<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ending September 30, 1996. Commission File Number 0-15814
VENTURA COUNTY NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
California 77-0038387
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Esplanade Drive, Oxnard, California 93030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (805) 981-2600
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. [ ]
There were 9,228,723 shares of common stock for the registrant issued and
outstanding as of November 5, 1996.
Total number of pages: 24
Exhibit index on page: 2
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGES
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
A. Consolidated Balance Sheets 3
B. Consolidated Statements of Operations 4
C. Consolidated Statements of Cash Flows 5
D. Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION 23
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Securities 23
ITEM 3. Defaults Upon Senior Securities 23
ITEM 4. Submission of Matters to a Vote of Security Holders 23
ITEM 5. Other Information 23
ITEM 6. Exhibits and Reports on Form 8-K 23
SELECTED FINANCIAL DATA 24
</TABLE>
<PAGE>
Part I.
Item 1. Financial Statements
VENTURA COUNTY NATIONAL BANCORP
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,588 $ 19,920
Federal funds sold 27,950 47,450
Interest-bearing deposits - 100
Securities held-to-maturity, at amortized cost:
fair value 1996 - $9,297; 1995 - nil 9,411 -
Securities available-for-sale, at fair value 47,268 36,588
Loans, net of unearned income 170,397 157,765
Allowance for loan losses (4,950) (5,401)
- ------------------------------------------------------------------------------------------
Loans, net 165,447 152,364
- ------------------------------------------------------------------------------------------
Premises and equipment, net 2,110 2,371
Other assets 8,946 8,963
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $271,720 $267,756
==========================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 73,256 $ 68,074
Interest-bearing demand and savings 77,984 77,085
Time certificates of deposit 86,690 90,913
- ------------------------------------------------------------------------------------------
Total deposits 237,930 236,072
- ------------------------------------------------------------------------------------------
Accrued interest payable and other liabilities 4,445 2,225
- ------------------------------------------------------------------------------------------
Total Liabilities 242,375 238,297
- ------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value: 20,000,000
shares authorized; 9,228,723 and 9,226,723 shares issued
and outstanding in 1996 and 1995, respectively 37,029 37,025
Retained deficit (6,929) (6,951)
Unrealized loss on available-for-sale securities, net of taxes (755) (615)
- ------------------------------------------------------------------------------------------
Total Shareholders' Equity 29,345 29,459
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES and SHAREHOLDERS' EQUITY $271,720 $267,756
==========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ending September 30, Nine Months Ending September 30,
--------------------------------- --------------------------------
1996 1995 1996 1995
------ ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and leases $4,196 $4,147 $12,374 $12,349
Deposits with financial institutions - 4 1 20
Investment securities 932 636 2,431 2,034
Federal funds sold 254 467 1,162 1,190
------ ------ ------- -------
Total interest income 5,382 5,254 15,968 15,593
------ ------ ------- -------
INTEREST EXPENSE
Deposits and other borrowings 1,563 1,617 4,827 4,733
------ ------ ------- -------
Total interest expense 1,563 1,617 4,827 4,733
------ ------ ------- -------
NET INTEREST INCOME 3,819 3,637 11,141 10,860
Provision for loan losses - (100) - 410
------ ------ ------- -------
Net interest income after provision for loan lo sses 3,819 3,737 11,141 10,450
Noninterest income:
Service charges on deposit accounts 292 233 855 713
Loan servicing fees 18 14 65 78
Other fees and charges 76 66 252 219
Gain (Loss) on sales of investment securities - 41 (86) 47
Gain on sales of SBA loans 261 110 532 428
Other income (Loss) (4) 106 157 125
------ ------ ------- -------
Total noninterest income 643 570 1,775 1,610
------ ------ ------- -------
Noninterest expense:
Salaries and employee benefits 1,940 1,721 4,999 4,966
Occupancy, net 358 432 1,094 1,294
Equipment 161 151 485 506
Professional fees 283 180 922 613
Data processing 151 157 458 470
Other real estate owned 111 33 241 (67)
Courier services 56 63 176 203
Office supplies and office expense 155 131 416 378
FDIC/OCC assessments 20 169 224 554
Advertising and promotion 192 144 502 375
Other 218 446 3,523 1,291
------ ------ ------- -------
Total noninterest expense 3,645 3,627 13,040 10,583
------ ------ ------- -------
Income/(loss) before provision (benefit) for income taxes 817 680 (124) 1,477
Income tax provision (benefit) 242 30 (146) 30
------ ------ ------- -------
NET INCOME $ 575 $ 650 $ 22 $ 1,477
====== ====== ======= =======
Primary weighted average number of shares outstanding
(in thousands) 9,288 9,285 9,291 7,363
====== ====== ======= =======
Earnings per share, primary $ 0.06 $ 0.07 $ 0.00 $ 0.20
====== ====== ======= =======
Earnings per share, fully-diluted $ 0.06 $ 0.07 $ 0.00 $ 0.20
====== ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ending September 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 22 $ 1,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - 410
(Gain) loss on sale of fixed assets 9 (2)
(Gain) loss on sale of SBA loans (532) (428)
(Gain) loss on sale of available-for-sale investment securities 86 (47)
Net amortization of premiums (accretion of discount) on investment securities 295 (181)
Net change in deferred loan fees (108) (43)
Depreciation and amortization 429 430
Provision for deferred income taxes 55 600
(Increase)/decrease in accrued interest receivable and other assets 355 (817)
Increase (Decrease) in accrued interest payable and other liabilities 2,094 (214)
-------- -------
Net cash provided by operating activities 2,705 1,155
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment securities 13,241 7,227
Proceeds from maturities of available-for-sale investment securities 10,072 11,794
Proceeds from maturities of held-to-maturity investment securities 3,976 1,971
Purchase of investment securities, available-for-sale (36,937) (4,916)
Purchase of investment securities, held-to-maturity (11,452) (3,996)
Change in Federal funds sold 19,500 (6,400)
Change in deposits with financial institutions 100 594
Proceeds from sale of SBA loans 6,473 4,018
Loans funded, net of payments received (20,018) (591)
Proceeds from sale of fixed assets and other assets 55 2
Purchase of fixed assets (233) (828)
Proceeds from sale of other real estate owned 1,324 3,794
-------- -------
Net cash provided by (used in) investing activities (13,899) 12,669
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in demand deposits, NOW accounts and savings
accounts 6,081 (2,220)
(Decrease) in time certificates of deposit (4,223) (7,878)
(Decrease) in notes payable - (125)
Issuance of common stock 4 5,529
-------- -------
Net cash provided by (used in) financing activities 1,862 (4,694)
-------- -------
Increase/(decrease) in cash and cash equivalents (9,332) 9,130
Cash and cash equivalents, beginning of period 19,920 11,442
-------- -------
Cash and cash equivalents, end of period $ 10,588 $20,572
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Interest payments $ 4,833 $ 4,698
Income tax payments 5 364
OREO foreclosures 1,077 4,123
</TABLE>
See Notes To Consolidated Financial Statements.
5
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
Notes to Consolidated Financial Statements
(Unaudited, except for information as of and for the year ended
December 31, 1995)
NOTE 1 - BASIS OF PRESENTATION
The Company's accounting and reporting policies conform to generally accepted
accounting principles prescribed for bank holding companies and banks, and
predominant banking industry practice. The interim period financial statements
are unaudited. It is the opinion of Company management that all adjustments
consisting of normal, recurring accruals necessary for a fair presentation of
the results of operations have been reflected therein. Results for the period
ending September 30, 1996, are not necessarily indicative of results that may be
expected for any other interim periods or for the year as a whole. For further
information, refer to the Consolidated Financial Statements and footnotes
included in the Company's Annual Report for the year ended December 31, 1995.
The Consolidated Financial Statements include the accounts of the Company and
the following subsidiaries: Ventura County National Bank, ("Ventura") and
Frontier Bank, N.A., ("Frontier"), (jointly, "the Banks"), and Ventura County
Management Services Company, Inc., the last company is currently inactive. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks.
Securities:
The Company's securities portfolio includes U.S. Treasury and U.S. federal
agency securities. The Company has classified its investment securities as
held-to-maturity or as available-for-sale; the Company has no trading account
assets.
Securities are classified as available-for-sale when the Company intends to hold
the securities for an indefinite period of time but not necessarily to maturity.
Any decision to sell a security classified as available-for-sale would be based
on various factors, including significant movements in interest rates, changes
in the maturity mix of the Company's assets and liabilities, liquidity demands,
regulatory capital considerations and other similar factors. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of shareholders' equity. Realized gains and losses
from the sales of available-for-sale securities are reported separately in the
statements of operations. The cost basis of available-for-sale securities is
recorded using the specific identification method.
Securities are classified as held-to-maturity when the Company has both the
intent and ability to hold the securities to maturity on a long-term basis.
Securities held-to-maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts to maturity or, in the case of mortgage-
backed securities, over the estimated life of the securities.
SBA Loans and Servicing Income:
The portion of loans guaranteed by the SBA, which are originated and are
intended for sale in the secondary market, is carried at the lower of cost or
estimated market value. Funding for SBA programs depends on annual
appropriations by the U.S. Congress, and accordingly, the sale of loans under
this program is dependent on the continuation of such programs.
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 or losses are
determined using the specific identification method for loans sold and are
recorded as noninterest income as of the date of sale.
The Company sells SBA loans and retains servicing. At the time of 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 normal servicing fee, or the Company's cost
of servicing such loans plus a normal profit, whichever is greater, is
determined. The amount necessary to enhance the yield of the unguaranteed
portion of the SBA loan sold is also determined. The amount of the present
value of the contractual servicing fee income less the amount necessary for the
yield enhancement, is recognized as a servicing fee over the life of the related
loans. If the present value of the servicing fee is less than the amount
necessary for the yield enhancement of the unguaranteed portion, then a
liability is created and the difference is amortized over the life of the
related loans. If the present value of the servicing fee is greater than the
amount necessary for fee enhancement, an asset is not created, instead servicing
fee income is recognized over the life of the loan. Loan servicing costs are
charged to expense as incurred.
6
<PAGE>
NOTE 1 - BASIS OF PRESENTATION - CON'T
Accounting for Stock Based Compensation:
The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation", which encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. This statement does not require the application of the fair value
method and allows the continuance of the current accounting method, which
requires accounting for stock compensation awards based on their intrinsic value
as of the grant date. However, SFAS No. 123 requires proforma disclosure of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in this Statement had been applied. The accounting and
disclosure requirements are effective for financial statements for fiscal years
beginning after December 15, 1995. The Company has elected not to adopt the
fair value provisions of this Statement.
NOTE 2 - INVESTMENT SECURITIES
As a result of a temporary decline in the market value of securities-available-
for-sale, the Company recorded unrealized losses totaling $755 thousand and $615
thousand, which are included in shareholders' equity on the consolidated
balances sheets, at September 30, 1996 and December 31, 1995, respectively. The
decline in the market value of the portfolio reflects the current interest rate
environment; such decline is deemed temporary in nature.
The amortized cost and estimated fair values of investment securities as of
September 30 1996, and December 31, 1995, are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 1996 Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government agencies $23,226 $ 52 $ (12) $23,266
Mortgage-backed securities 23,112 - (534) 22,578
Federal Reserve Bank and FHLB Stock 1,424 - - 1,424
- -------------------------------------------------------------------------------------------------------------------------
Total $47,762 $ 52 $(546) $47,268
=========================================================================================================================
<CAPTION>
December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government agencies $13,491 $ 85 $ (1) $13,575
Mortgage-backed securities 21,882 230 (464) 21,648
Federal Reserve Bank and FHLB Stock 1,365 - - 1,365
- -------------------------------------------------------------------------------------------------------------------------
Total $36,738 $315 $(465) $36,588
=========================================================================================================================
<CAPTION>
SECURITIES HELD TO MATURITY
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 1996 Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government agencies $ - $ - $ - $ -
Mortgage-backed securities 9,411 - (114) 9,297
Federal Reserve Bank and FHLB Stock - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total $ 9,411 $ - $(114) $ 9,297
=========================================================================================================================
</TABLE>
Federal Home Loan Bank and Federal Reserve Bank stocks are not deemed marketable
equity securities, as they are not traded on a registered security exchange, and
are carried at cost. Securities with a fair value of $9.1 million on September
30, 1996, were pledged as required by law.
7
<PAGE>
NOTE 3 - LOANS AND LOAN LOSS RESERVES
A certain degree of risk is inherent in the extension of credit. Credit losses
arise primarily from the loan portfolio, but may also be derived from other
credit-related sources, including commitments to extend credit, guarantees and
standby letters of credit. Actual credit losses and other charges, net of
recoveries, are deducted from the allowance for possible loan losses. Other
charges to the allowance primarily include amounts related to loan foreclosures
at the time of transfer to other real estate owned. A provision for possible
loan losses, which is a charge against earnings, is added to the allowance based
on management's assessment of certain factors including, but not necessarily
limited to, estimated losses from loans and other credit arrangements; general
economic conditions; deterioration in pledged collateral; historical loss
experience; and trends in portfolio volume, maturity, composition,
delinquencies, and nonaccruals. While management has attributed reserves to
various portfolio segments, the allowance is general in nature and is available
for the credit portfolio in its entirety.
Loans are classified as impaired loans when based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The majority of
the Company's impaired loans represent loans placed on nonaccrual status.
Nonaccrual loans are those which are past due 90 days as to either principal or
interest, or earlier when payment in full of principal or interest is not
expected. When a loan is placed on nonaccrual status, interest accrued but not
received is reversed against interest income. Thereafter, interest income is no
longer recognized and the full amount of all payments received, whether
principal or interest, are applied to the principal balance of the loan. A
nonaccrual loan may be restored to an accrual basis when principal and interest
payments are current, and full payment of principal and interest is expected.
Loans are generally carried at the principal amount outstanding, net of unearned
discounts and deferred fees. Purchased loans are generally carried at the
principal amount outstanding, net of any unamortized discounts or premiums.
Interest on loans, other than certain mortgage loans, is calculated using the
simple interest method. Interest income on discounted loans is generally
recognized over the estimated life of the loans based on methods that
approximate the interest method. Net deferred loan origination fees are
amortized to interest income over the contractual lives of the related loans
using methods that approximate the interest method.
8
<PAGE>
NOTE 3 - LOANS AND LOAN LOSS RESERVES - CON'T
The following table summarizes the balances and changes in the allowance for
loan losses:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1996 1995
----------------- -----------------
<S> <C> <C>
Average outstanding loans net of unearned income $164,701 $161,036
======== ========
Loans net of unearned income at end of period $170,397 $157,937
======== ========
Allowance at beginning of period $ 5,401 $ 8,261
Charge-offs:
Commercial 470 2,817
Real estate 52 150
Installment 110 247
Losses on loans sold 108
-------- --------
Total charge-offs 740 3,214
Recoveries:
Commercial 254 254
Real estate 15 -
Installment 20 42
Losses on loans sold - -
-------- --------
Total recoveries 289 296
Net charge-offs 451 2,918
Provision charged to expense - 410
-------- --------
Allowance at end of period $ 4,950 $ 5,753
======== ========
Ratio of allowance for loan losses to loans
outstanding at end of period 2.90% 3.64%
Ratio of allowance for loan losses to
nonperforming loans at end of period 159.22% 126.72%
Ratio of allowance for loan losses to
nonperforming assets at end of period 77.05% 69.51%
Ratio of annualized net charge-offs to
average loans 0.37% 2.43%
</TABLE>
At September 30, 1996, the Company had loans representing $400 thousand
classified as impaired with a specific reserve of $217 thousand and $2.8 million
of its loans impaired with no specific loss reserve determined in accordance
with SFAS No:114. However, the company has a general reserve in its allowance
for loan loss that management currently believes is sufficient to cover any
potential losses due to impaired loans that do not have specific reserves. The
average recorded investment in impaired loans during the nine months ended
September 30, 1996, was $3.7 million. Loans classified as impaired at September
30, 1996 included $1.5 million of commercial real estate loans, $1.1 million of
commercial loans, $491 thousand of residential loans and $26 thousand of
personal loans. Once a loan has been identified as impaired, the Company
discontinues recognition of interest income and applies the full amount of all
payments received, whether principal or interest, to the principal balance of
the loan until all principal is paid off. Then payments are posted to interest
until all contractual payments have been made. Interest income that would have
been collected during the first nine months of 1996 and 1995 on nonaccrual loans
had they performed in accordance with their original terms was approximately
$139 thousand and $183 thousand, respectively.
9
<PAGE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments to
extend credit which are not reflected in the accompanying consolidated financial
statements. The Company does not anticipate losses as a result of these
transactions. Commercial and standby letters of credit totaled approximately
$2.3 million and $2.5 million at September 30, 1996 and December 31, 1995,
respectively. In addition, the Banks had unfunded credit commitments of $51.4
million and $36.3 million at September 30, 1996 and December 31, 1995,
respectively.
The Company uses the same credit policies in making commitments and conditional
obligations as it does in extending loan facilities to customers. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
held varies, but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
NOTE 5 - COMMON STOCK AND STOCK OPTIONS
During 1991, the Company's Board of Directors and shareholders adopted the
Ventura County National Bancorp 1991 Stock Option Plan (1991 Plan). The 1991
Plan provides that incentive stock options may be granted to full-time salaried
officers and management level employees of the Company or its subsidiaries for a
term of 10 years exercisable at 20% annually at the fair market value at the
date of the grant. The 1991 Plan also provides that nonqualified stock options
may 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,
exercisable at 20% annually at the fair market value at the date of grant.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995; no dividend yield for either
year; expected volatility of 43 percent; risk-free interest rates of 6.6
percent; and expected lives of 10 years. The Company applies APB Opinion 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of FASB Statement 123, the Company's net income or loss and earnings
or loss per share would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Nine months ending
September 30,
1996 1995
-------------------------
<S> <C> <C> <C> <C>
Net Income(loss) As reported $ 22,000 $1,447,000
Pro forma $(38,000) $1,402,000
Primary Earnings(loss) Per Share As reported $ 0.00 $ 0.20
Pro forma $ (0.00) $ 0.19
Fully Diluted Earnings(loss) Per Share As reported $ 0.00 $ 0.20
Pro forma $ (0.00) $ 0.19
</TABLE>
10
<PAGE>
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion represents information about the results of operations,
financial condition, liquidity and capital resources of Ventura County National
Bancorp and its subsidiaries, Ventura County National Bank and Frontier Bank,
N.A. (together, the "Company"). This information should be read in conjunction
with the 1995 audited consolidated financial statements of the Company and the
notes thereto and the accompanying quarterly unaudited consolidated financial
statements and notes thereto.
OVERVIEW
The Company reported net income of $22 thousand for the first nine months of
1996 compared to earnings of $1.4 million for the first nine months of 1995.
Net income for three months ended September 30, 1996 and September 30, 1995 was
$575 thousand and $650 thousand, respectively. The year to date 1996 results
were negatively impacted by the $2.5 million reserve that the company recorded
during the second quarter pursuant to a jury verdict resulting from a
countersuit to a suit that the company filed against a former officer of the
company and the company's former legal counsel. Also, the company received a
pre-trial settlement of $950 thousand from the former legal counsel. During the
third quarter the company reached a settlement with the former officer who had
previously won the $2.5 million judgment. The company also settled a lawsuit
which was filed during the third quarter by another former officer. The third
quarter impact to net income was minimal because the reserve recorded in the
second quarter was sufficient to cover both settlements and the costs associated
therewith.
On September 15, 1996 the Company entered into a definitive agreement to be
purchased by and merge into City National Corporation headquartered in Beverly
Hills, California. Pursuant the terms of the agreement, Ventura County National
Bancorp shareholders will receive at their election, cash, stock or a
combination thereof valued at $5.03 per share. The aggregate amount of City
National Corporation Stock available to holders who elect to receive City
National stock shall equal approximately 55% of the total consideration paid for
Ventura County National Bancorp. The purchase price of $5.03 represents a
multiple of 1.6 times Ventura County National Bancorp's June 30, 1996 book
value. Subject to shareholder and regulatory approval, the transaction is
anticipated to close in the first quarter of 1997.
Financial results of the Company for the first nine months ending September 30,
1996 show continued improvement. Net interest income increased to $11.1
million from $10.9 million in the nine months of 1996, as compared to the first
nine months of 1995. The net interest margin decreased to 6.12% for the nine
months ended September 30, 1996, compared to 6.21% for the prior year. The
decrease in the net interest margin can be attributed to higher interest rates
paid on time deposits and due to the slightly lower prime rate and fed funds
rate.
Noninterest income was $1.8 million and $1.6 million for the nine months ended
September 30, 1996 and 1995, respectively. The Company benefited from an
additional $142 thousand in service charge fee income in addition to other small
increases in other non interest income . These increases were offset by a loss
of $86 thousand on the sale of investment securities for the period.
Operating expenses increased from $10.6 million for the nine months ended
September 30, 1995 to $13.0 million for the nine months ended September 30,
1996. The increase in operating expense is largely the result of the accrual
for the above mentioned legal action, as well as merger related expense of
approximately $300 thousand. Absent this accrual, noninterest expense was very
little changed from the prior period. Decreases were observed in Occupancy and
FDIC insurance. These decreases were offset by an increase in Professional
Fees, OREO expense and Advertising.
For the three months ending September 30, 1996, net interest income increased to
$3.8 million from $3.6 million. The net interest margin was unchanged at 6.18%
for the three months ended September 30, 1996, compared to three months ended
September 30, 1995. The increase in net interest income is the result of a $12
million increase in average interest-earning assets for comparative periods
ending September 30, 1996 and September 30, 1995.
Noninterest income increased to $643 thousand from $570 thousand for the three
months ended September 30 1996 and 1995, respectively. Operating expenses
were unchanged at $3.6 million for the three months ended September 30, 1996 and
September 30, 1995 respectively.
Total assets increased slightly to $271.7 million at September 30, 1996, as
compared to $267.8 million at year-end 1995. Gross loans increased to $170.4
million at September 30, 1996, from $157.8 million at December 31, 1995.
The OCC recently completed its regular examination of Frontier and terminated
the consent order which Frontier entered into with the OCC on March 29, 1993.
The Company remains subject to a Memorandum of Understanding with the Federal
Reserve Bank.
11
<PAGE>
The following table summarizes key performance indicators pertaining to the
Company's operating results. Average balances are computed using daily
averages.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Nine Months ended September 30, 1996 1995
- -----------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Return on average assets (1) 0.01% 0.77%
Return on average shareholders' equity (1) 0.10% 8.82%
Net income $ 22 $ 1,447
Earnings per share $ 0.00 $ 0.20
Total average assets $266,143 $251,352
- -----------------------------------------------------------------
(1) Annualized
</TABLE>
12
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the difference between interest earned on assets and
interest paid on liabilities. The net interest margin is net interest income
expressed as a percentage of average interest-earning assets. Interest income
and expense are affected by changes in the volume and mix of average interest
earning-assets and interest-bearing deposits and other liabilities, as well as
fluctuations in interest rates. The following table sets forth certain
information concerning average interest-earning assets and average interest-
bearing liabilities and the yields and rates thereon. The table also sets forth
a summary of the changes in interest income and interest expense resulting from
changes in average interest rates (rate) and changes in average asset and
liability balances (volume) for the periods indicated. Average balances are
average daily balances. Nonaccrual loans are included in total average loans
outstanding.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------------------------------------------------------------------
Yield/ Yield/
Avg. bal. Interest Rate(1) Avg. bal. Interest Rate(1) Rate Volume
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, agricultural and SBA (2) $148,728 $11,221 10.08% $138,896 $10,691 10.29% $(334) $ 864
Real estate, mortgage 6,035 381 8.43% 8,449 527 8.34% 9 (155)
Real estate, construction 2,493 238 12.75% 4,798 469 13.07% (11) (220)
Installment 7,410 531 9.57% 8,811 654 9.92% (22) (101)
Lease financing 35 3 11.45% 82 8 13.04% (1) (4)
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, net of deferred fees (3) $164,701 $12,374 10.04% $161,036 $12,349 10.25% $(359) $ 384
Investment securities 49,399 2,431 6.57% 45,206 2,034 6.02% $ 239 $ 158
Federal funds sold and other 29,177 1,163 5.32% 27,449 1,210 5.89% (150) 103
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets/interest income $243,277 $15,968 8.77% $233,691 $15,593 8.92% (270) 645
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 17,219 15,950
Allowance for loan losses (5,181) (7,603)
Premises and equipment 2,268 1,998
OREO 2,481 3,007
Other assets 6,079 4,309
- ----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest earning assets 22,866 17,661
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $266,143 $251,352
==================================================================================================================================
NOW/MMDA 50,823 912 2.40% 52,902 1,069 2.70% (116) (41)
Savings 25,638 380 1.98% 28,146 503 2.39% (81) (42)
TCDs 90,109 3,535 5.24% 84,351 3,156 5.00% 156 223
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits $166,570 $ 4,827 3.87% $165,399 $ 4,728 3.82% (41) 140
- ----------------------------------------------------------------------------------------------------------------------------------
Other interest-bearing liabilities - - 91 5 7.35% (3) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/interest expense $166,570 $ 4,827 3.87% $165,490 $ 4,733 3.82% (44) 138
- ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 66,990 62,131
Other liabilities 3,402 1,798
- ------------------------------------------------------------- --------
Total liabilities 236,962 229,419
- ------------------------------------------------------------- --------
Shareholders' equity 29,181 21,933
- ------------------------------------------------------------- --------
Total liabilities and equity $266,143 $251,352
==================================================================================================================================
NET INTEREST INCOME/(LOSS)/NET INTEREST MARGIN $11,141 6.12% $10,860 6.21% $(226) $ 507
==================================================================================================================================
</TABLE>
(1) Annualized.
(2) Includes loans held available for sale $2.0 million and $1.4 million at
September 30, 1996 and 1995, respectively.
(3) Includes loans on nonaccrual status of approximately $2.7 million and $4.5
million at September 30, 1996 and 1995, respectively. The amounts of
interest income forgone year to date on loans that were on nonaccrual
status at September 30, 1996 and 1995 were approximately $139 thousand and
$183 thousand, respectively. Interest income on loans includes amortization
of net loan (costs) or fees of approximately $108 thousand and $43 thousand
for the nine months ended September 30, 1996 and 1995, respectively.
13
<PAGE>
NET INTEREST INCOME AND NET INTEREST MARGIN (CON'T)
Net interest income increased slightly to $11.1 million for the nine months
ended September 30, 1996, from $10.9 million in the first nine months ending
September 30, 1995, despite a slight decrease in the net interest margin from
6.21% at September 30, 1995 to 6.12% at September 30, 1996. Average yields on
interest-earning assets for the first nine months of 1996 decreased by 15 basis
points to 8.77% from 8.92% for the first nine months of 1995. Average funding
costs for the nine months of 1996 increased by 5 basis points to 3.87% from
3.82% for the first nine months of 1995. Interest income increased slightly to
$16.0 million during the first nine months of 1996, compared to $15.6 million
for the same period in 1995. This increase was primarily due to an $9.8 million
increase in interest-earning assets, the majority of which was the commercial,
financial, agricultural and SBA loan portfolio, securities and fed funds sold.
Total loans increased to $164.7 million on average compared to $161.0 million on
average in 1995. However, the composition of the loan portfolio changed.
Commercial, financial, agricultural and SBA loans increased while decreases were
noted in all of the other loan categories, with the most significant decrease in
the real estate construction portfolio.
The earnings generated from the increased volume in earning assets were
partially offset by the reduction in rates of 15 basis points. The rate
reduction is evidenced in the commercial, financial, agricultural and SBA loan
portfolio which experienced a reduction of 21 basis points. A large portion of
these loans are tied to the prime rate. During the nine month period ending
September 30, 1995, the prime rate was at 9% as compared to a rate of 8.25% for
a majority of the nine month period ending September 30, 1996. Additionally, the
rate on fed funds sold dropped from 5.89% in the first nine months of 1995, to
5.32% during the first nine months of 1996 which also had a negative impact on
interest income. Average yields on total loans decreased 21 basis points from
10.25% in 1995 to 10.04% for nine months ending September 30, 1996. Average
yields on investments increased by 55 basis points as a result of the shift in
the portfolio from U.S. Treasury securities to higher yielding mortgage backed
securities. Average yields on fed funds sold decreased 57 basis points from the
prior year, primarily as a result of the Federal Reserve Bank lowering short
term interest rates.
Interest expense increased from $4.7 million during the first nine months of
1995 compared to $4.8 million during the first nine months of 1996. This
increase was primarily due to the change in the composition of the deposits.
Certificates of deposit, the highest costing deposits increased $5.8 million
from the prior year, while the rate paid increased 24 basis points. During
December, 1995, Ventura had a marketing promotion which raised $8.0 million in
new certificates of deposit at a rate of 6.0%. The strategy was to develop
relationships with these customers. A majority of the 6.0% certificates of
deposit matured in June, 1996 and most of funds remained with the bank at
current market rates. Rates have decreased during the first nine months of 1996
for the NOW accounts, money market accounts and savings accounts. The NOW and
money market rates have decreased 30 basis points from 2.70% to 2.40%, while the
savings rates have decreased 41 basis points from 2.39% to 1.98%. Total NOW and
money market deposits averaged $2.1 million less during the first nine months of
1996 compared to 1995, while average savings accounts decreased by $2.5
million. Total interest bearing deposits increased slightly, averaging $166.6
during the first nine months of 1996 compared to $165.4 in 1995; however, non-
interest bearing demand deposits increased $4.8 million on average in the same
period.
PROVISION FOR LOAN LOSSES
During the first nine months of 1996, due to the Company's improved asset
quality, the Company recorded no provision for loan losses compared to $410
thousand for the nine months ended September 30, 1995. Gross loan charge-offs
totaled $197 thousand for the quarter and $740 thousand for the nine months
ended September 30, 1996, compared to $854 thousand for the quarter and $3.2
million for the nine months ended September 30, 1995. Recoveries totaled $91
thousand for the quarter and $289 thousand for the nine months ended September
30, 1996, compared to $90 thousand for the quarter and $296 thousand for the
nine months ended September 30, 1995. Nonaccrual loans decreased from $4.3
million at year-end 1995 to $2.7 million at September 30, 1996. Management
believes that current reserve levels are adequate. (Please refer to NOTE 3 -
LOANS.)
NONINTEREST INCOME
Noninterest income increased $165 thousand to $1.8 million for the nine months
ending September 30, 1996, from $1.6 million for the nine months ending
September 30, 1995. Most of the increase is the result of increased service
charges and other income which was partially offset by a loss on the sale of
investment securities of $86 thousand. Service charges on deposit accounts
increased $142 thousand for the nine months ended September 30, 1996, as the
Company increased its core deposit base.
Noninterest income increased $73 thousand to $643 thousand from $570 thousand
for three months ending September 30, 1996 and 1995. Service charges on deposit
accounts increased $ 59 thousand to $292 thousand for three months ending
September 30, 1996 from $233 thousand for the three months ending September 30,
1995. In addition, gain on sale of SBA loans increased $151 thousand from $110
thousand for three months ending September 30, 1995 to $261 thousand for the
three months ending September 30, 1996. These increases were offset by
decreases in other income and the absence of securities gains for the three
months ending September 30, 1996. Other noninterest income for the three
months ending September 30, 1996 was $(4) thousand as a result of an adjustment
on a previously completed fixed asset conversion.
14
<PAGE>
NONINTEREST EXPENSE
The following table sets forth information by category on the Company's
noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Nine month periods ended September 30, 1996 1995
- ---------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Salaries and employee benefits $ 4,999 $ 4,966
Occupancy, net 1,094 1,294
Equipment 485 506
Professional fees 922 613
Data processing 458 470
Other real estate owned 241 (67)
Courier services 176 203
Office supplies and office expense 416 378
FDIC/OCC assessments 224 554
Advertising and promotion 502 375
Other 3,523 1,291
- ---------------------------------------------------------------
Total noninterest expense $13,040 $10,583
===============================================================
Annualized noninterest expense as a %
of average earning assets 7.16% 6.05%
Efficiency ratio 100.96% 84.87%
</TABLE>
The Company reported noninterest expense of $13.0 million for the first nine
months of 1996 as compared to $10.6 million for the first nine months of 1995.
The net increase reflects the accrual for the legal judgment, increased
professional fees, expenses related to other real estate owned and advertising
expenses, which are partially offset by decreases in occupancy, equipment, and
FDIC assessments.
Noninterest expense as a percentage of average interest-earning assets has
increased significantly due to the accrual for legal proceedings posted in the
nine months ended September 30, 1996. The Company's efficiency ratio, which is
noninterest expense divided by the sum of net interest income plus noninterest
income, increased during the period ended September 30, 1996, mainly as a result
of the legal accrual.
The slight increase in salaries for the nine months ended September 30, 1996,
compared to the previous year was offset by staff reductions, as the number of
full-time equivalent staff decreased from 128 at September 30, 1995, to 125 at
September 30, 1996.
Occupancy expense decreased $200 thousand, or 15.4%, for the first nine months
of 1996 to $1.1 million from $1.3 million for the first nine months of 1995.
Most of the decrease resulted from decreased amortization on leasehold
improvements, lower rent expenses and an increase in sublease income. The
Company sublet or terminated leases for office space formerly housing its
administration and Wilmington branch location; the Company also negotiated a
favorable renewal of the lease for its Central Operations office.
Equipment expense decreased $21 thousand primarily due to a significant decrease
in depreciation and in computer maintenance expense associated with the
outsourcing of data processing operations.
Professional fees incurred a significant increase of $309 thousand, or 54%, due
to higher legal and consulting expenses, increased outside audit fees and
increased property management fees.
15
<PAGE>
NONINTEREST EXPENSE (CON'T)
FDIC assessments decreased $330 thousand as a result of lower premium rates.
Non interest expense for the three months ending September 30, 1996 and
September 30, 1995 were unchanged at $3.6 million. Salary expense increased $219
thousand to $1.9 million for the three months ending September 30,1996 as
compared to $1.7 million for the same period in 1995. Professional expenses
increased to $283 for three months ending September 30,1996 as compared to $180
thousand for the same period in 1995. ORE Expense was $111 thousand and $33
thousand for three months ending September 30, 1996 and 1995, respectively.
These increases were equally offset by decreases in categories such as
occupancy, FDIC insurance and other expenses.
FINANCIAL CONDITION
The following table provides a summary comparison of the assets and liabilities
in the Company's consolidated balance sheets as of the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31, Amount Percent
1996 1995 change change
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 10,588 $ 19,920 $ (9,332) -46.85%
Federal funds sold 27,950 47,450 (19,500) -41.10%
Interest-bearing deposits - 100 (100) -
Investment securities 56,679 36,588 20,091 54.91%
Loans, net 165,447 152,364 13,083 8.59%
Premises and equipment, net 2,110 2,371 (261) -11.01%
Other assets 8,946 8,963 (17) -0.19%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $271,720 $267,756 $ 3,964 1.48%
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 73,256 $ 68,074 $ 5,182 7.61%
Interest-bearing demand & savings deposits 77,984 77,085 899 1.17%
Time certificates of deposit 86,690 90,913 (4,223) -4.65%
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 237,930 236,072 1,858 0.79%
- ---------------------------------------------------------------------------------------------------------------------------
Accrued interest payable and other liabilities 4,445 2,225 2,220 99.78%
Total Shareholders' Equity 29,345 29,459 (114) -0.39%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $271,720 $267,756 $ 3,964 1.48%
===========================================================================================================================
</TABLE>
16
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and deposits at correspondent
banks. The Company maintains balances at correspondent banks adequate to cover
daily inclearings and other charges. In accordance with Federal regulations,
reserve balances of $2.6 million were maintained in the form of deposits with
the Federal Reserve Bank at September 30, 1996.
Cash and cash equivalents decreased $9.3 million from $19.9 million at year end
1995 to $10.6 million at September 30, 1996.
FEDERAL FUNDS SOLD
The Company invests or sells its excess cash balances in overnight federal
funds. Federal funds sold decreased $19.5 million, as the Company increased its
investment securities portfolio.
INVESTMENT SECURITIES
Investment securities increased $20.1 million to $56.7 million from $36.6
million at September 30, 1996 and December 31, 1995 respectively. The source of
the funds was primarily the reduction of fed funds sold. The Company invests
primarily in U.S Treasury, US government agency and mortgage-backed securities.
Mortgage-backed securities consisted of Federal Home Mortgage Loan Corporation
(FHLMC), Federal National Mortgage Association (FNMA) and Government National
Mortgage Association (GNMA)
LOANS
The Company makes loans to small to medium-sized businesses in its service
areas. The Company also originates and sells Small Business Administration
("SBA") loans. The interest rates charged for the loans made by the Company
vary with the degree of risk, the size and maturity of the loans, whether the
loan has a fixed or variable rate, the borrowers' depository relationship with
the Company, and prevailing market interest rates. The Company is primarily a
commercial lender, and most of its loans are floating rate loans tied to prime.
The Company may sell these SBA loans for a variety of reasons, including but not
limited to, liquidity needs or market value fluctuations. As of September 30,
1996, the Company had $2.0 million of these SBA loans available for sale which,
if sold at an 8% premium, would result in a gain of $164 thousand pretax and
$96 thousand after-tax income. Therefore, if the Company had sold these loans,
other income would have been higher by approximately $164 thousand.
During the first nine months of 1996, the Company generated $39.7 million in new
loan fundings and purchased a $10.0 million commercial real estate loan
portfolio. The Company experienced significant paydowns/payoffs, particularly
on mini-perm commercial real estate loans, which resulted in a net increase in
loans of $12.6 million, or 8%, during the first nine months of 1996. The
Company sold $5.9 million of SBA loans that were originated during the first
nine months of 1996, as well as $5 million of SBA loans purchased by the Company
in 1995. The Company continues to focus its marketing efforts to small and mid-
sized businesses. The new originations were principally commercial lines of
credit and commercial real estate loans.
17
<PAGE>
LOANS - CON'T
The following tables set forth the maturity distribution of the Company's loan
portfolio (excluding nonaccrual loans) at September 30, 1996, based on remaining
scheduled principal repayments; and the sensitivity of the amounts due to
changes in interest rates for the Company's loan portfolio (excluding nonaccrual
loans):
<TABLE>
<CAPTION>
Maturing in
--------------------------------------
Over one
(Gross loans, in thousands) One year year through Over
or less five years five years Total
-------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Real estate $ 158 $ 1,324 $ 3,913 $ 5,395
Commercial $43,060 $49,833 $56,639 $149,532
Construction $ 3,070 $ 2,662 $ - $ 5,732
Installment $ 2,135 $ 2,153 $ 2,763 $ 7,051
------- ------- ------- --------
Total $48,423 $55,972 $63,315 $167,710
======= ======= ======= ========
<CAPTION>
Repricing in
--------------------------------------
Over one
(Gross loans, in thousands) One year year through Over
or less five years five years Total
-------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Real estate $ 158 $ 1,324 $ 3,913 $ 5,395
Fixed interest rates $15,962 $23,979 $17,389 $ 57,330
Variable interest rates $32,461 $31,993 $45,926 $110,380
------- ------- ------- --------
Total $48,423 $55,972 $63,315 $167,710
======= ======= ======= ========
</TABLE>
The amounts reported in the categories in the tables do not reflect loan
prepayments or other factors which may cause the loans to react in different
degrees and at different times to changes in market interest rates.
18
<PAGE>
ASSET QUALITY
NONACCRUAL, PAST DUE AND MODIFIED LOANS
A certain degree of risk is inherent in the extension of credit. Management has
adopted a policy to maintain the allowance for possible loan and lease losses at
a level considered by management to be adequate to absorb estimated known and
inherent risks in the existing 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. Although management believes the level of the loan loss reserve as
of September 30, 1996, is adequate to absorb losses inherent in the loan
portfolio, declines in the local economy may result in increased losses than
cannot be reasonably predicted at this time.
At September 30, 1996, the loan loss reserve was $5.0 million, as compared to
$5.4 million at December 31, 1995. The ratio of the loan loss reserve to total
outstanding loans and leases was 2.90% at September 30, 1996 and 3.42% at
December 31, 1995. The coverage ratio, or the ratio of loan loss reserves to
nonperforming loans was 159.22% at September 30, 1996 and 121.62% at December
31, 1995, respectively. Nonperforming assets consist of nonperforming loans plus
other real estate owned "OREO" and other foreclosed personal property. The
Company's nonperforming loans fall within two categories: loans past due greater
than 90 days and still accruing interest, and loans on nonaccrual status. The
level of the loan loss reserve reflects management's assessment of the inherent
risk associated with the Company's classified assets and ongoing economic
weakness within the Banks' service areas.
In determining income from loans, the Company generally adheres to a policy of
not accruing interest on loans on which a default of principal or interest has
existed for a period of 90 days or more. The Company's policy is to assign
nonaccrual status to a loan if either (i) principal or interest payments are
past due in excess of 90 days, unless the loan is both well secured and in the
process of collection; or (ii) the full collection of interest or principal
becomes uncertain, regardless of the length of past due status, or (iii) unless
the loan is a SBA guaranteed loan and a deferral period has been negotiated.
When a loan reaches nonaccrual status, any interest accrued on such a loan is
reversed and charged against current income. Loans past due more than 90 days
and still accruing interest increased to $422 thousand at September 30, 1996,
from $101 thousand at December 31, 1995. The balance at September 30, 1996
consists of one commercial loan. At September 30, 1996 and December 31, 1995,
the Company had nonaccrual loans of $2.7 million and $4.3 million, respectively.
The Company's OREO balances decreased to $2.4 million at September 30, 1996 from
$2.7 million at December 31, 1995. Other foreclosed assets were unchanged from
year end at $878 thousand. During the first nine months of 1996, the company
sold nine properties and acquired five new properties. At September 30, 1996 ,
the company's OREO consisted of five commercial properties with carrying values
totaling $1.7 million and two parcels of land zoned for residential purposes
valued at $679 thousand. OREO is carried at the lower of cost or current fair
market value less estimated selling costs in the consolidated balance sheets as
a component of other assets. During the nine months ended September 30, 1996
and 1995, the Company incurred property maintenance expense related to OREO
properties of $139 thousand and $173 thousand, rental income related to OREO
properties of $59 thousand and $56 thousand, respectively. For the nine months
ended September 30, 1996 and 1995. the Company had writedowns, net of gains on
sale, of $161 thousand and ($184) thousand, respectively. The net writedown of
($184) thousand was the result of gain on sale of OREO in the amount of $289
thousand and writedowns of $105 thousand for the nine month period ending
September 30, 1995. The net impact of the preceding activity for the nine
months ending September 30, 1996 and September 30, 1995 was a net OREO expense
of $241 thousand and ($67) thousand, respectively.
Troubled debt restructured credits (TDRs) are loans on which the borrower has
failed to perform under the original terms of the obligation. As of September
30, 1996, and December 31, 1995, the Company had $4.0 million and $3.3 million,
respectively. All but one TDR for $200 thousand are performing in accordance
with their restructured terms. TDRs are considered performing is payments are
contractually met for some minimum period of time, typically at least six
months.
19
<PAGE>
DEPOSITS
Total deposits at September 30, 1996 increased $1.9 million to $237.9 million
from $236.1 million at December 31, 1995. Average deposits increased slightly
for nine months ended September 30, 1996 over the average deposits for the nine
months ended September 30, 1995. The increase is due to the Ventura's time
certificates of deposit (TCDs) promotion at year end and an increase in demand
deposits. This increase was offset by a slight declines in average NOW/MMDA
and savings balances.
<TABLE>
<CAPTION>
Year to Date Year to Date
September 30, 1996 September 30, 1995
--------------------------------- ----------------------------------
Avg. bal. Rate (1) % of total Avg. bal. Rate (1) % of total
- ------------------------------------------------------------------ ----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 66,990 28.68% $ 62,131 27.31%
NOW/MMDA 50,823 2.40% 21.76% 52,902 2.70% 23.25%
Savings 25,638 1.98% 10.98% 28,146 2.39% 12.37%
TCDs 90,109 5.24% 38.58% 84,351 5.00% 37.07%
- ------------------------------------------------------------------ ----------------------------------
Deposits $233,560 3.87% 100.00% $227,530 3.82% 100.00%
================================================================== ==================================
</TABLE>
(1) Annualized.
The following table sets forth the maturities of the Company's time certificates
of deposit outstanding at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1996
Maturing in
- ---------------------------------------------------------------------------------------------------------------
Over three Over six
Three months months through months through Over
or less six months twelve months twelve months Total
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Under $100,000 $18,421 $14,249 $18,715 $4,255 $55,640
$100,000 and over $ 9,285 $ 7,199 $13,905 $ 661 $31,050
- ---------------------------------------------------------------------------------------------------------------
Total $27,706 $21,448 $32,620 $4,916 $86,690
===============================================================================================================
</TABLE>
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 important to liquidity
management.
The Banks maintain a level of liquidity that they consider adequate to meet
their current needs. The Banks' principal sources of liquidity include incoming
deposits, repayment of loans and conversion of investment securities. When
liquidity requirements increase faster than generated, either through increased
loan demand or withdrawal of deposited funds, the Banks may arrange for the sale
of loans and investments, or access their Federal funds lines of credit with
correspondent banks or lines of credit with federal agencies.
Management of the Company has set a minimum liquidity level of 20% as a target.
The Company's average liquid assets (average cash and cash equivalents, federal
funds sold, interest-bearing deposits with other financial institutions and
investment securities, less pledged securities, and outgoing cash letters) as a
percentage of average assets of the Company at the quarter ended September 30,
1996, was 26.6%, as compared to 27.5% for the corresponding period in 1995.
The average loan to deposit ratios for the Company for the month of September
30, 1996, and December 31, 1995, were 72.98% and 64.5%, respectively.
20
<PAGE>
The following table sets forth information concerning the Company's rate
sensitive assets and rate sensitive liabilities as of September 30, 1996. Such
assets and liabilities are classified by the earlier of maturity or repricing
date in accordance with their contractual terms.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT - CON'T
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear in the table.
<TABLE>
<CAPTION>
Three months One year
Three months through through Over
(In thousands) or less twelve months five years five years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 27,950 $ - $ - $ - $ 27,950
Investment securities (1) - 7,056 16,227 33,889 57,172
Loans (2) 115,095 11,247 23,979 17,389 167,710
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 143,045 $ 18,303 $40,206 $51,278 $252,832
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing demand and
savings deposits $ 77,984 $ - $ - $ - $ 77,984
Time certificates of deposit 27,706 54,068 4,916 - 86,690
Other borrowings and interest-
bearing liabilities - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $105,690 $ 54,068 $ 4,916 $ - $164,674
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 37,355 $(35,765) $35,290 $51,278
Cumulative interest rate sensitivity gap 37,355 1,590 36,880 88,158
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets 14.77% 0.63% 14.59% 34.87%
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Excludes the unrealized loss of $ 493
(2) Loans exclude nonaccrual loans of $ 2,687
</TABLE>
At September 30, 1996, the Company's rate sensitive balance sheet was shown to
be in a positive gap position. The gap between assets and liabilities that
reprice within 3 months was $37.4 million or 14.77% of assets. The cumulative
positive gap for 12 months which reflects the total assets less the total
liabilities that re-price during the 12 month period decreases to $ 1.6 million
or .63% of total assets. After one year, the cumulative positive gap increases.
A positive gap implies that the Company is asset sensitive, 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 the 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
Banks have established floors on 31.9% of the variable rate loans to mitigate
the effect on the net interest margin if interest rates decline. The Company's
held-to-maturity investment portfolio consists primarily of fixed-rate mortgage-
backed securities with estimated average lives of between 5 to 6 years.
22
<PAGE>
CAPITAL RESOURCES
The Company and its bank subsidiaries are subject to risk-based capital
regulations adopted by the federal banking regulators in January 1990. These
guidelines are used to evaluate capital adequacy, and are based on an
institution's asset risk profile and off balance sheet exposures, such as unused
loan commitments and standby letters of credit. The regulations require that a
portion of total capital be core, or Tier 1, capital consisting of common
stockholders' equity and perpetual preferred stock, less goodwill and certain
other deductions, with the remaining, or Tier 2, capital consisting of other
elements, primarily subordinated debt, mandatory convertible debts, and
grandfathered senior debt, plus the allowance for loan losses, subject to
certain limitations. As of December 1992, the risk-based capital rules were
further supplemented by a leverage ratio, defined as Tier 1 capital divided by
quarterly average assets after certain adjustments. The minimum leverage ratio
is 3 percent for banking organizations that do not anticipate significant growth
and have well-diversified risk, including no undue interest rate exposure,
excellent asset quality, high liquidity, and good earnings. Other banking
organizations not in this category are expected to have ratios of at least 4 to
5 percent, depending on their particular condition and growth plans. Higher
capital ratios can be mandated by the regulators if warranted by the particular
circumstances or risk profile of a banking organization. In the current
regulatory environment, banking companies must stay "well capitalized", as
defined in the banking regulations, in order to receive favorable regulatory
treatment on acquisitions and favorable risk-based deposits insurance
assessments. Management seeks to maintain capital ratios in excess of the
regulatory minimums. As of September 30, 1996, the capital ratios of the Company
and the Banks exceeded the "well capitalized" thresholds prescribed in the
rules, as reported in the following table:
<TABLE>
<CAPTION>
Company Ventura County National Bank Frontier Bank, N.A
----------------------- ----------------------------- -----------------------
(In thousands) Amount % Amount % Amount %
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio $30,469 11.12% $18,959 10.53% $8,933 10.44%
Regulatory minimum 10,961 4.00% 7,199 4.00% 3,424 4.00%
Excess 19,508 7.12% 11,760 6.53% 5,509 6.44%
Risk-based ratios
Tier 1 capital $30,469 (a) 16.95% (b) $18,959 (a) 16.12% (b) $8,933 (a) 14.45% (b)
Tier 1 minimum 7,190 4.00% (c) 4,705 4.00% (c) 2,473 4.00% (c)
Excess 23,279 12.95% 14,254 12.12% 6,460 10.45%
Total capital $32,749 (d) 18.22% (b) $20,454 (d) 17.39% (b) $9,714 (d) 15.71% (b)
Total capital minimum 14,380 8.00% 9,410 8.00% 4,946 8.00%
Excess 18,369 10.22% 11,044 9.39% 4,768 7.71%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes common shareholders' equity, excluding unrealized losses on
available-for-sale securities.
(b) Risk-weighted assets of $179.7 million for the Company, $117.6 million for
Ventura, and $61.8 million for Frontier were used to compute these
percentages.
(c) Insured institutions, such as the Banks, must maintain Tier 1 capital
ratios of at least 4% to 6%, and Total capital ratios of at least 8% to 10%
in order to be categorized "adequately capitalized" or "well capitalized",
respectively.
(d) Tier 1 capital plus the allowance for loan losses, limited to 1.25% of
total risk-weighted assets.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
On September 15, 1996 the Company entered into a definitive agreement
to be purchased by and merge into City National Corporation
headquartered in Beverly Hills, California. Pursuant the terms of the
agreement, Ventura County National Bancorp shareholders will receive at
their election, cash, stock or a combination thereof valued at $5.03
per share. The aggregate amount of City National Corporation Stock
available to holders who elect to receive City National stock shall
equal approximately 55% of the total consideration paid for Ventura
County National Bancorp. The purchase price of $5.03 represents a
multiple of 1.6 times Ventura County National Bancorp's June 30, 1996
book value. Subject to shareholder and regulatory approval, the
transaction is anticipated to close in the first quarter of 1997.
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Report on Form 8-K dated September 25, 1996
pursuant to Item 5.
SIGNATURE
Pursuant to the requirements 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.
DATE: NOVEMBER 5, 1996 VENTURA COUNTY NATIONAL BANCORP
(Registrant)
By: /s/ Simone Lagomarsino
-----------------------------
Simone Lagomarsino
Senior Vice President, C.F.O.
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,588
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,268
<INVESTMENTS-CARRYING> 9,411
<INVESTMENTS-MARKET> 9,297
<LOANS> 170,397
<ALLOWANCE> (4,950)
<TOTAL-ASSETS> 271,720
<DEPOSITS> 237,930
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,445
<LONG-TERM> 0
0
0
<COMMON> 37,029
<OTHER-SE> (7,684)
<TOTAL-LIABILITIES-AND-EQUITY> 271,720
<INTEREST-LOAN> 12,374
<INTEREST-INVEST> 2,431
<INTEREST-OTHER> 1,163
<INTEREST-TOTAL> 15,968
<INTEREST-DEPOSIT> 4,827
<INTEREST-EXPENSE> 4,827
<INTEREST-INCOME-NET> 11,141
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (86)
<EXPENSE-OTHER> 13,040
<INCOME-PRETAX> (124)
<INCOME-PRE-EXTRAORDINARY> (124)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<YIELD-ACTUAL> 6.12
<LOANS-NON> 2,687
<LOANS-PAST> 422
<LOANS-TROUBLED> 4,047
<LOANS-PROBLEM> 10,526
<ALLOWANCE-OPEN> 5,401
<CHARGE-OFFS> 740
<RECOVERIES> 289
<ALLOWANCE-CLOSE> (4,950)
<ALLOWANCE-DOMESTIC> (4,950)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
