<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 six months ending June 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 August 14, 1996.
Total number of pages: 23
Exhibit index on page: 2
1
<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 22
ITEM 1. Legal Proceedings 22
ITEM 2. Changes in Securities 22
ITEM 3. Defaults Upon Senior Securities 22
ITEM 4. Submission of Matters to a Vote of Security Holders 22
ITEM 5. Other Information 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SELECTED FINANCIAL DATA 23
</TABLE>
2
<PAGE>
Part I.
Item 1. Financial Statements
VENTURA COUNTY NATIONAL BANCORP
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Dollars in thousands) (Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,591 $ 19,920
Federal funds sold 37,050 47,450
Interest-bearing deposits - 100
Securities held-to-maturity, at amortized cost:
fair value 1996 - $9,728; 1995 - nil 9,923 -
Securities available-for-sale, at fair value 34,912 36,588
Loans, net of unearned income 167,841 157,765
Allowance for loan losses (5,056) (5,401)
-------- --------
Loans, net 162,785 152,364
-------- --------
Premises and equipment, net 2,194 2,371
Other assets 8,321 8,963
-------- --------
TOTAL ASSETS $273,776 $267,756
======== ========
LIABILITIES
Deposits:
Noninterest-bearing $ 74,772 $ 68,074
Interest-bearing demand and savings 77,717 77,085
Time certificates of deposit 87,946 90,913
-------- --------
Total deposits 240,435 236,072
-------- --------
Accrued interest payable and other liabilities 4,893 2,225
-------- --------
Total Liabilities 245,328 238,297
-------- --------
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 (7,504) (6,951)
Unrealized loss on available-for-sale securities, net of taxes (1,077) (615)
-------- --------
Total Shareholders' Equity 28,448 29,459
-------- --------
TOTAL LIABILITIES and SHAREHOLDERS' EQUITY $273,776 $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 June 30, Six Months Ending June 30,
---------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans and leases $ 4,130 $4,053 $ 8,178 $ 8,202
Deposits with financial institutions - 8 1 16
Investment securities 762 727 1,499 1,398
Federal funds sold 501 362 908 723
------- ------ ------- -------
Total interest income 5,393 5,150 10,586 10,339
------- ------ ------- -------
INTEREST EXPENSE
Deposits and other borrowings 1,628 1,571 3,264 3,116
------- ------ ------- -------
Total interest expense 1,628 1,571 3,264 3,116
------- ------ ------- -------
NET INTEREST INCOME 3,765 3,579 7,322 7,223
Provision for loan losses - 155 - 510
------- ------ ------- -------
Net interest income after provision for loan losses 3,765 3,424 7,322 6,713
Noninterest income:
Service charges on deposit accounts 288 245 563 480
Loan servicing fees 17 23 47 64
Other fees and charges 104 82 176 153
(Loss) on sales of investment securities (18) 6 (86) 6
Gain on sales of SBA loans 91 63 271 318
Other income 161 15 161 19
------- ------ ------- -------
Total noninterest income 643 434 1,132 1,040
------- ------ ------- -------
Noninterest expense:
Salaries and employee benefits 1,498 1,607 3,059 3,245
Occupancy, net 342 404 736 862
Equipment 158 163 324 355
Professional fees 263 161 639 433
Data processing 152 155 307 313
Other real estate owned 98 (137) 130 (100)
Courier services 59 71 120 140
Office supplies and office expense 139 123 261 247
FDIC/OCC assessments 104 179 204 385
Advertising and promotion 148 116 310 231
Provision for legal judgement 2,500 - 2,500 -
Other 450 492 805 845
------- ------ ------- -------
Total noninterest expense 5,911 3,334 9,395 6,956
------- ------ ------- -------
Income/(loss) before provision for income taxes (1,503) 524 (941) 797
Income tax benefit 624 - 388 -
------- ------ ------- -------
NET INCOME/(LOSS) $ (879) $ 524 $ (553) $ 797
======= ====== ======= =======
Weighted average number of shares outstanding (in thousands) 9,229 6,401 9,228 6,384
======= ====== ======= =======
Earnings/(loss) per share $ (0.10) $ 0.08 $ (0.06) $ 0.12
======= ====== ======= =======
Earnings/(loss) per share, fully-diluted $ (0.10) $ 0.08 $ (0.06) $ 0.12
======= ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
VENTURA COUNTY NATIONAL BANCORP
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ending June 30, 1996 1995
-------------------------
(Dollars in thousands) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (553) $ 797
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses - 510
(Gain) on sale of fixed assets 9 (2)
(Gain) on sale of SBA loans (271) (318)
Loss on sale of available-for-sale investment securities 86 (6)
Net amortization of premiums (accretion of discount) on investment securities 260 (146)
Net change in deferred loan fees (13) (13)
Depreciation and amortization 282 286
Provision for deferred income taxes 55 -
(Increase)/decrease in accrued interest receivable and other assets 10 (463)
(Decrease) in accrued interest payable and other liabilities 2,542 (575)
-------- -------
Net cash provided by operating activities 2,407 70
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale investment securities 13,241 4,193
Proceeds from maturities of available-for-sale investment securities 8,769 534
Proceeds from maturities of held-to-maturity investment securities 1,219 10,164
Purchase of investment securities, available-for-sale (20,684) (4,859)
Purchase of investment securities, held-to-maturity (11,452) (3,997)
Change in Federal funds sold 10,400 (4,250)
Change in deposits with financial institutions 100 (1)
Proceeds from sale of SBA loans 1,983 187
Loans funded, net of payments received (12,693) 8,368
Proceeds from sale of fixed assets and other assets 48 2
Purchase of fixed assets (162) (519)
Proceeds from sale of other real estate owned 1,128 1,920
-------- -------
Net cash provided by (used in) investing activities (8,103) 11,742
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in demand deposits, NOW accounts and savings
accounts 7,330 (8,215)
Increase/(decrease) in time certificates of deposit (2,967) (4,943)
Issuance of common stock 4 5,676
-------- -------
Net cash provided by (used in) financing activities 4,367 (7,482)
-------- -------
Increase/(decrease) in cash and cash equivalents (1,329) 4,330
Cash and cash equivalents, beginning of period 19,920 11,442
-------- -------
Cash and cash equivalents, end of period $ 18,591 $15,772
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Interest payments $ 3,321 $ 3,103
Income tax payments 1 -
OREO foreclosure 674 67
</TABLE>
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 June 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 $1.1 million and $615
thousand, which are included in shareholders' equity on the consolidated
balances sheets at June 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 June
30 1996, and December 31, 1995, are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains (Losses) Value
- ------------- --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
US Treasury securities and obligations
of US government agencies $ 8,981 $ 89 $ - $ 9,070
Mortgage-backed securities 24,926 152 (641) 24,437
Federal Reserve Bank and FHLB Stock 1,405 - - 1,405
------- ------ ----- -------
Total $35,312 $ 241 $(641) $34,912
======= ====== ===== =======
<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
June 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 9,923 - (195) 9,728
Federal Reserve Bank and FHLB Stock - - - -
------ ------ ----- ------
Total $9,923 $ - $(195) $9,728
====== ====== ===== ======
</TABLE>
7
<PAGE>
NOTE 2 - INVESTMENT SECURITIES - CON'T
FHLB 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 $6.7 million on June 30, 1996,
were pledged as required by law.
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>
Six months ended Six months ended
June 30, June 30,
1996 1995
---------------- ----------------
<S> <C> <C>
Average balance of gross loans outstanding $161,895 $161,607
======== ========
Gross loan balance at end of period $167,841 $155,614
======== ========
Allowance at beginning of period $ 5,401 $ 8,261
Charge-offs:
Commercial 303 2,037
Real estate 39 166
Installment 93 157
Losses on loans sold 108
-------- --------
Total charge-offs 543 2,360
Recoveries:
Commercial 180 169
Real estate 5 29
Installment 13 8
Losses on loans sold - -
-------- --------
Total recoveries 198 206
Net charge-offs 345 2,154
Provision charged to expense - 510
Allowance at end of period $ 5,056 $ 6,617
======== ========
Ratio of allowance for loan losses to loans
outstanding at end of period 3.01% 4.25%
Ratio of allowance for loan losses to
nonperforming assets at end of period 93.68% 83.54%
Ratio of annualized net charge-offs to
average loans 0.43% 1.33%
</TABLE>
At June 30, 1996, the Company had loans representing $1.0 million classified as
impaired with a specific reserve of $271 thousand and $2.2 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 six months ended June 30, 1996, was $3.9
million. Loans classified as impaired at June 30, 1996 included $2.1 million of
commercial real estate loans, $822 thousand of commercial loans, $152 thousand
of personal loans and $85 thousand of residential 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 6 months
of 1996 and 1995 on nonaccrual loans had they performed in accordance with their
original terms was approximately $110 thousand and $217 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 $
2.4 million and $2.5 million at June 30, 1996, and December 31, 1995,
respectively. In addition, the Banks had unfunded credit commitments of $ 41.9
million and $36.3 million at June 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>
Six months ending
June 30, June 30,
1996 1995
--------------------------
<S> <C> <C> <C>
Net Income(loss) As reported $(553,000) $797,000
Pro forma $(573,000) $785,000
Primary Earnings(loss) Per Share As reported $ (0.06) $ 0.12
Pro forma $ (0.06) $ 0.12
Fully Diluted Earnings(loss) Per Share As reported $ (0.06) $ 0.12
Pro forma $ (0.06) $ 0.12
</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 a net loss of $553 thousand for the first six months of
1996 compared to earnings of $797 thousand for the first six months of 1995.
Although both of the subsidiary banks were profitable, the loss is the direct
result of an accrual pursuant to a $2.5 million jury verdict against the Company
which is being appealed. The jury ruling came in connection with a damage suit
filed by the Company against a former officer and the Company's former
attorneys, as well as a cross claim which was filed against the Company by the
former officer. The Company received a pretrial settlement of $950 thousand in
connection with its claim against its former attorneys. The net, after tax
effect of the accrual, the related costs, and the receipt of the $950 thousand,
was a charge to earnings of approximately $1.5 million. The earnings growth and
improving asset quality by the subsidiary banks have assisted in reducing the
impact of the accrual.
Net interest income improved slightly in the first six months of 1996. Net
interest income increased to $7.3 million from $7.2 million in the first half of
1996 as compared to the first half of 1995. The net interest margin decreased to
6.08% for the six months ended June 30, 1996, compared to 6.23% 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 $1.1 million and $1.0 million for the six months ended
June 30, 1996, and 1995, respectively. The Company benefited from an additional
$84 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 $6.9 million for the six months ended June 30,
1995, to $9.4 million for the six months ended June 30, 1996. The increase in
operating expense is largely the result of the accrual for the above mentioned
legal action. Absent this accrual, noninterest expense was very little changed
from the prior period. Decreases were observed in Salary and Benefits, FDIC
insurance and Occupancy. These decreases were offset by an increase in
Professional Fees, OREO expense and Advertising.
Total assets were increased slightly to $273.8 million at June 30, 1996, as
compared to $267.8 million at year-end 1995. Gross loans increased to $167.8
million at June 30, 1996, from $157.8 million at December 31, 1995.
The OCC recently completed its regular examination of Frontier and has indicated
that it intends to terminate 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.
The following table summarizes key performance indicators pertaining to the
Company's operating results. Average balances are computed using daily averages.
<TABLE>
<CAPTION>
Six Months ended June 30, 1996 1995
- ------------------------- ---- ----
(In thousands, except per share amounts)
<S> <C> <C>
Return on average assets (1) -0.42% 0.64%
Return on average shareholders' equity (1) -4.11% 7.82%
Net income/(loss) $ (553) $ 797
Earnings/(loss) per share $ (0.06) $ 0.12
Total average assets $264,965 $250,877
</TABLE>
(1) Annualized
11
<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>
June 30, 1996 June 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) $146,697 $ 7,450 10.18% $138,070 $ 7,028 10.26% $(150) $ 572
Real estate, mortgage 6,254 273 8.75% 8,755 361 8.32% 50 (138)
Real estate, construction 1,538 100 13.04% 5,564 359 13.01% 3 (262)
Installment 7,367 353 9.61% 9,127 448 9.90% (13) (82)
Lease financing 39 2 10.28% 91 6 13.30% (1) (3)
-------- ------- ----- -------- ------- ----- ----- -----
Loans, net of deferred fees (3) $161,895 $ 8,178 10.16% $161,607 $ 8,202 10.23% $ (66) $ 42
Investment securities 45,818 1,499 6.58% 46,709 1,398 6.04% 172 (71)
Federal funds sold and other 34,326 909 5.33% 25,459 739 5.85% (176) 346
-------- ------- ----- -------- ------- ----- ----- -----
Total interest earning assets/interest income $242,039 $10,586 8.80% $233,775 $10,339 8.92% $(338) $ 585
-------- ------- ----- -------- ------- ----- ----- -----
Cash and due from banks 17,202 16,060
SFAS 115 unrealized gain (loss)
Allowance for loan losses (5,239) (8,163)
Premises and equipment 2,330 1,886
OREO 2,704 3,167
Other assets 5,929 4,152
Noninterest earning assets 22,926 17,102
-------- ------- ----- -------- ------- ----- ----- -----
Total assets $264,965 $250,877
======== ======= ===== ======== ======= ===== ===== =====
NOW/MMDA 50,342 590 2.35% 52,940 731 2.78% (107) (34)
Savings 25,732 254 1.98% 28,595 340 2.40% (55) (31)
TCDs 91,674 2,420 5.29% 85,526 2,041 4.81% 220 159
Other interest-bearing liabilities 125 4 6.45% (2) (2)
-------- ------- ----- -------- ------- ----- ----- -----
Total interest-bearing liabilities/interest
expense $167,748 $ 3,264 3.91% $167,186 $ 3,116 3.76% $ 136 $ 12
-------- ------- ----- -------- ------- ----- ----- -----
Demand deposits 64,701 61,589
Other liabilities 5,491 1,614
-------- ------- ----- --------
Total liabilities 237,940 230,389
-------- ------- ----- --------
Shareholders' equity 27,025 20,488
-------- ------- ----- -------- ------- ----- ----- -----
Total liabilities and equity $264,965 $250,877
======== ======= ===== ======== ======= ===== ===== =====
NET INTEREST INCOME/(LOSS)/NET INTEREST
MARGIN $ 7,322 6.08% $ 7,223 6.23% $(377) $ 476
</TABLE>
(1) Annualized.
(2) Includes loans held available for sale $2.5 million and $2.0 million at
June 30, 1996 and 1995, respectively.
(3) Includes loans on nonaccrual status of approximately $2.4 million and $8.5
million at June 30, 1996 and 1995, respectively. The amounts of interest
income forgone on loans that were on nonaccrual status at June 30, 1996 and
1995 were approximately $110 thousand and $217 thousand, respectively.
Interest income on loans includes amortization of net loan (costs) or fees
of approximately $(7) thousand and $83 thousand for the quarters ended June
30, 1996 and 1995, respectively.
Net interest income increased slightly to $7.3 million for the six months ended
June 30, 1996, and 1995, respectively, despite a slight decrease in the net
interest margin from 6.23% at June 30, 1995 to 6.08% at June 30, 1996. Average
yields on earning assets for the first six months of 1996 decreased by 12 basis
points to 8.80% from 8.92% for the first six months of 1995. Average funding
costs for the first quarter of 1996 increased by 17 basis points to 3.91% from
3.74% for the first six months of 1995.
12
<PAGE>
NET INTEREST INCOME AND NET INTEREST MARGIN - CON'T
Interest income increased slightly to $10.6 million during the first half of
1996, compared to $10.3 million for the same period in 1995. This increase was
primarily due to an $8.3 million increase in earning assets, the majority of
which was fed funds sold and the commercial, financial, agricultural and SBA
loan portfolio. Total loans remained relatively unchanged at $161.9 million on
average compared to $161.6 million on average in 1995. However the composition
of the loan portfolio changed. Commercial, financial, agricultural and SBA loans
increased and 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 12 basis points. The rate
reduction is evidenced in the commercial, financial, agricultural and SBA loan
portfolio which experienced a reduction of 8 basis points. A large portion of
these loans are tied to the prime rate and the prime rate was 9.0% during most
of the first half of 1995 while the prime rate was 8.25% during most of the
first half of 1996. Additionally the rate on fed funds sold dropped from 5.85%
in the first six months of 1995 to 5.33% during the first six months of 1996
which also had a negative impact on interest income. Average yields on total
loans were relatively unchanged decreasing 7 basis points from 10.23% in 1995 to
10.16% for six months ending June 30, 1996. Average yields on investments
increased by 54 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 52 basis points from the prior year,
primarily as a result of the federal reserve bank lowering short term interest
rates.
Interest expense Increased from $3.1 million during the first six months of 1995
compared to $3.3 million during the first six months of 1996. The increase is
primarily a result of the increased rates paid on the deposit accounts of 15
basis points. This increase was primarily due to the change in the composition
of the deposits. Certificates of deposit, the highest costing deposits increased
$6.1 million from the prior year while the rate paid on them increased 48 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 six
months of 1996 for the NOW accounts, money market accounts and savings accounts.
The NOW and money market rates have decreased 43 basis points from 2.78% to
2.35% while the savings rates have decreased 42 basis points from 2.40% to
1.98%. Total NOW and money market deposits averaged $2.6 million less during the
first six months of 1996 compared to 1995 while savings accounts averaged $2.8
million. Total interest bearing deposits remained relatively unchanged averaging
$167.7 during the first half of 1996 compared to 167.2 in 1995, however non-
interest bearing demand deposits increased $3.2 million on average in the same
period.
PROVISION FOR LOAN LOSSES
During the first six months of 1996, due to the Company's improved asset
quality, the Company recorded no provision for loan losses compared to $155
thousand for the quarter and $510 thousand for the six months ended June 30,
1995. Gross loan charge-offs totaled $389 thousand for the quarter and $543
thousand for the six months ended June 30, 1996, compared to $2.0 million for
the quarter and $2.4 million for the six months ended June 30, 1995. Recoveries
totaled $110 thousand for the quarter and $198 thousand for the six months ended
June 30, 1996, compared to $111 thousand for the quarter and $206 thousand for
the six months ended June 30, 1995. Nonaccrual loans decreased from $4.3 million
at year-end 1995 to $2.4 million at June 30, 1996. Management believes that
current reserve levels are adequate. (Please refer to NOTE 3 -LOANS.)
NONINTEREST INCOME
Noninterest income increased $92 thousand to $1.1 million for the six months
ending June 30, 1996, from $1.0 million for the six months ending June 30, 1995.
Most of the increase is the result of increased service charges and other income
which was partially offset by a nonrecurring loss on the sale of investment
securities of $86 thousand. Service charges on deposit accounts increased $83
thousand for the six months ended June 30, 1996, as the Company increased its
core deposit base. The Company changed its strategy to retain the guaranteed
portion of some of the SBA Loans originated at Frontier Bank which had a
negative impact on non-interest income.(See Management's Discussion "Loans")
13
<PAGE>
NONINTEREST EXPENSE
The following table sets forth information by category on the Company's
noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
Six month periods ended June 30, 1996 1995
-------------------------------- ------- -------
(Dollars in thousands)
<S> <C> <C>
Salaries and employee benefits $3,059 $3,245
Occupancy, net 736 862
Equipment 324 355
Professional fees 639 433
Data processing 307 313
Other real estate owned 130 (100)
Courier services 120 140
Office supplies and office expense 261 247
FDIC/OCC assessments 204 385
Advertising and promotion 310 231
Provision for legal judgement 2,500 -
Other 805 845
------ ------
Total noninterest expense $9,395 $6,956
====== ======
Annualized noninterest expense as a %
of average earning assets 7.81% 5.98%
Efficiency ratio 111.13% 84.18%
</TABLE>
The Company reported noninterest expense of $9.4 million for the first six
months of 1996 as compared to $7.0 million for the first six 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 salaries and benefits, occupancy,
equipment, and FDIC assessments.
The Company continues to make improvements in its overall operating efficiency.
Noninterest expense as a percentage of average earning assets has increased
significantly due to the accrual for legal proceedings posted in the six months
ended June 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 June 30, 1996, mainly as a result of the legal
accrual and losses on sales on investment securities. If the efficiency ratio
calculation is adjusted for these two nonrecurring items, the ratio improved by
99 basis points.
The decrease in salaries for the six months ended June 30, 1996, compared to the
previous year is due to staff reductions as the number of full-time equivalent
staff decreased from 131 at June 30, 1995, to 129 at June 30, 1996.
Occupancy expense decreased $126 thousand, or 15.0%, for the first six months of
1996 from $862 thousand for the first six 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 $31 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 $206 thousand, or 48%, due
to higher legal and consulting expenses, increased outside audit fees and
increased property management fees.
FDIC assessments decreased $181 thousand as a result of lower premium rates.
14
<PAGE>
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>
June 30, December 31, Amount Percent
1996 1995 change change
-------- ------------ --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 18,591 $ 19,920 $ (1,329) -6.67%
Federal funds sold 37,050 47,450 (10,400) -21.92%
Interest-bearing deposits - 100 (100) -
Investment securities 44,835 36,588 8,247 22.54%
Loans, net 162,785 152,364 10,421 6.84%
Premises and equipment, net 2,194 2,371 (177) -7.47%
Other assets 8,321 8,963 (642) -7.16%
-------- -------- -------- ------
TOTAL ASSETS $273,776 $267,756 $ 6,020 2.25%
======== ======== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 74,772 $ 68,074 $ 6,698 9.84%
Interest-bearing demand & savings deposits 77,717 77,085 632 0.82%
Time certificates of deposit 87,946 90,913 (2,967) -3.26%
-------- -------- -------- ------
Total deposits 240,435 236,072 4,363 1.85%
-------- -------- -------- ------
Accrued interest payable and other liabilities 4,893 2,225 2,668 119.91%
Total Shareholders' Equity 28,448 29,459 (1,011) -3.43%
-------- -------- -------- ------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $273,776 $267,756 $ 6,020 2.25%
======== ======== ======== ======
</TABLE>
15
<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 $2.1 million were maintained in the form of deposits with
the Federal Reserve Bank at June 30, 1996.
Cash and cash equivalents decreased $1.3 million from $19.9 million at year end
1995 to $18.6 million at June 30, 1996.
FEDERAL FUNDS SOLD
The Company invests or sells its excess cash balances in overnight federal
funds. Federal funds sold decreased $10.4 million as the Company increased its
investment securities portfolio.
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 changed its strategy to retain the guaranteed portion of some of the
SBA loans originated at Frontier Bank. In order to enhance the Company's
interest income in future periods as these earning assets will continue to
accrue interest income. The Company may sell some or all of these loans later in
the year for a variety of reasons including but not limited to liquidity needs
or market value fluctuations. As of June 30, 1996, the Company had $2.5 million
of these SBA loans available for sale which if sold at an 8% premium would
result in a gain of $204thousand pretax and $120 thousand after-tax income. Had
the Company not changed its strategy other income would have been higher by
approximately $204 thousand.
During the first six months of 1996 the Company generated $29.0 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 $10.0 million or 6% during the first six months of 1996. The Company
sold $2.8 million of SBA loans that were originated during the first 6 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.
16
<PAGE>
LOANS - CON'T
The following tables set forth the maturity distribution of the Company's loan
portfolio (excluding nonaccrual loans) at June 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 $ 194 $ 1,497 $ 3,897 $ 5,588
Commercial 44,633 54,473 50,655 149,761
Construction 923 1,666 - 2,589
Installment 2,016 2,450 3,022 7,488
------- ------- ------- --------
Total $47,766 $60,086 $57,574 $165,426
======= ======= ======= ========
<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>
Fixed interest rates $13,871 $22,714 $13,211 $ 49,796
Variable interest rates 33,895 37,372 44,363 115,630
------- ------- ------- --------
Total $47,766 $60,086 $57,574 $165,426
======= ======= ======= ========
</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.
17
<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 June 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 June 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 3.01% at June 30, 1996, and 3.42% at December
31, 1995. The coverage ratio, or the ratio of loan loss reserves to
nonperforming assets was 93.68% at June 30, 1996, and 67.33% at December 31,
1995, respectively. Nonperforming assets consist of nonperforming loans plus
other real estate owned "OREO" and other foreclosed personalty. 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 an 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 $714 thousand at June 30, 1996, from
$101 thousand at December 31, 1995. This increase includes one loan with a
balance of $280 thousand which is guaranteed by the SBA. At June 30, 1996, and
December 31, 1995, the Company had nonaccrual loans of $2.4 million and $4.3
million, respectively.
The Company's OREO balances decreased to $2.1 million at June 30, 1996 from $2.7
million at December 31, 1995. Other foreclosed assets were unchanged from year
end at $878 thousand. During the first six months of 1996, the company sold six
properties and acquired four new properties. At June 30, 1996 , the company's
OREO consisted of six commercial properties with carrying values totaling $1.2
million and three parcels of land zoned for residential purposes valued at $878
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 six months ended June 30, 1996, and 1995, the Company
incurred net property maintenance expenses related to REO properties of $130
thousand and net income related to REO properties of $100 thousand,
respectively. The income in 1995 was the result of a $140 thousand gain on sale
of OREO.
Troubled debt restructured credits (TDRs) are loans on which the borrower has
failed to perform under the original terms of the obligation. As of June 30,
1996, and December 31, 1995, the Company had $3.9 million and $3.3 million,
respectively, of such loans that have been performing in accordance with their
restructured terms for some minimum period of time, typically at least six
months.
18
<PAGE>
DEPOSITS
Total deposits at June 30, 1996, increased $4.3 million to $240.4 from $236.1
million at December 31, 1995. Average deposits increased slightly for the first
quarter of 1996 due to the Ventura's time certificates of deposit(TCDs)
promotion at year end and offset by slight declines in average demand and
savings deposits.
<TABLE>
<CAPTION>
Quarter ended Fiscal Year Ended
June 30, 1996 December 31, 1995
------------------------------------ ----------------------------------
Avg. bal. Rate (1) % of total Avg. bal. Rate % of total
--------- -------- ---------- --------- ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 61,301 26.88% $ 62,980 27.63%
NOW/MMDA 49,466 2.51% 21.69% 52,895 2.63% 23.21%
Savings 25,542 2.01% 11.20% 27,707 2.36% 12.16%
TCDs 91,703 5.20% 40.22% 84,337 5.12% 37.00%
-------- ----- ------- -------- ----- -------
Deposits $228,012 100.00% $227,919 100.00%
======== ===== ======= ======== ===== =======
(1) Annualized.
</TABLE>
The following table sets forth the maturities of the Company's time certificates
of deposit outstanding at the dates indicated:
<TABLE>
<CAPTION>
June 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 $18,711 $12,846 $21,558 $4,296 $57,411
$100,000 and over $ 6,915 $ 7,011 $15,976 $ 632 30,534
------- ------- ------- ------ -------
Total $25,626 $19,857 $37,534 $4,928 $87,946
======= ======= ======= ====== =======
</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 period ended June 30, 1996,
was 29.3% as compared to 31.3% for the corresponding period in 1995. The average
loan to deposit ratios for the Company for the month of June 30, 1996, and
December 31, 1995, were 69.8% and 64.5%, respectively.
The following table sets forth information concerning the Company's rate
sensitive assets and rate sensitive liabilities as of June 30, 1996. Such assets
and liabilities are classified by the earlier of maturity or repricing date in
accordance with their contractual terms.
19
<PAGE>
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 $ 37,050 $ - $ - $ - $ 37,050
Investment securities (1) 1,000 5,067 3,530 35,682 45,279
Loans (2) 117,241 12,260 22,714 13,211 165,426
-------- -------- ------- ------- --------
Total interest-earning assets $155,291 $ 17,327 $26,244 $48,893 $247,755
-------- -------- ------- ------- --------
INTEREST-BEARING LIABILITIES
Interest-bearing demand and
savings deposits $ 77,717 $ - $ - $ - $ 77,717
Time certificates of deposit 25,626 57,391 4,928 - 87,946
Other borrowings and interest-
bearing liabilities - - - - -
-------- -------- ------- ------- --------
Total interest-bearing liabilities $103,343 $ 57,391 $ 4,928 $ - $165,663
-------- -------- ------- ------- --------
Interest rate sensitivity gap $ 51,948 $(40,064) $21,316 $48,893
Cumulative interest rate sensitivity gap 51,948 11,884 33,200 82,093
Cumulative interest rate sensitivity gap
as a percentage of total interest-
earning assets 20.97% 4.80% 13.40% 33.13%
-------- -------- ------- ------- --------
(1) Excludes the unrealized loss of $ 444
(2) Loans exclude nonaccrual loans of $ 2,415
</TABLE>
At June 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 $51.9 million or 20.97% 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 $ 11.8 million or 4.80% of
total assets. After one year, the cumulative positive gap increases. 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 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 32.5% 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.
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
20
<PAGE>
CAPITAL RESOURCES - CON'T
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 June 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 $30,422 11.22% $18,603 10.32% $9,008 10.34%
Regulatory minimum 10,844 4.00% 7,211 4.00% 3,486 4.00%
Excess 19,578 7.22% 11,392 6.32% 5,522 6.34%
Risk-based ratios
Tier 1 capital $30,422 (a) 17.14% (b) $18,603 (a) 15.85% (b) $9,008 (a) 15.09% (b)
Tier 1 minimum 7,099 4.00% (c) 4,696 4.00% (c) 2,387 4.00% (c)
Excess 23,323 13.14% 13,907 11.85% 6,621 11.09%
Total capital $32,675 (d) 18.41% (b) $20,096 (d) 17.12% (b) $9,763 (d) 16.36% (b)
Total capital minimum 14,197 8.00% 9,391 8.00% 4,775 8.00%
Excess 18,478 10.41% 10,705 9.12% 4,988 8.36%
</TABLE>
- --------------------
(a) Includes common shareholders' equity, excluding unrealized losses on
available-for-sale securities.
(b) Risk-weighted assets of $177.5 million for the Company, $117.4 million for
Ventura, and $59.7 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.
21
<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
On May 22, 1996, the Company held its annual shareholders meeting. The
only item brought before the shareholders for a vote was the re-
election of the following Directors: Ralph R. Bennett, Bart M. Hackley
Jr., Richard A. Lagomarsino, Zella A. Rushing, all of whom were
nominated by the Board of Directors. There were 6,754,480 shares
present either in person or by proxy representing 73.2% of the
outstanding shares. Each of the nominated directors were re-elected.
Ralph R. Bennett received 6,674,534 shares voting for and 79,946
shares voting to withhold his re-election. Bart M. Hackley Jr.
received 6,665,160 shares voting for and 89,420 shares voting to
withhold his re-election. Richard A. Lagomarsino received 6,680,412
shares voting for and 74,068 shares voting to withhold his re-
election. Zella A. Rushing received 6,672,946 shares voting for and
81,534 shares voting to withhold her re-election.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
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: August 14, 1996 VENTURA COUNTY NATIONAL BANCORP
(Registrant)
By: /s/ Simone Lagomarsino
____________________________
Simone Lagomarsino
Senior Vice President, C.F.O.
(Principal Financial and Accounting Officer)
22
<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 three
months ended June 30, 1996, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 18,591
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 37,050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,912
<INVESTMENTS-CARRYING> 9,923
<INVESTMENTS-MARKET> 9,728
<LOANS> 167,841
<ALLOWANCE> (5,056)
<TOTAL-ASSETS> 273,776
<DEPOSITS> 240,435
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,893
<LONG-TERM> 0
37,029
0
<COMMON> 0
<OTHER-SE> (8,581)
<TOTAL-LIABILITIES-AND-EQUITY> 273,776
<INTEREST-LOAN> 8,178
<INTEREST-INVEST> 1,499
<INTEREST-OTHER> 909
<INTEREST-TOTAL> 10,586
<INTEREST-DEPOSIT> 3,264
<INTEREST-EXPENSE> 3,264
<INTEREST-INCOME-NET> 7,322
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (86)
<EXPENSE-OTHER> 9,395
<INCOME-PRETAX> (941)
<INCOME-PRE-EXTRAORDINARY> (941)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<YIELD-ACTUAL> 6.08
<LOANS-NON> 2,415
<LOANS-PAST> 714
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,890
<ALLOWANCE-OPEN> 5,401
<CHARGE-OFFS> 543
<RECOVERIES> 198
<ALLOWANCE-CLOSE> (5,056)
<ALLOWANCE-DOMESTIC> (5,056)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
