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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



(Mark One)



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
|- |  | -------------------------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 0-11337



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FOOTHILL INDEPENDENT BANCORP

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-3815805                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|510 South Grand Avenue, Glendora, California                   |  | 91741                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(626) 963-8551

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock

(Title of Class)



Rights to Purchase Common Stock

(Title of Class)



Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports);
and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  x.



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Securities Exchange Act Rule 12b-2) Yes  x    No ̈.



The aggregate market value of voting shares held by non-affiliates of Registrant as of June 30, 2003, which was determined
on the basis of the closing price of Registrants shares on that date, was approximately $94,884,000.



As of March 3, 2004, there were 6,731,455 shares of Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Except as otherwise indicated therein, Part III of the Form 10-K is incorporated by reference from the Registrants
Definitive Proxy Statement for its 2004 Annual Meeting to be filed with the Commission on or before April 29, 2004.



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FOOTHILL INDEPENDENT BANCORP, INC.



ANNUAL REPORT ON FORM 10-K



FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2003



TABLE OF CONTENTS



|                           |  |                                                                                                  |  |         
|-------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --------
|                           |  |                                                                                                  |  | Page No.
|Forward Looking Statements |  | 1                                                                                               
|                           |  |                                                                                                 
|Part I                     |  |                                                                                                  |  |         
|Item 1                     |  | Business                                                                                         |  | 1       
|Item 2                     |  | Properties                                                                                       |  | 16      
|Item 3                     |  | Legal Proceedings                                                                                |  | 16      
|Item 4                     |  | Submission of Matters to a Vote of Security Holders                                              |  | 16      
|Item 4A                    |  | Executive Officers of the Registrant                                                             |  | 17      
|                           |  |                                                                                                 
|Part II                    |  |                                                                                                  |  |         
|Item 5                     |  | Market for Registrants Common Equity and Related Stockholder Matters                            |  | 18      
|Item 6                     |  | Selected Financial Data                                                                          |  | 20      
|Item 7                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 21      
|Item 7A                    |  | Quantitative and Qualitative Disclosure About Market Risk                                        |  | 36      
|Item 8                     |  | Financial Statements and Supplementary Data                                                      |  | 38      
|                           |  |                                                                                                 
|                           |  | Independent Auditors Report                                                                     |  | 39      
|                           |  |                                                                                                 
|                           |  | Consolidated Balance Sheets at December 31, 2003 and 2002                                        |  | 40      
|                           |  |                                                                                                 
|                           |  | Consolidated Statements of Income for the Years ended December 31, 2003, 2002 and 2001           |  | 41      
|                           |  |                                                                                                 
|                           |  | Consolidated Statements of Stockholders Equity the Years ended December 31, 2003, 2002 and 2001 |  | 42      
|                           |  |                                                                                                 
|                           |  | Consolidated Statements of Cash Flows for the Years ended December 31, 2003, 2002 and 2001       |  | 43      
|                           |  |                                                                                                 
|                           |  | Notes to Consolidated Financial Statements                                                       |  | 45      
|Item 9                     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures            |  | 64      
|Item 9A                    |  | Controls and Procedures                                                                          |  | 64      
|                           |  |                                                                                                 
|Part III                   |  |                                                                                                  |  |         
|                           |  |                                                                                                 
|Item 10                    |  | Directors and Executive Officers of the Registrant                                               |  | 64      
|                           |  |                                                                                                 
|Item 11                    |  | Executive Compensation                                                                           |  | 64      
|                           |  |                                                                                                 
|Item 12                    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   |  | 64      
|                           |  |                                                                                                 
|Item 13                    |  | Certain Relationships and Related Transactions                                                   |  | 64      
|                           |  |                                                                                                 
|Item 14                    |  | Principal Accountant Fees and Services                                                           |  | 64      
|                           |  |                                                                                                 
|Part IV                    |  |                                                                                                  |  |         
|                           |  |                                                                                                 
|Item 15                    |  | Exhibits, Financial Statement Schedules, Reports on Form 8-K                                     |  | 65      
|                           | 
|Signature Page             |  | S-1                                                                                             
|                           | 
|Index to Exhibits          |  | E-1                                                                                             



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FORWARD LOOKING STATEMENTS



Statements contained in this Report that are not historical facts or that discuss our expectations or beliefs regarding our future operations or future financial performance, or financial or other trends in our business, constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the 1933 Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the 1934 Act).
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words believe, expect, anticipate, intend,
plan, estimate, project, or words of similar meaning, or future or conditional verbs such as will, would, should, could, or may. The expectations or
believes discussed in forward-looking statements are based on current information and the outcome of those matters are subject to a number of risks and uncertainties that could cause our financial condition or operating results in the future to
differ significantly from those expected at the current time. Those risks and uncertainties are described in Part II of this Report in the Section entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations, and readers of this Report are urged to read the cautionary statements contained in that Section of this Report.



Due to these uncertainties and risks, readers are cautioned not to place undue reliance on forward-looking statements contained in this Report, which
speak only as of the date of this Annual Report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



PART I



ITEM 1.    BUSINESS



Foothill Independent Bancorp (the Company), which was organized in 1982, is a one-bank holding company that is registered, as such, under the Bank Holding Company Act of 1956, as amended (the BHCA). Like other bank
holding companies in the United States, we are subject to regulation, supervision and periodic examination by the Board of Governors of the Federal Reserve System (commonly known as the Federal Reserve Board). We own all of the capital
stock of Foothill Independent Bank, a California state-chartered bank (the Bank), which is our principal subsidiary and accounts for substantially all of our consolidated assets, liabilities and operating results.



The Bank, which was organized and commenced business operations in 1973,
conducts a commercial banking business in the contiguous counties of Los Angeles, San Bernardino and Riverside, California, and as of December 31, 2003 had total assets of $686,158,000. The Bank is an FDIC insured state bank and member of the
Federal Reserve System. As such it is also is subject to regulation, supervision and periodic examination by the Federal Reserve Board and also by the California Department of Financial Institutions. See Supervision and Regulation below
in this Section of this Report.



Until July 18, 2000, the
Company was a California corporation. With the approval of our shareholders, on that date we were re-incorporated as a Delaware corporation and our articles of incorporation were amended in several respects. Reference is hereby made to the
Companys Current Report on Form 8-K dated July 18, 2000 for additional information regarding the Delaware reincorporation and those amendments to our articles of incorporation. No changes were made to the state of incorporation or to the
articles of incorporation of the Bank.



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 and business loans, including credit lines and accounts receivable and inventory financing, real estate
mortgage and construction loans and consumer installment loans. In addition, the Bank provides safe deposit, collection, travelers checks, notary public and other customary non-deposit banking services. The Bank currently operates 12 banking
offices, one in each of the communities of Glendora, Upland, Claremont, Irwindale, Ontario, Rancho Cucamonga, Covina, Glendale, Corona, Chino, Monrovia, and Temecula California, which are located in the area of Southern California that includes (i)
the San Gabriel Valley of Los Angeles County, (ii) the western portions of San Bernardino, and (iii) the western and southern portions of Riverside Counties, which together are commonly known as the Inland Empire. The Banks
organization and operations have been designed primarily to meet the banking needs of small-to-medium sized businesses, professionals and consumers.



The Bank emphasizes personalized service, convenience and the ability to customize services to meet the banking needs of its customers in order to attract
business within its market areas. Drive-up or walk-up facilities and 24-hour automated teller machines (ATMs) are available at all of its banking offices. The Bank also offers (i) a



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computerized telephone service, which enables customers to obtain information concerning their bank deposit accounts
telephonically at any time day or night, and (ii) internet banking services to consumers and business customers. The Banks deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) to the maximum extent
allowed by law.



As a California state-chartered bank that is a
member of the Federal Reserve System (a state member bank), the Bank is subject to regulation, supervision and periodic examination, at the state level, by the California Department of Financial Institutions (the DFI), and,
at the Federal level, by the Federal Reserve Board. See Supervision and RegulationFoothill Independent Bank.



Consolidated Average Assets and Liabilities. The following table sets forth the average balances for each principal category of our consolidated
assets and liabilities and also of our stockholders equity for each of the years in the three year period ended December 31, 2003. Average balances are based on daily averages for the Bank and monthly averages for the Company, since the
Company does not maintain daily average information. We believe that the differences between monthly and daily average data (where monthly data has been used) are not significant. (Dollars are set forth in thousands.)



|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|------------------------------------------ |  | --------------- | ------- | - | --------------- | ----- | - | --------------- | - | ------- | ---------------- |  | ----- | --------------- |  | - | ---------------- | - |  | ----- | -
|                                           |  | 2003            |         |   | 2002            |       |   | 2001            |  
|                                           |  | AverageBalances |         |   | Percentof Total |       |   | AverageBalances |   |         | Percent of Total |  |       | AverageBalances |  |   | Percent of Total |  
|Assets                                     |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Investment SecuritiesTaxable              |  | $               | 99,453  |   |                 | 15.2  | % |                 | $ | 47,100  |                  |  | 8.2   | %               |  | $ | 63,760           |   |  | 12.3  | %
|Investment SecuritiesNon-Taxable          |  |                 | 7,992   |   |                 | 1.2   |   |                 |   | 8,119   |                  |  | 1.4   |                 |  |   | 5,060            |   |  | 1.0   |  
|Federal Funds Sold & Repos                 |  |                 | 34,370  |   |                 | 5.3   |   |                 |   | 40,808  |                  |  | 7.1   |                 |  |   | 21,043           |   |  | 4.0   |  
|Due from BanksTime Deposits               |  |                 | 8,320   |   |                 | 1.3   |   |                 |   | 7,544   |                  |  | 1.3   |                 |  |   | 12,119           |   |  | 2.3   |  
|Loans                                      |  |                 | 451,351 |   |                 | 69.1  |   |                 |   | 424,443 |                  |  | 73.9  |                 |  |   | 370,882          |   |  | 71.5  |  
|Direct Lease Financing                     |  |                 | 971     |   |                 | 0.1   |   |                 |   | 1,160   |                  |  | 0.2   |                 |  |   | 951              |   |  | 0.2   |  
|Reserve for Loan and Lease Losses          |  |                 | (4,710  | ) |                 | (0.7  | ) |                 |   | (4,378  | )                |  | (0.8  | )               |  |   | (3,889           | ) |  | (0.7  | )
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Net Loans and Leases                       |  |                 | 447,612 |   |                 | 68.5  |   |                 |   | 421,225 |                  |  | 73.3  |                 |  |   | 367,944          |   |  | 71.0  |  
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Total Interest Earning Assets              |  |                 | 597,747 |   |                 | 91.5  |   |                 |   | 524,796 |                  |  | 91.3  |                 |  |   | 469,926          |   |  | 90.6  |  
|Cash and Non-interest Earning Deposits     |  |                 | 32,085  |   |                 | 4.9   |   |                 |   | 29,610  |                  |  | 5.2   |                 |  |   | 27,690           |   |  | 5.3   |  
|Net Premises, Furniture and Equipment      |  |                 | 4,591   |   |                 | 0.7   |   |                 |   | 5,206   |                  |  | 0.9   |                 |  |   | 5,864            |   |  | 1.1   |  
|Other Assets                               |  |                 | 18,894  |   |                 | 2.9   |   |                 |   | 14,722  |                  |  | 2.6   |                 |  |   | 16,163           |   |  | 3.0   |  
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Total Assets                               |  | $               | 653,317 |   |                 | 100.0 | % |                 | $ | 574,334 |                  |  | 100.0 | %               |  | $ | 519,643          |   |  | 100.0 | %
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Liabilities and Stockholders Equity        |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Savings Deposits                           |  | $               | 288,756 |   |                 | 44.2  | % |                 | $ | 242,304 |                  |  | 42.2  | %               |  | $ | 201,183          |   |  | 38.7  | %
|Time Deposits                              |  |                 | 80,612  |   |                 | 12.3  |   |                 |   | 88,824  |                  |  | 15.5  |                 |  |   | 108,989          |   |  | 21.0  |  
|Short-term Borrowings                      |  |                 | 0       |   |                 |      |   |                 |   | 0       |                  |  |      |                 |  |   | 260              |   |  | 0.1   |  
|Long-term Borrowings                       |  |                 | 8,248   |   |                 | 1.3   |   |                 |   | 667     |                  |  | 0.1   |                 |  |   |                 |   |  |      |  
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Total Interest-Bearing Liabilities         |  |                 | 377,616 |   |                 | 57.8  |   |                 |   | 331,795 |                  |  | 57.8  |                 |  |   | 310,432          |   |  | 59.8  |  
|Demand Deposits                            |  |                 | 212,278 |   |                 | 32.5  |   |                 |   | 182,178 |                  |  | 31.7  |                 |  |   | 155,828          |   |  | 30.0  |  
|Other Liabilities                          |  |                 | 4,843   |   |                 | 0.7   |   |                 |   | 5,655   |                  |  | 1.0   |                 |  |   | 3,779            |   |  | 0.7   |  
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Total Liabilities                          |  |                 | 594,737 |   |                 | 91.0  |   |                 |   | 519,628 |                  |  | 90.5  |                 |  |   | 470,039          |   |  | 90.5  |  
|Stockholders Equity                       |  |                 | 58,580  |   |                 | 9.0   |   |                 |   | 54,706  |                  |  | 9.5   |                 |  |   | 49,604           |   |  | 9.5   |  
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  
|Total Liabilities and Stockholders Equity |  | $               | 653,317 |   |                 | 100.0 | % |                 | $ | 574,334 |                  |  | 100.0 | %               |  | $ | 519,643          |   |  | 100.0 | %
|                                           |  |                 |         |   |                 |       |   |                 |   |         |                  |  |       |                 |  |   |                  |   |  |       |  



Deposits.
Deposits represent the Banks primary source of funds that it uses to fund its interest earning assets, principally loans and investment securities. The following table sets forth, as of December 31, 2003, the different categories of deposits
maintained at the Bank and the number of deposit accounts, the average balance of each account and the aggregate dollar amount of the deposits in each such category:



|                        |  |                    |  |                         |         |                |   |         |    
|----------------------- |  | ------------------ |  | ----------------------- | ------- | -------------- | - | ------- | ---
|Type of Deposit Account |  | Number of Accounts |  | Average Account Balance |         | Total Deposits |  
|                        |  |                    |  |                         |         | (In thousands) |  
|Demand & NOW            |  | 28,647             |  | $                       | 11,197  |                | $ | 320,755 | (1)
|Money market            |  | 1,758              |  |                         | 88,576  |                |   | 155,717 | (2)
|Savings                 |  | 10,227             |  |                         | 5,962   |                |   | 60,977  |    
|Time Deposits(3)        |  |                    |  |                         |         |                |   |         |    
|TCDs                    |  | 212                |  |                         | 142,675 |                |   | 30,247  |    
|Other time deposits     |  | 2,200              |  |                         | 20,161  |                |   | 44,354  |    

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|(1) |  | Includes $11,659,000 of municipal and other government agency deposits.
|--- |  | -----------------------------------------------------------------------

|(2) |  | Includes $282,000 of municipal and other government agency deposits.
|--- |  | --------------------------------------------------------------------

|(3) |  | In this Report, we use the term TCDs to mean time certificates of deposit in denominations of more than $100,000, the term other time deposits to mean
certificates of deposit in denominations of $100,000 or less; and the term time deposits to mean TCDs and other time deposits, collectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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During the twelve months ended December 31, 2003, average demand deposits increased by $30.1 million, or
16.5%; average money market checking account deposits increased by $28.1 million, or 25.0%; average savings deposits increased by $8.8 million, or 18.2%; and average time deposits decreased by $8.2 million, or 9.2%, which was attributable to
decreases of $5.8 million in TCDs and $2.4 million in other time deposits.



Although there are some business and public agency customers that carry large deposits with the Bank, we do not believe that the Bank 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 that can result from the loss of
a substantial depositor. At December 31, 2003, no individual, corporate or public agency depositor accounted for more than 2% of the Banks total deposits and the five largest deposit accounts represented, collectively, 6% of total deposits.



Loan Portfolio



We offer a diverse line of loan products, including commercial loans and
credit lines, SBA guaranteed business loans, accounts receivable and inventory financing, real estate mortgage and construction loans and consumer loans.



The following table sets forth the types, and the amounts (in thousands of dollars), by type, of the loans that were outstanding at December 31, 2003,
2002 and 2001, respectively.



|                                       |  |              |         |   |      |   |         |      |  |   |         |  
|-------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                       |  | December 31, |        
|Types Of Loans(1)                      |  | 2003         |         |   | 2002 |   |         | 2001 | 
|Commercial, Financial and Agricultural |  | $            | 44,855  |   |      | $ | 44,136  |      |  | $ | 48,077  |  
|Real Estate Construction               |  |              | 27,077  |   |      |   | 34,492  |      |  |   | 16,091  |  
|Real Estate Mortgage(2)                |  |              | 381,563 |   |      |   | 357,707 |      |  |   | 337,626 |  
|Consumer Loans                         |  |              | 3,816   |   |      |   | 4,073   |      |  |   | 4,718   |  
|Lease Financing(3)                     |  |              | 528     |   |      |   | 1,211   |      |  |   | 1,360   |  
|All other Loans (including overdrafts) |  |              | 2,263   |   |      |   | 508     |      |  |   | 626     |  
|                                       |  |              |         |   |      |   |         |      |  |   |         |  
|Subtotal                               |  |              | 460,102 |   |      |   | 442,127 |      |  |   | 408,498 |  
|Less:                                  |  |              |         |   |      |   |         |      |  |   |         |  
|Unearned Discount                      |  |              | (54     | ) |      |   | (67     | )    |  |   | (92     | )
|                                       |  |              |         |   |      |   |         |      |  |   |         |  
|Reserve for Loan and Lease Losses      |  |              | (4,947  | ) |      |   | (4,619  | )    |  |   | (4,206  | )
|                                       |  |              |         |   |      |   |         |      |  |   |         |  
|Total                                  |  | $            | 455,101 |   |      | $ | 437,441 |      |  | $ | 404,200 |  
|                                       |  |              |         |   |      |   |         |      |  |   |         |  

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|(1) |  | All of the Banks loans have been made to borrowers in the United States.
|--- |  | -------------------------------------------------------------------------

|(2) |  | A portion of these loans were made, not for the purpose of financing real properties, but for commercial or agricultural purposes. However, in accordance with the Banks credit
policies, such loans were secured by deeds of trust on real properties and, therefore, are classified as real mortgage loans.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Lease financing amounts are stated net of unearned income of $69 for 2003; $118,000 for 2002; and $158,000 for 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------



Except for the categories of loans set forth in the table above, at December
31, 2003 there were no loans outstanding to borrowers engaged in similar businesses activities that aggregated more than 10% of our loan portfolio.



Commercial Loans.    The commercial loans we offer include:



| |  |  | secured and unsecured loans with maturities ranging from 12 to 120 months;
| | - |  | --------------------------------------------------------------------------



| |  |  | SBA guaranteed business loans with terms not to exceed 10 years; and
| | - |  | --------------------------------------------------------------------



| |  |  | accounts receivable financing for terms not exceeding 12 months.
| | - |  | ----------------------------------------------------------------



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In order to mitigate the risk of borrower defaults, we generally require collateral to support the
credit, personal guarantees from the owners of the businesses that are borrowing, or both. In addition, all loans must have well-defined primary and secondary sources of repayment. Generally, lines of credit are granted for no more than a 12-month
period and are subject to frequent periodic reviews.



We also
offer asset-based lending products that involve a higher degree of risk in that such loans are designed for those borrowers who do not quality, under our loan underwriting criteria, for unsecured lending. The borrowers generally consist of
businesses that are growing rapidly, but which cannot internally fund their growth without borrowings. Usually, the collateral for such loans consists of accounts receivable and inventory. We mitigate our risk by requiring loan-to- value ratios of
not more than 80% and by closely and regularly monitoring the amount and value of the collateral in order to maintain that ratio. These loans often are supported by additional collateral, usually in the form of first or second mortgages or deeds of
trust on real property.



Commercial loans, including accounts
receivable financing, are generally made to businesses that have been in operation for at least three years. In addition, to qualify for these loans, a borrower usually is required to have a debt-to-net worth ratio of not more than four-to-one;
operating cash flow sufficient to demonstrate the ability to pay obligations as they become due; and a good payment history.



Real Estate Loans.    Nonresidential real estate loans make up approximately 84% of our real estate loan portfolio, and
substantially all of those loans are secured by first mortgages or deeds of trust. The remainder of our real estate loans are secured by first and second deeds of trust on residential real property.



Loans secured by nonresidential real estate often involve loan balances to
single borrowers or groups of related borrowers, and generally involve a greater risk of nonpayment than do mortgage loans secured by single and multi-family dwellings. Payments on loans secured by nonresidential real estate depend to a large degree
on the results of operations and dependable cash flows generated by the businesses of the borrowers or tenants in the property. As a result, repayment of these loans is affected by changes in the economic conditions in general or by the real estate
market more specifically. Accordingly, the nature of this type of loan makes it more difficult to monitor and evaluate. Consequently, personal guarantees from the owners of the borrowers are typically required as security for the repayment of such
loans.



A customer seeking to obtain a commercial real estate
loan must have a good payment record and the property must generate a cash flow that will cover the debt service of the loan by at least 1.25-to-1. If the property is owner-occupied, the owners business generally must have a debt coverage
ratio of at least 1.50-to-1 on its obligations. In addition, we require adequate insurance on the property to protect the collateral value. Generally, these types of loans are written for maximum terms of 10 years with loan-to-value ratios of not
more than 70%.



Consumer
Loans.    We offer a wide variety of products to consumers that include personal installment loans, lines of credit and credit cards. We design these products to meet the needs of our customers and some are made at fixed
rates of interest and others at adjustable rates. Consumer loans often entail greater risk than real estate mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles, which may not provide an adequate source of loan repayment in the event of a default by the borrower. As a result, consumer loan collections are dependent on borrowers ongoing financial stability. Furthermore, bankruptcy and
insolvency laws may limit the amount that can be recovered on such loans. We require the borrower to have a good payment record and, typically, a debt to asset ratio of not more than 45%.



Past Due, Restructured and Non-Accrual Loans.    The risk that borrowers will fail or be unable
to repay their loans is an inherent part of the banking business. We follow the practice of specifically identifying loans that have become past due, either as to interest or principal, for more than 90 days. Such loans are given special attention
by our credit officers and additional efforts are made to get the borrowers to bring their loans current or to provide additional collateral to reduce the risk of potential losses on those loans. Additionally, we sometimes renegotiate the payment
terms of loans to permit the borrower to defer interest or principal payments in those instances where it appears that the borrower is encountering temporary or short-term financial difficulties and we believe the deferral will reduce the likelihood
of an eventual loss on the loan. When we have reason to believe that continued payment of interest and principal on any loan is unlikely, the loan is placed on non-accrual status (that is, accrual of interest on the loan is discontinued and any
previously accrued but unpaid interest on the loan is reversed and, therefore, the loan ceases to be an earning asset for the Bank) and we increase our efforts to recover the amounts due us, which may include the initiation of foreclosure
proceedings against the collateral securing the loan.



4



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##### Table of Contents

The table which follows sets forth, as of the end of each of the years in the five year period ended
December 31, 2003, the amounts of our loans, by type, (i) that were more than 90 days past due, (ii) as to which the terms of payment had been renegotiated (referred to as troubled debt restructurings), and (iii) that had been placed on
non-accrual status.



|                                     |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------------ |  | -------------- | --- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                     |  | December 31,  
|                                     |  | 2003           |     | 2002 |   | 2001  |  | 2000 |       | 1999
|                                     |  | (In thousands)
|Loans More Than 90 Days Past Due(1): |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|Commercial                           |  | $              | 120 |      | $ |      |  | $    | 34    |      | $ |      |  | $ | 148  
|Real Estate                          |  |                |    |      |   |      |  |      |      |      |   |      |  |   | 50   
|Consumer                             |  |                |    |      |   | 5     |  |      |      |      |   | 17    |  |   | 4    
|Leases                               |  |                |    |      |   |      |  |      |      |      |   |      |  |   |     
|Troubled Debt Restructurings(2)      |  |                | 18  |      |   | 1,096 |  |      | 1,178 |      |   | 858   |  |   | 1,780
|Non-Accrual Loans(3)                 |  |                | 608 |      |   | 1,455 |  |      | 2,717 |      |   | 2,319 |  |   | 6,068
|                                     |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|                                     |  | $              | 746 |      | $ | 2,556 |  | $    | 3,929 |      | $ | 3,194 |  | $ | 8,050
|                                     |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      

---

|(1) |  | Reflects loans for which there has been no payment of interest and/or principal for 90 days or more.
|--- |  | ----------------------------------------------------------------------------------------------------

|(2) |  | The terms of the restructured loans did not involve any interest deferrals, and the amounts of interest collected in 2003, 2002, 2001, 2000, and 1999 were those required to have
been paid in accordance with the original terms of those loans.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | There were 3 loans on non-accrual status at December 31, 2003, 4 loans at December 31, 2002, 6 loans at each of December 31, 2001 and December 31, 2000, and 14 loans at December 31,
1999. The interest income that would have been collected on these loans had they remained current in accordance with their original terms were $90,000 in 2003, $117,000 in 2002, $197,000 in 2001, $644,000 in 2000, and $819,000 in 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In accordance with 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), we consider a loan to be impaired when, based upon current information and events, we believe it is probable that we will be unable to collect the entire amount due according to the
contractual terms of the loan agreement. In determining impairment, we primarily evaluate those loans, both performing and non-performing, that are large non-homogenous loans in our 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 financial difficulties. In general, payment delays of less than 90 days or
payment shortfalls of less than 1% are deemed insignificant and, for that reason, would not necessarily result in classification of a loan as impaired. However, we consider all non-accrual and troubled debt restructured loans to be impaired. Smaller
balance, homogenous loans, which consist primarily of consumer installment, credit card and direct lease financing, are not considered in determining loan impairment.



A loan identified as impaired is placed on non-accrual status and is evaluated at that time and regularly thereafter to
determine whether the carrying value of the loan should be written off in its entirety, as a loss, or partially written-down to what is believed to be its recoverable value, or whether the terms of the loan, including the collateral required to
secure the loan, should renegotiated with the borrower. Impaired loans are written-off or written down when the possibility of collecting the full balance of the loan becomes remote. The average balances of impaired loans in our loan portfolio
totaled approximately $1,140,000 for the fiscal year ended December 31, 2003, down from $2,428,000 for fiscal 2002. During 2003, cash receipts totaling approximately $2,086,000 were applied to reduce the principal balances of, and $39,000 of
interest income was recognized on, impaired loans and we set aside reserves for possible losses specifically on those loans of approximately $19,000, as compared to $38,000 during 2002. Additional information regarding the Banks loan loss
reserve is set forth below in this Section of this Report under the caption, The Reserve for Loan Losses. Additional information regarding SFAS 114, is contained in Note 5 to the Companys Consolidated Financial Statements that are
set forth in Part II, Item 8 of this Report.



5



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##### Table of Contents

Other Potential Problem Loans or Assets.    At December 31, 2003, there were
no loans in our loan portfolio as to which there were serious doubts as to the ability of the borrower to comply with then present loan repayment terms as to which we had not ceased accruing interest and there were no other interest-earning assets
as to which we believe the recovery of the principal or interest is at significant risk.



THE RESERVE FOR LOAN LOSSES.



The risk that borrowers will fail or be unable to repay their loans is an inherent part of the banking business. In order to recognize on a timely basis,
to the extent practicable, losses that can result from such failures, banks establish a reserve or allowance for loan losses by means of periodic charges to income referred to as provisions for loan losses. When we believe that
collection of a loan has become unlikely, either in whole or in part, the carrying amount of the loan is written down to its what is believed to be its recoverable value (in any case where the loan is believed to be collectible in part) or written
off in its entirety (in any case where the loan is believed to have become uncollectible in full). The write down in the value, or the write off, of the loan is charged against the loan loss reserve. Periodic additions are made to the loan loss
reserve by making provisions for loan losses in order (i) to replenish and thereby maintain the adequacy of the reserve following the occurrence of loan losses that have been charged against the reserve, and (ii) to increase the reserve in response
to increases in the volume of outstanding loans or deteriorations in economic conditions or in the financial condition of any borrowers that increase the potential for future loan losses. At December 31, 2003 the loan loss reserve totaled
approximately $4.95 million or 1.08% of total loans and leases outstanding.



As is set forth in the following table, the loan loss reserve is allocated among the different loan categories because there are differing levels of risk associated with each such 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. Dollar amounts in the table are set forth in thousands.



|                                        |  |                        |       |                           |        |   |                       |      |                           |  |        |                         |  |                          |       |  |                        |   |                           |   |       |                         |        |                           |  |   |       |  |        |  
|--------------------------------------- |  | ---------------------- | ----- | ------------------------- | ------ | - | --------------------- | ---- | ------------------------- |  | ------ | ----------------------- |  | ------------------------ | ----- |  | ---------------------- | - | ------------------------- | - | ----- | ----------------------- | ------ | ------------------------- |  | - | ----- |  | ------ | -
|                                        |  | 2003                   |       |                           | 2002   |   |                       | 2001 |                           |  | 2000   |                         |  | 1999                     |      
|                                        |  | Reservefor Loan Losses |       | % of Loans to Total Loans |        |   | Reservefor LoanLosses |      | % of Loans to Total Loans |  |        | Reserve for Loan Losses |  | % of Loans to TotalLoans |       |  | Reserve for LoanLosses |   | % of Loans to Total Loans |   |       | Reserve for Loan Losses |        | % of Loans to Total Loans | 
|Commercial, Financial, and
Agricultural |  | $                      | 1,226 |                           | 10.14  | % |                       | $    | 1,156                     |  | 8.60   | %                       |  | $                        | 2,668 |  | 11.49                  | % |                           | $ | 1,762 |                         | 12.01  | %                         |  | $ | 4,854 |  | 11.88  | %
|Real Estate-construction                |  |                        | 248   |                           | 5.88   |   |                       |      | 276                       |  | 4.82   |                         |  |                          | 59    |  | 3.94                   |   |                           |   | 97    |                         | 3.43   |                           |  |   | 68    |  | 3.22   |  
|Real Estate-mortgage                    |  |                        | 3,401 |                           | 82.55  |   |                       |      | 3,136                     |  | 85.17  |                         |  |                          | 1,452 |  | 82.65                  |   |                           |   | 1,765 |                         | 82.32  |                           |  |   | 1,125 |  | 82.02  |  
|Installment loans                       |  |                        | 68    |                           | 0.83   |   |                       |      | 39                        |  | 1.02   |                         |  |                          | 22    |  | 1.15                   |   |                           |   | 48    |                         | 1.74   |                           |  |   | 30    |  | 1.72   |  
|Lease financing                         |  |                        | 4     |                           | 0.11   |   |                       |      | 12                        |  | 0.27   |                         |  |                          | 5     |  | 0.32                   |   |                           |   | 20    |                         | 0.32   |                           |  |   | 25    |  | 0.68   |  
|Other                                   |  |                        | 0     |                           | 0.49   |   |                       |      |                          |  | 0.12   |                         |  |                          |      |  | 0.45                   |   |                           |   |      |                         | 0.18   |                           |  |   |      |  | 0.48   |  
|                                        |  |                        |       |                           |        |   |                       |      |                           |  |        |                         |  |                          |       |  |                        |   |                           |   |       |                         |        |                           |  |   |       |  |        |  
|                                        |  | $                      | 4,947 |                           | 100.00 |   |                       | $    | 4,619                     |  | 100.00 |                         |  | $                        | 4,206 |  | 100.00                 |   |                           | $ | 3,692 |                         | 100.00 |                           |  | $ | 6,102 |  | 100.00 |  
|                                        |  |                        |       |                           |        |   |                       |      |                           |  |        |                         |  |                          |       |  |                        |   |                           |   |       |                         |        |                           |  |   |       |  |        |  



THE
INVESTMENT PORTFOLIO.



As a customary part of our business, we
purchases investment grade securities, consisting primarily of securities issued by the United States government and its agencies and by state and local government agencies, in order to diversify its investment risks and provide a source of
liquidity for its operations. The objectives of our investment policy are to manage interest rate risk, provide adequate liquidity and reinvest in the our market areas, while maximizing earnings with a portfolio of investment-grade securities. Each
security purchased is subject to the credit, maturity and liquidity guidelines that are defined in our investment policy and the securities are reviewed regularly to verify their continued creditworthiness.



6



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##### Table of Contents

The following table summarizes the components of our investment securities at the dates indicated (in
thousands):



|                                         |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       
|---------------------------------------- |  | -------------- | ------- | ------------ | - | -------------- |  | ------------ | ------ | ------------- | - | ------------ |  | - | ------ |  | - | ------
|                                         |  | December 31,  
|                                         |  | 2003           |         | 2002         |   | 2001          
|                                         |  | Amortized Cost |         | Market Value |   | Amortized Cost |  | Market Value |        | AmortizedCost |   | Market Value
|Investment SecuritiesHeld-To-Maturity   |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       
|U.S. Treasury and Agency                 |  | $              | 2,141   |              | $ | 2,154          |  | $            | 2,290  |               | $ | 2,386        |  | $ | 5,891  |  | $ | 5,980 
|State and Political Subdivisions         |  |                | 4,448   |              |   | 4,715          |  |              | 4,678  |               |   | 4,973        |  |   | 4,853  |  |   | 4,908 
|Other Securities                         |  |                | 2,311   |              |   | 2,311          |  |              | 2,311  |               |   | 2,311        |  |   | 2,311  |  |   | 2,311 
|                                         |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       
|Total                                    |  | $              | 8,900   |              | $ | 9,180          |  | $            | 9,279  |               | $ | 9,670        |  | $ | 13,055 |  | $ | 13,199
|                                         |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       
|Investment SecuritiesAvailable-For-Sale |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       
|U.S. Treasury and Agency                 |  | $              | 127,514 |              | $ | 127,668        |  | $            | 58,057 |               | $ | 58,588       |  | $ | 60,627 |  | $ | 60,881
|State and Political Subdivisions(1)      |  |                | 7,012   |              |   | 7,169          |  |              | 3,085  |               |   | 3,194        |  |   | 4,013  |  |   | 4,156 
|Other Securities                         |  |                | 1,955   |              |   | 1,813          |  |              | 10,006 |               |   | 9,717        |  |   | 2,008  |  |   | 1,651 
|                                         |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       
|Total                                    |  | $              | 136,481 |              | $ | 136,650        |  | $            | 71,148 |               | $ | 71,499       |  | $ | 66,648 |  | $ | 66,688
|                                         |  |                |         |              |   |                |  |              |        |               |   |              |  |   |        |  |   |       

---

|(1) |  | Includes, in 2003, 2002 and 2001, non-rated certificates of participation evidencing ownership interests in the California Statewide Communities Development AuthoritySan
Joaquin County Limited Obligation Bond Trust, with amortized cost values of $840,000, $1,835,000 and $2,765,000, and market values of $863,000, $1,890,000 and $2,899,000, at December 31, 2003, 2002 and 2001, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table presents the maturities of our investment securities
at December 31, 2003, and the weighted average yields of those securities (which, in the case of tax-exempt obligations are presented on a fully taxable basis assuming a 36.0% tax rate).



|                                         |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|---------------------------------------- |  | --------------- | ----- | ----- | ------------------------------- | - | ------ | ------------------------------ | ------- |  | --------------- | ------ |  | ----- | ------ |  | ------ | - | ----- | - | ----- |  | ---- | -
|                                         |  | Within One Year |       |       | After One and Within Five Years |   |        | After Five andWithin Ten Years |         |  | After Ten Years |       
|                                         |  | Amount          |       | Yield |                                 |   | Amount |                                | Yield   |  |                 | Amount |  | Yield |        |  | Amount |   | Yield |  
|Investment Securities Held to Maturity   |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|U.S. Treasury and Agency                 |  | $               | 2,141 |       | 4.95                            | % |        | $                              |        |  |                | %      |  | $     |       |  |       | % |       | $ |      |  |     | %
|State and Political Subdivisions         |  |                 | 225   |       | 4.45                            |   |        |                                | 1,823   |  | 4.85            |        |  |       | 2,400  |  | 5.32   |   |       |   |      |  |     |  
|Other Securities                         |  |                 | 2,311 |       |                                |   |        |                                |        |  |                |        |  |       |       |  |       |   |       |   |      |  |     |  
|                                         |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|Total Securities Held to Maturity        |  | $               | 4,677 |       | 2.48                            |   |        | $                              | 1,823   |  | 4.85            |        |  | $     | 2,400  |  | 5.32   |   |       |   |      |  |     |  
|                                         |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|Investment Securities Available for Sale |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|U.S. Treasury and Agency                 |  | $               | 4,000 |       | 3.76                            |   |        | $                              | 115,302 |  | 3.04            |        |  | $     | 8,187  |  | 4.07   |   |       | $ | 179   |  | 7.46 |  
|State and Political Subdivisions         |  |                 | 210   |       | 6.40                            |   |        |                                | 720     |  | 6.08            |        |  |       | 1,739  |  | 3.90   |   |       |   | 4,500 |  | 3.86 |  
|Other Securities                         |  |                 | 133   |       |                                |   |        |                                |        |  |                |        |  |       |       |  |       |   |       |   | 1,680 |  |     |  
|                                         |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|Total Securities Available for Sale      |  |                 | 4,343 |       | 3.77                            |   |        |                                | 116,022 |  | 3.06            |        |  |       | 9,926  |  | 4.07   |   |       |   | 6,359 |  | 2.94 |  
|                                         |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  
|Total Investment Securities              |  | $               | 9,020 |       | 2.51                            | % |        | $                              | 117,845 |  | 3.09            | %      |  | $     | 12,326 |  | 4.29   | % |       | $ | 6,359 |  | 2.94 | %
|                                         |  |                 |       |       |                                 |   |        |                                |         |  |                 |        |  |       |        |  |        |   |       |   |       |  |      |  



COMPETITION



The banking business in California
generally, and in our market areas in particular, is highly competitive both for loans and deposits and is dominated by a relatively small number of large multi-regional and large out-of-state based banks which have offices operating over wide
geographic areas. We compete for loans and deposits with such banks, as well as other independent and community banks that are based or have branch offices in our market areas, and with savings and loan associations, credit unions, mortgage
companies, money market and other mutual funds, stock brokerage firms, insurance companies and other traditional and nontraditional financial institutions. We also compete for customers funds with governmental and private entities issuing debt
or equity securities or other forms of investments which may offer different and potentially higher yields than those available through bank deposits.



Major financial institutions that operate throughout California and that have offices in our service areas include Wells Fargo Bank, Bank of America,
Union Bank of California, Washington Mutual Bank, Comerica Bank, Bank of the West and Citibank. Wells Fargo Bank, Bank of America, Comerica and Citibank and Washington Mutual Bank are headquartered outside of California. Independent banks or
financial institutions with offices in our service area include, among others, City National Bank, Citizens Business Bank, PFF Bank & Trust and Vineyard Bank.



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##### Table of Contents

The larger banks and some of the independent institutions have the financial capability to conduct
extensive advertising campaigns and to shift their resources to regions or activities of greater potential profitability. Many of them also offer diversified financial services that we do not presently offer directly, such as trust services and
international banking services. The larger banks also have substantially more capital and higher lending limits, which enables them to meet the lending needs of larger borrowers whose lending requirements exceed our lending limits.



In order to compete with the financial institutions and financial service
organizations operating in our market areas, we rely on our independent status to provide flexible and greater personalized service to customers. We emphasize personal contacts with customers by our executive officers, directors and employees;
develop and participate in local promotional activities; and seek to develop specialized or streamlined services for customers. To the extent customers desire loans in excess of our lending limit or services not offered by us, we attempt to assist
customers in obtaining such loans or other services through participations with other banks or assistance from correspondent banks or third party vendors.



Additionally, a growing number of banks and financial services companies are offering customers the ability to effectuate banking transactions with them
over the internet. We began offering such internet banking services to our consumer customers during 2001 and to our business customers in 2002.



Existing and future state and federal legislation could significantly affect the costs of doing business, the range of permissible activities and
competitive balance among major and smaller banks and other financial institutions, all of which could affect the competitive environment in which we operate. We cannot predict the impact such developments may have on commercial banking in general
or on our business in particular. For additional information regarding these matters, see the discussion in below under the caption Supervision and Regulation.



SUPERVISION AND REGULATION



Bank holding companies and banks are regulated under both extensive federal and state laws. This regulation is intended primarily for the protection of
depositors and the FDICs deposit insurance fund and not for the benefit of stockholders. Set forth below is a summary description of the material laws and regulations which affect or bear on our operations. The description does not purport to
be complete and is qualified in its entirety by reference to the laws and regulations that are summarized below.



Foothill Independent Bancorp



General.    We are a registered bank holding company subject to regulation under the Bank Holding Company Act and, pursuant to
that Act we are required to file periodic reports with, and we are subject to periodic examinations by the Federal Reserve Board.



Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Boards policy that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use
available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding companys failure to meet these obligations will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Boards regulations,
or both.



Among the powers conferred on the Federal Reserve
Board is the power to require any bank holding company to terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates that the Federal Reserve Board determines constitutes a significant risk to the financial
safety, soundness or stability of the bank holding company or any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of a bank holding companys debt, including authority to impose interest
ceilings and reserve requirements on such debt. Subject to certain exceptions, bank holding companies also are required to file a written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming the holding
companys common stock or other equity securities. A bank holding company and its non-banking subsidiaries also are prohibited from requiring tie-in arrangements in connection with any extension of credit, lease or sale of property or
furnishing of any services by its bank or other subsidiaries.



8



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##### Table of Contents

Additionally, the Federal Reserve Board requires all bank holding companies to maintain capital at or
above certain prescribed levels. See Capital Standards and Prompt Corrective Action below.



As a bank holding company, we must obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities, or of substantially all of the assets, of any bank or other bank holding company and for any merger of the Company with any other bank holding company.



We also are a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, we are
subject to examination by, and may be required to file reports with, the California Department of Financial Institutions (the DFI).



Our shares of Common Stock are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the
Exchange Act) and, therefore, we are subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of that Act.



Financial Services Modernization Legislation.    In 1999, the Gramm-Leach-Bliley Act of 1999 (the
Financial Services Modernization Act) was enacted into law. The principal objectives of that Act were to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other
financial service providers by revising and expanding the Bank Holding Company Act to permit a holding company system, meeting certain specified qualifications, to engage in a broader range of financial activities and, thereby, to foster greater
competition among financial services companies. To accomplish those objectives, among other things, Financial Services Modernization Act repealed the two affiliation provisions of the Glass-Steagall Act that had been adopted in the early 1930s
during the Depression: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms engaged principally in specified securities activities; and Section 32, which restricted officer, director, or employee
interlocks between a member bank and any company or person primarily engaged in specified securities activities. The Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. This Act also:



| |  |  | broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provides an enhanced framework for protecting the privacy of consumer information;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | modifies the laws governing the implementation of the Community Reinvestment Act (which is described in greater detail below); and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



A bank holding company that elects to become a financial holding company may
affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are incidental or complementary to activities that are financial in nature. According to current Federal Reserve Board
regulations, activities that are financial in nature include:



| |  |  | securities underwriting, dealing and market making;
| | - |  | ---------------------------------------------------



| |  |  | sponsoring mutual funds and investment companies;
| | - |  | -------------------------------------------------



| |  |  | engaging in insurance underwriting and brokerage;
| | - |  | -------------------------------------------------



| |  |  | merchant banking; and
| | - |  | ---------------------



| |  |  | other activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking, or managing or
controlling banks, as to be a proper incident to the provision of banking and related financial services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

In order to become and to continue to be a financial holding company, all of the bank subsidiaries of a
bank holding company must have been found, at their most recent regulatory examinations, to be well capitalized, well managed and, subject to certain limited exceptions, to be in compliance with the Community Reinvestment Act. If, after a bank
holding company has become a financial holding company, any of its bank subsidiaries ceases to maintain compliance with any of those requirements, the financial holding company may not acquire any more financial services businesses permitted to
financial holding companies until that bank subsidiary again achieves compliance with those requirements. Moreover, if that bank subsidiary fails to come back into compliance with any of those requirements within a period of 180 days, the Federal
Reserve Board has the power to require the financial holding company to divest itself of those of its businesses that are engaged in financial activities solely permitted to a financial holding company, or may even require the holding company to
divest itself of all of its bank subsidiaries.



In 2002 we
became a financial holding company under the Financial Services Modernization Act. Accordingly, as a financial holding company, we are now permitted to engage in any of the above described financial activities, in addition to those deemed closely
related to banking and which, as a result, may be engaged in by bank holding companies generally. Additionally, as a financial holding company, we do not need to obtain prior approval for the acquisition of companies or businesses engaged in such
financial activities. By contrast, a bank holding company that is not a financial holding company may not engage in such activities. Instead, it is limited to engaging in banking and such other activities as determined by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.



At the present time we have no plans to engage in any of the financial activities that are permitted to be engaged in by financial holding companies.
Additionally, we do not believe that the Financial Services Modernization Act will have a material effect on our operations, at least in the near-term. However, to the extent that it enables banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation. Additionally, the Act may have the result of increasing the extent of competition that we face from larger institutions and other types of companies offering financial
products, many of which may have substantially greater financial resources than we have.



Privacy Provisions of the Financial Services Modernization Act.    Pursuant to the Financial Services Modernization Act, federal banking regulators adopted rules that limit the ability of
banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. Pursuant to the rules, financial institutions must provide:



| |  |  | initial notices to customers about their privacy policies, describing the conditions under which they may disclose non-public personal information to non-affiliated third parties
and affiliates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | annual notices of their privacy policies to current customers; and
| | - |  | ------------------------------------------------------------------



| |  |  | a reasonable method for customers to opt out of disclosures to non-affiliated third parties.
| | - |  | ----------------------------------------------------------------------------------------------



These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed
to outside vendors. These privacy provisions have not had a material impact on our financial condition or our results of operations.



The Sarbanes-Oxley Act of 2002.



On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002. This Act addresses accounting oversight and corporate governance matters
of companies whose securities are registered under the Exchange Act (public companies) and, therefore, applies to the Company. Among other things, the Sarbanes-Oxley Act:



| |  |  | provided for the creation of a five-member oversight board appointed by the Securities and Exchange Commission that sets standards for accountants and have investigative and
disciplinary powers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibits accounting firms from providing various types of consulting services to their public company clients and requires accounting firms to rotate partners among public company
clients every five years;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased the criminal penalties for financial crimes;
| | - |  | ------------------------------------------------------



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##### Table of Contents

| |  |  | expands the disclosure of corporate operations and requires public companies to implement disclosure controls and procedures designed to assure that material information regarding
their business and financial performance is included in the public reports they file under the Exchange Act (Exchange Act Reports);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requires the chief executive and chief financial officers of public companies to certify as to the accuracy and completeness of the Exchange Act Reports that their companies file,
the financial statements included in those Reports and the adequacy of their disclosure procedures and controls and the adequacy and integrity of their internal controls;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requires the management of every public company to certify to the effectiveness of the companys internal accounting controls and the companys independent auditors to
attest to the correctness of that certification by management;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requires the directors of public companies that serve on audit committees to meet stringent independence standards;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | requires larger public companies to file their Exchange Act Reports on a more accelerated basis than previously required;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | requires more expeditious reporting by directors and officers and other public company insiders regarding their trading in company securities; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | established statutory separations between investment banking firms and analysts.
| | - |  | --------------------------------------------------------------------------------



We implemented disclosure controls and procedures and have taken other actions to meet the expanded disclosure requirements
and certification requirements of the Sarbanes-Oxley Act. Additionally, we have determined that the members of our audit committee meet the independence standards imposed by that Act. A number of the requirements under that Act will become effective
during fiscal 2004 and additional provisions will become effective in 2005. To the extent we do not already meet any of the new requirements, we will be taking the actions required to do so.



Foothill Independent Bank



General.    As a member of the Federal Reserve
Bank of San Francisco, the Bank is subject to regulation by the Federal Reserve Board, which is its primary federal banking regulator, and as a California state chartered bank, the Bank is subject to supervision, periodic examination and regulation
by the DFI. Also, because its deposits are insured by the FDIC, the Bank is subject to regulations promulgated by the FDIC.



Various requirements and restrictions under the Federal and California state laws affect the operations of the Bank. Those laws, and the implementing
regulations that are promulgated by Federal and State regulatory agencies cover most aspects of a banks operations, including the reserves a bank must maintain against deposits and for possible loan losses and other contingencies; the
ownership and acquisition of deposit accounts; the interest rates that a bank may pay on deposits, loans and investments; the types of investments that a bank may make; the borrowings that a bank may incur; the banks growth levels and the
number and location of bank branches a bank may establish; the merger and acquisition activities of a bank; the amount of dividends that a bank may pay; and the capital requirements that a bank must satisfy. See the more detailed discussion
regarding capital requirements that are applicable to us and the Bank that is set forth below under the caption Capital Standards and Prompt Corrective Action.



If, as a result of an examination of the Bank, the Federal Reserve Board were to determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Banks operations had become unsatisfactory or that the Bank or its management was in violation of any law or regulation, the Federal Reserve
Board is empowered to take a number of remedial actions. These actions include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in the Banks capital, to restrict the Banks growth, to assess civil monetary penalties against the Banks officers or directors, to remove officers and
directors and ultimately to terminate the Banks deposit insurance, which would result in a revocation of the Banks charter and require it to cease its banking operations. Additionally, under California law the DFI has many of the same
remedial powers.



11



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##### Table of Contents

Dividends and Other Transfers of Funds.    Dividends from the Bank constitute
our principal source of cash. Foothill Independent Bancorp (the Bancorp) is a legal entity separate and distinct from the Bank and the Bank is subject to various statutory and regulatory restrictions on its ability to pay cash dividends
to us. In addition, the DFI and the Federal Reserve Board have the authority to prohibit the Bank from paying dividends, if either of those agencies deem payment of dividends by the Bank to be an unsafe or unsound practice.



The Federal Reserve Board and the DFI also have authority to prohibit the
Bank from engaging in activities that, in either of their opinions, constitute unsafe or unsound practices. It is possible, depending upon the future financial condition of the Bank and other factors, that either of those agencies could assert that
the payment of dividends or other payments by the Bank to the Bancorp might, under some circumstances, constitute an unsafe or unsound practice. Additionally, the Federal Reserve Board has established guidelines with respect to the maintenance of
appropriate levels of capital by banks and bank holding companies under its jurisdiction. A failure to maintain compliance with the standards set forth in those guidelines could result in the imposition by federal bank regulators, under the prompt
corrective action provisions of federal law, of restrictions on the amount of dividends which a bank may pay and on the business operations and growth of a bank that could increase the costs of operations and the competitiveness of a bank. See
Capital Standards and Prompt Corrective Action below.



Restrictions on Transactions between the Bank and the Company and Company Affiliates.    The Bank is subject to restrictions imposed by federal law on any extensions of credit to, and the
issuance of any guarantees or letters of credit on behalf of, the Bancorp or its other affiliates; the purchase of, or investments in, Bancorp stock or other Bancorp securities; the taking of such securities as collateral for loans; and the purchase
of assets from the Bancorp or its other subsidiaries. Such restrictions prevent the Bancorp or its other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations in designated amounts. In addition, no such loan
or investment by the Bank to or in Bancorp or any other Bancorp affiliates may exceed 10% of the Banks capital and surplus (as defined by federal regulations) and the total of such loans and investments may not exceed, in the aggregate, 20% of
the Banks capital and surplus. California law also imposes restrictions with respect to transactions between the Bank and the Bancorp and other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of federal law.



Capital Standards and Prompt Corrective Action.



Capital Standards.    The Federal Reserve Board and the other federal bank regulatory agencies have adopted uniform risk-based minimum capital guidelines intended to require banking organizations to maintain
capital at levels that reflect the degree of risk associated with the banking organizations operations, both for assets reported on the balance sheet and assets, such as letters of credit and recourse arrangements, which are recorded as
off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjusted percentages, which range from zero percent for assets with low
credit risk, such as U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans.



These guidelines require banking organizations to maintain a ratio of qualifying total capital-to-risk adjusted assets of at least 8% and a minimum ratio
of Tier 1 capital (the sum of a banks common stock, non-redeemable preferred stock and retained earnings)-to-risk adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to
maintain a ratio of Tier 1 capital-to-total average assets of 4%, which is referred to as a banking organizations leverage ratio. However, for a banking organization to be rated by a bank regulatory agency above minimum capital
requirements, the minimum leverage ratio of Tier 1 capital to total assets must be higher than 4% (see Prompt Corrective Action and Other Enforcement Mechanisms below). In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, federal and state banking regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios, if the
regulator believes that the quality of a banks assets, its liquidity and other risks faced by a bank are greater than those generally faced by most commercial banking organizations.



12



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##### Table of Contents

Prompt Corrective Action and Other Enforcement Mechanisms.    Federal banking
agencies, including the Federal Reserve Board, possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including those institutions that fall below one or more the minimum
capital ratios prescribed by banking regulations.



Each federal
banking agency, including the Federal Reserve Board, has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios:



| |  |  | well capitalized;
| | - |  | -----------------



| |  |  | adequately capitalized;
| | - |  | -----------------------



| |  |  | undercapitalized;
| | - |  | -----------------



| |  |  | significantly undercapitalized; and
| | - |  | -----------------------------------



| |  |  | critically undercapitalized.
| | - |  | ----------------------------



However, a bank that, based upon its capital levels, is classified as well capitalized, adequately capitalized or undercapitalized, may be treated as
though it were in the next lower capital category, if its federal bank regulatory agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice at that institution warrants such
treatment. At each successive lower capital category, an insured depository institution is subject to greater operating restrictions and increased Prompt Corrective Action and Other Enforcement Mechanisms supervision. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.



The following table sets forth, as of December 31, 2003, the capital ratios of the Bank and compares those capital ratios to the federally established
capital requirements that must be met for a bank to be categorized as adequately capitalized and well capitalized, respectively, institution under the prompt corrective action regulations described below:



|                                       |  |             |   |  |                              |  |                                    
|-------------------------------------- |  | ----------- | - |  | ---------------------------- |  | -----------------------------------
|At December 31, 2003                   |  | BanksRatio |   |  | Capital AdequacyRequirements |  | To be Classifiedas Well Capitalized
|Total Capital to Risk Weighted Assets  |  | 13.8        | % |  | (>or=) 8.0%                  |  | (>or=) 10.0%                       
|Tier I Capital to Risk Weighted Assets |  | 12.8        | % |  | (>or=) 4.0%                  |  | (>or=) 6.0%                        
|Tier I Capital to Average Assets       |  | 9.7         | % |  | (>or=) 4.0%                  |  | (>or=) 5.0%                        



As the table
indicates, at December 31, 2003 the Bank exceeded not only the capital ratios required to be for classified as an adequately capitalized institution, but also the capital ratios required to be classified as a well capitalized
institution, under the federally established prompt corrective action regulations.



Safety and Soundness Standards.    In addition to measures taken under the prompt corrective action provisions, banking organizations may be subject to potential enforcement actions by
federal regulators for unsafe or unsound practices or for violating any law, rule, regulation, or any condition imposed in writing by the agency or in any written agreement entered into by the banking organization with the agency. The federal
banking agencies have adopted guidelines designed to identify and address potential safety and soundness concerns that could, if not corrected, lead to a deterioration in the quality of a banks assets or to liquidity or capital problems. Those
guidelines set forth operational and managerial standards relating to such matters as:



| |  |  | internal controls, information systems and internal audit systems;
| | - |  | ------------------------------------------------------------------



| |  |  | loan documentation;
| | - |  | -------------------



| |  |  | credit underwriting;
| | - |  | --------------------



| |  |  | asset growth;
| | - |  | -------------



| |  |  | earnings; and
| | - |  | -------------



| |  |  | compensation, fees and benefits.
| | - |  | --------------------------------



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##### Table of Contents

These guidelines also provide six standards for establishing and maintaining a system to identify problem
assets and prevent those assets from deteriorating. Under these standards, an insured depository institution is expected to:



| |  |  | conduct periodic asset quality reviews to identify problem assets;
| | - |  | ------------------------------------------------------------------



| |  |  | estimate the inherent losses in problem assets and establish reserves sufficient to absorb estimated losses;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | compare problem asset totals to capital;
| | - |  | ----------------------------------------



| |  |  | take appropriate corrective action to resolve problem assets;
| | - |  | -------------------------------------------------------------



| |  |  | consider the size and potential risks of material asset concentrations; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



These guidelines also establish standards for evaluating and monitoring
earnings and for ensuring that earnings are sufficient to enable the bank to maintain adequate capital and reserves.



FDIC Deposit Insurance.



The FDIC operates a Bank Insurance Fund (BIF) which insures the deposits, up to federally prescribed limits, of those banks that are subject
to regulation by a federal banking regulatory agency and have elected to participate in that Fund (BIF Members). The Bank is a BIF Member and, as a result, its deposit accounts are insured up to the maximum amount permitted by law. The
FDIC charges all BIF Members an annual assessment for the insurance of their deposits. The amount of a banks annual assessment is based on its relative risk of default as measured by (i) the institutions federal regulatory capital risk
category, which can range from well capitalized to less than adequately capitalized, and (ii) its supervisory subgroup category, which is based on the federal regulatory assessment of the financial condition of the institution and the probability
that FDIC or other corrective action will be required. The assessment rate currently ranges from 0 to 27 cents per $100 of domestic insured deposits. The FDIC has the authority to increase or decrease the rate of the assessment on a semi-annual
basis. An increase in the assessment rate would increase the costs of doing business.



The FDIC may terminate insurance of deposits upon finding that an insured institution has engaged in unsafe or unsound practices, is in too unsafe or unsound a condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC or the institutions primary federal regulatory agency. California does not permit commercial banks to operate without FDIC insurance and, as a result, termination of a
California banks FDIC insurance would result in its closure.



All FDIC-insured depository institutions also are required to pay an annual assessment for the payment of interest on bonds (known as FICO Bonds) that were issued by the Financing Corporation, a federally chartered corporation,
to assist in the recovery of the savings and loan industry following the failure of numerous savings and loan institutions in the 1980s. Since the fourth quarter of 2002, the FICO assessment rate has been set at approximately $0.0170 per $100 of
assessable deposits of the insured banks. The FICO assessment rates are subject to quarterly adjustments by the FDIC to reflect changes in the assessment bases of the FDICs insurance funds and, unlike the BIF assessments, do vary on the basis
of a banks capital or supervisory risk categories.



Community Reinvestment Act and Fair Lending Developments.    The Bank, like other federally insured banking organizations, is subject to fair lending requirements and reporting obligations involving home mortgage
lending operations and Community Reinvestment Act activities. The Community Reinvestment Act (the CRA) generally requires federal bank regulatory agencies to evaluate the performance of the financial institutions which they regulate in
meeting the credit needs of their local communities, including low-and moderate-income neighborhoods. A bank also may incur substantial penalties and be required to take corrective measures in the event it is found to be in violation of fair lending
laws. The federal banking agencies may take compliance with those laws and CRA obligations into account when regulating and supervising other activities of the banks they regulate.



A banks compliance with its CRA obligations is measured in accordance with a performance-based evaluation system which
bases CRA ratings on an institutions lending service and investment performance in serving the credit needs of its local communities. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will assess the CRA performance of each of its existing bank subsidiaries, and a finding that such performance has been deficient could be a basis for denying the application.



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Interstate Banking and Branching.    The Bank Holding Company Act permits bank
holding companies from any state to acquire banks and bank holding companies located in any other state, subject to conditions including nationwide- and state-imposed concentration limits. The Bank also has the ability, subject to certain
restrictions, to acquire branches outside California either by acquisition from or a merger with another bank. The establishment by a state bank of new bank branches (often referred to as de novo branches) in other states is also
possible in states with laws that expressly permit it. Interstate branches are subject to laws of the states in which they are located. Consolidations of and competition among banks has increased as banks have begun to branch across state lines and
enter new markets.



USA Patriot Act of
2001.    The USA Patriot Act of 2001, enacted into law in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, is intended to strengthen the ability of U.S. law enforcement
agencies and the intelligence community to work cohesively to combat terrorism on a variety of fronts. Among other things that Act contains sweeping anti-money laundering and financial transparency laws and imposes various requirements on banking
organizations, including:



| |  |  | due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requirements for verifying customer identification at account opening;
| | - |  | ----------------------------------------------------------------------



| |  |  | rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | obligations to file reports to the Treasury Departments Financial Crimes Enforcement Network for transactions exceeding $10,000; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | obligations to file suspicious activities reports if a financial institution believes a customer may be violating U.S. laws and regulations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



The U.S. Treasury Department has adopted regulations requiring institutions
to incorporate a customer identification program into their written money laundering plans that would implement reasonable procedures for:



| |  |  | verifying the identity of any person seeking to open an account, to the extent reasonable and practicable;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | maintaining records of the information used to verify the persons identity; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | determining whether the person appears on any list of known or suspected terrorists or terrorist organizations.
| | - |  | ---------------------------------------------------------------------------------------------------------------



California Privacy Laws.    California also has
adopted laws designed to protect consumers privacy, many of which are more restrictive than federal privacy laws and the laws of most other states. On August 27, 2003, California enacted the California Financial Information Privacy Act (the
California Privacy Act), which will take effect on July 1, 2004. The California Privacy Act places limits on the sharing of nonpublic personal information obtained from a California resident by a financial institution, but does not
restrict sharing of information between a financial institution and its wholly-owned subsidiaries. Information covered by this Act includes:



| |  |  | information obtained in connection with making, servicing and collecting loans;
| | - |  | -------------------------------------------------------------------------------

| |  |  | the very fact that an individual is a customer of the financial institution; and
| | - |  | --------------------------------------------------------------------------------

| |  |  | information gathered through an Internet banking web site.
| | - |  | ----------------------------------------------------------



15



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##### Table of Contents

Under the California Privacy Act, except to the extent necessary to complete a transaction requested by a
customer and under other limited circumstances, financial institutions will be required to:



| |  |  | obtain an opt-in from customers prior to sharing nonpublic personal information with nonaffiliated third parties; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | notify customers annually of any sharing of nonpublic personal information with affiliated parties, and provide an opt-out election allowing customers to stop such
sharing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, California has recently
enacted legislation, that is applicable to all businesses conducting operations in California, that places restrictions on the disclosure and use of social security numbers and requires businesses that maintain computerized personal information to
disclose to affected customers breaches in the security of such information.



These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We do not expect the federal privacy provisions, adopted pursuant
to the Financial Services Modernization Act, to have a material impact on our financial condition or results of our operations. However, due to the fact that the California Privacy Act has only recently been adopted, we cannot yet determine what
effect this Act will have on our operations or operating results.



Future
Legislation and Regulatory Initiatives.



In recent years,
significant legislative proposals and reforms affecting the financial services industry have been introduced in and considered by Congress, including reforms that would result in a consolidation of the three current federal bank regulatory agencies,
the Federal Reserve Board, the FDIC and the Comptroller of the Currency, into a single federal bank regulatory agency. We cannot predict what new proposals might be introduced in the current Congress or whether any will be enacted into law. It is
possible, however, that new laws may be adopted that could have a significant impact on the operations and financial performance of banking institutions or the competitive environment in which we operate.



EMPLOYEES



At December 31, 2003, we had 177 full-time and 85 part-time employees, all of whom are employees of the Bank and two of whom
also are employees of the Bancorp. We believe that our relations with our employees is good.



COMPANY WEBSITE



Our internet
website address is www.foothillbank.com. Our Annual Report to Stockholders and Quarterly Statements of Condition of the Bank are available on our website.



ITEM 2.    PROPERTIES



Our executive offices and those of the Banks are located at the Banks main banking office at 510 South Grand Avenue, Glendora, California. The Bank owns the building and the land at that location; owns the building and leases,
under a 20-year ground lease, the land on which its Claremont banking office is located; and occupies its ten other banking offices, and the facilities where its service center are located, under leases expiring at various dates through 2014. We
believe that the Banks present facilities are adequate for its present purposes and anticipated growth in the foreseeable future.



ITEM 3.    LEGAL PROCEEDINGS



There are no pending legal proceedings in which the Company or the Bank is a party or to which any of their respective properties are subject other than ordinary routine litigation incidental to the Banks
business, the outcome of which is not expected to be material to the Company or its operating results or financial condition.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



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##### Table of Contents

ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT



Set forth below is certain information regarding the current executive officers of the Company and the Bank:



|                    |  |     |  |                                                              |  |                                                             
|------------------- |  | --- |  | ------------------------------------------------------------ |  | ------------------------------------------------------------
|Name                |  | Age |  | Position with the Company                                    |  | Position with the Bank                                      
|George E. Langley   |  | 63  |  | President and Chief Executive Officer                        |  | President and Chief Executive Officer                       
|Carol Ann Graf      |  | 58  |  | Senior Vice President, Chief Financial Officer and Secretary |  | Senior Vice President, Chief Financial Officer and Secretary
|Casey J. Cecala III |  | 48  |  | N/A                                                          |  | Executive Vice President and Chief Credit Officer           



All officers hold
office at the pleasure of the Board of Directors, except Mr. Langley who 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, which preceded the formation of the Company, Mr. Langley held various executive
positions with the Bank.



CAROL ANN
GRAF.    Ms. Graf has served as Chief Financial Officer of the Company and the Bank since January 1993 and as a Senior Vice President of both the Company and the Bank since January 1997. From 1993 to 1997, she was a First Vice
President of the Bank as well as its Chief Financial Officer. 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.



CASEY J. CECALA, III.    Mr. Cecala has been the Chief
Credit Officer of the Bank since 2001 and was promoted to Executive Vice President in 2003. From 1998 to May 2001, he was a Senior Vice President and Senior Credit Officer of the Bank. From 1992, when he joined the Bank, through September 1998, Mr.
Cecala held other management positions with the Bank including as a Vice President.



17



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##### Table of Contents

PART II



ITEM 5.    MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS



Trading Market for Shares. The Companys Common Stock is listed and its shares trade on the NASDAQ National Market System under the symbol
FOOT. The following table sets forth the high and low closing sales per share prices of our Common Stock as reported on the NASDAQ National Market System for each of the fiscal quarters in 2003 and 2002. On March 3, 2004 the closing per
share price was $21.89 and, as of that same date, there were 1,040 record shareholders of the Company.



|               |  |                                  |       |     |   |                 |  |     |                |  |   |     
|-------------- |  | -------------------------------- | ----- | --- | - | --------------- |  | --- | -------------- |  | - | ----
|               |  | Trading Prices ofCommon Stock(1) |       |     |   |                 | 
|               |  | High                             |       | Low |   | Stock Dividends |  |     | Cash Dividends
|2003:          |  |                                  |       |     |   |                 |  |     |                |  |   |     
|First Quarter  |  | $                                | 17.11 |     | $ | 14.23           |  |    |                |  | $ | 0.11
|Second Quarter |  |                                  | 18.81 |     |   | 15.83           |  |    |                |  |   | 0.12
|Third Quarter  |  |                                  | 20.97 |     |   | 16.71           |  |    |                |  |   | 0.12
|Fourth Quarter |  |                                  | 22.29 |     |   | 19.13           |  | 9.0 | %              |  |   | 0.33
|2002:          |  |                                  |       |     |   |                 |  |     |                |  |   |     
|First Quarter  |  | $                                | 12.37 |     | $ | 10.36           |  |    |                |  | $ | 0.10
|Second Quarter |  |                                  | 14.52 |     |   | 10.96           |  |    |                |  |   | 0.11
|Third Quarter  |  |                                  | 17.84 |     |   | 11.08           |  |    |                |  |   | 0.11
|Fourth Quarter |  |                                  | 18.38 |     |   | 14.30           |  | 9.0 | %              |  |   | 0.11

---

|(1) |  | All trading prices have been retroactively adjusted for prior stock dividends.
|--- |  | ------------------------------------------------------------------------------



Transfer Agent.    The transfer agent and registrar for the Companys shares is Registrar and Transfer Company, the
address of which is 10 Commerce Drive, Cranford, New Jersey 07016.



Dividends and Repurchases of Shares.



Dividend Policy.    It has been and continues to be the objective of our Board of Directors to retain earnings that are needed to meet not only the capital requirements under applicable government regulations, but
also to support our growth. At the same time, it is the policy of the Board of Directors to pay cash dividends if earnings exceed the amounts required to meet that objective. Pursuant to that policy, the Company has paid regular quarterly cash
dividends since September of 1999 and, in January of 2004, the Board of Directors declared an $0.13 per share cash dividend, which is the 18thconsecutive quarterly cash dividend declared since the current dividend policy was adopted by the Board of Directors. It is currently anticipated that similar cash dividends will be paid during the balance of 2004. However,
the Board of Directors may change the amount or frequency of cash dividends to the extent that it deems necessary or appropriate to achieve our objective of maintaining capital in amounts sufficient to support our growth as well as to meet
regulatory capital requirements. In the fourth quarter of 2003, we also declared a 9% stock dividend to all of stockholders of record as of January 8, 2004.



Stock Repurchases.    In January of 2003, the Board of Directors authorized a stock repurchase program under which the Company
may repurchase up to $5,000,000 of its shares of common stock. Repurchases may be made from time-to-time in open market or in privately negotiated transactions when opportunities to do so at favorable prices present themselves, in compliance with
Securities and Exchange Commission (SEC) guidelines. As of December 31, 2003, we had repurchased a total of 185,651 shares of our common stock under this program for an aggregate price of approximately $3,562,000.



Restrictions Applicable to the Payment of Dividends and Stock
Repurchases.    The principal source of funds available to the Company for cash dividends and stock repurchases, at least until such time, if any, as it may acquire or develop other businesses, is cash dividends from the
Bank. Therefore, government regulations, including the laws of the State of California, as they pertain to the payment of cash dividends by state chartered banks, limit the amount of funds that will be available to the Company to fund any operations
that may be conducted by the Company or any subsidiaries other than the Bank or acquisition activity that might be engaged in by the Company, as well as to pay cash dividends to the Companys stockholders and to repurchase its shares.



18



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##### Table of Contents

California law places a statutory restriction on the amount of cash dividends a state chartered bank may
pay to its shareholders. Under that law, which applies to the Bank, without the prior approval of the DFI dividends declared by the Bank may not exceed, in any calendar year, the lesser of (i) the Banks net income for the year plus its
retained earnings generated in the two preceding years (after deducting all dividends paid during the period), or (ii) the Banks aggregate retained earnings. However, because payment of cash dividends has the effect of reducing a banks
capital, as a practical matter the capital requirements imposed on the Bank, as a federally insured bank, operate to preclude the payment of cash dividends in amounts that might otherwise be permitted by California law. See
BUSINESSSupervision and RegulationCapital Standards and Prompt Corrective Action. Additionally, Federal bank regulatory agencies, as part of their supervisory powers, generally require insured banks to adopt dividend
policies which limit the payment of cash dividends much more strictly than do applicable laws.



Section 23(a) of the Federal Reserve Act also restricts the Bank from extending credit to the Company or any other subsidiary of the Company.



A more detailed discussion of the capital requirements and other restrictions applicable to the Bank is contained in Part I
of this Report in the Section entitled BUSINESSSupervision and Regulation.



RIGHTS DIVIDEND



On February
25, 1997, the Board of Directors adopted a Rights Agreement (the Rights Agreement) pursuant to which it declared a dividend distribution of rights (the Rights) to purchase shares of the Companys Common Stock and, under
certain circumstances, other securities, to the holders of record of its outstanding shares of Common Stock.



The Rights dividend was made to holders of record of shares of the Companys Common Stock at the close of business on March 18, 1997 and are attached
to the outstanding shares of Common Stock. Upon the occurrence of an attempted acquisition of control of the Company, that is not approved by the Board of Directors, each Right will entitle the registered holder to purchase from the Company, at an
initial exercise price of $48.00 per Right (subject to adjustment), such number of newly issued shares of the Companys Common Stock or the common stock of the acquiring or surviving company in a change of control transaction, depending on the
type of triggering event, equal to an aggregate market value as of the date of the triggering event of two (2) times the exercise price of the Right.



The issuance of the Rights dividend is intended to encourage any one seeking to acquire the Company to negotiate the terms of such an acquisition with the
Board of Directors, rather than launching a hostile take over attempt. The Board of Directors believes that, through negotiations, the Board and management would be able to better ascertain the intentions and capabilities of anyone seeking to gain
control of the Company and take steps needed to achieve fair and non-discriminatory treatment of all stockholders of the Company. If the Board, as a result of such efforts, comes to support the proposed acquisition, it has the authority to suspend
the exercisability of the Rights. However, the existence of the Rights may also have the effect of discouraging acquisition proposals that may be viewed as favorable to the Companys stockholders.



The Rights Agent for the Rights is Registrar and Transfer Company, the
transfer agent for the Companys Common Stock.



19



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##### Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA



The selected income statement data set forth below for the fiscal years ended December 31, 2003, 2002 and 2001, and the selected balance sheet data as of December 31, 2003 and 2002, are derived from the audited
consolidated financial statements of the Company examined by Vavrinek, Trine, Day and Company, LLP, certified public accountants, that are included elsewhere in this Report and should be read in conjunction with those consolidated financial
statements. The selected income statement data for the fiscal years ended December 31, 2000 and 1999, and the selected balance sheet data as of December 31, 2001, 2000 and 1999, are derived from audited consolidated financial statements examined by
Vavrinek, Trine, Day and Company, LLP which are not included in this Report.



|                                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                    |  | 2003                                          |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                                    |  | (Dollars in thousands, except per share data) |          
|Income Statement Data                               |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                                     |  | $                                             | 35,680    |   |      | $ | 34,811    |      |  | $ | 36,736    |   |  | $    | 38,983    |   |  | $ | 35,551    |  
|Interest expense                                    |  |                                               | (4,283    | ) |      |   | (5,039    | )    |  |   | (9,030    | ) |  |      | (11,103   | ) |  |   | (8,333    | )
|                                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                 |  |                                               | 31,397    |   |      |   | 29,772    |      |  |   | 27,706    |   |  |      | 27,880    |   |  |   | 27,218    |  
|Provision for possible loan losses                  |  |                                               | (348      | ) |      |   | (460      | )    |  |   | (498      | ) |  |      | (1,070    | ) |  |   | (485      | )
|                                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income after provision for loan losses |  |                                               | 31,049    |   |      |   | 29,312    |      |  |   | 27,208    |   |  |      | 26,810    |   |  |   | 26,733    |  
|Other income                                        |  |                                               | 5,613     |   |      |   | 5,694     |      |  |   | 5,414     |   |  |      | 4,604     |   |  |   | 4,521     |  
|Other expense                                       |  |                                               | (23,515   | ) |      |   | (22,934   | )    |  |   | (21,846   | ) |  |      | (20,794   | ) |  |   | (21,342   | )
|                                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income before income taxes                          |  |                                               | 13,147    |   |      |   | 12,072    |      |  |   | 10,776    |   |  |      | 10,620    |   |  |   | 9,912     |  
|Applicable income taxes                             |  |                                               | (4,726    | ) |      |   | (4,378    | )    |  |   | (3,926    | ) |  |      | (3,920    | ) |  |   | (3,662    | )
|                                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income                                          |  | $                                             | 8,421     |   |      | $ | 7,694     |      |  | $ | 6,850     |   |  | $    | 6,700     |   |  | $ | 6,250     |  
|                                                    |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Per Share Data                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net incomeBasic(1) (2)                             |  | $                                             | 1.27      |   |      | $ | 1.17      |      |  | $ | 1.04      |   |  | $    | 0.97      |   |  | $ | 0.84      |  
|Net incomeDiluted(1) (2)                           |  |                                               | 1.18      |   |      |   | 1.09      |      |  |   | 0.99      |   |  |      | 0.94      |   |  |   | 0.79      |  
|Cash dividends(3)                                   |  |                                               | 0.68      |   |      |   | 0.43      |      |  |   | 0.40      |   |  |      | 0.36      |   |  |   | 0.41      |  
|Book value (at year-end)(1)                         |  | $                                             | 9.07      |   |      | $ | 8.76      |      |  | $ | 7.92      |   |  | $    | 7.24      |   |  | $ | 6.60      |  
|Weighted average shares outstandingBasic(1) (2)    |  |                                               | 6,613,062 |   |      |   | 6,562,700 |      |  |   | 6,571,543 |   |  |      | 6,906,748 |   |  |   | 7,481,531 |  
|Weighted average shares outstandingDiluted(1)(2)   |  |                                               | 7,140,144 |   |      |   | 7,059,565 |      |  |   | 6,912,383 |   |  |      | 7,149,019 |   |  |   | 7,947,629 |  
|Balance Sheet Data                                  |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Investment securities                               |  | $                                             | 145,550   |   |      | $ | 80,778    |      |  | $ | 79,743    |   |  | $    | 70,816    |   |  | $ | 61,548    |  
|Loans and leases (net)                              |  |                                               | 455,101   |   |      |   | 437,441   |      |  |   | 404,200   |   |  |      | 364,782   |   |  |   | 339,533   |  
|Assets                                              |  |                                               | 686,158   |   |      |   | 604,818   |      |  |   | 550,141   |   |  |      | 505,825   |   |  |   | 458,676   |  
|Deposits                                            |  |                                               | 612,049   |   |      |   | 534,562   |      |  |   | 475,390   |   |  |      | 454,041   |   |  |   | 397,264   |  
|Other debt(4)                                       |  |                                               | 8,248     |   |      |   | 8,248     |      |  |   | 19,000    |   |  |      |          |   |  |   | 8,819     |  
|Stockholders equity                                |  | $                                             | 60,788    |   |      | $ | 57,576    |      |  | $ | 51,852    |   |  | $    | 48,263    |   |  | $ | 48,439    |  

---

|(1) |  | Retroactively adjusted for stock dividends.
|--- |  | -------------------------------------------

|(2) |  | For information regarding the determination of basic and diluted earnings per share, see Note 17 to the Companys Consolidated Financial Statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | For information regarding restrictions affecting the ability of the Company to pay cash dividends, see Note 13 to the Companys Consolidated Financial Statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | For information regarding other debt, see Note 9 to the Companys Consolidated Financial Statements.
|--- |  | ----------------------------------------------------------------------------------------------------



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##### Table of Contents

ITEM 7    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL



The following discussion should be read in conjunction with our audited consolidated financial statements, and the footnotes thereto, contained
elsewhere in this report and the statements regarding forward-looking information and the factors that could affect our future performance described below in this Report.



Our principal operating subsidiary is Foothill Independent Bank (the Bank), which is a California state
chartered bank and a member of the Federal Reserve System. The Bank accounts for substantially all of our consolidated revenues and income. Accordingly, the following discussion focuses primarily on the Banks operations and financial
condition.



FORWARD-LOOKING STATEMENTS



The discussion below in this Section of this Annual Report
includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the 1933 Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the 1934 Act).
Those Sections of the 1933 Act and 1934 Act provide a safe harbor for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary
statements identifying important factors that could cause actual results to differ significantly from projected results. Other than statements of historical fact, all statements in this Report and, in particular, any projections of or statements as
to our expectations or beliefs concerning our future financial performance or financial condition or trends in our business or in our markets, are forward-looking statements. Forward-looking statements often include the words believe,
expect, anticipate, intend, plan, estimate, project, or words of similar meaning, or future or conditional verbs such as will, would, should,
could, or may. Factors that could affect our future operating results and cause them to differ, possibly significantly, from those currently anticipated are described in this Section of this Report, including in the
subsections entitled Critical Accounting Policies and Factors That Could Affect Our Future Financial Performance and, according, this Section of this Report should be read in its entirety.



CRITICAL ACCOUNTING POLICIES



Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (US GAAP) and general practices in the banking industry. The information contained within our financial statements is, to a significant extent, based on approximate
measures of the financial effects of transactions and events that have already occurred. However, the carrying value of some of our assets can be affected by estimates and the judgments we make about future or anticipated events, the outcome of
which, in some cases, is outside of our control and which could cause our future operating results to differ, possibly materially, from the results that are currently expected.



Judgments Regarding Reserves for Potential Loan Losses.    The accounting policies we follow in
determining the sufficiency of the reserves we establish for possible loan losses require us to make judgments and assumptions about future economic and market conditions that can affect the ability of our borrowers to meet their loan payment
obligations. For example, if economic or market conditions were to change in an unexpectedly adverse manner or interest rates were to increase beyond the levels expected by us when we established the reserves for loan losses, such changed conditions
could increase the possibility of borrower payment defaults, which could require us to increase reserves for potential loan losses. Since reserves are increased by a charge against income (known as the provision for loan losses), such
changed conditions could cause our earnings to decline in the period when those increases are recorded. See Results of Operation  Provision for Loan Losses below in this Section of this Report. Additionally, conditions or
events of this nature could require us to reduce the carrying values of the loans that are affected by these conditions (often referred to as loan write-downs or loan charge-offs). Since loans represent the largest component of our
total assets, unanticipated changes in economic or market conditions potentially can have a significant effect on the amount of our reported assets as set forth on our balance sheet.



21



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##### Table of Contents

Utilization of Deferred Income Tax Benefits.    The provision that we make for
income taxes is based on, among other things, our ability to use certain income tax benefits available under state and federal income tax laws to reduce our income tax liability. As of December 31, 2003, the total of the unused income tax benefits
(referred to in our consolidated financial statements as a deferred tax asset), available to reduce our income taxes in future periods was $2,818,000. Such tax benefits expire over time unless used and the realization of those benefits
is dependent on our generating taxable income in the future in amounts sufficient to utilize those tax benefits prior to their expiration. We have made a judgment, based on historical experience and current and anticipated market and economic
conditions and trends, that it is more likely than not that we will generate taxable income in future years sufficient to fully utilize those benefits. In the event, however, that our income were to decline in future periods making it less likely
that those benefits could be fully utilized, we would be required to establish a valuation reserve to cover the potential loss of those tax benefits. The creation of such an allowance would result in an increase in the provision we make for income
taxes, and, therefore, would have the effect of reducing our net income.



RESULTS OF OPERATIONS



Overview of Fiscal 2003 Operating Results.



The principal determinant of a banking organizations income is net interest income, which is the difference between the interest that a bank earns on loans, investments and other interest earning assets, and its interest expense,
which consists primarily of the interest it must pay to attract and retain deposits and the interest that it pays on other interest bearing liabilities. A banks interest income and interest expense are, in turn, affected by a number of
factors, some of which are outside of its control, including the monetary policies of the Federal Reserve Board, national and local economic conditions, and competition from other depository institutions and financial services companies, which
affect interest rates and also the demand for loans and the ability of borrowers to meet their loan payment obligations.



The following table sets forth information regarding the interest income that we generated, the interest expense that we incurred, our net interest income
and our net earnings in years ended December 31, 2003, 2002 and 2001:



|                    |  |                         |        |      |   |        |  |   |       
|------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                    |  | Year Ended December 31,
|                    |  | 2003                    |        | 2002 |   | 2001  
|                    |  | (In thousands)         
|Interest Income     |  | $                       | 35,680 |      | $ | 34,811 |  | $ | 36,736
|Interest Expense    |  |                         | 4,283  |      |   | 5,039  |  |   | 9,030 
|Net interest income |  |                         | 31,397 |      |   | 29,772 |  |   | 27,706
|Net Income          |  | $                       | 8,421  |      | $ | 7,694  |  | $ | 6,850 



During 2001 the
Federal Reserve Board adopted and began implementing a monetary policy that was designed to reduce market rates of interest in an effort to stimulate the U.S. economy, which was heading into recession. That policy continued through 2002 and 2003, as
the hoped for economic recovery has been slow to develop. Pursuant to that policy the Federal Reserve Board reduced interest rates throughout 2001 and, as a result, the prime rate of interest charged by most banks declined from 9.50% to 4.75% during
2001. It remained at 4.75% through most of 2002, declining to 4.25% in November 2002, where it remained until late June of 2003 when it declined further to 4.00% as a result of a further reduction in interest rates by the Federal Reserve Board.
Those monetary policies, combined with the continued softness in the United States economy, caused the average rate of interest earned on our interest earning assets to decline to 6.0% in fiscal 2003 from 6.7% in fiscal 2002 and 7.8% in fiscal 2001.



Despite that decline, as indicated in the table above, we
still achieved an increase of $727,000, or 9.5%, in net earnings in 2003 as compared to 2002. That increase was primarily due an increase in net interest income in 2003 of $1,625,000, or 5.5%, as compared to 2002, which was partially offset by a
$581,000 increase in non-interest expense.



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##### Table of Contents

As the following table indicates, net earnings for 2003 represented a return on average assets of 1.29%
and a return on average equity of 14.35%, compared to 1.34% and 14.07%, respectively, for 2002.



|                      |  |       |   |  |       |   |  |       |  
|--------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                      |  | 2003  |   |  | 2002  |   |  | 2001  |  
|Return on Assets      |  | 1.29  | % |  | 1.34  | % |  | 1.32  | %
|Return on Equity      |  | 14.35 | % |  | 14.07 | % |  | 13.81 | %
|Dividend Payout Ratio |  | 53.54 | % |  | 33.86 | % |  | 32.26 | %
|Equity to Asset Ratio |  | 8.99  | % |  | 9.53  | % |  | 9.55  | %



Results of
Operations for the Years ended December 31, 2003 and 2002.



Net Interest Income.    As indicated by the following table, which sets forth the net interest earnings (in thousands of dollars) and the net yields on average earning assets for the years ended December 31, 2003,
2002 and 2001, the increase in net interest income in 2003 was due to the combined effect of a $869,000 increase in interest income and a $756,000 reduction in interest expense.



|                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                 |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Total interest income(1) (2)                                     |  | $    | 35,993  |   |      | $ | 35,165  |      |  | $ | 37,048  |  
|Total interest expense(3)                                        |  | $    | 4,283   |   |      | $ | 5,039   |      |  | $ | 9,030   |  
|Net interest income(1) (2)                                       |  | $    | 31,710  |   |      | $ | 30,126  |      |  | $ | 28,018  |  
|Net average earning assets(2)                                    |  | $    | 602,457 |   |      | $ | 529,174 |      |  | $ | 473,815 |  
|Net yield on average earning assets(1) (2)                       |  |      | 5.3     | % |      |   | 5.7     | %    |  |   | 5.9     | %
|Net yield on average earning assets (excluding loan fees)(1)
(2) |  |      | 4.8     | % |      |   | 5.4     | %    |  |   | 5.6     | %

---

|(1) |  | Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates that approximate 35.9 percent for 2003, 36.3 percent for 2002
and 36.4 percent for 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Loans, net of unearned discount, do not reflect average reserves for possible loan losses of $4,711,000 in 2003, $4,378,000 in 2002, and $3,890,000 in 2001. Loan fees of $2,582,000
in 2003, $1,463,000 in 2002, and $1,364,000 in 2001 are included in interest income. Average loan balances include loans placed on non-accrual status during the periods presented, but interest on such loans has been excluded. There were three
non-accruing loans totaling $608,000 (0.1% of total loans outstanding) at December 31, 2003, and four non-accruing loans totaling $1,455,000 (0.4%, of total loans outstanding) at December 31, 2002 and six non-accruing loans totaling $2,717,000 (0.7%
of total loans outstanding) at December 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes NOW and Money Market Deposit Accounts.
|--- |  | -----------------------------------------------



Increase in interest income.    The increase in interest income was primarily attributable to the following factors (set forth
in order of importance in terms of their effect on interest income):



| |  |  | an increase in loan volume, which more than offset the effect of declining rates of interest on interest income; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in loan prepayment fees, due to refinancings of mortgage loans, or mortgage loan payoffs on sales of real properties, by borrowers who chose to take advantage of
declining interest rates or increasing property values in our markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although these mortgage loan refinancings and payoffs helped to increase our interest income in 2003, they could have the effect of reducing average yields on outstanding loans and, therefore, our net interest margin
in future periods.



Reduction in Interest
Expense.    The reduction in interest expense was primarily attributable to the following factors (set forth in order of importance in terms of their impact on interest expense):



| |  |  | lower rates of interest paid on deposits that resulted principally from the lowering of market rates of interest by the Federal Reserve Board; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a reduction in the average volume of outstanding time deposits, including those in denominations of $100,000 or more, as a result of our decision to allow some of those deposits to
be withdrawn on their maturity rather than seeking their renewal.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Information Regarding Average Interest Earning Assets and Interest Bearing
Liabilities.    The following table sets forth (i) the average amounts of and the average interest rates charged on our interest earning assets and (ii) the average amounts of and the average interest rates paid on our
interest bearing liabilities. Averages were computed based upon daily balances and dollars are in thousands.



|                                    |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|----------------------------------- |  | --------------- | ------- | -------- | ---- | ------------ |  | ---- | --------------- |  | -------- | ------- | ------------ | - | ------ | --------------- | --- | -------- |  | ----------- | ------- |  | - | ------ |  | --- | -
|                                    |  | 2003            |         |          | 2002 |              |  | 2001 |                
|                                    |  | Average Balance |         | Interest |      | Average Rate |  |      | Average Balance |  | Interest |         | Average Rate |   |        | Average Balance |     | Interest |  | AverageRate |        
|Earning Assets:                     |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Investment Securities               |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|U.S. Treasury                       |  | $               | 555     |          | $    | 17           |  | 3.1  | %               |  | $        | 349     |              | $ | 15     |                 | 4.3 | %        |  | $           | 565     |  | $ | 28     |  | 5.0 | %
|U.S. Government Agencies            |  |                 | 95,771  |          |      | 2,973        |  | 3.1  |                 |  |          | 43,629  |              |   | 2,007  |                 | 4.6 |          |  |             | 45,453  |  |   | 2,505  |  | 5.5 |  
|Municipal Leases(1)                 |  |                 | 7,992   |          |      | 600          |  | 7.5  |                 |  |          | 8,119   |              |   | 657    |                 | 8.1 |          |  |             | 5,060   |  |   | 432    |  | 8.5 |  
|Other Securities                    |  |                 | 3,127   |          |      | 100          |  | 3.2  |                 |  |          | 16,426  |              |   | 390    |                 | 2.4 |          |  |             | 17,742  |  |   | 780    |  | 4.4 |  
|                                    |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Total Investment Securities         |  |                 | 107,445 |          |      | 3,690        |  | 3.4  |                 |  |          | 68,523  |              |   | 3,069  |                 | 4.5 |          |  |             | 68,820  |  |   | 3,745  |  | 5.4 |  
|Federal Funds Sold                  |  |                 | 34,370  |          |      | 359          |  | 1.0  |                 |  |          | 27,504  |              |   | 430    |                 | 1.6 |          |  |             | 21,043  |  |   | 808    |  | 3.8 |  
|Due from Banks  Time               |  |                 | 8,320   |          |      | 122          |  | 1.5  |                 |  |          | 7,544   |              |   | 194    |                 | 2.6 |          |  |             | 12,119  |  |   | 564    |  | 4.7 |  
|Loans(2)                            |  |                 | 451,351 |          |      | 31,742       |  | 7.0  |                 |  |          | 424,443 |              |   | 31,379 |                 | 7.4 |          |  |             | 370,882 |  |   | 31,849 |  | 8.6 |  
|Lease Financing(1)                  |  |                 | 971     |          |      | 80           |  | 8.2  |                 |  |          | 1,160   |              |   | 93     |                 | 8.0 |          |  |             | 951     |  |   | 82     |  | 8.6 |  
|                                    |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Total Interest-Earning Assets(1)    |  | $               | 602,457 |          | $    | 35,993       |  | 6.0  | %               |  | $        | 529,174 |              | $ | 35,165 |                 | 6.6 | %        |  | $           | 473,815 |  | $ | 37,048 |  | 7.8 | %
|                                    |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Interest Bearing Liabilities:       |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Domestic Deposits & Borrowed Funds: |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Savings Deposits(3)                 |  | $               | 288,756 |          | $    | 2,585        |  | 0.9  | %               |  | $        | 242,305 |              | $ | 2,784  |                 | 1.1 | %        |  | $           | 201,183 |  | $ | 3,743  |  | 1.9 | %
|Time Deposits                       |  |                 | 80,612  |          |      | 1,325        |  | 1.6  |                 |  |          | 88,824  |              |   | 2,216  |                 | 2.5 |          |  |             | 108,989 |  |   | 5,282  |  | 4.8 |  
|Short-Term borrowings               |  |                 |        |          |      |             |  | 0.0  |                 |  |          |        |              |   |       |                 | 0.0 |          |  |             | 260     |  |   | 5      |  | 1.9 |  
|Long-Term borrowings                |  |                 | 8,248   |          |      | 373          |  | 4.5  |                 |  |          | 667     |              |   | 39     |                 | 3.7 |          |  |             |        |  |   |       |  | 0.0 |  
|                                    |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  
|Total Interest-Bearing Liabilities  |  | $               | 377,616 |          | $    | 4,283        |  | 1.1  | %               |  | $        | 331,796 |              | $ | 5,039  |                 | 1.5 | %        |  | $           | 310,432 |  | $ | 9,030  |  | 2.9 | %
|                                    |  |                 |         |          |      |              |  |      |                 |  |          |         |              |   |        |                 |     |          |  |             |         |  |   |        |  |     |  

---

|(1) |  | Interest income includes the effects of tax equivalent adjustments on tax exempt securities and leases using tax rates that approximate 35.9 percent for 2003, 36.3 percent for 2002
and 36.4 percent for 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Loans, net of unearned discount, do not reflect average reserves for possible loan losses of $4,711,000 in 2003, $4,378,000 in 2002, and $3,890,000 in 2001. Loan fees of $2,582,000
in 2003, $1,463,000 in 2002, and $1,364,000 in 2001 are included in interest income. Average loan balances include loans placed on non-accrual status during the periods presented, but interest on such loans has been excluded. There were three
non-accruing loans totaling $608,000 (0.1% of total loans outstanding) at December 31, 2003, and four non-accruing loans totaling $1,455,000 (0.4%, of total loans outstanding) at December 31, 2002 and six non-accruing loans totaling $2,717,000 (0.7%
of total loans outstanding) at December 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes NOW and Money Market Deposit Accounts.
|--- |  | -----------------------------------------------



Rate Sensitivity, Net Interest Margins and Market Risk.



Rate Sensitivity.    Like other banks and bank holding companies, our margins (that is, the difference between yields we are
able to realize, and therefore the interest income that we are able to generate, on loans and other interest earning assets, on the one hand, and the interest we pay on deposits, on the other hand) are affected by a number of factors, including the
relative percentages or the mix of:



| |  |  | our assets, between loans, on the one hand, on which we are able to obtain higher rates of interest, and investment securities, federal funds sold and funds held in interest-bearing
deposits with other financial institutions, on the other hand, on which yields generally are lower;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | variable and fixed rate loans in the loan portfolio; and
| | - |  | --------------------------------------------------------



| |  |  | demand, savings and money market deposits, on the one hand, and higher priced time deposits, on the other hand.
| | - |  | ---------------------------------------------------------------------------------------------------------------



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Impact on Net Interest Margins of the Mix of Fixed and Variable Rate
Loans.    As a general rule, in an interest rate environment like the one we have experienced during the past two years, a bank with a relatively high percentage of variable rate loans will experience a decline in net
interest margins because those loans will reprice automatically when market rates of interest decline. By contrast, a bank with a large proportion of fixed rates loans generally will experience an increase in net interest margins,
because the interest rates on those fixed rate loans will not decline in response to declines in market rates of interest. In a period of increasing interest rates, however, the interest margin of banks with a high proportion of fixed rate loans
generally will suffer because they will be unable to reprice those loans to fully offset the increase in the rates of interest they must offer to retain maturing time deposits and attract new deposits. A bank with a higher proportion of
variable loans in an environment of increasing market rates of interest will, on the other hand, be able to offset more fully the impact of rising rates of interest on the amounts they must pay to retain existing and attract new deposits.



The following table sets forth the maturities of our loans,
and the mix of fixed and variable rate loans, as of December 31, 2003 (in thousands):



|                          |  |                 |        |                   |   |                  |  |       |         |  |   |        
|------------------------- |  | --------------- | ------ | ----------------- | - | ---------------- |  | ----- | ------- |  | - | -------
|                          |  | Maturing       
|                          |  | Within One Year |        | One to Five Years |   | After Five Years |  | Total
|Total fixed rate loans    |  | $               | 16,447 |                   | $ | 49,854           |  | $     | 258,151 |  | $ | 324,452
|Total variable rate loans |  |                 | 36,394 |                   |   | 18,975           |  |       | 80,281  |  |   | 135,650
|                          |  |                 |        |                   |   |                  |  |       |         |  |   |        
|Total                     |  | $               | 52,841 |                   | $ | 68,829           |  | $     | 338,432 |  | $ | 460,102
|                          |  |                 |        |                   |   |                  |  |       |         |  |   |        



Impact on Net
Interest Margins of the Mix of Demand, Savings and Time Deposits.    In a period of declining market rates of interest, all other things being equal, a bank with a greater proportion of demand and savings accounts, as
compared to time deposits, is likely to have, at least for the short term, a higher interest margin than a bank with a greater proportion of time deposits, because a bank must wait for its time deposits to mature before it can implement reductions
in the rates of interest it must pay on those deposits in response to declining market rates of interest. By contrast, such reductions can be implemented more quickly on savings and money market deposits. As a result, in a period of increasing
market rates of interest, all other things being equal, a bank with a higher proportion of time deposits will generally have, at least for the short term, a higher interest margin than a bank with a higher proportion of savings deposits and a lower
proportion of time deposits, because a bank need not increase the interest it pays on its time deposits until they mature, while it will usually have to increase its interest rates on savings and money market deposits to be able to retain them in
response to increasing market rates of interest and competition from other depository institutions.



The average amounts (in thousands) of and the average rates paid on deposits, by type, in the year ended December 31, 2003 are summarized below:



|                                    |  |                              |         |              |     |  
|----------------------------------- |  | ---------------------------- | ------- | ------------ | --- | -
|                                    |  | Year ended December 31, 2003 |        
|                                    |  | Average Balance              |         | Average Rate |    
|Noninterest bearing demand deposits |  | $                            | 212,278 |              | -0- |  
|Savings Deposits(1)                 |  |                              | 288,756 |              | 0.9 | %
|Time Deposits(2)                    |  |                              | 80,612  |              | 1.6 | %
|                                    |  |                              |         |              |     |  
|Total Deposits                      |  | $                            | 581,646 |              | 0.7 | %
|                                    |  |                              |         |              |     |  



Impact of Changes
in the Mix of Earning Assets and in the Mix of Interest Bearing Liabilities.    The increase in net interest income in 2003 was not only attributable to a decline in interest rates paid on interest bearing deposits, but also
to a reduction in the volume of our higher priced time deposits that resulted from a decision we made to allow some of those deposits to run off rather than to seek their renewal. Additionally, we were able to mitigate somewhat the
effect of declining market rates of interest on interest income by implementing marketing programs that enabled us to increase the volume of our outstanding loans in 2003.



The following table sets forth changes in interest earned, including loan fees, and interest paid in each of the years ended
December 31, 2003 and 2002 and the extent to which those changes were attributable to changes in the volume or changes in the mix of interest earning assets and changes in the volume or changes in the mix of interest bearing liabilities. Changes in
interest earned and interest paid due to both rate and volume have been allocated to the in proportion to the relationship of the absolute dollar amounts of the changes in each category. (Amounts are in thousands).



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|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|--------------------------- |  | --------------------- | ---- | - | ---------------- | - | ---- | ----------------- |  | - | ------------------- | - |  | ------------------------ | ------ | ---- | --------------------- | - | --- | ----- |  | - | ---- | - |  | - | ------ | -
|                            |  | Investment Securities |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |  
|Interest Earned On          |  | Taxable               |      |   | Non- Taxable (1) |   |      | FederalFunds Sold |  |   | Loans (1)           |   |  | Direct LeaseFinancing(1) |        |      | Time Deposits         |   |     | Total | 
|2003 compared to 2002:      |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Increase (decrease) due to: |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Volume Changes              |  | $                     | 438  |   |                  | $ | (36  | )                 |  | $ | 92                  |   |  | $                        | 1,972  |      |                       | $ | (16 | )     |  | $ | 18   |   |  | $ | 2,468  |  
|Rate Changes                |  |                       | 240  |   |                  |   | (21  | )                 |  |   | (163                | ) |  |                          | (1,609 | )(2) |                       |   | 3   |       |  |   | (90  | ) |  |   | (1,640 | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Net Increase (Decrease)     |  | $                     | 678  |   |                  | $ | (57  | )                 |  | $ | (71                 | ) |  | $                        | 363    |      |                       | $ | (13 | )     |  | $ | (72  | ) |  | $ | 828    |  
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|2002 compared to 2001:      |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Increase (decrease) due to: |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Volume Changes              |  | $                     | (12  | ) |                  | $ | 444  |                   |  | $ | 198                 |   |  | $                        | 4,236  |      |                       | $ | 17  |       |  | $ | (169 | ) |  | $ | 4,714  |  
|Rate Changes                |  |                       | (889 | ) |                  |   | (219 | )                 |  |   | (576                | ) |  |                          | (4,706 | )(2) |                       |   | (6  | )     |  |   | (201 | ) |  |   | (6,597 | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Net Increase (Decrease)     |  | $                     | (901 | ) |                  | $ | 225  |                   |  | $ | (378                | ) |  | $                        | (470   | )    |                       | $ | 11  |       |  | $ | (370 | ) |  | $ | (1,883 | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|                            |  |                       |      |   |                  |   |     
|Interest Paid On:           |  |                       |      |   |                  |   |      | Savings Deposits  |  |   | Other Time Deposits |   |  | Long TermBorrowings (3)  |        |      | Short Term Borrowings |   |     | Total | 
|2003 compared to 2002       |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Increase (decrease) due to: |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Volume Changes              |  |                       |      |   |                  |   |      |                   |  | $ | 479                 |   |  | $                        | (190   | )    |                       | $ | 345 |       |  | $ |     |   |  | $ | 634    |  
|Rate Changes                |  |                       |      |   |                  |   |      |                   |  |   | (678                | ) |  |                          | (701   | )    |                       |   | (11 | )     |  |   |     |   |  |   | (1,390 | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Net Increase (Decrease)     |  |                       |      |   |                  |   |      |                   |  | $ | (199                | ) |  | $                        | (891   | )    |                       | $ | 334 |       |  | $ |     |   |  | $ | (756   | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|2002 compared to 2001       |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Increase (decrease) due to: |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Volume Changes              |  |                       |      |   |                  |   |      |                   |  | $ | 663                 |   |  | $                        | (846   | )    |                       | $ | 39  |       |  | $ | (5   | ) |  | $ | (149   | )
|Rate Changes                |  |                       |      |   |                  |   |      |                   |  |   | (1,622              | ) |  |                          | (2,220 | )    |                       |   |    |       |  |   |     |   |  |   | (3,842 | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  
|Net Increase (Decrease)     |  |                       |      |   |                  |   |      |                   |  | $ | (959                | ) |  | $                        | (3,066 | )    |                       | $ | 39  |       |  | $ | (5   | ) |  | $ | (3,991 | )
|                            |  |                       |      |   |                  |   |      |                   |  |   |                     |   |  |                          |        |      |                       |   |     |       |  |   |      |   |  |   |        |  

---

|(1) |  | Interest income includes the effects of tax equivalent adjustments on tax exempt securities, loans and leases using tax rates which approximate 35.9% for 2003 and 36.4% in 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The decline in interest earned in 2003 that was attributable to rate changes was partially offset by a $1,119,000 increase in loan fees. In 2002 loan fees declined by $100,000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Long term borrowings in 2003 and 2002 consists of junior subordinated debentures issued in December 2002. Those debentures mature in 30 years and bear interest at a rate equal to
the three-month LIBOR (London Inter Bank Offered Rate) rate plus 3.05%. The interest rate on those borrowings in effect at December 31, 2003 was 4.42%.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Market Risk and Net Interest Margin in 2003 and 2002.    As demonstrated by the impact of the
reductions in market rates of interest during the past three years, our net interest margin and, therefore, our net interest income and net earnings are affected by changes in market rates of interest (which we sometimes refer to as market
risk). We attempt to reduce our exposure to market risk associated with interest rate fluctuations by seeking (i) to attract and maintain a significant volume of demand and savings deposits that are not as sensitive to interest rate
fluctuations as are time deposits, (ii) to match opportunities to reprice interest earning assets and interest bearing liabilities in response to changes in market rates of interest, and (iii) to change the mix of interest earning assets
and interest bearing liabilities in a manner that is designed to achieve increases in net interest income. In the current interest rate environment, however, it is no longer possible to reduce the rates we pay on deposits much further in response to
declining rates of interest on interest earning assets. As a result, declining interest rates have exerted, and we expect that at least during the next 12 months will continue to exert, downward pressure on our net interest margin (as well as that
of banking institutions generally).



In an effort to counteract
this downward pressure on net interest margin, during the past year:



| |  |  | We have continued sales and marketing programs that are designed to increase our volume of loans, on which yields are higher than on other earning assets, and to change the mix of
deposits to a greater proportion of lower cost demand and savings deposits;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have allowed some of our higher priced time deposits to run-off, rather than to seek their renewal as a means of reducing our interest expense; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We adopted a new loan repricing policy which places an interest rate floor, currently at 4.59%, that is applicable to all new variable rate loans that we make.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

As a result of these measures, the volume of outstanding loans at December 31, 2003 was $18.7 million, or
4%, greater than at December 31, 2002 and the volume of demand, savings and money market deposits (which are sometimes referred to as core deposits) represented 88%, while time deposits (including those in denominations of $100,000 or
more) represented 12%, of total deposits at December 31, 2003, as compared to 84% and 16%, respectively, at December 31, 2002.



Our net interest margin (i.e., tax-adjusted net interest income stated as a percentage of average interest-earning assets) was 5.27% for the year ended
December 31, 2003, compared to 5.70% for the year ended December 31, 2002. That decline was primarily due to the decrease in interest rates as mentioned above. However, notwithstanding that decline, based on data obtained from the FDIC, we believe
that our net interest margin continues to exceed the average net interest margin for other banks and bank holding companies with assets ranging from $250-to-$750 million (the Peer Group Banks), largely because we have been able to
maintain the ratio of demand and savings deposits to total deposits at a higher level than that of our Peer Group Banks and we were able to increase the volume of our loans which generate higher yields than do our other interest earning assets.



The ability to maintain our net interest margin is not
entirely within our control, however, because the interest rates we are able to charge on loans and the interest rates we must offer to maintain and attract deposits are affected by national monetary policies established and implemented by the
Federal Reserve Board and by competitive conditions in our service areas.



In addition, the effect on a banks net interest margin of changes in market rates of interest is affected by 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. Also, 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 will affect a banks net interest margin.



Following the Federal Reserve Boards reduction in the federal funds rate in June 2003, which led to a further reduction in market rates of interest,
we experienced an increase in the number of higher interest rate loans that were either refinanced at lower rates of interest or were prepaid. As a result, unless we are able to increase our loan volume and the volume of lower cost core deposits, we
would expect our net interest margin to decline somewhat during 2004. Accordingly, we have again instituted sales and marketing programs for 2004 that are designed to increase our loan volume and the volume of our core deposits. However, we may find
it necessary or prudent to increase time deposits to fund any resulting increases in loan volume. Additionally, there are a number of uncertainties and risks that could adversely affect our net interest margin in 2004, including increased
competition in our market areas, both from banks and other types of financial institutions as well as from securities brokerage firms and mutual funds that offer competing investment products, and the possibility that the economic slowdown will
continue longer than is currently anticipated, which could result in reduced loan activity and in a further decline in market rates of interest.



Provision for Loan and Lease Losses.    Like virtually all banking organizations, we follow the practice of maintaining a
reserve (the Loan Loss Reserve) for possible losses on loans and leases that occur from time to time as an incidental part of the banking business. When it is determined that payment in full of a loan has become unlikely, the carrying
value of the loan is reduced to what management estimates is its realizable value. This reduction, which is referred to as a loan charge-off, is charged against and, to that extent, reduces the amount of a reserve or
allowance for potential loan losses that the Bank maintains (and which we will refer to as the Loan Loss Reserve). The Loan Loss Reserve is increased periodically (i) to replenish the Reserve after it has been reduced due to
loan charge-offs, (ii) to reflect changes in the volume of outstanding loans, and (iii) to take account of increases 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 due to adverse changes in national or local economic conditions. Those increases and additions are made through a charge against income referred to as the provision for loan and lease losses. Recoveries of loans
previously charged-off are added back to and, to that extent, increase the Loan Loss Reserve and therefore may reduce the amount of the provision that the Bank would need to make to maintain the Loan Loss Reserve at a level believed by management to
be adequate.



27



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##### Table of Contents

We employ economic models that are based on bank regulatory guidelines and industry standards to evaluate
and determine the adequacy of the Loan Loss Reserve and, therefore, also the amount of the provision that we make for potential loan losses. However, those determinations involve judgments or forecasts about future economic conditions and other
events that are subject to a number of uncertainties, some of which are outside of our ability to control. See the discussion above under the caption Critical Accounting Policies and below under the caption Factors That Could
Affect Our Future Financial Performance.



During 2003 we
made provisions for potential loan losses of $348,000, as compared to $460,000 during 2002 and, at December 31, 2003 the Loan Loss Reserve was approximately $4,947,000 or 1.08% of total loans and leases outstanding, compared to approximately
$4,619,000 or 1.04% of total loans and leases outstanding at December 31, 2002. As indicated below under caption Financial ConditionLoansInformation Regarding Non-Performing Loans, the overall quality of our
loan portfolio improved in 2003, as it had in 2002, which enabled us to reduce the provision we made for potential loan losses in 2003 as compared to 2002 and 2001.



The following table sets forth an analysis of our loan and lease loss experience, by category, for the past three years
(with dollars stated in thousands).



|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | --
|                                                                    |  | Year Ended December 31, |        
|                                                                    |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Average amount of loans and leases outstanding(1)                   |  | $                       | 452,322 |   |      | $ | 425,603 |      |  | $ | 371,831 |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Loan and lease loss reserve at beginning of year                    |  |                         | 4,619   |   |      |   | 4,206   |      |  |   | 3,692   |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Charge-Offs  Domestic Loans(2):                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Commercial, financial and agricultural                              |  |                         |        |   |      |   | (77     | )    |  |   | (46     | ) 
|Real Estate-construction                                            |  |                         |        |   |      |   |        |      |  |   |        |   
|Real Estate-mortgage                                                |  |                         | (25     | ) |      |   |        |      |  |   |        |   
|Consumer                                                            |  |                         | (46     | ) |      |   | (18     | )    |  |   | (40     | ) 
|Lease Financing                                                     |  |                         | (12     | ) |      |   |        |      |  |   |        |   
|Other                                                               |  |                         |        |   |      |   |        |      |  |   |        |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Total Charge-Offs                                                   |  |                         | (83     | ) |      |   | (95     | )    |  |   | (86     | ) 
|Recoveries  Domestic Loans(2):                                     |  |                         |         |   |      |   |         |      |  |   |         |   
|Commercial, financial and agricultural                              |  |                         | 62      |   |      |   | 46      |      |  |   | 46      |   
|Real Estate-construction                                            |  |                         |        |   |      |   |        |      |  |   | 20      |   
|Real Estate-mortgage                                                |  |                         |        |   |      |   |        |      |  |   | 16      |   
|Consumer                                                            |  |                         | 1       |   |      |   | 2       |      |  |   | 20      |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Total Recoveries                                                    |  |                         | 63      |   |      |   | 48      |      |  |   | 102     |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Net Recoveries (Net Charge-Offs)                                    |  |                         | (20     | ) |      |   | (47     | )    |  |   | 16      |   
|Additions charged to operations                                     |  |                         | 348     |   |      |   | 460     |      |  |   | 498     |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Loan and lease loss reserve  balance at end of year                |  | $                       | 4,947   |   |      | $ | 4,619   |      |  | $ | 4,206   |   
|                                                                    |  |                         |         |   |      |   |         |      |  |   |         |   
|Ratios:                                                             |  |                         |         |   |      |   |         |      |  |   |         |   
|Net charge-offs to average loans/leases outstanding during the year |  |                         | 0.004   | % |      |   | 0.011   | %    |  |   | (0.004  | )%
|Loan loss reserve to total gross loans                              |  |                         | 1.08    | % |      |   | 1.04    | %    |  |   | 1.030   | % 
|Net loan charge-offs to loan loss reserve                           |  |                         | 0.40    | % |      |   | 1.02    | %    |  |   | (0.380  | )%
|Net loan charge-offs to provision for loan losses                   |  |                         | 5.75    | % |      |   | 10.22   | %    |  |   | (3.210  | )%
|Loan loss reserve to non-performing loans                           |  |                         | 813.65  | % |      |   | 317.46  | %    |  |   | 154.800 | % 

---

|(1) |  | Net of unearned discount.
|--- |  | -------------------------

|(2) |  | We do not have any loans outstanding to borrowers in foreign countries and therefore there are no foreign loan charge-offs or recoveries to report for any of the periods presented
in the table above.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2003,
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 $608,000, or 0.1% of total loans then outstanding, compared to $1,455,000, or 0.4%, of total loans
outstanding at December 31, 2002 and $2,717,000 or 0.7% of total loans outstanding at December 31, 2001. As a result of that improvement, coupled with the provisions made for potential loan losses in fiscal 2003, the ratio of our Loan Loss Reserve
to non-performing loans improved to 813.65% at December 31, 2003, as compared to 317.460% and 154.80% at December 31, 2002 and 2001, respectively.



28



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##### Table of Contents

Non-Interest Income.    The following table identifies the components of and
the percentage changes in non-interest income in 2003 as compared to 2002.



|                          |  |                         |       |                       |   |               |  |      |   
|------------------------- |  | ----------------------- | ----- | --------------------- | - | ------------- |  | ---- | --
|                          |  | Year Ended December 31, |       | % Increase (Decrease) |  
|                          |  | 2003                    |       | 2002                  |   | 2003 vs. 2002 | 
|                          |  | (Dollars in thousands)  |       |                       |  
|Non Interest Income       |  |                         |       |                       |   |               |  |      |   
|Services fees             |  | $                       | 5,000 |                       | $ | 5,214         |  | (4.1 | )%
|Gain on sale of SBA loans |  |                         | 5     |                       |   | 3             |  | N/M  |   
|Other                     |  |                         | 608   |                       |   | 477           |  | 27.5 | % 
|                          |  |                         |       |                       |   |               |  |      |   
|                          |  | $                       | 5,613 |                       | $ | 5,694         |  | (1.4 | )%
|                          |  |                         |       |                       |   |               |  |      |   



The decrease in
non-interest income was primarily attributable to decreases in transaction fees and service charges collected on deposits and other banking transactions as compared to 2002, which was partially offset by increases in other non-interest income.



Non-Interest
Expense.    Non-interest expense (also sometimes referred to as other 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 such expenses as insurance premiums, marketing expenses, data processing costs and professional fees.



In order to attract a higher volume of non-interest bearing demand and lower cost savings and money market deposits as a means of maintaining the
Banks net interest margin, it has been our policy to provide a higher level of personal service to our customers than the level of service that is typically provided by many of our competitors. As a result, we have more banking personnel than
many of our competitors of comparable size, which is reflected in our non-interest expense. However, we believe that this higher level of service has helped us to retain our existing deposit customers and attract new customers which has enabled us
to achieve an average net interest margin that exceeds the average net interest margin of the banks in our Peer Group.



Set forth below is information regarding non-interest expense incurred by us in the years ended December 31, 2003 and 2002:



|                                  |  |                        |        |   |                      |   |        |               |  |      |   
|--------------------------------- |  | ---------------------- | ------ | - | -------------------- | - | ------ | ------------- |  | ---- | --
|                                  |  | Year EndedDecember 31, |        |   | % Increase(Decrease) |  
|                                  |  | 2003                   |        |   | 2002                 |   |        | 2003 vs. 2002 | 
|                                  |  | (Dollars in thousands) |        |   |                      |  
|Non Interest Expenses             |  |                        |        |   |                      |   |        |               |  |      |   
|Salaries and employee benefits    |  | $                      | 11,822 |   |                      | $ | 11,397 |               |  | 3.7  | % 
|Net occupancy expense of premises |  |                        | 2,496  |   |                      |   | 2,470  |               |  | 1.1  | % 
|Furniture and equipment expenses  |  |                        | 1,537  |   |                      |   | 1,576  |               |  | (2.5 | )%
|Other expenses                    |  |                        | 7,660  |   |                      |   | 7,491  |               |  | 2.3  | % 
|                                  |  |                        |        |   |                      |   |        |               |  |      |   
|                                  |  | $                      | 23,515 |   |                      | $ | 22,934 |               |  | 2.5  | % 
|                                  |  |                        |        |   |                      |   |        |               |  |      |   
|Efficiency Ratio                  |  |                        | 63.9   | % |                      |   | 64.8   | %             |  |      |   



As the table above
indicates, the increase in non-interest expense in 2003, as compared to 2002, was primarily attributable to increases in salaries and in employee benefit expenses. That increase, in turn, was primarily due to a general increase in employee base
salaries and an increase in bonuses paid to loan officers and other employees for meeting loan and deposit growth targets established for 2003. Notwithstanding that increase, however, due primarily to the increase in our net interest income in 2003,
we were able to improve our efficiency ratio to 63.9% from 64.8% in 2002. The efficiency ratio is, basically, the ratio of non-interest expense (adjusted to exclude non-recurring expenses) to the sum of net interest income and non-interest income
(as adjusted to exclude any non-recurring income).



Income
Taxes.    Income taxes increased by approximately $348,000 or 7.9% in 2003 as compared to 2002. Since our effective income tax rates were approximately the same in each of those years, that increase was primarily the result
of the increases in pre-tax income in 2003. As discussed above, under the caption Critical Accounting Policies our income tax rates in 2003 and 2002 reflect the beneficial impact of our ability to use certain income tax benefits
available under state and federal income tax laws.



29



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##### Table of Contents

Financial Condition



Total Assets.    Our total assets increased during 2003 by approximately $81.3 million, or 13.4%, to $686.2 million at December
31, 2003 from $604.8 million at December 31, 2002. Contributing to the growth of our assets in 2003 were increases of $18.8 million, or 4.2%, in outstanding loans and $64.8 million, or 80.2%, in our investment portfolio. As indicated in the table
that follows, those increases were funded, in part, by a shift of funds from other earning assets, including Federal funds sold, overnight repurchase agreements and time deposits held at other banks, as well as an increase in total deposits.



The following tale sets forth the dollar amounts (in
thousands) of our interest earning assets at December 31:



|                                                          |  |                |         |      |   |        
|--------------------------------------------------------- |  | -------------- | ------- | ---- | - | -------
|                                                          |  | 2003           |         | 2002
|                                                          |  | (In thousands)
|Cash and due from banks                                   |  | $              | 34,565  |      | $ | 32,665 
|Federal funds sold and overnight Repurchase Agreements    |  |                | 18,500  |      |   | 26,300 
|Total Cash and Cash Equivalents                           |  |                | 53,065  |      |   | 58,965 
|Interest-bearing deposits in other financial institutions |  |                | 7,425   |      |   | 7,922  
|Investment securities held-to-maturity                    |  |                | 8,900   |      |   | 9,279  
|Investment securities available-for-sale                  |  |                | 136,650 |      |   | 71,499 
|Total Loans, net                                          |  |                | 455,101 |      |   | 437,441



We currently
anticipate that we will achieve modest asset growth in the year ending December 31, 2004, which is expected to result from increased lending and deposit activity that we expect will be generated by our marketing programs.



Loans.



Types of Loans.    Set forth below is information regarding the actual volume of our loans, by
type or category of loan, for each of the following years ended December 31:



|                                       |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                       |  | 2003           |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|                                       |  | (In Thousands) |        
|Types of Loans                         |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial, financial and agricultural |  | $              | 44,855  |   |      | $ | 44,136  |      |  | $ | 48,077  |   |  | $    | 47,744  |   |  | $ | 43,676  |  
|Real Estate construction               |  |                | 27,077  |   |      |   | 34,492  |      |  |   | 16,091  |   |  |      | 12,647  |   |  |   | 11,144  |  
|Real Estate mortgage                   |  |                | 381,563 |   |      |   | 357,707 |      |  |   | 337,626 |   |  |      | 299,981 |   |  |   | 281,150 |  
|Consumer                               |  |                | 3,816   |   |      |   | 4,073   |      |  |   | 4,718   |   |  |      | 6,400   |   |  |   | 5,916   |  
|Lease Financing                        |  |                | 528     |   |      |   | 1,211   |      |  |   | 1,360   |   |  |      | 1,164   |   |  |   | 2,341   |  
|All other (including overdrafts)       |  |                | 2,263   |   |      |   | 508     |      |  |   | 626     |   |  |      | 679     |   |  |   | 1,707   |  
|                                       |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Subtotal:                              |  | $              | 460,102 |   |      | $ | 442,127 |      |  | $ | 408,498 |   |  | $    | 368,615 |   |  | $ | 345,934 |  
|Less:                                  |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Unearned Discount                      |  |                | (54     | ) |      |   | (67     | )    |  |   | (92     | ) |  |      | (141    | ) |  |   | (299    | )
|Reserve for loan and lease losses      |  |                | (4,947  | ) |      |   | (4,619  | )    |  |   | (4,206  | ) |  |      | (3,692  | ) |  |   | (6,102  | )
|                                       |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total                                  |  | $              | 455,101 |   |      | $ | 437,441 |      |  | $ | 404,200 |   |  | $    | 364,782 |   |  | $ | 339,533 |  
|                                       |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  



Loan
Maturities.    The maturities of our loans, as of December 31, 2003, presented by type or category of loan, is set forth below (in thousands):



|                                       |  |                 |        |                   |   |                  |  |       |         |  |   |        
|-------------------------------------- |  | --------------- | ------ | ----------------- | - | ---------------- |  | ----- | ------- |  | - | -------
|                                       |  | MATURING       
|                                       |  | Within One Year |        | One to Five Years |   | After Five Years |  | Total
|Commercial, financial and agricultural |  | $               | 27,149 |                   | $ | 11,972           |  | $     | 5,734   |  | $ | 44,855 
|Real Estate construction               |  |                 | 3,933  |                   |   | 264              |  |       | 22,880  |  |   | 27,077 
|Real Estate mortgage                   |  |                 | 17,778 |                   |   | 54,533           |  |       | 309,252 |  |   | 381,563
|Consumer                               |  |                 | 2,219  |                   |   | 1,112            |  |       | 485     |  |   | 3,816  
|Lease Financing                        |  |                 | 89     |                   |   | 439              |  |       | 0       |  |   | 528    
|All other                              |  |                 | 1,673  |                   |   | 509              |  |       | 81      |  |   | 2,263  
|                                       |  |                 |        |                   |   |                  |  |       |         |  |   |        
|Total                                  |  | $               | 52,841 |                   | $ | 68,829           |  | $     | 338,432 |  | $ | 460,102
|                                       |  |                 |        |                   |   |                  |  |       |         |  |   |        



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##### Table of Contents

Information Regarding Non-Performing Loans.    The table which follows sets
forth, as of the end of each of the years in the five year period ended December 31, 2003, the amounts of the Banks loans (i) that were more than 90 days past due, (ii) as to which the terms of payment had been renegotiated (referred to as
troubled debt restructurings), and (iii) that had been placed on non-accrual status.



|                                     |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------------ |  | -------------- | --- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                     |  | December 31,  
|                                     |  | 2003           |     | 2002 |   | 2001  |  | 2000 |       | 1999
|                                     |  | (In thousands)
|Loans More Than 90 Days Past Due(1): |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|Aggregate Loan Amounts:              |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|Commercial                           |  | $              | 120 |      | $ |      |  | $    | 34    |      | $ |      |  | $ | 148  
|Real Estate                          |  |                |    |      |   |      |  |      |      |      |   |      |  |   | 50   
|Consumer                             |  |                |    |      |   | 5     |  |      |      |      |   | 17    |  |   | 4    
|Aggregate Leases                     |  |                |    |      |   |      |  |      |      |      |   |      |  |   |     
|Troubled Debt Restructurings(2)      |  |                | 18  |      |   | 1,096 |  |      | 1,178 |      |   | 858   |  |   | 1,780
|Non-Accrual Loans(3)                 |  |                | 608 |      |   | 1,455 |  |      | 2,717 |      |   | 2,319 |  |   | 6,068
|                                     |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      
|                                     |  | $              | 746 |      | $ | 2,556 |  | $    | 3,929 |      | $ | 3,194 |  | $ | 8,050
|                                     |  |                |     |      |   |       |  |      |       |      |   |       |  |   |      

---

|(1) |  | Reflects loans for which there has been no payment of interest and/or principal for 90 days or more.
|--- |  | ----------------------------------------------------------------------------------------------------

|(2) |  | The terms of the restructured loans did not involve any interest deferrals, and the amounts of interest collected in 2003, 2002, 2001, 2000, and 1999 were those required to have
been paid in accordance with the original terms of those loans.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | There were 3 loans on non-accrual status at December 31, 2003, 4 loans at December 31, 2002, 6 loans at each of December 31, 2001 and December 31, 2000, and 14 loans at December 31,
1999. The interest amounts that would have been collected on these loans had they remained current in accordance with their original terms were $99,000 in 2003, $117,000 in 2002, $197,000 in 2001, $644,000 in 2000, and $819,000 in 1999.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Deposits.    During
2003 we again conducted programs by which we were able to increase deposits to provide additional funds that we used to grow our loan and investment portfolios. Set forth below are the average amounts (in thousands) of, and the average rates paid
on, deposits in each of 2003, 2002 and 2001:



|                                    |  |                         |         |              |      |   |                 |      |              |  |      |                 |  |              |         |  |      |  
|----------------------------------- |  | ----------------------- | ------- | ------------ | ---- | - | --------------- | ---- | ------------ |  | ---- | --------------- |  | ------------ | ------- |  | ---- | -
|                                    |  | Year Ended December 31, |        
|                                    |  | 2003                    |         |              | 2002 |   |                 | 2001 |             
|                                    |  | Average Balance         |         | Average Rate |      |   | Average Balance |      | Average Rate |  |      | Average Balance |  | Average Rate |        
|Noninterest bearing demand deposits |  | $                       | 212,278 |              |     |   |                 | $    | 182,178      |  |     |                 |  | $            | 155,828 |  |     |  
|Savings deposits(1)                 |  |                         | 288,756 |              | 0.89 | % |                 |      | 242,304      |  | 1.15 | %               |  |              | 201,183 |  | 1.86 | %
|Time deposits(2)                    |  |                         | 80,612  |              | 1.64 | % |                 |      | 88,824       |  | 2.49 | %               |  |              | 108,989 |  | 4.85 | %
|                                    |  |                         |         |              |      |   |                 |      |              |  |      |                 |  |              |         |  |      |  
|Total deposits                      |  | $                       | 581,646 |              | 0.67 | % |                 | $    | 513,306      |  | 0.98 | %               |  | $            | 466,000 |  | 1.94 | %
|                                    |  |                         |         |              |      |   |                 |      |              |  |      |                 |  |              |         |  |      |  

---

|(1) |  | Includes NOW and Money Market Deposit Accounts.
|--- |  | -----------------------------------------------

|(2) |  | Includes time certificates of deposit in denominations greater than and less than $100,000.
|--- |  | -------------------------------------------------------------------------------------------



As indicated in the above table, in 2003 the average volume of deposits increased by $68.3 million, or 13.2%, as compared to
the volume of deposits during 2002. Contributing to that increase was an increase of $75.9 million, or 17.9%, in the volume of our average core deposits, made up of demand deposits, which do not bear interest, and savings and money market deposits,
on which we pay lower rates of interests than on time deposits. At the same time, during 2003, we reduced the average volume of time deposits (including those in denominations of $100,000 or more) by $8.2 million, or 9.2%. As a result, our core
demand, savings and money market deposits represented 87.8% of total deposits at the end of 2003 as compared to 84.1% at the end of 2002, with time deposits (including those in denominations of $100,000 or more) representing 12.2% of total deposits
in 2003 as compared to 15.9% in 2002. The decreases in the volume of time deposits, together with decreases in interest rates that we paid (primarily on our core deposits) in response to decreases in market rates of interest, resulted in a decrease
in interest expense in 2003 as compared to 2002. See the discussion above under the captions Results of Operations  Net Interest Income and Results of OperationsRate Sensitivity, Net Interest Margins and
Market Risk.



31



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##### Table of Contents

Liquidity Management.    We have established liquidity management policies
which are designed to achieve a matching of sources and uses of funds in order to enable us to fund our customers requirements for loans and for deposit withdrawals. In accordance with those policies, we maintain a number of short-term sources
of funds to meet periodic increases in loan demand and deposit withdrawals and maturities. At December 31, 2003, the principal sources of liquidity consisted of $34.6 million in cash and demand balances due from other banks and $18.5 million of
Federal funds sold and overnight repurchase agreements, which together totaled $53.1 million. Other sources of liquidity include $127.5 million in securities available for sale, of which approximately $4.2 million mature within one year; $2.4
million in securities held to maturity which mature within one year; and $7.4 million in interest-bearing deposits at other financial institutions, which mature in 6 months or less. In addition, substantially all of the Banks installment loans
and leases, the amount of which aggregated $4.3 million at December 31, 2003, require regular installment payments from customers, providing us with a steady flow of internally generated cash.



We also have a line of credit from the Federal Home Loan Bank, the amount of
which was $29.8 million as of December 31, 2003. Borrowings under that credit line are secured by a pledge of some of our outstanding loans. We also have established loan facilities that would enable us to borrow up to $13 million of Federal funds
from other banks and we have an account with the Federal Reserve Bank of San Francisco that will also allow us to borrow at its discount window should the need arise. Finally, if necessary, we could obtain additional cash by selling time
certificates of deposit into the CD market. However, as a general rule, it has been and continues to be our policy to make use of borrowings under the credit line or loan facilities to fund short term cash requirements, before selling
securities or reducing deposit balances at other banks and before selling time certificates of deposit.



Contractual Obligations.



Set forth below is information regarding our material contractual obligations as of December 31, 2003:



Operating Lease Obligations.    As of December 31,
2003, our future minimum payment obligations (stated in thousands) under real property and equipment leases were:



|           |  |        |      
|---------- |  | ------ | -----
|Year       |  | Amount
|2004       |  | $      | 1,353
|2005       |  |        | 1,190
|2006       |  |        | 881  
|2007       |  | $      | 702  
|2008       |  |        | 577  
|Thereafter |  |        | 1,956
|           |  |        |      
|Total      |  | $      | 6,659



Maturing Time
Certificates Of Deposits.    Set forth below is a maturity schedule, as of December 31, 2003, of domestic time certificates of deposit of $100,000 or more (with amounts stated in thousands):



|                               |  |                      |       
|------------------------------ |  | -------------------- | ------
|                               |  | At December 31, 2003
|Three Months or Less           |  | $                    | 14,901
|Over Three through Six Months  |  |                      | 5,399 
|Over Six through Twelve Months |  |                      | 8,134 
|Over Twelve Months             |  |                      | 1,813 
|                               |  |                      |       
|                               |  | $                    | 30,247
|                               |  |                      |       



However, based on our
historical experience, we believe that at least 80% of these time certificates of deposit will be renewed by depositors, unless we decide to reduce the volume of such deposits by reducing the interest rates we will pay to maintain them.



Deferred Compensation Obligations.    We
maintain a nonqualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation which will entitle them to receive certain payments upon retirement, death, or
disability. The plan provides for payments for ten years commencing upon retirement and reduced benefits upon early retirement, disability, or termination of employment. At December 31, 2003, the Companys aggregate payment obligations under
this plan totaled $4.6 million. Based on the age of the participants in the Plan, it is our current expectation that this amount would be paid over a period that should range from 2004 to 2021. In order to provide funds to pay these benefits the
Company purchased life insurance policies on the participants in this plan, the proceeds from which are designed to cover the payments that the Company will become obligated to make to plan participants.



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##### Table of Contents

Loan Commitments and Standby Letters of Credit.    In the ordinary course of
business we make commitments to extend credit and issue standby commercial letters of credit to or for our customers. At December 31, 2003 and 2002, contractual commitments to extend credit to customers totaled $46.0 million and $83.6 million, ,
respectively, and obligations under standby letters of credit totaled $1.4 million at the end of each of those years.



Commitments to extend credit and standby letters of credit generally have fixed expiration dates or other termination clauses and the customer may be
required to pay a fee and meet other conditions in order to draw on those commitments or standby letters of credit. We expect, based on historical experience, that many of the commitments will expire without being drawn upon and, therefore, the
total commitment amounts do not necessarily represent future cash requirements.



To varying degrees, commitments to extend credit involve elements of credit and interest rate risk for us that are in excess of the amounts recognized in our balance sheets. Our exposure to credit loss in the event of
nonperformance by the customers to whom such commitments are made is equal to the amount of those commitments. As a result, before making such a commitment to a customer, we evaluate the customers creditworthiness using the same underwriting
standards that we apply when deciding whether or not to approve loans to the customer. In addition, we often require the customer to secure its payment obligations for amounts drawn on such commitments with collateral such as accounts receivable,
inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction.



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.



We believe that our cash and cash equivalent resources, together with available borrowings under our line of credit and credit facilities, will be
sufficient to enable us to meet any increases in demand for loans and leases or in the utilization of outstanding loan commitments or standby letters of credit and any increase in deposit withdrawals that might occur in the foreseeable future.



Capital Resources and
Dividends.    It has been and continues to be the objective of our Board of Directors to retain earnings that are needed to meet capital requirements under applicable government regulations and to support our growth. At the
same time, it is the policy of the Board of Directors to pay cash dividends if earnings exceed the amounts required to meet that objective. Pursuant to that policy, the Company has paid regular quarterly cash dividends since September of 1999 and,
in January of 2004, the Board of Directors declared a $0.13 per share cash dividend, which is the 18thconsecutive
quarterly cash dividend declared since the current dividend policy was adopted. However, the Board may change the amount or frequency of cash dividends to the extent that it deems necessary or appropriate to achieve our objective of maintaining
capital in amounts sufficient to support our growth. For example the retention of earnings in previous years enabled us to fund the opening of new banking offices and to extend the Banks market areas, all of which have contributed to our
increased profitability and the maintenance of our capital adequacy ratios well above regulatory requirements.



We continue to evaluate and explore opportunities to expand our market into areas such as eastern Los Angeles County, western San Bernardino County, north
Orange County and northern Riverside County, all of which are contiguous to our existing markets. The number of independent banks based in our market areas has declined significantly, due to a consolidation in the banking industry that occurred over
the past several years. We believe that this consolidation has created opportunities for us to increase our market share in those areas. We have taken advantage of those opportunities by establishing a substantial number of new customer
relationships and increasing the volume of our demand, savings and money market deposit balances. We also believe that there are still additional expansion and growth opportunities that we will seek to take advantage of in the future.



Stock Repurchase Program.    In January of 2003
the Board of Directors authorized a stock repurchase program that provided for the Company to repurchase up to $5,000,000 of its common stock. Repurchases may be made from time-to-time in the open market or in privately negotiated transactions when
opportunities to do so at favorable prices present themselves, in compliance with Securities and Exchange Commission (SEC) guidelines. As of December 31, 2003, we had repurchased a total of 185,651 shares of our common stock under this program for
an aggregate price of approximately $3,562,242.



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Junior Subordinated Debentures.    In December of 2002 we issued $8,248,000 of
floating rate junior subordinated deferrable interest debentures (the Subordinated Debentures) in connection with the sale of floating rate trust preferred securities to an institutional investor as part of a pooled securitization
transaction by that investor. The trust preferred securities were issued and sold by Foothill Independent Statutory Trust I, a Connecticut trust (the Trust), of which we own all of the outstanding common securities, and the net proceeds
from the sale of the trust preferred securities were paid to us in exchange for the issuance of the Subordinated Debentures. The Subordinated Debentures are subordinated to all of our borrowings and mature in 30 years, on December 26, 2032; but are
redeemable, at par, at our option after five years (beginning December 26, 2007). We are required to make quarterly interest payments on these Debentures at an interest rate that is 3.05% above the three-month LIBOR (London Inter Bank Offered Rate),
which resets quarterly. The interest rate that we are paying on these securities for the three month period ending March 24 2004 is 4.42%. The interest is passed through by the Trust to the holder of the trust preferred securities.



Until December 2003, we consolidated the Trust into our consolidated
financial statements and in accordance with a ruling issued by the Federal Reserve Board, reported the net amount of the trust preferred securities it had issued as Tier 1 Capital for regulatory purposes. See the discussion below under the
subcaption Regulatory Capital Requirements.In accordance with FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which was adopted and became
effective on December 31, 2003, we have ceased consolidating the Trust into our consolidated financial statements. We have been informed that the Federal Reserve Board is evaluating whether FIN No. 46 will have any impact on its previous ruling;
however, we have been advised by the Federal Reserve Board to continue reporting the net amount of the trust securities as part of our Tier 1 capital for regulatory purposes. However, if the Federal Reserve Board were to retroactively revoke its
prior ruling, we will become entitled thereafter to redeem the Subordinated Debentures at par without having to wait until December 2007 to do so.



During the second quarter of 2003, $4 million of the net proceeds from the issuance of the Subordinated Debentures was used to purchase Bank-owned life
insurance policies on key management employees of the Bank, with the Bank as the beneficiary under such policies. The purposes of bank-owned life insurance (commonly known in the banking industry as BOLI) are (i) to enable the Bank to
offer employee retirement and benefit plans designed to attract and retain key management employees, by providing the Bank with a source of funds (primarily from the cash surrender value of such policies) that the Bank can use to fund the payment of
benefits under those plans, and (ii) to protect the Bank against the costs or losses that could occur as a result of the death of any key management employee. The remainder of the proceeds from the issuance of the Subordinated Debentures will be
used to fund the continued growth of the Bank and may also be used to repurchase our common stock under our stock repurchase plan.



Regulatory Capital Requirements.    Federal banking agencies require FDIC insured banks to maintain a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital (essentially, the sum of a banks capital stock and retained earnings, less any intangibles) to risk-adjusted assets of 4%. In addition to the
risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total average assets (which is to as a banks leverage ratio). For these purposes, subordinated
indebtedness issued in connection with a sale of trust preferred securities may comprise up to 25% of a banking organizations Tier 1 capital and, to the extent such indebtedness exceeds that limitation, such indebtedness will constitute Tier 2
capital for regulatory capital purposes. All of the subordinated indebtedness evidenced by the Subordinated Debentures that we issued in December 2002 qualifies as Tier 1 capital under Federal Reserve Board regulations.



The federal banking agencies have adopted uniform capital requirements for
the banks that they supervise and assign each of those banks to one of the following five categories based on their respective capital ratios:



| |  |  | well capitalized;
| | - |  | -----------------



| |  |  | adequately capitalized;
| | - |  | -----------------------



| |  |  | undercapitalized;
| | - |  | -----------------



| |  |  | significantly undercapitalized; and
| | - |  | -----------------------------------



| |  |  | critically undercapitalized
| | - |  | ---------------------------



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As a general rule, banks that are categorized as well capitalized are subject to less
stringent supervision by their federal regulatory agencies than are banks that are classified in one of the other categories; and at each successive lower capital category, a bank is subject to greater operating restrictions and increased regulatory
supervision.



Set forth below are the minimum capital ratios
that a bank must meet to be categorized as adequately capitalized and well capitalized, respectively, and the corresponding capital ratios of the Bank at December 31, 2003. The Bank is categorized as well capitalized for federal regulatory purposes
because, as the table below indicates, the Banks capital ratios exceed the ratios required to qualify as a well capitalized bank.



|                                                    |  |                                                           |   |  |                           |   |  |        |  
|--------------------------------------------------- |  | --------------------------------------------------------- | - |  | ------------------------- | - |  | ------ | -
|                                                    |  | To be Categorized by a Federal Bank Regulatory Agency as: |   |  | Foothill Independent Bank |  
|                                                    |  | Adequately Capitalized                                    |   |  | Well Capitalized          |   |  | Actual |  
|Total Capital to Risk Weighted Assets               |  | 8.0                                                       | % |  | 10.0                      | % |  | 13.8   | %
|Tier 1 Capital to Risk Weighted Assets              |  | 4.0                                                       | % |  | 6.0                       | % |  | 12.8   | %
|Tier 1 Capital to Average Assets (Leverage Ratio) |  | 4.0                                                       | % |  | 5.0                       | % |  | 9.7    | %



Risk-based capital
ratios are determined by weighting a banks assets in accordance with certain risk factors; and, the higher the risk profile of the 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%.



FACTORS THAT
COULD AFFECT OUR FUTURE FINANCIAL PERFORMANCE



Statements
contained in this Report that are not historical facts or that discuss our expectations or beliefs regarding our future operations or future financial performance, or financial or other trends in our business, constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS  Forward Looking Statements above. Forward-looking statements are based on current information and assumptions about future events over which we do not have control and that information is subject to a number of risks and
uncertainties that could cause our financial condition or operating results in the future to differ significantly from those expected at the current time. Certain of those risks and uncertainties are discussed above in the section of the Report
entitled MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. In addition, included among the risks and uncertainties that could affect our future financial performance or financial condition are the
following:



Increased
Competition.    Increased competition from other financial institutions, mutual funds and securities brokerage and investment banking firms that offer competitive loan and investment products could require us to reduce
interest rates and loan fees in order to attract new loans or to increase interest rates that we offer on time deposits, either or both of which could, in turn, reduce our interest income or increase our interest expense, thereby reducing our net
interest margin, net interest income and net earnings.



Possible Adverse Changes in Economic Conditions.    A continued slowness in current economic conditions or an adverse change in future economic conditions, either national or local, could (i) reduce loan demand
that could, in turn, reduce interest income and net interest margins; (ii) weaken the financial capability of borrowers to meet their loan obligations, resulting in increases in loan losses that would require us to increase reserves for possible
loan losses through additional charges against income; and (iii) lead to reductions in real property values that, due to our reliance on real property to secure many of our loans, could make it more difficult for us to prevent losses from being
incurred on non-performing loans through the sale of such real properties.



Possible Adverse Changes in Federal Reserve Board Monetary Policies.    Changes in national economic conditions, such as increases in inflation or declines in economic output often prompt
changes in Federal Reserve Board monetary policies that could increase the cost of funds to us or reduce yields on interest earning assets and, thereby, reduce net interest margins and net interest income and, therefore, also our net earnings. As
discussed above, in the past three years, the Federal Reserve Board has lowered market rates of interest in an effort to stimulate the national economy. Those reductions caused our net interest margin to decline, because they led to reductions in
the



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##### Table of Contents

interest paid by borrowers on outstanding variable rate loans or enabled borrowers to refinance existing fixed rate loans
at lower interest rates or to repay their loans. If such conditions continue they could lead to further reductions in our net interest margin and net interest income and, therefore, in our net earnings.



In particular, the decline in prevailing interest rates and increases in real
property values in 2003 in our market area resulted in an increase in loan refinancings at lower interest rates and loan prepayments by a number of our borrowers. While those loan refinancings and prepayments increased loan fees that helped to
offset a decline in yields on loans in 2003, they may reduce our interest margins and our net interest income in 2004, if we are not able to increase our loan volume or reduce our interest expense in amounts sufficient to offset the effects of those
refinancings and prepayments on interest income in 2004.



Real Estate Mortgage Loans.    Approximately 90% of the Banks loans are secured by deeds of trust or mortgages on real property. Although a significant portion of these loans were made to individuals, or
entities controlled by individuals, whose businesses occupy the properties and the principal source of repayment is the cash flow from or the revenue generated by those businesses, if there was a significant decline in real property values in
Southern California, such a decline could result in a deterioration in some of those loans that would necessitate increases in the loan loss reserve and could result in loan write-offs that would adversely affect our financial conditions and lead to
reductions in earnings.



Changes in Regulatory
Policies.    Changes in federal and state bank regulatory policies, such as increases in capital requirements or in loan loss reserves, or changes in required asset/liability ratios, could adversely affect earnings by
reducing yields on earning assets or increasing operating costs.



Effects of Growth.    It is our intention to take advantage of opportunities to increase our business, through acquisitions of other banks, the establishment of new banking offices or the offering of new products
or services to our customers. If we do acquire any other banks, open any additional banking offices or begin offering new products or services, we are likely to incur additional operating costs that may adversely affect our operating results, at
least on an interim basis.



Due to these and other possible
uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Market risk is the risk of loss to future earnings, to fair values of assets or to future cash flows that may result from changes in the price or value of
financial instruments. The value of a financial instrument may change as a result of changes in interest rates and other market conditions. Market risk is attributed to all market risk sensitive financial instruments, including loans and investment
securities, deposits and borrowings. We do not engage in trading activities or participate in foreign currency transactions for our own account. Accordingly, our exposure to market risk is primarily a function of our asset and liability management
activities and of changes in market rates of interest that can cause or require increases in the rates we pay on deposits that may take effect more rapidly or may be greater than the increases in the interest rates we are able to charge on loans and
the yields that we can realize on our investments. The extent of that market risk depends on a number of variables, including the sensitivity to changes in market interest rates and the maturities of our interest earning assets and our deposits.



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##### Table of Contents

The table below sets forth information concerning the interest rate sensitivity of our consolidated
assets and liabilities as of December 31, 2003. Assets and liabilities are classified by the earliest possible repricing date or maturity, whichever comes first.



|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|----------------------------------------- |  | ---------------------- | -------- | - | ------------------------------- | - | -------- | ------------------------------- |  | - | --------------- | - | --------------------- | - | ------- | ----- | - | -------- | - |  | - | -------
|                                          |  | Three Months or Less   |          |   | Over Three Through TwelveMonths |   |          | Over OneYear Through Five Years |  |   | Over Five Years |   | Non- Interest Bearing |   |         | Total
|                                          |  | (Dollars in Thousands)
|Assets                                    |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Interest-bearing deposits in banks        |  | $                      | 3,762    |   |                                 | $ | 3,663    |                                 |  | $ |                |   |                       | $ |        |       | $ |         |   |  | $ | 7,425  
|Investment securities                     |  |                        | 43,198   |   |                                 |   | 51,416   |                                 |  |   | 35,062          |   |                       |   | 15,874  |       |   |         |   |  |   | 145,550
|Federal Funds Sold                        |  |                        | 18,500   |   |                                 |   |         |                                 |  |   |                |   |                       |   |        |       |   |         |   |  |   | 18,500 
|Net loans                                 |  |                        | 130,053  |   |                                 |   | 19,859   |                                 |  |   | 52,039          |   |                       |   | 253,150 |       |   |         |   |  |   | 455,101
|Noninterest-earning assets                |  |                        |         |   |                                 |   |         |                                 |  |   |                |   |                       |   |        |       |   | 59,566   |   |  |   | 59,566 
|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Total assets                              |  | $                      | 195,513  |   |                                 |   | 74,938   |                                 |  | $ | 87,101          |   |                       | $ | 269,024 |       | $ | 59,566   |   |  | $ | 686,142
|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Liabilities and Stockholders Equity:     |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Noninterest-bearing deposits              |  | $                      |         |   |                                 | $ |         |                                 |  | $ |                |   |                       | $ |        |       | $ | 225,863  |   |  | $ | 225,863
|Interest-bearing deposits                 |  |                        | 348,353  |   |                                 |   | 33,382   |                                 |  |   | 4,449           |   |                       |   | 2       |       |   |         |   |  |   | 386,186
|Short-term borrowings                     |  |                        |         |   |                                 |   |         |                                 |  |   |                |   |                       |   |        |       |   |         |   |  |   |       
|Long-term borrowings                      |  |                        | 8,248    |   |                                 |   |         |                                 |  |   |                |   |                       |   |        |       |   |         |   |  |   | 8,248  
|Other liabilities                         |  |                        |         |   |                                 |   |         |                                 |  |   |                |   |                       |   |        |       |   | 5,072    |   |  |   | 5,072  
|Stockholders equity                      |  |                        |         |   |                                 |   |         |                                 |  |   |                |   |                       |   |        |       |   | 60,773   |   |  |   | 60,773 
|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Total liabilities and stockholders equity |  | $                      | 356,601  |   |                                 | $ | 33,382   |                                 |  | $ | 4,449           |   |                       | $ | 2       |       | $ | 291,708  |   |  | $ | 686,142
|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Interest rate sensitivity gap             |  | $                      | (161,088 | ) |                                 | $ | 41,556   |                                 |  | $ | 82,652          |   |                       | $ | 269,022 |       | $ | (232,142 | ) |  | $ |       
|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        
|Cumulative interest rate sensitivity gap  |  | $                      | (161,088 | ) |                                 | $ | (119,532 | )                               |  | $ | (36,880         | ) |                       | $ | 232,142 |       | $ |         |   |  | $ |       
|                                          |  |                        |          |   |                                 |   |          |                                 |  |   |                 |   |                       |   |         |       |   |          |   |  |   |        



Generally, where
rate-sensitive assets (principally loans, investment securities and other interest earning assets) exceed rate-sensitive liabilities (principally interest bearing deposits), the net interest margin will 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, the net interest margin generally will be negatively affected during periods of increasing
interest rates and positively affected during periods of decreasing interest rates.



At December 31, 2003, our rate sensitive balance sheet was shown to be in a negative three month gap position because our rate sensitive liabilities exceeded our rate sensitive assets for that period . This implies
that our net interest margin would decrease in the shortterm if interest rates were to rise and would increase in the shortterm if interest rates were to fall. However, the extent to which our net interest margin will be impacted by
changes in prevailing interests rates will depend on a number of factors, including how quickly rate sensitive assets and liabilities react to changes in interest rates, which will depend on a number of factors, including the mix of interest earning
assets between loans, on the one hand, and other earning assets, on the other hand, and the mix of core and time certificates of deposit. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 
RESULTS OF OPERATIONRate Sensitivity, Net Interest Margins and Market Risk



We use a dynamic simulation model to forecast the anticipated impact of changes in market interest rates on our net interest income. That model is used to assist management in evaluating, and in determining and
adjusting strategies designed to reduce, our exposure to these market risks, which may include, for example, changing the mix of earning assets or interest-bearing deposits.



|                       |  |                                          |  |              |  |         
|---------------------- |  | ---------------------------------------- |  | ------------ |  | --------
|Simulated Rate Changes |  | Estimated Net Interest IncomeSensitivity |  | Market Value
|                       |  | Assets                                   |  | Liabilities 
|(Dollars in Thousands)
|+100 basis points      |  | (3.35)%                                  |  | $705,527     |  | $622,014
|+300 basis points      |  | (11.60)%                                 |  | $682,668     |  | $621,183
|-100 basis points      |  | 4.22%                                    |  | $731,267     |  | $622,866
|-300 basis points      |  | (5.20)%                                  |  | $760,463     |  | $623,741



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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



|                                                                                                        |  |     
|------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                        |  | Page
|Foothill Independent Bancorp and Subsidiaries:                                                          |  |     
|                                                                                                        | 
|Independent Auditors Report                                                                            |  | 39  
|                                                                                                        | 
|Consolidated Balance Sheets at December 31, 2003 and 2002                                               |  | 40  
|                                                                                                        | 
|Consolidated Statements of IncomeYears Ended December 31, 2003, 2002, and 2001                         |  | 41  
|                                                                                                        | 
|Consolidated Statements of Changes in Stockholders EquityYears Ended December 31, 2003, 2002 and 2001 |  | 42  
|                                                                                                        | 
|Consolidated Statements of Cash FlowsYears Ended December 31, 2003, 2002 and 2001                      |  | 43  
|                                                                                                        | 
|Notes to Consolidated Financial Statements                                                              |  | 45  



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##### Table of Contents

Independent Auditors Report



Board of
Directors and Stockholders

Foothill Independent Bancorp and Subsidiaries

Glendora, California



We have audited the
accompanying consolidated balance sheets of Foothill Independent Bancorp and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income and changes in stockholders equity and statements of cash flows for
the three years ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and
2002, and the results of its operations and cash flows for the three years ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



Vavrinek, Trine, Day & Co., LLP

Rancho Cucamonga, California

January 23, 2004



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002



|                                                                                                                                            |  |                        |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                            |  | 2003                   |         |   | 2002 |  
|                                                                                                                                            |  | (dollars in thousands) |        
|ASSETS                                                                                                                                      |  |                        |         |  
|Cash and due from banks                                                                                                                     |  | $                      | 34,565  |   |      | $ | 32,665  |  
|Federal funds sold and overnight Repurchase Agreements                                                                                      |  |                        | 18,500  |   |      |   | 26,300  |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Total Cash and Cash Equivalents                                                                                                             |  |                        | 53,065  |   |      |   | 58,965  |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Interest-bearing deposits in other financial institutions                                                                                   |  |                        | 7,425   |   |      |   | 7,922   |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Investment securities held-to-maturity                                                                                                      |  |                        | 8,900   |   |      |   | 9,279   |  
|Investment securities available-for-sale                                                                                                    |  |                        | 136,650 |   |      |   | 71,499  |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Total Investments                                                                                                                           |  |                        | 145,550 |   |      |   | 80,778  |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Federal Home Loan Bank stock, at cost                                                                                                       |  |                        | 374     |   |      |   | 357     |  
|Federal Reserve Bank stock, at cost                                                                                                         |  |                        | 351     |   |      |   | 229     |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Loans, net of unearned income                                                                                                               |  |                        | 459,520 |   |      |   | 440,849 |  
|Direct lease financing                                                                                                                      |  |                        | 528     |   |      |   | 1,211   |  
|Allowance for Loan Losses                                                                                                                   |  |                        | (4,947  | ) |      |   | (4,619  | )
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Total Loans                                                                                                                                 |  |                        | 455,101 |   |      |   | 437,441 |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Premises and equipment                                                                                                                      |  |                        | 5,061   |   |      |   | 5,498   |  
|Other real estate owned                                                                                                                     |  |                        |        |   |      |   | 387     |  
|Cash surrender value of life insurance                                                                                                      |  |                        | 11,491  |   |      |   | 6,778   |  
|Deferred tax assets                                                                                                                         |  |                        | 2,818   |   |      |   | 2,317   |  
|Accrued interest and other assets                                                                                                           |  |                        | 4,922   |   |      |   | 4,146   |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL ASSETS                                                                                                                                |  | $                      | 686,158 |   |      | $ | 604,818 |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                        |  |                        |         |   |      |   |         |  
|Liabilities                                                                                                                                 |  |                        |         |   |      |   |         |  
|Demand deposits                                                                                                                             |  | $                      | 225,863 |   |      | $ | 198,286 |  
|Savings and NOW deposits                                                                                                                    |  |                        | 155,868 |   |      |   | 138,430 |  
|Money market deposits                                                                                                                       |  |                        | 155,717 |   |      |   | 113,081 |  
|Time deposits $100,000 or over                                                                                                              |  |                        | 30,247  |   |      |   | 34,446  |  
|Time deposits under $100,000                                                                                                                |  |                        | 44,354  |   |      |   | 50,319  |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Total Deposits                                                                                                                              |  |                        | 612,049 |   |      |   | 534,562 |  
|Accrued employee benefits                                                                                                                   |  |                        | 3,154   |   |      |   | 2,792   |  
|Accrued interest and other liabilities                                                                                                      |  |                        | 1,890   |   |      |   | 1,640   |  
|Short-term borrowings                                                                                                                       |  |                        | 29      |   |      |   |        |  
|Junior subordinated debentures                                                                                                              |  |                        | 8,248   |   |      |   | 8,248   |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Total Liabilities                                                                                                                           |  |                        | 625,370 |   |      |   | 547,242 |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Commitments and ContingenciesNote #18                                                                                                      |  |                        |         |   |      |   |         |  
|Stockholders Equity                                                                                                                        |  |                        |         |   |      |   |         |  
|Common Stock  authorized, 25,000,000 shares $.001 par value; issued and outstanding, 6,702,912 shares in 2003 and 6,032,277 shares in
2002 |  |                        | 6       |   |      |   | 6       |  
|Additional paid-in capital                                                                                                                  |  |                        | 55,048  |   |      |   | 43,110  |  
|Stock Dividend to be distributed                                                                                                            |  |                        | 12,174  |   |      |   | 9,328   |  
|Retained earnings (deficit)                                                                                                                 |  |                        | (6,605  | ) |      |   | 4,868   |  
|Accumulated other comprehensive incomeNet unrealized gains on available for sale securities, net of taxes of $83 in 2003 and $89 in
2002   |  |                        | 165     |   |      |   | 264     |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|Total Stockholders Equity                                                                                                                  |  |                        | 60,788  |   |      |   | 57,576  |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  |  | $                      | 686,158 |   |      | $ | 604,818 |  
|                                                                                                                                            |  |                        |         |   |      |   |         |  



The
accompanying notes are an integral part of these consolidated financial statements.



40



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                    |  | 2003                                             |        |   | 2002 |   |        | 2001 | 
|                                                    |  | (dollars in thousands, except per share amounts) |       
|Interest Income                                     |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Interest and fees on loans                          |  | $                                                | 31,623 |   |      | $ | 31,257 |      |  | $ | 31,720 |  
|Interest on Investment Securities                   |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Taxable                                             |  |                                                  | 3,131  |   |      |   | 2,438  |      |  |   | 3,313  |  
|Exempt from federal taxes                           |  |                                                  | 384    |   |      |   | 419    |      |  |   | 275    |  
|Interest on deposits                                |  |                                                  | 122    |   |      |   | 194    |      |  |   | 564    |  
|Interest on federal funds sold                      |  |                                                  | 360    |   |      |   | 430    |      |  |   | 808    |  
|Lease financing income exempt from federal taxes    |  |                                                  | 60     |   |      |   | 73     |      |  |   | 56     |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Total Interest Income                               |  |                                                  | 35,680 |   |      |   | 34,811 |      |  |   | 36,736 |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Interest Expense                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Interest on savings, NOW and money market deposits  |  |                                                  | 2,585  |   |      |   | 2,784  |      |  |   | 3,743  |  
|Interest on time deposits over $100,000             |  |                                                  | 568    |   |      |   | 874    |      |  |   | 2,225  |  
|Interest on time deposits under $100,000            |  |                                                  | 757    |   |      |   | 1,342  |      |  |   | 3,057  |  
|Interest on borrowings                              |  |                                                  | 373    |   |      |   | 39     |      |  |   | 5      |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Total Interest Expense                              |  |                                                  | 4,283  |   |      |   | 5,039  |      |  |   | 9,030  |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Net interest income                                 |  |                                                  | 31,397 |   |      |   | 29,772 |      |  |   | 27,706 |  
|Provision for Loan Losses                           |  |                                                  | (348   | ) |      |   | (460   | )    |  |   | (498   | )
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Net interest income after provision For Loan Losses |  |                                                  | 31,049 |   |      |   | 29,312 |      |  |   | 27,208 |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Non Interest Income                                 |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Services fees                                       |  |                                                  | 5,000  |   |      |   | 5,214  |      |  |   | 5,231  |  
|Gain on sale of SBA loans                           |  |                                                  | 5      |   |      |   | 3      |      |  |   | 24     |  
|Other                                               |  |                                                  | 608    |   |      |   | 477    |      |  |   | 159    |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|                                                    |  |                                                  | 5,613  |   |      |   | 5,694  |      |  |   | 5,414  |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Non Interest Expenses                               |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Salaries and employee benefits                      |  |                                                  | 11,822 |   |      |   | 11,397 |      |  |   | 10,454 |  
|Net occupancy expense of premises                   |  |                                                  | 2,496  |   |      |   | 2,470  |      |  |   | 2,488  |  
|Furniture and equipment expenses                    |  |                                                  | 1,537  |   |      |   | 1,576  |      |  |   | 1,550  |  
|Other expenses                                      |  |                                                  | 7,660  |   |      |   | 7,491  |      |  |   | 7,354  |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|                                                    |  |                                                  | 23,515 |   |      |   | 22,934 |      |  |   | 21,846 |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Income before income taxes                          |  |                                                  | 13,147 |   |      |   | 12,072 |      |  |   | 10,776 |  
|Income Taxes                                        |  |                                                  | 4,726  |   |      |   | 4,378  |      |  |   | 3,926  |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|NET INCOME                                          |  | $                                                | 8,421  |   |      | $ | 7,694  |      |  | $ | 6,850  |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Earnings Per Share                                  |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Basic                                               |  | $                                                | 1.27   |   |      | $ | 1.17   |      |  | $ | 1.04   |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  
|Diluted                                             |  | $                                                | 1.18   |   |      | $ | 1.09   |      |  | $ | 0.99   |  
|                                                    |  |                                                  |        |   |      |   |        |      |  |   |        |  



The
accompanying notes are an integral part of these consolidated financial statements.



41



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ----------- | - | ------------------------- | - | ------------------------------ |  | - | ------------------- | - |  | ------------------------- | ----- | - | ----------------------------------- | - | ------- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                                                                   |  | Number ofSharesOutstanding |   |  | CommonStock |   | AdditionalPaid-in Capital |   | StockDividend to beDistributed |  |   | ComprehensiveIncome |   |  | RetainedEarnings(Deficit) |       |   | AccumulatedOtherComprehensiveIncome |   |         | Total | 
|                                                                                                   |  | (dollars in thousands)     |  
|Balance, January 1, 2001                                                                           |  | 5,243,863                  |   |  | $           | 5 |                           | $ | 37,754                         |  | $ |                    |   |  |                           |       |   |                                     | $ | 10,746  |       |  | $ | (242 | ) |  | $ | 48,263 |  
|7% stock dividend                                                                                  |  | 361,421                    |   |  |             | 1 |                           |   | 4,626                          |  |   |                     |   |  |                           |       |   |                                     |   | (4,627  | )     |  |   |      |   |  |   |       |  
|Cash paid in lieu of fractional shares                                                             |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   | (7      | )     |  |   |      |   |  |   | (7     | )
|Cash dividend                                                                                      |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   | (2,177  | )     |  |   |      |   |  |   | (2,177 | )
|Exercise of stock options                                                                          |  | 38,417                     |   |  |             |   |                           |   | 224                            |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   | 224    |  
|Common stock issued under employee benefit and dividend reinvestment and optional investment plans |  | 22,130                     |   |  |             |   |                           |   | 288                            |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   | 288    |  
|Common stock repurchased, cancelled and retired                                                    |  | (151,468                   | ) |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   | (1,908  | )     |  |   |      |   |  |   | (1,908 | )
|Comprehensive income:                                                                              |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Net income                                                                                         |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  | $                         | 6,850 |   |                                     |   | 6,850   |       |  |   |      |   |  |   | 6,850  |  
|Net unrealized holding gains on available-for-sale securities (net of taxes of $37)                |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           | 319   |   |                                     |   |         |       |  |   | 319  |   |  |   | 319    |  
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Total Comprehensive Income                                                                         |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  | $                         | 7,169 |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Balance, December 31, 2001                                                                         |  | 5,514,363                  |   |  | $           | 6 |                           | $ | 42,892                         |  | $ |                    |   |  |                           |       |   |                                     | $ | 8,877   |       |  | $ | 77   |   |  | $ | 51,852 |  
|9% stock dividend                                                                                  |  | 497,498                    |   |  |             |   |                           |   |                                |  |   | 9,328               |   |  |                           |       |   |                                     |   | (9,328  | )     |  |   |      |   |  |   |       |  
|Cash dividend                                                                                      |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   | (2,375  | )     |  |   |      |   |  |   | (2,375 | )
|Exercise of stock options                                                                          |  | 13,168                     |   |  |             |   |                           |   | 120                            |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   | 120    |  
|Common stock issued under employee benefit and dividend reinvestment and optional investment plans |  | 7,248                      |   |  |             |   |                           |   | 98                             |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   | 98     |  
|Comprehensive income:                                                                              |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Net income                                                                                         |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           | 7,694 |   |                                     |   | 7,694   |       |  |   |      |   |  |   | 7,694  |  
|Net unrealized holding gains on available-for-sale securities (net of taxes of $89)                |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           | 187   |   |                                     |   |         |       |  |   | 187  |   |  |   | 187    |  
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Total Comprehensive Income                                                                         |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  | $                         | 7,881 |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Balance, December 31, 2002                                                                         |  | 6,032,277                  |   |  | $           | 6 |                           | $ | 43,110                         |  | $ | 9,328               |   |  |                           |       |   |                                     | $ | 4,868   |       |  | $ | 264  |   |  | $ | 57,576 |  
|Stock dividend distributed                                                                         |  |                            |   |  |             | 6 |                           |   | 9,328                          |  |   | (9,328              | ) |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |       |  
|9% stock dividend                                                                                  |  | 552,839                    |   |  |             |   |                           |   |                                |  |   | 12,174              |   |  |                           |       |   |                                     |   | (12,174 | )     |  |   |      |   |  |   |       |  
|Cash dividend                                                                                      |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   | (4,158  | )     |  |   |      |   |  |   | (4,158 | )
|Exercise of stock options                                                                          |  | 303,447                    |   |  |             |   |                           |   | 2,610                          |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   | 2,610  |  
|Common stock issued under employee benefit and dividend reinvestment and optional investment plans |  | (185,651                   | ) |  |             |   |                           |   |                               |  |   |                     |   |  |                           |       |   |                                     |   | (3,562  | )     |  |   |      |   |  |   | (3,562 | )
|Comprehensive income:                                                                              |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Net income                                                                                         |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           | 8,421 |   |                                     |   | 8,421   |       |  |   |      |   |  |   | 8,421  |  
|Net unrealized holding gains on available-for-sale securities (net of taxes of $83)                |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           | (99   | ) |                                     |   |         |       |  |   | (99  | ) |  |   | (99    | )
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Total Comprehensive Income                                                                         |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  | $                         | 8,322 |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  
|Balance, December 31, 2003                                                                         |  | 6,702,912                  |   |  | $           | 6 |                           | $ | 55,048                         |  | $ | 12,174              |   |  |                           |       |   |                                     | $ | (6,605  | )     |  | $ | 165  |   |  | $ | 60,788 |  
|                                                                                                   |  |                            |   |  |             |   |                           |   |                                |  |   |                     |   |  |                           |       |   |                                     |   |         |       |  |   |      |   |  |   |        |  



The
accompanying notes are an integral part of these consolidated financial statements.



42



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                        |  | 2003                   |          |   | 2002 |   |         | 2001 | 
|                                                                        |  | (dollars in thousands) |         
|Cash Flows From Operating Activities                                    |  |                        |          |   |      |   |         |      |  |   |         |  
|Interest and fees received                                              |  | $                      | 35,000   |   |      | $ | 35,469  |      |  | $ | 37,238  |  
|Service fees and other income received                                  |  |                        | 880      |   |      |   | 4,982   |      |  |   | 4,814   |  
|Financing revenue received under leases                                 |  |                        | 60       |   |      |   | 73      |      |  |   | 56      |  
|Interest paid                                                           |  |                        | (4,342   | ) |      |   | (5,160  | )    |  |   | (9,379  | )
|Cash paid to suppliers and employees                                    |  |                        | (22,031  | ) |      |   | (20,914 | )    |  |   | (18,107 | )
|Income taxes paid                                                       |  |                        | (4,980   | ) |      |   | (4,423  | )    |  |   | (4,033  | )
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|Net Cash Provided By Operating Activities                               |  |                        | 4,587    |   |      |   | 10,027  |      |  |   | 10,589  |  
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|Cash Flows From Investing Activities                                    |  |                        |          |   |      |   |         |      |  |   |         |  
|Proceeds from maturity of available-for-sale securities                 |  |                        | 109,830  |   |      |   | 89,172  |      |  |   | 79,927  |  
|Purchase of available-for-sale securities                               |  |                        | (175,259 | ) |      |   | (93,342 | )    |  |   | (97,013 | )
|Proceeds from maturity of held-to-maturity securities                   |  |                        | 955      |   |      |   | 3,775   |      |  |   | 13,806  |  
|Purchase of held-to-maturity securities                                 |  |                        | (580     | ) |      |   | (46     | )    |  |   | (6,116  | )
|Net (increase) decrease in deposits in other financial institutions     |  |                        | 497      |   |      |   | 5,336   |      |  |   | (5,253  | )
|Net (increase) decrease in credit card and revolving credit receivables |  |                        | (530     | ) |      |   | 254     |      |  |   | (154    | )
|Recoveries and deferred recoveries on loans previously written off      |  |                        | 6        |   |      |   | 33      |      |  |   | 75      |  
|Net increase in loans                                                   |  |                        | (18,375  | ) |      |   | (34,191 | )    |  |   | (39,711 | )
|Net (increase) decrease in leases                                       |  |                        | 683      |   |      |   | 117     |      |  |   | (164    | )
|Capital expenditures                                                    |  |                        | 78       |   |      |   | (570    | )    |  |   | (1,838  | )
|Proceeds from sale of other real estate owned                           |  |                        | (615     | ) |      |   | 1,903   |      |  |   |        |  
|Proceeds from sale of property, plant and equipment                     |  |                        | 387      |   |      |   | 1       |      |  |   | 1,094   |  
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|Net Cash Used In Investing Activities                                   |  |                        | (82,923  | ) |      |   | (27,558 | )    |  |   | (55,347 | )
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|Cash Flows From Financing Activities                                    |  |                        |          |   |      |   |         |      |  |   |         |  
|Net increase in deposits                                                |  |                        | 77,546   |   |      |   | 59,158  |      |  |   | 21,307  |  
|Net increase (decrease) in short term borrowing                         |  |                        |         |   |      |   | (19,000 | )    |  |   | 19,092  |  
|Net increase in junior subordinated debentures                          |  |                        |         |   |      |   | 8,248   |      |  |   |        |  
|Proceeds from exercise of stock options                                 |  |                        | 2,610    |   |      |   | 120     |      |  |   | 224     |  
|Proceeds from stock issuance                                            |  |                        |         |   |      |   | 98      |      |  |   | 288     |  
|Dividends paid                                                          |  |                        | (4,158   | ) |      |   | (2,375  | )    |  |   | (2,184  | )
|Stock repurchased and retired                                           |  |                        | (3,562   | ) |      |   |        |      |  |   | (1,908  | )
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|Net Cash Provided By Financing Activities                               |  |                        | 72,436   |   |      |   | 46,249  |      |  |   | 36,819  |  
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                    |  |                        | (5,900   | ) |      |   | 28,718  |      |  |   | (7,939  | )
|Cash and Cash Equivalents, Beginning of Year                            |  |                        | 58,965   |   |      |   | 30,247  |      |  |   | 38,186  |  
|Cash and Cash Equivalents, End of Year                                  |  | $                      | 53,065   |   |      | $ | 58,965  |      |  | $ | 30,247  |  
|                                                                        |  |                        |          |   |      |   |         |      |  |   |         |  



The
accompanying notes are an integral part of these consolidated financial statements.



43



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



|                                                                                 |  |                        |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                 |  | 2003                   |        |   | 2002 |   |        | 2001 | 
|                                                                                 |  | (dollars in thousands) |       
|Reconciliation of Net Income to Net Cash Provided By Operating Activities        |  |                        |        |   |      |   |        |      |  |   |        |  
|Net Income                                                                       |  | $                      | 8,421  |   |      | $ | 7,694  |      |  | $ | 6,850  |  
|Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities |  |                        |        |   |      |   |        |      |  |   |        |  
|Depreciation and amortization                                                    |  |                        | 979    |   |      |   | 1,385  |      |  |   | 1,364  |  
|Provision for possible credit losses                                             |  |                        | 348    |   |      |   | 460    |      |  |   | 498    |  
|Provision for possible OREO losses                                               |  |                        |       |   |      |   |       |      |  |   | 125    |  
|(Gain) loss on sale of equipment                                                 |  |                        | (5     | ) |      |   | 7      |      |  |   | (72    | )
|Gain on sale of other real estate owned                                          |  |                        |       |   |      |   | (108   | )    |  |   |       |  
|Credit for deferred taxes                                                        |  |                        | (501   | ) |      |   | (342   | )    |  |   | (174   | )
|Increase in taxes payable                                                        |  |                        | 248    |   |      |   | 297    |      |  |   | 67     |  
|(Increase) decrease in other assets                                              |  |                        | (99    | ) |      |   | 131    |      |  |   | 231    |  
|(Increase) decrease in interest receivable                                       |  |                        | (581   | ) |      |   | 669    |      |  |   | 335    |  
|(Increase) decrease in discounts and premiums                                    |  |                        | (39    | ) |      |   | 62     |      |  |   | 223    |  
|(Increase) decrease in prepaid expenses                                          |  |                        | 55     |   |      |   | 241    |      |  |   | 1,352  |  
|Increase in cash surrender value of life insurance                               |  |                        | (4,713 | ) |      |   | (611   | )    |  |   | (528   | )
|Decrease in interest payable                                                     |  |                        | (59    | ) |      |   | (121   | )    |  |   | (349   | )
|Increase in accrued expenses and other liabilities                               |  |                        | 533    |   |      |   | 263    |      |  |   | 667    |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |        |  
|Total Adjustments                                                                |  |                        | (3,834 | ) |      |   | 2,333  |      |  |   | 3,739  |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided By Operating Activities                                        |  | $                      | 4,587  |   |      | $ | 10,027 |      |  | $ | 10,589 |  
|                                                                                 |  |                        |        |   |      |   |        |      |  |   |        |  



The
accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #1Summary of
Significant Accounting Policies



Principles of Consolidation



The consolidated financial statements include the accounts of
Foothill Independent Bancorp and its wholly owned subsidiaries, Foothill Independent Bank (the Bank), and Foothill BPC, Inc., collectively referred to herein as the Company. Inter-company balances and transactions have been
eliminated.



Investment in Non-Consolidated Subsidiary



The Company accounts for its investment in its wholly owned special purpose
entity, Foothill Independent Statutory Trust I, using the equity method under which the subsidiarys net earnings are recognized in the Bancorps statement of income, pursuant to Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. 



Nature of Operations



We operate in a single operating segment, consisting of commercial banking operations that are conducted from twelve branch banking offices in various
locations in the Los Angeles, Riverside, and San Bernardino Counties of Southern California. Our primary source of revenue are interest income and fees paid to us on loans made to our customers, who are predominately small and middle market
businesses and individuals.



Foothill BPC, Inc. is an entity
that owns or holds leasehold interests in certain of our branch banking offices and leases or subleases those offices to the Bank.



On December 18, 2000, the Company formed Platinum Results, Inc., as a California corporation and data processing subsidiary of the Company. As of December
31, 2003, Platinum Results, Inc. was dissolved.



Use of Estimates



The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America 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. Material estimates that are particularly susceptible to significant change in the near term
relate to the determination of the allowance for loan losses (See Note #5), the valuation of foreclosed real estate (See Note #7) and deferred tax assets (See Note #16).



Cash and Cash Equivalents



For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and federal funds sold. Generally, federal funds are sold for
one day periods.



Cash and Due From Banks



Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank. We were in compliance with the reserve requirements as of December 31, 2003.



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.



45



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #1Summary of Significant Accounting Policies, (continued)



Investment Securities (continued)



Securities are considered available-for-sale if they would be sold under
certain conditions, among these being changes in interest rates, fluctuations in deposit levels or loan demand, or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities
classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income and reported as an amount net of taxes as a separate component of other
comprehensive income included in stockholders equity (See Note #2).



Loans
and Interest on Loans



Loans are stated at unpaid
principal balances, net of deferred loan fees and unearned discounts. The Bank recognizes loan origination fees to the extent they represent reimbursement for initial direct costs, as income at the time of loan boarding. The excess of fees over
costs, if any, is deferred and recognized as an adjustment to yield of the loan (See Note #3).



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.



For impairment recognized in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by SFAS No. 118, the entire change in the present value of expected cash flows of an impaired loan is reported either as provision for loan losses in the same manner in which impairment initially was
recognized, or as a reduction in the amount of provision for loan losses that otherwise would be reported (See Note #5).



Provision for Loan Losses



The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Managements periodic evaluation of
the adequacy of the allowance is based on the Companys past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying
collateral, and current and anticipated economic and market conditions. The provision for the current increase to the allowance for loan losses is charged to expense (See Note #5).



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 leases with terms from three to seven years.



Premises and Equipment



Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and twenty to thirty years for buildings. Leasehold improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for improvements or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred (See Note #6).



46



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #1Summary of Significant Accounting Policies (continued)



Other Real Estate Owned



Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value minus estimated
costs to sell. Revenue and expenses from the operation of those properties and additions to the valuation allowance are included in other expenses (See Note #7).



Loan Sales and Servicing



Gains and losses from the sale of participating interests in loans guaranteed by the Small Business Administration (SBA) are recognized based
on the premium received or discount paid and the cost basis of the portion of the loan sold. The cost basis of the portion of the loan sold is 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. We retain the servicing on the portion of the loans sold and recognize income on the servicing fees when they are received.



Income Taxes



Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing
the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. A valuation allowance is established to the extent necessary to reduce the
deferred tax asset to the level at which it is more likely than not that the tax asset or benefits will be realized. Realization of tax benefits for deductible temporary differences and operating loss carryforwards depends on having
sufficient taxable income of an appropriate character within the carryforward periods (See Note #16).



Comprehensive Income



Beginning in 1998, we adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which requires the disclosure of comprehensive income and its components. Changes in unrealized gain
(loss) on available-for-sale securities, net of income taxes, is the only component of our accumulated other comprehensive income.



Earnings Per Share (EPS)



Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then
shared in the earnings of the Company. Earnings per share and stock option amounts have been retroactively restated to give effect to all stock dividends (See Note #17).



Stock-Based Compensation



SFAS No. 123, Accounting for Stock-Based Compensation,encourages, but does not require, companies to record compensation costs for
stock-based employee compensation plans at fair value. We have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation costs for stock options is measured as the excess, if any, of the quoted market price of our shares of common stock at the date of
the grant over the amount an employee must pay to acquire the stock.



47



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #1Summary of Significant Accounting Policies,(continued)



Had compensation cost for our stock options plans been determined based on
the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below:



|                                                                                               |  |                                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                               |  | Year Ended December 31,                 |      
|                                                                                               |  | 2003                                    |       |   | 2002 |   |       | 2001 | 
|                                                                                               |  | (In thousands, exceptper share amounts) |      
|Net income:                                                                                    |  |                                         |       |   |      |   |       |      |  |   |       |  
|As reported                                                                                    |  | $                                       | 8,421 |   |      | $ | 7,694 |      |  | $ | 6,850 |  
|Stock-Based compensation using the intrinsic value method                                      |  |                                         |      |   |      |   |      |      |  |   |      |  
|Stock-Based compensation that would have been reported using the fair value method of SFAS 123 |  | $                                       | (318  | ) |      | $ | (132  | )    |  | $ | (154  | )
|Pro forma                                                                                      |  |                                         | 8,103 |   |      |   | 7,562 |      |  |   | 6,696 |  
|Per share data:                                                                                |  |                                         |       |   |      |   |       |      |  |   |       |  
|Net incomeBasic                                                                               |  |                                         |       |   |      |   |       |      |  |   |       |  
|As reported                                                                                    |  | $                                       | 1.27  |   |      | $ | 1.17  |      |  | $ | 1.04  |  
|Pro forma                                                                                      |  | $                                       | 1.22  |   |      | $ | 1.15  |      |  | $ | 1.01  |  
|Net incomediluted                                                                             |  |                                         |       |   |      |   |       |      |  |   |       |  
|As reported                                                                                    |  | $                                       | 1.18  |   |      | $ | 1.09  |      |  | $ | 0.99  |  
|Pro forma                                                                                      |  | $                                       | 1.13  |   |      | $ | 1.06  |      |  | $ | 0.97  |  



Disclosure About Fair Value of
Financial Instruments



SFAS No. 107 specifies the
disclosure of the estimated fair value of financial instruments. The estimated fair value amounts of our financial instruments have been determined by us using available market information and appropriate valuation methodologies.



However, considerable judgment is required to develop the estimate of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts we could have realized in a current market exchange. The use of different market assumptions and/or estimates of methodologies may have a material effect on the
estimated fair value amounts.



Although we are not aware of any
factor that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the balance sheet date and, therefore, current estimates of fair value may
differ significantly from the amounts presented in the accompanying notes (See Note #20).



Current Accounting Pronouncements



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003; however, adoption of SFAS No. 149 did not, during 2003, and is not expected to have a material impact on our financial statements.



In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify a financial
instrument that is within its scope as a liability. Many of those instruments were previously classified as equity. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at
the beginning of the first interim period beginning after June 15, 2003; however, adoption of SFAS No. 150 did not, during 2003, and is not expected to have a material impact on our financial statements.



48



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #1Summary of Significant Accounting Policies (continued)



In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities an Interpretation of ARB NO. 51 (FIN 46); and in December 2003, FASB issued a revision (FIN 46R). FIN 46 and FIN 46R address the requirements for consolidation by business
enterprises of variable interest entities. It has been determined that subsidiary business trusts, formed by bank holding companies to issue trust preferred securities and lend the proceeds to the parent holding company, do not meet the definition
of a variable interest entity and, therefore, may no longer be consolidated for financial reporting purposes. Bank holding companies have previously consolidated these entities and reported the trust preferred securities as liabilities in the
consolidated financial statements. Accordingly, effective December 31, 2003 we ceased consolidating our trust preferred securities which, however, did not have a material impact on our financial statements. For additional disclosure regarding the
potential impact on regulatory capital requirements, see the Note 19Regulatory Matters.



Reclassifications



Certain reclassifications were made to prior years presentations to conform to the current year.



Note #2Investment Securities



Debt and equity securities have been classified in the consolidated balance sheets according to managements intent. The carrying amounts of
securities and their approximate fair market values at December 31, were as follows (in thousands):



Held to Maturity Securities



|                                   |  |                   |       |                       |   |                        |  |            |   |  |   |      
|---------------------------------- |  | ----------------- | ----- | --------------------- | - | ---------------------- |  | ---------- | - |  | - | -----
|                                   |  | December 31, 2003
|                                   |  | Amortized Cost    |       | GrossUnrealized Gains |   | GrossUnrealized Losses |  | Fair Value
|U.S. Treasury Securities           |  | $                 | 201   |                       | $ |                       |  | $          |  |  | $ | 201  
|Other Government Agency Securities |  |                   | 1,940 |                       |   | 12                     |  |            |  |  |   | 1,952
|Municipal Agencies                 |  |                   | 4,448 |                       |   | 268                    |  |            |  |  |   | 4,716
|Other Securities                   |  |                   | 2,311 |                       |   |                       |  |            |  |  |   | 2,311
|                                   |  |                   |       |                       |   |                        |  |            |   |  |   |      
|Total                              |  | $                 | 8,900 |                       | $ | 280                    |  | $          |  |  | $ | 9,180
|                                   |  |                   |       |                       |   |                        |  |            |   |  |   |      
|                                   | 
|                                   |  | December 31, 2002
|                                   |  | Amortized Cost    |       | GrossUnrealized Gains |   | GrossUnrealized Losses |  | Fair Value
|U.S. Treasury Securities           |  | $                 | 349   |                       | $ | 10                     |  | $          |  |  | $ | 359  
|Other Government Agency Securities |  |                   | 1,941 |                       |   | 86                     |  |            |  |  |   | 2,027
|Municipal Agencies                 |  |                   | 4,678 |                       |   | 295                    |  |            |  |  |   | 4,973
|Other Securities                   |  |                   | 2,311 |                       |   |                       |  |            |  |  |   | 2,311
|                                   |  |                   |       |                       |   |                        |  |            |   |  |   |      
|Total                              |  | $                 | 9,279 |                       | $ | 391                    |  | $          |  |  | $ | 9,670
|                                   |  |                   |       |                       |   |                        |  |            |   |  |   |      



Available-For-Sale Securities



|                              |  |                   |         |                       |   |                        |  |            |     |  |   |        
|----------------------------- |  | ----------------- | ------- | --------------------- | - | ---------------------- |  | ---------- | --- |  | - | -------
|                              |  | December 31, 2003
|                              |  | Amortized Cost    |         | GrossUnrealized Gains |   | GrossUnrealized Losses |  | Fair Value
|U. S. Treasury Securities     |  | $                 | 373     |                       | $ | 2                      |  | $          |    |  | $ | 375    
|Government Agency Securities  |  |                   | 124,776 |                       |   | 487                    |  |            | 344 |  |   | 124,919
|Certificates of Participation |  |                   | 840     |                       |   | 23                     |  |            |    |  |   | 863    
|Municipal Agencies            |  |                   | 6,172   |                       |   | 136                    |  |            | 2   |  |   | 6,306  
|Mortgage-Back Securities      |  |                   | 2,366   |                       |   | 10                     |  |            | 1   |  |   | 2,375  
|Other Securities              |  |                   | 1,954   |                       |   |                       |  |            | 142 |  |   | 1,812  
|                              |  |                   |         |                       |   |                        |  |            |     |  |   |        
|Total                         |  | $                 | 136,481 |                       | $ | 658                    |  | $          | 489 |  | $ | 136,650
|                              |  |                   |         |                       |   |                        |  |            |     |  |   |        



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #2Investment Securities (continued)



Available for Sale Securities



|                              |  |                   |        |                       |   |                        |  |            |     |  |   |       
|----------------------------- |  | ----------------- | ------ | --------------------- | - | ---------------------- |  | ---------- | --- |  | - | ------
|                              |  | December 31, 2002
|                              |  | Amortized Cost    |        | GrossUnrealized Gains |   | GrossUnrealized Losses |  | Fair Value
|Government Agency Securities  |  | $                 | 57,534 |                       | $ | 518                    |  | $          |    |  | $ | 58,052
|Certificates of Participation |  |                   | 1,835  |                       |   | 55                     |  |            |    |  |   | 1,890 
|Municipal Agencies            |  |                   | 1,250  |                       |   | 54                     |  |            |    |  |   | 1,304 
|Mortgage-Back Securities      |  |                   | 523    |                       |   | 13                     |  |            |    |  |   | 536   
|Other Securities              |  |                   | 10,006 |                       |   | 1                      |  |            | 290 |  |   | 9,717 
|                              |  |                   |        |                       |   |                        |  |            |     |  |   |       
|Total                         |  | $                 | 71,148 |                       | $ | 641                    |  | $          | 290 |  | $ | 71,499
|                              |  |                   |        |                       |   |                        |  |            |     |  |   |       



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.



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 $840,000 and $1,835,000 and market values of $863,000 and $1,890,000 at December 31, 2003 and
2002, respectively.



Proceeds from maturities of investment
securities held-to-maturity during 2003, were $955,000. Proceeds from maturities of investment securities available-for-sale during 2003, were $109,830,000. There were no gains or losses recognized.



Proceeds from maturities of investment securities held-to-maturity during
2002, were $3,775,000. Proceeds from maturities of investment securities available-for-sale during 2002, were $89,172,000. There were no gains or losses recognized.



Proceeds from maturities of investment securities held-to-maturity during 2001, were $3,545,000. Proceeds from maturities of
investment securities available-for-sale during 2001, were $13,806,000. There were no gains or losses recognized.



Securities with book values of $16,602,000 and $15,688,000 and market values of $16,596,000 and $16,069,000 at December 31, 2003 and 2002, 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 held to maturity at December 31, 2003, by contractual maturity were as follows (in thousands):



|                                                       |  |                             |       |            |   |               |  |      |  
|------------------------------------------------------ |  | --------------------------- | ----- | ---------- | - | ------------- |  | ---- | -
|                                                       |  | Held-to-Maturity Securities |      
|Maturities Schedule of Securities at December 31, 2003 |  | Amortized Cost              |       | Fair Value |   | Average Yield | 
|Due in one year or less                                |  | $                           | 4,677 |            | $ | 4,695         |  | 2.48 | %
|Due after one year through five years                  |  |                             | 1,823 |            |   | 1,918         |  | 4.85 | %
|Due after five years                                   |  |                             | 2,400 |            |   | 2,567         |  | 5.32 | %
|                                                       |  |                             |       |            |   |               |  |      |  
|Carried at Amortized Cost                              |  | $                           | 8,900 |            | $ | 9,180         |  | 3.73 | %
|                                                       |  |                             |       |            |   |               |  |      |  



50



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##### Table of Contents

FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #2Investment Securities (continued)



The amortized cost, estimated fair value and average yield of securities available for sale at December 31, 2003, by
contractual maturity were as follows (in thousands):



|                                                       |  |                               |         |            |   |              |  |      |  
|------------------------------------------------------ |  | ----------------------------- | ------- | ---------- | - | ------------ |  | ---- | -
|                                                       |  | Available-for-Sale Securities |        
|Maturities Schedule of Securities at December 31, 2003 |  | Amortized Cost                |         | Fair Value |   | AverageYield | 
|Due in one year or less                                |  | $                             | 4,343   |            | $ | 4,426        |  | 3.77 | %
|Due after one year through five years                  |  |                               | 115,868 |            |   | 115,982      |  | 3.06 | %
|Due after five through ten years                       |  |                               | 9,926   |            |   | 9,971        |  | 4.04 | %
|Due after ten years                                    |  |                               | 6,344   |            |   | 6,271        |  | 2.94 | %
|                                                       |  |                               |         |            |   |              |  |      |  
|Carried at Fair Value                                  |  | $                             | 136,481 |            | $ | 136,650      |  | 3.15 | %
|                                                       |  |                               |         |            |   |              |  |      |  



In the case of both
securities held to maturity and securities available for sale, the average yields are based on effective rates of book balances at the end of each year. Yields are derived by dividing interest income, adjusted for amortization of premiums and
accretion of discounts, by total amortized cost.



Note #3Loans



The composition of the loan portfolio at December 31,
2003 and 2002, was as follows (in thousands):



|                                                                           |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                           |  | 2003 |         |   | 2002 |  
|Commercial, financial and agricultural                                     |  | $    | 44,855  |   |      | $ | 44,136  |  
|Real Estateconstruction                                                   |  |      | 27,077  |   |      |   | 34,492  |  
|Real Estatemortgage                                                       |  |      |         |   |      |   |         |  
|Commercial                                                                 |  |      | 360,751 |   |      |   | 331,108 |  
|Residential                                                                |  |      | 20,812  |   |      |   | 26,599  |  
|Loans to individuals for household, family                                 |  |      |         |   |      |   |         |  
|Loans to individuals for household, family and other personal expenditures |  |      | 3,816   |   |      |   | 4,073   |  
|All other loans (including overdrafts)                                     |  |      | 2,263   |   |      |   | 508     |  
|                                                                           |  |      |         |   |      |   |         |  
|                                                                           |  |      | 459,574 |   |      |   | 440,916 |  
|Deferred income on loans                                                   |  |      | (54     | ) |      |   | (67     | )
|                                                                           |  |      |         |   |      |   |         |  
|Loans, net of deferred income                                              |  | $    | 459,520 |   |      | $ | 440,849 |  
|                                                                           |  |      |         |   |      |   |         |  



Nonaccruing loans
totaled approximately $608,000 and $1,455,000 at December 31, 2003 and 2002, respectively. Interest income that would have been recognized on nonaccrual loans if they had performed in accordance with the terms of those loans was approximately
$90,000, $117,000, and $197,000 for the years ended December 31, 2003, 2002, and 2001, respectively.



At December 31, 2003 and 2002, we had approximately $120,000 and $5,000, respectively, of loans that were past due 90 days or more in interest or
principal but which were still accruing interest. These loans are collateralized and in the process of collection.



Note #4Direct Lease Financing



We lease equipment to customers 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 investments in direct lease financing at December 31, 2003 and 2002, consists of the following (in thousands):



|                          |  |      |     |   |      |   |       |  
|------------------------- |  | ---- | --- | - | ---- | - | ----- | -
|                          |  | 2003 |     |   | 2002 |  
|Lease payments receivable |  | $    | 597 |   |      | $ | 1,329 |  
|Unearned income           |  |      | (69 | ) |      |   | (118  | )
|                          |  |      |     |   |      |   |       |  
|Total                     |  | $    | 528 |   |      | $ | 1,211 |  
|                          |  |      |     |   |      |   |       |  



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #4Direct Lease Financing (continued)



At December 31, 2003, future minimum lease payments receivable under direct financing leases are as follows (in thousands):



|                     |  |   |     |  
|-------------------- |  | - | --- | -
|Year                 |  |   |    
|2004                 |  | $ | 230 |  
|2005                 |  |   | 127 |  
|2006                 |  |   | 123 |  
|2007                 |  |   | 88  |  
|2008                 |  |   | 29  |  
|Thereafter           |  |   |    |  
|                     |  |   |     |  
|                     |  |   | 597 |  
|Less unearned income |  |   | (69 | )
|                     |  |   |     |  
|Total                |  | $ | 528 |  
|                     |  |   |     |  



Note #5Allowance For Loan and
Lease Losses



Transactions in the reserve for loan and
lease losses are summarized as follows (in thousands):

|                                           |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                           |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Balance, Beginning of Year                 |  | $    | 4,619 |   |      | $ | 4,206 |      |  | $ | 3,692 |  
|Recoveries on loans previously charged off |  |      | 63    |   |      |   | 48    |      |  |   | 102   |  
|Provision charged to operating expense     |  |      | 348   |   |      |   | 460   |      |  |   | 498   |  
|Loans charged off                          |  |      | (83   | ) |      |   | (95   | )    |  |   | (86   | )
|                                           |  |      |       |   |      |   |       |      |  |   |       |  
|Balance, End of Year                       |  | $    | 4,947 |   |      | $ | 4,619 |      |  | $ | 4,206 |  
|                                           |  |      |       |   |      |   |       |      |  |   |       |  



We treat all
nonaccruing loans and troubled debt restructurings as impaired loans. The allowances for loan losses related to impaired loans amounted to approximately $18,800 and $38,000 for the years ended December 31, 2003 and 2002, respectively, and those
allowances are included in the above balances. The average balance of these loans amounted to approximately $1,140,000 and $2,428,000 for the years ended December 31, 2003 and 2002, respectively. During 2003, cash receipts totaling approximately
$2,086,000 were applied to reduce the principal balances of, and $39,000 of interest income was recognized on, impaired loans. During 2002, cash receipts totaling approximately $104,740 were applied to reduce the principal balances of, and no
interest income was recognized on, impaired loans.



Note #6Bank
Premises and Equipment



Major classifications of bank
premises and equipment are summarized as follows (in thousands):



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                |  | 2003 |         |   | 2002 |  
|Buildings                                       |  | $    | 2,424   |   |      | $ | 2,424   |  
|Furniture and equipment                         |  |      | 10,156  |   |      |   | 9,885   |  
|Leasehold improvements                          |  |      | 3,734   |   |      |   | 3,650   |  
|                                                |  |      |         |   |      |   |         |  
|                                                |  |      | 16,314  |   |      |   | 15,959  |  
|Less: Accumulated depreciation and amortization |  |      | (11,628 | ) |      |   | (10,836 | )
|                                                |  |      |         |   |      |   |         |  
|                                                |  |      | 4,686   |   |      |   | 5,123   |  
|Land                                            |  |      | 375     |   |      |   | 375     |  
|                                                |  |      |         |   |      |   |         |  
|Total                                           |  | $    | 5,061   |   |      | $ | 5,498   |  
|                                                |  |      |         |   |      |   |         |  



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #6Bank Premises and Equipment (continued)



We lease 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       |  |  
|2004       |  | $ | 1,353
|2005       |  |   | 1,190
|2006       |  |   | 881  
|2007       |  |   | 702  
|2008       |  |   | 577  
|Thereafter |  |   | 1,956
|           |  |   |      
|Total      |  | $ | 6,659
|           |  |   |      



Total rental expense
for the three years ended December 31, 2003, 2002, and 2001, was $1,407,000, $1,353,000, and $1,329,000, respectively.



Note #7Other Real Estate Owned



Other Real Estate Owned is carried at the estimated fair value of the real estate. An analysis of the transactions for December 31, 2003 and 2002, were as
follows (in thousands):



|                                           |  |      |      |   |      |   |        |  
|------------------------------------------ |  | ---- | ---- | - | ---- | - | ------ | -
|                                           |  | 2003 |      |   | 2002 |  
|Balance, Beginning of Year(1)              |  | $    | 387  |   |      | $ | 2,182  |  
|Additions                                  |  |      |     |   |      |   | 33     |  
|Valuation adjustments and other reductions |  |      | (387 | ) |      |   | (1,828 | )
|                                           |  |      |      |   |      |   |        |  
|Balance, End of Year(1)                    |  | $    |     |   |      | $ | 387    |  
|                                           |  |      |      |   |      |   |        |  

---

|(1) |  | The balances at December 31, 2003 and 2002 are shown net of reserves of $-0- and $-0-, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------



Transactions in the reserve for other real estate owned are summarized for December 31, 2003, 2002, and 2001 as follows (in
thousands):



|                                   |  |      |   |      |   |      |      |  |   |    
|---------------------------------- |  | ---- | - | ---- | - | ---- | ---- |  | - | ---
|                                   |  | 2003 |   | 2002 |   |      | 2001
|Balance, Beginning of Year         |  | $    |  |      | $ | 125  |      |  | $ |   
|Provision charged to other expense |  |      |  |      |   |     |      |  |   | 125
|Charge-offs and other reductions   |  |      |  |      |   | (125 | )    |  |   |   
|                                   |  |      |   |      |   |      |      |  |   |    
|Balance, End of Year               |  | $    |  |      | $ |     |      |  | $ | 125
|                                   |  |      |   |      |   |      |      |  |   |    



Note #8Deposits



At December 31, 2003, the scheduled maturities of time
deposits are as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|Year       |  |  
|2004       |  | $ | 70,139
|2005       |  |   | 3,851 
|2006       |  |   | 276   
|2007       |  |   | 322   
|2008       |  |   | 13    
|Thereafter |  |   |      
|           |  |   |       
|Total      |  | $ | 74,601
|           |  |   |       



Directors and
executive officers of the Company and the Bank accounted for $1,252,000 of the Banks deposits as of December 31, 2003.



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #9Junior Subordinated Debentures



On December 6, 2002, the Company issued $8,248,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures (the
Subordinated Debentures) to Foothill Independent Statutory Trust I, a Connecticut business trust (the Trust). These Debentures, which are subordinated, effectively, to all other borrowings of the Company, become due and
payable on December 6, 2032, but are redeemable, at par, at the Companys option after December 26, 2007, or at any time upon the occurrence of a circumstance that would adversely affect the tax or capital treatment of the Debentures. Interest
is payable quarterly on the Subordinated Debentures at the 3-Month LIBOR plus 3.25%. At December 31, 2003 that rate was 4.42%. The Company also purchased a 3% minority interest totaling $248,000 in the Trust, which is included in other assets.



Until December 31, 2003 the Trust was treated, for accounting
purposes, as a consolidated subsidiary of the Company. In accordance with FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which became effective on December 31, 2003,
the Company has ceased consolidating the Trust into its consolidated financial statements. The Federal Reserve Board had ruled that certain mandatorily redeemable preferred securities of a consolidated entities of bank holding companies qualify as
Tier 1 Capital. The Federal Reserve Board is evaluating whether FIN No. 46 will affect this ruling; but has advised bank holding companies to continue to include the amount of the trust preferred securities in Tier 1 capital. Accordingly, at
December 31, 2003 the net amount of the Subordinated Debentures was included in our Tier 1 Capital for regulatory capital purposes.



Note #10Stock Option Plans



The Company maintains an employee incentive and nonqualified stock option plan which was approved by its stockholders in 1993 (the 1993 Option
Plan). The Company applies APB Opinion No. 25 and related interpretations in accounting with respect to this Option Plan. Accordingly, no compensation cost has been recognized with respect to options granted under the 1993 Option Plan.



The 1993 Option Plan provided for the issuance of up to an
aggregate of 1,147,041 shares of the Company Common Stock (as adjusted for stock dividends), pursuant to options that could be granted to officers, key employees and directors of the Company and its subsidiaries at prices that were not less than the
fair market value of such shares at dates of grant. Generally, options were granted under this Plan for a term of up to 10 years. This Plan expired in 2003 and the Company no longer may grant options under this Plan; however, options granted prior
to the expiration date of the Plan will continue to remain outstanding until they are exercised, expire or are terminated pursuant to the terms of the Plan.



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
2002 and 2001, respectively: risk-free rates of 2.57% and 4.37%, dividend yields of 3% and 3%, expected life of five years; and volatility of 30% and 31%.



Information with respect to the number of shares of common stock that were subject to options granted or exercised, and those that expired without
exercise, under the 1993 Option Plan during the years ended December 31, 2003, 2002, and 2001, the weighted exercise prices thereof, and the number of shares subject to exercisable options at the end of each of those years, is presented below:



|                                                               |  |        |          |   |                               |   |       |        |  |   |                               |   |  |        |        |   |                               |   |           |   |  |   |        |  
|-------------------------------------------------------------- |  | ------ | -------- | - | ----------------------------- | - | ----- | ------ |  | - | ----------------------------- | - |  | ------ | ------ | - | ----------------------------- | - | --------- | - |  | - | ------ | -
|                                                               |  | 2003   |          |   | 2002                          |   |       | 2001   | 
|                                                               |  | Shares |          |   | WeightedAverageExercise Price |   |       | Shares |  |   | WeightedAverageExercise Price |   |  | Shares |        |   | WeightedAverageExercise Price |  
|Outstanding, Beginning of Year                                 |  |        | 997,122  |   |                               | $ | 7.80  |        |  |   | 1,003,190                     |   |  | $      | 7.15   |   |                               |   | 1,076,305 |   |  | $ | 7.25   |  
|Granted                                                        |  |        |         |   |                               |   |      |        |  |   | 14,257                        |   |  |        | 12.46  |   |                               |   | 47,673    |   |  |   | 10.12  |  
|Exercised                                                      |  |        | (330,732 | ) |                               |   | (6.18 | )      |  |   | (15,595                       | ) |  |        | (7.16  | ) |                               |   | (106,285  | ) |  |   | (5.89  | )
|Forfeited                                                      |  |        | (4,792   | ) |                               |   | (7.06 | )      |  |   | (4,730                        | ) |  |        | (10.29 | ) |                               |   | (14,503   | ) |  |   | (10.42 | )
|                                                               |  |        |          |   |                               |   |       |        |  |   |                               |   |  |        |        |   |                               |   |           |   |  |   |        |  
|Outstanding, End of Year                                       |  |        | 661,598  |   |                               | $ | 7.78  |        |  |   | 997,122                       |   |  | $      | 7.80   |   |                               |   | 1,003,190 |   |  | $ | 7.15   |  
|                                                               |  |        |          |   |                               |   |       |        |  |   |                               |   |  |        |        |   |                               |   |           |   |  |   |        |  
|Options exercisable at year end                                |  |        | 655,915  |   |                               | $ | 7.76  |        |  |   | 955,190                       |   |  | $      | 7.11   |   |                               |   | 847,840   |   |  | $ | 7.15   |  
|Weighted average fair value of options granted during the year |  | $      |         |   |                               |   |       |        |  | $ | 2.25                          |   |  |        |        |   |                               | $ | 2.80      |   |  |   |        |  



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #10Stock Option Plans (continued)



The Company also maintains an employee incentive and nonqualified stock option plan which was approved by its stockholders
in 2003 (the 2003 Option Plan). The Company applies APB Opinion No. 25 and related interpretations in accounting with respect to this Option Plan. Accordingly, no compensation cost has been recognized with respect to options granted
under the 2003 Option Plan.



At December 31, 2003, the 2003
Option Plan provided for the issuance of up to an aggregate of 490,500 shares of the Company common stock (retroactively adjusted for a 9% stock dividend declared in November 2003). Options to purchase those shares may be granted to officers, key
employees and directors of the Company and its subsidiaries at prices that are 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 dates on which the
options are granted.



The fair value of each option grant under
the 2003 Option Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2003: risk-free rate of 3.07%, dividend yield of 2.3%, expected life of five years, and volatility of 27%.



2003 Stock Option Plan



|                                                               |  |        |         |                                 |   |      
|-------------------------------------------------------------- |  | ------ | ------- | ------------------------------- | - | -----
|                                                               |  | 2003  
|                                                               |  | Shares |         | Weighted Average Exercise Price
|Outstanding, Beginning of Year                                 |  |        |         |                                 |   |      
|Granted                                                        |  |        | 170,040 |                                 | $ | 16.93
|Exercised                                                      |  |        |        |                                 |   |     
|Forfeited                                                      |  |        |        |                                 |   |     
|                                                               |  |        |         |                                 |   |      
|Outstanding, End of Year                                       |  |        | 170,040 |                                 | $ | 16.93
|                                                               |  |        |         |                                 |   |      
|Options exercisable at year end                                |  |        | 92,485  |                                 | $ | 16.93
|Weighted average fair value of options granted during the year |  | $      | 3.78    |                                 |   |      



The following table
summarizes information about fixed stock options outstanding at December 31, 2003:



|                 |  |                     |  |                                           |  |                              |       |                   |         |                               |   |      
|---------------- |  | ------------------- |  | ----------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ----------------------------- | - | -----
|                 |  | Options Outstanding |  | Options Exercisable                      
|Exercise Price   |  | NumberOutstanding   |  | Weighted AverageRemainingContractual Life |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercise Price
|$4.18 to $5.36   |  | 155,211             |  | 1.76                                      |  | $                            | 4.89  |                   | 155,211 |                               | $ | 4.89 
|$9.47 to $9.54   |  | 360,158             |  | 3.95                                      |  |                              | 7.62  |                   | 360,155 |                               |   | 7.62 
|$10.07 to $13.77 |  | 146,229             |  | 5.97                                      |  |                              | 11.24 |                   | 140,549 |                               |   | 11.29
|$15.50 to $16.97 |  | 115,540             |  | 9.30                                      |  |                              | 16.24 |                   | 79,363  |                               |   | 16.03
|$17.20 to $20.20 |  | 54,500              |  | 9.61                                      |  |                              | 18.40 |                   | 13,122  |                               |   | 18.33
|                 |  |                     |  |                                           |  |                              |       |                   |         |                               |   |      
|$4.18 to $20.20  |  | 831,638             |  |                                           |  |                              |       |                   | 748,400 |                               |   |      
|                 |  |                     |  |                                           |  |                              |       |                   |         |                               |   |      



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, 2003, 2002, and 2001, the
Companys contributions to that Plan amounted to approximately $311,000, $179,000, and $248,000, respectively.



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



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 2003 was $428,000 ($253,000 net of income taxes), 2002 was $428,000 ($253,000 net of income taxes), and 2001 was $378,000 ($223,020 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 the prior approval of the California Commissioner of Financial Institutions, net income for the year and the retained net income for the preceding two years.
Section 23A of the Federal Reserve Act restricts the Bank from extending credit to the Company and other affiliates of the Company amounting to more than 20% of its contributed capital and retained earnings. At December 31, 2003, the maximum
combined amount of funds that were available from these two sources was approximately $26,125,000 or 43% consolidated stockholders equity.



Note #14Stock Dividend



On November 26, 2003, the Board of Directors declared a 9% stock dividend payable on January 29, 2004, to stockholders of record on January 8, 2004. All
references in the accompanying financial statements to the number of common shares and per share amounts for all years presented have been restated to reflect the stock dividend.



Note #15Other Expenses



The following is a breakdown of other expenses for the years ended December 31, 2003, 2002, and 2001 (amounts in thousands):



|                                       |  |      |       |      |   |       |  |   |      
|-------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                       |  | 2003 |       | 2002 |   | 2001 
|Data processing                        |  | $    | 1,575 |      | $ | 1,416 |  | $ | 1,248
|Marketing expenses                     |  |      | 1,156 |      |   | 982   |  |   | 1,086
|Office supplies, postage and telephone |  |      | 1,090 |      |   | 1,117 |  |   | 1,086
|Bank insurance                         |  |      | 559   |      |   | 529   |  |   | 448  
|Supervisory assessments                |  |      | 148   |      |   | 123   |  |   | 127  
|Professional fees                      |  |      | 1,000 |      |   | 1,170 |  |   | 1,287
|Operating losses                       |  |      | 213   |      |   | 175   |  |   | 151  
|OREO expenses                          |  |      | 10    |      |   | 35    |  |   | 197  
|Other                                  |  |      | 1,909 |      |   | 1,944 |  |   | 1,724
|                                       |  |      |       |      |   |       |  |   |      
|Total                                  |  | $    | 7,660 |      | $ | 7,491 |  | $ | 7,354
|                                       |  |      |       |      |   |       |  |   |      



Note #16Income Taxes



The provisions for income taxes consist of the following
(amounts in thousands):



|                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                       |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Tax provision applicable to income before income taxes |  | $    | 4,726 |   |      | $ | 4,378 |      |  | $ | 3,926 |  
|                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Federal Income Tax                                     |  |      |       |   |      |   |       |      |  |   |       |  
|Current                                                |  |      | 3,564 |   |      |   | 3,570 |      |  |   | 3,048 |  
|Deferred                                               |  |      | (250  | ) |      |   | (388  | )    |  |   | (174  | )
|State Franchise Tax                                    |  |      |       |   |      |   |       |      |  |   |       |  
|Current                                                |  |      | 1,503 |   |      |   | 1,334 |      |  |   | 1,095 |  
|Deferred                                               |  |      | (91   | ) |      |   | (138  | )    |  |   | (43   | )
|                                                       |  |      |       |   |      |   |       |      |  |   |       |  
|Total                                                  |  | $    | 4,726 |   |      | $ | 4,378 |      |  | $ | 3,926 |  
|                                                       |  |      |       |   |      |   |       |      |  |   |       |  



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #16Income Taxes (continued)



The following is a summary of the components of the deferred tax assets accounts recognized in the accompanying statements
of financial condition as of December 31 (amounts in thousands):



|                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                             |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Deferred Tax Assets                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Allowance for loan losses due to tax limitations             |  | $    | 1,667 |   |      | $ | 1,502 |      |  | $ | 1,137 |  
|Deferred compensation plan                                   |  |      | 1,373 |   |      |   | 1,201 |      |  |   | 1,050 |  
|Allowance for other real estate owned                        |  |      |      |   |      |   |      |      |  |   | 129   |  
|Other assets and liabilities                                 |  |      | 438   |   |      |   | 267   |      |  |   | 80    |  
|                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Total Deferred Tax Assets                                    |  |      | 3,478 |   |      |   | 2,970 |      |  |   | 2,396 |  
|Deferred Tax Liabilities                                     |  |      |       |   |      |   |       |      |  |   |       |  
|Premises and equipment due to depreciation difference        |  |      | (336  | ) |      |   | (295  | )    |  |   | (384  | )
|Other assets and liabilities                                 |  |      | (320  | ) |      |   | (269  | )    |  |   |      |  
|Net unrealized appreciation on available-for-sale securities |  |      | (4    | ) |      |   | (89   | )    |  |   | (37   | )
|                                                             |  |      |       |   |      |   |       |      |  |   |       |  
|Net Deferred Tax Assets                                      |  | $    | 2,818 |   |      | $ | 2,317 |      |  | $ | 1,975 |  
|                                                             |  |      |       |   |      |   |       |      |  |   |       |  



As a result of the
following items, the total tax expenses for 2003, 2002, and 2001, were less than the amount computed by applying the statutory U.S. Federal income tax rate to income before taxes (dollars in thousands):



|                                                              |  |        |       |   |                        |      |   |        |   |       |                        |  |      |        |  |   |                        |   |  |      |  
|------------------------------------------------------------- |  | ------ | ----- | - | ---------------------- | ---- | - | ------ | - | ----- | ---------------------- |  | ---- | ------ |  | - | ---------------------- | - |  | ---- | -
|                                                              |  | 2003   |       |   | 2002                   |      |   | 2001   |  
|                                                              |  | Amount |       |   | Percent ofPretaxIncome |      |   | Amount |   |       | Percent ofPretaxIncome |  |      | Amount |  |   | Percent ofPretaxIncome |  
|Federal rate                                                  |  | $      | 4,465 |   |                        | 34.0 |   |        | $ | 4,104 |                        |  | 34.0 |        |  | $ | 3,664                  |   |  | 34.0 |  
|Changes due to State income tax, (net of Federal tax benefit) |  |        | 932   |   |                        | 7.1  |   |        |   | 857   |                        |  | 7.1  |        |  |   | 765                    |   |  | 7.1  |  
|Exempt income                                                 |  |        | (517  | ) |                        | (3.9 | ) |        |   | (570  | )                      |  | (4.7 | )      |  |   | (547                   | ) |  | (2.7 | )
|Other, net                                                    |  |        | (154  | ) |                        | (1.2 | ) |        |   | (13   | )                      |  | (0.1 | )      |  |   | 44                     |   |  | (2.0 | )
|                                                              |  |        |       |   |                        |      |   |        |   |       |                        |  |      |        |  |   |                        |   |  |      |  
|Total                                                         |  | $      | 4,726 |   |                        | 36.0 |   |        | $ | 4,378 |                        |  | 36.3 |        |  | $ | 3,926                  |   |  | 36.4 |  
|                                                              |  |        |       |   |                        |      |   |        |   |       |                        |  |      |        |  |   |                        |   |  |      |  



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #17Earnings Per Share (EPS)



The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute
earnings per share (EPS). All amounts in the table are in thousands. Shares have been retroactively restated to give effect to 9% stock dividend declared November 26, 2003 to shareholders on January 29, 2004 to shareholders of record
January 8, 2004.



|                                                     |  |        |       |        |       |   |        |      |        |  |       |        |  |        |       |  |      
|---------------------------------------------------- |  | ------ | ----- | ------ | ----- | - | ------ | ---- | ------ |  | ----- | ------ |  | ------ | ----- |  | -----
|                                                     |  | 2003   |       |        | 2002  |   |        | 2001
|                                                     |  | Income |       | Shares |       |   | Income |      | Shares |  |       | Income |  | Shares
|Net income as reported                               |  | $      | 8,406 |        |       |   |        | $    | 7,708  |  |       |        |  | $      | 6,850 |  |      
|Shares outstanding at year end                       |  |        |      |        | 6,703 |   |        |      |       |  | 6,575 |        |  |        |      |  | 6,551
|Impact of weighting shares purchased during the year |  |        |      |        | (90   | ) |        |      |       |  | (12   | )      |  |        |      |  | 20   
|                                                     |  |        |       |        |       |   |        |      |        |  |       |        |  |        |       |  |      
|Used in Basic EPS                                    |  |        | 8,406 |        | 6,613 |   |        |      | 7,708  |  | 6,563 |        |  |        | 6,850 |  | 6,571
|Dilutive effect of outstanding stock options         |  |        |      |        | 527   |   |        |      |       |  | 497   |        |  |        |      |  | 341  
|Used in Dilutive EPS                                 |  | $      | 8,406 |        | 7,140 |   |        | $    | 7,708  |  | 7,060 |        |  | $      | 6,850 |  | 6,912
|                                                     |  |        |       |        |       |   |        |      |        |  |       |        |  |        |       |  |      



Note #18Commitments and
Contingencies



The Bank is involved in various litigation
that has arisen in the ordinary course of its business. In the opinion of management, the disposition of pending litigation 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, 2003 and 2002, the Bank had commitments to extend credit of $46,022,000 and $83,586,000, respectively, and obligations under standby letters of credit of $1,422,000 and
$1,404,000, respectively.



Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Bank upon extension of credit is based on managements credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under construction.



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.



We have a line
of credit from the Federal Home Loan Bank in the amount of approximately $29 million which is secured by pledged securities. We also have lines of credit from correspondent banks entitling us to borrow federal funds of approximately $13 million.



Note #19Regulatory Matters



The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by federal banking agencies. Under applicable law and government regulations, a failure by the Company or the Bank to meet certain minimum capital requirements would result in the imposition of
operational restrictions and other requirements and the possible initiation of additional discretionary actions by government regulatory agencies that could have a direct material effect on the Companys financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The most recent
notification from the federal regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. Prompt corrective action provisions are not applicable to bank holding companies.



58



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##### Table of Contents

Note #19Regulatory Matters(continued)



Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts (set
forth in the table below) of total capital and Tier 1 capital (as defined in the regulations) and ratios of total capital and Tier 1 capital to risk-weighted assets (also as defined in the regulations), and to average assets (as defined).



The following table compares, as of December 31, 2003 and
December 31, 2002, the total capital and Tier 1 capital of the Company (on a consolidated basis), and that of the Bank, to the capital requirements imposed by government regulations (with amounts stated in thousands):



FOOTHILL INDEPENDENT BANCORP



|                                       |  |        |        |       |                               |   |        |                                                          |        |  |     |        |  |       |  |    
|-------------------------------------- |  | ------ | ------ | ----- | ----------------------------- | - | ------ | -------------------------------------------------------- | ------ |  | --- | ------ |  | ----- |  | ---
|                                       |  |        |        |       | Capital Needed               
|                                       |  | Actual |        |       | For Capital Adequacy Purposes |   |        | To Be Well Capitalized Under Prompt CorrectiveProvisions
|                                       |  | Amount |        | Ratio |                               |   | Amount |                                                          | Ratio  |  |     | Amount |  | Ratio
|As of December 31, 2003:               |  |        |        |       |                               |   |        |                                                          |        |  |     |        |  |       |  |    
|Total capital to risk-weighted assets  |  | $      | 73,541 |       | 14.1                          | % |        | $                                                        | 41,606 |  | 8.0 | %      |  | N/A   |  | N/A
|Tier 1 capital to risk-weighted assets |  |        | 68,531 |       | 13.2                          | % |        |                                                          | 20,803 |  | 4.0 | %      |  | N/A   |  | N/A
|Tier 1 capital to average assets       |  |        | 68,531 |       | 9.9                           | % |        |                                                          | 27,736 |  | 4.0 | %      |  | N/A   |  | N/A
|As of December 31, 2002:               |  |        |        |       |                               |   |        |                                                          |        |  |     |        |  |       |  |    
|Total capital to risk-weighted assets  |  | $      | 69,749 |       | 14.2                          | % |        | $                                                        | 39,278 |  | 8.0 | %      |  | N/A   |  | N/A
|Tier 1 capital to risk-weighted assets |  |        | 65,130 |       | 13.3                          | % |        |                                                          | 19,639 |  | 4.0 | %      |  | N/A   |  | N/A
|Tier 1 capital to average assets       |  |        | 65,130 |       | 10.8                          | % |        |                                                          | 24,047 |  | 4.0 | %      |  | N/A   |  | N/A



FOOTHILL INDEPENDENT BANK



|                                       |  |        |        |       |                               |   |        |                                                          |        |  |     |        |  |       |        |  |      |  
|-------------------------------------- |  | ------ | ------ | ----- | ----------------------------- | - | ------ | -------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                       |  |        |        |       | Capital Needed                |  
|                                       |  | Actual |        |       | For Capital Adequacy Purposes |   |        | To Be Well Capitalized Under Prompt CorrectiveProvisions |       
|                                       |  | Amount |        | Ratio |                               |   | Amount |                                                          | Ratio  |  |     | Amount |  | Ratio |       
|As of December 31, 2003:               |  |        |        |       |                               |   |        |                                                          |        |  |     |        |  |       |        |  |      |  
|Total capital to risk-weighted assets  |  | $      | 71,619 |       | 13.8                          | % |        | $                                                        | 41,504 |  | 8.0 | %      |  | $     | 51,880 |  | 10.0 | %
|Tier 1 capital to risk-weighted assets |  |        | 66,610 |       | 12.8                          | % |        |                                                          | 20,752 |  | 4.0 | %      |  |       | 31,128 |  | 6.0  | %
|Tier 1 capital to average assets       |  |        | 66,610 |       | 9.7                           | % |        |                                                          | 27,607 |  | 4.0 | %      |  |       | 34,509 |  | 5.0  | %
|As of December 31, 2002:               |  |        |        |       |                               |   |        |                                                          |        |  |     |        |  |       |        |  |      |  
|Total capital to risk-weighted assets  |  | $      | 60,860 |       | 12.6                          | % |        | $                                                        | 38,760 |  | 8.0 | %      |  | $     | 48,450 |  | 10.0 | %
|Tier 1 capital to risk-weighted assets |  |        | 56,241 |       | 11.6                          | % |        |                                                          | 19,380 |  | 4.0 | %      |  |       | 29,070 |  | 6.0  | %
|Tier 1 capital to average assets       |  |        | 56,241 |       | 9.4                           | % |        |                                                          | 23,932 |  | 4.0 | %      |  |       | 29,915 |  | 5.0  | %



As disclosed in Note
#9Junior Subordinated Debentures, subject to percentage limitations, the proceeds from the issuance of trust preferred securities are considered Tier 1 capital of the Company for regulatory purposes. However, as a result of the issuance of FIN
46 and FIN 46R, the Companys trust subsidiary that issued the trust preferred securities is no longer consolidated in the Companys financial statements and, therefore, the proceeds received by the trust subsidiary from its sale of the
trust preferred securities, which were transferred to the Company in exchange for the Companys issuance of the Junior Subordinated Debentures is reported in these financial statements as subordinated debt of the Company. The Federal Reserve
Board has indicated that it would review the regulatory implications of this change in financial reporting on the continued inclusion of these amounts in regulatory capital; but has advised bank holding companies to continue to report the amount of
the trust preferred securities in regulatory reports as a minority interest and to continue to include that amount in Tier 1 capital.



59



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #20Fair Value of Financial Instruments



The table below presents the carrying amounts and fair values of financial
instruments at December 31, 2003 and 2002 (with dollars in thousands). FAS Statement 107, Disclosures about Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point-in-time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holding of a particular financial instrument. Because no market value exists for a significant portion of
the financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, future expected loss experience and other factors. These estimates are subjective in
nature, involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes and assumptions could significantly affect the estimates.



The following methods and assumptions were used to estimate the fair value of financial instruments:



| |  |  | Investment Securities
| | - |  | ---------------------



For U.S. Treasury and U.S. Government Agency securities, fair values are based on market prices. For other investment securities, fair value equals quoted
market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities as the basis for a pricing matrix.



| |  |  | Loans
| | - |  | -----



The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of the future cash flows expected to be received from the
various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk.



| |  |  | 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,
2003, and December 31, 2002. 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.



| |  |  | Short-Term Borrowings; Junior Subordinated Debentures
| | - |  | -----------------------------------------------------



Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.



|                                   |  |                   |         |                   |   |                |  |            |         |  |   |        
|---------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                   |  | December 31, 2003 |         | December 31, 2002
|                                   |  | CarryingAmount    |         | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial Assets                   |  |                   |         |                   |   |                |  |            |         |  |   |        
|Cash and cash equivalents          |  | $                 | 53,065  |                   | $ | 53,065         |  | $          | 58,965  |  | $ | 58,965 
|Investment securities and deposits |  |                   | 153,700 |                   |   | 152,164        |  |            | 98,700  |  |   | 97,365 
|Loans                              |  |                   | 459,520 |                   |   | 494,162        |  |            | 440,849 |  |   | 445,771
|Direct lease financing             |  |                   | 528     |                   |   | 542            |  |            | 1,211   |  |   | 1,200  
|Cash surrender value               |  |                   | 11,491  |                   |   | 11,491         |  |            | 6,778   |  |   | 6,778  
|Financial Liabilities              |  |                   |         |                   |   |                |  |            |         |  |   |        
|Deposits                           |  |                   | 612,050 |                   |   | 611,616        |  |            | 534,562 |  |   | 536,520
|Short-Term borrowings              |  |                   |        |                   |   |               |  |            |        |  |   |       
|Junior subordinated debentures     |  |                   | 8,248   |                   |   | 8,248          |  |            | 8,000   |  |   | 8,000  
|Unrecognized Financial Instruments |  |                   |         |                   |   |                |  |            |         |  |   |        
|Commitments to extend credit       |  |                   | 46,022  |                   |   | 460            |  |            | 55,933  |  |   | 559    
|Standby letters of credit          |  |                   | 1,422   |                   |   | 14             |  |            | 1,404   |  |   | 14     



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #21Condensed Financial Information of Foothill Independent Bancorp (Parent Company)



|                                                    |  |                 |        |   |      |   |        |  |   |       
|--------------------------------------------------- |  | --------------- | ------ | - | ---- | - | ------ |  | - | ------
|                                                    |  | At December 31,
|                                                    |  | 2003            |        |   | 2002 |   | 2001  
|                                                    |  | (In thousands) 
|Balance Sheets                                      |  |                 |       
|Assets                                              |  |                 |        |   |      |   |        |  |   |       
|Cash                                                |  | $               | 371    |   |      | $ | 508    |  | $ | 122   
|Interest-bearing deposits in financial institutions |  |                 | 297    |   |      |   | 1,500  |  |   |      
|Investment securities available-for-sale            |  |                 |       |   |      |   | 5,996  |  |   |      
|Investment in subsidiaries                          |  |                 | 67,194 |   |      |   | 57,240 |  |   | 51,361
|Accounts receivable                                 |  |                 | 908    |   |      |   | 285    |  |   | 385   
|Prepaid expenses                                    |  |                 | 289    |   |      |   | 264    |  |   | 76    
|Accrued interest and other assets                   |  |                 |       |   |      |   | 68     |  |   |      
|                                                    |  |                 |        |   |      |   |        |  |   |       
|Total Assets                                        |  | $               | 69,059 |   |      | $ | 65,861 |  | $ | 51,944
|                                                    |  |                 |        |   |      |   |        |  |   |       
|Liabilities and Stockholders Equity                |  |                 |        |   |      |   |        |  |   |       
|Liabilities                                         |  |                 |        |   |      |   |        |  |   |       
|Accounts payable                                    |  | $               | 23     |   |      | $ | 37     |  | $ | 92    
|Long term debentures                                |  |                 | 8,248  |   |      |   | 8,248  |  |   |      
|                                                    |  |                 |        |   |      |   |        |  |   |       
|                                                    |  |                 | 8,271  |   |      |   | 8,285  |  |   | 92    
|                                                    |  |                 |        |   |      |   |        |  |   |       
|Stockholders Equity                                |  |                 |        |   |      |   |        |  |   |       
|Common stock                                        |  |                 | 6      |   |      |   | 6      |  |   | 6     
|Additional paid-in capital                          |  |                 | 67,194 |   |      |   | 52,449 |  |   | 42,892
|Retained earnings (deficit)                         |  |                 | (6,412 | ) |      |   | 5,121  |  |   | 8,954 
|                                                    |  |                 |        |   |      |   |        |  |   |       
|Total Stockholders Equity                          |  |                 | 60,788 |   |      |   | 57,576 |  |   | 51,852
|                                                    |  |                 |        |   |      |   |        |  |   |       
|Total Liabilities and Stockholders Equity           |  | $               | 69,059 |   |      | $ | 65,861 |  | $ | 51,944
|                                                    |  |                 |        |   |      |   |        |  |   |       



Statements of Income



|                                               |  |                         |       |      |   |       |  |   |      
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                                               |  | Year Ended December 31,
|                                               |  | 2003                    |       | 2002 |   | 2001 
|                                               |  | (In thousands)         
|Income                                         |  |                         |       |      |   |       |  |   |      
|Equity in undistributed income of subsidiaries |  | $                       | 8,910 |      | $ | 8,072 |  | $ | 7,197
|Interest income                                |  |                         | 29    |      |   | 4     |  |   |     
|                                               |  |                         |       |      |   |       |  |   |      
|                                               |  |                         | 8,939 |      |   | 8,076 |  |   | 7,197
|Expense                                        |  |                         |       |      |   |       |  |   |      
|Amortization and other expenses                |  |                         | 860   |      |   | 646   |  |   | 560  
|                                               |  |                         |       |      |   |       |  |   |      
|Total Operating Income                         |  |                         | 8,079 |      |   | 7,430 |  |   | 6,637
|Tax benefit of parents operating expenses     |  |                         | 342   |      |   | 264   |  |   | 213  
|                                               |  |                         |       |      |   |       |  |   |      
|Net Income                                     |  | $                       | 8,421 |      | $ | 7,694 |  | $ | 6,850
|                                               |  |                         |       |      |   |       |  |   |      



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



Note #21Condensed Financial Information of Foothill Independent Bancorp (Parent
Company) (Continued)



Statements of Cash Flows

For the Years Ended December 31, 2003, 2002, and 2001



|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                 |  | 2003           |        |   | 2002 |   |        | 2001 | 
|                                                                                 |  | (In thousands) |       
|Cash Flows From Operating Activities                                             |  |                |        |   |      |   |        |      |  |   |        |  
|Cash received for tax benefit from Foothill Independent Bank                     |  | $              | 264    |   |      | $ | 213    |      |  | $ | 175    |  
|Interest received                                                                |  |                | 33     |   |      |   |       |      |  |   |       |  
|Cash paid for operating expenses                                                 |  |                | (1,173 | ) |      |   | (779   | )    |  |   | (629   | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided (Used) By Operating Activities                                 |  |                | (876   | ) |      |   | (566   | )    |  |   | (454   | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Investing Activities                                             |  |                |        |   |      |   |        |      |  |   |        |  
|Purchase of deposits in other financial institutions                             |  |                | 1,203  |   |      |   | (1,500 | )    |  |   |       |  
|Purchase of investment securities available-for-sale                             |  |                | 5,996  |   |      |   | (5,999 | )    |  |   |       |  
|Capital contributed to subsidiary                                                |  |                | (4,000 | ) |      |   | (248   | )    |  |   | (150   | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided (Used) By Investing Activities                                 |  |                | 3,199  |   |      |   | (7,747 | )    |  |   | (150   | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Cash Flows From Financing Activities                                             |  |                |        |   |      |   |        |      |  |   |        |  
|Dividends paid                                                                   |  |                | (4,158 | ) |      |   | (2,375 | )    |  |   | (2,184 | )
|Dividends received from Foothill Independent Bank                                |  |                | 2,650  |   |      |   | 2,630  |      |  |   | 4,280  |  
|Issuance of debentures                                                           |  |                |       |   |      |   | 8,248  |      |  |   |        |  
|Proceeds from stock purchased                                                    |  |                |       |   |      |   | 98     |      |  |   | 288    |  
|Proceeds from exercise of stock options                                          |  |                | 2,610  |   |      |   | 98     |      |  |   | 52     |  
|Capital stock repurchased                                                        |  |                | (3,562 | ) |      |   |       |      |  |   | (1,908 | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided (Used) By Financing Activities                                 |  |                | (2,460 | ) |      |   | 8,699  |      |  |   | 528    |  
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Net Increase (Decrease) in Cash                                                  |  |                | (137   | ) |      |   | 386    |      |  |   | (76    | )
|Cash, Beginning of Year                                                          |  |                | 508    |   |      |   | 122    |      |  |   | 198    |  
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Cash, End of Year                                                                |  | $              | 371    |   |      | $ | 508    |      |  | $ | 122    |  
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Reconciliation of Net Increase to Net Cash Provided by Operating Activities      |  |                |        |   |      |   |        |      |  |   |        |  
|Net Income                                                                       |  | $              | 8,421  |   |      | $ | 7,694  |      |  | $ | 6,850  |  
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities |  |                |        |   |      |   |        |      |  |   |        |  
|Amortization                                                                     |  |                | 8      |   |      |   |       |      |  |   | 42     |  
|Undistributed earnings of subsidiaries                                           |  |                | (8,910 | ) |      |   | (8,072 | )    |  |   | (7,197 | )
|(Increase) Decrease in accounts receivable                                       |  |                | (360   | ) |      |   | (51    | )    |  |   | (39    | )
|Increase in accrued interest receivable                                          |  |                | 4      |   |      |   | (4     | )    |  |   |       |  
|Increase in prepaid expenses                                                     |  |                | (25    | ) |      |   | (188   | )    |  |   | (57    | )
|Increase (Decrease) in accounts payable                                          |  |                | (14    | ) |      |   | 55     |      |  |   | (53    | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Total Adjustments                                                                |  |                | (9,297 | ) |      |   | (8,260 | )    |  |   | (7,304 | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  
|Net Cash Provided (Used) by Operating Activities                                 |  | $              | (876   | ) |      | $ | (566   | )    |  | $ | (454   | )
|                                                                                 |  |                |        |   |      |   |        |      |  |   |        |  



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FOOTHILL INDEPENDENT BANCORP



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2003, 2002 AND 2001



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, 2003 and 2002, is summarized below:



|                                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|--------------------------------------------------- |  | ---------------------------------------- | ----- | ------ | - | ----- |  | ------ | ----- |  | - | -----
|                                                    |  | 2003                                    
|                                                    |  | First                                    |       | Second |   | Third |  | Fourth
|                                                    |  | (In thousands, except per share amounts)
|Summary of Income                                   |  |                                          |       |        |   |       |  |        |       |  |   |      
|Interest income                                     |  | $                                        | 8,609 |        | $ | 8,556 |  | $      | 9,317 |  | $ | 9,198
|Interest expense                                    |  |                                          | 1,104 |        |   | 1,138 |  |        | 1,043 |  |   | 998  
|Net interest income                                 |  |                                          | 7,505 |        |   | 7,418 |  |        | 8,274 |  |   | 8,200
|Provision for loan losses                           |  |                                          |      |        |   | 100   |  |        | 200   |  |   | 48   
|Net interest income after provision for loan losses |  |                                          | 7,505 |        |   | 7,318 |  |        | 8,074 |  |   | 8,152
|Other income                                        |  |                                          | 1,350 |        |   | 1,434 |  |        | 1,416 |  |   | 1,413
|Other expense                                       |  |                                          | 5,672 |        |   | 5,664 |  |        | 6,077 |  |   | 6,102
|Income before taxes                                 |  |                                          | 3,183 |        |   | 3,088 |  |        | 3,413 |  |   | 3,463
|Applicable income taxes                             |  |                                          | 1,152 |        |   | 1,115 |  |        | 1,215 |  |   | 1,244
|                                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|Net Income                                          |  | $                                        | 2,031 |        | $ | 1,973 |  | $      | 2,198 |  | $ | 2,219
|                                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|Earnings Per ShareBasic                            |  | $                                        | 0.31  |        | $ | 0.30  |  | $      | 0.33  |  | $ | 0.33 
|                                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|Earnings Per ShareDiluted                          |  | $                                        | 0.29  |        | $ | 0.28  |  | $      | 0.31  |  | $ | 0.31 
|                                                    |  |                                          |       |        |   |       |  |        |       |  |   |      



|                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|----------------------------------- |  | ---------------------------------------- | ----- | ------ | - | ----- |  | ------ | ----- |  | - | -----
|                                    |  | 2002                                    
|                                    |  | First                                    |       | Second |   | Third |  | Fourth
|                                    |  | (In thousands, except per share amounts)
|Summary of Income                   |  |                                          |       |        |   |       |  |        |       |  |   |      
|Interest income                     |  | $                                        | 8,622 |        | $ | 8,814 |  | $      | 8,732 |  | $ | 8,643
|Interest expense                    |  |                                          | 7,238 |        |   | 1,254 |  |        | 1,244 |  |   | 1,157
|Net interest income                 |  |                                          | 1,384 |        |   | 7,560 |  |        | 7,488 |  |   | 7,486
|Provision for loan losses           |  |                                          | 100   |        |   | 150   |  |        | 110   |  |   | 100  
|Net interest income after provision |  |                                          |       |        |   |       |  |        |       |  |   |      
|for loan losses                     |  |                                          | 7,138 |        |   | 7,410 |  |        | 7,378 |  |   | 7,386
|Other income                        |  |                                          | 1,346 |        |   | 1,658 |  |        | 1,255 |  |   | 1,435
|Other expense                       |  |                                          | 5,527 |        |   | 5,948 |  |        | 5,593 |  |   | 5,866
|Income before taxes                 |  |                                          | 2,957 |        |   | 3,120 |  |        | 3,040 |  |   | 2,955
|Applicable income taxes             |  |                                          | 1,075 |        |   | 1,127 |  |        | 1,100 |  |   | 1,076
|                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|Net Income                          |  | $                                        | 1,882 |        | $ | 1,993 |  | $      | 1,940 |  | $ | 1,879
|                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|Earnings Per ShareBasic            |  | $                                        | 0.29  |        | $ | 0.30  |  | $      | 0.30  |  | $ | 0.28 
|                                    |  |                                          |       |        |   |       |  |        |       |  |   |      
|Earnings Per ShareDiluted          |  | $                                        | 0.29  |        | $ | 0.28  |  | $      | 0.28  |  | $ | 0.26 
|                                    |  |                                          |       |        |   |       |  |        |       |  |   |      





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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A.    CONTROLS AND PROCEDURES



The Companys management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) in effect as of December 31, 2003. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2003, the Companys disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within these entities.



There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Except for information regarding our 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 to be filed with the Commission on or before April 29, 2004 for the Companys 2004 annual meeting of shareholders,.



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, 2004 for the Companys 2004 annual
shareholders meeting.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



Except for the information regarding equity compensation plans set forth below, 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, 2004 for the Companys 2003 annual shareholders meeting.



The following table provides information relating to our equity compensation plans as of December 31, 2003:



|                                                   |  |                                                                      |  |          |                                                      |          |                                                                                                                                      
|-------------------------------------------------- |  | -------------------------------------------------------------------- |  | -------- | ---------------------------------------------------- | -------- | -------------------------------------------------------------------------------------------------------------------------------------
|                                                   |  | Column A                                                             |  | Column B |                                                      | Column C
|                                                   |  | Number of Securities to beIssued upon Exercise ofOutstanding Options |  |          | Weighted-AverageExercise Price ofOutstanding Options |          | Number of Securities RemainingAvailable for Future Issuance underEquity Compensation
Plans(Excluding Securities Reflectedin Column A)
|                                                   |  |                                                                      |  |          |                                                      |          |                                                                                                                                      
|Equity compensation plans approved by shareholders |  | 831,638                                                              |  | $        | 9.65                                                 |          | 320,460                                                                                                                              
|                                                   |  |                                                                      | 
|Equity compensation not approved by shareholders   |  |                                                                     |  |          |                                                     |          |                                                                                                                                     
|                                                   |  |                                                                      |  |          |                                                      |          |                                                                                                                                      
|                                                   |  | 831,638                                                              |  | $        | 9.65                                                 |          | 320,460                                                                                                                              
|                                                   |  |                                                                      |  |          |                                                      |          |                                                                                                                                      



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, 2004 for the Companys 2004 annual shareholders meeting.



ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by Item 14 is incorporated herein by reference from the Companys definitive proxy statement to be filed with the Commission
on or before April 29, 2004 for the Companys 2004 annual shareholders meeting.



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PART IV



ITEM 15.    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 38 of this Report.



| | (2) |  | Financial Statement Schedules:
| | --- |  | ------------------------------



All schedules are omitted as the information is not required, is not material or is otherwise furnished.



| | (3) |  | Exhibits:
| | --- |  | ---------



See Index to Exhibits on Page E-1 of this Form 10-K.



| | (4) |  | Reports on Form 8-K:
| | --- |  | --------------------



The Company filed a Current Report on Form 8-K dated January 21, 2004 to furnish, under Item 12 of that Report, a copy of its press release announcing its
results of operations for the fiscal year ended, and its financial condition as of, December 31, 2003.



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POWER OF ATTORNEY



Each person whose signature appears below hereby authorizes George E. Langley and Carol Ann Graf, and each of them
individually, as attorney-in-fact, to sign in his or her behalf and in each capacity stated below, and to file, all amendments and/or supplements to this Annual Report on form 10-K.



SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th day of March 2004.



FOOTHILL INDEPENDENT BANCORPBy:

/s/    GEORGE E. LANGLEYGeorge E. Langley, Presidentand 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 12, 2004.



|                                                |  |                                                                              
|----------------------------------------------- |  | -----------------------------------------------------------------------------
|                                                | 
|/s/    GEORGE E. LANGLEYGeorge E. Langley       |  | President, Chief Executive Officer (Principal Executive Officer) and Director
|                                                | 
|/s/    CAROL ANN GRAFCarol Ann Graf             |  | Chief Financial Officer (Principal Financial and Accounting Officer)         
|                                                | 
|/s/    WILLIAM V. LANDECENAWilliam V. Landecena |  | Chairman of the Board of Directors                                           
|                                                | 
|/s/    RICHARD GALICHRichard Galich             |  | Director                                                                     
|                                                | 
|/s/    O. L. MESTADO. L. Mestad                 |  | Director                                                                     
|                                                | 
|/s/    GEORGE SELLERSGeorge Sellers             |  | Director                                                                     
|                                                | 
|/s/    DOUGLAS F. TESSITORDouglas F. Tessitor   |  | Director                                                                     
|                                                | 
|/s/    MAX E. WILLIAMSMax E. Williams           |  | Director                                                                     



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                        
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Description of Exhibit                                                                                                                                                                                                                                                 
|           | 
|2.1*       |  | Agreement and Plan of Merger dated May 4, 2000 between Foothill Independent Bancorp, Inc (Foothill Delaware) and Foothill Independent Bancorp (Foothill California)
pursuant to which the Companys state of incorporation was changed from California to Delaware.
|           | 
|2.28*      |  | Certificate of Merger filed with the Delaware Secretary of State on July 18, 2000 effectuating the reincorporation of the Company in Delaware.                                                                                                                         
|           | 
|3.1*       |  | Certificate of Incorporation of the Company as filed in Delaware.                                                                                                                                                                                                      
|           | 
|3.2*       |  | Bylaws of the Company, as in effect under Delaware Law.                                                                                                                                                                                                                
|           | 
|4.1*       |  | Rights Agreement between the Company and ChaseMellon Shareholder Services LLC setting forth the rights of the holders of Rights to Purchase Common Stock of the Company.                                                                                               
|           | 
|4.2**      |  | Amendment dated February 13, 2002 to Rights Agreement to appoint Registrar and Transfer Company as the successor Rights Agent to ChaseMellon Shareholder Services LLC                                                                                                  
|           | 
|21         |  | Subsidiaries of the Company.                                                                                                                                                                                                                                           
|           | 
|23.1       |  | Consent of Independent Public Accountants.                                                                                                                                                                                                                             
|           | 
|31.1       |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     
|           | 
|31.2       |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     
|           | 
|32.1       |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     
|           | 
|32.2       |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     

---

|* |  | Incorporated by reference from the Companys Current Report on Form 8-K dated July 18, 2000.
|- |  | --------------------------------------------------------------------------------------------

|** |  | Incorporated by reference from the Companys Annual Report on Form 10-K for its fiscal year ended December 31, 2001.
|-- |  | --------------------------------------------------------------------------------------------------------------------



E-1