ITEM 1. BUSINESS
Foothill Independent Bancorp (the "Company") is a one-bank holding company which owns all of the capital stock of Foothill Independent Bank, a California state-chartered bank (the "Bank"), that was organized and commenced business operations in 1973. The business of the Bank is carried on as a wholly-owned subsidiary of the Company. The Company, which was organized in 1982, is a California corporation and is registered under the Bank Holding Company Act of 1956, as amended.
The Bank
The Bank was organized as a national banking association under federal law and commenced operations under the name Foothill National Bank on June 1, 1973. The Bank converted from a national banking association to a California state-chartered bank effective July 1, 1979 and changed its name to Foothill Independent Bank. The Bank's accounts are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank 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 size businesses located in the San Gabriel Valley and the Inland Empire in Southern California, where the Bank conducts its operations. The Bank emphasizes personalized service and convenience of banking and attracts banking customers by offering services that are designed to meet the banking requirements of the customers in its communities. Drive-up or walk-up facilities and 24-hour Automated Teller Machines ("ATM's") are available at ten of its banking offices. The Bank also offers a computerized telephone service which enables customers to obtain information concerning their bank deposit accounts telephonically at any time day or night.
The Bank offers a full range of commercial banking services including the acceptance of checking and savings deposits, and the making of various types of commercial loans and real estate loans. In addition, the Bank provides safe deposit, collection, travelers checks, notary public and other customary non-deposit banking services.
Deposits of Foothill Independent Bank
Deposits represent the Bank's primary source of funds. As of December 31, 1996, the Bank had approximately 15,793 demand deposit accounts representing aggregate deposits of approximately $108,993,000 with an average account balance of $5,591; approximately 8,870 accounts representing approximately $110,586,000 in money market & NOW checking accounts with an average account balance of $12,628; approximately 9,779 accounts representing approximately $33,294,000 in savings deposits with an average account balance of $3,422; and approximately 3,108 accounts representing approximately $118,416,000 in time deposits ("TCD's") with an average account balance of $37,969. Of the total deposits at December 31, 1996, $58,159,000, or 15.8%, were TCD's in denominations of $100,000 or more and $21,444,000, or 5.8%, were municipal and other governmental deposits, both time and demand.
During the twelve months ended December 31, 1996, average demand deposits increased by approximately $20,726,000 or 25.3%; average money market deposit accounts increased by approximately $137,488,000 or 14.7%; average savings deposits remained substantially unchanged; and average time deposits decreased by approximately $5,810,000 or 4.6%, which was the result of a decrease of $3,653,000 in TCD's in denominations of $100,000 or more and a decrease of approximately $2,157,000 in TCD's of less than $100,000 ("other time deposits").
Although there are some public agency depositors that carry large deposits with the Bank, the Bank does not believe it is dependent on a single customer or a few customers for its deposits. Most of the Bank's deposits are obtained from individuals and small and moderate size businesses. This results in relatively small average deposit balances, but makes the Bank less subject to the adverse effect on liquidity which can result from the loss of a substantial depositor. No individual, corporate or public agency depositor accounted for more than approximately 2% of the Bank's total deposits and the five largest deposit accounts represented, collectively, 3.2% of total deposits.
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 material.
- --------------------- (1) Includes NOW, Super NOW and Money Market Account.
Interest Rates and Differentials
The Company's earnings depend primarily upon the difference between the interest income the Bank earns on loans, investment securities and other interest-earning assets and the Bank's cost of funds, principally interest paid on savings and time deposits. Interest rates charged on the Bank's loans are affected principally by the demand for loans, the supply of money available for lending purposes, and competitive factors. In turn, these factors are influenced by general economic conditions and other constraints beyond the Company's control, such as Federal economic and tax policies, general supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board. (See "Business -- Effect of Governmental Policies and Recent Legislation.")
Information concerning average interest earning assets and interest bearing liabilities, along with the average interest rates earned and paid thereon is set forth in the following table. Averages were computed based upon daily balances.
The table below shows the net interest earnings and the net yield on average earning assets:
- ---------------------- (1) Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates which approximate 37.0 percent for 1996, 37.1 percent for 1995 and 37.9 percent for 1994.
(2) Loans, net of unearned discount, do not reflect average reserves for possible loan losses of $4,012,000 in 1996, $3,586,000 in 1995 and $2,432,000 in 1994. Loan fees of $2,891,000 in 1996, $2,141,000 in 1995 and $3,372,000 in 1994 are included in loan interest income. Average loan balances include loans placed on non-accrual status during the period presented, but interest on such loans is excluded. There were twenty-one non-accruing loans at December 31, 1996, forty-five at December 31, 1995 and sixty at December 31, 1994.
(3) Includes NOW, Super NOW, and Money Market Deposit Accounts.
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.
- ------------------ (1) Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates which approximate 37.0% for 1996 and 37.1% for 1995.
(2) Includes an increase in loan fees of $750,000 in 1996 and a decrease of $1,231,000 in 1995.
(3) Long term borrowings in 1996 and 1995 consist of an obligation secured by 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.
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 credit worthiness.
Effective January 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 115, " Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and reclassified its investment security portfolio to differentiate between Investment Securities Held-to-Maturity and Investment Securities Available-For-Sale. Previously, the investment securities were carried at cost, adjusted for the accretion of discounts and amortization of premiums. The classification of securities is made by management at the time of acquisition.
The following table summarizes the components of the Company's investment securities at the dates indicated (in thousands):
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(1) Includes, in 1996 and 1995, non-rated certificates of participation evidencing ownership interests in the California Statewide Communities Development Authority - San Joaquin County Limited Obligation Bond Trust with book values of $4,428,000 and $4,434,000 and market values of $4,452,000 and $4,477,000 at December 31, 1996 and 1995, respectively.
The following table shows the maturity of investment securities at December 31, 1996, and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 37.0% tax rate) of such securities.
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, 1996.
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(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 $33,000 for 1996; $322,000 for 1995; $567,000 for 1994; $1,397,000 for 1993 and $2,582,000 for 1992, and is net of unearned income of $329,000 for 1996; $252,000 for 1995; $391,000 for 1994; $491,000 for 1993 and $4,375,000 for 1992. 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, 1996.
Of the total amount of loans (exclusive of loans on non-accrual status) outstanding as of December 31, 1996 that had maturities of more than one year, $119,455,000 had predetermined, or fixed, rates of interest and $90,429,000 had floating or adjustable rates of interest.
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, 1996. 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.
RISK ELEMENTS
Non-accrual, Past Due and Restructured Loans
- ---------------- (1) Reflects loans for which there has been no payment of interest and/or principal for 90 days or more.
(2) Troubled Debt Restructuring are loans which have been renegotiated to provide a deferral of interest or principal. The terms of the restructured loans did not involve any deferrals of interest and interest collected in 1996, 1995, 1994, 1993 and 1992 were the same amounts that would have been collected in accordance with the original terms of the loans.
(3) Ordinarily, a loan is placed on non-accrual status (that is, accrual of interest on the loan is discontinued) when the Bank has reason to believe that continued payment of interest and principal is unlikely. There were twenty-one loans on non-accrual status at December 31, 1996; forty-five loans at December 31, 1995; sixty loans at December 31, 1994; thirty-one loans at December 31, 1993 and sixteen loans at December 31, 1992. The amount of interest that would have been collected on these loans had they remained current in accordance with their original terms was $1,488,000 in 1996, $985,000 in 1995, $510,000 in 1994, $504,000 in 1993 and $262,000 in 1992.
Effective January 1, 1995 the Company adopted Statement of Financial Accounting Standards N. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loans' original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had no material impact on the Company's consolidated financial statements as the Bank's existing policy of measuring loan impairment is consistent with methods prescribed in these standards.
The Bank considers a loan to be impaired when, based upon current information and events, it believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Bank principally evaluates those loans, both performing and non-performing, that are large non-homogenous loans in its commercial and real estate mortgage and construction loan portfolios which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. In general, payment delays of less than 90 days or payment shortfalls of less than 1% are deemed insignificant and would not necessarily result in classification of a loan as impaired. However, management considers all non-accrual loans to be impaired. The Bank does not consider all non-accrual loans to be impaired. The Bank does not consider smaller balance, homogenous loans in determining loan impairment. These loans include consumer installment, credit card and direct lease financing.
Loans identified as impaired are placed on non-accrual status and are evaluated for write-off, write-down or 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, $485,000 for the year ended December 31, 1996 and were included in the Bank's Reserve for Loan Losses at December 31, 1996. The average balance of the impaired loans amounted to approximately $10,314,000 for the year ended December 31, 1996. Cash receipts during 1996 applied to reduce principal balances and recognized as interest income were approximately $2,073,000 and $137,000, respectively. For additional information regarding SFAS 114, see Note 5 to the Company's Consolidated Financial Statements set forth in part II, Item 8 of this Report.
Potential Problem Loans - -----------------------
At December 31, 1996, there were no loans on accrual status where there were serious doubts as to the ability of the borrower to comply with then present loan repayment terms.
Foreign Outstanding - -------------------
The Bank did not have any loans, acceptances, interest-bearing deposits or other monetary assets of any foreign country.
Loan Concentrations - -------------------
The Bank does not have loans made to borrowers who are engaged in similar activities where the aggregate amount of the loans exceeds 10% of their loan portfolio that are not broken out as a separate category in the loan portfolio.
Other Interest-Bearing Assets - -----------------------------
The Bank does not have any interest-bearing assets as to which management believes that recovery of principal or interest thereon is at significant risk.
Summary of Loan and Lease Loss Experience
The following table sets forth an analysis of the Bank's loan and lease loss experience, by category, for the past five years.
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(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.
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 during the past five years were due primarily to the continuing severity and duration of economic recession in Southern California which, it now appears, began in the second half of 1990. The recession resulted in an increase in loan delinquencies and 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 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 of the Bank 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 prevailing economic conditions in the Bank's market areas and 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.
Allocation of Reserve for Loan Losses -------------------------------------
The loan loss reserve is allocated among the different loan categories, as set forth in the table below, as a result of the differing levels of risk associated with each loan category. The allocation is made based on historical loss experience within each category and management's periodic review of loans in the loan portfolio. However, the reserves allocated to specific loan categories are not the total amounts available for future losses that might occur within such categories because the total reserve is the general reserve applicable to the entire portfolio.
DEPOSITS
The average amount (in thousands) of and the average rate paid on deposits is summarized below:
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(1) Includes NOW, Super NOW, and Market Deposit Accounts.
Set forth below is maturity schedule of domestic time certificates of deposits of $100,000 or more:
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).
Competition - -----------
The banking business in the Bank's marketing areas is highly competitive. In those areas, the Bank competes for loans and deposits with other commercial banks, including branches of most of California's major banks, many of which have greater financial, marketing and other resources than those of the Bank. Larger commercial banks have greater lending limits than the Bank and offer certain services, such as trust services, which the Bank does not offer directly. Competition is expected to continue to increase as a result of legislation passed in California in 1986 which permits bank holding companies in other states to acquire California banks and bank holding companies. See "Effects of Governmental Polices and Recent Legislation." The Bank also competes with savings and loan associations, finance companies, credit unions, mortgage companies, insurance companies, brokerage firms, leasing companies and other financial institutions in its market areas. In competing with other financial institutions, the Bank places emphasis on providing a high level of personal service and convenience to its customers and conducts local advertising and promotional programs and activities in its market areas.
Supervision and Regulation - --------------------------
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 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 adequately capitalized unless there are significant adverse financial and managerial factors present. Regardless of the level of total capital, a banking organization with a primary capital ratio of less than 5.5%% will generally be considered undercapitalized. At December 31, 1996 the Company, on a consolidated basis, had total and primary capital of approximately $39,637,000 and a primary capital-to-asset ratio of approximately 9.7%.
Under FRB capital adequacy guidelines, bank holding companies are also required to maintain a minimum level of "qualifying capital" determined on the basis of a holding company's total consolidated weighted risk assets. For purposes of satisfying the FRB guidelines, "qualifying Capital" equals "core capital" plus "supplementary capital" less certain required deductions. Core capital consists of common stock, related surplus and retained earnings (net of treasury stock), perpetual preferred stock in an aggregate amount of up to 25% of total core capital including such stock, and minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital consist of allowances for loan and lease losses in an amount of up to 1.25% of total weighted risk assets, perpetual preferred stock, long-term preferred stock with a maturity of twenty years or more and related surplus (to the extent not included as core capital), certain "hybrid" capital instruments (i.e., instruments having characteristics of both debt and equity), mandatory convertible debt, term subordinated debt and intermediate-term preferred stock in an aggregate amount of up to 50% of core capital (net of goodwill), and perpetual debt. The amounts to be deducted from capital to determine qualifying capital consist of goodwill, which must be deducted from core capital, and investments in certain subsidiaries and reciprocal holdings of capital instruments (i.e., cross-holdings resulting from formal or informal arrangements in which two or more banking organizations swap, exchange or other wise agree to hold each other's capital instruments), 50% of which generally must be deducted from core capital and 50% from supplementary capital.
Total weighted risk assets, for purposes of the FRB guidelines, is determined by assigning to one of four risk categories the holding company's consolidated assets and credit equivalent amounts of off-balance sheet items. The dollar amount of the items in each category will then be multiplied by the risk weight assigned to that category (i.e., 0%, 20%, 50% or 100%). The resulting weighted values from each risk category will be added together and the sum of such values will constitute the holding company's total weighted risk assets. Total qualifying capital is divided by total weighted risk assets to determine the holding company's risk-based capital ratio. The guidelines require that all bank holding companies must have a minimum ratio of qualifying capital to total weighted risk assets of 8% and a minimum ratio of core capital-to-total weighted risk assets of 4%. At December 31, 1996, the Company's risk-based capital ratio, determined in accordance with the FRB regulations, was 12.4% which exceeds the minimum ratio required to comply with those regulations.
The Company is an affiliate of the Bank and is subject to various legal restrictions which limit the extent to which the Bank can supply funds to the Company. Such restrictions also apply to any non-banking entities which the Company might acquire or become affiliated with in the future. In particular, the Bank is subject to certain restrictions imposed by federal law on any extensions of credit to the Company, on investments in stock or other securities thereof, on the taking of such securities as collateral for loans to borrowers, and on the purchase of assets from the Company. Such restrictions prevent the Company from borrowing from the Bank unless the loans are secured by specified obligations and are limited in amount as to the Company to 10% of the Bank's capital and surplus and as to the Company and all affiliates to an aggregate of 20% of the Bank's capital and surplus.
The Bank is subject to restrictions applicable to the payment of cash dividends to the Company, which are the principal source of cash available for the payment of dividends by the Company to its shareholders. Under California law, the approval of the California Superintendent of Banks is required before a state-chartered bank, such as the Bank, may declare a dividend which would exceed the lesser of: (i)the Bank's retained earnings or (ii) its net income for the immediately preceding three years (after deducting all dividends paid during that period). At December 31, 1996, the maximum dividend payable by the Bank to the Company under these restrictions would have been $9,784,301. 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 person, generally must give 60 days' prior written notice to the FRB. "Control" exists when the acquiring party has voting control of at least 25 percent of the insured institution's voting power, or the power directly or indirectly, to direct the management or policies of such bank. Under FRB regulations, the power to direct the management or policies of a an holding company is presumed to exist where the acquiring party has ownership, control or the power to vote at least 10 percent of a class of voting securities of the bank holding company, if (i) the bank holding company has any class of voting securities which is registered under Section 12 of the 1934 Act, or (ii) immediately after the transaction no other person will own a greater proportion of that class of voting securities. The statute authorizes the FRB to disapprove the proposed transaction on certain specified grounds.
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 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, 1996 the Bank's Tier 1 leverage ratio had increased to 8.5% from 7.7% at December 31, 1995.
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 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 on the basis of a bank's assets and certain off-balance sheet items to one of five separate risk categories, after which the aggregate dollar value of the items in each category is multiplied by a risk factor assigned to each specific asset category. After the items in each category have been totaled and multiplied by the category's risk factor, the total of the adjusted capital base is divided by the weighted risk assets to derive the bank's risk-based asset ratio. FDIC-insured banks are required to maintain a ratio of total capital to total risk-weighted assets of 8.0%. At December 31, 1996 the Bank's risk-based capital ratio, determined on the basis of the FDIC rules, was approximately 12.3%.
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 few years, 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, 1993, 1995 and 1996, the Bank increased loan loss revenues and implemented more stringent credit and loan collection policies. Despite the increases in reserves, which are made by means of charges against income, during the three years ended December 31, 1996, the Bank was able to maintain Tier 1 leverage ratios of 8.53% as of December 31, 1996 and 7.77% as of December 31, 1995 and 7.20% as of December 31, 1994.
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 effected by, and are highly sensitive to, the demand and the supply of money for loans, which are, in turn, directly affected by general economic conditions, the general supply of money in the economy, and the policies of various governmental and regulatory agencies.
The earnings and business of the Company are and will be affected by the policies of various regulatory authorities of the Unite States, including the Federal Reserve Board. Important functions of the Federal Reserve Board, in addition to those enumerated under "Supervision and Regulation" above, are to regulate the supply of credit and to deal with general economic conditions within the United States. The monetary policies adopted by the Federal Reserve Board for these purposes influence in various ways the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on earning assets.
The Federal Reserve Board has broad powers to, and does, regulate money, credit conditions, and interest rates in order to influence general economic conditions. For example, in times of inflation it has exercised such powers to increase the cost of money which affects (i) the interest rates which the Bank can charge on loans and the interest and yields it can obtain on its investment securities, (ii) the interest which the Bank must pay on deposits and other liabilities, and (iii) the yields on money market investments which compete with the Bank for the funds of the Bank's depositors. These policies, as well as the specific policies of other governmental agencies, have a significant effect upon the overall growth, distribution and yields of the Bank's loans and investments and the interest rates it must pay for time deposits, as well as the extent to which such rates will be attractive to the Bank's customers. At times, such regulations result in the cost of money to the Bank, as well as other banks, increasing at a rate greater than the increase in the rate at which the Bank is able to lend, resulting in a reduction of gross profit margins. At other times, such regulations can result in increases in the spread between the cost of money to the Bank and the price at which the Bank lends, thus potentially increasing its gross profit margins.
During 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 restriction 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," 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 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 and adequately capitalized bank to comply with one or more requirements applicable to undercapitalized banks, such as submitting a plan or 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 not subject to any significant operating restrictions under FDICIA. However, FDICIA also requires bank regulatory agencies to adopt regulations establishing nationwide lending standards and auditing procedures which will be applicable to all federally insured banks, including the Bank, the potential effects of which cannot yet be determined.
Other legislation and government regulations have been proposed which could also affect the business activities of the Bank and it is likely that additional legislation affecting such business will be introduced in Congress or in state legislatures in the future. The proposed legislation includes wide-ranging proposals to alter the structure, regulation and competitive relationships of the nation's financial institutions, such as proposals to alter the present statutory separation of commercial and investment banking; to permit bank holding companies and banks to engage in certain securities underwriting and distribution activities and certain real estate investment activities; to permit bank holding companies to own or control thrift institutions; to subject banks to increased disclosure and reporting requirements; and to generally expand the range of financial services which can be provided by bank holding companies as well as by other financial institutions. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the present of future business of the Bank may be affected thereby.
Employees - ---------
At December 31, 1996, the Bank had approximately 218 full-time and 48 part-time employees.
Executive Officers of the Company
Set forth below is certain information regarding the executive officers of the Company and the Bank:
All officers hold office at the pleasure of the Board of Directors, except that Mr. Langley is employed under an Employment Agreement with the Bank.
George E. Langley. Mr. Langley has been the President and Chief Executive Officer of the Company and the Bank since April 1992. From 1982 to April 1992, Mr. Langley served as the Executive Vice President, Chief Financial Officer and Secretary of the Company and the Bank. From 1976 to 1982 Mr. Langley held various executive positions with the Bank.
Tom Kramer. Mr. Kramer was appointed Executive Vice President - Chief Credit Officer of the Bank in April 1994, as well as, Secretary of the Company and Bank in April 1992 and has been an Executive Vice President of the Company since its organization in December 1982. From 1979 to 1982, Mr. Kramer held various executive positions with the Bank, including Senior Vice President - Loan Administrator and Assistant Secretary.
Donna Miltenberger. Ms. Miltenberger has been an Executive Vice President of the Bank since November 1993 and named Executive Vice President - Chief Administrative Officer in 1994. 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 and Senior Vice President and Chief Financial Officer of the Bank in January 1997. From April 1988 to January 1993, Ms. Graf served as Vice President and Comptroller, and from 1984 to April 1988 as Assistant Comptroller, of the Bank.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located at the Bank's main banking office at 510 South Grand Avenue, Glendora, California. The Bank owns the building and the land on which its main banking office is located; owns the building and leases, under a 20-year ground lease, the land on which its Claremont banking office is located; and occupies its nine other banking offices, and the facilities where its loan center and service center are located, under expiring at various dates through 2027. Management believes that the Bank's present facilities are adequate for its present purposes and anticipated growth in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company or the Bank is a party or to which any of their respective properties are subject other than ordinary routine litigation incident to the Bank's business, the outcome of which is not expected to be material to the Company or its operations or properties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under the symbol FOOT. The following table sets forth the high and low closing sales prices per share of the Company's Common Stock as reported on the NASDAQ National Market System for all four quarters of 1996 and 1995. On March 14, 1997 the closing per share price was $13.50 and, as of that same date, there were 1,114 record shareholders of the Company.
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(1) Stock prices for the quarterly periods preceding the 10% stock dividends to shareholders of record April 10, 1995 which was paid on May 1, 1995 and March 22, 1996 which was paid on April 5, 1996, have not been adjusted to reflect those dividends.
Dividends - ---------
Dividend Policy. It had 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 $.40 per share in each of 1992, 1993, and 1994.
In order to take advantage of opportunities to achieve further growth and in order to support that growth through increases in capital, in March 1995 the Board of Directors determined, in accordance with its dividend policy, that the Company should retain its earnings. Accordingly, no cash dividends were paid in 1995 or 1996. The Board of Directors has determined to continue to retain earnings to support growth in 1997 and, therefore, it is not expected that cash dividends will be paid in 1997.
Restrictions Applicable to the Payment of Dividends. The principal source of funds available to the Company for cash dividends, at least until such time, if any, as it may acquire or develop other businesses, is cash dividends from the Bank. Therefore, government regulations, including the laws of the State of California, as they pertain to cash dividends by state chartered banks, will limit the ability of the Company to pay cash dividends for the foreseeable future. California law places a statutory restriction on the amounts of cash dividends a bank may pay to its shareholders. Under that law, dividends declared by the Bank may not exceed, in any calendar year, without approval of the California Superintendent of Banks, the lessor of (i) net income of the Bank for the year and retained net income from the preceding two years (after deducting all dividends paid during the period), or (ii) the Bank's retained earnings. However, because the payment of cash dividends has the effect of reducing capital, as a practical matter capital requirements imposed on federally insured banks operate to preclude the payment of cash dividends in amounts that might otherwise be permitted by California law; and the FDIC, as part of its supervisory powers, generally requires insured banks to adopt dividend policies which limit the payment of cash dividends much more strictly than do applicable laws.
In addition, Section 23(a) of the Federal Reserve Act restricts any banking subsidiary of the Company from extending credit to the Company unless the loans are secured by specified obligations and are limited in amount to no more than 10% of the banking subsidiary's contributed capital and retained earnings.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data set forth below for the fiscal years ended December 31, 1996, 1995, and 1994, and the selected balance sheet data as of December 31, 1996 and 1995, are derived from the audited consolidated financial statements of the Company examined by Vavrinek, Trine, Day and Company, certified public accountants, and included elsewhere in this Report and should be read in conjunction with those consolidated financial statements. The selected income statement data for the fiscal year ended December 31, 1993 and 1992, and the selected balance sheet data as of December 31, 1994, 1993 and 1992, are derived from audited consolidated financial statements examined by Vavrinek, Trine, Day and Company which are not included in this Report.
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(1) For information regarding restrictions affecting the ability of the Company to pay cash dividends, see Note 13 to the Company's Consolidated Financial Statements.
(2) For information regarding long term debt, see Note 9 to the Company's Consolidated Financial Statements.
(3) Retroactively adjusted for stock dividends and stock splits.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal operating subsidiary is Foothill Independent Bank, a California state chartered bank (the "Bank"), which accounts for substantially all of the Company's revenues and income. Accordingly, the following discussion focuses primarily on the operations and financial condition of the Bank.
NET INTEREST INCOME. Net interest income is a principal determinant of a bank's income. Net interest income represents the difference or "spread" between the interest earned on interest-earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities, principally deposits. Net interest income increased by approximately $1,662,000 or 7.0% in 1996 compared to 1995, due primarily to (i) an increase in interest income that resulted from an 11% increase in the average volume of loans outstanding during 1996, and (ii) a decline in interest paid on time deposits, including time certificates of deposits ("TCD's") in denominations of more than $100,000 and other time deposits, due to decreases in the volume of and in the rates paid on those deposits during 1996 as compared to 1995. In 1995, net interest income increased by approximately $2,132,000 or 9.9% due primarily to increases in market rates of interest in the first half of 1995 and increases in the volume of investment securities and other interest-earning assets which more than offset a reduction in loan fees that was caused by a slowing in the rate of loan growth in 1995.
RATE SENSITIVITY AND EFFECT ON NET INTEREST INCOME. A bank's net interest income is affected by a number of factors including the relative percentages or the "mix" of (i) variable and fixed rate loans in its loan portfolio and (ii) demand and savings deposits, on the one hand, and time deposits, including TCD's, on the other hand. As a general rule, a bank with a relatively high percentage of fixed-rate loans will experience a decline in interest income during a period of increasing market rates of interest, because it will be unable to "reprice" its fixed rate loans to offset fully the increase in the rates of interest it must offer to retain maturing time deposits and attract new deposits. Similarly, a bank with a high percentage of time deposits and TCD's generally will experience greater increases in interest expense, and therefore, a decrease in net interest income, during a period of increasing market rates of interest than a bank with a greater percentage of demand and savings deposits which are less sensitive to changes in market rates of interest. By contrast, during a period of declining market rates of interest, a bank with a higher percentage of variable loans, as a general rule, will experience a decline in net interest income because such loans usually contain automatic repricing provisions that are "triggered" by declines in market rates of interest; whereas offsetting reductions in the rates of interest paid on TCD's cannot be implemented until they mature, at which time a bank can seek their renewal at lower rates of interest or allow such deposits to terminate or "run-off" in order to reduce interest expense.
The Bank attempts to reduce its exposure to interest rate fluctuations, and thereby at least to maintain and, if possible, to increase its net interest margin or spread by seeking (i) to attract and maintain a significant volume of demand and savings deposits that are not as sensitive to interest rate fluctuations as are 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. Beginning in the second half of 1996, the Bank's management elected to allow maturing TCD's to "run-off" and commenced marketing programs designed to attract additional demand and savings deposits. As a result of these efforts, during 1996, the average volume of demand and savings (including money market) deposits increased by $33,517,000 or 15.9% and, at December 31, 1996, such deposits represented 68% of the Bank's total deposits as compared to 62% at December 31, 1995. At the same time, the average volume of TCD's in denominations of $100,000 or more, on which the Bank pays interest at its highest rates, declined by $3,653,000 or 2.2%. The change in the mix of deposits, together with the increase in interest and fees earned on loans in 1996, as compared to 1995, contributed to an improvement in the Bank's net interest margin (i.e., net interest income stated as a percentage of interest
income) in 1996 which increased to 71.9% from 70.7% in 1995, during which the Bank's net interest margin declined from 77.6% in 1994.
The ability of the Bank to maintain its net interest margin is not entirely within its control because the interest rates the Bank is able to charge on loans and the interest rates it must offer to maintain and attract deposits are affected by (i) national monetary policies established and implemented by the Federal Reserve Board and (ii) 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 improvement in its net interest margin for 1997, as compared to 1996, due to a number of factors, including (i) a stabilizing in market rates of interest, (ii) the anticipated run-off of some of the Bank's higher interest-bearing TCD's in denominations of $100,000 or more due to a decision by management not to seek renewal of those deposits, which is expected to reduce interest expense, and (iii) somewhat greater loan growth which is expected to result from the more stable interest rates, a gradually improving economy in Southern California and an increase in the number of customers as a result of the growth of new banking offices that were opened in 1996 and marketing programs directed at customers of recently consolidated state-wide and regional banks with offices in the Bank's service areas who desire more personalized service than their existing banks provide them. However, there are a number of uncertainties and risks that could adversely affect the Bank's net interest margin in 1997, including the possibility of adverse changes in economic conditions in Southern California, increases 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, 1996 AND 1995 - --------------------------------------
INTEREST INCOME. The increase in interest income of approximately $1,745,000 or 5.2% in 1996 compared to 1995 was due primarily to an increase of $2,067,000 or 7.16% in interest and fees earned on loans that was attributable to an 11% increase in the average volume of the Bank's outstanding loans. The increase in interest and fee income attributable to increased loan volume more than offset the effects on interest income of (i) somewhat lower interest rates during 1996 than in 1995 and (ii) a decrease in the average volume of federal funds sold, which were reduced to fund new loans and a planned reduction or "run-off" of TCD's.
INTEREST EXPENSE. Interest expense increased by less than 1% in 1996, as reductions in the average volume of TCD's and slightly lower interest rates largely offset an increase in interest expense attributable to increases in the volume of savings and money market deposits.
PROVISION FOR LOAN AND LEASE LOSSES. The Bank follows the practice of maintaining a reserve for possible losses on loans and leases that occur from time to time as an incidental part of the banking business. Write-offs of loans (essentially reductions in the carrying values of non-performing loans due to possible losses on their ultimate recovery) are charged against this reserve (the "Loan Loss Reserve"), which is adjusted periodically to reflect changes in the volume of outstanding loans and in the risk of potential losses due to a deterioration in the condition of borrowers or in the value of property securing non-performing loans or changes in general
economic conditions. Additions to the Loan Loss Reserve are made through a charge against income referred to as the "provision for loan and lease losses." During 1996 this provision was $2,200,000 compared to $2,016,000 for 1995 and the Loan Loss Reserve at December 31, 1996 was approximately $4,744,000 or 1.6% of total loans and leases outstanding, compared to approximately $3,644,000 or 1.4% of total loans and leases outstanding at December 31, 1995. The increase in the provision made in 1996, as compared to the provision made in 1995, was due to the increase, during 1996, in the volume of loans outstanding and a decision to increase the ratio of reserve for loan losses-to-total loans to a more conservative level, consistent with the practices of other California-based banks of comparable size ("peer group banks") and the recommendations of bank regulatory agencies, despite the fact that, historically, the Bank's ratio of loan charge offs-to-average loans and leases outstanding has been lower than that recorded by California-based peer group banks. Net loan charge-offs for 1996 aggregated $1,100,000, representing thirty-nine hundredths of one percent (0.39%) of average loans and leases, as compared to net loan charge-offs in 1995 of $1,517,000, which represented sixty-one hundredths of one percent (0.61%) of average loans and leases outstanding.
The Bank's non-performing loans, which consist primarily of loans for which there have been no payments of principal or interest for more than 90 days, totaled approximately $11,622,000 or 3.9% of total loans at December 31, 1996, as compared to $12,620,000 or 4.8% of total loans at December 31, 1995 and $8,621,000 or 3.5% of total loans at December 31, 1994. The ratio of the Bank's Loan Loss Reserve to non-performing loans was 40.8% at December 31, 1996, as compared to 28.9% and 36.5% at December 31, 1995 and 1994, respectively.
OTHER INCOME. Other income increased by $576,000 or 12.3% in 1996 compared to 1995, primarily as a result of increases in transaction fees and service charges that were attributable to increases in the volume of total deposits and other banking transactions.
OTHER EXPENSE. Non-interest expense, consists primarily of (i) salaries and other employee expenses, (ii) occupancy and furniture and equipment expenses, and (iii) other operating and miscellaneous expenses that include insurance premiums, marketing expenses, data processing costs and charges that are periodically made against income to establish reserves for possible losses on the disposition of real properties acquired on or in lieu of foreclosure of defaulted loans (commonly referred to as "other real estate owned" or "OREO"). Non-interest expense increased by approximately $1,075,000 or 5.2% in 1996 compared to 1995. Contributing to that increase were personnel expenses attributable to staffing requirements for the two new banking offices opened by the Bank, respectively, in Corona, California in the third quarter of 1995 and in Chino Hills, California in the first quarter of 1996. This increase was partially offset by a reduction of $387,000 in the provision for possible losses on other real estate owned that was made possible by the disposition of certain of the OREO properties and a determination by the Bank's management that, after giving effect to those dispositions and the risk exposures related to the remaining OREO properties, the reserves for possible OREO losses were adequate. Despite the increase in the total dollar amount of non-interest expense, as a percentage of operating income (net interest income plus other income) Other Expense declined from 72.9% in 1995 to 71.0% in 1996.
INCOME TAXES. Income taxes increased by approximately $359,000 or 17.1% during 1996 compared to 1995, primarily as a result of the increase in pre-tax income achieved in 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994 - --------------------------------------
INTEREST INCOME. The increase in interest income of approximately $5,712,000 or 20.6% in 1995 compared to 1994 was due to an increase of $3,524,000 or 13.9% in interest and fees earned on loans which was attributable to increases in the volume of the Bank's outstanding loans. Additionally, increases in the volume of the Bank's
other interest-earning assets, such as federal funds sold and investment securities, generated an increase in interest income of $2,206,000 or 103.8% for 1995 compared to 1994.
INTEREST EXPENSE. Interest expense increased by approximately $3,580,000 or 57.7% in 1995 compared to 1994, primarily as a result of increases in the average volume of time deposits which generally bear interest at higher rates than savings deposits, and, to a lesser extent, somewhat higher interest rates paid on deposits as a result of increases in market rates of interest.
PROVISION FOR LOAN AND LEASE LOSSES. The provision for loan and lease losses made in 1995 was $2,016,000 compared to $2,363,000 for 1994. Net loan charge-offs for 1995 aggregated $1,517,000, representing sixty-one hundredths of one percent (0.61%) of average loans and leases, as compared to net loan charge-offs in 1994 of $1,546,000, which represented sixty-nine hundredths of one percent (0.69%) of average loans and leases outstanding.
OTHER INCOME. Other income decreased by $364,000 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") loans.
OTHER EXPENSE. 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 expenses which increases were primarily attributable to internal growth in the Bank's assets and operations. Also contributing to the increase in other operating expenses in 1995 was an increase of $108,000 in the provisions made for possible losses on other real estate owned.
INCOME TAXES. Income taxes decreased by approximately $6,000 or .3% during 1995 compared to 1994, primarily as a result of the increase in the volume of tax-exempt investments securities held by the Bank.
FINANCIAL CONDITION
The Company's total assets at December 31, 1996 were approximately $15,324,000 or 3.9% higher than at December 31, 1995. Average total assets for 1996 increased by approximately $32,356,000 to $400,908,000 from $368,552,000 for 1995. These increases were primarily the result of new loan volume, which was partially offset by reductions in other interest-earning assets, principally cash and balances due from other banks and Federal funds sold, to fund the higher yielding loans and planned reductions in time deposits, including TCD's.
The average volume of loans and leases (less reserves) outstanding during 1996 increased by approximately $29,920,000 or 12.3% compared 1995. The average amount of investment securities held by the Bank during 1996 increased by approximately $7,697,000 or 20% compared to 1995 figures. The average volume of interest bearing deposits held at other financial institutions increased by 189% to $7,391,000 in 1996 from $2,789,000 in 1995. These increases were offset by a 41% reduction in the average volume of Federal Funds sold in 1996 to $20,033,000 from $33,762,000 in 1995.
Beginning in the first quarter of 1996, the Bank initiated new marketing programs designed to increase the volume of demand, savings and money market deposits, which are either non-interest bearing or bear interest at rates which are substantially lower than those paid on time deposits. At the same time, management began reducing the interest rates it offered on TCD's and other time deposits to discourage renewals of existing and purchases of new time deposits by customers and, thereby, reduce the volume of those deposits at the Bank. As a result, at December 31, 1996, the volume of demand deposits and savings deposits at the Bank was
$24,716,000 higher than at December 31, 1995 and non-interest bearing demand deposits, as a percentage of total deposits, had increased to 29.3% from 26.7% at December 31, 1995. By contrast the volume of time deposits, including TCD's of $100,000 or more, outstanding at December 31, 1996 was $19,292,000 or 14% lower than at December 31, 1995.
The Company currently anticipates that there will be modest growth in the Bank's total assets in 1997, which is expected to result from increased lending and deposit activity at the Bank's newer banking offices in Glendale, Corona and Chino Hills and new programs designed to attract customers from recently merged state-wide and regional banks with offices located in the Bank's service areas.
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, 1996, the principal source of liquidity consisted of $33,673,000 in cash and demand balances due from banks and $14,900,000 of Federal funds sold which, together, totaled $48,573,000, as compared to $68,028,000 at December 31, 1995. This reduction was primarily attributable to the use of a portion of these assets primarily to fund increases in loan volume in 1996 and withdrawls of TCD's which management permitted to run-off rather than to renew. Other sources of liquidity include $39,477,000 in securities available for sale, of which approximately $25,877,000 mature within one year and $3,900,000 in interest-bearing deposits at other financial institutions, which mature in 6 months or less. The Bank also has established facilities to borrow Federal Funds from other banks which total $10,100,000 and has an unused line of credit with the Federal Home Loan Bank in the amount of $8,415,000. Furthermore, substantially all of the Bank's installment loans and leases, the amount of which aggregated $11,021,000 at December 31, 1996, 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 made the decision to discontinue the payment of cash dividends in order to retain internally generated funds to support the growth of the Bank. In addition to the two new offices opened during 1995, the Bank opened its eleventh office, in Chino Hills, California on March 25, 1996. During the first quarter of 1996, the Company declared its second 10% stock dividend in two years, which was distributed on April 5, 1996 and for accounting purposes was recorded as a $3,571,000 reduction in retained earnings, offset by a corresponding $3,571,000 increase in the Company's contributed capital.
As a result of the increased earnings in 1996 and the retention of internally generated funds, the Company's total shareholders' equity increased by approximately $5,180,000 or 16.7% to $36,222,000 at December 31, 1996 from $31,042,000 at December 31, 1995. Net earnings in 1996 represent a return on beginning assets (that is, total assets as of January 1, 1996) of 1.06% and a return on beginning equity (total shareholders' equity as of January 1, 1996) of 13.48%.
At December 31, 1996, the Bank's Tier 1 capital ratio was 8.5% compared to 7.7% at December 31, 1995, and as of those same respective dates, the Bank's Tier 1 risk-based capital ratios were 12.3% and 11.3%. The risk-based capital ratio is determined by weighting the bank's assets in accordance with certain risk factors and, the higher the risk profile of a bank's assets, the greater is the amount of capital that is required to maintain an adequate risk-based capital ratio, which generally is at least 8%. The Bank's Tier 1 capital and Tier 1 risk-based capital ratios compare favorably with other peer group banks.
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward looking information which reflects Management's current views of future financial performance. The forward-looking information is subject to certain risks and uncertainties, including but not limited to, the 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 prevent potential losses on non-performing loans by means of sales of collateral securing such 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 Annual Report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[VAVRINEK, TRINE, DAY & CO. LETTERHEAD]
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP ------------------------------- Vavrinek, Trine, Day & Co., LLP
Vavrinek, Trine, Day & Co., LLP Rancho Cucamonga, California January 23, 1997
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
The accompanying notes are an integral part of these financial statements.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1996 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Foothill Independent Bancorp (the "Company") and Subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. A summary of the significant accounting and reporting policies consistently applied in the preparation of the accompanying financial statements follows:
A. Principles of Consolidation
The consolidated financial statements include the Company and its wholly owned subsidiaries, Foothill Independent Bank ("Bank"), and Foothill BPC, Inc. Intercompany balances and transactions have been eliminated.
B. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
C. Investment Securities
Securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts over the period to maturity, or to an earlier call, if appropriate, on a straight-line basis. Such securities include those that management intends and has the ability to hold into the foreseeable future.
Securities would be considered available-for-sale if they would be sold under certain conditions, among these being changes in interest rates, fluctuations in deposit levels or loan demand, or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are not recognized as current income, but rather as an increase or decrease of capital through a separate reserve (net of tax).
D. Loans and Interest on Loans
Loans are stated at unpaid principal balances, and net of deferred loan fees and unearned discounts. The Bank recognizes loan origination fees to the extent they represent reimbursement for initial direct costs, as income at the time of loan boarding. The excess of fees over costs, if any, is deferred and credited to income over the term of the loan.
The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to make all payments due according to the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
E. Provision and Reserve for Loan and Lease Losses
The determination of the balances in the reserves for loan and lease losses is based on an analysis of the respective portfolios and reflects an amount which, in Management's judgment, is adequate to provide for potential losses after giving consideration to the character of the portfolios, current economic conditions, past loss experiences and such other factors as deserve current recognition in estimating losses. The provision for loan and lease losses are charged to expense.
F. Direct Lease Financing
The investment in lease contracts is recorded using the finance method of accounting. Under the finance method, an asset is recorded in the amount of the total lease payments receivable and estimated residual value, reduced by unearned income. Income, represented by the excess of the total receivable over the cost of the related asset, is recorded in income in decreasing amounts over the term of the contract based upon the principal amount outstanding. The financing lease portfolio consists of equipment with terms from three to seven years.
G. Bank Premises, Equipment and Leasehold Improvements
Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred. Depreciation is computed on the straight line basis over the estimated useful lives of the related assets. Depreciation expense is based on the following depreciable lives: buildings (including leasehold premises) 20 to 30 years; leasehold improvements 3 to 20 years; and equipment 3 to 20 years.
H. Other Real Estate Owned
Other real estate owned, which represents real estate acquired through foreclosure, is stated at the lower of the carrying value of the loan or the estimated fair market value (less selling costs) of the related real estate. Loan balances in excess of the fair market value of the real estate acquired at the date of acquisition are charged against the 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 Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 and 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.
L. Current Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" as amended by SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", establishing accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of the financial components approach. This approach requires the recognition of financial assets when control is surrendered and the derecognition of liabilities when they are extinguished. Specific criteria are established for determining when control has been surrendered in the transfer of financial assets. Liabilities and derivatives incurred or obtained by transferors in conjunction with the transfer of financial assets are required to be measured at fair value, if practicable. Servicing assets and other retained interests in transferred assets are required to be measured by allocating the previous carrying amount between the assets sold, if any, and the interest that is retained, if any, based on the relative fair values of the assets on the date of the transfer. Servicing assets retained are subsequently subject to amortization and assessment for impairment. Management has not determined the potential impact this statement will have, however believes that there will be no material effect on the Bank's financial condition or results of operations. SFAS No. 125 is effective for transactions occurring after December 31, 1996.
M. Reclassifications
Certain reclassifications were made to prior years' presentations to conform to the current year.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #2 - INVESTMENT SECURITIES
Based upon the guidelines of SFAS No. 115 and management's analysis of securities holdings, the Company's securities were classified as held- to-maturity and available-for-sale, respectively, as follows:
o Held-To-Maturity Securities
The amortized cost and estimated fair value of held-to-maturity securities were as follows for the dates indicated (in thousands):
December 31, 1996 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) --------- ---------- ---------- ---------- U.S. Treasury Securities $2,796 $ 5 $1 $2,800 Municipal Agencies 2,529 10 1 2,538 Other Securities 250 - - 250 ------ --- -- ------ Total Held-to-Maturity Securities $5,575 $15 $2 $5,588 ====== === == ======
December 31, 1995 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) --------- ---------- ---------- ----------- U.S. Treasury Securities $ 4,958 $27 $- $ 4,985 Securities of Other U.S. Governmental Agencies 14,777 53 - 14,830 Municipal Agencies 3,506 15 4 3,517 Other Securities 250 - - 250 ------- --- -- ------- Total Held-to-Maturity Securities $23,491 $95 $4 $23,582 ======= === == =======
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #2 - INVESTMENT SECURITIES, Continued
o Available-For-Sale Securities
The amortized cost and estimated fair value of available-for-sale securities were as follows for the dates indicated (in thousands):
December 31, 1996 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) --------- ---------- ---------- ---------- U.S. Treasury Securities $ 1,944 $ 6 $ - $ 1,950 Securities of Other U.S. Government Agencies 29,933 - 83 29,850 Certificates of Participation(b) 4,428 24 - 4,452 Municipal Agencies 344 - 4 340 Other Securities 3,238 - 353 2,885 ------- --- ---- ------- Total Available-for-Sale Carried at Fair Value $39,887 $30 $440 $39,477 ======= === ==== =======
December 31, 1995 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Value Cost Gains Losses (a) --------- ---------- ---------- ---------- Securities of Other U.S. Governmental Agencies $11,804 $12 $ 5 $11,811 Certificates of Participation(b) 4,434 43 - 4,477 Other Securities 2,707 - 252 2,455 ------- --- ---- ------- Total Available-for-Sale Carried at Fair Value $18,945 $55 $257 $18,743 ======= === ==== =======
- --------------------- (a) The Bank's portfolio of securities primarily consists of investment-grade securities. The fair value of actively-traded securities is determined by the secondary market, while the fair value for non-actively-traded securities is based on independent broker quotations.
(b) Non-rated certificates of participation evidencing ownership interest in the California Statewide Communities Development Authority - San Joaquin County Limited Obligation Bond Trust with book values of $4,428,000 and $4,434,000 and market values of $4,452,000 and $4,477,000 at December 31, 1996 and 1995, respectively.
Proceeds from maturities of investment securities held-to-maturity during 1996, were $16,630,000. Proceeds from maturities of investment securities available-for-sale during 1996, were $123,970,000. There were no gains or losses recognized. Included in shareholders' equity at December 31, 1996, is $383,000 of net unrealized losses on investments available-for-sale.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from maturities of investment securities held-to-maturity during 1995, were $26,946,000. Proceeds from maturities of investment securities available-for-sale during 1995, were $29,858,000. There were no gains or losses recognized. Included in shareholders' equity at December 31, 1995, is $202,000 of net unrealized loss on investments available-for-sale.
Securities with a book value of $27,384,000 and $32,723,000 and market value of $27,329,000 and $32,801,000 at December 31, 1996 and 1995, 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, 1996, by contractual maturity were as follows (in thousands):
- ---------------------- (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.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #3 - LOANS
The composition of the loan portfolio at December 31, 1996 and 1995, was as follows (in thousands):
1996 1995 -------- -------- Commercial, financial and agricultural $ 40,980 $ 44,801 Real Estate - construction 11,601 32,098 Real Estate - mortgage Commercial 201,367 141,462 Residential 30,051 30,505 Loans to individuals for household, family and other personal expenditures 8,157 10,887 All other loans (including overdrafts) 407 178 -------- -------- 292,563 259,931 Deferred income on loans (797) (863) -------- -------- Loans, Net of Deferred Income $291,766 $259,068 ======== ========
Nonaccruing loans totaled approximately $11,622,000 and $12,620,000 at December 31, 1996 and 1995, 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 $1,488,000, $985,000 and $510,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Bank had approximately $2,829,000 and $1,456,000 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, 1996 and 1995, consists of the following (in thousands): 1996 1995 ------ ------ Lease payments receivable $3,183 $2,086 Estimated residual values 33 322 ------ ------ 3,216 2,408 Unearned income (329) (252) Lease residual balance account (23) (70) ------ ------ $2,864 $2,086 ====== ======
At December 31, 1996, the Bank had no outstanding lease commitments.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #4 - DIRECT LEASE FINANCING, Continued
At December 31, 1996, future minimum lease payments receivable under direct financing leases are as follows (in thousands):
Year -------- 1997 $1,277 1998 712 1999 568 2000 326 2001 104 Thereafter 206 ------ 3,193 Less unearned income (329) ------ $2,864 ======
NOTE #5 - RESERVE FOR LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows (in thousands): 1996 1995 1994 ------- ------- ------- Balance at beginning of year $ 3,644 $ 3,145 $ 2,328 Recoveries on loans previously charged off 503 549 291 Provision charged to operating expense 2,200 2,016 2,363 Loans charged off (1,603) (2,066) (1,837) ------- ------- ------- Balance at end of year $ 4,744 $ 3,644 $ 3,145 ======= ======= =======
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan" on January 1, 1995. The statement generally requires those loans identified as "impaired" to be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will not be able to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.
The Bank has identified all nonaccruing loans as being impaired loans. The allowance for loan losses related to impaired loans amounted to approximately $485,000 for the year ended December 31, 1996, and is included in the above balance. The average balance of these loans amounted to approximately $10,314,000 for the year ended December 31, 1996. Cash receipts during 1996 applied to reduce principal balance and recognized as interest income was approximately $2,073,000 and $137,000, respectively.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
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 1996 and 1995, is as follows (in thousands):
1996 1995 ---- ------- Outstanding Balance, Beginning of year $50 $ 1,976 Credit granted, including renewals 82 Repayments and other reductions (9) (2,008) --- ------- Outstanding Balance, End of year $41 $ 50 === =======
NOTE #7 - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows (in thousands):
1996 1995 ------- -------
Buildings $ 2,424 $ 2,425 Furniture and equipment 9,331 8,532 Leasehold improvements 2,250 2,111 ------- ------- 14,005 13,068 Less: Accumulated depreciation and amortization (7,923) (6,937) ------- ------- 6,082 6,131 Land 1,222 1,222 ------- ------- Total $ 7,304 $ 7,353 ======= =======
NOTE #8 - OTHER REAL ESTATE OWNED
As discussed in Note #1H, Other Real Estate Owned is carried at the estimated fair value of the real estate. An analysis of the transactions for December 31, 1996 and 1995, were as follows (in thousands):
1996 1995 ------- ------- Balance, Beginning of year $ 3,879 $ 2,470 Additions 4,877 5,715 Valuation adjustment and other reductions (4,161) (4,306) ------- ------- Balance, End of year $ 4,595 $ 3,879 ======= =======
The balances at December 31, 1996 and 1995, are shown net of reserves.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #8 - OTHER REAL ESTATE OWNED, Continued
Transactions in the reserve for other real estate owned are summarized for December 31, 1996 and 1995, were as follows (in thousands):
1996 1995 ------ ------ Balance, Beginning of year $ 909 $ 515 Provision charged to other expense 572 959 Charge-offs and other reductions (335) (565) ------ ------ Balance, End of year $1,146 $ 909 ====== ======
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 (in thousands):
Year Principal Interest Total - ---- --------- -------- ----- 1997 $ 45 $ 15 $ 60 1998 49 10 59 1999 55 5 60 2000 19 - 19 ---- ---- ---- $168 $ 30 $198 ==== ==== ====
NOTE #10 - STOCK OPTION PLAN
At December 31, 1996, the Bank has a fixed option plan, which is described below. The Bank applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation costs for these plans been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the impact would not have materially affected net income.
The Company's 1993 incentive stock option and nonqualified stock option plan approved by the stockholders provide that an aggregate of 460,467 shares (after giving retroactive effect for 10 percent stock dividends) of the Company's unissued common stock may be granted to certain officers, key employees, and directors at prices not less than the fair market value of such shares at dates of grant. Options granted expire within a period of not more than ten years from the date the option is granted.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 1996, 1995 and 1994, respectively: risk-free rates of 6.17%, 5.35% and 5.22%; dividend yields of 0%, 1.38% and 5.23%; expected life of five years; and volatility of 35% for all years.
NOTE #10 - STOCK OPTION PLAN, Continued
A summary of the status of the Bank's fixed stock option plan as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below:
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
NOTE #11 - DEFINED CONTRIBUTION PLAN (401K)
The Company sponsors a defined contribution pension plan that covers all employees with 1,000 or more hours worked in a year. Contributions to the plan are based on the employee's gross salary less the IRS Section 125 flex plan. For the years ending December 31, 1996, 1995 and 1994, the amount of pension expense was $138,000, $112,000, and $105,000, respectively.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #12 - DEFERRED COMPENSATION
The Bank maintained a nonqualified, unfunded deferred compensation plan for certain key management personnel whereby they may defer compensation which will then provide for certain payments upon retirement, death, or disability. The plan provides for payments for ten years commencing upon retirement. The plan provides for reduced benefits upon early retirement, disability, or termination of employment. The deferred compensation expense for 1996 was $322,488 ($193,493 net of income taxes), 1995 was $155,000 ($93,000 net of income taxes), and 1994 was $206,000 ($124,000 net of income taxes).
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the Company. Dividends declared by the Bank may not exceed, in any calendar year, without approval of the 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, 1996, the combined amount of funds available from these two sources amounted to approximately $17,054,000 or 47% of consolidated stockholders equity.
NOTE #14 - STOCK DIVIDENDS
On May 1, 1995, the Bank distributed 356,433 shares of common stock in connection with a 10% stock dividend. As a result of the stock dividend, common stock was increased and retained earnings was decreased by $2,940,000. On January 23, 1996, the Board of Directors declared a 10% stock dividend payable on April 5, 1996, to stockholders of record on March 22, 1996. As a result, common stock was increased and retained earnings were decreased by $3,571,000. All references in the accompanying financial statements to the number of common shares and per share amounts for 1995 and 1994, have been restated to reflect the stock dividends.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #15 - OTHER EXPENSES
The following is a breakdown of other expenses for the years ended December 31, 1996, 1995 and 1994 (in thousands):
NOTE #16 - INCOME TAXES
The provisions for income taxes consist of the following (dollars in thousands):
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #16 - INCOME TAXES, Continued
Deferred tax expense results from timing differences in the recognition of revenues and expenses for tax and financial statement purposes. The sources of these differences and the tax effect of each are as follows (in thousands):
As a result of the following items, the total tax expenses for 1996, 1995 and 1994, were less than the amount computed by applying the statutory U.S. Federal income tax rate to income before taxes (dollars in thousands):
NOTE #17 - 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 4,402,806, 4,326,095, and 4,282,910 for the years ending December 31, 1996, 1995 and 1994, respectively, after 10% stock dividends in 1996 and 1995. Stock options granted did not have a dilutive effect, and they have been excluded from the calculation of income per share.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #18 - COMMITMENTS AND CONTINGENCIES
The Bank leases land and buildings under noncancelable operating leases expiring at various dates through 2014. The following is a schedule of future minimum lease payments based upon obligations at year end (in thousands):
Year ---- 1997 $1,032 1998 866 1999 863 2000 863 2001 789 Succeeding years 5,267 ------ $9,680 ======
Total rental expense for the three years ended December 31, 1996, 1995 and 1994, was $1,064,000 $1,087,000, $760,000, respectively. The increase in occupancy expense in 1996 and 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.
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, 1996 and 1995, the Bank had commitments to extend credit of $34,461,000 and $35,642,000, respectively, and obligations under standby letters of credit of $1,088,000 and $1,982,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #18 - COMMITMENTS AND CONTINGENCIES, Continued
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
NOTE #19 - REGULATORY MATTERS
The bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt correct action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject.
The Bank's actual capital amounts and ratios are presented in the following table (dollars in thousands):
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of financial instruments at December 31, 1996 (dollars in thousands). FASB Statement 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair value of financial instruments:
o Investment Securities
For U.S. Treasury and U.S. Government Agency securities, fair values are based on market prices. For other investment securities, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities as the basis for a pricing matrix.
o Loans
The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of the future cash flows expected to be received by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
o Deposits
The fair value of demand deposits, money market deposits, savings accounts and NOW accounts is defined as the amounts payable on demand at December 31, 1996. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.
o 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.
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP (PARENT COMPANY)
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #21 - CONDENSED FINANCIAL INFORMATION OF FOOTHILL INDEPENDENT BANCORP (PARENT COMPANY)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994
NOTE #22 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the Company and its subsidiaries for the two years ended December 31, 1996, is summarized below:
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 1997 annual meeting of shareholders, to be filed with the Commission on or before April 29, 1997.
ITEM 11.
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, 1997 for the Company's 1997 annual shareholders' meeting.
ITEM 12.
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, 1997 for the Company's 1997 annual shareholders' meeting.
ITEM 13.
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, 1997 for the Company's 1997 annual shareholders' meeting.
PART IV
ITEM 14.
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 33 of this Report.
(2) Financial Statement Schedules:
All schedules are omitted as the information is not required, is not material or is otherwise furnished.
(3) Exhibits:
See Index to Exhibits on Page 64 of this Form 10-K.
(4) Reports on Form 8-K:
None
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 capacitiy 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 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March 1997.
FOOTHILL INDEPENDENT BANCORP (Registrant)
By: /s/ GEORGE E. LANGLEY -------------------------------------- George E. Langley President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following officers and directors of the registrant in the capacities indicated on March 27, 1997.
/s/ GEORGE E. LANGLEY President, Chief Executive Officer - ------------------------------- (Principal Executive Officer) and George E. Langley Director
/s/ CAROL ANN GRAF Chief Financial Officer (Principal - ------------------------------- Financial and Accounting Officer) Carol Ann Graf
/s/ WILLIAM V. LANDECENA Chairman of the Board of Directors - ------------------------------- William V. Landecena
/s/ RICHARD A. BARKER Director - ------------------------------- Richard A. Barker
/s/ CHARLES G. BOONE Director - ------------------------------- Charles G. Boone
/s/ O.L. MESTAD Director - ------------------------------- O.L. Mestad
/s/ MAX E. WILLIAMS Director - ------------------------------- Max E. Williams
/s/ DOUGLAS F. TESSITOR Director - ------------------------------- Douglas F. Tessitor
________________
(R-1) Incorporated by reference to the same numbered exhibit to Registration Statement on Form S-14 (File No. 2-83329) filed on May 10, 1983.
(R-2) Incorporated by reference to the same numbered exhibit to Registration Statement on Form S-8 (File No. 2-89744) filed on March 2, 1984.
(R-3) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985.
(R-4) Incorporated by reference to Exhibit A to the Proxy Statement/Prospectus included in the Company's Registration Statement on Form S-4 (File No. 33-5898) filed on May 22, 1986.
(R-5) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1986.
(R-6) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.
(R-7) Incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
(R-8) Incorporated by reference to same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
(R-9) Incorporated by reference to the same numbered exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
(R-10) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated February 27, 1997 filed to register, under Section 12(g) of the Securities Exchange Act of 1934, Rights to Purchase Common Stock ("Shareholder Rights").