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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended 12-31-94 Commission File No. 0-15814
VENTURA COUNTY NATIONAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 77-00038387
(State or Other Jurisdiction of (I.R.S. Employer ID. Number)
Incorporation or Reorganization)
500 Esplanade Drive, Oxnard, California 93030
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (805)981-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
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Common Stock, $zero par value.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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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 amendments to
this Form 10-K. [X]
Aggregate Market Value of Voting Stock Held by Non affiliates of the Registrant:
$12,865,510
Number of Shares Outstanding of Each of the Issuer's Classes of Common Stock
Common Stock No Par Value - No. of Shares Outstanding at March 17, 1995
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6,333,835
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Documents Incorporated by Reference:
Part II. Items 5,6,7,8 and 9, 1994 Annual Report to Shareholders
Part III. Items 10,11,12, and 13, Proxy Statement for 1995 Meeting
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TABLE OF CONTENTS
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No. Item Page
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<S> <C> <C>
Part I
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1. Business 1
2. Properties 21
3. Legal Proceeding 23
4. Submission of Matters to a Vote of Security 24
Holders
Part II
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5. Market for the Common Stock and Related 24
Shareholder Matters
6. Selected Financial Data 24
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
8. Financial Statements 24
9. Disagreements with Accountants on Accounting and
Financial Disclosure 24
Part III
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10. Directors and Executive Officers 24
11. Executive Compensation 24
12. Shareholdings of Certain Beneficial Owners and
Management 24
13. Certain Relationships and Related Transactions 24
14. Exhibits, Financial Statement Schedules and
Reports on Form 8K 24
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Part I
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Item 1. Business
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General
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The Company is a registered bank holding company conducting business
through its two subsidiary banks, Ventura County National Bank ("Ventura") and
Frontier Bank, N.A. ("Frontier"). (Ventura and Frontier are sometimes
collectively referred to herein as the "Banks.") At December 31, 1994, the
Company had total consolidated assets of $257.8 million, total consolidated
deposits of $236.3 million and total consolidated shareholders' equity of $19.1
million. The principal executive offices of the Company are located at 500
Esplanade Drive, Oxnard, California 93030, and its telephone number at that
address is (805) 981-2600.
The Banks are both national banking associations operating in Southern
California. Ventura conducts its banking operations through four branch offices
located in Ventura County, California, approximately 60 miles northwest of
downtown Los Angeles. Ventura's headquarters are located in Oxnard, California,
and its branch offices are located in Oxnard, Ventura, Camarillo and Westlake
Village. Frontier is based in La Palma in northwestern Orange County and has a
branch office in Wilmington in southern Los Angeles County. The Banks provide
commercial banking services to small to medium sized businesses, professional
firms and individuals in their market areas.
Competition
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In an environment of heightened regulatory scrutiny with respect to
insured depository institutions such as Ventura and Frontier and expanded bank-
like services provided by limited service financial institutions and by nonbank
financial service providers, banking and bank related services continue to be an
industry of rapid change and intense competition, thereby creating a highly
competitive environment for the Company. Large moneycenter banks, super-
regional banks, regional banks, multinational banks and mutual funds are the
Company's primary competitors. Higher lending limits, wide-reaching advertising
campaigns, and access to international money markets allows these organizations
greater flexibility in meeting the needs of their customers. The Company
competes for deposits and loans with these organizations as well as with local
banks, savings and loans, savings banks, credit unions, thrift associations, and
mortgage and finance companies. The Company believes its marketing niche to be
small and medium-sized businesses with revenues less than $25 million. In order
to compete with the other financial institutions in its service areas, the
Company principally relies upon local promotional activities, personal
relationships established by officers, directors and employees with its
customers, and specialized services tailored to meet its customers' needs. In
those instances where the Company is unable to accommodate all of a customer's
needs because of regulatory restrictions, the Company will arrange for those
services to be provided by its correspondent banks or other companies with whom
it has a relationship.
Bank of America, N.T. & S.A. and First Interstate Bank of California
are the dominant competitors in both Ventura and Frontier's market areas. As of
June 30, 1993, Ventura had approximately 7.12% of total bank deposits in Ventura
County. As of June 30, 1993, Frontier had
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approximately 0.17% of total bank deposits in Orange County and 0.08% of total
bank deposits in Los Angeles County.
Supervision and Regulation
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The Company
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The Company, as a registered bank holding company, is subject to
regulation under the BHC Act. The Company is required to file with the Federal
Reserve Board quarterly and annual reports and such additional information as
the Federal Reserve Board may require pursuant to the BHC Act. The Federal
Reserve Board may conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain nonbank
subsidiaries or affiliates when the Federal Reserve Board believes the activity
or the control or the subsidiary or affiliate constitutes a significant risk to
the financial safety, soundness or stability of any of its banking subsidiaries.
Under certain circumstances, the Company must file written notice and obtain
approval from the Federal Reserve Board prior to purchasing or redeeming its
equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve
Board, a bank holding company and its nonbanking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "Supervision and Regulation -- Capital Standards."
The Company is required to 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 substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company with another bank
holding company.
The Company is prohibited by the BHC Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company may, subject to
the prior approval of the Federal Reserve Board, engage in any, or acquire
shares of companies engaged in, activities that are deemed 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 making any such determination, the
Federal Reserve Board is required to consider whether the performance of such
activities by the Company or an affiliate can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Federal Reserve Board is also
empowered to differentiate between activities commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern and is
currently prohibited from approving an application by a bank holding company to
acquire voting shares
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of any bank in another state unless such acquisition is expressly authorized by
the laws of such other state. Beginning September 29, 1995, a bank holding
company that is adequately capitalized and managed may obtain approval under the
BHCA to acquire an existing bank located in another state without regard to
state law. See "Supervision and Regulation -- Interstate Banking and Branching."
Under Federal Reserve Board policy, 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. This doctrine has become known as the "source of strength"
doctrine. Although the United States Court of Appeals for the Fifth Circuit
found the Federal Reserve Board's source of strength doctrine invalid in 1990,
stating that the Federal Reserve Board had no authority to assert the doctrine
under the Act, the decision, which is not binding on federal courts outside the
Fifth Circuit, was recently reversed by the United States Supreme Court on
procedural grounds. The validity of the source of strength doctrine is likely
to continue to be the subject of litigation until definitively resolved by the
courts or by Congress.
The Company is also a bank holding company within the meaning of
California Financial Code Section 3700. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California Superintendent of Banks. Regulations have not yet been
adopted to implement the Superintendent's power under this statute.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Banks
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As national banking associations, the Banks are subject to primary
supervision, periodic examination and regulation by the OCC. If, as a result of
an examination of a bank, the OCC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity, or
other aspects of either Bank's operations are unsatisfactory or that either Bank
or its management is violating or has violated any law or regulation, various
remedies are available to the OCC. Such remedies 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 capital, to
restrict the growth of the bank, to assess civil monetary penalties and to
remove officers and directors. FDICIA has provided the FDIC with similar
enforcement authority, in addition to its authority to terminate a bank's
deposit insurance in the absence of action by the OCC and upon a finding that a
bank is in an unsafe or unsound condition, is engaging in unsafe or unsound
activities, or that its conduct poses a risk to the deposit insurance fund or
may prejudice the interest of its depositors.
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The Banks are insured by the FDIC, which currently insures deposits of
each member bank to a maximum of $100,000 per depositor as determined under FDIC
regulations. For this protection, each bank pays a semi-annual statutory
assessment and is subject to certain of the rules and regulations of the FDIC.
See "Supervision and Regulation -- Premiums for Deposit Insurance." The Banks
are also subject to certain regulations of the Federal Reserve Board.
Various requirements and restrictions under the laws of the United
States affect the operations of the Banks. See "Supervision and Regulation --
Effect of Governmental Policies and Recent Legislation." Federal statutes and
regulations relate to many aspects of the Banks' operations, including reserves
against deposits, deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
The OCC's statement of policy on risk-based capital requires that
banks maintain a ratio of qualifying total capital to risk-weighted assets of
not less than 8.00% (at least 4.00% of which must be in the form of Tier 1
capital). The regulations set forth minimum requirements, and OCC has reserved
the power to require that banks maintain higher capital ratios. Among other
powers, the OCC's regulations provide that capital requirements may be enforced
by the issuance of a directive. The OCC's capital adequacy regulations also
require that banks maintain a minimum leverage ratio of 3.00% Tier 1 capital to
total assets for the most highly rated banks. This ratio is only a minimum.
Institutions experiencing or anticipating significant growth or those with other
than minimum risk profiles are expected to maintain a leverage ratio of at least
100 to 200 basis points above the minimum level. In addition, higher leverage
ratios are required to be considered well-capitalized or adequately capitalized
under the prompt corrective action provisions of the FDIC Improvement Act. For
a more complete description of the OCC's risk-based capital regulations, see
"Supervision and Regulation -- Capital Standards" and "Supervision and
Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms."
Restrictions on Transfers of Funds to Parent by the Banks
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Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered (or, if no market exists, actual cost plus a reasonable profit).
Parent is a legal entity separate and distinct from the Banks. At
present, substantially all of Parent's revenues, including funds available for
the payments of dividends and other operating expenses, would be dividends paid
to Parent from the Banks. The Banks, however, are currently prohibited from
paying any dividends without the consent of the OCC. See "Supervision and
Regulation -- Potential and Existing Enforcement Actions."
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There are also statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Banks. Sections 56 and 60 of
Title 12 of the United States Code contain the major limitations on the payment
of dividends by national banks. Section 56 generally prohibits national banks
from paying dividends out of capital, and Section 60 further limits dividends,
absent the OCC's approval, to the amount of a national bank's recent earnings.
Under the prompt corrective action rules of FDICIA, no depository institution,
such as the Banks, may issue a dividend or pay a management fee if it would
cause the institution to become undercapitalized. Additionally, a bank holding
company controlling a significantly undercapitalized institution may not make
any capital distributions without the prior approval of the Federal Reserve
Board. Other supervisory actions may be taken against institutions that are
significantly undercapitalized, as well as undercapitalized institutions that
fail to submit an acceptable capital restoration plan as required by law or that
fail in any material respect to implement an accepted plan. See "Supervision
and Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms."
The OCC also has authority to prohibit the Banks from engaging in
what, in the OCC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the OCC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board
have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines could limit the
amount of dividends which the Banks or the Company may pay.
The Banks are subject to certain restrictions imposed by federal law
on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, Parent or other affiliates, the purchase of or investment
in stock or other securities thereof, the taking of such securities as
collateral for loans and the purchase of assets from Parent or other affiliates.
Such restrictions prevent Parent and such other affiliates from borrowing from
the Banks unless the loans are secured by marketable obligations of specified
amounts. Further, such secured loans, investments and other transactions
between either of the Banks and Parent or any other affiliate are limited to 10%
of either Bank's capital and surplus (as defined by federal regulations) and
such secured loans, investments and other transactions are limited, in the
aggregate, to 20% of either Bank's capital and surplus (as defined by federal
regulations). Such transactions must also comply with regulations prohibiting
terms that would be preferential to Parent other affiliates of the Banks.
There have been no intercompany transactions between Parent and either
of the Banks which would implicate these provisions.
Effect of Governmental Policies and Recent Legislation
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Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Banks on their deposits and
their other borrowings and the interest rate received by the Banks on loans
extended to their customers and securities held in the Banks' portfolio comprise
the major portion of the Banks' earnings. These rates are highly sensitive to
many factors that are beyond the control of the Bank. Accordingly, the earnings
and growth of the Banks are subject to the influence of local, domestic and
foreign economic conditions, including recession, unemploy ment and inflation.
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The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial intermediaries subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve Board
in these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits. The nature
and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and other
financial intermediaries are frequently made in Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Bank are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
Capital Standards
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The OCC has adopted risk-based minimum capital guidelines intended to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, 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 adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively higher
credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, term preferred stock, term subordinated debt
and certain other instruments with some characteristics of equity. The
inclusion of elements of Tier 2 capital is subject to certain other requirements
and limitations of the federal banking agencies, including the limitation that
Tier 2 capital may not exceed Tier 1 capital for determining an institution's
capital ratios. The federal banking agencies require a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of
Tier 1 capital 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 assets, referred to as the
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leverage ratio. For a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the minimum
leverage ratio of Tier 1 capital to total assets must be 3%. For all banking
organizations not rated in the highest category, the minimum leverage ratio must
be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The federal banking regulators have issued a proposed rule to take
account of interest rate risk in calculating risk-based capital. The proposed
rule includes a supervisory model for taking account of interest rate risk.
Under that model, institutions would report their assets, liabilities and off
balance sheet positions in time bands based upon their remaining maturities.
The federal banking agencies would then calculate a net risk weighted interest
rate exposure. If that interest rate risk exposure was in excess of a certain
threshold (1% of assets), the institution could be required to hold additional
capital proportionate to that excess risk. Alternatively, the agencies have
proposed making interest rate risk exposure a subjective factor in considering
capital adequacy. Exposures would be measured in terms of the change in the
present value of an institution's assets minus the change in the present value
of its liabilities and off-balance sheet positions for an assumed 100 basis
point parallel shift in market interest rates. However, the federal banking
agencies have proposed to let banks use their own internal measurement of
interest rate risk if it is declared adequate by examiners.
Effective January 17, 1995, the federal banking agencies issued a
final rule relating to capital standards and the risks arising from the
concentration of credit and nontraditional activities. Institutions which have
significant amounts of their assets concentrated in high risk loans or
nontraditional banking activities and who fail to adequately manage these risks,
will be required to set aside capital in excess of the regulatory minimums. The
federal banking agencies have not imposed any quantitative assessment for
determining when these risks are significant, but have identified these issues
as important factors they will review in assessing an individual bank's capital
adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- New Accounting Pronouncements." The federal banking agencies
recently issued final rules governing banks and bank holding companies, which
become effective April 1, 1995, which limit the amount of deferred tax assets
that are allowable in computing an institutions regulatory capital. The
standard has been in effect on an interim basis since March 1993. Deferred tax
assets that can be realized from taxes paid in prior carryback years and from
future reversals of existing taxable temporary differences are generally not
limited. Deferred tax assets that can only be realized through future taxable
earnings are limited for regulatory capital
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purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 Capital and
total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
Prompt Corrective Action and Other Enforcement Mechanisms
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Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized" "Adequately capitalized"
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%;and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (or less than
3% if rated CAMEL 1 under the
composite rating system.)
"Undercapitalized" "Significantly undercapitalized"
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Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less
Leverage ratio less than 4% (or than 3%; or Leverage ratio less
less than 3% if rated CAMEL 1 than 3%.
under the composite rating
system.)
"Critically undercapitalized"
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Tangible equity to total assets less than 2%.
An institution 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 the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject
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to more restrictions. The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its capital ratio actually
warrants such treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt corrective action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
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Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository
institution would not be liable to the institution's shareholders or creditors
for consenting in good faith to the appointment of a receiver or conservator or
to an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
Safety and Soundness Standards
- ------------------------------
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. Additional standards on earnings and classified assets are
expected to be issued in the near future.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate lending. The
regulations, which became effective on March 19, 1993, require insured
depository institutions to adopt written policies establishing standards,
consistent with such guidelines, for extensions of credit secured by real
estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. Appraisals by state certified
appraisers are not required for transactions of less than $100,000 if certain
criteria are met. In such cases, the real property collateral must be evaluated
in accordance with the OCC's
10
<PAGE>
Guidelines for Real Estate Appraisal Policies and Review Procedures. State
certified appraisers are required for all transactions with a transaction value
of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or
more; and for "complex" 1-4 family residential properties of $250,000 or more.
A state licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing or refinancing of
real property, and the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed securities.
Premiums for Deposit Insurance
- ------------------------------
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits.
The FDIC has adopted final regulations implementing a risk-based
premium system required by federal law. Under the regulations, which cover the
assessment periods commencing on and after January 1, 1994, insured depository
institutions are required to pay insurance premiums currently within a range of
23 cents per $100 of deposits to 31 cents per $100 of deposits depending on
their risk classification. On January 31, 1995, the FDIC issued proposed
regulations that would establish a new assessment rate schedule of 4 cents per
$100 of deposits to 31 cents per $100 of deposits applicable to members of BIF.
There can be no assurance that the final regulations will be adopted as
proposed. To determine the risk-based assessment for each institution, the FDIC
will categorize an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios. A well-capitalized institution is
one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-
based capital ratio and a 5% Tier 1 leverage capital ratio. An adequately
capitalized institution will have at least an 8% total risk-based capital ratio,
a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage capital ratio. An
undercapitalized institution will be one that does not meet either of the above
definitions. The FDIC will also assign each institution to one of three
subgroups based upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements and other information
relevant to evaluating the risk posed by the institution.
Interstate Banking and Branching
- --------------------------------
On September 29, 1994, the President signed into law the Riegel-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain approval
under the BHCA to acquire an existing bank located in another state without
regard to state law. A bank holding company would not be permitted to make such
an acquisition if, upon
11
<PAGE>
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not
acquire a state bank in existence for less than a minimum length of time that
may be prescribed by state law except that a state may not impose more than a
five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations. In addition, in March 1995,
the OCC issued proposed rules that would permit national banks to use loan
production offices for the origination of loans and other nonbranch offices for
loan approvals. These proposed rules may result in increased competition by
allowing national banks to conduct certain lending activities across state
lines.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two stages. The first stage allowed acquisitions on a "reciprocal"
basis within a region consisting of 11 western states. The second stage, which
became effective January 1, 1991, allows interstate acquisitions on a national
"reciprocal" basis. California has also adopted similar legislation applicable
to savings associations and their holding companies.
Community Reinvestment Act and Fair Lending Developments
- --------------------------------------------------------
The Banks are subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. Under the CRA, regulated financial
institutions are required to help meet the credit needs of their communities,
including those of low and moderate income individuals. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of their local communities, including
low and moderate income neighborhoods. In addition to substantial penalties and
corrective measures that may be required for a violation of certain fair lending
laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities. On December 21,
1993, the federal banking agencies issued a proposal to change the manner in
which they measure a bank's compliance with its CRA obligations. In
12
<PAGE>
October 1994, the federal banking agencies revised the proposal, but no final
regulation has yet been approved.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
Potential and Existing Enforcement Actions
- ------------------------------------------
Commercial banking organizations, such as the Banks, and their
institution-affiliated parties, which include the Company, are subject to
potential enforcement actions by the Federal Reserve Board, the FDIC and the OCC
for any unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a cease-
and-desist order that can be judicially enforced, the termination of insurance
of deposits (in the case of the Banks), the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and sanctions
under the prompt corrective action provisions of the FDIC Improvement Act.
Additionally, a holding company's inability to serve as a source of strength to
its subsidiary banking organizations could serve as an additional basis for a
regulatory action against the holding company.
Following supervisory examinations of Ventura conducted as of June 30,
1992 and Frontier as of July 30, 1992, Ventura entered into a Formal Agreement
with the OCC on March 19, 1993 and Frontier entered into a Consent Order with
the OCC on March 29, 1993. The Consent Order replaced the 1992 MOU previously
entered into between the OCC and Frontier. The significant common requirements
of the Formal Agreement and the Consent Order for Ventura and Frontier include
conducting a program to evaluate and improve board supervision and management,
developing a program designed to improve the lending staff and loan
administration, obtaining current credit information on any loans lacking such
information, reviewing and revising loan policies, establishing an independent
loan review program including periodic reports to the Board, developing and
implementing a program to collect or strengthen criticized assets, reviewing and
maintaining an adequate loan loss reserve, developing a new long range strategic
plan and annual budget, developing a three-year capital plan, developing and
revising liquidity and funds management policy, correcting violations of law
cited by the OCC and obtaining approval from the OCC to declare or pay a
dividend.
The Consent Order requires that Frontier maintain as of May 31, 1993
and beyond a Tier 1 risk based capital ratio of 9.50% and a leverage capital
ratio of 7.00%. At December 31, 1994, Frontier's Tier 1 risk based capital
ratio was 12.29% and its leverage capital ratio was 8.32%. The Consent Order
also requires Frontier to retain a new president and to continue to develop a
program of asset diversification.
Based upon an examination of Ventura conducted as of July 31, 1993,
the Formal Agreement was amended on February 3, 1994 to require Ventura to
achieve a Tier 1 risk based capital ratio of 12.00% and a leverage ratio of
7.00% by September 30, 1994. As of September 30, 1994, Ventura's Tier 1 risk
13
<PAGE>
based capital ratio was 9.44% and its leverage ratio was 6.88%, which did not
meet the higher leverage and Tier 1 Capital ratios required by the Formal
Agreement. As of December 31, 1994, approximately $1.4 million additional
capital was necessary for Ventura to meet the capital requirements of the Formal
Agreement. As required by the Formal Agreement on October 18, 1994, Ventura
submitted to the OCC its plan for restoring capital and the OCC did not object
to implementation of the plan as proposed. In addition, Ventura applied for and
received an extension of the date by which such ratios are required to be
achieved to June 30, 1995, provided that the subscription period for its Rights
Offering is no longer than six weeks. The Offering is being undertaken in part
to ensure that Ventura meets all applicable capital requirements. However,
there can be no guarantee that after the Offering, Ventura or Frontier will
continue to be in compliance with all of their regulatory requirements.
The amendment to the Formal Agreement also requires Ventura to seek
Reimbursement of Interest relating to interest paid on a deposit account at
Ventura. The deposit account held funds generated by Parent through the sales
of commercial paper to Ventura customers. Ventura categorized this account as a
savings account, and as such paid interest on such account. However, the OCC
concluded that the account should have been categorized as a demand deposit
account, on which the payment of interest is not permitted. As a result, the
OCC has required Ventura to seek Reimbursement of Interest. Furthermore, Parent
has been required by the Reserve Bank to cease all such commercial paper sales,
which Parent did in December 1993.
Parent entered into the MOU with the Reserve Bank on March 19, 1994.
The significant requirements of the MOU include submitting a program to improve
the financial condition of the Banks, evaluate and improve board supervision and
management, exit the commercial paper market, comply with Federal Reserve Board
policy regarding management or service fees assessed by the Company and paid by
the Banks and implement steps to improve the effectiveness of the audit and
credit review functions. The MOU further restricts the Company from declaring
or paying a dividend, incurring any debt, adding or replacing a director or
senior executive or repurchasing Company stock without notice to and
nondisapproval of the Reserve Bank. The MOU also requires the Company's Board
of Directors to establish a committee to monitor compliance with the MOU and
ensure that quarterly written progress reports detailing the form and manner of
all actions taken to attain compliance with the MOU are submitted.
Parent intends to use the proceeds of the Offering to reimburse
interest to Ventura. The Reimbursement of Interest will also result in an
increase in the capital levels of Ventura. The OCC recently completed a
regularly scheduled examination of Ventura and, based upon this examination,
indicated in that Ventura was in full or partial compliance with the other
requirements of the amended Formal Agreement. Frontier and Parent are in full
or partial compliance with or in the process of complying with all of the other
items required under the Consent Order and MOU, respectively. Notwithstanding
the foregoing, however, Parent, Ventura and Frontier continue their efforts to
implement the policies developed to meet the requirements of the MOU, Formal
Agreement and Consent Order.
14
<PAGE>
Statistical Financial Data
- --------------------------
Investment Portfolio
- --------------------
The following table sets forth book and market value of investment securities at
the dates indicated.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
At December 31,
---------------------------------------------------------------
1994 1993 1992
-------------------- ------------------- --------------------
Book Market Book Market Book Market
-------- ---------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Government securities..... $ 22,935 $ 22,706 $38,597 $ 38,475 $ -- $ --
U.S. Government Agency -- -- -- -- -- --
securities....................
Mortgage-backed securities..... 8,067 7,551 -- -- -- --
Federal Reserve Bank and FHLB 1,602 1,602 2,300 2,300 -- --
Stock.........................
Other equity securities........ -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment
securities.................... $ 32,604 $ 31,859 $ 40,897 $ 40,775 $ -- $ --
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
SECURITIES HELD-TO-MATURITY
At December 31,
---------------------------------------------------------------
1994 1993 1992
-------------------- ------------------- --------------------
Book Market Book Market Book Market
-------- ---------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Government securities..... $ 1,250 $ 1,222 $ -- $ -- $ 3,140 $ 3,209
U.S. Government Agency -- -- -- -- 4,124 4,030
securities....................
Mortgage-backed securities..... 17,525 16,741 -- -- 21,256 19,919
Federal Reserve Bank and FHLB -- -- -- -- 1,825 1,825
Stock.........................
Other equity securities........ -- -- -- -- 2,823 2,823
-------- -------- -------- -------- -------- --------
Total.......................... $ 18,775 $ 17,963 $ -- $ -- $ 33,168 $ 31,806
======== ======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
The following table sets forth the maturity distribution of the investment
portfolio at December 31, 1994:
<TABLE>
<CAPTION>
At December 31, 1994
-----------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
-----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government securities:
Within one year...................................... $ 14,707 $ 14,648 5.54%
After one but within five years...................... 9,478 9,280 5.92
After five but within ten years...................... -- -- --
After ten years...................................... -- -- --
-----------------------------------------
Total U.S. Government securities................... $ 24,185 $ 23,928 5.71
=========================================
Mortgage-backed securities:
Within one year...................................... $ -- -- --
After one but within five years...................... 13,696 $ 12,992 5.44
After five but within ten years...................... 11,896 11,300 6.55
After ten years...................................... -- -- --
-----------------------------------------
Total mortgage-backed securities................... $ 25,592 $ 24,292 6.40
=========================================
Federal Reserve Bank and FHLB Stock
Within one year...................................... $ -- $ -- --
After one but within five years...................... -- -- --
After five but within ten years...................... -- -- --
After ten years...................................... 1,602 1,602 7.35
-----------------------------------------
Total Federal Reserve Bank and FHLB Stock.......... $ 1,602 $ 1,602 7.35
=========================================
</TABLE>
16
<PAGE>
Loan Portfolio
- --------------
The following table sets forth the amounts of loans At December 31,
outstanding at the dates indicated, according to the type of loan at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, Financial and Agriculture.......... $138,193 $ 197,384 $ 221,553 $ 190,076 $ 154,630
Real Estate -Construction...................... 7,734 23,559 31,264 40,860 66,323
Real Estate - Mortgage......................... 11,993 31,202 36,775 37,045 51,449
Installment.................................... 9,897 14,961 21,242 30,068 28,627
Lease Financing, net of unearned income........ 117 408 867 1,218 2,562
---------- ---------- ---------- ---------- ----------
Total Loans.................................... $ 167,934 $ 267,514 $ 311,701 $ 299,267 $ 301,951
========== ========== ========== ========== ==========
</TABLE>
Maturity of Loans and Sensitivity of Loans to Changes in Interest Rates
- -----------------------------------------------------------------------
The following table sets forth by category of loan (including fixed and
variable rate loans) the amounts of loans outstanding as of December 31, 1994
which are, based on remaining scheduled repayment of principal, due in less than
one year, due in one to five years, or due in more than five years. Loan
maturities are based on contractual maturities. (Dollars in thousands).
<TABLE>
<CAPTION>
At December 31, 1994
---------------------------------------------
Loans Maturing In
---------------------------------------------
Between Greater
Less Than One-Five Than Five
One Year Years Years Total
---------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and $ 44,853 $ 72,042 $ 21,298 $ 138,193
agricultural.......................
Real Estate:
Construction........................ 7,511 223 0 7,734
Mortgage............................ 688 1,651 9,654 11,993
Installment......................... 6,702 3,084 111 9,897
Lease Financing..................... 33 84 0 117
-------- -------- -------- ---------
Total....................... $ 59,787 $ 77,084 $ 31,063 $ 167,934
======== ======== ======== =========
Loans with fixed interest rates..... $ 9,489 $ 15,989 $ 4,277 $ 29,755
Loans with variable interest rates.. 50,298 61,095 28,786 138,179
-------- -------- -------- ---------
Total....................... $ 59,787 $ 77,084 $ 31,063 $ 167,934
======== ======== ======== =========
</TABLE>
17
<PAGE>
Nonaccrual Loans
- ----------------
The following table sets forth nonaccrual loans, loans which were
delinquent for 90 days or more but still accruing, loan that are accounted for
as "troubled debt restructurings," REO and potential problem loans at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis..................... $ 7,612 $ 18,939 $ 2,464 $ 2,142 $ 485
Accruing loans which are 90 days or
more past due as to interest or
principal............................ 331 552 410 7,296 2,167
TDR's................................ 2(1) 348 380 16 467
-------- -------- ------- -------- -------
Total nonperforming loans............ 7,945 19,839 3,254 9,454 3,119
-------- -------- ------- -------- -------
Foreclosed personalty 878 -- -- -- --
REO.................................. 2,346 2,229 3,940 2,206 --
-------- -------- ------- -------- -------
Total nonperforming assets........... $ 11,169 $ 22,068 $ 7,194 $ 11,660 $ 3,119
======== ======== ======= ======== =======
</TABLE>
- -------
(1) Does not include loans which have been restructured and which were
previously on nonaccrual status but have been performing in accordance with
their restructured terms for some minimum period of time, typically at
least six months. At December 31, 1994 the Company had one such loan, in
the amount of $1,966,000.
Potential Problem Loans. In addition to the loans disclosed in the above
table, at December 31, 1994, the Company had loans in the aggregate amount of
$19,769,000 where known information about possible credit problems of the
borrowers caused management to have serious concerns about the ability of such
borrowers to comply with the present loan repayment terms.
18
<PAGE>
Foregone Interest Income. If nonaccrual, past due and restructured loans
had been current and performing according to original terms, gross interest
income for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 would
have increased by $1,609,000, $2,214,000, $728,000, $429,000 and $23,000,
respectively. The following summarizes foregone interest income for 1994:
<TABLE>
<CAPTION>
<S> <C>
Interest income at original terms.............. $ 2,321,000
Less: Interest income included in 1994 income.. (712,000)
------------
Foregone interest income....................... $ 1,609,000
===========
</TABLE>
Deposits
- --------
The Company competes for deposits principally by providing quality customer
service at the Banks' branch offices. In order to stabilize its funding
sources, the Company has taken action to reduce title and escrow deposits and
institutional certificates of deposits as a percentage of total deposits. The
Banks are prohibited from purchasing brokered deposits by virtue of their
regulatory agreements with the OCC. See "Supervision and Regulation".
The following table sets forth information regarding the average monthly
deposits and the average rate paid for certain deposit categories for each of
the periods indicated. Average balances are computed using daily average
balances for each month in the period divided by the number of months in the
period.
<TABLE>
<CAPTION>
For the Years ended December 31,
---------------------------------------------------------------------------------
1994 1993 1992
------------------------- ----------------------- -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------- ------------------------ -------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits:
Interest-bearing..... $ 58,114 2.65% $ 66,167 2.73% $ 58,254 4.56%
Noninterest-bearing.. 75,568 --- 87,383 --- 89,298 ---
Savings deposits..... 34,575 2.37% 37,892 2.78% 38,838 3.62%
Time deposits........ 104,671 3.72% 142,020 3.88% 145,202 4.81%
--------- -------- --------
Total deposits...... $ 272,928 2.29% $ 333,462 2.51% $ 331,592 3.12%
========= ======== =========
</TABLE>
19
<PAGE>
With respect to the Company's time certificates of deposit of $100,000 or
more, at December 31, 1994, such deposits had the following schedule of
maturity:
<TABLE>
<CAPTION>
At December 31,
1994
---------------
(Dollars in
thousands)
<S> <C>
Three months or less.. $10,594
Three to six months... 4,811
Six to twelve months.. 8,663
Over twelve months.... 1,265
-------------
Total......... $25,333
=============
</TABLE>
Other Borrowings
- ----------------
The following table sets forth certain information with respect to the
Company's commercial paper activities. As of December 31, 1993, the Company had
ceased all commercial paper activity.
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------
(in thousands)
<S> <C> <C> <C>
Balance at December 31:......... $ -- $ -- $ 8,860
Maximum month end balance
outstanding during the year..... $ -- $ 8,616 $ 22,048
Average amount outstanding
during the year................. $ -- $ 6,987 $ 12,805
Weighted average interest rate.. -- 2.66% 3.42%
</TABLE>
The Company utilized credit lines with FHLB during 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
---------------------
<S> <C> <C>
(in thousands)
Balance at December 31: $ -- $ --
Maximum amount outstanding during the year.. 5,000 8,000
Average amount outstanding during the year.. 129 7,447
Weighted average interest rate.............. 3.55% 3.83%
</TABLE>
20
<PAGE>
Employees
- ---------
At December 31, 1994, the Company had 141 full-time employees. None of the
employees are covered by a collective bargaining agreement. In addition to cash
compensation, the Company compensates its employees with health and accident
insurance, vacation and sick leave, and other normal fringe benefits.
Effects of Environmental Protection Laws
- -----------------------------------------
The Company, to the best of its knowledge, is not aware of any facts relating
to its present loan portfolio that reasonably indicates that compliance by the
Banks with Federal, state or local provisions relating to the protection of the
environment will have a material adverse effect on the financial resources,
earnings or competitive position of the Company.
Return on Equity and Assets
- ---------------------------
The following table shows consolidated operating and capital ratios of the
Company:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
<S> <C> <C> <C>
1994 1993 1992
-------------------------
Return on Assets (1) (0.09%) (3.17%) .18%
Return on Equity (2) (1.29%) (45.12%) 2.30%
Dividend Payout Ratio 0 0 0
Capital to Assets Ratio (3) 10.48% 7.03% 7.66%
</TABLE>
(1) Return on assets: Net income to average total assets.
(2) Return on equity: Net income to average total shareholder's equity.
(3) Capital to assets ratio: Average shareholders' equity to average total
assets.
Item 2: Properties
- ------------------
Since October 1987, Company headquarters have been located at 500 Esplanade
Drive in Oxnard, California. The Company and Ventura's main offices share
31,097 square feet of leased space. The lease which expires in 2002, requires
the Company to pay for any allocated property tax or utility cost increases and
to adjust the monthly rent annually, based on consumer price index changes. The
Company does not have an option to renew this lease. The Company subleased
9,335 square feet of office space in December 1994. The Company anticipates
annual cost savings of approximately $134,000.
Ventura leases a 3,100 square foot building at 4730 Telephone Road in
Ventura under a lease expiring December 1995. The Lessor of the premises is T &
H Enterprises, a partnership of which W.E. Hartman, a director of Ventura, is a
managing partner. Ventura does not have an option to renew this lease. The
Company anticipates that it will attempt to negotiate a renewal of this lease in
the third quarter of 1995.
Ventura also leases 6,640 square feet at 502 Las Posas Road, Camarillo and
4,000 square feet at 2655 Townsgate Road in Westlake Village. The Camarillo
lease expires in June of 1997, with one ten year and two five year options to
renew. The Westlake Village lease expires in 2006, with one five year option to
renew. Ventura pays its pro rata share of utilities, taxes, common area
maintenance and insurance on all branch locations. In addition to annual
adjustments tied to the consumer price index, Ventura pays $12,000 annually on
the Westlake Village property in lieu of an option to construct an additional
7,000 square foot building.
Ventura's Data Processing was and Central Operations is housed in 8,105
square feet at 2125 Knoll Drive in Ventura. The lease expires in December 1995,
and the Company is in the process of negotiating a renewal of the lease, which
expires on March 31, 2000. The lease provides for annual adjustments of the
rent. The Company has the option of terminating the lease without penalty during
the final year. As a result of the renegotiation of the lease, the Company
anticipates cost savings in 1995 of $44,100.
Ventura also leases 3,306 square feet at 175 E. Olive in Burbank for a loan
servicing office, and has subsequently subleased 2,400 square feet. This lease
expires in April 1995 and the Company intends to vacate this space when the
lease expires.
21
<PAGE>
Frontier's main office occupies 17,588 square feet at One Centerpointe
Drive in La Palma, California. The Company has subsequently subleased an
additional 8,559 square feet. Frontier leased an additional 1,668 square feet at
One Centerpointe Drive in La Palma under an amendment to the original lease. The
lease for the main office expires in December 2006 and the lease for the
additional space expires in July 1998. Frontier does not have an option to renew
these leases.
Frontier also has a branch totaling 9,600 square feet located at 100 Avalon
Boulevard in Wilmington subject to a month to month lease. Frontier intends to
vacate this property and is in the process of negotiating to purchase a building
in the vicinity of its current branch location, which is anticipated to occur in
the second quarter of 1995.
The Company believes its present facilities are adequate for its present
needs and anticipated future growth. The Company believes that, if necessary, it
could secure suitable alternative facilities on similar terms without adversely
affecting operations.
22
<PAGE>
Item 3: Legal Proceedings
- -------------------------
There are no material legal proceedings pending other than ordinary routine
litigation incidental to the business of the Company to which the Company or its
subsidiaries is a party or of which any of their property is a subject, except
as described below.
Sharon Tillis, Karen Tillis, et al v. Bank of America, N.T. & S.A., et al.
--------------------------------------------------------------------------
On January 26 1993, plaintiffs filed a class action lawsuit in Los Angeles
County Superior Court, Case No. BC 073448, against Wilshire Computer College
("WCC"), its proprietor Peter Chung, Bank of America, N.T. & S.A. ("Bank of
America") and the California Student Aid Commission ("CSAC"). The Complaint was
subsequently amended to add Ventura, Marine Midland Bank, N.A. ("Marine
Midland") and Educational Funding Services, Inc. ("EFSI"). (Bank of America,
Marine Midland, EFSI and Ventura are collectively referred to as the "Bank
Defendants.") This action arises out of loans made to students of WCC, which
plaintiffs contend were made to induce them to enroll at WCC. CSAC and the Bank
Defendants filed a joint demurrer and motion to strike portions of the First
Amended Complaint, which was sustained on November 17, 1993, eliminating several
theories of liability against the Bank Defendants.
Plaintiffs filed a Second Amended Complaint, alleging the following seven
causes of action against the Bank Defendants: (1) violations of Business and
Professions Code (S)17500 regarding allegations of untrue or misleading
statements to prospective students to induce them to enroll at WCC; (2)
violations of the Unruh Act, Civil Code (S)1801 regarding allegations that the
student loan agreements constituted retail installment sales contracts; (3)
violations of Business and Professions Code (S)17200 regarding allegations that
defendants engaged in unfair business practices, including unfair advertising,
acting without permits and making false representations to students and
agencies; (4) fraud, misrepresentation and negligent misrepresentation regarding
allegations that employees and representatives of WCC made misrepresentations to
students to induce them to enroll at the WCC; (5) breach of contract, breach of
the implied covenant of good faith based on the contracts entered into between
plaintiffs and Bank Defendants; (6) rescission and restitution based on the
contracts entered into between plaintiffs and Bank Defendants; and (7) secondary
theories of liability based on causes (1), (3) and (4) regarding allegations of
agency, joint venture, aiding and abetting and close connection.
CSAC and the Bank Defendants filed a joint demurrer to all causes of action
in the Second Amended Complaint which was sustained without leave to amend as to
the Bank Defendants and with leave to amend as to CSAC. Plaintiffs did not amend
their Second Amended Complaint, however, and the court issued an Order and
Judgment of Dismissal of all defendants on October 12, 1994. Notice of Entry of
Judgment in this matter was served on October 25, 1994.
On December 7, 1994, plainitffs filed a Notice of Appeal with the Court of
Appeal of the State of California. Following preparation of the record for
appeal, the court clerk will notify the parties of the filing which will
determine the briefing schedule. As of the date of this Prospectus, no briefs on
appeal have been filed. Plaintiff's counsel has recently attempted to begin
settlement negotiations with the Bank Defendants. Based upon the advice of
counsel, management does not believe that s will prevail in this lawsuit. No
assurances can be given, however, as to the outcome of plaintiffs' appeal. In
the event plainitffs ultimately were to prevail, management is currently unable
to estimate the amount or range of potential loss.
23
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
There were no matters submitted for vote to the shareholders during the fourth
quarter of 1994.
Part II
- -------
Item 5: Market for Common Stock and Related Shareholder Matters
- ---------------------------------------------------------------
See "Market for Common Stock and Related Shareholder Matters" section of 1994
Annual Report to shareholders which is incorporated by reference herein.
Item 6: Selected Financial Data
- -------------------------------
See "Summary Selected Consolidated Financial And Other Data" section of the 1994
Annual Report to shareholders, which is incorporated by reference herein.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of the 1994 Annual Report to shareholders which is
incorporated by reference herein.
Item 8: Financial Statements
- ----------------------------
See "Financial Statements" section of the 1994 Annual Report to shareholders
which is incorporated by reference herein.
Item 9: Disagreements on Accounting and Financial Disclosures
- -------------------------------------------------------------
Not applicable.
Part III
- --------
Item 10: Directors and Executives Officers
- ------------------------------------------
Contained in the Proxy Statement for the 1995 Annual Meeting which is to be
filed within 120 days after December 31, 1994 which is incorporated by
reference.
Item 11: Executive Compensation
- -------------------------------
Contained in the Proxy Statement for the 1995 Annual Meeting which is to be
filed within 120 days after December 31, 1994 which is incorporated by
reference.
Item 12: Shareholdings of Certain Beneficial Owners and Management
- ------------------------------------------------------------------
Contained in the Proxy Statement for the 1995 Annual Meeting which is to be
filed within 120 days after December 31, 1994 which is incorporated by
reference.
Item 13: Certain Relationships and Related Transactions
- -------------------------------------------------------
24
<PAGE>
Contained in the Proxy Statement for the 1995 Annual Meeting which is to be
filed within 120 days after December 31, 1994 which is incorporated by
reference.
Item 14: Exhibits, Financial Statement Schedules And Reports On Form 8-K
- ------------------------------------------------------------------------
INDEX
- -----
(a.) 1. The following consolidated financial statements of the Company and its
Subsidiaries are included in Item 8 and incorporated by reference to the
1994 Annual Report to shareholders:
Consolidated Balance Sheets at December 31, 1994 and December 31, 1993.
Consolidated Statements of Operations for the years ended December 31, 1994,
1993, and 1992.
Consolidated Statements of Changes in Shareholder's Equity for the
years ended December 31, 1994, 1993, and 1992.
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1993 and 1992.
Notes to the Consolidated Financial Statements.
Independent Auditors' Report.
2. Financial Statement Schedules: All schedules to the Consolidated
Financial Statements of the Company required by Article 9 of Regulations S-X are
included in the Notes to the Financial Statements or are not required under the
related instructions, or are inapplicable.
<TABLE>
<CAPTION>
3. Exhibits:
<S> <C>
3.1 -- Articles of Incorporation, as amended (1)
3.2 -- Bylaws, as amended (1)
10.1 -- 1991 Incentive Stock Option Plan (2)
10.2 -- Incentive Stock Option Plan (3)
10.3 -- Incentive Stock Option Plan of Conejo (former subsidiary of
Ventura) (4)
10.4 -- Non-Qualified Stock Option Plan of Conejo (former subsidiary of
Ventura) (5)
10.5 -- 401(k)/Employee Stock Ownership Plan (6)
10.6 -- Salary Continuation Agreement for Cupp (1)
10.7 -- Employment Agreement for Kellogg (7)
10.8 -- Employment Agreement for Raggio (7)
10.9 -- Employment Agreement for Lagomarsino(7)
11 -- Computation of Per Share Earnings
13 -- Annual Report to Shareholders (information not incorporated
by reference herein is excluded)
22 -- The following companies are wholly owned subsidiaries of
Ventura County National Bancorp:
Ventura County National Bank, a National Association
Venco Finance Company, a California Corporation
Venco Mortgage Co., a California Corporation
Ventura Management Services Company Inc.
Frontier Bank, N.A., a National Association
Frontier Services, Inc., a California Corporation
23.1 -- Consent of Deloitte & Touche LLP
27 -- Financial Data Schedule
</TABLE>
25
<PAGE>
- -----------------
(1) This exhibit is filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993 and incorporated herein by
reference.
(2) This exhibit is filed as an Exhibit to the Registrant's S-8 Registration
Statement File No. 33-9207 and incorporated herein by reference.
(3) This exhibit is filed as Exhibit 10.6 to Registrant's Statement File No.
33-9207 and incorporated herein by reference.
(4) This exhibit is filed as Exhibit 10.1 to Registrant's Registration
Statement File No. 33-28780 and incorporated herein by reference.
(5) This exhibit is filed as Exhibit 10.2 to Registrant's Registration
Statement File No. 33-28780 and incorporated herein by reference.
(6) This exhibit is filed as Exhibit 10.5 to Registrant's Registration
Statement File No. 33-28780 and incorporated herein by reference.
(7) This exhibit is filed as an Exhibit to the Registrant's S-2 Registration
Statement File No. 33-88388 and incorporated herein by reference.
(b.) Reports on Form 8-K
------------------
No reports of Form 8-K have been filed during the last quarter of 1994.
(c.) Exhibits
--------
See Index to Exhibits included in 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.
Dated: March 29, 1995.
Ventura County National Bancorp
(Registrant)
By /s/ Richard Cupp
RICHARD CUPP
President and
Chief Executive Officer
26
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dated indicated.
Signature Title Date
- --------- ----- ----
____________________ Director March , 1995
Michael Antin
/s/ Ralph R. Bennett
____________________ Director March 29, 1995
Ralph R. Bennett
/s/ Richard S. Cupp
____________________ Director, President March 29, 1995
Richard S. Cupp and Chief Executive
Officer (Principal
Executive Officer)
/s/ James M. Davis
____________________ Director March 29, 1995
James M. Davis
____________________ Director March , 1995
Bart M. Hackley, Jr.
/s/ W.E. Hartman
____________________ Director March 29, 1995
W.E. Hartman
____________________ Chairman of the Board March , 1995
James B. Hussey
27
<PAGE>
/s/ Richard A. Lagomarsino
__________________________ Director March 29, 1995
Richard A. Lagomarsino
______________________ Director March , 1995
Zella A. Rushing
/s/ Raymond E. Swift
______________________ Director March 29, 1995
Raymond E. Swift
/s/ Simone Lagomarsino
______________________ Senior Vice March 29, 1995
Simone Lagomarsino President and
Chief Financial
Officer (Principal
Accounting Officer)
28
<PAGE>
EXHIBIT 11
Computation of per share income (loss)(1)
- -----------------------------------------
<TABLE>
<CAPTION>
Year Ended
----------------------------------------
12/31/94 12/31/93 12/31/92
-------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net Income (loss) used to compute primary earnings per share........ $ (262) $ (12,087) $ 685
Net Income (loss) used to compute fully diluted earnings per share.. $ (262) $ (12,087) $ 685
Primary Earnings per share:
Average Number of shares of:
Common Stock and Common Stock equivalents outstanding............. 6,333,835 5,635,941 5,610,792
Primary earnings per share........................................ $ (.04) $ (2.15) $ .12
========= ========= =========
Fully diluted earnings per share:
Weighted average number of Common shares outstanding.............. 6,333,835 5,635,941 5,610,792
Number of shares used to compute fully diluted earnings per share 6,333,835 5,635,941 5,610,792
Fully diluted earnings per share.................................... $ (.04) $ (2.15) $ .12
========= ========= =========
</TABLE>
(1) All per share data has been adjusted to reflect stock dividends to
shareholders of record on March 7, 1991 and March 9, 1992.
<PAGE>
MARKET PRICE OF COMMON STOCK AND DIVIDENDS
The Common Stock is included for quotation on the Nasdaq National Market. The
following table sets forth the high and low sales prices for each of the nine
quarters ended March 31, 1995, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
March 31, 1993................................................ $6.50 $3.50
June 30, 1993................................................. 5.00 2.50
September 30, 1993............................................ 3.63 2.00
December 31, 1993............................................. 2.63 1.63
March 31, 1994................................................ 2.38 1.88
June 30, 1994................................................. 3.25 1.75
September 30, 1994............................................ 3.13 2.75
December 31, 1994............................................. 2.94 2.00
</TABLE>
As of March 29, 1995, the closing sales price of the Common Stock, as quoted
through the Nasdaq National Market, was $2.38. There were 1,057 shareholders
of record of the Common Stock atDecember 31, 1994.
Parent has never paid a cash dividend on the Common Stock and there can be no
assurance that Parent will generate earnings in the future which would permit
the declaration of dividends. Parent is prohibited by the terms of the MOU from
declaring or paying a dividend without fifteen days' prior notice to the
Reserve Bank, which may prohibit the payment of dividends.
In addition, the source of any such dividends is likely to be dividends from
Ventura or Frontier. The Banks are also limited in the amount of dividends
which they may distribute according to the terms of the Formal Agreement and
the Consent Order. Pursuant to the Formal Agreement, in the case of Ventura,
and the Consent Order, as it pertains to Frontier, the Board of Directors of
each Bank may declare or pay dividends only: (i) when their Bank is in
compliance with 12 U.S.C. sections 56, 60, and 1831o(d)(1); (ii) when their
Bank is in compliance with the capital program developed pursuant to the Formal
Agreement and Consent Order; (iii) when such dividend payment is consistent
with the capital levels specified in paragraph (1) of the Formal Agreement and
Consent Order; and (iv) with prior written approval of the Director of Special
Supervision of the OCC, pursuant to the Formal Agreement, and the District
Administrator of the OCC, pursuant to the Consent Order. See "Supervision and
Regulation--Restrictions on Transfers of Funds to Parent by the Banks."
Furthermore, it is anticipated that for the foreseeable future any earnings
which may be generated will be retained for the purpose of increasing the
Company's capital and reserves in order to facilitate growth.
1
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected consolidated financial and other data
of the Company as of and for each of the years in the five years ended December
31, 1994. The data as of and for each of the five years in the period ended
December 31, 1994 should be read in conjunction with, and is qualified in its
entirety by, the more detailed information included elsewhere, including the
Company's audited Consolidated Financial Statements and the Notes thereto.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PERIOD END BALANCE SHEET
DATA:
Assets.................. $ 257,755 $ 340,529 $ 400,195 $ 364,734 $ 384,385
Securities held-to-
maturity (approximate
market value of $17,963
in 1994)................ 18,775 -- 33,168 13,590 24,407
Securities available-
for-sale............... 31,859 40,775 -- -- --
Loans and leases, net... 159,673 253,201 307,847 296,422 299,666
Loan loss reserve....... 8,261 14,313 3,854 2,845 2,285
Deposits
Interest-bearing
demand............... 67,177 99,502 106,108 93,651 82,649
Non interest-bearing
demand............... 80,646 101,224 100,688 94,364 82,835
Time.................. 88,519 117,563 141,791 136,471 165,058
Shareholders' equity.... 19,052 20,370 30,388 29,179 27,642
Shares of capital stock
outstanding............ 6,333,835 6,333,835 5,614,255 5,282,301 4,802,520
Period end book value
per share(1)........... $ 3.01 $ 3.22 $ 5.41 $ 5.21 $ 4.94
ASSET QUALITY:
Nonperforming loans..... $ 7,945(2) $ 19,839 $ 3,254 $ 9,454 $ 3,119
Nonperforming assets.... 11,169(2) 22,068 7,194 11,660 3,119
ASSET QUALITY RATIOS:
Nonperforming loans to
total loans............ 4.73% 7.41% 1.04% 3.16% 1.03%
Nonperforming assets to
total assets........... 4.33 6.48 1.79 3.15 0.81
Loan loss reserves to
nonperforming loans.... 103.98 72.15 118.44 30.09 73.26
Loan loss reserves to
nonperforming assets... 73.96 64.86 53.57 24.78 73.26
Classified assets to
loan loss reserve plus
shareholders' equity... 113.27 186.27 84.71 67.45 47.63
OTHER DATA:
Full time equivalent
employees.............. 141 199 198 221 249
STATEMENT OF OPERATIONS
DATA:
Net interest income..... $ 15,868 $ 16,912 $ 17,586 $ 17,931 $ 18,552
Provision for loan
losses................. 3,825 16,213 3,404 2,537 743
Other income............ 4,064 4,820 5,512 5,364 4,555
Other expenses.......... 16,084 20,839 18,438 19,239 16,551
Income (loss) before
income taxes and
cumulative effect of
change in accounting
method................. 23 (15,320) 1,256 1,519 5,813
Applicable income taxes
(benefit).............. 285 (3,233) 571 713 2,476
Cumulative effect of
change in accounting
method................. -- -- -- -- 286
Net income (loss)....... (262) (12,087) 685 806 3,623
PER SHARE DATA:(1)
Income (loss) per share
before income taxes and
cumulative effect of
change in accounting
method................. $ (0.04) $ (2.73) $ .22 $ .27 $ 1.03
Net income (loss) per
share.................. (0.04) (2.15) .12 .14 .64
SELECTED PERFORMANCE
RATIOS:
Return on average
equity................. (1.29)% (45.12)% 2.30% 2.79% 14.18%
Return on average
assets................. (0.09) (3.18) 0.18 0.22 1.01
Efficiency ratio(3)..... 80.71 95.89 79.83 82.59 71.63
Noninterest expense to
average assets......... 5.45 5.47 4.74 5.14 4.62
Net interest margin..... 5.68 4.81 4.95 5.34 5.77
Net interest rate
spread................. 4.80% 3.96% 4.27% 5.06% 4.13%
</TABLE>
- --------
(1) All per share data included herein have been adjusted to reflect the stock
splits and stock dividends to shareholders of record on February 7, 1990,
March 7, 1991 and March 9, 1992 .
(2) Does not include $1,966,000 in troubled debt restructuring that were
performing at December 31, 1994.
(3) The efficiency ratio is other expenses divided by the sum of net interest
income before provision for loan losses plus other income.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the
consolidated financial condition and operating results of the Company as of and
for the years ended December 31, 1994, 1993 and 1992. The discussion should be
read in conjunction with the Company's consolidated financial statements.
OVERVIEW
In September 1993, new management began taking actions to address the major
concerns confronting the Banks. The Company's net loss was reduced to $262,000
or $0.04 per share for 1994, compared with a net loss of $12.1 million in 1993.
The significant improvement over 1993 was due a significant decrease in the
provision for loan losses, reduced other expenses, gains on the sale of mortgage
servicing rights and the merchant card portfolio totaling $1.4 million and
$174,000, respectively, and improved net interest margin in 1994. The Company
returned to profitability beginning in the third quarter of 1994, and had net
income for the second half of 1994 of $615,000, compared to a net loss of
$877,000 for the first six months of the year. The Company's net loss for the
first two quarters of 1994 was offset by the $1.4 million and $174,000
nonrecurring gains noted above. Earnings improvement in the second half compared
to the first half of 1994 was due to a $1.9 million decrease in the provision
for loan losses, $1.2 million decrease in other expenses and a $143,000 decrease
in income tax provision, which were offset by a decline in other income of $2.1
million. The provision for loan losses was decreased during the second half due
to the significant reduction in the level of classified and nonperforming loans
in conjunction with the discounted loan sale, the marketing of loan
participations and the tightening of underwriting criteria. The decrease in
other expenses during the second half was due to the closing of the Company's
mortgage origination, mortgage servicing and data processing departments, as
well as the replacement during 1994 of ESOP expense with lower 401(k) matching
contributions. For these departments, salaries and benefits, occupancy expenses
and retirement benefits decreased $597,000, $122,000 and $522,000, respectively,
from the first half of 1994 to the second half of 1994. Of the decrease in other
income,$1.6 million was due to the gain on sale of mortgage servicing rights and
the gain on sale of the merchant card portfolio during the first half of the
year. In addition, service charges, loan fees and other fee income decreased
during the second half as a result of reduced mortgage activities. Total assets
at December 31, 1994 decreased 24.3% from December 31, 1993, as a result of
management's efforts to reduce the loan to deposit ratio, increase capital
ratios and improve liquidity by tightening underwriting criteria, selling
nonperforming loans at a discount and marketing loan participations.
Additionally, the Company allowed significant runoff of title and escrow and
institutional certificates of deposit during 1994.
During the two years ended December 31, 1993, the Company's net income
declined significantly, culminating with a net loss of $12.1 million during
1993. The reductions in earnings during 1992 and the loss experienced during
1993 reflect substantial increases in the provision for loan losses
necessitated by increased levels of nonperforming assets and net charge-offs.
The Company's nonperforming assets were $22.1 million at December 31, 1993,
compared with $7.2 million at December 31, 1992. Net charge-offs were $5.8
million for 1993, compared to $2.4 million for 1992. Other expenses also
increased during the two year period ended December 31, 1993. The increase in
other expenses during 1993 was primarily due to increased expenses associated
with REO, increased legal costs related to nonperforming assets and regulatory
matters, and the write-off of goodwill at Frontier. Furthermore, during the two
year period ended December 31, 1993, net interest income decreased primarily
due to reductions in earning assets.
In January 1994 and 1995, Southern California experienced major flooding, with
Ventura County being one of the areas to incur the greatest amount of rainfall.
Additionally, in January 1994, the greater Los Angeles area was seriously
affected by a major earthquake, centered in the San Fernando Valley. Although
the Company's operations and customers are located in the most seriously
affected areas, based upon surveys of customers and employees, management
believes that there will be no significant impact on the Company's operations or
loan collateral as a result of these natural disasters.
FINANCIAL CONDITION
Total assets at December 31, 1994 decreased $82.8 million, or 24.3%, from
December 31, 1993. Average interest earning assets decreased from $355,090,000
for 1992 to $351,686,000 for 1993, to $227,612,000 for 1994, decreases of 1.0%
and 21.1%, respectively. During 1993 and 1994, the balance sheet was reduced
for liquidity purposes as well as to achieve compliance with the capital
requirements of the Banks' regulatory agreements. Management does not presently
intend to further reduce the balance sheet, but anticipates that the additional
capital raised as a result of its proposed Rights Offering will be used to
support an increase in assets in the
3
<PAGE>
post-recessionary environment. Net loans and leases decreased $93.5 million or
37.0% from year end 1993, primarily due to the sale of nonperforming loans and
the payoff of other loans that funded deposit outflows. Average loans and
leases, net of unearned income, decreased 8.2% to $289,675,000 during 1993 and
26.8% to $212,029,000 during 1994. These decreases were partially offset by
increases in average federal funds sold of $8.1 million, or 44.0%, and cash and
cash equivalents of $180,000, or 11.0%.
At December 31, 1994, the Company had $2,346,000 in REO comprised of three
commercial properties with carrying values totaling $2,196,000, one single
family residence totaling $100,000 and land zoned for residential purposes of
$50,000. The Company sold $4,835,000 of REO during 1994 and incurred REO write
down and property maintenance expense of $641,000. At December 31, 1993, the
Company had $2,229,000 in REO comprised of seven commercial properties totaling
$1,149,000, three single family residences totaling $687,000, land zoned for
multi-family purposes of $325,000 and land zoned for residential purposes of
$68,000. REO is carried at cost or current fair market value less estimated
selling costs, whichever is lower. There were no loans to facilitate the sale
of REO during 1994. The Company sold $833,000 of REO during 1993 and incurred
REO write down and property maintenance expenses of $1,733,000. As of December
31, 1994, all REO properties held at December 31, 1993 with the exception of
one residential lot, had been sold. Loans to facilitate the sale of REO during
1993 totaled $603,000. These loans were made in accordance with the Company's
credit policies and under similar terms extended to creditworthy borrowers.
Fixed assets, net of depreciation, increased from $1,687,000 at December 31,
1993 to $1,917,000 at December 31, 1994 due to capitalized costs associated
with the Company's data processing conversion. Average fixed assets, net of
depreciation, decreased from $3,210,000 in 1992 to $2,273,000 in 1993 and
$1,862,000 in 1994. The decreases since 1992 have resulted from accumulated
depreciation charges and the acceleration of depreciation related to data
processing equipment and leaseholds.
Total deposits at December 31, 1994 decreased $81.9 million or 25.7% from
December 31, 1993, due primarily to the planned run-off of $33.4 million of
title and escrow deposits and $18.0 million of institutional and brokered
certificates of deposit designed to improve the core deposit base and reduce
potentially volatile liabilities. Average deposits during 1994, 1993 and 1992
were $272,928,000, $333,462,000 and $331,592,000, respectively. The 0.6%
increase in average deposits from 1992 to 1993 was a result of increased title
and escrow deposits to fund increased mortgage origination activity and
marketing programs designed to attract interest bearing demand deposits and
savings deposits which were offset by a decrease in time certificates of
deposit. Average interest-bearing deposits increased from $242,294,000 for 1992
to $246,079,000 for 1993, an increase of 1.6%, then decreased to $197,361,000
for 1994, a decrease of 19.8%. Other categories of deposits also decreased.
During 1994, 1993 and 1992, average noninterest bearing deposits totaled
$75,568,000, $87,383,000, and $89,298,000, respectively, which represented
27.7%, 26.2%, 26.9%, respectively, of total average deposits. During 1994,
average noninterest bearing demand deposits decreased 13.5%, average interest-
bearing demand and savings accounts decreased 10.9%, and average time
certificates of deposit decreased 26.3%. During 1993, average noninterest
bearing demand deposits decreased 2.1% while average interest bearing demand
and savings accounts increased 7.2% and average time certificates of deposit
decreased 2.2%, compared to 1992. Management believes the reduction in time
deposits was also attributable to depositors seeking higher yields on their
funds than the Company was offering as a result of the lower interest rate
environment. Management believes the 20.3% reduction in savings deposits during
1994 was attributable to customers moving their banking relationships to other
institutions when the Company restructured its loan portfolio to reduce
concentrations, as well as to the public's reaction to adverse publicity about
the Company's losses, management changes and regulatory orders. The Company has
taken steps to improve the public's perception of the Bank's financial
condition, including marketing campaigns and enhanced business development
efforts designed to generate core deposit growth and a renewed expansion of
total banking relationships.
The Company discontinued the issuance of commercial paper on December 31,
1993. Average commercial paper sold in 1993 was $6,987,000. Average federal
funds purchased in 1994 declined to $44,000, compared to $1,376,000 in 1993, a
decrease of 96.8%. In 1993, the Company raised $1,555,555 from a private
placement of Common Stock and issued the Notes, the proceeds of which were used
to retired the remaining principal on a loan to fund the Company's ESOP.
Principal outstanding on the Notes was $125,000 at December 31, 1994.
Shareholders' equity totalled $19.1 million at December 31, 1994, a decrease
of 6.5% from the $20.4 million at December 31, 1993.
4
<PAGE>
On December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." See "New Accounting
Pronouncements." Prior to the adoption of SFAS No. 115, all investment
securities were stated at cost, with the exception of investments in mutual
funds, which were deemed equity investments, based upon the Company's intent
and ability to hold such securities to maturity. At December 31, 1992, the
Company did not have a plan or need to sell such securities. Subsequently,
however, and in anticipation of the adoption of SFAS No. 115, the Company
determined to restructure the investment portfolio. During 1993, the Company
sold most of the securities previously identified as held to maturity,
substantially all of which were sold in the third or fourth quarter of 1993. In
addition, certain securities were purchased and sold during 1993. In connection
with the adoption of SFAS No. 115, the Company classified all of its investment
securities as available for sale and recorded unrealized loss of $122,000, net
of tax effect. During 1994, the Company purchased securities which were
classified as either available-for-sale or held-to-maturity at the time of
purchase, based on management's intent and ability to hold certain investments
to maturity. In addition, the Company transferred mortgage backed securities
with unrealized losses of $472,000 from available-for-sale to held-to-maturity
during 1994 due to a change in intent to hold the securities to maturity. The
unrealized losses will be accreted to shareholders' equity over the average
life of the securities. Due to a decline in the market value of investment
securities classified as available-for-sale and the unrealized losses on the
securities transferred, in accordance with SFAS No. 115, the Company recorded
an unrealized loss totaling $1,178,000 in shareholders' equity at December 31,
1994, an increase of $1,056,000, or 865.6%, from December 31, 1993. The Company
had no trading securities at December 31, 1994 or 1993. Mortgage-backed
securities consisted entirely of Federal Home Loan Mortgage Corporation backed
securities. The Company did not have structured notes, CMOs or other derivative
products in the portfolio at December 31, 1994 or 1993.
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Net Interest Income and Net Interest Margin
Net interest income decreased by $1,045,000, or 6.2%, to $15,868,000 during
1994 compared to 1993, primarily due to a significant decrease in average
interest earning assets. These decreases reflect overall balance sheet
shrinkage, beginning in 1993, to improve liquidity as well as to achieve
compliance with the capital requirements of the Bank's regulatory agreements.
See "Financial Condition."
Interest income for 1994 decreased $3,775,000, or 14.6%, over 1993 to
$22,136,000 while interest expense decreased $2,732,000, or 30.4%, for the same
period to $6,268,000.
The decrease in interest income during 1994 was primarily attributable to a
significant decrease in interest earning assets, primarily loans. Average
interest earning assets were $277,612,000 during 1994, a 21.1% decrease from
the average balance of $351,686,000 for 1993. The Company reduced average
interest earning assets to fund a planned reduction of volatile deposits,
particularly title and escrow deposits and institutional certificates of
deposit. Loans, the largest and highest yielding component of earning assets,
decreased 26.8% during 1994. The decrease in interest income was slightly
offset by an increase in the yield on interest earning assets to 7.97% for 1994
versus a 7.37% yield on interest earning assets for 1993, which reflects
increases in market interest rates beginning in 1994 and a change in the mix of
assets due to the declining asset base. Average interest earning assets as a
percent of total average assets increased from 92.3% for 1993 to 94.0% for
1994.
The decrease in interest expense during 1994 was primarily attributable to a
19.8% decrease in average interest bearing deposits from $246,079,000 for 1993
to $197,360,000 for 1994. In addition, the decrease in interest expense was
affected by a change in the mix of interest-bearing liabilities. Average
noninterest bearing deposits as a percent of total average deposits increased
from 26.2% for 1993 to 27.7% for 1994. Average deposits decreased from
$333,462,000 for 1993 to $272,928,000 for 1994, a decrease of 18.2%. Average
5
<PAGE>
certificates of deposit greater than $100,000 decreased from 16.27% of average
total deposits for 1993 to 12.34% of average total deposits for 1994. As a
result of the shift in the mix of liabilities, the average cost of funds
declined to 3.17% during 1994 compared to a 3.41% cost of funds for 1993,
despite increases in market interest rates.
As a result of the foregoing, net interest margin increased from 4.81% for
1993 to 5.68% for 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Rate Sensitive Assets/Rate Sensitive
Liabilities."
The following tables summarize average balances and for interest earning
assets and interest bearing liabilities, the amounts of interest earned or paid
and the yields or rates for the periods indicated. The average balances in the
following table and elsewhere in this Prospectus have been calculated on the
basis of the daily account balances.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Loans(1)............... $212,029 $18,740 8.84% $289,675 $23,190 8.01% $315,659 $26,892 8.52%
Investment Securities.. 37,736 2,169 5.75 37,935 1,916 5.06 18,438 1,178 6.39
Interest Bearing
Deposits with other
Banks................. 1,311 67 5.11 5,645 263 4.66 5,195 256 4.93
Federal Funds Sold 26,536 1,160 4.37 18,431 542 2.94 15,798 625 3.96
-------- ------- -------- ------- -------- -------
Total Interest Earning
Assets................. 277,612 22,136 7.97 351,686 25,911 7.37 355,090 28,951 8.52
Noninterest Earning As-
sets:
Cash and Due from
Banks.................. 19,353 25,717 23,649
Premises and Equipment,
Net................... 1,862 2,273 3,210
Other Assets........... 7,704 10,594 9,938
Less: Loan Loss Re-
serves (11,237) (9,309) (3,263)
-------- -------- --------
Total Assets........... $295,294 $380,961 $388,624
======== ======== ========
Interest Bearing
Liabilities:
Demand Deposits........ $ 58,114 $ 1,540 2.65 $ 66,167 $ 1,805 2.73 $ 58,254 $ 1,949 3.35
Savings Deposit........ 34,575 821 2.37 37,892 1,052 2.78 38,838 1,404 3.62
Time Deposits.......... 104,671 3,892 3.72 142,020 5,515 3.88 145,202 6,983 4.81
FHLB Borrowings........ 129 5 3.88 7,447 285 3.83 9,431 410 4.35
Federal Funds
Purchased............. 44 1 2.27 1,376 44 3.20 265 8 3.02
Commercial Paper Sold.. -- -- -- 6,987 186 2.66 12,805 438 3.42
Notes Payable.......... 125 9 7.20 1,908 112 5.87 2,474 173 6.99
-------- ------- -------- ------- -------- -------
Total Interest Bearing
Liabilities........... 197,658 6,268 3.17 263,797 8,999 3.41 267,269 11,365 4.25
-------- ------- -------- ------- -------- -------
Noninterest Bearing
Liabilities:
Demand Deposit......... 75,568 87,383 89,298
Other.................. 1,965 2,992 2,279
-------- -------- --------
77,533 90,374 91,577
-------- -------- --------
Shareholders' Equity.... 20,103 26,789 29,778
-------- -------- --------
Total Liabilities and
Shareholders' Equity.. $295,294 $380,961 $388,624
======== ======== ========
Net Interest Income..... $15,868 $16,912 $17,586
======= ======= =======
Net Interest Margin..... 5.68 4.81 4.95
</TABLE>
- --------
(1) Average balances exclude nonaccrual loans.
6
<PAGE>
<TABLE>
<CAPTION>
1994 COMPARED TO 1993 1993 COMPARED TO 1992
--------------------------------- --------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: (1) DUE TO: (1)
--------------------- --------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
---------- --------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Earned On:
Loans (2).............. $ (6,832) $ 2,412 $(4,451) $ (2,081) $ (1,621) $(3,702)
Investment Securities.. (11) 262 251 987 (247) 740
Interest Bearing Depos-
its with other Banks.. (221) 26 (195) 21 (16) 5
Federal Funds Sold..... 354 264 618 77 (160) (83)
---------- --------- ------- --------- --------- -------
Total................. $ (6,710) $ 2,964 $(3,777) $ (996) $ (2,044) $(3,040)
---------- --------- ------- --------- --------- -------
Interest Paid On:
Demand Deposits........ $ (213) $ (52) $ (265) $ 216 $ (360) $ (144)
Savings Deposits....... (79) (152) (231) (26) (326) (352)
Time Deposits.......... (1,388) (236) (1,624) (123) (1,345) (1,468)
Federal Funds Pur-
chased................ (30) (13) (43) 36 0 36
Other Short Term
Borrowings............ (284) 4 (280) (76) (49) (125)
Commercial Paper....... 0 (186) (186) (155) (97) (252)
Notes Payable.......... (128) 25 (103) (33) (28) (61)
---------- --------- ------- --------- --------- -------
Total................. $ (2,122) $ (610) $(2,732) $ (161) $ (2,205) $(2,366)
---------- --------- ------- --------- --------- -------
Net interest income..... $ (4,588) $ 3,573 $(1,045) $ (835) $ (161) $ (674)
========== ========= ======= ========= ========= =======
</TABLE>
- --------
(1) The changes due to simultaneous rate and volume changes have been allocated
to rate and volume changes in proportion to the relationship between their
absolute dollar amounts.
(2) The above table does not include interest income that would have been
earned on nonaccrual loans.
Other Income
Other income decreased $756,000, or 15.7%, during 1994, primarily due to a
lower level of mortgage activity. Loan fees decreased 60.6% from $1,192,000 in
1993 to $470,000 in 1994, reflecting a significant decrease in income resulting
from mortgage loan originations and servicing during the year. Net mortgage
servicing fees were $317,000 in 1994, compared with $618,000 in 1993, a
decrease of 48.7%. The Company sold its mortgage servicing rights for a net
gain of $1,443,000 in May 1994, which was offset by a write-off of $320,000. The
Company also sold its mortgage origination unit in June 1994 in return for
residual income on future loan originations by the acquiror. However, due to
significant reductions in mortgage origination activity subsequent to the sale,
the acquiror closed the mortgage origination unit, and no residual income will
be generated. Other income increased in 1994, due to the gain on sale of
mortgage servicing and a gain of $174,000 on the sale of the merchant credit
card operation in March 1994. These increases were offset by a 21.0% decrease in
gains on the sale of SBA loans during 1994. The decreases in gain on sale of SBA
loans were due primarily to reduced volume of sales and the deferral of income
recognition due to the timing of such sales. Service charges on deposit accounts
decreased during 1994 as a result of customers maintaining higher average
balances to offset service charge assessments and lower deposit levels.
Miscellaneous fee income decreased 40.0% from $590,000 in 1993 to $354,000 in
1994 due to the elimination of the merchant card portfolio during 1994 and
certain other recordkeeping services for customers during 1993 and 1994.
Miscellaneous fees include merchant card income, cash management service
charges, safe deposit box rentals, charges for items such as money orders,
cashiers' checks and ATM transactions, and reflect usage and transaction
volume. Merchant card income represented 13.0% and 24.9% of total miscellaneous
fees during 1994 and 1993, respectively.
Other income in the future is anticipated to be lower due to the
discontinuance of mortgage activities. Combined net mortgage servicing fees and
gains on sale of mortgage loans included in total other income were $589,000,
$1,694,000, and $1,806,000 in 1994, 1993 and 1992, respectively.
7
<PAGE>
Other Expenses
The following table sets forth the Company's other expenses for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits................ $ 6,423 $ 7,082 $ 6,797
Net occupancy................................. 2,087 2,578 2,809
Equipment..................................... 830 1,241 1,102
Professional services......................... 1,928 1,878 1,391
Real Estate Owned............................. 641 1,733 479
Amortization of goodwill...................... -- 1,266 105
Customer services............................. 286 382 687
Office supplies and office expense............ 612 800 1,000
FDIC assessments.............................. 878 921 789
Amortization of core deposits................. -- -- 513
Business development and advertising.......... 364 271 371
Other......................................... 2,035 2,687 2,395
---------- ---------- ----------
Total Other Expense......................... $ 16,084 $ 20,839 $ 18,438
========== ========== ==========
</TABLE>
Other expense decreased $4,755,000, or 22.8%, in 1994, due primarily to a
decrease in REO expense, the writeoff of goodwill during 1993, and decreased
salaries and employee benefits, occupancy and equipment expenses.
REO expense declined $1,092,000 during 1994. The Company incurred writedowns
on REO of $1,408,000 during 1993 due to declining market values on properties
that were principally raw land and commercial real estate. REO writedowns in
1994 totaled $959,000, which reflects a stabilizing market for distressed
properties. The majority of the $1.4 million in writedowns during 1993 were
taken approximately at the time that the loans were placed in REO. When a
property is taken into REO, if the fair market value of the property is less
than the Company's carrying costs, a writedown is taken immediately. However,
during 1993, when a property values were continuing to decline, the fair market
value of a foreclosed property was not always available at the time of the
foreclosure. In all cases, upon foreclosure, the Company obtains an appraisal
on a timely basis, generally within 30 to 60 days. To the extent the apprisal
indicates further reduction in fair market value, additional writedowns are
taken. These writedowns were partially offset by gains on sale of REO of $1,000
in 1993 and $511,000 in 1994.
Salary and employee benefit expense decreased by $659,000, or 9.3%, during
1994 primarily as a result of staff reductions. Total full time equivalent
employees declined from 199 at December 31, 1993 to 141 at December 31, 1994.
The decrease in employee benefits expense during 1994 reflected reduced
employee health benefits and the savings of $635,000 compensation expense
related to the ESOP loan, which was partially offset by $49,000 in 401(k)
matching contributions. The ESOP loan, which remains outstanding, is secured by
185,840 shares of Common Stock held in a suspense account which would be
released and allocated to the accounts of participants to the extent the
Company makes future ESOP contributions. The Company also adopted Statement of
Position ("SOP") 93-6 in 1994 which provides that future ESOP contributions, if
any, shall be expensed at fair market value of the Common Stock at the time of
the contribution rather than the historical cost of $9.00 per share. Adoption
of SOP 93-6 had no impact on results of operations during 1994. The extent to
which the adoption of SOP 93-6 will affect the Company's results of operations
depends on the level of future ESOP contributions, if any, and the market value
of the Common Stock, neither of which can be determined at this time. These
salary and employee benefit expense reductions were partially offset by
decreased deferred loan origination costs. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91, the Company defers loan
origination costs and amortizes them into loan interest income over the life of
each loan. These deferred costs were $457,000 and $207,000 as of December 31,
1994 and 1993, respectively.
In addition, occupancy expense decreased $491,000, or 19.0%, during 1994, as
a result of a decrease in amortization expense related to leased space and an
increase in income from subleases. During 1993 and 1994,
8
<PAGE>
the Company sublet or terminated leases for office space formerly housing its
commercial lending department, mortgage origination department and
administrative personnel. The Company also negotiated a favorable renewal of the
lease for its Central Operations office, and allowed the lease for one of its
properties to expire during 1995. Equipment expense decreased $411,000, or
33.1%, during 1994, primarily due to a significant decrease in depreciation
expense. The Company outsourced its data processing in May 1994 with monthly
cost savings of approximately $52,000. The Company outsourced its courier
service in September 1993, resulting in monthly reductions of approximately
$8,000.
Total other expense expressed as a percentage of net interest income plus
other income, commonly referred to as the efficiency ratio, was 80.71% for 1994
and 95.89% for 1993.
Provision For Loan Losses and Nonperforming Loans
The Company maintains a loan loss reserve which it considers adequate to
cover the risk of losses in the loan and lease portfolio. The charge to expense
is based on management's evaluation of the quality of the loan and lease
portfolio, the level of classified loans and leases, total outstanding loans
and leases, losses previously charged against the reserve, and current and
anticipated economic conditions. Management also considers certain elements in
the portfolio and the grading systems used to measure the quality of the
portfolio. These factors include industry concentrations and collateral
concentrations. In response to the recession in Southern California and the
decline in real estate values, the Company assessed the value of collateral for
loans, particularly those secured by real estate. If during this process a
shortfall ensued, the Company then recorded a charge-off or provided a specific
reserve to reflect current market value of the loan. During 1994, the Company
expanded the Loan Administration and Special Assets Departments to improve
overall asset quality through problem loan management and risk and collateral
value identification. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the adequacy of the Company's
loan loss reserve. Such agencies may require the Company to recognize additions
to the loan loss reserve based upon their judgment of the information available
to them at the time of their examination. In connection with its examination of
Frontier, the OCC required changes in the risk grading of certain credits which
resulted in an additional provision for loan losses of $200,000 during 1994.
The following table summarizes the Company's loan loss reserves and loan loss
experience for the years indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $14,313 $ 3,854 $ 2,845 $2,285 $1,863
Charge-offs
Commercial, financial and agricultural......... 8,705 4,026 1,818 1,696 428
Real estate construction....................... 603 67 -- 100 0
Real estate mortgage........................... 254 1,476 -- 0 0
Installment.................................... 808 570 722 243 39
Lease financing................................ 69 52 3 29 86
------- ------- ------- ------ ------
Total charge-offs................................ 10,439(1) 6,191 2,543 2,068 553
Recoveries
Commercial, financial and agricultural......... 428 409 111 56 199
Real estate construction....................... -- -- -- 0 0
Real estate mortgage........................... 4 1 -- 0 0
Installment.................................... 117 16 38 35 11
Lease financing................................ 13 11 -- 0 22
------- ------- ------- ------ ------
Total recoveries................................. 562 437 148 91 232
Net charge-offs.................................. 9,877 5,754 2,395 1,977 321
Provision charged to operations.................. 3,825 16,213 3,404 2,537 743
------- ------- ------- ------ ------
Balance at end of period......................... $ 8,261 $14,313 $ 3,854 $2,845 $2,285
======= ======= ======= ====== ======
Ratio of net charge-offs to average loans
outstanding..................................... 4.66% 1.99% .76% .68% .12%
</TABLE>
- --------
(1) Of this amount, $5.0 million was attributable to the bulk loan sale
completed in May 1994.
(2) Does not include $1,966,000 of TDRs that were performing at December 31,
1994.
9
<PAGE>
Over the five year period ended December 31, 1994, the allocation of the
allowance for loan losses for commercial, financial and agricultural loans
increased steadily to correspond with increases in the total volume of loans
and the level of loans losses in this category. The Company's current practice
is to make specific allocations to large loans and unspecific allocations to
each loan category based on management's risk assessment. The following table
sets forth the allocation of the allowance for loan losses by loan category as
of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------- --------------- --------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
TOTAL TOTAL TOTAL TOTAL TOTAL
BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Financial
and Agriculture........ $6,704 3.99% $11,361 4.25% $3,132 1.00% $1,925 0.64% $1,427 0.47%
Real Estate--
Construction........... 265 0.16 1,916 0.72 242 0.08 254 0.08 436 0.14
Real Estate--Mortgage... 964 0.57 420 0.16 70 0.02 238 0.08 338 0.11
Installment............. 325 0.19 555 0.21 362 0.12 399 0.13 34 0.01
Lease Financing......... 3 0.00 61 0.02 48 0.02 29 0.01 50 0.02
------ ---- ------- ---- ------ ---- ------ ---- ------ ----
Total Allocated........ $8,261 4.92% $14,313 5.35% $3,854 1.24% $2,845 0.95% $2,285 0.76%
====== ==== ======= ==== ====== ==== ====== ==== ====== ====
</TABLE>
In 1994 and 1993, the provision loan losses was $3,825,000 and $16,213,000,
respectively. Loans charged off in 1994 and 1993 were $10,439,000 and
$6,191,000, respectively, or 4.92% and 2.13% of average outstanding loans and
leases, respectively. Of the 1994 chargeoffs, $5.0 million are attributable to
the bulk loan sale which occurred in May 1994. In 1994 and 1993, loan and lease
recoveries totaled $562,000 and $437,000, respectively, constituting 9% and 17%
of the total loans charged off in the respective prior years. The reduction of
loan loss provision from 1993 to 1994 is due to a significant decline in the
migration of loans to nonaccrual status or REO during 1994.
Twenty-two medium term commercial real estate loans aggregating $10.3 million
are scheduled to mature during 1995, of which six loans in the aggregate amount
of $3.2 million have been classified. All such classified loans have been
reevaluated for collateral value within the past six months and additional loan
loss reserves have been taken where appropriate. Of the $10.3 million, thirteen
loans aggregating $7.0 million were loans for investment properties. Of that
amount, nine loans aggregating $5.9 million are anticipated to be refinanced or
repaid during 1995. The remaining $1.1 million consists of four loans, none of
which exceeds $570,000 principal balance. None of such loans were classified at
December 31, 1994, and based upon current information, management does not
anticipate that additional loan loss reserves will be assessed with respect to
such loans.
At December 31, 1994, the loan loss reserve decreased to $8,261,000 compared
to $14,313,000 at December 31, 1993. The ratio of the loan loss reserves to
outstanding loans and leases at December 31, 1994 and 1993 was 4.92% and 5.35%,
respectively.
Nonperforming loans are those on which the borrower fails to perform under
the original terms of the obligation. The Company's nonperforming loans fall
within three categories: loans past due 90 days and still accruing, loans on
nonaccrual status and restructured loans. The coverage ratio, or the ratio of
loan loss reserves to nonperforming loans, was 103.98% and 72.15%, at December
31, 1994 and 1993, respectively. Loans past due 90 days or more and still
accruing totaled $331,000 and $552,000 at December 31, 1994 and 1993,
respectively. The decrease in loans past due 90 days and still accruing was
primarily attributable to the migration of certain of these loans to nonaccrual
status.
Loans are automatically placed on nonaccrual status when principal or
interest payments are past due greater than 90 days. If a loan is an SBA
guaranteed loan and a deferral period has been negotiated or if the
10
<PAGE>
loan is in the process of imminent collection in the normal course of business,
the Company may remove the loan from nonaccrural status and continue to accrue
interest. Loans are placed on nonaccrual status earlier if there is doubt as to
the collectibility any amounts due according to the contractual terms of the
loan agreement. At December 31, 1994, loans totaling $7,612,000 were on
nonaccrual status, compared with $18,939,000 at December 31, 1993.
As of December 31, 1994, the Company had restructured loans in the amount of
$2,000, compared to $348,000 at December 31, 1993.
Total nonperforming loans as a percent of total loans outstanding were 4.73%
and 7.41% at December 31, 1994 and 1993, respectively.
Income Taxes
The Company recorded income tax expense of $285,000 in 1994. Applicable tax
expense for 1994 was offset by the utilization of a tax valuation allowance.
The charge of $285,000 was taken to increase the tax valuation allowance in
accordance with the provisions of SFAS No. 109 and to reflect the filing of the
Company's 1993 tax returns. The Company recorded income tax benefit of
$3,233,000 in 1993, reflecting available carryback to tax years 1990 through
1992. The Company had a tax asset of $794,000 at December 31, 1994,
representing the remaining benefit from the 1994 net operating loss carryback
to 1992 and other refundable taxes. In addition, the Company had a net deferred
tax asset of $3,115,000 which was fully offset by a tax valuation allowance. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. Management considers
projected future taxable income and tax planning strategies in making this
assessment. If future taxable income were deemed probable, the necessity for
the valuation allowance would be reassessed, and all or a portion of the
valuation allowance could be reversed in future periods, resulting in income
recognition. No assurances may be given, however, as to the likelihood of any
such future profitability or the timing or amount of any such income
recognition.
1993 COMPARED WITH 1992
Net Interest Income
Interest income for the Company decreased 10.5%, from $28,951,000 in 1992 to
$25,911,000 in 1993, due to a decline and a change in the mix of interest
earning assets. The proportion of interest income contributed by the loan
portfolio decreased from 92.9% during 1992 to 89.5% during 1993. The yield on
interest earning assets decreased from 8.15% in 1992 to 7.37% in 1993,
reflecting increases in lower yielding investment securities as a percentage of
total interest-earning assets and decreased interest rates over the two year
period.
Interest expense decreased 20.8%, from $11,365,000 in 1992 to $8,999,000 in
1993, due to a decline in deposit pay rates. Total deposits decreased 8.7% at
December 31, 1993 as compared to December 31, 1992, while average deposits
increased .6% from $331,592,000 in 1992 to $333,462,000 in 1993. Average
interest bearing deposits increased to 73.8% of average total deposits in 1993
from 73.1% of average total deposits in 1992. The cost of total deposits
decreased from 3.1% in 1992 to 2.5% in 1993 due to declines in interest rates
during 1993.
The cost of other borrowed funds decreased to 3.2% in 1993 from 3.8% in 1992.
Average commercial paper sold decreased from $12,805,000 at 3.4% in 1992 to
$6,987,000 at 2.7% in 1993. The Company utilized a line of credit with the
Federal Home Loan Bank during 1993 resulting in average borrowings of
$7,447,000 at 3.8%.
11
<PAGE>
In November 1989, the Company borrowed $4,000,000 to fund the ESOP. In 1993,
the Company raised $1,555,000 from a private placement of 719,580 shares of
Common Stock and the issuance of $125,000 in notes payable and used the
proceeds to retire the remaining principal on the ESOP loan. In 1993 and 1992,
the Company paid $112,000 and $173,000, respectively, in interest expense on
the ESOP loan.
The yield on interest earning assets decreased from 8.2% in 1992 to 7.4% in
1993, while the cost of interest bearing liabilities decreased from 4.3% in
1992 to 3.4% in 1993. The net interest margin decreased from 5.0% in 1992 to
4.8% in 1993. Declines in interest rates during 1993 accounted for the decrease
in yields and rates on interest sensitive balances from 1992, while the
decrease in the net interest margin was a result of a lower ratio of higher
yielding assets (loans) to average interest earning assets. Interest foregone
on nonaccrual loans in 1993 and 1992 totaled $2,214,000 and $728,000,
respectively.
Other Income
Other income in 1993 totaled $4,820,000, a 12.6% decrease compared to 1992.
Service charges on deposits totaled $1,521,000 in 1993, an 11.9% increase over
the $1,359,000 total in 1992. The increase in service charges on deposits in
1993 was a result of increased deposits subject to in-depth analyses of funds
availability and peer group standards performed by the Company.
Loan fees of $1,192,000 in 1993 represented a 23.7% decrease from loan fees
in 1992 due to decreasing mortgage origination volume and increased mortgage
servicing premium amortization.
Miscellaneous fees decreased 6.5% to $590,000 in 1993 from $631,000 in 1992,
as a result of the elimination of certain recordkeeping services for customers.
Miscellaneous fees include cash management service charges, safe deposit box
rentals, charges for items such as money orders, cashiers checks and ATM
transactions.
Included in the "Other" category in "Other Income" are premiums and fees
collected on sales of mortgage loans, SBA loans less gains on sale, student
loans and investments. Other income in 1993 totaled $1,131,000, a 24.6%
increase over 1992.
Other Expenses
Total other expense was $20,839,000 in 1993, a 13.0% increase over the 1992
total of $18,438,000. The increase from 1992 to 1993 is primarily due to
increased expenses associated with REO of $1.3 million, increased legal costs
of $434,000 related to increased nonperforming assets and regulatory matters,
and the complete write-off of $1,266,000 of goodwill as a result of the
Company's decision to consider the sale of Frontier.
Salary and employee benefit expense increased 4.2%, from $6,797,000 in 1992
to $7,082,000 in 1993, due to lower deferred loan origination costs. At
December 31, 1993, the Company had 199 full-time equivalent employees, compared
to 198 employees at December 31, 1992.
Occupancy expense decreased from $2,809,000 in 1992 to $2,578,000 in 1993,
due to reduced space occupied by the Company.
Equipment expense increased from $1,102,000 in 1992 to 1,241,000 in 1993, as
the Company accelerated depreciation on data processing equipment that would
not be in use in 1994 as a result of its decision to outsource data processing
services.
Professional fees increased $487,000, or 35.0%, in 1993 compared to 1992, due
to increased legal fees associated with increased levels of nonperforming
assets.
12
<PAGE>
Other miscellaneous expenses increased from $6,339,000 in 1992 to $8,060,000
in 1993. The significant increase in other miscellaneous expenses from 1992 to
1993 resulted from the write-off of goodwill, increased REO expense and legal
costs, and higher FDIC assessment rates. See "Supervision and Regulation--
Premiums for Deposit Insurance." Other miscellaneous expenses in 1992 included
a nonrecurring charge of $513,000 to decrease core deposit premiums related to
the Westco acquisition. The Company wrote off the core deposit premium as an
analysis of these deposits showed significant run off of Westco deposits due, in
part, to the closing of a former Westco branch during 1992. As a result of the
significant impairment of this intangible asset, the Company did not feel it was
prudent to continue carrying such an asset in the financial statements.
Provision For Loan Losses and Nonperforming Loans
At December 31, 1993, the loan loss reserve increased to $14,313,000 compared
to $3,854,000 at December 31, 1992. The ratio of the loan loss reserve to
outstanding loans and leases at December 31, 1993 and 1992 was 5.35% and 1.24%,
respectively.
Loans past due 90 days or more and still accruing totaled $552,000 and
$410,000, at December 31, 1993 and 1992, respectively. The decrease in loans
past due 90 days and still accruing was primarily attributable to the placement
of certain of these loans on nonaccrual status.
At December 31, 1993, loans totaling $18,939,000 were on nonaccrual status,
compared with nonaccrual loans of $2,464,000 at December 31, 1992.
The Company had restructured loans in the amount of $348,000 at December 31,
1993, compared with $380,000 at December 31, 1992.
Total nonperforming loans as a percent of total loans outstanding at December
31, 1993 and 1992 were 7.42% and 1.04%, respectively.
Income Taxes
The Company recorded income tax benefit of $3,233,000 in 1993, reflecting
available carryback to tax years 1990 through 1992. Income tax expense totaled
$571,000 for the year ended December 31, 1992. The effective combined tax rate
for 1992 was 45.5%.
INFLATION
The assets and liabilities of the Company, except for fixed assets, are
virtually all monetary items. Since the Company maintains a small portion of
its total assets in fixed assets, 0.7% at December 31, 1994 and 0.5% at
December 31, 1993, respectively, the potential for inflated earnings resulting
from understated depreciation charges is minimal. High inflation rates could
impact other expense items, such as salaries and occupancy expense.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity management for banks requires that funds be available to pay all
deposit withdrawals and maturing financial obligations and meet credit funding
requirements promptly and fully in accordance with their terms. Over a very
short time frame, for most banks, including the Banks, maturing assets provide
only a limited portion of the funds required to pay maturing liabilities. The
balance of the funds required is provided by liquid assets and the acquisition
of additional liabilities, making liability management integral to liquidity
management in the short term.
The Banks maintain levels of liquidity that they consider adequate to meet
their current needs. The Banks' principal sources of cash include incoming
deposits, the repayment of loans and conversion of investment securities. When
cash requirements increase faster than cash is generated, either through
increased loan demand or withdrawal of deposited funds, the Banks can arrange
for the sale of loan participations and liquidate investments and access their
Federal Funds lines of credit with correspondent banks or other lines of credit
with federal agencies. Ventura has credit totaling $5.0 million with an
unaffiliated financial institution which enables it to borrow federal funds on
an unsecured basis. In addition, the Banks have available lines of credit with
the Federal Home Loan Bank of San Francisco equal to 15% of Ventura's assets
and 10% of Frontier's assets which enables them to borrow funds on a secured
basis. At December 31, 1994, the Banks where not obligated to any entity in
connection with their federal funds lines of credit. In addition, the Banks
could engage in other borrowings, including reverse repurchase agreements.
13
<PAGE>
Management of the Company has set a minimum liquidity level of 20% as a
target. The Company's average liquid assets (cash and cash equivalents, federal
funds sold, interest bearing deposits with other financial institutions and
investment securities available for sale, less securities pledged as collateral
and outgoing cash letters) as a percentage of average assets of the Company
during 1994, 1993, and 1992 was 18.6%, 13.6%, and 15.1%, respectively. Average
liquidity for 1994, 1993 and 1992, expressed as a percent of average
liabilities, was 20.0%, 16.6% and 16.5%, respectively. From 1992 to 1994, the
Company underwent significant balance sheet restructuring, as evidenced by the
substantial reductions in assets, loans, and deposits, which accounts for the
improved liquidity. The Company's strategic plan is to build its core business
by generating and maintaining banking relationships with small and medium sized
businesses, professional firms, and individuals within its market area. The
loan to deposit ratios for the Company at December 31, 1994, 1993, and 1992
were 67.6%, 79.6%, and 88.3%.
Although the Banks do not currently purchase brokered deposits, in the past,
both Ventura and Frontier have, to a certain degree, funded growth in their
assets through demand deposits of title and escrow companies and by the
issuance of certificates of deposit to persons, including other financial
institutions, not otherwise having banking relationships with the Banks. Such
liabilities are potentially unstable sources of deposits because they are
generally attracted to the financial institution based primarily upon the
interest rate paid by the institution and the general financial condition of
the institution and may be withdrawn on relatively short notice. Furthermore,
the proceeds of such liabilities are generally invested in relatively low
yielding short term investment securities rather than higher yielding loans. In
order to stabilize its funding sources, the Company has taken action to reduce
title and escrow deposits and institutional deposits as a percentage of total
deposits. Demand deposits owned by title and escrow companies represented 1.2%
and 11.3% of total deposits at December 31, 1994 and 1993, respectively.
Certificates of deposit held by other financial institutions represented 9.4%
and 11.4% of total deposits at December 31, 1994 and 1993, respectively and
brokered CDs represented 0% and 1.3% of total deposits at December 31, 1994 and
1993, respectively. There can be no assurances that the Company will be able to
replace such deposits with core deposits in the future.
Although liability management is the key to liquidity management in the
short-term, long-term planning of both assets and liabilities is necessary to
manage net yields. To the extent maturities of assets and liabilities do not
match in a changing rate environment, net yields may be affected.
Parent is a legal entity, separate and distinct from its subsidiaries, and it
must separately meet its liquidity needs. Aside from raising capital on its own
behalf or borrowing from outside sources, Parent may receive additional funds
through dividends paid by, and fees from services provided to its subsidiaries.
Future cash dividends paid to Parent by its subsidiaries will depend on each
subsidiary's future profitability, capital requirements, restrictions imposed
by regulatory agreements and other factors. See "Market Price of Common Stock
and Dividends" and "Risk Factors--Dividend Restrictions." In addition, the
Formal Agreement requires Ventura to seek reimbursement of $3.4 million in
connection with interest paid to Parent on deposits of funds generated by
commercial paper sales. See "Risk Factors--Regulatory Agreements and Capital
Requirements." At December 31, 1994, Parent had notes payable in the amount of
$125,000, scheduled to mature in December 1995, upon which Parent pays interest
quarterly. Parent has sufficient cash available to meet its interest
obligations during 1995. However, Parent does not presently have sufficient
cash to repay the notes payable at maturity. A portion of the net proceeds of
this Offering will be utilized to repay the notes payable at maturity. Should
this Offering not be successful, Parent would attempt to renegotiate such
notes. No assurances can be given that Parent would be successful in any such
effort. See "Use of Proceeds."
RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES
The objective of asset/liability management is to provide stable growth in
net interest income while minimizing the impact on earnings due to changes in
interest rates. To reduce exposures to interest rate fluctuations, the Company
attempts to match its interest sensitive assets with its interest sensitive
liabilities,
14
<PAGE>
and maintain the maturity and repricing of these assets and liabilities at
appropriate levels. Rate sensitive assets and liabilities are those instruments
on which interest rates can be adjusted within a short period of time. In
recent years, assets and liabilities have become more interest rate sensitive
as a result of deregulation and increased volatility in interest rates.
One method the Company uses to monitor interest rate sensitivity is by
attempting to match rate sensitive assets to rate sensitive liabilities over
several time periods by using what is called GAP analysis. Set forth in the
table below is the interest rate sensitivity or GAP position of the Company at
December 31, 1994.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------
OVER
LESS ONE YEAR OVER
THAN ONE THROUGH FIVE NONINTEREST
YEAR FIVE YEARS YEARS BEARING TOTAL
-------- ---------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.. $ -- $ -- $ -- $11,442 $ 11,442
Interest-bearing deposits
with other financial
institutions............ 694 -- -- -- 694
Federal funds sold....... 27,000 -- -- -- 27,000
Securities held-to-
maturity................ -- 14,922 4,286 -- 19,208(1)
Securities available-for-
sale.................... 14,749 8,475 9,380 -- 32,604(1)
Loans, net fixed rate.... 9,489 15,989 4,277 -- 29,755
Loans, net floating rate. 130,567 -- -- 7,612 138,179
Noninterest bearing
assets.................. -- -- -- 8,312 8,312
Less loan loss reserve... -- -- -- (8,261) (8,261)
-------- ------- ------- ------- --------
Total assets........... $182,499 $39,386 $17,943 $19,105 $258,933
======== ======= ======= ======= ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
Noninterest bearing
deposits................ $ -- $ -- $ -- $67,177 $ 67,177
Interest-bearing demand
and savings deposits.... 80,646 -- -- -- 80,646
Time certificates of
deposit................. 80,344 8,131 44 -- 88,519
Notes payable............ 125 -- -- -- 125
Other liabilities........ -- -- -- 2,236 2,236
Shareholders' equity..... -- -- -- 20,230 20,230(1)
-------- ------- ------- ------- --------
Total liabilities and
shareholders' equity.. $161,115 $ 8,131 $ 44 $89,643 $258,933
======== ======= ======= ======= ========
Interest rate-sensitivity
gap..................... $ 21,384 $31,255 $17,899
Cumulative interest rate-
sensitivity gap......... $ 21,384 $52,639 $70,538
Cumulative interest rate-
sensitivity gap as a
percent of total assets. 8.3% 20.3% 27.2%
</TABLE>
- --------
(1) Excludes unrealized losses of $745,000 on securities available for sale and
$433,000 on securities previously available for sale and transferred to
securities held to maturity in 1994.
At December 31, 1994, the Company had net repriceable assets (a "positive"
gap) as measured at one year of 8.26% of total assets. The net repriceable
assets over a five-year time horizon totalled approximately $52.6 or 20.3% of
total assets. A positive gap implies that the Company is asset sensitive, and
therefore subject to a decline in net interest income as interest rates
decline. In a relatively stable interest rate environment that follows a rise
in interest rates, variable rate liabilities will continue to reprice upward
while variable rate assets, particularly those indexed to prime rate, remain
relatively constant, thereby narrowing net interest margin. As interest rates
decline, variable rate assets reprice at lower rates immediately, while the
variable rate liabilities reprice gradually, resulting in a narrowing of the
net interest margin. The 1994 results reflect the situation in which net
interest margin grew as rates increased, whereas, the 1993 and 1992 results
reflect the opposite situation, with declines in net interest margin as rates
declined.
15
<PAGE>
To measure the earnings impact due to asset sensitivity, the Company has
purchased software to simulate the effect of interest rate changes on the
balance sheet. The Asset/Liability Committee ("ALCO") of the Company analyzes
data produced by this software monthly to determine the most appropriate manner
to counter interest rate risk. Based on the recommendations from ALCO, the
Company has implemented strategies to counter the impact of changing interest
rates, including the establishment of interest rate floors on 47% of the
variable rate loans at December 31, 1994 to mitigate the effect on net interest
margin if rates decline, and also by investing in fixed rate investment
securities. Management believes that these strategies are effective in
minimizing the impact on earnings from changes in interest rates.
CAPITAL RESOURCES
The FDIC Improvement Act requires that for banks to be considered "well
capitalized", they must maintain a leverage ratio of 5.0%, a Tier 1 capital
ratio of 6.0% and a risk-based capital ratio of 10.0% and not be under a
written agreement or capital directive. Banks will be considered "adequately
capitalized" if they maintain a leverage ratio of 4.0%, a Tier 1 risk-based
capital ratio of 4.0%, and a total risk-based capital ratio of 8.0%. The
Consent Order and the Formal Agreement require the Banks to maintain capital
ratios at levels substantially higher than the levels generally applicable to
other national banks. Frontier is required to maintain a Tier 1 risk-based
capital ratio of 9.50% and a leverage capital ratio of 7.00%. Ventura is
required to maintain a Tier 1 risk-based capital ratio of 12.00% and a leverage
capital ratio of 7.00%. See "Supervision and Regulation--Potential and Existing
Enforcement Actions". Tier 1 capital consists primarily of common stock,
retained earnings and perpetual preferred stock, less goodwill and other
ineligible items. Tier 2 capital is comprised limited life preferred stock,
subordinated debt and loan loss reserves limited to 1.25% of total risk
weighted assets. Total risk-based capital is Tier 1 plus Tier 2 capital;
however, at least 50% of total capital must be comprised of Tier 1 capital. The
capital standards specify that assets, including certain off-balance items be
assigned risk weights based on credit and liquidity risk which range from 0%
risk weight for cash to 100% risk weight for commercial loans and certain other
assets. The leverage ratio is Tier 1 capital to adjusted average assets. The
Tier 1 capital ratio is Tier 1 capital to risk weighted assets. The total risk-
based capital ratio is Tier 1 plus Tier 2 capital to risk weighted assets. The
following sets forth the capital ratios for the Company and the Banks at
December 31, 1994 and 1993.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
Company(1)
Risk-based Capital Ratio............ 12.61% 8.73%
Tier 1 Capital Ratio................ 11.32% 7.43%
Leverage Ratio...................... 7.53% 6.02%
Ventura
Risk-based Capital Ratio............ 12.21% 7.83%
Tier 1 Capital Ratio................ 10.92% 6.52%
Leverage Ratio...................... 7.21% 5.49%
Frontier(1)
Risk-based Capital Ratio............ 13.57% 11.31%
Tier 1 Capital Ratio................ 12.29% 10.03%
Leverage Ratio...................... 8.32% 7.30%
</TABLE>
- --------
(1) In accordance with recent guidance from the Federal Financial Institutions
Examination Council, regulatory capital includes $756,000, which represents
a $792,000 cumulative effect adjustment to reduce the balance of SBA loans,
a portion of which was offset by income recognized pursuant to generally
accepted accounting principles. This amount is not reflected in the
accompanying financial statements prepared in accordance with generally
accepted accounting principles.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 109, "Accounting for Income Taxes," superseded SFAS No. 96, both of
which changed the method of accounting for income taxes from the deferred
method previously required by Accounting Principles Board Opinion No. 11, to
the asset/liability method. The asset/liability method primarily
16
<PAGE>
emphasizes the valuation of current and deferred tax assets and liabilities.
The asset/liability method focuses first on the balance sheet, and the amount
of income tax expense is determined by changes in the elements of the balance
sheet. The amount of income tax expense for a period is the amount of income
taxes currently payable or refundable, plus or minus the change in aggregate
deferred tax assets and liabilities. A deferred tax asset or liability is
computed based on the differences between the book and tax bases of an asset or
liability and the reversal of these differences in future years applying
current tax laws. The Company adopted SFAS No. 96 as of January 1, 1990, but
elected not to restate any prior periods. The effect of the change on total
income tax provision was not significant. The Company adopted SFAS No. 109 as
of January 1, 1992. The effect on the financial statements of adopting SFAS No.
109 was not material.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of the Loan." SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and
loans whose terms are modified in troubled debt restructurings. SFAS No. 114
states that a loan is impaired when it is probable that a creditor will be
unable to collect all principal and interest amounts due according to the
contracted terms of the loan agreement.A creditor is required to measure
impairment by discounting expected future cash flows at the loan's effective
interest rate, or by reference to an observable market price, or by determining
that foreclosure is probable. SFAS No. 114 also clarifies the existing
accounting for in-substance foreclosures by stating that a collateral-dependent
real estate loan would be reported as real estate owned only if the lender had
taken possession of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish that
it eliminated the provisions in SFAS No. 114 that described how a creditor
should report income on an impaired loan. SFAS No. 118 did not change the
provisions in SFAS No. 114 that require a creditor to measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or as a practical expedient, at the observable market
price of the loan or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to those impaired
loans. SFAS No. 114 is effective for financial statements issued for fiscal
years beginning after December 15, 1994. Although earlier application is
encouraged, it is not required. SFAS No. 118 is effective concurrent with the
effective date of SFAS No. 114. Although earlier application is encouraged, it
is not required. The Company will adopt SFAS No. 114 during the first quarter
of 1995 and management's preliminary studies reveal that the impact upon
adoption should be immaterial.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company adopted SFAS No. 115 as
of December 31, 1993. SFAS No. 115 addresses accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Those investments are to be classified
in three categories and accounted for as follows: (1) debt securities for which
the Company has the positive intent and ability hold to maturity are classified
as held-to-maturity securities and reported at amortized cost; (2) debt and
equity securities that are bought and held principally for the purpose of
selling in the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings; and (3) debt
and equity securities not classified as either held-to-maturity securities or
trading securities are classified as available for sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of shareholders' equity. Accreted discounts
and amortized premiums on investment securities are included as interest
income, and unrealized gains or losses relating to holding or selling
securities are calculated using the specific identification method.
Effective January 1, 1994, the Company adopted the provisions of SOP 93-6,
"Employer's Accounting for Employee Stock Ownership Plans." This SOP requires
the Company to record compensation expense upon release of shares to employees
at the current fair value of shares released. Prior to adoption of SOP 93-6,
the Company recorded compensation expense for released shares based on the
historical cost of the shares of $9.00. The adoption of SOP 93-6 had no effect
on the reported results of operations of the Company, as the Company made no
contributions to the ESOP during 1994, and no shares were released to
participants.
17
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1994 1993
------ -------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 11,442 $ 15,943
Federal funds sold......................................... 27,000 18,000
Interest-bearing deposits with other financial
institutions.............................................. 694 2,180
Securities available-for-sale, at market (cost of $32,604
and $40,897, respectively)................................ 31,859 40,775
Securities held-to-maturity, at cost (market value of
$17,963 in 1994).......................................... 18,775 --
Loans and leases, net of unearned income................... 167,934 267,514
Less loan loss reserve..................................... 8,261 14,313
Net Loans and Leases..................................... 159,673 253,201
Premises and equipment, net................................ 1,917 1,687
Other assets............................................... 6,395 8,743
-------- --------
Total Assets............................................. $257,755 $340,529
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Deposits:
Non-interest-bearing demand.............................. $ 67,177 $ 99,502
Interest-bearing demand and savings...................... 80,646 101,224
Time..................................................... 88,519 117,563
-------- --------
Total Deposits........................................... 236,342 318,289
Notes payable.............................................. 125 125
Other liabilities.......................................... 2,236 1,745
-------- --------
Total Liabilities........................................ 238,703 320,159
Commitments and Contingencies:
Shareholders' Equity:
Contributed Capital, including common stock of no par
value. Authorized 20,000,000 shares; issued 6,333,835 in
1994 and in 1993........................................ 30,949 30,949
Unrealized loss on securities............................ (1,178) (122)
Retained deficit......................................... (10,719) (10,457)
-------- --------
Total Shareholders' Equity............................... 19,052 20,370
-------- --------
Total Liabilities and Shareholders' Equity............... $257,755 $340,529
======== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1994 1993 1992
------- -------- -------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Interest Income
Loans and leases.................................. $18,740 $ 23,190 $26,892
Deposits with financial institutions.............. 67 263 256
Investment securities............................. 2,169 1,916 1,178
Federal funds sold................................ 1,160 542 625
------- -------- -------
Total Interest Income........................... 22,136 25,911 28,951
======= ======== =======
Interest Expense
Deposits.......................................... 6,253 8,372 10,336
Other borrowings.................................. 15 627 1,029
------- -------- -------
Total Interest Expense.......................... 6,268 8,999 11,365
------- -------- -------
Net Interest Income............................... 15,868 16,912 17,586
Provision for loan losses......................... 3,825 16,213 3,404
------- -------- -------
Net Interest Income After Provision for Loan
Losses......................................... 12,043 699 14,182
======= ======== =======
Other Income
Service charges on deposit accounts............... 1,217 1,521 1,359
Loan fees......................................... 470 1,192 1,563
Miscellaneous fees................................ 354 590 631
Gain on sale of loan servicing rights............. 1,443 -- 46
Gain on sale of SBA loans......................... 305 386 875
Other............................................. 275 1,131 1,038
------- -------- -------
Total Other Income.............................. 4,064 4,820 5,512
======= ======== =======
Other Expense
Salaries and employee benefits.................... 6,423 7,082 6,797
Net occupancy..................................... 2,087 2,578 2,809
Equipment......................................... 830 1,241 1,102
Professional services............................. 1,928 1,878 1,391
Other............................................. 4,816 8,060 6,339
------- -------- -------
Total Other Expense............................. 16,084 20,839 18,438
======= ======== =======
Income (Loss) Before Income Taxes................. 23 (15,320) 1,256
Income Taxes...................................... 285 (3,233) 571
------- -------- -------
Net Income (Loss)................................. $ (262) $(12,087) $ 685
======= ======== =======
Per share:
Net Income (Loss)................................. (.04) $ (2.15) $ .12
======= ======== =======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
SHARES CONTRIBUTED LOSS ON EARNINGS
OUTSTANDING CAPITAL SECURITIES (DEFICIT) TOTAL
----------- ----------- ---------- --------- --------
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES OF STOCK)
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1992................... 5,282,301 $26,941 $ (53) $ 2,291 $ 29,179
Net Income--1992...... -- -- -- 685 685
--------- ------- ------- -------- --------
Increase in unrealized
loss on securities..... -- -- (73) -- (73)
Decrease in unearned
compensation related to
ESOP................... -- 572 -- -- 572
Stock options exercised. 15,263 25 -- -- 25
Stock Dividend.......... 316,691 1,346 -- (1,346) --
--------- ------- ------- -------- --------
Balance at December 31,
1992................... 5,614,255 $28,884 $ (126) $ 1,630 $ 30,388
Net Loss--1993........ -- -- -- (12,087) (12,087)
Decrease in unrealized
loss on securities..... -- -- 4 -- 4
Decrease in unearned
compensation related to
ESOP................... -- 635 -- -- 635
Sale of common stock.... 719,580 1,430 -- -- 1,430
--------- ------- ------- -------- --------
Balance at December 31,
1993................... 6,333,835 $30,949 $ (122) $(10,457) $ 20,370
Net Loss--1994........ -- -- -- (262) (262)
Increase in unrealized
loss on securities..... -- -- (1,056) -- (1,056)
Balance at December 31,
1994................... 6,333,835 $30,949 $(1,178) $(10,719) $ 19,052
========= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................ $ (262) $(12,087) $ 685
Adjustments to reconcile net income (loss) to
cash flows (applied to) provided by operating
activities:
Depreciation and amortization................... 739 2,446 1,692
Provision for loan losses....................... 3,825 16,213 3,404
Change in deferred loan fees.................... (250) (271) 122
Accretion of investment discount, net of
amortization of investment premium............. 39 322 (36)
Loss on sale of investment securities available
for sale....................................... 195 -- --
Gain on sale of investment securities........... -- (56) --
Gain on sale of loan servicing rights........... (1,443) -- (46)
Gain on sale of merchant card portfolio......... (174) -- --
Gain on sale of SBA loans....................... (305) (386) (875)
Gain on sale of fixed assets.................... (9) (11) (26)
(Gain)/loss on sale of REO...................... (511) (1) 346
REO write-downs................................. 959 1,408 --
Provision for deferred income taxes............. (1,200) (1,133) (261)
Change in other assets.......................... (2,465) (1,515) (1,937)
Change in other liabilities..................... 491 (427) 1,142
Decrease in deferred compensation related to
ESOP........................................... -- 635 572
-------- -------- --------
Net Cash (Applied To) Provided By Operating
Activities..................................... (371) 5,137 4,782
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities..... -- 44,930 --
Proceeds from sales of investment securities
available-for-sale.............................. 8,732 -- --
Proceeds from maturities of investment
securities...................................... -- 31,834 12,913
Proceeds from maturities of investment securities
held-to-maturity................................ 3,466 -- --
Proceeds from maturities of investment securities
available-for-sale.............................. 2,625 -- --
Purchase of investment securities................ -- (84,633) (32,528)
Purchase of investment securities held-to-
maturity........................................ (3,194) -- --
Purchase of investment securities available-for-
sale............................................ (22,778) -- --
Purchase of premises and equipment............... (996) (373) (483)
Proceeds from sale of premises and equipment..... 36 366 56
Payoff of senior obligations on REO.............. -- -- (1,377)
Proceeds from sale of REO properties............. 5,345 833 1,130
Net change in loans.............................. 80,589 39,376 (15,207)
Proceeds from the sale of SBA loans.............. 513 605 1,131
Proceeds from the sale of non-performing loans... 9,056 -- --
Change in Federal funds sold..................... (9,000) (18,000) 10,800
Change in deposits with other financial
institutions.................................... 1,486 4,955 (5,053)
Proceeds from sale of loan servicing rights...... 1,763 -- 46
Proceeds from sale of merchant card portfolio.... 174 -- --
-------- -------- --------
Net Cash Provided By (Applied To) Investing
Activities..................................... 77,817 19,893 (28,572)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand and savings deposits............ (52,903) (6,070) 18,781
Change in time deposits.......................... (29,044) (24,228) 5,320
Change in short-term borrowings.................. -- (16,860) 9,842
Issuance of common stock......................... -- 1,430 25
Repayment of note payable........................ -- (2,188) (572)
Issuance of notes payable........................ -- 125 --
Net Cash (Applied To) Provided By Financing
Activities..................................... (81,947) (47,791) 33,396
Net (Decrease) Increase In Cash and Cash
Equivalents.................................... (4,501) (22,761) 9,606
Cash and Cash Equivalents at Beginning of Year... 15,943 38,704 29,098
-------- -------- --------
Cash and Cash Equivalents at End of Year......... $ 11,442 $ 15,943 $ 38,704
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Ventura County National Bank, a national banking organization (VCNB), was
organized on February 17, 1982 and commenced business on October 25, 1982.
Ventura County National Bancorp (separately "Ventura," and with its
subsidiaries on a consolidated basis, the "Company") was organized and
incorporated on February 22, 1984 for the purpose of becoming a bank holding
company by acquiring all of the outstanding common stock of VCNB. Accordingly,
on September 12, 1984, all of the Shareholders of VCNB exchanged their common
stock for an equal number of shares of the Company's common stock.
During 1989, the Company acquired all of the outstanding shares of Frontier
Group, Incorporated, the parent holding company of Frontier Bank, N. A., in
exchange for cash. The acquisition was accounted for as a purchase.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation.
VCNB conducts its banking operations through four branch offices located in
Ventura County, California, approximately 60 miles northwest of downtown Los
Angeles. VCNB's four branch offices are positioned in Ventura, Camarillo,
Oxnard, and Westlake Village. Frontier is based in La Palma in northwestern
Orange County and has a branch office in Wilmington in southern Los Angeles
County. Ventura's headquarters are located in Oxnard, California.
NOTE 2. ACCOUNTING POLICIES
The Company and its subsidiaries follow generally accepted accounting
principles and reporting practices applicable to the banking industry, the
most significant of which are summarized below:
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks.
Investment Securities
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company adopted the
provisions of the new standard in its financial statements as of December 31,
1993. SFAS No. 115 addresses accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified in
three categories and accounted for as follows: 1) debt securities for which
the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost;
2) debt and equity securities that are bought and held principally for the
purpose of selling in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and 3) debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available for sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
equity.
22
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Consistent with the provisions of No. SFAS 115, the Company classified its
investment securities as available for sale upon adoption at December 31, 1993,
and recorded an unrealized loss of $122,000, net of tax effect. No portion of
such unrealized losses was previously recognized in operating results prior to
the adoption of SFAS No. 115. Prior to the adoption of SFAS No. 115, all
investment securities were stated at cost, with the exception of investments in
mutual funds, which were deemed equity investments, with adjustments to lower
of cost or market being recorded as a component of equity. During 1994, the
Company purchased securities which were classified as either available for sale
or held to maturity categories at the time of purchase, based on management's
intent and ability to hold certain securities to maturity. Previously recorded
unrealized losses of $433,000 on securities transferred from held to maturity
to available for sale during 1994 are being amortized over the securities'
remaining lives. Ventura had no trading securities at December 31, 1993 or
1994. Mortgage-backed securities consist entirely of Federal Home Loan Mortgage
Corporation (FHLMC) backed securities; there are no stuctured notes, CMOs, or
other derivative products in the investment portfolio.
Accreted discounts and amortized premiums on investment securities are
included in interest income, and unrealized and realized gains or losses
relating to holding or selling securities are calculated using the specific
identification method.
Interest and Fees on Loans
Interest on loans is accrued and credited to operations based on the
principal amount outstanding, except that accruals are normally discontinued
whenever payment of principal or interest is in doubt. When a loan is
classified as non-accrual, all previously accrued interest is reversed. Loan
origination fees and initial direct costs of loan origination are deferred and
amortized over the life of the loan as an adjustment of yield throughout the
life of the related loan. Such fees and costs related to loans held for sale
are deferred and recognized in income as a component of gain on sale of loans
when the related loans are sold.
Gains on Sale of SBA Loans and Servicing Income
Gains on sale of the guaranteed portion of SBA Loans are recognized to the
extent sales proceeds less amounts necessary to provide required yield
enhancement to the Company for retaining the unguaranteed portion of the loan
exceed the carrying value of the guaranteed portion sold. Gains are determined
using the specific identification method for loans sold and are deferred for 90
days (the recourse period), at which time they are recorded as Other Income.
The Company sells SBA loans with servicing retained. At the time of the sale,
an evaluation is made of the contractual servicing fee which is represented by
the differential between the contractual interest rate of the loan and the
interest rate payable to the investor. The present value of the amount by which
the contractual servicing fee exceeds a nornal servicing fee, or the Company's
cost of servicing such loans plus a normal profit, whichever is greater, after
evaluation of estimated prepayments on such loans, is considered to be an
adjustment of the sales proceeds, which in turn increases the gain recognized
at the time of the sale. Such gains are only recognized to the extent they do
not exceed the amount deferred as yield enhancement on the unguaranteed portion
of the SBA loan sold. The resultant amount of deferred loan sales proceeds is
amortized using a method which approximates a level yield over the estimated
remaining lives of such loans. The contractual servicing fee is recognized as
income over the lives of the related loans, net of the estimated normal
amortization of the deferred loan sales proceeds. Loan servicing costs are
charged to expense as incurred. When actual loan repayment experience differs
from original estimates, amortization is adjusted accordingly through
operations.
23
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Loss Reserve
The loan loss reserve is maintained at a level believed adequate by
management to absorb potential losses on the loan and lease portfolios.
Management's determination of that adequacy is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth, composition of the portfolio and other relevant factors. In addition,
regulatory authorities have recently required many California financial
institutions to substantially increase their loan loss reserve in recognition
of the inherent risk in the existing economic environment. Management also
considers this factor in calculating the loan loss reserve. Although management
believes the level of the loan loss reserve as of December 31, 1994 is adequate
to absorb losses inherent in the loan portfolio, additional declines in the
local economy may result in increasing losses that cannot be reasonably
predicted at this time. The reserve is increased by provisions for loan losses
charged against income. Loans and leases are charged against the loan loss
reserve when management determines that collectibility of the principal is
unlikely. Recoveries on loans previously charged off are credited to the
reserve.
In May, 1993, the Financial Accounting Standards Board issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. SFAS No. 114 prescribes the
recognition criterion for loan impairment and the measurement methods for
certain impaired loans and loans whose terms are modified in troubled debt
restructurings. SFAS No. 114 states that a loan is impaired when it is probable
that a creditor will be unable to collect all principal and interest amounts
due according to the contracted terms of the loan agreement.
A creditor is required to measure impairment by discounting expected future
cash flows at the loan's effective interest rate, or by reference to an
observable market price, or by fair value of collateral, if collateral
dependent . SFAS No. 114 also clarifies the existing accounting for in-
substance foreclosures by stating that a collateral-dependent real estate loan
would be reported as real estate owned only if the lender had taken possession
of collateral. SFAS No. 114 is effective for financial statements issued for
fiscal years beginning after December 15, 1994. Although earlier application is
encouraged, it is not required. The Company will adopt SFAS No. 114 on January
1, 1995. The Company's preliminary study of loan impairment under SFAS 114
revealed that the impact upon adoption is not anticipated to be material to the
financial statements.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. It eliminated the
provisions in SFAS No. 114 which described how a creditor should report income
on an impaired loan. SFAS No. 118 amends the disclosure requirements in SFAS
No. 114 to require information about the recorded investment in certain
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. SFAS No. 118 is effective concurrent with the effective
date of SFAS No. 114, for financial statements issued for fiscal years
beginning after December 15, 1994.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. The
provisions for depreciation are generally computed on a straight-line basis,
based upon the term of the lease or the estimated useful life of the related
asset. Leasehold improvements are amortized over an average life of
approximately eleven years, or the lease term, whichever is shorter. Furniture,
fixtures and equipment are amortized over an average life of 5 years.
Real Estate Owned
Real estate acquired through foreclosure or deed-in-lieu-of foreclosure, is
carried at cost or fair value less estimated costs to sell, whichever is lower.
At the time of acquisition, any excess of cost over fair value is charged to
the loan loss reserve. Gains and losses realized on sale are included in other
income or expense, respectively, in the consolidated statements of operations.
24
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The financial statements reflect the adoption in 1992 of the liability method
of accounting as prescribed by Statement of Financial Accounting Standards
(SFAS) No. 109, which superseded SFAS No. 96. The effect on the financial
statements of adopting SFAS No. 109 was not material.
Income (Loss) Per Share
Income (Loss) per share data is computed using the weighted-average number of
shares of common stock and common stock equivalents outstanding. Stock options
and warrants are considered to be common stock equivalents, except when their
effect is antidilutive. Shares of Common Stock held by the Trustee of the
Employee Stock Ownership Plan, in suspense as collateral for a loan, are not
accounted for as common stock equivalents until such time as they are released
to participants. The weighted-average number of shares outstanding has been
retroactively adjusted for stock dividends and stock splits. The weighted-
average number of shares used to compute income per share were 6,333,835,
5,635,941 and 5,610,792 in 1994, 1993 and 1992, respectively.
Servicing Rights
For the years ended December 31, 1992 and 1993, and for the first half of
1994, the cost of acquired loan servicing rights was capitalized and amortized
over the estimated remaining term of the underlying loan portfolio. During May,
1994, the Company sold its mortgage loan servicing department and the related
capitalized loan servicing rights.
Reclassifications
Certain reclassifications have been made to 1993 and 1992 amounts to conform
to 1994 presentation.
NOTE 3. STATEMENT OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992, the Company paid
approximately $6,276,000, $9,124,000 and $11,445,000 in interest and $nil,
$300,000 and $1,155,000 in income taxes, respectively. The Company acquired
$6,197,000,$664,000 and $6,508,000 in real estate owned through foreclosures
during the years ended December 31, 1994, 1993 and 1992, respectively. No loans
were extended to buyers of Company-owned real estate during the year ended
December 31, 1994. Loans of $603,000 were extended to buyers of Company-owned
real estate during the year ended December 31, 1993. Securities with an
amortized cost totaling $16,263,000, and with a fair value of $15,830,000, at
December 31, 1994 were transferred from the available for sale to the held to
maturity category during 1994.
NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Company is required to maintain cash reserve balances on transaction
accounts and non-personal time deposits with the Federal Reserve Bank. These
reserve requirements can be offset by cash balances held at the Company. The
average amount of these reserve balances for the year ended December 31, 1994
was $2,475,000.
NOTE 5. INVESTMENT SECURITIES
As a result of a temporary decline in the market value of securities-
available-for-sale, the Company recorded unrealized losses totaling $1,178,000
and $122,000, which are included in shareholders' equity on the consolidated
balance sheet at December 31, 1994 and 1993, respectively. Several mortgage-
backed securities with a market value of $16,724,000 and an amortized cost of
$17,196,000, at the time of transfer, were transferred from the available for
sale to the held to maturity. Previously recorded unrealized losses with a
balance of $433,000 at December 31, 1994 are included in shareholder's equity
and are being amortized over the securities' remaining lives. The decline in
the market value of the portfolio reflects the current interest rate
environment; such decline is deemed temporary in nature. Accreted discounts and
amortized premiums on investment securities are included in interest income.
Unrealized and realized gains and losses related to holding or selling
securities are calculated using the specific identification method.
25
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FHLB stock of $1,067,000 at December 31, 1994 is not deemed a marketable
equity security, as it is not traded on a registered security exchange, and is
carried at cost. Securities held-to-maturity carried at amortized cost of
approximately $4,390,000, and with a fair value of $4,264,000, on December 31,
1994 were pledged as required by law.
The amortized cost basis, gross unrealized holding gains and losses and
estimated market values of securities-available-for-sale at December 31, 1994
were as follows:
SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
1994 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
U.S. Government securities........ $22,935 $ -- $229 $22,706
Mortgage-backed securities........ 8,067 -- 516 7,551
Federal Reserve Bank and
FHLB Stock....................... 1,602 -- -- 1,602
------- ------- ---- -------
Total........................... $32,604 $ -- $745 $31,859
======= ======= ==== =======
</TABLE>
The amortized cost, gross unrealized gains and losses and estimated market
value of securities held-to-maturity at December 31, 1994 are as follows:
SECURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
1994 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
U.S. Government securities........ $ 1,250 $ -- $ 28 $ 1,222
Mortgage-backed securities........ 17,525 -- 784 16,741
------- ------- ---- -------
Total........................... $18,775 $ -- $812 $17,963
======= ======= ==== =======
</TABLE>
Securities available-for-sale as of December 31, 1993 included Federal
Reserve Bank stock carried at $588,000, which approximates market. FHLB stock
of $1,712,000 at December 31, 1993 is not deemed a marketable equity security,
as it is not traded on a registered security exchange, and is carried at cost.
Securities available for sale carried at approximately $4,142,000 and with a
market value of $4,130,000 at December 31, 1993 were pledged as required by
law.
The amortized cost, gross unrealized holding gains and losses and estimated
market values of securities available-for-sale at December 31, 1993 are as
follows:
SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
1993 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Mortgage-backed securities....... $38,597 $56 $178 $38,475
Federal Reserve Bank and FHLB
Stock........................... 2,300 -- -- 2,300
------- --- ---- -------
Total.......................... $40,897 $56 $178 $40,775
======= === ==== =======
</TABLE>
26
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Losses from the sale of available for sale debt securities in 1994 were
$195,000. Net gains from the sale of debt and equity securities in 1993 were
$56,000. No investment securities were sold during 1992.
At December 31, 1994, the average life of mortgage-backed securites
classified as available-for-sale was approximately 3.5 years, and the average
maturity was approximately 10 years. At December 31, 1994, the scheduled
maturities of debt securities available for sale were as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------------------------
(IN THOUSANDS OF DOLLARS)
<C> <S> <C> <C>
Within one year U.S. Goverment
Obligations............. $ 14,707 $ 14,648
After one year through five years U.S. Goverment
Obligations............. 8,228 8,058
After five years through ten years Mortgage-backed
Securities.............. 8,067 7,551
------------ ------------
Total.................................................... $ 31,002 $ 30,257
============ ============
</TABLE>
At December 31, 1994, the scheduled maturities of debt securities held to
maturity were as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------------------------
(IN THOUSANDS OF DOLLARS)
<C> <S> <C> <C>
After one year through five years Mortgage-backed
Securities.............. $ 13,696 $ 12,992
U.S. Goverment Obliga-
tions.................. 1,250 1,222
After five years through ten years Mortgage-backed
Securities.............. 3,829 3,749
------------ ------------
Total.................................................... $ 18,775 $ 17,963
============ ============
</TABLE>
NOTE 6. LOANS AND LEASES
The following is a summary of the loan and lease portfolio on December 31:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Commercial, financial and agricultural................. $138,193 $197,384
Real estate--Mortgage.................................. 11,993 31,202
Real estate--Construction.............................. 7,734 23,559
Installment............................................ 9,897 14,961
Lease financing........................................ 129 447
-------- --------
Subtotal............................................. 167,946 267,553
Less unearned income................................... 12 39
-------- --------
Loans and leases, net of unearned income............. $167,934 $267,514
======== ========
</TABLE>
Included in the loan portfolio are loans on which the Company has ceased the
accrual of interest or renegotiated the terms to provide for a reduction or
deferral of interest. At December 31, 1994 and 1993, such loans amounted to
approximately $7,614,000 and $19,287,000, respectively. Interest foregone on
nonaccrual loans in 1994, 1993 and 1992 totaled $1,609,000, $2,214,000 and
$728,000, respectively.
27
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Loss Reserve
Following is a summary of the activity in the loan loss reserve:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year.................... $14,313 $ 3,854 $2,845
Provision charged to expense.................... 3,825 16,213 3,404
Loans charged off(1)............................ (10,439) (6,191) (2,543)
Recoveries on loans previously charged off...... 562 437 148
Balance at end of year.......................... $ 8,261 $14,313 $3,854
</TABLE>
- --------
(1) $5.0 million of total Charge-offs for the year ended December 31, 1994 were
due to the discounted sale of $14.1 million in non-performing loans.
NOTE 7. PREMISES AND EQUIPMENT
Following is a summary of the premises and equipment accounts at December 31:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Leasehold improvements......................... $ 1,962 $ 1,949
Furniture, fixtures and equipment.............. 4,723 4,214
------------ ------------
6,684 6,163
============ ============
Less accumulated depreciation and amortization. 4,767 4,476
------------ ------------
Premises and equipment, net.................... $ 1,917 $ 1,687
============ ============
</TABLE>
Depreciation and amortization expense related to property and leasehold
improvements was $739,000, $948,000 and $1,555,000 for the years ended December
31, 1994, 1993 and 1992, respectively.
NOTE 8. REAL ESTATE OWNED
At December 31, 1994 and 1993, other assets include approximately $2,346,000
and $2,229,000, respectively, of real estate owned. Additionally, at December
31, 1994, other assets include approximately $878,000 of other foreclosed
personalty.
NOTE 9. TIME CERTIFICATES OF DEPOSIT, OTHER SHORT-TERM BORROWINGS AND INTEREST
EXPENSE
The following summarizes time certificates of deposit outstanding at December
31:
<TABLE>
<CAPTION>
1994 1993
------------ -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Time certificates of deposit under $100,000... $ 63,186 $ 74,830
Time certificates of deposit, $100,000 and
over......................................... 25,333 42,733
------------ -------------
Total....................................... $ 88,519 $ 117,563
============ =============
</TABLE>
The Company terminated the issuance of commercial paper and retired advances
from the Federal Home Loan Bank in December, 1993. During 1994, the Company
made immaterial borrowings on its FHLB advance line and repaid them promptly.
28
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest expense relating to deposits and other borrowed funds for each of
the three years ended December 31 is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Time certificates of deposit under $100,000......... $2,638 $3,337 $ 3,839
Time certificates of deposit, $100,000 and over..... 1,254 2,178 3,144
Other deposits...................................... 2,361 2,857 3,353
Short-term borrowings............................... 6 515 856
Note payable........................................ 9 112 173
------ ------ -------
Total Interest Expense............................ $6,268 $8,999 $11,365
====== ====== =======
</TABLE>
NOTE 10. OTHER INCOME AND OTHER EXPENSES
December 31, 1994, 1993, and 1992 other loan fee income includes net mortgage
servicing fees of $317,000, $618,000 and $812,000, respectively, and other loan
processing fees and late charges. Miscellaneous fees include credit card fee
income and other account servicing fees. The "other" category of other income
includes the gain on the sale of the merchant card portfolio of $174,000 in
1994. Other income for 1994, 1993 and 1992, includes net gains related to the
sale of mortgage loans of $272,000, $1,076,000 and $994,000 for the years ended
December 31, 1994, 1993 and 1992, respectively, in addition to net losses on
the sale of securities and fixed assets.
The following is included in other expenses in the accompanying consolidated
statements of operations at December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
FDIC assessments.................................... $ 878 $ 921 $ 789
Office supplies and office expense.................. 612 800 1,000
Real estate owned................................... 641 1,733 479
Business development and advertising................ 364 271 371
Appraisal fees...................................... 309 257 57
Customer services................................... 286 382 687
Courier service..................................... 280 255 256
Amortization of goodwill............................ -- 1,266 105
Amortization of core deposits....................... -- -- 513
Other............................................... 1,446 2,175 2,082
------ ------ ------
Total Other Expenses.............................. $4,816 $8,060 $6,339
====== ====== ======
</TABLE>
29
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. INCOME TAXES
The components of consolidated income tax (benefit) expense, for the three
years ended December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- -----
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Current:
Federal......................................... $ (923) $(2,100) $ 610
State........................................... 8 -- 222
------ ------- -----
$ (915) $(2,100) $ 832
====== ======= =====
Deferred:
Federal......................................... $1,202 $(1,352) $(193)
State........................................... (2) 219 (68)
------ ------- -----
1,200 (1,133) (261)
====== ======= =====
$ 285 $(3,233) $ 571
====== ======= =====
</TABLE>
Deferred income taxes for 1994, 1993 and 1992 reflect the impact of
"temporary differences" between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations.
Principal items making up the deferred income tax provisions follow.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- -----
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Financial statement income from leases different
from amounts recognized for tax................. $ 18 $ (93) $(134)
Depreciation recognized for tax different from
amount recognized for financial statement
depreciation.................................... 86 (162) (33)
Financial statement bad debt deduction different
than tax bad debt deduction..................... 1,477 (2,488) (378)
Financial statement deferred loan fees and costs
different from amounts recognized for tax....... (293) 79 135
Prepaid expense recognized for tax different from
amounts recognized for financial statement
purposes........................................ (34) -- 293
Financial statement other real estate owned
deduction different from tax other real estate
owned deduction................................. 78 (629) --
State income tax benefit recognized for tax
different from amounts recognized for financial
statement purposes.............................. (413) (416) --
Other items, net................................. 261 (52) (144)
Less: net deferred tax valuation allowance....... 20 2,628 --
------ ------- -----
$1,200 $(1,133) $(261)
====== ======= =====
</TABLE>
30
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reasons for the difference between income tax benefit and expense and the
amount computed by applying the statutory Federal income tax rate to the loss
or income before income taxes are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ------- ----
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
35% of pre-tax (loss) income......................... $ 8 $(5,362) $440
State income taxes, net of Federal Tax benefit....... 4 (1,686) 91
Goodwill and other................................... (6) 771 40
State income tax limitation of net operating loss.... 259 416 --
Provision for deferred tax asset valuation allowance. 20 2,628 --
---- ------- ----
$285 $(3,233) $571
==== ======= ====
</TABLE>
Net deferred tax asset and liabilities reflect the cumulative inventory of
"temporary differences" resulting from the differences of assets and
liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations which will result in taxable or deductible amounts in
future years when the reported amount of the asset or liability is recovered or
settled, respectively. As of December 31, 1994 the Company's gross deferred
assets, deferred liabilities, and tax asset valuation allowance totaled
$3,916,000, $801,000 and $3,115,000, respectively as compared to gross deferred
assets, deferred liabilities, and tax asset valuation allowance of $4,978,000,
$995,000 and $2,783,000, respectively, as of December 31, 1993.
At December 31, the principal items making up the net deferred income tax
(assets) and liabilities are as follows:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Financial statement income from leases dif-
ferent from amounts recognized for tax..... $ 0 $ (9)
Depreciation recognized for tax different
from amount recognized for financial state-
ment depreciation.......................... 434 164
Financial statement bad debt deduction dif-
ferent than tax bad debt deduction......... (2,276) (3,182)
Financial statement deferred loan fees and
costs different from amounts recognized for
tax........................................ 294 652
Prepaid expense recognized for tax different
from amounts recognized for financial
statement purposes......................... 73 179
Financial statement other real estate owned
deduction difference from tax other real
estate owned deduction..................... (136) (629)
Financial statement occupancy expense deduc-
tion difference from tax occupancy expense
deduction.................................. (390) (406)
State income tax benefit recognized for tax
different from amounts recognized for fi-
nancial statement purposes................. (393) (416)
Other items, net............................ (254) (288)
Unrealized loss on available for sale secu-
rities..................................... (467) (48)
Less: net deferred tax valuation allowance.. 3,115 2,783
------------ ------------
Net deferred tax asset...................... $ 0 $ (1,200)
============ ============
</TABLE>
The net deferred tax asset for the year ended December 31, 1993, is included
in other assets of the consolidated balance sheets.
31
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. COMMON STOCK AND STOCK OPTIONS
On February 20, 1992, the Company declared a 6% stock dividend for
Shareholders of record on March 9, 1992. The weighted average number of shares
outstanding at December 31, 1992 has been restated to reflect the 6% stock
dividend in 1992.
Under a stock option plan approved by the Board of Directors in 1982,
options have been granted to key personnel for a term of ten years
exerciseable at 25% annually at the fair market value at the date of grant.
During 1991, the Company's Board of Directors adopted the Ventura County
National Bancorp 1991 Stock Option Plan (1991 Plan). The 1991 Plan provides
that incentive stock options be granted to full-time salaried officers and
management level employees of the Company or its subsidiaries for a term of 10
years exerciseable at 20% annually at the fair market value at the date of the
grant. The 1991 Plan also provides that non-qualified stock options be granted
to directors, key full-time salaried officers and management level employees
of the Company or its subsidiaries for a term of 10 years, exerciseable at 25%
annually at the fair market value at the date of grant.
Under the 1982 stock option plan, there were 21,813, 46,741 and 49,648
options outstanding at December 31, 1994, 1993 and 1992, respectively. At
December 31, 1994, there were 4,362 shares which were exercisable under the
1982 stock option plan at a price of $4.81 per share. During 1991, 46,640
options were granted while no options were granted during 1992, 1993, and
1994. During 1992, 15,263 options were exercised, while no options were
exercised during 1994, 1993 or 1991. In 1994, 1993 and 1992 respectively,
24,928, 2,907 and 59,104 options expired.
Under the 1991 Plan, there were 171,588, 167,418 and 136,730 options
outstanding at December 31, 1994, 1993 and 1992, respectively, which are
exerciseable at prices ranging from $2.13 to $6.84 per share. During 1994,
1993 and 1992, 25,000, 104,888 and 9,000 options were granted, respectively.
At December 31, 1994, 69,955 of these options were exerciseable. Option prices
and number of shares under option have been restated for stock dividends and
stock splits. A total of 20,830 and 74,200 options were canceled in 1994 and
1993.
In October 1989, the Company established an Employee Stock Ownership Plan
(ESOP), for which all full-time employees who have completed one year of
service at the Plan year end and all part-time employees who work at least
1,000 hours per year and have completed one year of service at the Plan year
end are eligible. The ESOP was funded by a $4,000,000 loan to the Company from
an independent third party. These debt proceeds were lent to the ESOP which
used the proceeds to acquire 444,444 newly issued shares of the Company's
common stock. The Company raised $1,555,000 from a private placement of
719,580 shares of common stock and issued $125,000 in notes payable during
1993 and used the proceeds to retire the remaining principal on the ESOP note
payable to a third party. At December 31, 1994, there were 230,014, 185,840,
and 28,590 shares released, held in suspense, and issued to individuals who
are no longer employees of the Company, respectively. The fair market value of
shares held in suspense at December 31, 1994 was $406,525.
Effective January 1, 1994, the Company adopted the provisions of Statement
of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans."
This SOP requires the Company to record compensation expense upon release of
shares to employees at the current fair value of shares released. Prior to
adoption of SOP 93-6, the Company recorded compensation expense for allocated
shares based on the historical cost of $9.00 per share. The adoption of SOP
93-6 had no effect on the reported results of operations of the Company, as
the Company made no contributions to the Plan in 1994 and no shares were
released to participants.
Unallocated shares held in a suspense account by the ESOP are released to
the Plan participants in proportion to contributions required to service the
debt between the Company and the Plan, in relation to the total debt
outstanding, as specified in the debt agreement, within the limitations of
Internal Revenue Code Section 415 and deductibility of ESOP contributions by
the Company for tax purposes.
32
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1994, 1993 and 1992, the Company incurred $nil, $635,000, and
$571,000 of compensation expense and $nil, $112,000, and $173,000 of interest
expense, respectively, related to the ESOP and note payable.
During 1989 the Company issued 649,647 shares of common stock and 295,294
warrants to purchase common stock under a common stock subscription rights
offering. The warrants entitled the holder to purchase one share of common
stock at $7.41 and expired on June 6, 1994.
NOTE 13. 401(K) PLAN
The Company established a 401(k) plan on July 1, 1994 for which all full-
time employees who have completed 90 consecutive days of service and all part-
time employees who work at least 1000 hours per year and have completed 90
consecutive days of service are eligible for enrollment. Employees may
contribute a percentage of their salary pursuant to IRS regulatory maximums,
and under the plan, the Company matches 50% of employee contributions up to
3%. During 1994, the Company contributed $48,844 to the 401(k) plan.
NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of financial instruments is
made in accordance with SFAS No. 107. The estimates have been determined by
the Company using available market information and appropriate valuation
methodologies. The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -----
(IN THOUSANDS OF (IN THOUSANDS OF
DOLLARS) DOLLARS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............... $ 11,442 $ 11,442 $ 15,943 $ 15,943
Federal funds sold...................... 27,000 27,000 18,000 18,000
Interest bearing deposits with other
financial institutions................. 694 694 2,180 2,180
Investment securities................... 50,634 49,822 40,775 40,775
Net loans and leases.................... 159,673 148,692 233,582 233,437
Liabilities:
Demand deposits and savings............. 147,823 147,823 200,726 200,726
Time deposits........................... 88,519 88,366 117,563 117,194
Other borrowings........................ 125 125 125 125
Off-balance-sheet instruments (unrealized
gains (losses)):
Commitments to extend credit............ 0 0 0 0
Standby letters of credit............... 0 0 0 0
</TABLE>
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount is a reasonable estimate
of fair value.
33
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Bearing Deposits with Other Financial Institutions
The fair value of fixed-maturity certificates of deposit is estimated by
discounting the future cash flows using the current market rates for deposits
with similar remaining maturities.
Investment Securities
For securities held as investments, fair value equals quoted market prices.
Estimated fair value for mortgage-backed securities issued by quasi-
governmental agencies is based on quoted market prices.
Net Loans and Leases
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. During the second
quarter of 1994, $14.1 million in non-performing loans were sold in a bulk sale
at 67% of book value. As such, management utilized this valuation factor in
placing a fair value on non-performing loans of $7,945,000 at December 31, 1994.
It was not practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for non-performing loans at December 31, 1993.
Therefore, non-performing loans of $19,619,000 are excluded at December 31,
1993. Interest rates on such loans ranged from 7-10%, maturities ranged from
zero to four and one half years, and approximately 95% were real estate secured.
Demand Deposits, Savings and Time Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for deposits of similar
remaining maturities.
Other Borrowings and Notes Payable
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. Fair
value approximates carrying value in 1993 as other borrowings and notes payable
had variable interest rates that adjust with the market. At December 31, 1994,
the differential between the current note payable's carrying value and its
discounted value is insignificant.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counter-parties. The
fair value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counter-parties at the reporting date. Current rates have
increased since the commitments were made, yet the fee applied to the balance
of commitments outstanding resulted in values which are insignificant for 1994
and 1993.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1994. Considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. Although management is not aware of
34
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to certain financial instruments in the normal course
of business with a degree of off-balance sheet risk. These instruments include
commitments to extend credit, standby, and commercial letters of credit, which
are designed to meet the needs of the banks' customers.
Commitments to extend credit and standby and commercial letters of credit are
evaluated on a case-by-case basis dependent on each customer's credit
worthiness. The Company has a rating process which is applied to each customer.
The resulting rating establishes varying levels of required credit approvals
and limits of lending. Monitoring procedures include, but are not limited to,
monthly review of customer accounts by a management committee. The agreements
with the customers normally require collateral and provide restrictive
covenants under generally the same conditions as other lending activities of
the Company. Such collateral varies but may include accounts receivable,
inventories, property and equipment, and real property. The policy of the
Company is to limit lending to 75% of the market value of the collateral. The
Company's exposure to credit loss in the event of non-performance by the party
related to these instruments is represented by the contractual amount of these
instruments in the case of commitments to extend credit. As of December 31,
1994, the Company did not have commitments to borrowers that have additional
borrowings which have been classified as nonperforming loans and/or as potential
problem loans.
The Company conducts business primarily in Southern California and the
ability of the Company's customers to honor their loan agreements is dependent
on the economic health of this service area. Although the Company generally
provides loans and financial instruments to a broad variety of industries and
customers, at December 31, 1994 and 1993, approximately $67.1 million and $91
million, respectively, represented loans, commitments and letters of credit to
individuals and companies in the real estate industry (of which, $6.7 million
and $13 million, respectively, consisted of mortgage loans to individuals).
Further, a substantial portion of the collateral for commercial, financial and
agricultural loans is real estate.
Commitments to Extend Credit
Commitments to extend credit represent agreements to lend, on demand and
subject to the restrictive covenants, moneys to a customer up to a designated
limit. The commitments generally have fixed expiration dates, variable interest
rates, and normally require payment of an annual fee. Since many of the
commitments historically expire without being fully drawn upon and are subject
to regular monitoring and certain restrictions, the total commitment amounts
outstanding do not necessarily represent future cash requirements. The total
amount of commitments to extend credit at December 31, 1994 was $30,880,000,
compared with $46,029,000 at December 31, 1993.
Standby and Commercial Letters of Credit
Standby and commercial letters of credit are conditional commitments issued
by the Company to guarantee the performance of their customers to a third
party. Such letters of credit are normally issued to support performance bonds
and private borrowing arrangements, which include guarantees to suppliers
outside of the United States. Standby and commercial letters of credit
amounting to $2,898,000 were outstanding at December 31, 1994, all of which are
expected to expire by December 31, 1995. Standby and commercial letters of
credit amounted to $5,147,000 as of December 31, 1993, all of which expired by
December 31, 1994.
35
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lease Commitments
The Company leases office premises and certain equipment under operating
leases which expire at various dates through 2006. Total rental expense, net of
sublease income, for all non-cancelable operating leases amounted to
approximately $1,528,000, $1,682,000 and $1,645,000 for the three years ended
December 31, 1994, 1993 and 1992, respectively. Future minimum commitments
under these leases of premises and equipment as of December 31, 1994, net of
sublease income and including estimated CPI increases, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
OF DOLLARS
------------
<S> <C>
1995......................................................... $1,234
1996......................................................... 984
1997......................................................... 958
1998......................................................... 1,068
1999......................................................... 1,108
Thereafter................................................... 5,634
</TABLE>
Litigation
In the normal course of business, the Company is subject to various legal
actions. It is the opinion of management, based upon the opinion of legal
counsel, that such litigation will not have a material impact on the financial
position or results of operations of the Company.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries have granted loans to certain officers and
directors of the Company, and to businesses with which they are associated, in
the ordinary course of business. These loans are made under terms which are
consistent with the Company's normal lending policies. The amounts of these
loans were approximately $7,730,000 and $12,775,000 at December 31, 1994 and
1993, respectively. During 1994, new loans totaling $4,608,000 were made, and
net repayments of approximately $9,653,000 were received. During 1993, new
loans totaling $6,093,000 were made, and net repayments of approximately
$5,624,000 were received. Interest and fees earned on these loans approximated
$762,000, $1,111,000 and $1,176,000 in 1994, 1993 and 1992, respectively.
NOTE 17. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES
Certain restrictions exist regarding the ability of the subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or advances.
See Note 18 for discussion regarding restrictions placed on the Company per the
Formal Agreement and Consent Order. Generally, the approval of the Comptroller
of the Currency is required to pay dividends in excess of earnings retained in
the current year plus retained net profits for the two preceding years. Also,
under Federal Reserve regulation, a bank subsidiary is limited in the amount it
may loan to affiliates, including the Company, unless such loans are
collateralized by specific obligations.
At December 31, 1994 and 1993, the Company had no loans to affiliates.
NOTE 18. CAPITAL RESOURCES AND REGULATORY MATTERS
The Company is required by federal regulation to meet certain capital
standards. The risk-based capital standards require a minimum total capital of
8.0% of "risk-adjusted assets," as defined by the standard. At
36
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
least half of the required capital must contain Tier 1 capital, which consists
primarily of common stock and retained earnings, less goodwill. As of December
31, 1994 and 1993, the Company was in compliance with the requirements.
At December 31, 1994 and 1993, the Company's risk-based capital ratios were
12.61% and 8.73%, respectively. Additionally, the capital standards require the
Company to maintain a minimum leverage ratio of Tier 1 capital to average assets
and a Tier 1 capital to risk-weighted assets ratio of at least 4%. At December
31, 1994 and 1993, the Company's leverage capital ratios were 7.53% and 6.02%,
respectively, and Tier 1 capital ratios were 11.32% and 7.43%, respectively.
Regulatory Matters
At periodic intervals, both the Office of the Comptroller of the Currency and
the FDIC routinely examine the bank subsidiaries' financial statements as part
of their legally prescribed oversight of the banking industry. Based on these
examinations, the regulators can direct that the Company's financial statements
be adjusted in accordance with their findings. VCNB entered into a Formal
Agreement (Formal Agreement) with the OCC on March 19, 1993 while Frontier
entered into a Consent Order (Consent Order) with the OCC on March 29, 1993.
The significant common requirements of the Formal Agreement and the Consent
Order with respect to reviewing and correcting certain deficiencies identified
in the OCC examinations of VCNB and Frontier include conducting a program to
evaluate and improve board supervision and management, developing a program
designed to improve loan administration, developing a program regarding asset
diversification, obtaining current credit information on any loans lacking such
information, reviewing and revising loan policy, establishing an independent
loan review program, developing and implementing a program to collect or
strengthen criticized assets, reviewing and maintaining an adequate loan loss
reserve, developing a new long-range strategic plan, developing and
implementing a long-term capital program, reviewing and revising liquidity and
funds management policy, correcting violations of law cited by the OCC and
obtaining approval from the OCC to declare or pay a dividend. In addition, the
Consent Order requires that Frontier appoint a full-time President and Chief
Executive Officer and maintain, as of May 31, 1993 and beyond, a Tier 1 capital
ratio of 9.50% and a leverage ratio of 7.00%. Kathleen L. Kellogg became
President and Chief Executive Officer at Frontier in November 1994, and her
predecessor, Larry Sallinger was hired May 5, 1993. At December 31, 1994,
Frontier's Tier 1 capital and leverage ratios were 12.29% and 8.32%,
respectively.
The Formal Agreement, which was amended on February 3, 1994, required VCNB to
achieve a Tier 1 risk-based capital ratio of 12.00% and a leverage ratio of
7.00% by September 30, 1994. At September 30, 1994, VCNB's Tier 1 risk based
capital ratio was 9.44% and its leverage capital ratio was 6.88%, which did not
meet the higher leverage and Tier 1 capital ratios required by the formal
agreement. On October 18, 1994, VCNB submitted to the OCC its revised plan for
restoring capital and the OCC did not object to the implementation of the plan,
as proposed. VCNB applied for and received an extension of the date by which
such ratios are required to be achieved to June 30, 1995. As of December 31,
1994, VCNB's Tier 1 capital ratio was 10.92%, and its leverage ratio was 7.21%.
The Formal Agreement amendment further requires VCNB to seek reimbursement of
$3.4 million for all interest paid by VCNB to Ventura in connection with a
deposit account at VCNB which was related to the issuance of commercial paper.
The Company has committed to the completion of a rights offering, which is
scheduled to occur during the second quarter of 1995. The primary purpose of
the offering is to increase the capital bases of the Company and each of its
subsidiaries to permit growth in a post recessionary economy and to enable VCNB
to meet the requirements of the Formal Agreement. As of December 31, 1994, VCNB
37
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
needed approximately $1.4 million in additional capital to bring its Tier 1
capital ratio to 12.00%. The Company believes that compliance with the 12% Tier
1 capital ratio requirement, if achieved from sources noted above, will satisfy
the reimbursement requirement. Until such time as VCNB is reimbursed, the OCC
must authorize any payment from VCNB to Ventura.
VCNB and Frontier are in compliance with, or are in the process of complying
with, all of the items required under the Formal Agreement and Consent Order,
respectively, and management does not believe the Formal Agreement and Consent
Order will have any adverse material impact on its future operations. However,
any deficiency in compliance with the requirements of the Formal Agreement or
Consent Order could result in further regulatory restrictions.
The FDIC Improvement Act of 1991 (the 1991 Act) provides for a rating system
for insured institutions based on capital adequacy. Institutions are
categorized as critically undercapitalized, significantly undercapitalized,
undercapitalized, adequately capitalized and well capitalized. Regulatory
agencies have adopted definitions of how institutions are ranked for prompt
corrective action purposes and are as follows; (i) a well capitalized
institution is one that has a leverage ratio of 5%, a Tier 1 risk-based capital
ratio of 6%, a total risk-based capital ratio of 10% and is not subject to any
written order or final directive by the regulatory agency to meet and maintain
a specific capital level, (ii) an adequately capitalized institution is one
that meets the minimum required capital adequacy levels but not that of a well
capitalized institution, (iii) an undercapitalized institution is one that
fails to meet any one of the minimum required capital adequacy levels but not
as undercapitalized as a significantly undercapitalized institution, (iv) a
significantly undercapitalized institution is one that has a total risk-based
capital ratio of less than 6% and/or a leverage ratio of less than 3% and (v) a
critically undercapitalized institution is one with a leverage ratio of less
than 2%. Under the "prompt correction" provisions of the 1991 Act, banks that
become significantly undercapitalized are subject to a requirement to
recapitalize, merge with another financial institution, restrict interest rates
paid on deposits, or restrict transactions with affiliates. Critically
undercapitalized financial institutions are subject to appointment of a
receiver by the OCC.
On February 2, 1993, Ventura County National Bancorp entered into a
Memorandum of Understanding with the Federal Reserve Bank. The Memorandum
specified the following actions to be taken: Fifteen days notice to the Reserve
Bank is required prior to the payment of dividends and prior to incurring any
debt for other than operating purposes. The Parent may not repurchase any of
its outstanding stock without prior approval from the Reserve Bank. Within 45
days of each quarter end, the Company shall furnish to the Reserve Bank written
progress reports detailing the form and manner of actions taken to attain
compliance, as well as the Parent company only balance sheet and statement of
operations for the quarter end. Thirty days advance notice must be given to the
Reserve Bank prior to adding or replacing a director, employing a senior
executive officer, or promoting an existing employee to an officer.
Pursuant to the provisions of the Memorandum, the Company submitted a summary
of measures that have or are being taken to improve the financial condition of
the subsidiary banks, a summary of measures taken to improve the director's
supervision of the subsidiary banks, and steps taken to improve the
effectiveness of the audit and credit review functions. Board members were
designated to be responsible for monitoring and coordinating adherence to the
provisions of the Memorandum, which is to remain in effect until the individual
provisions are stayed, modified, terminated, or suspended by the Reserve Bank.
38
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following financial information represents the balance sheets of Ventura
County National Bancorp (Parent Company only) as of December 31, 1994 and 1993
and the related statements of income and cash flows for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Assets
Cash......................................... $ 37 $ 90
Equity in Bank subsidiaries.................. 19,143 20,402
Other assets................................. -- 38
------------ ------------
Total assets............................... $ 19,180 $ 20,530
============ ============
Liabilities
Note payable................................. $ 125 $ 125
Other liabilities............................ 3 35
------------ ------------
Total liabilities.......................... 128 160
============ ============
Shareholders' equity........................... 19,052 20,370
------------ ------------
Total liabilities and shareholders' equity. $ 19,180 $ 20,530
============ ============
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1994 1993 1992
------ -------- ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Income
Interest...................................... $ -- $ 193 $ 509
Management fees............................... 1,067 1,729 1,710
------ -------- ------
1,067 1,922 2,219
====== ======== ======
Expense
Interest...................................... 9 199 454
Salaries and benefits......................... 1,059 1,249 1,211
Miscellaneous operating....................... 62 718 425
------ -------- ------
1,130 2,166 2,090
====== ======== ======
Income (loss) before income taxes and undistrib-
uted net income (loss) of subsidiaries......... (63) (244) 129
Income tax expense allocated.................... (2) -- 49
------ -------- ------
(61) (244) 80
====== ======== ======
Equity in undistributed net earnings (deficit)
of Bank subsidiaries........................... (201) (11,843) 605
------ -------- ------
Net income (loss)............................... $ (262) $(12,087) $ 685
====== ======== ======
</TABLE>
39
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1993 1992
----- -------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income (loss).................................. $(262) $(12,087) $ 685
Adjustments to reconcile net income (loss) to cash
flows provided by operating activities:
Earnings (loss) from subsidiaries.................. 201 11,843 (605)
Amortization....................................... -- 231 33
Change in other assets............................. 39 2 146
Change in other liabilities........................ (31) 24 (367)
Decrease in deferred compensation related to ESOP.. -- 635 572
Net cash (applied to) provided by operating
activities........................................ (53) 648 464
Cash flows from investing activities:
Capital Contribution to Subsidiary................. -- (150) --
Change in interest-bearing deposits due from banks. -- 8,875 (1,698)
Proceeds from maturity of investment............... -- -- --
Net cash provided by (applied to) investing activi-
ties................................................ -- 8,725 (1,698)
Cash flows from financing activities:
Change in other short-term borrowings.............. -- (8,860) 1,842
Repayment of note payable.......................... -- (2,188) (572)
Issuance of note payable........................... -- 125 --
Issuance of stock.................................. -- 1,430 25
Net cash (applied to) provided by financing activi-
ties................................................ -- (9,493) 1,295
Net (decrease) increase in cash and cash equivalents. (53) (120) 61
Cash and cash equivalents at beginning of year..... 90 210 149
Cash and cash equivalents at end of year........... $ 37 $ 90 $ 210
Supplemental information:
Cash paid during the year for interest............. $ 9 $ 199 $ 454
Cash paid during the year for income taxes......... $ 3 $ 300 $ 1,155
</TABLE>
NOTE 20. ACQUISITION OF SERVICING RIGHTS
On November 15, 1990, VCNB purchased the rights to service certain loans held
by the RTC for $1,735,000. Amortization expense for 1994 and 1993 was $40,000
and $486,000, respectively. The remaining mortgage servicing rights, totaling
$320,000, were written off during 1994 in conjunction with the sale of the
mortgage servicing department.
NOTE 21. INTANGIBLE ASSETS
As a result of the acquisition of Frontier in October 1989, the Company
recorded goodwill representing the difference between the cost of the
acquisition and the fair value of the assets acquired. Goodwill amortization in
1993 includes a write-off in the amount of $1,167,000 based on the Company's
intent to sell Frontier at or near tangible book value. At December 31, 1994,
the Company is no longer actively marketing Frontier.
40
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22. QUARTERLY INFORMATION, 1994 AND 1993
The following table sets forth the Company's unaudited results of operations
for each of the quarters of 1994 and 1993. This information, in the opinion of
management, includes all adjustments necessary to state fairly the information
set forth herein. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994
----------------------------------
4TH 3RD 2ND 1ST
------- ------- ------- -------
(IN THOUSANDS OF DOLLARS EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest Income............................ $ 5,640 $ 5,511 $ 5,593 $ 5,391
Interest Expense........................... 1,554 1,503 1,549 1,661
------- ------- ------- -------
Net Interest Income........................ 4,086 4,008 4,044 3,730
Other Income............................... 374 591 1,956 1,143
Provision for Loan Losses.................. 550 400 2,075 800
Other Expenses............................. 3,864 3,559 4,474 4,187
------- ------- ------- -------
Income (Loss) before taxes................. 46 640 (549) (114)
Income taxes............................... (4) 75 214 0
------- ------- ------- -------
Net Income (Loss).......................... $ 50 $ 565 $ (763) $ (114)
======= ======= ======= =======
Earnings per share:
Net Income (Loss)........................ $ .01 $ .09 $ (.12) $ (.02)
======= ======= ======= =======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1993
----------------------------------
4TH 3RD 2ND 1ST
------- ------- ------- -------
(IN THOUSANDS OF DOLLARS EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest Income............................ $ 5,977 $ 6,239 $ 6,816 $ 6,878
Interest Expense........................... 1,976 2,207 2,440 2,376
------- ------- ------- -------
Net Interest Income........................ 4,001 4,032 4,376 4,502
Other Income............................... 1,081 1,000 1,220 1,519
Provision for Loan Losses.................. 1,800 6,062 4,326 4,025
Other Expenses............................. 6,151 4,489 5,542 4,657
------- ------- ------- -------
Income (Loss) before taxes................. (2,869) (5,519) (4,272) (2,661)
Income taxes............................... 671 (1,218) (1,602) (1,085)
------- ------- ------- -------
Net Income (Loss)........................ $(3,540) $(4,301) $(2,670) $(1,576)
======= ======= ======= =======
Earnings per share:
Net Income (Loss)........................ $ (0.62) $ (0.77) $ (0.48) $ (0.28)
======= ======= ======= =======
</TABLE>
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ventura National Bancorp:
We have audited the accompanying consolidated balance sheets of Ventura
County National Bancorp and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ventura County National Bancorp
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 18 to the consolidated financial statements, Frontier
Bank N.A. and Ventura County National Bank (VCNB) have entered into agreements
with the Office of the Comptroller of the Currency (OCC). The agreement between
VCNB and the OCC, as amended, requires VCNB to meet prescribed capital
requirements by no later than June 30, 1995. Currently, VCNB has not achieved
such capital requirements. Failure on the part of VCNB to meet the terms of the
agreement may subject VCNB to significant regulatory sanctions. The financial
statement impact, if any, that might result from the failure of VCNB to comply
with the agreement and, ultimately, the capital requirements prescribed by the
OCC cannot presently be determined. Accordingly, no adjustments that may result
from the ultimate resolution of this uncertainty have been made in the
accompanying financial statements.
DELOITTE & TOUCHE LLP
February 17, 1995
Los Angeles, California
42
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
on Form S-8 of Ventura County National Bancorp of our report dated February 17,
1995 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to noncompliance with regulatory capital requirements)
incorporated by reference in the Annual Report on Form 10-K/A for the year ended
December 31, 1994.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 14, 1995
