
Net Increase (Decrease) $ 600 $ 109 $ 1,420 $ 3,524 $ (23) $ 105 $ 5,735
======= ====== ======= ========= ======= ======= ========
1994 compared to 1993-
Increase (decrease) due to:
Volume Changes $ (101) $ (471) $ 134 $ 4,727 $ (701) $ (49) $ 3,539
Rate Changes (117) (21) 138 1,933 319 9 2,261
------- ------ ------- --------- ------- ------- --------
Net Increase (Decrease) $ (218) $ (492) $ 272 $ 6,660 $ (382) $ (40) $ 5,800
======= ====== ======= ========= ======= ======= ========
SAVINGS OTHER TIME LONG TERM
INTEREST PAID ON: DEPOSITS DEPOSITS BORROWINGS(4) TOTAL
- ----------------- -------- -------- ------------- -----
1995 compared to 1994 -
Increase (decrease) due to:
Volume Changes $ 68 $ 1,785 $ (135) $ 1,718
Rate Changes 374 1,488 -- 1,862
------ -------- ------- --------
Net Increase(Decrease) $ 442 $ 3,273 $ (135) $ 3,580
====== ======== ======= ========
1994 compared to 1993 -
Increase (decrease) due to:
Volume Changes $ 211 $ 314 $ (30) $ 495
Rate Changes (106) 282 153 329
------ -------- ------- --------
Net Increase(Decrease) $ 105 $ 596 $ 123 $ 824
====== ======== ======= ========
- ---------------
(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 37.1% for
1995 and 37.9% for 1994.
(2) Gives effect to (i) a decrease in loan fees of $1,231,000 in 1995, which
had the effect of partially offsetting the increases in interest rates on
loans in 1995 as compared to 1994 and (ii) an increase in loan fees of
$1,407,000 in 1994 as compared to 1993.
(3) The substantial decrease in interest earned on Lease Financing in 1994 is
attributable to volume changes resulting from the sale in 1993 of the
Bank's portfolio of leases.
(4) Long term borrowings in 1995 consist of an obligation secured by a deed of
trust that bears interest at 10.0%. In 1994 such borrowings also included
an unsecured note, at 1% over the City National Bank Base Prime Rate (which
was 8.5% at December 31, 1994), that was repaid in April 1994.
7
8
INVESTMENT PORTFOLIO
The objectives of the Bank's investment policy is to manage interest
rate risk, provide adequate liquidity and reinvest in its community while
maximizing earnings with a portfolio of investment-grade securities. Each
security purchased is subject to the credit and maturity guidelines defined in
the investment policy and is reviewed regularly to verify its continued
creditworthiness.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and reclassified its investment security
portfolio to differentiate between Investment Securities Held-to-Maturity and
Investment Securities Available-For-Sale. Previously, the investment securities
were carried at cost, adjusted for the accretion of discounts and amortization
of premiums. The classification of securities is made by management at the time
of acquisition.
The following table summarizes the components of the Company's
investment securities at the dates indicated (in thousands):
December 31,
-----------------------------------------------------------------------------
1995 1994 1993(1)
---------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
INVESTMENT SECURITIES
HELD-TO-MATURITY:
-----------------
U.S. Treasury and
Agency $ 19,735 $ 19,816 $ 17,451 $ 17,264 $ 39,815 $ 39,837
State and Political
Subdivisions 3,506 3,516 2,759 2,677 2,311 2,323
Other Securities 250 250 250 250 1,827 1,827
---------- ---------- ----------- -------- ---------- ----------
Total Investment
Securities $ 23,491 $ 23,582 $ 20,460 $ 20,191 $ 43,953 $ 43,987
========== ========== =========== ======== ========== ==========
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE:
-------------------
U.S. Treasury and
Agency $ 11,804 $ 11,811 $ 8,921 $ 8,917 $ -- $ --
State and Political
Subdivisions 4,434 4,477 -- -- -- --
Other Securities 2,707 2,455 1,982 1,600 -- --
---------- ---------- ----------- -------- ---------- ----------
Total Investment
Securities $ 18,945 $ 18,743 $ 10,903 $ 10,517 $ -- $ --
========== ========== =========== ======== ========== ==========
- ---------------
(1) No allocation was made in 1993 between investment securities
held-to-maturity and investment securities available for sale, because SFAS
115 was not adopted until January 1, 1994. Accordingly, for 1993 all
investment securities have been classified as investment securities
held-to-maturity.
8
9
The following table shows the maturities of investment securities at
December 31, 1995, and the weighted average yields (for tax-exempt obligations
on a fully taxable basis assuming a 37.1% 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 . . . . . $ 8,441 5.57% $ 11,294 6.24% $ -- --% $ -- --
States and Political 959 4.29 2,291 5.62 256 5.92 -- --
Other Securities . . 250 -- -- -- -- -- -- --
------- ---- -------- ---- --------- ---- ---- ----
$ 9,650 5.40% $ 13,585 6.12% $ 256 5.92% -- --
INVESTMENT SECURITIES
AVAILABLE-FOR-SALE:
-------------------
U.S. Treasury and
Agencies . . . . . $ 9,802 5.99% $ 2,009 7.21% $ -- --% $ -- --
States and Political -- -- 756 2.78 3,721 6.01 -- --
Other Securities . . 2,455 4.5 -- -- -- -- -- --
------- ---- -------- ---- --------- ---- ---- ----
$12,257 5.72% $ 2,765 5.97% $ 3,721 6.01% $ -- --
------- ---- -------- ---- --------- ---- ---- ----
Total Investment
Securities* . . . . $21,907 5.58% $ 16,350 6.09% $ 3,977 6.01% $ -- --
======= ==== ======== ==== ========= ====
- ---------------
* Excludes equity investments
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,
1995.
December 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
TYPES OF LOANS (In Thousands)
- --------------
Domestic:
Commercial, Financial
and Agricultural . . . $ 44,801 $ 67,551 $ 46,813 $ 40,942 $ 39,959
Real Estate Construction . 32,745 33,155 14,906 15,280 11,698
Real Estate Mortgage(1) . . 171,321 129,650 112,472 93,621 95,467
Consumer Loans . . . . . . 10,887 15,986 18,606 15,057 25,938
Lease Financing (2) . . . . 2,086 3,727 2,189 23,872 29,448
All other Loans
(including overdrafts) 178 112 178 34 25
----------- ----------- ---------- ---------- ----------
262,018 250,181 195,164 188,806 202,535
Less:
Unearned Discount . . . . . (864) (1,165) (928) (605) (958)
Reserve for Loan
and Lease Losses . . . (3,643) (3,145) (2,328) (2,168) (2,027)
----------- ----------- ---------- ---------- ----------
Total . . . . . $ 257,511 $ 245,871 $ 191,908 $ 186,033 $ 199,550
=========== =========== ========== ========== ==========
- ---------------
(1) A portion of these loans were made, not for the purpose of financing real
properties, but for commercial or agricultural purposes. However, in
accordance with the Bank's credit policies, such loans were secured by
deeds of trust on real properties and, therefore, are classified as real
estate mortgage loans.
(2) Lease financing includes residual values of $322,000 for 1995; $567,000 for
1994; $1,397,000 for 1993; $2,582,000 for 1992; and $3,688,000 for 1991;
and is net of unearned income of $252,000 for 1995; $391,000 for 1994;
$491,000 for 1993; $4,375,000 for 1992; and $5,807,000 for 1991. The
significant decline in Lease Financing was due primarily to the sale in
1993 of a portfolio of $19,000,000 of municipal leases by the Bank, and the
use of the proceeds thereof primarily to fund new loans and purchase
additional investment securities.
MATURITIES AND SENSITIVITIES TO INTEREST RATES
The following table shows the maturities and sensitivities to changes in
interest rates on loans outstanding at December 31, 1995.
MATURING
------------------------------------------------
WITHIN ONE TO AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(In Thousands)
Domestic:
Commercial and Agricultural . . $ 25,899 $ 15,046 $ 3,856 $ 44,801
Real Estate Construction . . . . 25,146 4,342 3,257 32,745
Real Estate Mortgage . . . . . . 41,048 89,982 40,291 171,321
Consumer Loans . . . . . . . . . 4,334 6,385 168 10,887
Lease Financing . . . . . . . . 756 1,330 0 2,086
All Other Loans . . . . . . . . 36 128 14 178
----------- ------------ ----------- ----------
Total . . . . . . . . . . . $ 97,219 $ 117,213 $ 47,586 $ 262,018
=========== ============ =========== ==========
Of the total amount of loans (exclusive of loans on non-accrual status)
outstanding as of December 31, 1995 that had maturities of more than one year,
$66,778,000 had predetermined, or fixed, rates of interest and $98,021,000 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, 1995. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
Generally, where rate-sensitive assets exceed rate-sensitive
liabilities, the net interest margin is expected to be positively impacted
during periods of increasing interest rates and negatively impacted during
periods of decreasing interest rates. When rate-sensitive liabilities exceed
rate-sensitive assets generally the net interest margin will be negatively
affected during periods of increasing interest rates and positively affected
during periods of decreasing interest rates.
Over One
Over Three Year
Three Through Through Over Non-
Months Twelve Five Five Interest
or Less Months Years Years Bearing Total
------- ------ ----- ----- ------- -----
ASSETS: (Dollars in Thousands)
Interest-bearing deposits
in banks . . . . . . . . $ 4,257 $ 2,176 $ -- $ -- $ -- $ 6,433
Investment securities . . . 22,796 11,319 7,162 -- 957 42,234
Federal funds sold . . . . 41,750 -- -- -- -- 41,750
Net loans . . . . . . . . . 39,128 49,399 105,555 55,316 8,113 257,511
Noninterest-earning
assets . . . . . . . . . -- -- -- -- 47,253 47,253
---------- --------- --------- ---------- ---------- ----------
Total assets . . . . . $ 107,931 $ 62,894 $ 112,717 $ 55,316 $ 56,323 $ 395,181
---------- --------- --------- ---------- ---------- ----------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Noninterest-bearing
deposits . . . . . . . . $ -- $ -- $ -- $ -- $ 96,479 $ 96,479
Interest-bearing deposits . 165,899 72,489 25,521 726 -- 264,635
Short-term borrowings . . . -- -- -- -- -- --
Long-term borrowings . . . 9 26 141 32 -- 208
Other liabilities . . . . . -- -- -- -- 2,817 2,817
Stockholders' equity . . . -- -- -- -- 31,042 31,042
---------- --------- --------- ---------- ---------- ----------
Total liabilities and
stockholders' equity . $ 165,908 $ 72,515 $ 25,662 $ 758 $ 130,338 $ 395,181
---------- --------- --------- ---------- ---------- ----------
Interest rate sensitivity
gap . . . . . . . . . . . $ (57,977) $ (9,621) $ 87,055 $ 54,558 $ (74,015) $ --
========== ========= ========= ========== ========== ==========
Cumulative interest rate
sensitivity gap . . . . . $ (57,977) $ (67,598) $ 19,457 $ 74,015 $ -- $ --
========== ========= ========= ========== ========== ==========
11
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RISK ELEMENTS
Non-Accrual, Past Due and Restructured Loans
DECEMBER 31
--------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Thousands)
Loans More Than 90 Days Past Due(1):
Aggregate Loan Amounts:
Commercial . . . . . . . . . . . . . . $ 584 $ 281 $ 92 $ 2,349 $ 360
Real Estate . . . . . . . . . . . . . . 869 2,117 -0- 116 2,171
Consumer . . . . . . . . . . . . . . . 3 51 36 7 8
Troubled Debt Restructurings(2) . . . . . . . 6,397 1,337 640 903 64
Non-Accrual Loans(3) . . . . . . . . . . . . 12,620 8,621 9,424 3,963 3,680
--------- -------- -------- --------- --------
$ 20,473 $ 12,407 $ 10,192 $ 7,338 $ 6,283
========= ======== ======== ========= ========
- ---------------
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days or more.
(2) Troubled debt restructurings are loans for which the interest rate has been
reduced or interest or principal payments have been deferred, usually
because of an inability of the borrower to service the loan in accordance
with its original terms. In those cases involving interest reductions or
deferrals, interest income is accrued at the lower effective rate as long
as the borrower is current under the revised terms of the loan. In 1995 and
1994, interest income was approximately $87,000 and $17,000 lower than
would have been the case had the borrowers performed in accordance with the
original terms of their loans. In years prior to 1994, the differences in
interest income were immaterial.
(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 45
loans on non-accrual status at December 31, 1995; 60 loans and at December
31, 1994; 31 loans at December 31, 1993; 16 loans at December 31, 1992; and
10 loans at December 31, 1991. The amount of interest that would have been
collected on these loans had they remained current in accordance with their
original terms was $812,000 in 1995, $510,000 in 1994, $504,000 in 1993,
$262,000 in 1992, and $198,000 in 1991.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"), as amended by Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired
when it is "probable" that a creditor will be unable to collect all amounts due
(i.e., both principal and interest) according to the contractual terms of the
loan agreement. The measurement of impairment may be based on (i) the present
value of the expected future cash flows of the impaired loan discounted at the
loans' original effective interest rate, (ii) the observable market price of
the impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had
no material impact on the Company's consolidated financial statements as the
Bank's existing policy of measuring loan impairment is consistent with methods
prescribed in these standards.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that it will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In determining impairment, the Bank principally evaluates those
loans, both performing and non-performing, that are large non-homogenous loans
in its commercial and real estate mortgage and construction loan portfolios
which exhibit, among other characteristics, high loan-to-value ratios, low
debt-coverage ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. In general, payment delays of less
than 90 days or payment shortfalls of less than 1% are deemed insignificant and
would not necessarily result in classification of a loan as impaired. However,
management considers all non-accrual loans to be impaired. The Bank does not
consider 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 $565,000 for the year ended
December 31, 1995 and were included in the Bank's Reserve for Loan Losses at
December 31, 1995. The average balance of the impaired loans amounted to
approximately $11,564,000 for the year ended December 31, 1995. Cash receipts
during 1995 applied to reduce principal balances and recognized as interest
income were approximately $336,000 and $363,000, 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.
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Potential Problem Loans
At December 31, 1995, 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 Outstandings
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.
Summary of Loan Loss Experience
The following table sets forth an analysis of the Bank's loan loss
experience, by category, for the past five years.
Year Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
Average amount of loans
and leases outstanding(1) . . $ 252,402 $ 222,288 $ 183,401 $ 196,752 $ 195,610
=========== =========== =========== ========== ==========
Loan loss reserve
balance at beginning of year $ 3,145 $ 2,328 $ 2,168 $ 2,027 $ 1,980
----------- ----------- ----------- ---------- ----------
Charge-Offs:
Domestic:
Commercial, financial
and agricultural . . . . (1,414) (1,114) (773) (1,380) (204)
Real Estate-construction . -- -- -- -- --
Real Estate-mortgage . . . (543) (516) (84) -- --
Consumer Loans . . . . . . (109) (207) (94) ( 58) ( 32)
Lease Financing . . . . . . -- -- -- -- --
----------- ----------- ----------- ---------- ----------
(2,066) (1,837) (951) (1,438) (236)
Foreign: . . . . . . . . . . -- -- -- -- --
----------- ----------- ----------- ---------- ----------
Recoveries:
Commercial, financial
and agricultural . . . . $ 283 $ 78 $ 75 $ 9 $ 110
Real Estate-construction . -- -- 1 -- --
Real Estate-mortgage . . . 186 140 -- -- --
Consumer Loans . . . . . . 79 72 10 15 5
Lease Financing . . . . . . -- -- -- -- --
----------- ----------- ----------- ---------- ----------
548 290 86 24 115
Net Charge-Offs . . . . . . . (1,518) (1,547) (865) (1,414) (121)
Additions charged to operations 2,016 2,364 1,025 1,555 168
----------- ----------- ----------- ---------- ----------
Loan loss reserve
balance at end of year . . . $ 3,643 $ 3,145 $ 2,328 $ 2,168 $ 2,027
=========== =========== =========== ========== ==========
Ratios:
Net charge-offs to average loans
and leases outstanding during
the year . . . . . . . . 0.60% 0.69% 0.47% 0.72% 0.06%
Loan loss reserve to total gross
loans . . . . . . . . . . 1.39% 1.26% 1.20% 1.17% 1.00%
Net loan charge-offs to loan
loss reserve . . . . . . 41.67% 49.19% 37.16% 65.22% 5.97%
Net loan charge-offs to provision
for loan losses . . . . . 75.30% 65.44% 84.39% 90.93% 72.02%
Loan Loss Reserve to
non-performing loans(2) . . . 25.88% 28.41% 24.37% 33.69% 32.59%
- ---------------
(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.
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14
Loans and leases are charged against the reserve for loan losses when
management believes that the collectability of principal is unlikely. The
reserve is replenished through provisions charged against current period income.
The amount of the provision is determined by management based on periodic
evaluations of the loan and lease portfolio which result in the establishment of
(i) specific reserves for specific problem loans and leases, based on such
factors as a deterioration in the financial condition of the borrower, a decline
in the value of the assets securing repayment of the loan or payment
delinquencies by the borrower, and (ii) general reserves for unidentified
potential losses in the loan and lease portfolio, based upon historical
experience and periodic evaluations of prevailing and anticipated economic
conditions, such as increases in interest rates or the onset of recessionary
conditions in the Bank's market areas, which can affect the ability of borrowers
to meet their payment obligations to the Bank.
The relatively higher levels of loan charge-offs in 1995, 1994, 1993
and 1992, as compared to years prior to 1992, were due primarily to the severity
and duration of the economic recession in Southern California which began in the
second half of 1990. The recession resulted in an increase in loan defaults by
borrowers and forced the Bank, like many other banks in Southern California, to
rely more heavily on sales of the assets collateralizing the defaulted loans for
their repayment. However, at the same time, the recession caused a decline in
the realizable value of such assets, making it more difficult for banks to
obtain full recovery of defaulted loans. These circumstances led the Bank, as
well as many other banks in Southern California, to reduce the amounts at which
the loans of the affected borrowers were carried on its books to the amounts
which, based on conservative valuation approaches mandated by federal and state
banking regulators, could be expected to be recovered from the borrowers or
from the sale of the assets collateralizing the loans.
These loan charge-offs were, in accordance with applicable accounting
principles, applied against the reserves that the Bank had established for
potential loan losses. As a consequence, it was necessary for the Bank to
replenish the reserve through additional "provisions" charged against operating
income and bring the reserve back to a level which management deemed adequate in
light of economic conditions.
The risk of non-payment of loans is an inherent feature of the banking
business. That risk varies with the type and purpose of the loan, the collateral
which is obtained to secure payment, and ultimately, the creditworthiness of the
borrower. In order to minimize this credit risk, the Bank has established
lending limits for each of its officers having lending authority, in each case
based upon the officer's experience level and prior performance. Whenever a
proposed loan by itself, or when aggregated with outstanding extensions of
credit to the same borrower, exceeds the officer's lending limits, the loan must
be approved by a management committee which is comprised of the Chief
Executive Officer and the Chief Credit Officer of the Bank and two senior loan
administrators or by the Loan Committee of the Board of Directors of the Bank.
The Bank also maintains a program of periodic review of all existing loans. The
Bank's administrative officers review a percentage of all loans and leases
made, with emphasis placed on large credits. Loans and leases are reviewed for
creditworthiness as well as documentation and compliance with the Bank's lending
policies. Problem or substandard loans or leases identified in the review
process are scheduled for special attention and remedial action.
The reserve for possible loan losses should not be interpreted as an
indication that charge-offs will occur in the amounts or proportions shown in
the table above, or that the allocation of the reserve set forth in the table
below indicates future charge-off trends. While management believes that the
reserve for loan losses is adequate, future additions to the reserve can be
expected as a result of any of a number of factors, including changes in
economic conditions, increases in the volume of the Bank's outstanding loans or
the incurrence of currently unanticipated losses on loans in the loan portfolio
due to deterioration in the financial condition of the borrowers. In addition,
both Federal and state banking regulatory agencies, as an integral part of their
periodic oversight examinations of the Bank, routinely review the loan loss
reserve and often recommend additions to the reserve based on their evaluation
of the loan portfolio.
14
15
Allocation of Reserve for Loan Losses
The loan loss reserve is allocated among the different loan categories,
as set forth in the table below, as a result of the differing levels of risk
associated with each loan category. The allocation is made based on historical
loss experience within each category and management's periodic review of loans
in the loan portfolio. However, the reserves allocated to specific loan
categories are not the total amounts available for future losses that might
occur within such categories because the total reserve is a general reserve
applicable to the entire portfolio.
Year Ended December 31,
----------------------------------------------------------------------------
1995 1994 1993
--------------------- ---------------------- ---------------------
% 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)
Domestic:
Commercial, Financial
and Agricultural $ 1,640 17.10% $ 1,493 28.00% $ 1,084 23.99%
Real Estate-construction 186 12.50 459 13.25 189 7.65
Real Estate-mortgage 1,523 65.38 1,215 51.83 871 57.63
Installment loans to
individuals 281 4.15 210 6.39 152 9.53
Lease financing 13 0.80 18 0.49 7 1.12
Other -- 0.07 -- 0.04 -- 0.09
Foreign -- -- -- -- -- --
Specific allocation -- -- -- -- -- --
Unallocated allowance -- -- (250) -- 25 --
---------- ----- --------- ----- ---------- -----
$ 3,643 100.00% $ 3,145 100.00% $ 2,328 100.00%
========== ====== ========= ====== ========== ======
Year Ended December 31,
-------------------------------------------------
1992 1991
---------------------- ---------------------
% of % of
Reserve Loans to Reserve Loans to
Loan Total Loan Total
Losses Loans Losses Loans
------ ----- ------ -----
Domestic:
Commercial, Financial
and Agricultural $ 1,153 21.70% $ 817 19.72%
Real Estate-construction 152 8.10 402 5.70
Real Estate-mortgage 587 49.60 744 47.13
Installment loans to
individuals 125 8.00 30 12.80
Lease financing 16 12.60 33 14.53
Other -- -- 1 0.12
Foreign -- -- -- --
Specific allocation -- -- -- --
Unallocated allowance 135 -- -- --
-------- ----- --------- -----
$ 2,168 100.00% $ 2,027 100.00%
======== ====== ========= ======
15
16
DEPOSITS
The average amount (in thousands) of and the average rate paid on
deposits is summarized below:
1995 1994 1993
-------------------- --------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
In Domestic Offices:
Noninterest bearing
demand deposits $ 82,076 --% $ 68,683 --% $ 55,979 --%
Savings Deposits(1) 127,467 2.0 123,659 1.7 112,628 1.8
Time Deposits 127,263 5.6 91,485 4.2 84,278 3.9
---------- --------- ----------
Total Deposits $ 336,806 2.9% $ 283,827 2.1% $ 252,885 2.1%
========== ========= ==========
(1) Includes NOW, Super NOW, and Money Market Deposit Accounts.
Set forth below is a maturity schedule of domestic time certificates of
deposit of $100,000 or more:
DECEMBER 31,
1995
--------------
(In Thousands)
Three Months or Less $ 6,619
Over Three through Six Months 11,322
Over Six through Twelve Months 22,600
Over Twelve Months 23,062
-------
$63,603
=======
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).
1995 1994 1993
---- ---- ----
Return on Assets . . . . . . . . . . . . 0.97% 1.19% 1.13%
Return on Equity . . . . . . . . . . . . 11.90% 13.33% 13.72%
Dividend Payout Ratio . . . . . . . . . --% 40.82% 42.55%
Equity to Asset Ratio . . . . . . . . . 8.13% 8.31% 8.27%
16
17
Competition
The banking business in the Bank's marketing areas is highly
competitive. In those areas, the Bank competes for loans and deposits with other
commercial banks, including branches of most of California's major banks, many
of which have greater financial, marketing and other resources than those of the
Bank. Larger commercial banks have greater lending limits than the Bank and
offer certain services, such as trust services, which the Bank does not offer
directly. Competition is expected to continue to increase as a result of
legislation which permits bank holding companies in other states to acquire
California banks and bank holding companies. See "Effects of Governmental
Policies and Recent Legislation." The Bank also competes with savings and loan
associations, finance companies, credit unions, mortgage companies, insurance
companies, brokerage firms, leasing companies and other financial institutions
in its market areas. In competing with other financial institutions, the Bank
places emphasis on providing a high level of personal service and convenience to
its customers and offering banking services that are designed to meet the
particular banking needs of customers in its communities. The Bank also conducts
local advertising and promotional programs and activities in its market areas to
attract new customers.
Supervision and Regulation
Regulations Applicable to the Company
The Company, as a bank holding company, is subject to regulation under
the Bank Holding Company Act (the "Act"). The Act requires every bank holding
company to obtain the prior approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board" or the "FRB") before it may acquire
substantially all of the assets of any bank or acquire ownership or control of
any voting shares of any bank if, after such acquisition, it would own or
control, directly or indirectly, more than 5% of the voting shares of such bank.
The Federal Reserve Board may not approve the acquisition by the Company of
voting shares, or substantially all the assets, of any bank located in any state
other than California unless the laws of such state specifically authorize such
an acquisition.
Under the Act, the Company may not engage in any business other than
managing or controlling banks or furnishing services to its subsidiaries, except
that it may engage in certain activities which, in the opinion of the Federal
Reserve Board, are so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. The Company is also prohibited, with
certain exceptions, from acquiring direct or indirect ownership or control of
any voting shares of any company which is not a bank or a bank holding company
unless that company is engaged in activities which the Federal Reserve Board has
determined are a proper incident to banking. If a company is engaged in
prohibited activities, then the Federal Reserve Board's approval must be
obtained before the shares of any such company can be acquired by the Company or
before the Company can open new offices. In ruling on applications for approval
of acquisitions of shares, the Federal Reserve Board is required to consider
whether performance of the activity to be carried on by the proposed subsidiary
can reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency that outweigh possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board has followed for some time a restrictive policy in permitting the
entry or expansion of bank holding companies and other bank affiliates into
domestic and foreign banking and banking-related activities. The Act does not
place territorial restrictions on the activities of non-bank subsidiaries of
bank holding companies.
The major non-banking activities that have been permitted to bank
holding companies with certain limitations are: making, acquiring or servicing
loans that would be made by a mortgage, finance, credit card or factoring
company; operating an industrial loan company; leasing real and personal
property; acting as an industrial agent, broker, or principal with respect to
insurance that is directly related to the
17
18
extension of credit by the bank holding company or any of its subsidiaries and
limited to repayment of the credit in the event of death, disability or
involuntary unemployment; issuing and selling money orders, savings bonds and
travelers checks; performing certain trust company services; performing
appraisals of real estate and personal property; providing investment and
financial advice; providing data processing services; providing courier
services; providing management consulting advice to nonaffiliated depository
institutions; arranging commercial real estate equity financing; providing
certain securities brokerage services; underwriting and dealing in government
obligations and money market instruments; providing foreign exchange advisory
and transactional services; acting as a futures commission merchant; providing
investment advice on financial futures and options on futures; providing
consumer financial counseling; providing tax planning and preparation services;
providing check guarantee services; engaging in collection agency activities;
and operating a credit bureau. The Federal Reserve Board has also requested
comments on a proposal that would allow bank holding companies to engage in
certain types of real estate investment activities subject to certain
restrictions on the manner in which such activities may be conducted.
Under the Act, bank holding companies are required to file with the FRB
annual reports and such additional information regarding the business operations
of the holding company and its subsidiaries as the FRB may require. The FRB may
conduct examination of such holding companies and their subsidiaries. The FRB
also has authority to regulate provisions of certain bank holding company debt.
Under the Act and regulations adopted by the FRB, a bank holding company and its
subsidiaries are prohibited from requiring certain tie-in arrangements in
connection with any extension of credit, lease, or sale of property or
furnishing of services.
In connection with its regulation and supervision of bank holding
companies, the FRB has established capital maintenance guidelines, under which,
on a consolidated basis, a bank holding company must maintain a minimum ratio of
total capital (inclusive of loan loss reserves)- to-total assets of not less
than 6.0% and a ratio of primary capital to total assets of not less than 5.5%.
The FRB utilizes total capital "zones" whereby a banking organization with a
ratio of total capital to total assets of less than 6% will be considered
undercapitalized, absent extenuating circumstances. Institutions with a total
capital ratio of 6-7% may be considered to be adequately capitalized if other
financial and managerial factors are satisfactory. Institutions with a total
capital ratio in excess of 7% will generally be considered to be well
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, 1995, the Company, on a
consolidated basis, had total and primary capital of approximately $34,686,000
and a primary capital-to-asset ratio of approximately 8.8%.
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 consists 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
18
19
banking organizations swap, exchange or otherwise 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, 1995, the Company's
risk-based capital ratio, determined in accordance with the FRB regulations, was
11.6% 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.
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, 1995, the maximum dividend payable by the
Bank to the Company under these restrictions would have been approximately
$7,444,000. See "Item 5. - Dividends" below.
Under the Change in Bank Control Act, persons who intend to acquire
control of a bank holding company, acting directly or indirectly or through or
in concert with one or more persons, 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 bank
holding company is presumed to exist where the acquiring party has ownership,
control or the power to vote at least 10 percent of a class of voting securities
of the bank holding company, if (i) the bank holding company has any class of
voting securities which is registered under Section 12 of the 1934 Act, or (ii)
immediately after the transaction no other person will own a greater proportion
of that class of voting securities. The statute authorizes the FRB to
disapprove the proposed transaction on certain specified grounds.
Regulations Applicable to the Bank
The Bank is subject to regulation, supervision and regular examination
by the California State Banking Department and the FDIC. The regulations and
policies of these agencies affect most aspects of the Bank's business and
prescribe permissible types of loans and investments, the amount of required
reserves, the requirements for branch offices, the permissible scope of the
Bank's activities, and various
19
20
other requirements. In addition, as part of their regular examinations of the
Bank, the California State Banking Department and FDIC consider and make
recommendations with respect to the adequacy of the Bank's capital and the
efficacy of lending, investment and other policies established and implemented
by the Bank. The Bank is also subject to certain reporting requirements of the
State Banking Department and the FDIC. Although the Bank is not a member of the
Federal Reserve System, it is nevertheless also subject to certain regulations
of the Federal Reserve Board.
The FDIC has adopted regulations and a statement of policy which define
and establish certain minimum requirements for capital adequacy. Under the
regulations, insured state non-member banks are required to maintain a ratio
(known as the "leverage capital ratio") of "Tier 1" or "core" capital-to-average
total assets of 3% in the case of banks that are financially strong and are not
experiencing significant asset growth; and between 4% and 5% in the case of most
other banks. However, the FDIC has the authority to impose higher leverage ratio
requirements where warranted by the risk profile of the bank, as determined by
the FDIC. As defined in the regulations, "Tier 1" capital consists of common
shareholders' equity, less intangible assets and assets classified loss; and
"average total assets" consist of total assets, less intangible assets and
assets classified loss. At December 31, 1995, the Bank's Tier 1 leverage ratio
was approximately 7.77%, which was substantially unchanged from the ratio at
December 31, 1994, despite the fact that its average total assets were higher in
1995 than in 1994.
Banks with capital ratios below the minimum do not have adequate
capital, and will be subject to appropriate administrative actions, including
the issuance by the FDIC of a capital directive requiring that the bank restore
its capital to the minimum required level within a specified period of time and
denial of applications for mergers, new branches, etc. Any insured bank
operating with a leverage capital ratio of less than 3% will be deemed to be
operating in an unsafe and unsound condition, and will be subject to appropriate
administrative actions.
In addition, under FDIC regulations, FDIC-insured banks are required to
maintain a so-called "risk-based" capital ratio that is determined on the basis
of a bank's weighted risk asset base. The weighted risk asset base is determined
by assigning each of the 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, 1995, the Bank's risk-based
capital ratio, determined on the basis of the FDIC rules, was approximately
11.3%.
As an insured bank, the Bank also is subject to certain FDIC
requirements designed to maintain the safety and soundness of individual banks
and the banking system. The FDIC periodically conducts examinations of insured
banks and, based upon its findings, may revalue assets of an insured bank and
require establishment of specific reserves in amounts equal to the difference
between such revaluation and the book value of the assets. During the past three
months, there has been a pronounced increase in regulatory oversight activity by
the FDIC and the California State Banking Department in response to recessionary
conditions and a resulting increase in non-performing loans at many banking
institutions in California. As part of that oversight activity, both of these
agencies have increased the standards by which they evaluate the quality and
collectability of loans and, through a number of regulatory devices, have
required banks in California to devote greater resources on efforts to reduce
the level of non-performing loans and to increase loan loss reserves against the
possibility that economic conditions in California will not improve and loan
defaults by borrowers will increase.
In response to FDIC examinations of the Bank in 1992 and 1993, the Bank
increased loan loss reserves and implemented more stringent credit and loan
collection policies. Despite the increases in
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reserves, which are made by means of charges against income, and substantial
increases in total assets in 1994 and 1995, between January 1, 1992 and December
31, 1995 the Bank was able to increase its leverage ratio to 7.77% from 7.20%.
Effects of Governmental Policies and Recent Legislation
Government Monetary Policies. A principal determinant of a bank's
earnings is the difference between the income it receives on its loans and
investment securities and the cost of its funds, primarily interest paid on
savings and time deposits and other liabilities. The interest rates charged on
loans are 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 United 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 the three years ended December 31, 1993, the Federal Reserve
Board followed a policy of reducing interest rates to promote borrowing and
investments in response to recessionary conditions in the economy. Although this
policy led to reductions in yields on loans and investments which the Bank made
during that period, it also had the effect of significantly reducing interest
rates on deposits, which reduced the cost of funds to the Bank and contributed
to the increase in net interest income in 1993. In 1994, the Federal Reserve
Board began increasing interest rates because of concerns about potential
increases in inflation due to improvements in the general economy. Those
increases in interest rates occurred at various times during 1994 and
contributed to increases in the Bank's interest expense in 1994 and 1995. It is
not possible to predict with any certainty, however, the impact of the Federal
Reserve Board's actions upon the future business and earnings of the Company.
Recent Legislation. In 1992, the FDIC adopted and began implementing
regulations under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), which will impose potentially far-reaching and extensive
government regulation over and restrictions on the operations of most
federally-insured banks. FDICIA established five criteria or levels of capital
adequacy by which the financial condition of banks is measured, ranging from
"well capitalized" to "critically undercapitalized,"
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and imposes increased operating restrictions and greater regulatory control over
a bank as its level of capital declines. A bank is deemed to be "well
capitalized" if it has a total risk-based capital ratio of at least 10%, a Tier
1 risk-based capital ratio of at least 6%, a leverage ratio of at least 5%, and
is not subject to any written agreement or prompt corrective action directive
issued by the FDIC to meet and maintain a specific capital level for any capital
measure. A bank is "adequately capitalized" if it has a total risk-based capital
ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and
either a leverage ratio of at least 4% or a leverage ratio of at least 3% if the
bank is rated composite 1 under the CAMEL rating system in the most recent
examination and is not experiencing or anticipating significant growth.
FDICIA also authorizes the FDIC to take supervisory actions against a
bank based on a determination, after notice and an opportunity for hearing, that
a bank is in an unsafe and unsound condition or is engaging in an unsafe or
unsound practice. In such circumstances, the FDIC may reclassify a well
capitalized bank as adequately capitalized, or require an adequately capitalized
bank to comply with one or more requirements applicable to undercapitalized
banks, such as submitting a plan for restoration of adequate capital, limiting
asset growth or being prohibited from making an acquisition or engaging in a new
line of business.
FDICIA also requires that all insured institutions with total assets
greater than $150 million prepare and submit to the FDIC annual financial
statements audited by an independent public accounting firm. The annual report
must include a statement by management concerning the establishment and
maintenance, within the institution, of internal control mechanisms to ensure
compliance with applicable laws and regulations. In addition, FDICIA requires
that the appropriate Federal or State banking authority conduct an annual
on-site examination of each insured institution, the cost of which is to be
borne by the institution. Civil penalties may be assessed under FDICIA against
an institution and its officers and directors for a failure to provide
information or otherwise cooperate with the examination.
FDICIA also requires that FDIC-insured state-chartered banks, like the
Bank, comply with certain restrictions on investment activities that are
applicable to national banks pursuant to regulations adopted by the U.S.
Comptroller of the Currency. Those restrictions are not expected to materially
affect the Bank's operations.
Based upon the Bank's capital ratios and its overall financial
condition, the Bank is classified as a "well-capitalized" bank and is not
subject to any significant operating restrictions under FDICIA.
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, banks and savings and loan associations to
operate mutual funds; to permit bank holding companies to own or control thrift
institutions; to subject banks to increased disclosure and reporting
requirements; and to generally expand the range of financial services which can
be provided by bank holding companies as well as by other financial
institutions. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the present of future business
of the Bank may be affected thereby.
Employees
At December 31, 1995, the Bank had approximately 202 full-time and 56
part-time employees.
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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 54 President and Chief President and Chief
Executive Officer Executive Officer
Tom Kramer 52 Executive Vice President Executive Vice President,
and Secretary Chief Credit Officer and
Secretary
Donna Miltenberger 40 N/A Executive Vice President and
Chief Administrative Officer
Carol Ann Graf 50 First Vice President, Chief First Vice President, Chief
Financial Officer and Financial Officer 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 is, and since April 1994 has been, Executive
Vice President and Chief Credit Officer of the Bank and has been an Executive
Vice President of the Company since its organization in December 1982. From
March 1982 to April 1994 he served as Executive Vice President - Loan
Administrator of the Bank. From 1979 to 1982, Mr. Kramer held various executive
positions with the Bank, including Senior Vice President - Loan Administrator
and Assistant Secretary.
Donna Miltenberger. Ms. Miltenberger has been an Executive Vice
President of the Bank since November 1993. Due to an increase in the scope of
her responsibilities, she was appointed to the position of Chief Administrative
Officer of the Bank and was designated as an executive officer by the Company's
Board of Directors in 1994. From June 1992 to November 1993, Ms. Miltenberger
held the position of Senior Vice President of the Bank. Prior to June 1992, Ms.
Miltenberger held various management positions with Chino Valley Bank, in Chino,
California, including Executive Vice President -- Cashier.
Carol Ann Graf. Ms. Graf was appointed Chief Financial Officer of the
Company and First Vice President and Chief Financial officer of the Bank in
January 1993. 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.
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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 eight other banking
offices, and the facilities where its loan center and service center are
located, under leases expiring at various dates through 2027. The Bank has
recently entered into a five-year lease of a building where its new banking
office, in the city of Chino, California, will be located. Management believes
that the Bank's present facilities are adequate for its present purposes and
anticipated growth in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company or the Bank
is a party or to which any of their respective properties are subject other than
ordinary routine litigation incident to the Bank's business, the outcome of
which is not expected to be material to the Company or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ National Market
under the symbol "FOOT." The following table sets forth the high and low closing
sales prices per share of the Company's Common Stock as reported on the NASDAQ
National Market for all four quarters of 1994 and 1993. On March 22, 1996, the
closing per share price of the Company's Common Stock on the NASDAQ National
Market was $9.125 and, as of that same date, there were 1,084 record
shareholders of the Company.
Bid Prices of Per Share Cash
Common Stock(1) Dividends Declared
--------------- ------------------
High Low
---- ---
1995(1)
-------
First Quarter $ 8.75 $ 7.75 $ --
Second Quarter 8.50 7.375 --
Third Quarter 9.00 7.75 --
Fourth Quarter 9.00 7.75 --
1994
----
First Quarter $ 9.75 $ 8.00 $ .10
Second Quarter 9.00 7.75 .10
Third Quarter 9.50 8.00 .10
Fourth Quarter 8.75 7.50 .10
- ---------------
(1) In May 1995, the Company distributed a 10% stock dividend to all
shareholders of record as of April 10, 1995. The trading prices in this
table for periods prior to the stock dividend have not been adjusted
for that dividend.
Dividends
Dividend Policy. It has been the Company's policy to pay cash dividends
out of internally generated funds that are not required to meet capital and cash
requirements or to support growth of the Company's business. Pursuant to that
policy, the Company paid cash dividends of $.25 per share in 1984; $.25 per
share in 1987; $.37 per share in 1988; $.16 per share in both 1989 and 1990;
$.47 per share in 1991; and $0.40 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 in 1995. Accordingly, no cash dividends
were paid in 1995. The Board of Directors has determined to continue to retain
earnings to support growth in 1996 and, therefore, it is not expected that cash
dividends will be paid in 1996. However, The Board of Directors declared a 10%
stock dividend payable on April 5, 1996 to shareholders of record at
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26
March 22, 1996, and if cash or capital requirements in 1996 prove to be less
than currently anticipated, the Board of Directors will consider declaring a
cash dividend in late 1996 or early 1997.
Restrictions Applicable to the Payment of Dividends. The principal
source of funds available to the Company for cash dividends is cash dividends
from the Bank. Under California law, dividends declared by the Bank may not
exceed, in any calendar year, without approval of the California Superintendent
of Banks, the lesser of (i) net income of the Bank for the year and retained net
income from the preceding two years (after deducting all dividends paid during
the period), or (ii) the Bank's retained earnings. However, because the payment
of cash dividends has the effect of reducing capital, as a practical matter
capital requirements imposed on federally insured banks operate to preclude the
payment of cash dividends in amounts that might otherwise be permitted by
California law; and the FDIC, as part of its supervisory powers, generally
requires insured banks to adopt dividend policies which limit the payment of
cash dividends much more strictly than do applicable laws.
In addition, Section 23(a) of the Federal Reserve Act restricts any
banking subsidiary of the Company from extending credit to the Company unless
the loans are secured by specified obligations and are limited in amount to no
more than 10% of the banking subsidiary's contributed capital and retained
earnings.
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ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal years
ended December 31, 1995, 1994 and 1993, and the selected balance sheet data as
of December 31, 1995 and 1994, 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 years ended December 31, 1992 and
1991, and the selected balance sheet data as of December 31, 1993, 1992 and
1991, 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 1995 1994 1993 1992 1991
----------- ----------- ----------- ---------- ----------
Interest Income . . . . . . . . . $ 33,403 $ 27,690 $ 21,732 $ 23,482 $ 25,448
Interest Expense . . . . . . . . 9,786 6,206 5,382 7,316 10,596
----------- ----------- ----------- ---------- ----------
Net Interest Income . . . . . . . 23,617 21,484 16,350 16,166 14,852
Provision for Possible Loan
Losses . . . . . . . . . . . . (2,016) (2,364) (1,025) (1,555) (168)
----------- ----------- ----------- ---------- ----------
Net Interest Income after
Provision
for Possible Loan Losses . . . 21,601 19,120 15,325 14,611 14,684
Other Income . . . . . . . . . . 4,687 5,052 5,962 4,294 3,911
Other (Expense) . . . . . . . . . (20,625) (18,613) (16,925) (14,600) (13,457)
----------- ----------- ----------- ---------- ----------
Income Before Income Taxes . . . 5,663 5,559 4,362 4,305 5,138
Applicable Income Taxes . . . . . 2,100 2,105 1,335 1,152 1,502
----------- ----------- ----------- ---------- ----------
Net Income Before Cumulative
Effect of Change in Accounting
for Income Taxes . . . . . . . 3,563 3,454 3,027 3,153 3,636
Cumulative Effect of Change in
Accounting for Income Taxes(1). -- -- 126 -- --
----------- ----------- ----------- ---------- ----------
Net Income . . . . . . . . . . . $ 3,563 $ 3,454 $ 3,153 $ 3,153 $ 3,636
=========== =========== =========== ========== ==========
Cash Dividends(2) . . . . . . . . $ -- $ 1,417 $ 1,310 $ 1,235 $ 1,723
----------- ----------- ----------- ---------- ----------
BALANCE SHEET DATA 1995 1994 1993 1992 1991
----------- ----------- ----------- ---------- ----------
Investment Securities . . . . . . $ 42,234 $ 30,977 $ 43,953 $ 28,554 $ 23,695
Loans and Leases (net) . . . . . 257,510 245,871 191,908 183,033 199,550
Assets . . . . . . . . . . . . . 395,180 331,262 280,494 266,878 261,823
Deposits . . . . . . . . . . . . 361,114 301,222 253,298 242,667 238,066
Long Term Debt (3) . . . . . . . 208 245 446 558 648
Shareholders' Equity . . . . . . 31,042 26,871 24,959 21,779 19,517
----------- ----------- ----------- ---------- ----------
PER COMMON SHARE DATA 1995 1994 1993 1992 1991
----------- ----------- ----------- ---------- ----------
Income Before Cumulative Effect . $ 0.82 $ .81 $ .75 $ .81 $ .95
Cumulative Effect . . . . . . . . -- -- .03 -- --
----------- ----------- ----------- ---------- ----------
Net Income(4) . . . . . . . . . . 0.82 $ .81 $ .78 $ .81 $ .95
Cash Dividends . . . . . . . . . -- .40 .40 .40 .47
Book Value (At year-end) . . . . $ 7.85 $ 7.57 $ 7.07 $ 6.96 $ 6.35
Number of Shares used in
Per Share Calculation(4) . . . . 4,326,095 4,282,910 4,039,788 3,894,489 3,840,486
- ---------------
(1) For information regarding the cumulative effect of the changes in
accounting for income taxes, see Note 15 to the Company's Consolidated
Financial Statements.
(2) For information regarding restrictions affecting the ability of the Company
to pay cash dividends, see Note 13 to the Company's Consolidated Financial
Statements.
(3) For information regarding long term debt, see Note 9 to the Company's
Consolidated Financial Statements.
(4) Retroactively adjusted for stock dividends and stock splits.
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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 commercial bank (the "Bank"), which accounts
for substantially all of the Company's revenues and income. Accordingly, the
following discussion focuses primarily on the operations and financial condition
of the Bank.
NET INTEREST INCOME. Net interest income is a principal determinant of
a bank's income. Net interest income represents the difference or "spread"
between the interest earned on interest-earning assets, such as loans and
investment securities, and the interest paid on interest-bearing liabilities,
principally deposits. Net interest income increased by approximately $2,132,000
or 9.9% in 1995 compared to 1994, and by approximately $5,135,000 or 31.4% in
1994 compared to 1993. The increase in 1995 was attributable to increases in
interest earned on loans due to higher interest rates during the first half of
1995 and to growth in the average volume of the Bank's interest-earning assets,
which increased by approximately 20% during 1995. The increase in net interest
income in 1994 was due to a 12% increase in the average volume of
interest-earning assets and increases in market rates of interest during 1994.
RATE SENSITIVITY AND EFFECT ON NET INTEREST INCOME. The "spread"
between the interest earned on interest-earning assets and the interest paid on
deposits (the "net interest margin") will be affected by the extent to which
interest rates charged on loans and leases are subject to adjustment in response
to changes in market conditions that affect the interest rates a bank must offer
to maintain and attract deposits, its principal source of funds. Banks that are
heavily dependent on interest-sensitive deposits to fund loans and other
interest-earning assets must increase the rates they pay to retain and attract
deposits during periods of rising interest rates. As a result, unless their
loans and other interest-earning assets have variable interest rates or
short-term maturities, such banks will experience reductions in net interest
margins during periods of increasing interest rates. On the other hand, during
periods of declining interest rates, interest income on interest-sensitive
(variable interest rate) assets will decline and banks with a high portion of
variable rate or short-term loans may sustain reductions in net interest income
during such periods.
The Bank attempts to reduce its exposure to interest rate fluctuations,
and thereby at least to maintain and, if possible, to increase its net interest
margin or spread by seeking (i) to attract and maintain a significant volume of
demand and savings deposits that are not as sensitive to interest rate
fluctuations as are time certificates of deposit ("TCD's"), and (ii) to match
opportunities to "reprice" earning assets, particularly loans, in response to
changes in market rates of interest which require or cause repricing of
deposits. During 1995, the Bank was able to increase, in absolute dollars, the
volume of the Bank's demand and savings deposits, as compared to 1994 and 1993.
Due in part to the increase in the volume of demand and savings deposits, the
relative stability of those deposits, and the decision of the Federal Reserve
Board to begin reducing interest rates, the Bank was able, during the second
half of 1995, to increase the volume of fixed rate loans in order to maintain
yields on earning assets in a declining interest rate market. As a result, at
December 31, 1995, the volume of loans with variable interest rates declined to
60.1% of the Bank's totals loans outstanding, as compared to 69.4% and 65.2%, at
December 31, 1994 and 1993, respectively.
Despite the increase in the volume of savings and demand deposits and
the increase in the volume of fixed rate loans, the Bank's net interest margin
(i.e., net interest income stated as a percentage of interest income) in 1995
declined to 70.7% from 77.6% in 1994 and 75.2% in 1993. This decline in 1995 was
attributable to a combination of: (i) increases in interest expense due to the
rise in the rates paid
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29
on interest-bearing time deposits in 1994 and the first half of 1995; (ii)
increases in 1995 in the average volume of time certificates of deposits ("time
deposits" or "TCD's"), on which the Bank pays higher rates of interest than on
savings and demand deposits; (iii) a slowing of loan growth in 1995 and an
increase in the volume of other types of interest-earning assets, such as
Federal funds sold, investment securities and deposits held at other
institutions, which generally are lower-yielding assets than are loans; and (iv)
a decline in market rates of interest during the second half of 1995, which had
a more immediate impact on variable-rate or short-term interest earning assets
than it did on the rates of interest paid on time deposits. The increase in the
volume of the Bank's time deposits, which was greater than the increase in the
volume of savings and demand deposits in 1995, were used to fund the Bank's
internal growth and increase the Bank's liquidity, which had declined in 1994
primarily because of a 28% increase during that year in the Bank's outstanding
loans. As time deposits mature during 1996, the Bank expects that they will be
replaced by deposits at the lower rates of interest corresponding to current
market interest rates.
The ability of the Bank to maintain its net interest margin is not
entirely within its control because the interest rates the Bank is able to
charge on loans and the interest rates it offers to maintain and attract
deposits are affected by national monetary policies established and implemented
by the Federal Reserve Board and by competitive conditions in the Bank's service
areas. In addition, the effect on a bank's net interest margins of changes in
market rates of interest will depend on the types and maturities of its deposits
and earning assets. For example, a change in interest rates paid on deposits in
response to changes in market rates of interest can be implemented more quickly
in the case of savings deposits and money market accounts than with respect to
time deposits as to which a change in interest rates generally cannot be
implemented until such deposits mature. In addition, a change in rates of
interest paid on deposits can and often does lead consumers to move their
deposits from one type of deposit to another or to shift funds from deposits to
non-bank investments or from such investments to bank deposit accounts or
instruments, which also will affect a bank's net interest margin.
The Bank currently anticipates an improvement in net interest margin in
1996, as compared to 1995, due to a number of factors, including, a decline in
market rates of interest and an anticipated run-off of some of the Bank's higher
interest bearing TCD's in denominations of $100,000 or more, which should reduce
interest expense, and somewhat greater loan growth which is expected to result
from the decline in interest rates, a slowly improving economy in Southern
California and the consolidations of larger banks in its market area which,
based on past experience, can lead some of their customers to transfer their
business to community banks, such as the Bank, to obtain improved service.
However, there are a number of uncertainties and risks that could adversely
affect the Bank's net interest margin in 1996, including the possibility of
adverse changes in economic conditions in Southern California, changes in market
rates of interest and the possibility of increased competition in the Bank's
market areas, both from other banks and from financial institutions and from
securities brokerage firms that offer competing loan and investment products.
YEARS ENDED DECEMBER 31, 1995 AND 1994
INTEREST INCOME. Interest income increased by approximately $5,712,000
or 20.6% in 1995, compared to 1994, due to an increase of approximately
$4,755,000 in interest earned on loans and other interest earning assets that
was attributable both to increases in market rates of interest during the first
half of 1995 and to increases in the volume of the Bank's interest-earning
assets, but which was partially offset by a decline, as compared to 1994, of
approximately $1,231,000 in loan fees, as loan growth was lower in 1995 than in
1994.
INTEREST EXPENSE. The increase in interest expense in 1995 of
approximately $3,580,000 or 57.7%, compared to 1994 figures, was primarily
attributable to a 18.4 % increase in the average volume of interest-bearing
deposits and to increases in interest rates paid on deposits as a result of a
change in the
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mix of deposits to a higher percentage of time deposits on which the Bank pays
interest at higher rates and increases in market rates of interest during the
first half of 1995.
PROVISION FOR LOAN AND LEASE LOSSES. The Bank maintains 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 (primarily
reductions in the carrying values of non-performing loans due to possible losses
on their ultimate recovery) are charged against the Reserve and the Reserve is
adjusted periodically to reflect changes in the volume of outstanding loans and
in the risk of potential losses due to a deterioration in the condition of
borrowers or in the value of property securing non-performing loans or changes
in general economic conditions. Additions to the Loan Loss Reserve are made
through a charge against income referred to as the "provision for loan and lease
losses." In 1995 this provision was $2,016,000, compared to $2,364,000 in 1994,
and the Reserve at December 31, 1995 was approximately $3,644,000 or 1.4% of
total loans and leases outstanding compared to a reserve of approximately
$3,145,000 or 1.3% of total loans and leases outstanding at December 31, 1994.
The decrease in the provision made in 1995, as compared to the provision made in
1994, was due primarily to a slowing in the growth of the Bank's volume of
outstanding loans and the assessment of the Bank's management that the amount of
the Loan Loss Reserve was adequate in relation to the volume and condition of
the Bank's outstanding loans. Net loan charge-offs in 1995 aggregated
$1,517,000, representing sixty-one hundredths of one percent (0.61%) of the
average volume of loans and leases that were outstanding in 1995, as compared to
net loan charge-offs in 1994 of $1,547,000, which represented sixty- nine
hundredths of one percent (0.69%) of average loans and leases outstanding.
OTHER INCOME. Other income decreased by $365,000 or 7.2% in 1995
compared to 1994. This decrease was primarily due to decreases in the volume of
and, consequently, in the fees generated from, sales of Small Business
Administration ("SBA") guaranteed loans.
OTHER EXPENSES. The Bank's non-interest expense increased by
approximately $2,012,000 or 10.8% during 1995. This increase included a $974,000
increase in salaries and employee benefits and a $456,000 increase in occupancy
expense. The increase in salaries and employee benefits was due primarily to
staffing requirements for two new banking offices established by the Bank, one
in Glendale, California that was opened in March 1995, and the second in Corona,
California that was opened in July 1995. Also contributing to the increase in
occupancy expense in 1995 was an increase in rental expense resulting from the
sale and leaseback in December of 1994 of the building housing the Bank's San
Dimas, California service center, that was effectuated to convert a non-earning
asset into cash that could be invested in earning assets. Also contributing to
the increase in other operating expenses in 1995 was a provision of $879,000
made to increase the Bank's reserves for possible losses on other real estate
owned, which is real property that was acquired by the Bank on defaulted loans
and is being held for resale. This compares to the provisions of $771,000 in
1994 and $151,000 in 1993. The increases in the provision in 1995 and 1994 were
made in response to declining real estate values due to the continued softness
in demand for commercial real estate in Southern California, which is a sector
of the local economy which has not experienced any material improvement during
the past three years. The reserves for possible losses on other real estate
owned totaled $ 776,000 at December 31, 1995, as compared to $516,000 and
$151,000 at December 31, 1994 and 1993, respectively.
INCOME TAXES. Income taxes decreased by approximately $6,000 or 0.3%
during 1995 compared to 1994, as a result of the increase in the volume of
tax-exempt investment securities held by the Bank.
YEARS ENDED DECEMBER 31, 1994 AND 1993
INTEREST INCOME. The increase in interest income of approximately
$5,958,000 or 27.4% in 1994 compared to 1993 was attributable to an increase in
the volume of the Bank's outstanding loans and, to a lesser extent, an increase
in market rates of interest.
30
31
INTEREST EXPENSE. Interest expense increased by approximately $824,000
or 15.3% in 1994 compared to 1993, primarily as a result of increases in the
average volume of time deposits on which the Bank pays higher rates of interest
than on savings deposits, and, to a lesser extent, increases in the rates paid
on those deposits.
PROVISIONS FOR LOAN AND LEASE LOSSES. The provision for loan and lease
losses made in 1994 was $2,364,000 as compared to $1,025,000 during 1993. Net
charge-offs for 1994 aggregated $1,547,000, representing approximately
sixty-nine hundredths of one percent (0.69%) of average loans and leases, as
compared to net loan charge-offs in 1993 of $865,000, which represented
forty-seven hundredths of one percent (0.47%) of average loans and leases
outstanding.
OTHER INCOME. The Bank's other income decreased approximately $910,000
or 15.3% in 1994 as compared to 1993. This decrease was primarily attributable
to the fact that other income in 1993 included (i) a one time gain of
approximately $478,000 from the sale of the Bank's portfolio of municipal leases
in March 1993, and (ii) a gain of $406,500 on the sale of the government
guaranteed portion of the Bank's SBA loans, as compared to gains from the sale
of SBA loans of $212,700 in 1994.
OTHER EXPENSES. The Bank's non-interest expense, consisting primarily
of salaries and other employee benefits, occupancy expenses, furniture and
equipment expenses, insurance expenses, data processing expenses, and
professional expenses, increased by approximately $1,688,000 or 10.0% during
1994 as compared to 1993. This increase was primarily due to an increase of
$1,046,000 in salaries and employee benefits to facilitate the service needs of
increased deposits and loans and a $240,000 increase, as compared to 1993, in
the provision made for possible losses on other real estate owned.
INCOME TAXES. Income taxes increased by approximately $771,000 or 57.8%
during 1994 as compared to 1993, primarily as a result of the increase in
pre-tax income in 1994 and a reduction in the proportion of the Bank's interest
income that was exempt from federal income taxes.
FINANCIAL CONDITION
The Company's total assets at December 31, 1995 were approximately
$63,919,000, or 19.3%, higher than at December 31, 1994. Average total assets
for 1995 increased by approximately $56,389,000 or 18% to $368,263,000 from
$311,874,000 for 1994. These increases were primarily the result of the
implementation of marketing programs designed to attract new customers and
increase deposits throughout the Bank, and to a lesser extent, the opening of
two new banking offices in 1995. The additional deposits that were generated
by those programs were used primarily to fund increases in deposits held at
other banks, Federal funds sold and investment securities, thereby increasing
the Bank's liquidity and, to a lesser extent, to fund new loans.
The average volume of interest bearing deposits held at other financial
institutions increased by 82% to $2,798,000 in 1995 from $1,534,000 in 1994 and
the average volume of Federal funds sold by the Bank in 1995 increased by
approximately 173% to $33,762,000 from $12,384,000 in 1994. The average volume
of investment securities held by the Bank during 1995 increased by approximately
$1,468,000 or 4% compared to 1994 figures. The average volume of loans and
leases (less reserves) outstanding during 1995 increased by approximately
$28,958,000, a 13% increase from 1994.
As a result of the addition in 1995 of the two new banking offices, and
the programs implemented to attract new deposits to the Bank, total deposits at
December 31, 1995 had increased by approximately $59,891,000 or 19.9% as
compared to total deposits at December 31, 1994. At December 31, 1995, time
deposits in denominations of less than $100,000 had increased to 21% of the
Bank's total deposits from approximately 17% at December 31, 1994. However,
although the aggregate volume of TCD's in denominations of $100,000 or more
increased during 1995, such deposits constituted
31
32
approximately 17% of total deposits at December 31, 1995, the same percentage as
at December 31, 1994. TCD's in denominations of more than $100,000 are more
sensitive to changes in the market rates of interest than other types of
deposits. For that reason, the Bank has made it a policy to seek TCD's in
denominations over $100,000 primarily from existing customers or from public
agencies and does not rely unduly on "brokered" deposits, which tend to be more
interest-sensitive and volatile. Of the TCD's in denominations of $100,000 or
more outstanding at December 31, 1995, approximately $12,719,000 had maturities
of three months or less, approximately $22,129,000 had maturities of between
three and twelve months and the balance had maturities of more than twelve
months. Although no assurances can be given, based on the fact that the holders
of a large portion of these TCD's are local depositors who in the past have
renewed their TCD's with the Bank, the Company anticipates that a substantial
portion of these deposits will be renewed, at interest rates which, due to
declining market rates of interest, are expected to be lower than those that
were in effect when such TCD's were originated, and that net withdrawals of
these deposits in 1996 should not materially exceed approximately $10,000,000.
The Company anticipates more modest growth in the Bank's total assets
and total deposits in 1996, as compared to 1995, during which the Bank opened
two new banking offices and implemented marketing programs designed to increase
deposits to fund that growth and increase the Bank's liquidity. Among other
things, the Bank intends to allow a run-off of, rather than to renew, some of
the shorter term TCD's in denominations of $100,000 as they mature in 1996,
which should have the effect of offsetting deposit growth anticipated within
other deposit categories.
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,
1995, the principal source of asset liquidity consisted of $26,278,000 in cash
and demand balances due from banks and $41,750,000 of Federal Funds sold which,
together, totaled $68,028,000, compared to a total of $36,668,000 at December
31, 1994. Other sources of liquidity included $18,743,000 in securities
available for sale, of which approximately $12,567,000 mature within one year.
The Bank also has established facilities to borrow Federal funds from other
banks in excess of $10,100,000 and has established a borrowing line of credit
with the Federal Home Loan Bank in the amount of $8,500,000. Furthermore,
substantially all of the Bank's installment loans and leases, the amount of
which aggregated $12,973,000 at December 31, 1995, require regular installment
payments, providing a steady flow of cash funds to the Bank. Accordingly, the
Company believes that the Bank has adequate cash and cash equivalent resources
to meet any increases in demand for loans and leases and any increase in deposit
withdrawals that might occur in the foreseeable future.
CAPITAL RESOURCES. During 1995, the Board of Directors discontinued
payment of cash dividends in order to retain internally generated funds to
support internal growth of the Bank. In addition to the new banking offices
opened in Glendale in March 1995 and in Corona in July 1995, the Bank has
recently opened a new banking office in Chino, California. The Board of
Directors intends to consider, later in 1996, whether to resume cash dividends.
However, it is not possible to predict at this time whether cash dividends will
be resumed, as that will depend on a number of factors, including the Company's
earnings and the growth of the Company's assets in 1996 and whether
opportunities for further growth may arise in the future. During the first
quarter of 1995, the Board of Directors declared a 10% stock dividend on the
Company's outstanding shares, which was distributed on May 1, 1995, and which,
for accounting purposes, was recorded as a $2,940,000 reduction in retained
earnings, offset by a corresponding $2,940,000 increase in the Company's stated
capital.
As a result of the increased earnings in 1995 and the retention of
internally generated funds, the Company's total shareholders' equity increased
by approximately $4,171,000 or 15.5% to $31,042,000 at December 31, 1995 from
$26,871,000 at December 31, 1994. Earnings in 1995 represent a return on
32
33
beginning assets (that is, total assets as of January 1, 1995) of 1.08% and a
return on beginning equity (total shareholders' equity as of January 1, 1995) of
13.26%, as compared to 1.23% and 13.84%, respectively, in 1994.
In January 1996, the Company declared another 10% stock dividend on its
outstanding shares that will be distributed on April 5, 1996 to shareholders of
record as of March 22, 1996. It is anticipated that an additional 395,680 shares
will be issued to the Company's shareholders as a result of this stock dividend
and that the stock dividend will be accounted for as a $3,560,000 approximate
reduction in retained earnings and an offsetting approximate increase of
$3,560,000 in stated capital, so that the Company's total shareholders' equity
will not be diminished as a result of this stock dividend.
Federal regulations require that banks maintain a minimum ratio of
capital (exclusive of loan loss reserves) to average assets of between 3% and 5%
(the "Tier 1 Capital Ratio" or "Tier 1 Leverage Ratio"). Despite the increases
in average assets during 1995, the Bank's Tier 1 capital ratio at December 31,
1995 remained unchanged from the December 31, 1994 percentage of 7.7%.
Federal bank regulations also require banks to meet a minimum
"risk-based capital ratio" of 8%. Under those regulations, a bank's assets are
weighted according to certain risk formulas; and, the higher risk profile of a
bank's assets, the greater of the amount of capital that is required to meet the
risk-based capital ratio. On the basis of the formulas set forth in those
regulations, the Bank's risk-based capital ratio at December 31, 1995 was 11.3%.
-----------------------------------
The foregoing discussion in Management's Discussion and Analysis of
Financial Condition and Results of Operation contains forward-looking
information which reflect Management's current views of future events and
financial performance. These forward looking statements are subject to certain
risks and uncertainties, including but not limited to, the effects on future
performance of increased competition from other financial institutions and firms
that offer competitive loan and investment products; local economic conditions
that affect loan demand, the ability of borrowers to meet their loan obligations
to the Bank and the ability of the Bank to recover potential losses from sales
of collateral securing non-performing loans; national economic conditions and
the monetary policies of the FRB that affect the cost of funds to the Bank and
the yields it can realize on its earning assets; and the regulatory policies of
the federal and state bank regulatory agencies that regulate the Bank. Due to
such uncertainties and risks, readers are cautioned not to place undue reliance
on such forward-looking statements, which speak only as of the date of this
Report.
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34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Foothill Independent Bancorp and Subsidiaries:
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Balance Sheets at December 31, 1995 and 1994 . . . . . . . . . . . . . . 36
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 41
34
35
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of
its operations and cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Vavrinek, Trine, Day & Co.
Rancho Cucamonga, California
January 26, 1996
35
36
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
------
1995 1994
--------------- ---------------
Cash and due from banks (minimum Federal Reserve balance at
December 31, 1995 was $6,810,000) $ 26,277,669 $ 28,722,660
Federal Funds sold 41,750,000 7,450,000
--------------- ---------------
Total Cash and Cash Equivalents 68,027,669 36,172,660
--------------- ---------------
Interest-bearing deposits in other financial institutions 6,433,209 1,188,000
Investment Securities Held to Maturity --------------- ---------------
U.S. Treasury 4,958,323 16,454,851
U.S. Government Agencies 14,777,382 996,104
Municipal Agencies 3,505,503 2,759,135
Other Securities 250,000 250,000
--------------- ---------------
Total Investment Securities Held to Maturity (Notes 1C and 2) 23,491,208 20,460,090
--------------- ---------------
Investment Securities Available-For-Sale (Notes 1C and 2) 18,743,254 10,517,101
--------------- ---------------
Loans, net of unearned income (Notes 1D, 3 and 6) 259,067,800 245,289,324
Direct lease financing (Notes 1F and 4) 2,086,233 3,726,697
Less reserve for possible loan and lease losses (Notes 1E and 5) (3,643,594) (3,145,193)
--------------- ---------------
257,510,439 245,870,828
--------------- ---------------
Bank premises and equipment (Notes 1G and 7) 7,352,380 6,626,777
Accrued interest 2,850,334 2,393,707
Other real estate owned (Notes 1H, 20 and 21) 3,878,891 2,469,469
Cash surrender value of life insurance 3,149,362 2,862,019
Prepaid expenses 916,481 527,170
Deferred tax asset (Notes 1J and 8) 1,607,278 1,103,663
Other assets 1,220,343 1,070,175
--------------- ---------------
Total Assets $ 395,180,848 $ 331,261,659
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Demand deposits 96,478,018 77,385,387
Savings and NOW deposits 78,143,475 78,966,296
Money market deposits 48,783,730 41,954,406
Time deposits in denominations of $100,000 or more 61,457,272 51,294,361
Other time deposits 76,251,030 51,621,654
--------------- ---------------
Total Deposits 361,113,525 301,222,104
Accrued employee benefits (Note 14) 1,195,123 992,955
Accrued interest and other liabilities 1,621,672 1,654,427
Accrued income taxes (Notes 1J and 8) - 275,809
Long-term debt (Note 9) 208,488 245,098
--------------- ---------------
Total Liabilities 364,138,808 304,390,393
--------------- ---------------
Stockholders' Equity
Common stock - authorized 12,500,000 shares without par value, issued and outstanding
3,955,761 shares in 1995 and 3,547,565 in 1994 10,788,474 7,439,924
Additional paid-in capital 455,997 455,997
Retained earnings 19,999,433 19,361,463
Valuation Allowance for Investments (Notes 1C and 2) (201,864) (386,118)
--------------- ---------------
Total Stockholders' Equity 31,042,040 26,871,266
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 395,180,848 $ 331,261,659
=============== ===============
36
37
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans (Note 1D) $28,872,030 $25,348,380 $18,688,173
Interest on investment securities
Taxable 2,045,081 1,444,787 1,662,881
Exempt from Federal taxes 175,324 95,633 459,849
Interest on deposits 164,726 59,701 99,507
Interest on Federal funds sold 1,944,058 523,549 251,754
Lease financing income (Note 1F)
Taxable 43,425 104,846 317,763
Exempt from Federal taxes 158,046 113,367 251,967
----------- ----------- -----------
33,402,690 27,690,263 21,731,894
----------- ----------- -----------
INTEREST EXPENSE
Interest on savings and NOW deposits 1,210,563 1,187,126 1,187,603
Interest on money market deposits 1,390,957 973,351 866,929
Interest on time deposits in denominations of
$100,000 or more 3,440,878 2,040,122 1,852,890
Interest on other time deposits 3,708,203 1,835,457 1,427,708
Interest on borrowings 35,445 169,833 47,220
----------- ----------- -----------
9,786,046 6,205,889 5,382,350
----------- ----------- -----------
Net Interest Income 23,616,644 21,484,374 16,349,544
PROVISIONS FOR LOAN AND LEASE LOSSES (Notes 1E and 5) (2,016,111) (2,363,650) (1,024,988)
----------- ----------- -----------
Net Interest Income After Provision for Loan and Lease Losses 21,600,533 19,120,724 15,324,556
OTHER INCOME
Service fees 4,299,986 4,612,549 4,390,254
Gain on sale of lease portfolio - - 478,328
Gain on sale of SBA loans 45,525 212,703 406,526
Other 342,196 227,110 686,869
----------- ----------- -----------
4,687,707 5,052,362 5,961,977
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 9,740,165 8,765,783 7,720,253
Net occupancy expense of premises 1,928,484 1,472,406 1,303,174
Furniture and equipment expenses 1,260,475 1,222,455 1,181,857
Other expenses (Note 12) 7,696,051 7,152,351 6,719,708
----------- ----------- -----------
20,625,175 18,612,995 16,924,992
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 5,663,065 5,560,091 4,361,541
----------- ----------- -----------
INCOME TAXES (Notes 1J and 8)
Currently payable 2,603,550 2,674,776 2,036,580
Deferred (503,615) (568,926) (701,882)
----------- ----------- -----------
2,099,935 2,105,850 1,334,698
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE IN ACCOUNTING FOR INCOME TAXES 3,563,130 3,454,241 3,026,843
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
INCOME TAXES - - 126,158
----------- ----------- -----------
NET INCOME $ 3,563,130 $ 3,454,241 $ 3,153,001
=========== =========== ===========
NET INCOME PER COMMON SHARE (Notes 15, 23 and 25)
Income before cumulative effect 0.82 0.81 0.75
Cumulative effect - - 0.03
=========== ========== ===========
Net Income $ 0.82 $ 0.81 $ 0.78
=========== ========== ===========
37
38
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
VALUATION
NUMBER ADDITIONAL ALLOWANCE
OF SHARES COMMON PAID-IN RETAINED FOR
OUTSTANDING STOCK CAPITAL EARNINGS INVESTMENTS TOTAL
----------- ----------- ---------- ------------ ----------- -----------
BALANCE, December 31, 1992 $3,131,286 $ 4,509,784 $455,997 $17,011,904 $(199,026) $21,778,659
Cash dividend paid - - - (1,305,337) - (1,305,337)
5% stock dividend (Note 23) 165,577 1,531,588 - (1,531,588) - -
Cash paid in lieu of fractional
shares - - - (4,253) - (4,253)
Exercise of stock options 234,597 1,293,251 - - - 1,293,251
Net unrealized gain on
marketable securities - - - - 43,729 43,729
Net income for the year - - - 3,153,001 - 3,153,001
---------- ----------- -------- ----------- --------- -----------
BALANCE December 31, 1993 3,531,460 7,334,623 455,997 17,323,727 (155,297) 24,959,050
Cash dividend paid - - - (1,061,748) - (1,061,748)
Cash dividend declared - - - (354,757) - (354,757)
Exercise of stock options 10,500 59,000 - - - 59,000
Common stock issued under
dividend reinvestment and
optional investment plan 5,605 46,301 - - - 46,301
Net unrealized loss on securities
available for sale - - - - (4,240) (4,240)
Net unrealized loss on
marketable securities - - - - (226,581) (226,581)
Net income for the year - - - 3,454,241 - 3,454,241
---------- ----------- -------- ----------- --------- -----------
BALANCE, December 31, 1994 3,547,565 7,439,924 455,997 19,361,463 (386,118) 26,871,266
10% stock dividend (Note 23) 356,433 2,939,689 - (2,939,689) - -
Cash paid in lieu of fractional
shares - - - (2,685) - (2,685)
Exercise of stock options 8,610 52,000 - - - 52,000
Common stock issued under
employee benefit and dividend
reinvestment and optional
investment plans 43,153 356,861 - - - 356,861
Net unrealized gain on securities
available for sale - - - - 53,925 53,925
Net unrealized gain on
marketable securities - - - 17,214 130,329 147,543
Net income for the year 3,563,130 3,563,130
---------- ----------- -------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1995 $3,955,761 $10,788,474 $455,997 $19,999,433 $(201,864) $31,042,040
========== =========== ======== =========== ========= ===========
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39
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 32,579,793 $ 27,129,375 $ 21,864,843
Service fees and other income received 4,268,614 3,848,146 5,962,088
Financing revenue received under leases 201,471 218,213 569,730
Interest paid (9,450,495) (5,822,844) (5,425,138)
Cash paid to suppliers and employees (20,730,427) (17,474,639) (17,284,086)
Income taxes paid (2,408,711) (2,399,060) (1,818,602)
------------ ------------ ------------
Net Cash Provided by Operating Activities 4,460,245 5,499,191 3,868,835
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities 63,914,492 43,735,793 57,507,738
Purchase of investment securities (74,815,933) (31,241,464) (77,051,876)
Proceeds from maturity of deposits in other financial institutions 792,000 2,758,975 6,808,000
Purchase of deposits in other financial institutions (6,037,209) (1,880,975) (5,419,000)
Net (increase) decrease in credit card and revolving
credit receivables 19,688 (314,375) (40,475)
Recoveries on loans previously written off 548,796 290,864 90,361
Net (increase) decrease in loans (15,544,905) (54,745,815) (29,483,063)
Net (increase) decrease in leases 1,746,428 (924,006) 22,958,277
Capital Expenditures (2,806,318) 845,509 (2,394,207)
Proceeds from sale of other real estate owned 4,102,223 2,063,933 2,369,611
Proceeds from sale of property, plant and equipment 216,039 61,268 105,850
Capitalized other real estate owned expenditures 359,518 - (40,914)
Purchase of other real estate owned (5,715,413) (2,084,009) (1,445,248)
------------ ------------ ------------
Net Cash (Used) in Investing Activities (33,220,594) (41,434,302) (26,034,946)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
savings accounts and money market deposits 25,313,431 22,720,033 19,297,441
Net increase in certificates of deposit with
maturities of three months or less 37,757,537 20,432,511 3,220,757
Proceeds from exercise of stock options 52,000 59,000 1,293,251
Proceeds from stock issue 356,861 46,301 -
Net increase (decrease) in certificates of deposits with
maturities of more than three months (2,965,250) 4,795,347 (5,445,515)
Principal payment on long-term debt (36,610) (220,640) (92,498)
Dividends paid (357,957) (1,419,147) (1,305,337)
------------ ------------ ------------
Net Cash Provided by Financing Activities 60,120,012 46,413,405 16,968,099
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,359,663 10,478,294 (5,198,012)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36,668,006 25,694,366 30,892,378
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 68,027,669 $ 36,172,660 $ 25,694,366
============ ============ ============
39
40
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
NET INCOME $3,563,130 $3,454,241 $3,153,001
---------- ---------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
Cash Provided by Operating Activities
Depreciation and amortization 703,873 761,448 771,833
Provision for possible credit losses 2,975,111 3,134,860 1,024,988
Provision for deferred taxes (168,620) (568,926) (701,882)
Gain on sale of equipment - (43,374) (51,435)
Decrease in taxes payable (775,521) (293,210) -
(Increase) decrease in other assets (831,480) (97,772) 91,458
(Increase) decrease in interest receivable (456,627) (342,675) 709,679
Increase (decrease) in discounts and premiums (164,799) (247,844) 113,631
Increase (decrease) in interest payable 335,551 383,045 39,028
(Increase) decrease in fees and other receivables (389,311) (948,139) (110)
Increase (decrease) in accrued expenses and other liabilities (94,102) 472,004 86,453
Loss (gain) on sale of other real estate owned - 98,336 (100,088)
Increase in cash surrender value of life insurance (287,343) (50,100) (382,867)
Gain on sale of investments and other assets 50,383 (212,703) (884,854)
---------- ---------- ----------
Total Adjustments 897,115 2,044,950 715,834
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $4,460,245 $5,499,191 $3,868,835
========== ========== ==========
40
41
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
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. Principals 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: The Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" on January 1, 1994
which addresses the accounting for investments in equity securities that
have readily determinable fair values and for investments in all debt
securities. Pursuant to SFAS No. 115, securities are classified in three
categories and accounted for as follows: "Debt securities that the Company
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and are measured at amortized cost; debt and equity
securities bought and held principally for the purpose of selling in the
near term are classified as trading securities and are measured at fair
unrealized gains and losses included in earnings; debt and equity
securities not classified as either held-to-maturity or trading securities
are deemed as either available-for-sale and are measured at fair value
with a separate component of stockholders' equity.
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.
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
judgement, 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 provisions for loan and
lease losses are charged to expense.
41
42
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
F. Direct Lease Financing: The investment in lease contracts is recorded
using the finance method of accounting. Under the finance method, an asset
is recorded in the amount of the total lease payments receivable and
estimated residual value, reduced by unearned income. Income, represented
by the excess of the total receivable over the cost of the related asset,
is recorded in income in decreasing amounts over the term of the contract
based upon the principal amount outstanding. The financing lease portfolio
consists of equipment with terms from three to seven years.
G. Bank Premises, Equipment and Leasehold Improvements: Bank premises,
equipment and leasehold improvements are stated at cost less accumulated
depreciation. Repairs and maintenance are expensed as incurred.
Depreciation is computed on the straight line basis over the estimated
useful lives of the related assets. Depreciation expense is based on the
following depreciable lives: buildings (including leasehold premises) 20
to 30 years; leasehold improvements 3 to 20 years; and equipment 3 to 20
years.
H. Other Real Estate Owned: Other real estate owned, which represents real
estate acquired through foreclosure, is stated at the lower of the
carrying value of the loan or the estimated fair market value (less
selling costs) of the related real estate. Loan balances in excess of the
fair market value of the real estate acquired at the date of acquisition
are charged against the allowance for loan and lease losses. Any
subsequent operating expenses or income and gains or losses on disposition
of such properties are charged to current operations.
I. Consolidated Statement 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.
J. Income Taxes: Provisions for income taxes are based on amounts reported in
the statements of income (after exclusion of nontaxable income such as
interest on state and municipal securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax
financial statement purposes. Deferred taxes are computed on the liability
method as prescribed in SFAS No. 109, "Accounting for Income Taxes".
K. Loan Sales and Servicing: Gains and losses from the sale of participating
interests in loans guaranteed by the Small Business Administration (SBA)
are recognized after a ninety day right of cancellation period has elapsed
based on the premium received or discount paid and the cost basis of the
portion of the loan sold. The cost basis of the portion of the loan sold
was arrived at by allocating the total cost of each loan between the
guaranteed portion of the loan sold and the unguaranteed portion of the
loan retained, based on their relative fair values. The book value
allocated to the unguaranteed portion of the loan, if less than the
principal amount, is recorded as a discount on the principal amount
retained. The discount is accreted to interest income over the remaining
estimated life of the loan. The Bank retains the servicing on the portion
of the loans sold and recognizes income on the servicing fees when they
are received.
42
43
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #2 - INVESTMENT SECURITIES
Based upon the guidelines of SFAS No. 115 and management's analysis of
0securities holdings, the Company's securities were classified as
held-to-maturity and available-for-sale, respectively, as follows:
Held-To-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity securities were
as follows for the dates indicated:
DECEMBER 31, 1995
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR VALUE
COST GAINS LOSSES (a)
----------- ----------- ----------- -----------
U.S. Treasury Securities $ 4,958,323 $27,096 $ - $ 4,985,419
Securities of Other U.S.
Government Agencies 14,777,382 53,203 - 14,830,585
Municipal Agencies 3,505,503 14,651 4,150 3,516,004
Other Securities 250,000 - - 250,000
----------- ------- ------ -----------
Total Held-To-Maturity Securities $23,491,208 $94,950 $4,150 $23,582,008
=========== ======= ====== ===========
DECEMBER 31, 1994
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR VALUE
COST GAINS LOSSES (a)
----------- ----------- ----------- -----------
U.S. Treasury Securities $16,454,851 $ 244 $183,304 $16,271,791
Securities of Other U.S.
Government Agencies 996,104 - 3,918 992,186
Municipal Agencies 2,759,135 4,625 86,483 2,677,277
Other Securities 250,000 - - 250,000
----------- ------ -------- -----------
Total Held-To-Maturity Securities $20,460,090 $4,869 $273,705 $20,191,254
=========== ====== ======== ===========
43
44
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #2 - INVESTMENT SECURITIES, Continued
Available-For-Sale Securities
The amortized cost and estimated fair value of available-for-sale securities
were as follows for the dates indicated:
DECEMBER 31, 1995
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR VALUE
COST GAINS LOSSES (a)
------------ ----------- ----------- -----------
Securities of Other U.S. Government
Agencies $11,803,631 $11,875 $ 4,936 $11,810,570
Certificates of Participation 4,434,279 42,746 - 4,477,025
Other Securities 2,707,208 - 251,549 2,455,659
----------- ------- -------- -----------
Total Available-For-Sale Carried
at Fair Value $18,945,118 $54,621 $256,485 $18,743,254
=========== ======= ======== ===========
DECEMBER 31, 1994
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR VALUE
COST GAINS LOSSES (a)
------------ ----------- ------------ -----------
U.S. Treasury Securities $ 2,460,923 $ - $ 1,290 $ 2,459,633
Securities of Other U.S. Government
Agencies 6,460,020 - 2,950 6,457,070
Other Securities 1,982,276 - 381,878 1,600,398
----------- ------ ----------- -----------
Total Available-For-Sale Carried
at Fair Value $10,903,219 $ - $ 386,118 $10,517,101
=========== ====== =========== ===========
(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.
Proceeds from maturities of investment securities held-to-maturity during 1995
were $26,946,061. Proceeds from maturities of investment securities
available-for-sale during 1995 were $29,858,042. There were no gains or losses
recognized. Included in shareholders' equity at December 31, 1995 is $201,864 of
net unrealized losses on investments available-for-sale.
44
45
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 1994
were $38,680,262. Proceeds from maturities of investment securities
available-for-sale during 1994 were $5,055,531. There were no gains or losses
recognized. Included in shareholders' equity at December 31, 1994 is $403,332 of
net unrealized loss on investments available-for-sale.
Securities with a book value of $32,723,000, and $28,127,281 and market value of
$32,800,887 and $27,858,448 at December 31, 1995 and 1994, 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, 1995 by contractual maturity were as follows:
HELD-TO-MATURITY SECURITIES
----------------------------------------------
MATURITIES SCHEDULE OF SECURITIES AMORTIZED AVERAGE
DECEMBER 31, 1995 COST FAIR VALUE YIELD (a)
- ---------------------------------------------------------- ----------- ----------- ---------
Due in one year or less $ 9,650,483 $ 9,659,250 5.40%
Due after one year through five years 13,585,100 13,665,915 6.12%
Due after five years through ten years 255,625 256,843 5.92%
----------- ----------- ----
Carried at Book Value $23,491,208 $23,582,008 5.82%
=========== =========== ====
AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------
AMORTIZED FAIR VALUE AVERAGE
COST YIELD (a)
----------- ----------- ---------
Due in one year or less $12,459,343 $12,257,479 5.72%
Due after one year through five years 2,765,148 2,765,148 5.97
Due after five years through ten years 3,720,627 3,720,627 6.01
----------- ----------- ----
Carried at Fair Value $18,945,118 $18,743,254 5.81%
=========== =========== ====
(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.
The Bank did not own investment securities of any issuer, except U.S. Government
obligations, for which the aggregate book value exceeded 10% of stockholders'
equity at December 31, 1995 or 1994.
45
46
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 1995 and 1994, was as
follows:
1995 1994
------------- -------------
Commercial, Financial and Agricultural $ 44,800,916 $ 67,550,677
Real Estate - construction 32,097,794 32,507,769
Real Estate - mortgage
Commercial 141,462,218 106,932,181
Residential 30,504,815 23,380,244
Loans to individuals for household, family, and other
personal expenditures 10,887,316 15,986,722
All other loans (including overdrafts) 178,285 96,786
------------ ------------
259,931,344 246,454,379
Deferred income on loans (863,544) (1,165,055)
------------ ------------
Loans, Net of Deferred Income $259,067,800 $245,289,324
============ ============
Nonaccruing loans totaled approximately $12,620,367 and $8,620,776 at December
31, 1995 and 1994, 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 $812,117 and $509,953 and $511,783 for the years ended
December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995 and 1994, the Bank had approximately $1,456,000 and
$2,449,000 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, 1995 and 1994, consists of the following:
1995 1994
----------- -----------
Lease payments receivable $ 2,086,234 $ 3,726,697
Estimated residual values 322,242 567,144
----------- -----------
2,408,476 4,293,841
Unearned income (252,237) (391,172)
Lease residual balance account (70,006) (175,972)
----------- -----------
$ 2,086,233 $ 3,726,697
=========== ===========
46
47
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #4 - DIRECT LEASE FINANCING, Continued
At December 31, 1995, the Bank had no outstanding lease commitments.
At December 31, 1995, future minimum lease payments receivable under direct
financing leases are as follows:
1996 $ 691,243
1997 513,163
1998 479,846
1999 376,725
2000 25,256
----------
$2,086,233
==========
NOTE #5 - RESERVE FOR LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows:
1995 1994 1993
----------- ----------- ----------
Balance at beginning of year $ 3,145,193 $ 2,328,316 $2,168,475
Recoveries on loans previously charged off 548,796 290,864 90,361
Provision charged to operating expense 2,016,111 2,363,650 1,024,988
Loans charged off (2,066,506) (1,837,637) (955,508)
----------- ----------- ----------
Balance at end of year $ 3,643,594 $ 3,145,193 $2,328,316
=========== =========== ==========
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 on 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
$565,000 for the year ended December 31, 1995, and is included in the above
balance. The average balance of these loans amounted to approximately
$11,564,000 for the year ended December 31, 1995. Cash receipts during 1995
applied to reduce principal balance and recognized as interest income was
approximately $336,000 and $363,000, respectively.
47
48
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
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 1995 and 1994 is as follows:
1995 1994
----------- -----------
Outstanding balance, Beginning of Year $ 1,975,761 $ 2,428,374
Credit granted including renewals 82,322 -
Repayments and other reductions (2,007,804) (452,613)
----------- -----------
Outstanding balance, End of Year $ 50,279 $ 1,975,761
=========== ===========
NOTE #7 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows:
1995 1994
------------ ------------
Buildings $ 2,424,374 $ 2,664,357
Furniture and equipment 8,532,145 7,499,662
Leasehold improvements 2,111,282 1,522,672
----------- -----------
13,067,801 11,686,691
Less: Accumulated depreciation and amortization (6,937,121) (6,309,614)
----------- -----------
6,130,680 5,377,077
Land 1,221,700 1,249,700
----------- -----------
Total $ 7,352,380 $ 6,626,777
=========== ===========
NOTE #8 - INCOME TAXES
1995 1994 1993
---------- ---------- ----------
Tax provision applicable to income before income taxes $2,099,935 $2,105,850 $1,334,698
========== ========== ==========
Federal Income Tax
Current 1,903,349 1,930,526 1,553,911
Deferred (425,121) (427,841) (576,430)
State Franchise Tax
Current 700,201 744,250 482,669
Deferred (78,494) (141,085) (125,452)
---------- ---------- ----------
Total $2,099,935 $2,105,850 $1,334,698
========== ========== ==========
48
49
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #8 - 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:
1995 1994 1993
---------------------- ---------------------- ------------------------
FEDERAL STATE FEDERAL STATE FEDERAL STATE
---------- ---------- ---------- ---------- ----------- ----------
Tax effect of
Nonaccrual loan interest computed
differently on tax returns than for
financial statements $ (49,915) $ (18,148) $ 17,000 $ 5,500 $(171,612) $ (55,521)
Direct lease financing 23,400 2,375 (273,955) (101,249) (76,480) (12,744)
Depreciation computed differently
on tax returns than for financial
statements (9,050) 8,781 74,724 19,158 (180,451) (9,714)
OREO transactions computed
differently on tax return than
for financial statements (191,109) (33,212) 22,833 7,387 (51,340) (16,600)
Deferred compensation plan (75,236) (24,340) (62,791) (20,437) (61,380) (19,858)
Provision for loan loss deduction
on tax return over or (under)
amount charged for financial
statement purposes (71,692) (11,500) (155,902) (50,760) (38,970) (12,540)
Other (51,519) (2,450) (49,750) (684) 3,803 1,525
--------- --------- --------- --------- --------- ---------
Total $(425,121) $ (78,494) $(427,841) $(141,085) $(576,430) $(125,452)
========= ========= ========= ========= ========= =========
As a result of the following items, the total tax expenses for 1995, 1994 and
1993 were less than the amount computed by applying the statutory U.S. Federal
income tax rate to income before taxes:
1995 1994 1993
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF OF OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------- ------- ---------- ------- ---------- -------
Federal rate $1,925,442 34.0% $1,890,431 34.0% $1,482,924 34.0%
Changes due to
State income tax, net of
Federal tax benefit 402,078 7.1 394,760 7.1 309,669 7.1
Exempt interest (154,281) (3.1) (127,882) (2.3) (362,876) (8.3)
Other (73,304) (0.9) (51,459) (0.9) (95,019) (2.2)
---------- ---- ---------- ---- ---------- ----
Total $2,099,935 37.1% $2,105,850 37.9% $1,334,698 30.6%
========== ==== ========== ==== ========== ====
49
50
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #9 - LONG-TERM DEBT
The long-term debt consists of one obligation. This note is a secured obligation
and bears interest at 10%. Principal and interest are payable monthly in
installments of $4,956, beginning October 1, 1990, until maturity at September
1, 2000.
The following is a schedule of future payments:
YEAR PRINCIPAL INTEREST TOTAL
- ------ --------- -------- --------
1996 $ 40,443 $ 19,029 $ 59,472
1997 44,677 14,795 59,472
1998 49,358 10,114 59,472
1999 54,526 4,946 59,472
2000 19,484 341 19,825
-------- -------- --------
$208,488 $ 49,225 $257,713
======== ======== ========
NOTE #10 - 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.
YEAR
---------
1996 $ 1,028,467
1997 911,477
1998 894,371
1999 890,521
2000 890,521
Succeeding years 7,077,396
-----------
$11,692,753
===========
Total rental expense for the three years ended December 31, 1995, 1994 and 1993
was $1,086,695, $760,051, $645,120, respectively. The increase in occupancy
expense in 1995 was due to an increase in rental expense from the sale and
leaseback of the service center, and rental expense incurred as a result of the
opening of two new banking offices.
The Bank is involved in various litigation. In the opinion of Management and the
Company's legal counsel, the disposition of all litigation pending will not have
a material effect on the Company's financial statements.
50
51
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #10 - COMMITMENTS AND CONTINGENCIES
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, 1995 and 1994, the Bank had commitments to extend credit of
$35,641,901 and $55,257,113, respectively, and obligations under standby letters
of credit of $1,981,713 and $2,324,396, 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 #11 - STOCK OPTION PLAN
The Company's 1993 incentive stock option and nonqualified stock option plan
approved by the stockholders provide that an aggregate of 442,267 shares (after
giving retroactive effect for 5 percent and 10 percent stock dividend) 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.
Transactions involving options granted under the 1993 plan and an earlier stock
option plan for the three years ended December 31, 1995, are summarized as
follows:
51
52
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #11 - STOCK OPTION PLAN, Continued
NUMBER OF SHARES
------------------------------------------------------
AVAILABLE INCENTIVE NONQUALIFIED PRICE
FOR OPTIONS OPTIONS PER
GRANTING OUTSTANDING OUTSTANDING SHARE*
--------- ----------- ------------ ------------
Balance, December 31, 1992 - 163,680 230,000 $4.762-6.494
Options available for granting 400,000 - - 7.251-7.662
Options expired - (4,000) - -
Options granted (83,500) 68,500 15,000 7.251-7.662
Options exercised - (64,597) (170,000) 4.762-6.494
Options canceled - (18,733) - -
5% stock dividend 15,825 9,500 3,750 -
-------- -------- --------
Balance, December 31, 1993 332,325 154,350 78,750 4.762-7.662
Options expired - (4,200) - 5.628
Options granted (52,000) - 52,000 7.386-7.954
Options exercised - (10,500) - 4.762-5.628
Options canceled 14,100 - (14,100) 7.662-7.954
-------- -------- --------
Balance, December 31, 1994 294,425 139,650 116,650 5.628-7.662
Options expired 17,325 (17,325) - 7.662
Options granted (162,500) 118,500 44,000 7.900-8.250
Options exercised - (8,610) - 5.628
Options canceled 6,310 (6,310) - 7.662-7.900
10% stock dividend 26,442 13,334 14,665 -
-------- -------- --------
Balance, December 31, 1995 182,002 239,239 175,315 $5.628-8.250
======== ======== ========
*Retroactively adjusted for 10% stock dividend for 1995 and 5% stock dividend in
1993. This table is not affected by the subsequent stock dividend as discussed
in Note #25.
52
53
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #12 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31,
1995, 1994 and 1993.
1995 1994 1993
---------- ---------- ----------
Data processing $ 903,472 $ 889,340 $ 830,774
Marketing expenses 808,511 545,356 422,208
Office supplies, postage and telephone 1,043,573 842,279 631,544
Bank insurance 454,011 468,393 492,548
FDIC assessments 472,814 616,569 618,594
Legal fees 558,389 494,650 391,035
Operating losses 389,188 337,856 594,727
OREO and provision for OREO 1,230,159 1,185,095 306,356
Other 1,835,934 1,772,813 2,431,922
---------- ---------- ----------
Total $7,696,051 $7,152,351 $6,719,708
========== ========== ==========
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the State Banking Department, net income for the year and
the retained net income for the preceding two years. Section 23A of the Federal
Reserve Act restricts the Bank from extending credit to the Company and other
affiliates amounting to more than 20% of its contributed capital and retained
earnings. At December 31, 1995, the combined amount of funds available from
these two sources amounted to approximately $13,500,000 or 43% of consolidated
stockholders equity.
NOTE #14 - 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 1995 was $155,184 ($93,111
net of income taxes), 1994 was $206,365 ($123,819 net of income taxes), and 1993
was $205,434 ($123,260 net of income taxes).
53
54
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #15 - NET INCOME PER COMMON SHARE
Income per share amounts are computed by dividing net income by the weighted
average number of common shares outstanding during the period, which were
4,326,095, 4,282,910, and 4,039,788 for the years ending December 31, 1995, 1994
and 1993, respectively, after a 10% stock dividend in 1996, and 1995 and a 5%
stock dividend in 1994. Stock options granted did not have a dilutive effect,
and they have been excluded from the calculation of income per share.
54
55
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #16 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT
BANCORP (PARENT COMPANY)
BALANCE SHEETS
1995 1994 1993
------------ ------------ -----------
ASSETS
Cash $ 195,401 $ 428,030 $ 1,387,177
Investment in subsidiary 30,135,300 25,456,166 23,197,095
Time certificates of deposit 95,000 693,000 198,000
Accounts receivable 36,870 16,348 86,520
Loans 14,931 15,448 15,918
Excess of cost over net assets of company acquired (net) 254,694 297,143 339,592
Prepaid and other 309,844 319,888 283,407
----------- ----------- -----------
Total Assets $31,042,040 $27,226,023 $25,507,709
=========== =========== ===========
LIABILITIES
Interest payable - - 3,760
Dividends payable - 354,757 357,399
Long-term debt - - 187,500
----------- ----------- -----------
Total Liabilities - 354,757 548,659
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock 10,788,474 7,439,924 7,334,623
Additional paid-in capital 455,997 455,997 455,997
Retained earnings 19,797,569 18,975,345 17,168,430
----------- ----------- -----------
Total Stockholders' Equity 31,042,040 26,871,266 24,959,050
----------- ----------- -----------
Total Liabilities and Stockholders' Equity $31,042,040 $27,226,023 $25,507,709
=========== =========== ===========
STATEMENTS OF INCOME
INCOME
Equity in undistributed income of subsidiaries $ 3,677,151 $ 3,528,689 $ 3,338,111
Interest 18,178 28,954 6,242
----------- ----------- -----------
3,695,329 3,557,643 3,344,353
----------- ----------- -----------
EXPENSE
Amortization and other expenses 169,069 116,667 244,924
Interest expense - 3,083 17,746
----------- ----------- -----------
169,069 119,750 262,670
----------- ----------- -----------
Total Operating Income 3,526,260 3,437,893 3,081,683
Tax benefit of parent's operating expenses 36,870 16,348 71,318
----------- ----------- -----------
Total Income $ 3,563,130 $ 3,454,241 $ 3,153,001
=========== =========== ===========
Net Income per Common Share $ .82 $ .81 $ .78
=========== =========== ===========
55
56
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #16 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT
BANCORP (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received for tax benefit from Foothill Independent Bank $ 36,870 $ 16,348 $ -
Dividend received from Foothill Independent Bank - 1,054,000 1,337,273
Interest received 18,178 28,954 6,242
Interest paid - 3,083 (17,746)
Cash paid for operating expenses (242,827) 135,344 (51,274)
Income taxes paid (1,739) - (800)
----------- ----------- -----------
Net Cash Provided by Operating Activities (189,518) 1,237,729 1,273,695
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of OREO - - 211,143
Net decrease (increase) in loans 470 470 (15,918)
Purchase of deposits in other financial institutions (95,000) (693,000) (198,000)
----------- ----------- -----------
Net Cash Used in Investing Activities (94,530) (692,530) (2,775)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (357,442) (1,422,147) (1,265,782)
Capital stock purchased 356,861 46,301 -
Proceeds from exercise of stock options 52,000 59,000 1,293,251
Principal payment on long-term debt - (187,500) (62,500)
Purchase of other assets - - (40,915)
----------- ----------- -----------
Net Cash Used by Financing Activities 51,419 (1,504,346) (75,946)
Net increase (decrease) in cash (232,629) (959,147) 1,194,974
CASH at beginning of year 428,030 1,387,177 192,203
----------- ----------- -----------
CASH at end of year $ 195,401 $ 428,030 $ 1,387,177
=========== =========== ===========
RECONCILIATION OF NET INCREASE TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 3,563,130 $ 3,454,241 $ 3,153,001
----------- ----------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and amortization 42,449 42,449 42,449
Undistributed earnings of subsidiaries (4,424,180) (1,614,382) (2,308,787)
Increase (decrease) in interest and income taxes payable - 18,962 (2,813)
(Increase) decrease in prepaids and other 10,044 (36,481) 407,087
Increase (decrease) in long-term debt - (187,500) (62,500)
(Increase) decrease in accounts receivable 20,522 54,970 259,176
Increase in time certificates of deposit 598,000 (495,000) (198,000)
Decrease (increase) in loans 517 470 (15,918)
----------- ----------- -----------
Total Adjustments (3,752,648) (2,216,512) 2,738,268
----------- ----------- -----------
Net Cash Provided by Operating Activities $ (189,518) $ 1,237,729 $ 5,891,269
=========== =========== ===========
56
57
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #17 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the Company and its
subsidiaries for the two years ended December 31, 1995, is summarized below:
(In thousands, except per share amounts) 1995
------------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
Summary of Operations
Interest income $7,769 $8,345 $8,620 $8,669
Interest expense 1,877 2,358 2,788 2,763
Net interest income 5,892 5,987 5,832 5,906
Provision for loan losses 630 870 170 347
Net interest income after provision for loan losses 5,262 5,117 5,662 5,559
Other income 1,235 1,145 1,022 1,286
Other expense 5,234 4,809 5,258 5,324
Income before taxes 1,263 1,453 1,426 1,521
Applicable income taxes 481 552 523 544
------ ------ ------ ------
Net Income $ 782 $ 901 $ 903 $ 977
====== ====== ====== ======
Net Income Per Share $ 0.18 $ 0.20 $ 0.21 $ 0.23
====== ====== ====== ======
1994
------------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ ------
Summary of Operations
Interest income $5,822 $6,925 $7,188 $7,755
Interest expense 1,274 1,426 1,613 1,892
Net interest income 4,548 5,499 5,575 5,863
Provision for loan losses 129 735 640 860
Net interest income after provision for loan losses 4,419 4,764 4,935 5,003
Other income 1,120 1,331 1,375 1,226
Other expense 4,509 4,790 4,917 4,398
Income before taxes 1,030 1,305 1,393 1,831
Applicable income taxes 350 476 549 730
------ ------ ------ ------
Net Income $ 680 $ 829 $ 844 $1,101
====== ====== ====== ======
Net Income Per Share $ 0.16 $ 0.19 $ 0.20 $ 0.26
====== ====== ====== ======
57
58
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #18 - RISK-BASED CAPITAL ADEQUACY
The federal bank regulatory authorities have adopted risk-based capital
guidelines which require Bank Holding Companies to maintain minimum total
capital of 8.00% (of which 4% must consist of Tier 1 capital) of risk weighted
assets. The Company's ratio of total capital to risk weighted assets in
accordance with these guidelines was approximately 12% and 11% at December 31,
1995 and 1994, respectively. Management believes that, under current
regulations, the Company will continue to meet its minimum capital requirements
in the foreseeable future.
NOTE #19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1995. 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, 1995
----------------------------
CARRYING FAIR
AMOUNT VALUE
------------ ------------
FINANCIAL ASSETS
Cash $ 74,460,878 $ 74,460,878
Investment securities 42,234,462 42,325,262
Real estate loans 29,325,713 29,327,000
Installment loans 12,878,389 13,001,000
Commercial loans 213,232,782 212,282,000
Direct lease financing 2,072,565 1,998,000
FINANCIAL LIABILITIES
Deposits 361,113,525 364,451,525
Long-term debt 208,488 208,488
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit 35,641,901 35,641,901
Standby letters of credit 1,981,713 1,981,713
58
59
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Investment Securities
For U.S. Treasury and U.S. Government Agency securities, fair values are based
on market prices. For other investment securities, fair value equals quoted
market price if available. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities as the basis for
a pricing matrix.
Loans
The fair value for loans with variable interest rates is the carrying amount.
The fair value of fixed rate loans is derived by calculating the discounted
value of the future cash flows expected to be received by the various
homogeneous categories of loans. All loans have been adjusted to reflect changes
in credit risk.
Deposits
The fair value of demand deposits, savings deposits, savings accounts and NOW
accounts is defined as the amounts payable on demand at December 31, 1995. 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.
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.
NOTE #20 - 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
were as follows:
1995 1994
----------- -----------
Balance at Beginning of Year $ 2,469,469 $ 4,321,234
Additions 5,715,413 2,084,009
Valuation adjustment and other reductions (4,305,991) (3,935,774)
----------- -----------
Balance at End of Year $ 3,878,891 $ 2,469,469
=========== ===========
The balances at December 31, 1995 and 1994 are shown net of reserves.
NOTE #21 - RESERVE FOR POSSIBLE LOSSES ON OTHER REAL ESTATE OWNED
Transactions in the reserve for other real estate owned are summarized for 1995
and 1994.
1995 1994
--------- ---------
Balance at Beginning of Year $ 515,503 $ 151,271
Provision charged to other expense 879,000 771,210
Charge-offs and other reductions (485,152) (406,978)
--------- ---------
Balance at End of Year $ 909,351 $ 515,503
========= =========
59
60
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #22 - NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". This Statement established accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used for long-lived assets and
certain identifiable intangibles to be disposed of. An impairment loss shall be
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. After an impairment is recognized, the reduced carrying
amount of the asset shall be accounted for as its new cost.
In May 1995, FASB issued Statement No. 122, "Accounting for Mortgage Servicing
Rights". SFAS 122 amends certain provisions of SFAS 65 "Accounting for Certain
Mortgage Banking Activities" to eliminate the accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions.
Accounting for the cost of mortgage servicing rights in accordance with SFAS
122, regardless of the origin of those costs the cost of acquisition includes
the cost of the related mortgage servicing rights. If the mortgage banking
enterprise sells a mortgage and a note and retains servicing rights, the total
cost of the mortgage loans should be allocated to the mortgage servicing rights
and the loan based upon the fair value of each. If the values are not
practicably determinable, the entire cost of the acquisition should be allocated
to the loan only.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". This Statement establishes a fair value based method of
accounting for stock based compensation plans and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period.
The Bank has not elected early adoption of any of the statements and has not
determined the potential impact of the statements on its financial statements.
The statements are effective for financial statements issued for fiscal years
beginning after December 15, 1995.
NOTE #23 - STOCK DIVIDEND
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 by $2,939,689 and retained earnings was decreased by
$2,939,689. On January 11, 1994, the Bank distributed 165,577 shares of common
stock in connection with a 5% stock dividend. As a result of the stock dividend,
common stock was increased by $1,531,588 and retained earnings was decreased by
$1,531,588. All references in the accompanying financial statements to the
number of common shares and per share amounts for 1994 and 1993 have been
restated to reflect the stock dividends.
NOTE #24 - 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, 1995, 1994 and 1993, the amount of pension expense
was $112,049, $105,468, and $119,770, respectively.
60
61
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE #25 - SUBSEQUENT EVENTS
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. Per share
amounts in the accompanying financial statements have been restated for the
stock dividend.
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 1996 annual meeting of shareholders, to be filed
with the Commission on or before April 29, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 29, 1996 for the Company's 1996 annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 29, 1996 for the Company's 1996 annual shareholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 29, 1996 for the Company's 1996 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
34 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 of this Annual Report on 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 26th day of
March 1996.
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 26, 1996.
Signature Title
--------- -----
/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 H. BARKER Director
- ---------------------------------------
Richard H. Barker
S-1
65
Signature Title
--------- -----
/s/ CHARLES G. BOONE Director
- ---------------------------------------
Charles G. Boone
/s/ O. L. MESTAD Director
- ---------------------------------------
O. L. Mestad
Director
- ---------------------------------------
Earl A. Musser
/s/ DOUGLAS F. TESSITOR Director
- ---------------------------------------
Douglas F. Tessitor
/s/ MAX E. WILLIAMS Director
- ---------------------------------------
Max E. Williams
S-2
66
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
67
Sequentially
Exhibit Numbered
Number Page
- ------- ------------
21 Subsidiaries of Registrant 76
23.1 Consent of Independent Certified Public Accountants with respect to
the Financial Statements of the Registrant 77
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 78
24.1 Power of Attorney-- (Included on Signature Page)
27 Financial Data Sheet 79
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 80
Compensation Plan and Arrangements
Nonqualified and Incentive Stock Option Plan -- See Exhibit 10.2 above
Foothill Independent Bank - Deferred Compensation Plan -- See Exhibit 10.2 above
Foothill Independent Bancorp - 1993 Stock Incentive Plan -- See Exhibit 10.18 above
Employment Agreement dated as of March 31, 1995 between Foothill Independent Bank and
George E. Langley -- See Exhibit 10.19 above
___________________________
(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.