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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from              to             

Commission file number 0-11337

FOOTHILL INDEPENDENT BANCORP

(Exact name of Registrant as specified in its charter)

(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

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  ¨     No  x.

The aggregate market value of voting shares held by non-affiliates of Registrant as of June 28, 2002, which was determined on the basis of the closing price of Registrant’s shares on that date, was approximately $67,706,000.

As of March 24, 2003, there were 5,978,799 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 2003 Annual Meeting to be filed with the Commission on or before April 30, 2003.

FOOTHILL INDEPENDENT BANCORP, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

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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 trend 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.” Forward-looking statements are based on current information and 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 — Forward Looking Information and Uncertainties Regarding Future Financial Performance” 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”) is a one-bank holding company, organized in 1982 and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), which owns all of the capital stock of Foothill Independent Bank, a California state-chartered bank (the “Bank”). The Company, like other bank holding companies in the United States, is subject to regulation, supervision and periodic examination by the Board of Governors of the Federal Reserve System (commonly known as the “Federal Reserve Board”).

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, 2002 had total assets of $604,570,000. 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 the Company’s shareholders, on that date, the Company was 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 the Company’s articles of incorporation. No changes were made to the state of incorporation or to the articles of incorporation of the Bank.

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, and (ii) the western portions of San Bernardino and 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 individuals and small-to-medium sized businesses.

The Bank emphasizes personalized service and convenience of banking and attracts banking customers by offering services that are designed to meet the banking requirements of the customers in its communities. Drive-up or walk-up facilities and 24-hour Automated Teller Machines (“ATM’s”) are available at all of its banking offices. The Bank also offers a computerized telephone service, which enables customers to obtain information concerning their bank deposit accounts telephonically at any time day or night, and the Bank offers 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.”

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIALS

The following table sets forth the condensed 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, 2002. 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.)

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, 2002, 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:

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During the twelve months ended December 31, 2002, average demand deposits increased by approximately $25,852,000 or 16.6%; average money market checking account deposits increased by approximately $34,548,000 or 21.6%; average savings deposits increased by approximately $6,575,000 or 15.8%; and average time deposits decreased by approximately $20,165,000 or 18.5%, which was the result of a decrease of $9,592,000 in TCDs and a decrease of approximately $10,573,000 in other time deposits.

Although there are some business and public agency customers that carry large deposits with the Bank, the Bank does not believe it is dependent on a single customer or a few customers for its deposits. Most of the Bank’s deposits are obtained from individuals and small and moderate size businesses. This results in relatively small average deposit balances, but makes the Bank less subject to the adverse effect on liquidity which can result from the loss of a substantial depositor. No individual, corporate or public agency depositor accounted for more than approximately 2% of the Bank’s total deposits and the five largest deposit accounts represented, collectively, 6% of total deposits.

THE LOAN PORTFOLIO

Loan Products.    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 of loans made by the Bank and the amounts (in thousands of dollars) of the loans, by type, that were outstanding at December 31, 2002, 2001 and 2000, respectively.

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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. 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 more frequent periodic reviews.

We also offer asset-based lending products that involve a higher degree of risk in that the loan is designed for those borrowers who do not quality, under our loan underwriting criteria, for unsecured lending. Typically, these borrowers consist of companies 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-(collateral) 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 further supported by real estate as additional collateral.

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 as evidenced by a credit report.

Real Estate Loans.    Nonresidential real estate loans make up approximately 82.7% of our real estate loan portfolio, and substantially all of those loans are secured by first trust deeds. 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 results of operations and dependable cash flows generated from the respective businesses of the borrowers or tenants in the property. As a result, repayment of these loans is affected by changes in the economy 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.

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 including 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, the Bank sometimes renegotiates 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 the Bank believes 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

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loan is discontinued and, therefore, it 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.

The table which follows sets forth, as of the end of each of the years in the five year period ended December 31, 2002, 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.

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 their 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 when the possibility of collecting the full balance of the loan becomes remote. The average balance of impaired loans in our loan portfolio amounted to approximately $2,428,000 at December 31, 2002 and during that year we set aside reserves for possible losses on those loans specifically, which totaled approximately $77,000 and were included in the Bank’s Reserve for Loan Losses at December 31, 2002. Cash receipts applied to reduce principal balances of those loans totaled approximately $104,700 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.

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Potential Problem Loans.    At December 31, 2002, there were no loans on accrual status as to which there were serious doubts as to the ability of the borrower to comply with then present loan repayment terms.

Loan Concentrations.    The Bank does not have loans made to borrowers who are engaged in similar activities where the aggregate amount of the loans exceeds 10% of their loan portfolio that are not broken out as a separate category in the loan portfolio.

Other Interest-Bearing Assets.    The Bank does not have any interest-earning assets, other than loans, as to which management believes 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 for loan losses by means of periodic charges to income known as “provisions for loan losses.” When management believes that collection of a loan has become unlikely, either in whole or in part, the carrying amount of the loan is written off in its entirety (in any case where the loan become uncollectible in full) or 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). The write off or write down in value 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 increases the potential for future loan losses. At December 31, 2002 the loan loss reserve was approximately $4,619,000 or 1.04% 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.

THE INVESTMENT PORTFOLIO

As a customary part of its business, the Bank 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 the Bank’s investment policy is to manage interest rate risk, provide adequate liquidity and reinvest in the Bank’s market areas, while maximizing earnings with a portfolio of investment-grade securities. Each security purchased is subject to the credit, maturity and liquidity guidelines that are defined in the Bank’s investment policy and the securities are reviewed regularly to verify their continued credit worthiness.

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

The following table presents the maturities of the Bank’s investment securities at December 31, 2002, 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 36.3% tax rate).

COMPETITION

The banking business in California generally, and in our market areas in particular, is highly competitive with respect to both 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 deposits and loans 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. Bank of America, Comerica and Citibank are headquartered outside of California. Independent

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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.

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 shareholder. 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. In addition, in 2002 we became a financial holding company under the Bank Holding Company Act pursuant to amendments to that Act promulgated by the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”), the principal features of which are summarized below.

As a financial holding company, we are now permitted to engage not only in banking and other activities deemed closely related to banking, but also in other financial activities which the Federal Reserve Board has determined, or may determine in the future, to be financial in nature, or incidental to such financial activities or complementary to such a financial activity.

As a financial holding company, we must still 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.

However, as financial holding company, we no longer need to obtain such prior approval for the acquisition of companies or businesses (other than banks) engaged in financial activities which the Federal Reserve Board has determined to be financial in nature. At the present time we have no plans to engage in such financial activities.

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

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.

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.

Foothill Independent Bancorp also is 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.    The principal objectives of the Financial Services Modernization 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, the 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:

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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 level 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.

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. We made the election to become a financial holding company in 2002. According to current Federal Reserve Board regulations, activities that are financial in nature include:

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.

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 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 require the holding company to divest itself of all of its bank subsidiaries.

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:

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

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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:

We have implemented disclosure controls and procedures and 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 2003 and, to the extent we do not already meet any of those new requirements, we will be taking the actions required to do so.

Foothill Independent Bank.

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.

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.

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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.”

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.

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 to risk-adjusted assets of 4%. (Tier 1 capital consists principally of common stock and non-redeemable preferred stock and retained earnings.) 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.” For a banking organization to be rated by a bank regulatory agency as “well-capitalized” (which is the highest of five categories used by regulators to rate the strength of banking organizations in terms of their capital), the minimum leverage ratio of Tier 1 capital to total assets must be 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the

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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, based on their assessment of the quality of a bank’s assets, its liquidity and other risks faced by a bank.

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 prescribed minimum capital ratios.

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:

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 regulatory increased 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, 2002, the capital ratios of the Bancorp and the Bank and compares those capital ratios to the federally established capital requirements that must be met for a bank holding company or a bank to be deemed adequately capitalized and to be deemed a “well capitalized institution” under the prompt corrective action regulations described below:

As the table indicates, at December 31, 2002 the Bancorp and the Bank exceeded the capital ratios required for classification as adequately capitalized institutions, under federally mandated capital standards and as “well capitalized” institutions 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 liquidity or capital problems.

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Those guidelines set forth operational and managerial standards relating to such matters as:

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:

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 Bank’s costs of doing business.