-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, A31R0AMhUqMGgNuILdDb/qwou/IsOChDtxVOv7Jifr06kD3Ecc3bl8xNQ0zcEsC/ 8VeLhTt2WnICX1vpxvAWOg== 0000898430-95-000582.txt : 19950420 0000898430-95-000582.hdr.sgml : 19950420 ACCESSION NUMBER: 0000898430-95-000582 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950419 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENTURA COUNTY NATIONAL BANCORP CENTRAL INDEX KEY: 0000744471 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 770038387 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-15814 FILM NUMBER: 95529532 BUSINESS ADDRESS: STREET 1: 500 ESPLANADE DR CITY: OXNARD STATE: CA ZIP: 93030 BUSINESS PHONE: 8059812600 MAIL ADDRESS: STREET 1: 500 ESPLANADE DRIVE CITY: OXNARD STATE: CA ZIP: 93030 10-K405/A 1 FORM 10-K405/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (AMENDMENT NO. 1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended 12-31-94 Commission File No. 0-15814 VENTURA COUNTY NATIONAL BANCORP (Exact Name of Registrant as Specified in its Charter) California 77-00038387 (State or Other Jurisdiction of (I.R.S. Employer ID. Number) Incorporation or Reorganization) 500 Esplanade Drive, Oxnard, California 93030 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (805)981-2600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Title of each class ------------------- Common Stock, $zero par value. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] Aggregate Market Value of Voting Stock Held by Non affiliates of the Registrant: $12,865,510 Number of Shares Outstanding of Each of the Issuer's Classes of Common Stock Common Stock No Par Value - No. of Shares Outstanding at March 17, 1995 - ------------------------- 6,333,835 - --------- Documents Incorporated by Reference: Part II. Items 5,6,7,8 and 9, 1994 Annual Report to Shareholders Part III. Items 10,11,12, and 13, Proxy Statement for 1995 Meeting 1 TABLE OF CONTENTS ____________________________________________________________________________ ____________________________________________________________________________
No. Item Page - --- ---- ---- Part I - ------ 1. Business 1 2. Properties 21 3. Legal Proceeding 23 4. Submission of Matters to a Vote of Security 24 Holders Part II - ------- 5. Market for the Common Stock and Related 24 Shareholder Matters 6. Selected Financial Data 24 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 8. Financial Statements 24 9. Disagreements with Accountants on Accounting and Financial Disclosure 24 Part III - --------- 10. Directors and Executive Officers 24 11. Executive Compensation 24 12. Shareholdings of Certain Beneficial Owners and Management 24 13. Certain Relationships and Related Transactions 24 14. Exhibits, Financial Statement Schedules and Reports on Form 8K 24
Part I ------ Item 1. Business - ----------------- General - ------- The Company is a registered bank holding company conducting business through its two subsidiary banks, Ventura County National Bank ("Ventura") and Frontier Bank, N.A. ("Frontier"). (Ventura and Frontier are sometimes collectively referred to herein as the "Banks.") At December 31, 1994, the Company had total consolidated assets of $257.8 million, total consolidated deposits of $236.3 million and total consolidated shareholders' equity of $19.1 million. The principal executive offices of the Company are located at 500 Esplanade Drive, Oxnard, California 93030, and its telephone number at that address is (805) 981-2600. The Banks are both national banking associations operating in Southern California. Ventura conducts its banking operations through four branch offices located in Ventura County, California, approximately 60 miles northwest of downtown Los Angeles. Ventura's headquarters are located in Oxnard, California, and its branch offices are located in Oxnard, Ventura, Camarillo and Westlake Village. Frontier is based in La Palma in northwestern Orange County and has a branch office in Wilmington in southern Los Angeles County. The Banks provide commercial banking services to small to medium sized businesses, professional firms and individuals in their market areas. Competition - ----------- In an environment of heightened regulatory scrutiny with respect to insured depository institutions such as Ventura and Frontier and expanded bank- like services provided by limited service financial institutions and by nonbank financial service providers, banking and bank related services continue to be an industry of rapid change and intense competition, thereby creating a highly competitive environment for the Company. Large moneycenter banks, super- regional banks, regional banks, multinational banks and mutual funds are the Company's primary competitors. Higher lending limits, wide-reaching advertising campaigns, and access to international money markets allows these organizations greater flexibility in meeting the needs of their customers. The Company competes for deposits and loans with these organizations as well as with local banks, savings and loans, savings banks, credit unions, thrift associations, and mortgage and finance companies. The Company believes its marketing niche to be small and medium-sized businesses with revenues less than $25 million. In order to compete with the other financial institutions in its service areas, the Company principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers' needs. In those instances where the Company is unable to accommodate all of a customer's needs because of regulatory restrictions, the Company will arrange for those services to be provided by its correspondent banks or other companies with whom it has a relationship. Bank of America, N.T. & S.A. and First Interstate Bank of California are the dominant competitors in both Ventura and Frontier's market areas. As of June 30, 1993, Ventura had approximately 7.12% of total bank deposits in Ventura County. As of June 30, 1993, Frontier had 1 approximately 0.17% of total bank deposits in Orange County and 0.08% of total bank deposits in Los Angeles County. Supervision and Regulation - -------------------------- The Company - ----------- The Company, as a registered bank holding company, is subject to regulation under the BHC Act. The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHC Act. The Federal Reserve Board may conduct examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain nonbank subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control or the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the BHC Act and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Supervision and Regulation -- Capital Standards." The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company with another bank holding company. The Company is prohibited by the BHC Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by the Company or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern and is currently prohibited from approving an application by a bank holding company to acquire voting shares 2 of any bank in another state unless such acquisition is expressly authorized by the laws of such other state. Beginning September 29, 1995, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. See "Supervision and Regulation -- Interstate Banking and Branching." Under Federal Reserve Board policy, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. This doctrine has become known as the "source of strength" doctrine. Although the United States Court of Appeals for the Fifth Circuit found the Federal Reserve Board's source of strength doctrine invalid in 1990, stating that the Federal Reserve Board had no authority to assert the doctrine under the Act, the decision, which is not binding on federal courts outside the Fifth Circuit, was recently reversed by the United States Supreme Court on procedural grounds. The validity of the source of strength doctrine is likely to continue to be the subject of litigation until definitively resolved by the courts or by Congress. The Company is also a bank holding company within the meaning of California Financial Code Section 3700. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California Superintendent of Banks. Regulations have not yet been adopted to implement the Superintendent's power under this statute. Finally, the Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, including but not limited to, filing annual, quarterly and other current reports with the Securities and Exchange Commission. The Banks - --------- As national banking associations, the Banks are subject to primary supervision, periodic examination and regulation by the OCC. If, as a result of an examination of a bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of either Bank's operations are unsatisfactory or that either Bank or its management is violating or has violated any law or regulation, various remedies are available to the OCC. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties and to remove officers and directors. FDICIA has provided the FDIC with similar enforcement authority, in addition to its authority to terminate a bank's deposit insurance in the absence of action by the OCC and upon a finding that a bank is in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that its conduct poses a risk to the deposit insurance fund or may prejudice the interest of its depositors. 3 The Banks are insured by the FDIC, which currently insures deposits of each member bank to a maximum of $100,000 per depositor as determined under FDIC regulations. For this protection, each bank pays a semi-annual statutory assessment and is subject to certain of the rules and regulations of the FDIC. See "Supervision and Regulation -- Premiums for Deposit Insurance." The Banks are also subject to certain regulations of the Federal Reserve Board. Various requirements and restrictions under the laws of the United States affect the operations of the Banks. See "Supervision and Regulation -- Effect of Governmental Policies and Recent Legislation." Federal statutes and regulations relate to many aspects of the Banks' operations, including reserves against deposits, deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital requirements. The OCC's statement of policy on risk-based capital requires that banks maintain a ratio of qualifying total capital to risk-weighted assets of not less than 8.00% (at least 4.00% of which must be in the form of Tier 1 capital). The regulations set forth minimum requirements, and OCC has reserved the power to require that banks maintain higher capital ratios. Among other powers, the OCC's regulations provide that capital requirements may be enforced by the issuance of a directive. The OCC's capital adequacy regulations also require that banks maintain a minimum leverage ratio of 3.00% Tier 1 capital to total assets for the most highly rated banks. This ratio is only a minimum. Institutions experiencing or anticipating significant growth or those with other than minimum risk profiles are expected to maintain a leverage ratio of at least 100 to 200 basis points above the minimum level. In addition, higher leverage ratios are required to be considered well-capitalized or adequately capitalized under the prompt corrective action provisions of the FDIC Improvement Act. For a more complete description of the OCC's risk-based capital regulations, see "Supervision and Regulation -- Capital Standards" and "Supervision and Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms." Restrictions on Transfers of Funds to Parent by the Banks - --------------------------------------------------------- Federal Reserve Board policy prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowings or other arrangements that might adversely affect the holding company's financial position. The policy further declares that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Other Federal Reserve Board policies forbid the payment by bank subsidiaries to their parent companies of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual cost plus a reasonable profit). Parent is a legal entity separate and distinct from the Banks. At present, substantially all of Parent's revenues, including funds available for the payments of dividends and other operating expenses, would be dividends paid to Parent from the Banks. The Banks, however, are currently prohibited from paying any dividends without the consent of the OCC. See "Supervision and Regulation -- Potential and Existing Enforcement Actions." 4 There are also statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Banks. Sections 56 and 60 of Title 12 of the United States Code contain the major limitations on the payment of dividends by national banks. Section 56 generally prohibits national banks from paying dividends out of capital, and Section 60 further limits dividends, absent the OCC's approval, to the amount of a national bank's recent earnings. Under the prompt corrective action rules of FDICIA, no depository institution, such as the Banks, may issue a dividend or pay a management fee if it would cause the institution to become undercapitalized. Additionally, a bank holding company controlling a significantly undercapitalized institution may not make any capital distributions without the prior approval of the Federal Reserve Board. Other supervisory actions may be taken against institutions that are significantly undercapitalized, as well as undercapitalized institutions that fail to submit an acceptable capital restoration plan as required by law or that fail in any material respect to implement an accepted plan. See "Supervision and Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms." The OCC also has authority to prohibit the Banks from engaging in what, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the OCC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the OCC and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines could limit the amount of dividends which the Banks or the Company may pay. The Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, Parent or other affiliates, the purchase of or investment in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets from Parent or other affiliates. Such restrictions prevent Parent and such other affiliates from borrowing from the Banks unless the loans are secured by marketable obligations of specified amounts. Further, such secured loans, investments and other transactions between either of the Banks and Parent or any other affiliate are limited to 10% of either Bank's capital and surplus (as defined by federal regulations) and such secured loans, investments and other transactions are limited, in the aggregate, to 20% of either Bank's capital and surplus (as defined by federal regulations). Such transactions must also comply with regulations prohibiting terms that would be preferential to Parent other affiliates of the Banks. There have been no intercompany transactions between Parent and either of the Banks which would implicate these provisions. Effect of Governmental Policies and Recent Legislation - ------------------------------------------------------ Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Banks on their deposits and their other borrowings and the interest rate received by the Banks on loans extended to their customers and securities held in the Banks' portfolio comprise the major portion of the Banks' earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Banks are subject to the influence of local, domestic and foreign economic conditions, including recession, unemploy ment and inflation. 5 The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The likelihood of any major changes and the impact such changes might have on the Bank are impossible to predict. Certain of the potentially significant changes which have been enacted and proposals which have been made recently are discussed below. Capital Standards - ----------------- The OCC has adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively higher credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, term preferred stock, term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies, including the limitation that Tier 2 capital may not exceed Tier 1 capital for determining an institution's capital ratios. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the 6 leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The federal banking regulators have issued a proposed rule to take account of interest rate risk in calculating risk-based capital. The proposed rule includes a supervisory model for taking account of interest rate risk. Under that model, institutions would report their assets, liabilities and off balance sheet positions in time bands based upon their remaining maturities. The federal banking agencies would then calculate a net risk weighted interest rate exposure. If that interest rate risk exposure was in excess of a certain threshold (1% of assets), the institution could be required to hold additional capital proportionate to that excess risk. Alternatively, the agencies have proposed making interest rate risk exposure a subjective factor in considering capital adequacy. Exposures would be measured in terms of the change in the present value of an institution's assets minus the change in the present value of its liabilities and off-balance sheet positions for an assumed 100 basis point parallel shift in market interest rates. However, the federal banking agencies have proposed to let banks use their own internal measurement of interest rate risk if it is declared adequate by examiners. Effective January 17, 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with SFAS No. 109. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- New Accounting Pronouncements." The federal banking agencies recently issued final rules governing banks and bank holding companies, which become effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institutions regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized from taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital 7 purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital and total assets and regulatory capital calculations. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. Prompt Corrective Action and Other Enforcement Mechanisms - --------------------------------------------------------- Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of federal law. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "Well capitalized" "Adequately capitalized" ---------------- ---------------------- Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%;and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4% (or less than 3% if rated CAMEL 1 under the composite rating system.) "Undercapitalized" "Significantly undercapitalized" ---------------- ------------------------------ Total risk-based capital less than 8%; Total risk-based capital less than 6%; Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less Leverage ratio less than 4% (or than 3%; or Leverage ratio less less than 3% if rated CAMEL 1 than 3%. under the composite rating system.) "Critically undercapitalized" --------------------------- Tangible equity to total assets less than 2%. An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject 8 to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt corrective action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. 9 Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease and desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Safety and Soundness Standards - ------------------------------ On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. Additional standards on earnings and classified assets are expected to be issued in the near future. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective on March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state certified or state licensed appraisers for transactions in excess of certain amounts. Appraisals by state certified appraisers are not required for transactions of less than $100,000 if certain criteria are met. In such cases, the real property collateral must be evaluated in accordance with the OCC's 10 Guidelines for Real Estate Appraisal Policies and Review Procedures. State certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing or refinancing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. Premiums for Deposit Insurance - ------------------------------ Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The FDIC has adopted final regulations implementing a risk-based premium system required by federal law. Under the regulations, which cover the assessment periods commencing on and after January 1, 1994, insured depository institutions are required to pay insurance premiums currently within a range of 23 cents per $100 of deposits to 31 cents per $100 of deposits depending on their risk classification. On January 31, 1995, the FDIC issued proposed regulations that would establish a new assessment rate schedule of 4 cents per $100 of deposits to 31 cents per $100 of deposits applicable to members of BIF. There can be no assurance that the final regulations will be adopted as proposed. To determine the risk-based assessment for each institution, the FDIC will categorize an institution as well capitalized, adequately capitalized or undercapitalized based on its capital ratios. A well-capitalized institution is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk- based capital ratio and a 5% Tier 1 leverage capital ratio. An adequately capitalized institution will have at least an 8% total risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage capital ratio. An undercapitalized institution will be one that does not meet either of the above definitions. The FDIC will also assign each institution to one of three subgroups based upon reviews by the institution's primary federal or state regulator, statistical analyses of financial statements and other information relevant to evaluating the risk posed by the institution. Interstate Banking and Branching - -------------------------------- On September 29, 1994, the President signed into law the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon 11 consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. The Interstate Act is likely to increase competition in the Company's market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such likely increased competition will have on the Company's operations. In addition, in March 1995, the OCC issued proposed rules that would permit national banks to use loan production offices for the origination of loans and other nonbranch offices for loan approvals. These proposed rules may result in increased competition by allowing national banks to conduct certain lending activities across state lines. In 1986, California adopted an interstate banking law. The law allows California banks and bank holding companies to be acquired by banking organizations in other states on a "reciprocal" basis (i.e., provided the other state's laws permit California banking organizations to acquire banking organizations in that state on substantially the same terms and conditions applicable to banking organizations solely within that state). The law took effect in two stages. The first stage allowed acquisitions on a "reciprocal" basis within a region consisting of 11 western states. The second stage, which became effective January 1, 1991, allows interstate acquisitions on a national "reciprocal" basis. California has also adopted similar legislation applicable to savings associations and their holding companies. Community Reinvestment Act and Fair Lending Developments - -------------------------------------------------------- The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. Under the CRA, regulated financial institutions are required to help meet the credit needs of their communities, including those of low and moderate income individuals. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. On December 21, 1993, the federal banking agencies issued a proposal to change the manner in which they measure a bank's compliance with its CRA obligations. In 12 October 1994, the federal banking agencies revised the proposal, but no final regulation has yet been approved. On March 8, 1994, the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. Potential and Existing Enforcement Actions - ------------------------------------------ Commercial banking organizations, such as the Banks, and their institution-affiliated parties, which include the Company, are subject to potential enforcement actions by the Federal Reserve Board, the FDIC and the OCC for any unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease- and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of the Banks), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the imposition of restrictions and sanctions under the prompt corrective action provisions of the FDIC Improvement Act. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. Following supervisory examinations of Ventura conducted as of June 30, 1992 and Frontier as of July 30, 1992, Ventura entered into a Formal Agreement with the OCC on March 19, 1993 and Frontier entered into a Consent Order with the OCC on March 29, 1993. The Consent Order replaced the 1992 MOU previously entered into between the OCC and Frontier. The significant common requirements of the Formal Agreement and the Consent Order for Ventura and Frontier include conducting a program to evaluate and improve board supervision and management, developing a program designed to improve the lending staff and loan administration, obtaining current credit information on any loans lacking such information, reviewing and revising loan policies, establishing an independent loan review program including periodic reports to the Board, developing and implementing a program to collect or strengthen criticized assets, reviewing and maintaining an adequate loan loss reserve, developing a new long range strategic plan and annual budget, developing a three-year capital plan, developing and revising liquidity and funds management policy, correcting violations of law cited by the OCC and obtaining approval from the OCC to declare or pay a dividend. The Consent Order requires that Frontier maintain as of May 31, 1993 and beyond a Tier 1 risk based capital ratio of 9.50% and a leverage capital ratio of 7.00%. At December 31, 1994, Frontier's Tier 1 risk based capital ratio was 12.29% and its leverage capital ratio was 8.32%. The Consent Order also requires Frontier to retain a new president and to continue to develop a program of asset diversification. Based upon an examination of Ventura conducted as of July 31, 1993, the Formal Agreement was amended on February 3, 1994 to require Ventura to achieve a Tier 1 risk based capital ratio of 12.00% and a leverage ratio of 7.00% by September 30, 1994. As of September 30, 1994, Ventura's Tier 1 risk 13 based capital ratio was 9.44% and its leverage ratio was 6.88%, which did not meet the higher leverage and Tier 1 Capital ratios required by the Formal Agreement. As of December 31, 1994, approximately $1.4 million additional capital was necessary for Ventura to meet the capital requirements of the Formal Agreement. As required by the Formal Agreement on October 18, 1994, Ventura submitted to the OCC its plan for restoring capital and the OCC did not object to implementation of the plan as proposed. In addition, Ventura applied for and received an extension of the date by which such ratios are required to be achieved to June 30, 1995, provided that the subscription period for its Rights Offering is no longer than six weeks. The Offering is being undertaken in part to ensure that Ventura meets all applicable capital requirements. However, there can be no guarantee that after the Offering, Ventura or Frontier will continue to be in compliance with all of their regulatory requirements. The amendment to the Formal Agreement also requires Ventura to seek Reimbursement of Interest relating to interest paid on a deposit account at Ventura. The deposit account held funds generated by Parent through the sales of commercial paper to Ventura customers. Ventura categorized this account as a savings account, and as such paid interest on such account. However, the OCC concluded that the account should have been categorized as a demand deposit account, on which the payment of interest is not permitted. As a result, the OCC has required Ventura to seek Reimbursement of Interest. Furthermore, Parent has been required by the Reserve Bank to cease all such commercial paper sales, which Parent did in December 1993. Parent entered into the MOU with the Reserve Bank on March 19, 1994. The significant requirements of the MOU include submitting a program to improve the financial condition of the Banks, evaluate and improve board supervision and management, exit the commercial paper market, comply with Federal Reserve Board policy regarding management or service fees assessed by the Company and paid by the Banks and implement steps to improve the effectiveness of the audit and credit review functions. The MOU further restricts the Company from declaring or paying a dividend, incurring any debt, adding or replacing a director or senior executive or repurchasing Company stock without notice to and nondisapproval of the Reserve Bank. The MOU also requires the Company's Board of Directors to establish a committee to monitor compliance with the MOU and ensure that quarterly written progress reports detailing the form and manner of all actions taken to attain compliance with the MOU are submitted. Parent intends to use the proceeds of the Offering to reimburse interest to Ventura. The Reimbursement of Interest will also result in an increase in the capital levels of Ventura. The OCC recently completed a regularly scheduled examination of Ventura and, based upon this examination, indicated in that Ventura was in full or partial compliance with the other requirements of the amended Formal Agreement. Frontier and Parent are in full or partial compliance with or in the process of complying with all of the other items required under the Consent Order and MOU, respectively. Notwithstanding the foregoing, however, Parent, Ventura and Frontier continue their efforts to implement the policies developed to meet the requirements of the MOU, Formal Agreement and Consent Order. 14 Statistical Financial Data - -------------------------- Investment Portfolio - -------------------- The following table sets forth book and market value of investment securities at the dates indicated.
SECURITIES AVAILABLE-FOR-SALE At December 31, --------------------------------------------------------------- 1994 1993 1992 -------------------- ------------------- -------------------- Book Market Book Market Book Market -------- ---------- -------- --------- -------- ---------- (Dollars in thousands) U.S. Government securities..... $ 22,935 $ 22,706 $38,597 $ 38,475 $ -- $ -- U.S. Government Agency -- -- -- -- -- -- securities.................... Mortgage-backed securities..... 8,067 7,551 -- -- -- -- Federal Reserve Bank and FHLB 1,602 1,602 2,300 2,300 -- -- Stock......................... Other equity securities........ -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total investment securities.................... $ 32,604 $ 31,859 $ 40,897 $ 40,775 $ -- $ -- ======== ======== ======== ======== ======== ========
SECURITIES HELD-TO-MATURITY At December 31, --------------------------------------------------------------- 1994 1993 1992 -------------------- ------------------- -------------------- Book Market Book Market Book Market -------- ---------- -------- --------- -------- ---------- (Dollars in thousands) U.S. Government securities..... $ 1,250 $ 1,222 $ -- $ -- $ 3,140 $ 3,209 U.S. Government Agency -- -- -- -- 4,124 4,030 securities.................... Mortgage-backed securities..... 17,525 16,741 -- -- 21,256 19,919 Federal Reserve Bank and FHLB -- -- -- -- 1,825 1,825 Stock......................... Other equity securities........ -- -- -- -- 2,823 2,823 -------- -------- -------- -------- -------- -------- Total.......................... $ 18,775 $ 17,963 $ -- $ -- $ 33,168 $ 31,806 ======== ======== ======== ======== ======== ========
15 The following table sets forth the maturity distribution of the investment portfolio at December 31, 1994:
At December 31, 1994 ----------------------------------------- Weighted Amortized Market Average Cost Value Yield ----------------------------------------- (Dollars in thousands) U.S. Government securities: Within one year...................................... $ 14,707 $ 14,648 5.54% After one but within five years...................... 9,478 9,280 5.92 After five but within ten years...................... -- -- -- After ten years...................................... -- -- -- ----------------------------------------- Total U.S. Government securities................... $ 24,185 $ 23,928 5.71 ========================================= Mortgage-backed securities: Within one year...................................... $ -- -- -- After one but within five years...................... 13,696 $ 12,992 5.44 After five but within ten years...................... 11,896 11,300 6.55 After ten years...................................... -- -- -- ----------------------------------------- Total mortgage-backed securities................... $ 25,592 $ 24,292 6.40 ========================================= Federal Reserve Bank and FHLB Stock Within one year...................................... $ -- $ -- -- After one but within five years...................... -- -- -- After five but within ten years...................... -- -- -- After ten years...................................... 1,602 1,602 7.35 ----------------------------------------- Total Federal Reserve Bank and FHLB Stock.......... $ 1,602 $ 1,602 7.35 =========================================
16 Loan Portfolio - -------------- The following table sets forth the amounts of loans At December 31, outstanding at the dates indicated, according to the type of loan at the dates indicated.
At December 31, ---------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Commercial, Financial and Agriculture.......... $138,193 $ 197,384 $ 221,553 $ 190,076 $ 154,630 Real Estate -Construction...................... 7,734 23,559 31,264 40,860 66,323 Real Estate - Mortgage......................... 11,993 31,202 36,775 37,045 51,449 Installment.................................... 9,897 14,961 21,242 30,068 28,627 Lease Financing, net of unearned income........ 117 408 867 1,218 2,562 ---------- ---------- ---------- ---------- ---------- Total Loans.................................... $ 167,934 $ 267,514 $ 311,701 $ 299,267 $ 301,951 ========== ========== ========== ========== ==========
Maturity of Loans and Sensitivity of Loans to Changes in Interest Rates - ----------------------------------------------------------------------- The following table sets forth by category of loan (including fixed and variable rate loans) the amounts of loans outstanding as of December 31, 1994 which are, based on remaining scheduled repayment of principal, due in less than one year, due in one to five years, or due in more than five years. Loan maturities are based on contractual maturities. (Dollars in thousands).
At December 31, 1994 --------------------------------------------- Loans Maturing In --------------------------------------------- Between Greater Less Than One-Five Than Five One Year Years Years Total --------------------------------------------- Commercial, financial and $ 44,853 $ 72,042 $ 21,298 $ 138,193 agricultural....................... Real Estate: Construction........................ 7,511 223 0 7,734 Mortgage............................ 688 1,651 9,654 11,993 Installment......................... 6,702 3,084 111 9,897 Lease Financing..................... 33 84 0 117 -------- -------- -------- --------- Total....................... $ 59,787 $ 77,084 $ 31,063 $ 167,934 ======== ======== ======== ========= Loans with fixed interest rates..... $ 9,489 $ 15,989 $ 4,277 $ 29,755 Loans with variable interest rates.. 50,298 61,095 28,786 138,179 -------- -------- -------- --------- Total....................... $ 59,787 $ 77,084 $ 31,063 $ 167,934 ======== ======== ======== =========
17 Nonaccrual Loans - ---------------- The following table sets forth nonaccrual loans, loans which were delinquent for 90 days or more but still accruing, loan that are accounted for as "troubled debt restructurings," REO and potential problem loans at the dates indicated.
At December 31, ---------------------------------------------------- 1994 1993 1992 1991 1990 -------- --------- --------- -------- --------- (Dollars in thousands) Loans accounted for on a nonaccrual basis..................... $ 7,612 $ 18,939 $ 2,464 $ 2,142 $ 485 Accruing loans which are 90 days or more past due as to interest or principal............................ 331 552 410 7,296 2,167 TDR's................................ 2(1) 348 380 16 467 -------- -------- ------- -------- ------- Total nonperforming loans............ 7,945 19,839 3,254 9,454 3,119 -------- -------- ------- -------- ------- Foreclosed personalty 878 -- -- -- -- REO.................................. 2,346 2,229 3,940 2,206 -- -------- -------- ------- -------- ------- Total nonperforming assets........... $ 11,169 $ 22,068 $ 7,194 $ 11,660 $ 3,119 ======== ======== ======= ======== =======
- ------- (1) Does not include loans which have been restructured and which were previously on nonaccrual status but have been performing in accordance with their restructured terms for some minimum period of time, typically at least six months. At December 31, 1994 the Company had one such loan, in the amount of $1,966,000. Potential Problem Loans. In addition to the loans disclosed in the above table, at December 31, 1994, the Company had loans in the aggregate amount of $19,769,000 where known information about possible credit problems of the borrowers caused management to have serious concerns about the ability of such borrowers to comply with the present loan repayment terms. 18 Foregone Interest Income. If nonaccrual, past due and restructured loans had been current and performing according to original terms, gross interest income for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 would have increased by $1,609,000, $2,214,000, $728,000, $429,000 and $23,000, respectively. The following summarizes foregone interest income for 1994:
Interest income at original terms.............. $ 2,321,000 Less: Interest income included in 1994 income.. (712,000) ------------ Foregone interest income....................... $ 1,609,000 ===========
Deposits - -------- The Company competes for deposits principally by providing quality customer service at the Banks' branch offices. In order to stabilize its funding sources, the Company has taken action to reduce title and escrow deposits and institutional certificates of deposits as a percentage of total deposits. The Banks are prohibited from purchasing brokered deposits by virtue of their regulatory agreements with the OCC. See "Supervision and Regulation". The following table sets forth information regarding the average monthly deposits and the average rate paid for certain deposit categories for each of the periods indicated. Average balances are computed using daily average balances for each month in the period divided by the number of months in the period.
For the Years ended December 31, --------------------------------------------------------------------------------- 1994 1993 1992 ------------------------- ----------------------- ------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------------------------- ------------------------ ------------------------- (Dollars in thousands) Demand Deposits: Interest-bearing..... $ 58,114 2.65% $ 66,167 2.73% $ 58,254 4.56% Noninterest-bearing.. 75,568 --- 87,383 --- 89,298 --- Savings deposits..... 34,575 2.37% 37,892 2.78% 38,838 3.62% Time deposits........ 104,671 3.72% 142,020 3.88% 145,202 4.81% --------- -------- -------- Total deposits...... $ 272,928 2.29% $ 333,462 2.51% $ 331,592 3.12% ========= ======== =========
19 With respect to the Company's time certificates of deposit of $100,000 or more, at December 31, 1994, such deposits had the following schedule of maturity:
At December 31, 1994 --------------- (Dollars in thousands) Three months or less.. $10,594 Three to six months... 4,811 Six to twelve months.. 8,663 Over twelve months.... 1,265 ------------- Total......... $25,333 =============
Other Borrowings - ---------------- The following table sets forth certain information with respect to the Company's commercial paper activities. As of December 31, 1993, the Company had ceased all commercial paper activity.
1994 1993 1992 ------------------------------- (in thousands) Balance at December 31:......... $ -- $ -- $ 8,860 Maximum month end balance outstanding during the year..... $ -- $ 8,616 $ 22,048 Average amount outstanding during the year................. $ -- $ 6,987 $ 12,805 Weighted average interest rate.. -- 2.66% 3.42%
The Company utilized credit lines with FHLB during 1994 and 1993.
1994 1993 --------------------- (in thousands) Balance at December 31: $ -- $ -- Maximum amount outstanding during the year.. 5,000 8,000 Average amount outstanding during the year.. 129 7,447 Weighted average interest rate.............. 3.55% 3.83%
20 Employees - --------- At December 31, 1994, the Company had 141 full-time employees. None of the employees are covered by a collective bargaining agreement. In addition to cash compensation, the Company compensates its employees with health and accident insurance, vacation and sick leave, and other normal fringe benefits. Effects of Environmental Protection Laws - ----------------------------------------- The Company, to the best of its knowledge, is not aware of any facts relating to its present loan portfolio that reasonably indicates that compliance by the Banks with Federal, state or local provisions relating to the protection of the environment will have a material adverse effect on the financial resources, earnings or competitive position of the Company. Return on Equity and Assets - --------------------------- The following table shows consolidated operating and capital ratios of the Company:
Year Ended December 31 ---------------------- 1994 1993 1992 ------------------------- Return on Assets (1) (0.09%) (3.17%) .18% Return on Equity (2) (1.29%) (45.12%) 2.30% Dividend Payout Ratio 0 0 0 Capital to Assets Ratio (3) 10.48% 7.03% 7.66%
(1) Return on assets: Net income to average total assets. (2) Return on equity: Net income to average total shareholder's equity. (3) Capital to assets ratio: Average shareholders' equity to average total assets. Item 2: Properties - ------------------ Since October 1987, Company headquarters have been located at 500 Esplanade Drive in Oxnard, California. The Company and Ventura's main offices share 31,097 square feet of leased space. The lease which expires in 2002, requires the Company to pay for any allocated property tax or utility cost increases and to adjust the monthly rent annually, based on consumer price index changes. The Company does not have an option to renew this lease. The Company subleased 9,335 square feet of office space in December 1994. The Company anticipates annual cost savings of approximately $134,000. Ventura leases a 3,100 square foot building at 4730 Telephone Road in Ventura under a lease expiring December 1995. The Lessor of the premises is T & H Enterprises, a partnership of which W.E. Hartman, a director of Ventura, is a managing partner. Ventura does not have an option to renew this lease. The Company anticipates that it will attempt to negotiate a renewal of this lease in the third quarter of 1995. Ventura also leases 6,640 square feet at 502 Las Posas Road, Camarillo and 4,000 square feet at 2655 Townsgate Road in Westlake Village. The Camarillo lease expires in June of 1997, with one ten year and two five year options to renew. The Westlake Village lease expires in 2006, with one five year option to renew. Ventura pays its pro rata share of utilities, taxes, common area maintenance and insurance on all branch locations. In addition to annual adjustments tied to the consumer price index, Ventura pays $12,000 annually on the Westlake Village property in lieu of an option to construct an additional 7,000 square foot building. Ventura's Data Processing was and Central Operations is housed in 8,105 square feet at 2125 Knoll Drive in Ventura. The lease expires in December 1995, and the Company is in the process of negotiating a renewal of the lease, which expires on March 31, 2000. The lease provides for annual adjustments of the rent. The Company has the option of terminating the lease without penalty during the final year. As a result of the renegotiation of the lease, the Company anticipates cost savings in 1995 of $44,100. Ventura also leases 3,306 square feet at 175 E. Olive in Burbank for a loan servicing office, and has subsequently subleased 2,400 square feet. This lease expires in April 1995 and the Company intends to vacate this space when the lease expires. 21 Frontier's main office occupies 17,588 square feet at One Centerpointe Drive in La Palma, California. The Company has subsequently subleased an additional 8,559 square feet. Frontier leased an additional 1,668 square feet at One Centerpointe Drive in La Palma under an amendment to the original lease. The lease for the main office expires in December 2006 and the lease for the additional space expires in July 1998. Frontier does not have an option to renew these leases. Frontier also has a branch totaling 9,600 square feet located at 100 Avalon Boulevard in Wilmington subject to a month to month lease. Frontier intends to vacate this property and is in the process of negotiating to purchase a building in the vicinity of its current branch location, which is anticipated to occur in the second quarter of 1995. The Company believes its present facilities are adequate for its present needs and anticipated future growth. The Company believes that, if necessary, it could secure suitable alternative facilities on similar terms without adversely affecting operations. 22 Item 3: Legal Proceedings - ------------------------- There are no material legal proceedings pending other than ordinary routine litigation incidental to the business of the Company to which the Company or its subsidiaries is a party or of which any of their property is a subject, except as described below. Sharon Tillis, Karen Tillis, et al v. Bank of America, N.T. & S.A., et al. -------------------------------------------------------------------------- On January 26 1993, plaintiffs filed a class action lawsuit in Los Angeles County Superior Court, Case No. BC 073448, against Wilshire Computer College ("WCC"), its proprietor Peter Chung, Bank of America, N.T. & S.A. ("Bank of America") and the California Student Aid Commission ("CSAC"). The Complaint was subsequently amended to add Ventura, Marine Midland Bank, N.A. ("Marine Midland") and Educational Funding Services, Inc. ("EFSI"). (Bank of America, Marine Midland, EFSI and Ventura are collectively referred to as the "Bank Defendants.") This action arises out of loans made to students of WCC, which plaintiffs contend were made to induce them to enroll at WCC. CSAC and the Bank Defendants filed a joint demurrer and motion to strike portions of the First Amended Complaint, which was sustained on November 17, 1993, eliminating several theories of liability against the Bank Defendants. Plaintiffs filed a Second Amended Complaint, alleging the following seven causes of action against the Bank Defendants: (1) violations of Business and Professions Code (S)17500 regarding allegations of untrue or misleading statements to prospective students to induce them to enroll at WCC; (2) violations of the Unruh Act, Civil Code (S)1801 regarding allegations that the student loan agreements constituted retail installment sales contracts; (3) violations of Business and Professions Code (S)17200 regarding allegations that defendants engaged in unfair business practices, including unfair advertising, acting without permits and making false representations to students and agencies; (4) fraud, misrepresentation and negligent misrepresentation regarding allegations that employees and representatives of WCC made misrepresentations to students to induce them to enroll at the WCC; (5) breach of contract, breach of the implied covenant of good faith based on the contracts entered into between plaintiffs and Bank Defendants; (6) rescission and restitution based on the contracts entered into between plaintiffs and Bank Defendants; and (7) secondary theories of liability based on causes (1), (3) and (4) regarding allegations of agency, joint venture, aiding and abetting and close connection. CSAC and the Bank Defendants filed a joint demurrer to all causes of action in the Second Amended Complaint which was sustained without leave to amend as to the Bank Defendants and with leave to amend as to CSAC. Plaintiffs did not amend their Second Amended Complaint, however, and the court issued an Order and Judgment of Dismissal of all defendants on October 12, 1994. Notice of Entry of Judgment in this matter was served on October 25, 1994. On December 7, 1994, plainitffs filed a Notice of Appeal with the Court of Appeal of the State of California. Following preparation of the record for appeal, the court clerk will notify the parties of the filing which will determine the briefing schedule. As of the date of this Prospectus, no briefs on appeal have been filed. Plaintiff's counsel has recently attempted to begin settlement negotiations with the Bank Defendants. Based upon the advice of counsel, management does not believe that s will prevail in this lawsuit. No assurances can be given, however, as to the outcome of plaintiffs' appeal. In the event plainitffs ultimately were to prevail, management is currently unable to estimate the amount or range of potential loss. 23 Item 4: Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- There were no matters submitted for vote to the shareholders during the fourth quarter of 1994. Part II - ------- Item 5: Market for Common Stock and Related Shareholder Matters - --------------------------------------------------------------- See "Market for Common Stock and Related Shareholder Matters" section of 1994 Annual Report to shareholders which is incorporated by reference herein. Item 6: Selected Financial Data - ------------------------------- See "Summary Selected Consolidated Financial And Other Data" section of the 1994 Annual Report to shareholders, which is incorporated by reference herein. Item 7: Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 1994 Annual Report to shareholders which is incorporated by reference herein. Item 8: Financial Statements - ---------------------------- See "Financial Statements" section of the 1994 Annual Report to shareholders which is incorporated by reference herein. Item 9: Disagreements on Accounting and Financial Disclosures - ------------------------------------------------------------- Not applicable. Part III - -------- Item 10: Directors and Executives Officers - ------------------------------------------ Contained in the Proxy Statement for the 1995 Annual Meeting which is to be filed within 120 days after December 31, 1994 which is incorporated by reference. Item 11: Executive Compensation - ------------------------------- Contained in the Proxy Statement for the 1995 Annual Meeting which is to be filed within 120 days after December 31, 1994 which is incorporated by reference. Item 12: Shareholdings of Certain Beneficial Owners and Management - ------------------------------------------------------------------ Contained in the Proxy Statement for the 1995 Annual Meeting which is to be filed within 120 days after December 31, 1994 which is incorporated by reference. Item 13: Certain Relationships and Related Transactions - ------------------------------------------------------- 24 Contained in the Proxy Statement for the 1995 Annual Meeting which is to be filed within 120 days after December 31, 1994 which is incorporated by reference. Item 14: Exhibits, Financial Statement Schedules And Reports On Form 8-K - ------------------------------------------------------------------------ INDEX - ----- (a.) 1. The following consolidated financial statements of the Company and its Subsidiaries are included in Item 8 and incorporated by reference to the 1994 Annual Report to shareholders: Consolidated Balance Sheets at December 31, 1994 and December 31, 1993. Consolidated Statements of Operations for the years ended December 31, 1994, 1993, and 1992. Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31, 1994, 1993, and 1992. Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. Notes to the Consolidated Financial Statements. Independent Auditors' Report. 2. Financial Statement Schedules: All schedules to the Consolidated Financial Statements of the Company required by Article 9 of Regulations S-X are included in the Notes to the Financial Statements or are not required under the related instructions, or are inapplicable.
3. Exhibits: 3.1 -- Articles of Incorporation, as amended (1) 3.2 -- Bylaws, as amended (1) 10.1 -- 1991 Incentive Stock Option Plan (2) 10.2 -- Incentive Stock Option Plan (3) 10.3 -- Incentive Stock Option Plan of Conejo (former subsidiary of Ventura) (4) 10.4 -- Non-Qualified Stock Option Plan of Conejo (former subsidiary of Ventura) (5) 10.5 -- 401(k)/Employee Stock Ownership Plan (6) 10.6 -- Salary Continuation Agreement for Cupp (1) 10.7 -- Employment Agreement for Kellogg (7) 10.8 -- Employment Agreement for Raggio (7) 10.9 -- Employment Agreement for Lagomarsino(7) 11 -- Computation of Per Share Earnings 13 -- Annual Report to Shareholders (information not incorporated by reference herein is excluded) 22 -- The following companies are wholly owned subsidiaries of Ventura County National Bancorp: Ventura County National Bank, a National Association Venco Finance Company, a California Corporation Venco Mortgage Co., a California Corporation Ventura Management Services Company Inc. Frontier Bank, N.A., a National Association Frontier Services, Inc., a California Corporation 23.1 -- Consent of Deloitte & Touche LLP 27 -- Financial Data Schedule
25 - ----------------- (1) This exhibit is filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (2) This exhibit is filed as an Exhibit to the Registrant's S-8 Registration Statement File No. 33-9207 and incorporated herein by reference. (3) This exhibit is filed as Exhibit 10.6 to Registrant's Statement File No. 33-9207 and incorporated herein by reference. (4) This exhibit is filed as Exhibit 10.1 to Registrant's Registration Statement File No. 33-28780 and incorporated herein by reference. (5) This exhibit is filed as Exhibit 10.2 to Registrant's Registration Statement File No. 33-28780 and incorporated herein by reference. (6) This exhibit is filed as Exhibit 10.5 to Registrant's Registration Statement File No. 33-28780 and incorporated herein by reference. (7) This exhibit is filed as an Exhibit to the Registrant's S-2 Registration Statement File No. 33-88388 and incorporated herein by reference. (b.) Reports on Form 8-K ------------------ No reports of Form 8-K have been filed during the last quarter of 1994. (c.) Exhibits -------- See Index to Exhibits included in this Annual Report on Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: March 29, 1995. Ventura County National Bancorp (Registrant) By /s/ Richard Cupp RICHARD CUPP President and Chief Executive Officer 26 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dated indicated. Signature Title Date - --------- ----- ---- ____________________ Director March , 1995 Michael Antin /s/ Ralph R. Bennett ____________________ Director March 29, 1995 Ralph R. Bennett /s/ Richard S. Cupp ____________________ Director, President March 29, 1995 Richard S. Cupp and Chief Executive Officer (Principal Executive Officer) /s/ James M. Davis ____________________ Director March 29, 1995 James M. Davis ____________________ Director March , 1995 Bart M. Hackley, Jr. /s/ W.E. Hartman ____________________ Director March 29, 1995 W.E. Hartman ____________________ Chairman of the Board March , 1995 James B. Hussey 27 /s/ Richard A. Lagomarsino __________________________ Director March 29, 1995 Richard A. Lagomarsino ______________________ Director March , 1995 Zella A. Rushing /s/ Raymond E. Swift ______________________ Director March 29, 1995 Raymond E. Swift /s/ Simone Lagomarsino ______________________ Senior Vice March 29, 1995 Simone Lagomarsino President and Chief Financial Officer (Principal Accounting Officer) 28 EX-11 2 COMPUTATION OF PER SHARE INCOME EXHIBIT 11 Computation of per share income (loss)(1) - -----------------------------------------
Year Ended ---------------------------------------- 12/31/94 12/31/93 12/31/92 -------- -------- -------- (Dollars in thousands, except per share data) Net Income (loss) used to compute primary earnings per share........ $ (262) $ (12,087) $ 685 Net Income (loss) used to compute fully diluted earnings per share.. $ (262) $ (12,087) $ 685 Primary Earnings per share: Average Number of shares of: Common Stock and Common Stock equivalents outstanding............. 6,333,835 5,635,941 5,610,792 Primary earnings per share........................................ $ (.04) $ (2.15) $ .12 ========= ========= ========= Fully diluted earnings per share: Weighted average number of Common shares outstanding.............. 6,333,835 5,635,941 5,610,792 Number of shares used to compute fully diluted earnings per share 6,333,835 5,635,941 5,610,792 Fully diluted earnings per share.................................... $ (.04) $ (2.15) $ .12 ========= ========= =========
(1) All per share data has been adjusted to reflect stock dividends to shareholders of record on March 7, 1991 and March 9, 1992. EX-13 3 A/R TO SHAREHOLDERS MARKET PRICE OF COMMON STOCK AND DIVIDENDS The Common Stock is included for quotation on the Nasdaq National Market. The following table sets forth the high and low sales prices for each of the nine quarters ended March 31, 1995, as reported by the Nasdaq National Market.
QUARTER ENDED HIGH LOW ------------- ----- ----- March 31, 1993................................................ $6.50 $3.50 June 30, 1993................................................. 5.00 2.50 September 30, 1993............................................ 3.63 2.00 December 31, 1993............................................. 2.63 1.63 March 31, 1994................................................ 2.38 1.88 June 30, 1994................................................. 3.25 1.75 September 30, 1994............................................ 3.13 2.75 December 31, 1994............................................. 2.94 2.00
As of March 29, 1995, the closing sales price of the Common Stock, as quoted through the Nasdaq National Market, was $2.38. There were 1,057 shareholders of record of the Common Stock atDecember 31, 1994. Parent has never paid a cash dividend on the Common Stock and there can be no assurance that Parent will generate earnings in the future which would permit the declaration of dividends. Parent is prohibited by the terms of the MOU from declaring or paying a dividend without fifteen days' prior notice to the Reserve Bank, which may prohibit the payment of dividends. In addition, the source of any such dividends is likely to be dividends from Ventura or Frontier. The Banks are also limited in the amount of dividends which they may distribute according to the terms of the Formal Agreement and the Consent Order. Pursuant to the Formal Agreement, in the case of Ventura, and the Consent Order, as it pertains to Frontier, the Board of Directors of each Bank may declare or pay dividends only: (i) when their Bank is in compliance with 12 U.S.C. sections 56, 60, and 1831o(d)(1); (ii) when their Bank is in compliance with the capital program developed pursuant to the Formal Agreement and Consent Order; (iii) when such dividend payment is consistent with the capital levels specified in paragraph (1) of the Formal Agreement and Consent Order; and (iv) with prior written approval of the Director of Special Supervision of the OCC, pursuant to the Formal Agreement, and the District Administrator of the OCC, pursuant to the Consent Order. See "Supervision and Regulation--Restrictions on Transfers of Funds to Parent by the Banks." Furthermore, it is anticipated that for the foreseeable future any earnings which may be generated will be retained for the purpose of increasing the Company's capital and reserves in order to facilitate growth. 1 SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following table presents selected consolidated financial and other data of the Company as of and for each of the years in the five years ended December 31, 1994. The data as of and for each of the five years in the period ended December 31, 1994 should be read in conjunction with, and is qualified in its entirety by, the more detailed information included elsewhere, including the Company's audited Consolidated Financial Statements and the Notes thereto.
AT DECEMBER 31, -------------------------------------------------------- 1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PERIOD END BALANCE SHEET DATA: Assets.................. $ 257,755 $ 340,529 $ 400,195 $ 364,734 $ 384,385 Securities held-to- maturity (approximate market value of $17,963 in 1994)................ 18,775 -- 33,168 13,590 24,407 Securities available- for-sale............... 31,859 40,775 -- -- -- Loans and leases, net... 159,673 253,201 307,847 296,422 299,666 Loan loss reserve....... 8,261 14,313 3,854 2,845 2,285 Deposits Interest-bearing demand............... 67,177 99,502 106,108 93,651 82,649 Non interest-bearing demand............... 80,646 101,224 100,688 94,364 82,835 Time.................. 88,519 117,563 141,791 136,471 165,058 Shareholders' equity.... 19,052 20,370 30,388 29,179 27,642 Shares of capital stock outstanding............ 6,333,835 6,333,835 5,614,255 5,282,301 4,802,520 Period end book value per share(1)........... $ 3.01 $ 3.22 $ 5.41 $ 5.21 $ 4.94 ASSET QUALITY: Nonperforming loans..... $ 7,945(2) $ 19,839 $ 3,254 $ 9,454 $ 3,119 Nonperforming assets.... 11,169(2) 22,068 7,194 11,660 3,119 ASSET QUALITY RATIOS: Nonperforming loans to total loans............ 4.73% 7.41% 1.04% 3.16% 1.03% Nonperforming assets to total assets........... 4.33 6.48 1.79 3.15 0.81 Loan loss reserves to nonperforming loans.... 103.98 72.15 118.44 30.09 73.26 Loan loss reserves to nonperforming assets... 73.96 64.86 53.57 24.78 73.26 Classified assets to loan loss reserve plus shareholders' equity... 113.27 186.27 84.71 67.45 47.63 OTHER DATA: Full time equivalent employees.............. 141 199 198 221 249 STATEMENT OF OPERATIONS DATA: Net interest income..... $ 15,868 $ 16,912 $ 17,586 $ 17,931 $ 18,552 Provision for loan losses................. 3,825 16,213 3,404 2,537 743 Other income............ 4,064 4,820 5,512 5,364 4,555 Other expenses.......... 16,084 20,839 18,438 19,239 16,551 Income (loss) before income taxes and cumulative effect of change in accounting method................. 23 (15,320) 1,256 1,519 5,813 Applicable income taxes (benefit).............. 285 (3,233) 571 713 2,476 Cumulative effect of change in accounting method................. -- -- -- -- 286 Net income (loss)....... (262) (12,087) 685 806 3,623 PER SHARE DATA:(1) Income (loss) per share before income taxes and cumulative effect of change in accounting method................. $ (0.04) $ (2.73) $ .22 $ .27 $ 1.03 Net income (loss) per share.................. (0.04) (2.15) .12 .14 .64 SELECTED PERFORMANCE RATIOS: Return on average equity................. (1.29)% (45.12)% 2.30% 2.79% 14.18% Return on average assets................. (0.09) (3.18) 0.18 0.22 1.01 Efficiency ratio(3)..... 80.71 95.89 79.83 82.59 71.63 Noninterest expense to average assets......... 5.45 5.47 4.74 5.14 4.62 Net interest margin..... 5.68 4.81 4.95 5.34 5.77 Net interest rate spread................. 4.80% 3.96% 4.27% 5.06% 4.13%
- -------- (1) All per share data included herein have been adjusted to reflect the stock splits and stock dividends to shareholders of record on February 7, 1990, March 7, 1991 and March 9, 1992 . (2) Does not include $1,966,000 in troubled debt restructuring that were performing at December 31, 1994. (3) The efficiency ratio is other expenses divided by the sum of net interest income before provision for loan losses plus other income. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following presents management's discussion and analysis of the consolidated financial condition and operating results of the Company as of and for the years ended December 31, 1994, 1993 and 1992. The discussion should be read in conjunction with the Company's consolidated financial statements. OVERVIEW In September 1993, new management began taking actions to address the major concerns confronting the Banks. The Company's net loss was reduced to $262,000 or $0.04 per share for 1994, compared with a net loss of $12.1 million in 1993. The significant improvement over 1993 was due a significant decrease in the provision for loan losses, reduced other expenses, gains on the sale of mortgage servicing rights and the merchant card portfolio totaling $1.4 million and $174,000, respectively, and improved net interest margin in 1994. The Company returned to profitability beginning in the third quarter of 1994, and had net income for the second half of 1994 of $615,000, compared to a net loss of $877,000 for the first six months of the year. The Company's net loss for the first two quarters of 1994 was offset by the $1.4 million and $174,000 nonrecurring gains noted above. Earnings improvement in the second half compared to the first half of 1994 was due to a $1.9 million decrease in the provision for loan losses, $1.2 million decrease in other expenses and a $143,000 decrease in income tax provision, which were offset by a decline in other income of $2.1 million. The provision for loan losses was decreased during the second half due to the significant reduction in the level of classified and nonperforming loans in conjunction with the discounted loan sale, the marketing of loan participations and the tightening of underwriting criteria. The decrease in other expenses during the second half was due to the closing of the Company's mortgage origination, mortgage servicing and data processing departments, as well as the replacement during 1994 of ESOP expense with lower 401(k) matching contributions. For these departments, salaries and benefits, occupancy expenses and retirement benefits decreased $597,000, $122,000 and $522,000, respectively, from the first half of 1994 to the second half of 1994. Of the decrease in other income,$1.6 million was due to the gain on sale of mortgage servicing rights and the gain on sale of the merchant card portfolio during the first half of the year. In addition, service charges, loan fees and other fee income decreased during the second half as a result of reduced mortgage activities. Total assets at December 31, 1994 decreased 24.3% from December 31, 1993, as a result of management's efforts to reduce the loan to deposit ratio, increase capital ratios and improve liquidity by tightening underwriting criteria, selling nonperforming loans at a discount and marketing loan participations. Additionally, the Company allowed significant runoff of title and escrow and institutional certificates of deposit during 1994. During the two years ended December 31, 1993, the Company's net income declined significantly, culminating with a net loss of $12.1 million during 1993. The reductions in earnings during 1992 and the loss experienced during 1993 reflect substantial increases in the provision for loan losses necessitated by increased levels of nonperforming assets and net charge-offs. The Company's nonperforming assets were $22.1 million at December 31, 1993, compared with $7.2 million at December 31, 1992. Net charge-offs were $5.8 million for 1993, compared to $2.4 million for 1992. Other expenses also increased during the two year period ended December 31, 1993. The increase in other expenses during 1993 was primarily due to increased expenses associated with REO, increased legal costs related to nonperforming assets and regulatory matters, and the write-off of goodwill at Frontier. Furthermore, during the two year period ended December 31, 1993, net interest income decreased primarily due to reductions in earning assets. In January 1994 and 1995, Southern California experienced major flooding, with Ventura County being one of the areas to incur the greatest amount of rainfall. Additionally, in January 1994, the greater Los Angeles area was seriously affected by a major earthquake, centered in the San Fernando Valley. Although the Company's operations and customers are located in the most seriously affected areas, based upon surveys of customers and employees, management believes that there will be no significant impact on the Company's operations or loan collateral as a result of these natural disasters. FINANCIAL CONDITION Total assets at December 31, 1994 decreased $82.8 million, or 24.3%, from December 31, 1993. Average interest earning assets decreased from $355,090,000 for 1992 to $351,686,000 for 1993, to $227,612,000 for 1994, decreases of 1.0% and 21.1%, respectively. During 1993 and 1994, the balance sheet was reduced for liquidity purposes as well as to achieve compliance with the capital requirements of the Banks' regulatory agreements. Management does not presently intend to further reduce the balance sheet, but anticipates that the additional capital raised as a result of its proposed Rights Offering will be used to support an increase in assets in the 3 post-recessionary environment. Net loans and leases decreased $93.5 million or 37.0% from year end 1993, primarily due to the sale of nonperforming loans and the payoff of other loans that funded deposit outflows. Average loans and leases, net of unearned income, decreased 8.2% to $289,675,000 during 1993 and 26.8% to $212,029,000 during 1994. These decreases were partially offset by increases in average federal funds sold of $8.1 million, or 44.0%, and cash and cash equivalents of $180,000, or 11.0%. At December 31, 1994, the Company had $2,346,000 in REO comprised of three commercial properties with carrying values totaling $2,196,000, one single family residence totaling $100,000 and land zoned for residential purposes of $50,000. The Company sold $4,835,000 of REO during 1994 and incurred REO write down and property maintenance expense of $641,000. At December 31, 1993, the Company had $2,229,000 in REO comprised of seven commercial properties totaling $1,149,000, three single family residences totaling $687,000, land zoned for multi-family purposes of $325,000 and land zoned for residential purposes of $68,000. REO is carried at cost or current fair market value less estimated selling costs, whichever is lower. There were no loans to facilitate the sale of REO during 1994. The Company sold $833,000 of REO during 1993 and incurred REO write down and property maintenance expenses of $1,733,000. As of December 31, 1994, all REO properties held at December 31, 1993 with the exception of one residential lot, had been sold. Loans to facilitate the sale of REO during 1993 totaled $603,000. These loans were made in accordance with the Company's credit policies and under similar terms extended to creditworthy borrowers. Fixed assets, net of depreciation, increased from $1,687,000 at December 31, 1993 to $1,917,000 at December 31, 1994 due to capitalized costs associated with the Company's data processing conversion. Average fixed assets, net of depreciation, decreased from $3,210,000 in 1992 to $2,273,000 in 1993 and $1,862,000 in 1994. The decreases since 1992 have resulted from accumulated depreciation charges and the acceleration of depreciation related to data processing equipment and leaseholds. Total deposits at December 31, 1994 decreased $81.9 million or 25.7% from December 31, 1993, due primarily to the planned run-off of $33.4 million of title and escrow deposits and $18.0 million of institutional and brokered certificates of deposit designed to improve the core deposit base and reduce potentially volatile liabilities. Average deposits during 1994, 1993 and 1992 were $272,928,000, $333,462,000 and $331,592,000, respectively. The 0.6% increase in average deposits from 1992 to 1993 was a result of increased title and escrow deposits to fund increased mortgage origination activity and marketing programs designed to attract interest bearing demand deposits and savings deposits which were offset by a decrease in time certificates of deposit. Average interest-bearing deposits increased from $242,294,000 for 1992 to $246,079,000 for 1993, an increase of 1.6%, then decreased to $197,361,000 for 1994, a decrease of 19.8%. Other categories of deposits also decreased. During 1994, 1993 and 1992, average noninterest bearing deposits totaled $75,568,000, $87,383,000, and $89,298,000, respectively, which represented 27.7%, 26.2%, 26.9%, respectively, of total average deposits. During 1994, average noninterest bearing demand deposits decreased 13.5%, average interest- bearing demand and savings accounts decreased 10.9%, and average time certificates of deposit decreased 26.3%. During 1993, average noninterest bearing demand deposits decreased 2.1% while average interest bearing demand and savings accounts increased 7.2% and average time certificates of deposit decreased 2.2%, compared to 1992. Management believes the reduction in time deposits was also attributable to depositors seeking higher yields on their funds than the Company was offering as a result of the lower interest rate environment. Management believes the 20.3% reduction in savings deposits during 1994 was attributable to customers moving their banking relationships to other institutions when the Company restructured its loan portfolio to reduce concentrations, as well as to the public's reaction to adverse publicity about the Company's losses, management changes and regulatory orders. The Company has taken steps to improve the public's perception of the Bank's financial condition, including marketing campaigns and enhanced business development efforts designed to generate core deposit growth and a renewed expansion of total banking relationships. The Company discontinued the issuance of commercial paper on December 31, 1993. Average commercial paper sold in 1993 was $6,987,000. Average federal funds purchased in 1994 declined to $44,000, compared to $1,376,000 in 1993, a decrease of 96.8%. In 1993, the Company raised $1,555,555 from a private placement of Common Stock and issued the Notes, the proceeds of which were used to retired the remaining principal on a loan to fund the Company's ESOP. Principal outstanding on the Notes was $125,000 at December 31, 1994. Shareholders' equity totalled $19.1 million at December 31, 1994, a decrease of 6.5% from the $20.4 million at December 31, 1993. 4 On December 31, 1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." See "New Accounting Pronouncements." Prior to the adoption of SFAS No. 115, all investment securities were stated at cost, with the exception of investments in mutual funds, which were deemed equity investments, based upon the Company's intent and ability to hold such securities to maturity. At December 31, 1992, the Company did not have a plan or need to sell such securities. Subsequently, however, and in anticipation of the adoption of SFAS No. 115, the Company determined to restructure the investment portfolio. During 1993, the Company sold most of the securities previously identified as held to maturity, substantially all of which were sold in the third or fourth quarter of 1993. In addition, certain securities were purchased and sold during 1993. In connection with the adoption of SFAS No. 115, the Company classified all of its investment securities as available for sale and recorded unrealized loss of $122,000, net of tax effect. During 1994, the Company purchased securities which were classified as either available-for-sale or held-to-maturity at the time of purchase, based on management's intent and ability to hold certain investments to maturity. In addition, the Company transferred mortgage backed securities with unrealized losses of $472,000 from available-for-sale to held-to-maturity during 1994 due to a change in intent to hold the securities to maturity. The unrealized losses will be accreted to shareholders' equity over the average life of the securities. Due to a decline in the market value of investment securities classified as available-for-sale and the unrealized losses on the securities transferred, in accordance with SFAS No. 115, the Company recorded an unrealized loss totaling $1,178,000 in shareholders' equity at December 31, 1994, an increase of $1,056,000, or 865.6%, from December 31, 1993. The Company had no trading securities at December 31, 1994 or 1993. Mortgage-backed securities consisted entirely of Federal Home Loan Mortgage Corporation backed securities. The Company did not have structured notes, CMOs or other derivative products in the portfolio at December 31, 1994 or 1993. RESULTS OF OPERATIONS 1994 COMPARED WITH 1993 Net Interest Income and Net Interest Margin Net interest income decreased by $1,045,000, or 6.2%, to $15,868,000 during 1994 compared to 1993, primarily due to a significant decrease in average interest earning assets. These decreases reflect overall balance sheet shrinkage, beginning in 1993, to improve liquidity as well as to achieve compliance with the capital requirements of the Bank's regulatory agreements. See "Financial Condition." Interest income for 1994 decreased $3,775,000, or 14.6%, over 1993 to $22,136,000 while interest expense decreased $2,732,000, or 30.4%, for the same period to $6,268,000. The decrease in interest income during 1994 was primarily attributable to a significant decrease in interest earning assets, primarily loans. Average interest earning assets were $277,612,000 during 1994, a 21.1% decrease from the average balance of $351,686,000 for 1993. The Company reduced average interest earning assets to fund a planned reduction of volatile deposits, particularly title and escrow deposits and institutional certificates of deposit. Loans, the largest and highest yielding component of earning assets, decreased 26.8% during 1994. The decrease in interest income was slightly offset by an increase in the yield on interest earning assets to 7.97% for 1994 versus a 7.37% yield on interest earning assets for 1993, which reflects increases in market interest rates beginning in 1994 and a change in the mix of assets due to the declining asset base. Average interest earning assets as a percent of total average assets increased from 92.3% for 1993 to 94.0% for 1994. The decrease in interest expense during 1994 was primarily attributable to a 19.8% decrease in average interest bearing deposits from $246,079,000 for 1993 to $197,360,000 for 1994. In addition, the decrease in interest expense was affected by a change in the mix of interest-bearing liabilities. Average noninterest bearing deposits as a percent of total average deposits increased from 26.2% for 1993 to 27.7% for 1994. Average deposits decreased from $333,462,000 for 1993 to $272,928,000 for 1994, a decrease of 18.2%. Average 5 certificates of deposit greater than $100,000 decreased from 16.27% of average total deposits for 1993 to 12.34% of average total deposits for 1994. As a result of the shift in the mix of liabilities, the average cost of funds declined to 3.17% during 1994 compared to a 3.41% cost of funds for 1993, despite increases in market interest rates. As a result of the foregoing, net interest margin increased from 4.81% for 1993 to 5.68% for 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Rate Sensitive Assets/Rate Sensitive Liabilities." The following tables summarize average balances and for interest earning assets and interest bearing liabilities, the amounts of interest earned or paid and the yields or rates for the periods indicated. The average balances in the following table and elsewhere in this Prospectus have been calculated on the basis of the daily account balances.
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992 -------------------------- -------------------------- -------------------------- AVERAGE AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest Earning Assets: Loans(1)............... $212,029 $18,740 8.84% $289,675 $23,190 8.01% $315,659 $26,892 8.52% Investment Securities.. 37,736 2,169 5.75 37,935 1,916 5.06 18,438 1,178 6.39 Interest Bearing Deposits with other Banks................. 1,311 67 5.11 5,645 263 4.66 5,195 256 4.93 Federal Funds Sold 26,536 1,160 4.37 18,431 542 2.94 15,798 625 3.96 -------- ------- -------- ------- -------- ------- Total Interest Earning Assets................. 277,612 22,136 7.97 351,686 25,911 7.37 355,090 28,951 8.52 Noninterest Earning As- sets: Cash and Due from Banks.................. 19,353 25,717 23,649 Premises and Equipment, Net................... 1,862 2,273 3,210 Other Assets........... 7,704 10,594 9,938 Less: Loan Loss Re- serves (11,237) (9,309) (3,263) -------- -------- -------- Total Assets........... $295,294 $380,961 $388,624 ======== ======== ======== Interest Bearing Liabilities: Demand Deposits........ $ 58,114 $ 1,540 2.65 $ 66,167 $ 1,805 2.73 $ 58,254 $ 1,949 3.35 Savings Deposit........ 34,575 821 2.37 37,892 1,052 2.78 38,838 1,404 3.62 Time Deposits.......... 104,671 3,892 3.72 142,020 5,515 3.88 145,202 6,983 4.81 FHLB Borrowings........ 129 5 3.88 7,447 285 3.83 9,431 410 4.35 Federal Funds Purchased............. 44 1 2.27 1,376 44 3.20 265 8 3.02 Commercial Paper Sold.. -- -- -- 6,987 186 2.66 12,805 438 3.42 Notes Payable.......... 125 9 7.20 1,908 112 5.87 2,474 173 6.99 -------- ------- -------- ------- -------- ------- Total Interest Bearing Liabilities........... 197,658 6,268 3.17 263,797 8,999 3.41 267,269 11,365 4.25 -------- ------- -------- ------- -------- ------- Noninterest Bearing Liabilities: Demand Deposit......... 75,568 87,383 89,298 Other.................. 1,965 2,992 2,279 -------- -------- -------- 77,533 90,374 91,577 -------- -------- -------- Shareholders' Equity.... 20,103 26,789 29,778 -------- -------- -------- Total Liabilities and Shareholders' Equity.. $295,294 $380,961 $388,624 ======== ======== ======== Net Interest Income..... $15,868 $16,912 $17,586 ======= ======= ======= Net Interest Margin..... 5.68 4.81 4.95
- -------- (1) Average balances exclude nonaccrual loans. 6
1994 COMPARED TO 1993 1993 COMPARED TO 1992 --------------------------------- -------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO: (1) DUE TO: (1) --------------------- -------------------- VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE ---------- --------- ---------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) Interest Earned On: Loans (2).............. $ (6,832) $ 2,412 $(4,451) $ (2,081) $ (1,621) $(3,702) Investment Securities.. (11) 262 251 987 (247) 740 Interest Bearing Depos- its with other Banks.. (221) 26 (195) 21 (16) 5 Federal Funds Sold..... 354 264 618 77 (160) (83) ---------- --------- ------- --------- --------- ------- Total................. $ (6,710) $ 2,964 $(3,777) $ (996) $ (2,044) $(3,040) ---------- --------- ------- --------- --------- ------- Interest Paid On: Demand Deposits........ $ (213) $ (52) $ (265) $ 216 $ (360) $ (144) Savings Deposits....... (79) (152) (231) (26) (326) (352) Time Deposits.......... (1,388) (236) (1,624) (123) (1,345) (1,468) Federal Funds Pur- chased................ (30) (13) (43) 36 0 36 Other Short Term Borrowings............ (284) 4 (280) (76) (49) (125) Commercial Paper....... 0 (186) (186) (155) (97) (252) Notes Payable.......... (128) 25 (103) (33) (28) (61) ---------- --------- ------- --------- --------- ------- Total................. $ (2,122) $ (610) $(2,732) $ (161) $ (2,205) $(2,366) ---------- --------- ------- --------- --------- ------- Net interest income..... $ (4,588) $ 3,573 $(1,045) $ (835) $ (161) $ (674) ========== ========= ======= ========= ========= =======
- -------- (1) The changes due to simultaneous rate and volume changes have been allocated to rate and volume changes in proportion to the relationship between their absolute dollar amounts. (2) The above table does not include interest income that would have been earned on nonaccrual loans. Other Income Other income decreased $756,000, or 15.7%, during 1994, primarily due to a lower level of mortgage activity. Loan fees decreased 60.6% from $1,192,000 in 1993 to $470,000 in 1994, reflecting a significant decrease in income resulting from mortgage loan originations and servicing during the year. Net mortgage servicing fees were $317,000 in 1994, compared with $618,000 in 1993, a decrease of 48.7%. The Company sold its mortgage servicing rights for a net gain of $1,443,000 in May 1994, which was offset by a write-off of $320,000. The Company also sold its mortgage origination unit in June 1994 in return for residual income on future loan originations by the acquiror. However, due to significant reductions in mortgage origination activity subsequent to the sale, the acquiror closed the mortgage origination unit, and no residual income will be generated. Other income increased in 1994, due to the gain on sale of mortgage servicing and a gain of $174,000 on the sale of the merchant credit card operation in March 1994. These increases were offset by a 21.0% decrease in gains on the sale of SBA loans during 1994. The decreases in gain on sale of SBA loans were due primarily to reduced volume of sales and the deferral of income recognition due to the timing of such sales. Service charges on deposit accounts decreased during 1994 as a result of customers maintaining higher average balances to offset service charge assessments and lower deposit levels. Miscellaneous fee income decreased 40.0% from $590,000 in 1993 to $354,000 in 1994 due to the elimination of the merchant card portfolio during 1994 and certain other recordkeeping services for customers during 1993 and 1994. Miscellaneous fees include merchant card income, cash management service charges, safe deposit box rentals, charges for items such as money orders, cashiers' checks and ATM transactions, and reflect usage and transaction volume. Merchant card income represented 13.0% and 24.9% of total miscellaneous fees during 1994 and 1993, respectively. Other income in the future is anticipated to be lower due to the discontinuance of mortgage activities. Combined net mortgage servicing fees and gains on sale of mortgage loans included in total other income were $589,000, $1,694,000, and $1,806,000 in 1994, 1993 and 1992, respectively. 7 Other Expenses The following table sets forth the Company's other expenses for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1994 1993 1992 ---------- ---------- ---------- (IN THOUSANDS) Salaries and employee benefits................ $ 6,423 $ 7,082 $ 6,797 Net occupancy................................. 2,087 2,578 2,809 Equipment..................................... 830 1,241 1,102 Professional services......................... 1,928 1,878 1,391 Real Estate Owned............................. 641 1,733 479 Amortization of goodwill...................... -- 1,266 105 Customer services............................. 286 382 687 Office supplies and office expense............ 612 800 1,000 FDIC assessments.............................. 878 921 789 Amortization of core deposits................. -- -- 513 Business development and advertising.......... 364 271 371 Other......................................... 2,035 2,687 2,395 ---------- ---------- ---------- Total Other Expense......................... $ 16,084 $ 20,839 $ 18,438 ========== ========== ==========
Other expense decreased $4,755,000, or 22.8%, in 1994, due primarily to a decrease in REO expense, the writeoff of goodwill during 1993, and decreased salaries and employee benefits, occupancy and equipment expenses. REO expense declined $1,092,000 during 1994. The Company incurred writedowns on REO of $1,408,000 during 1993 due to declining market values on properties that were principally raw land and commercial real estate. REO writedowns in 1994 totaled $959,000, which reflects a stabilizing market for distressed properties. The majority of the $1.4 million in writedowns during 1993 were taken approximately at the time that the loans were placed in REO. When a property is taken into REO, if the fair market value of the property is less than the Company's carrying costs, a writedown is taken immediately. However, during 1993, when a property values were continuing to decline, the fair market value of a foreclosed property was not always available at the time of the foreclosure. In all cases, upon foreclosure, the Company obtains an appraisal on a timely basis, generally within 30 to 60 days. To the extent the apprisal indicates further reduction in fair market value, additional writedowns are taken. These writedowns were partially offset by gains on sale of REO of $1,000 in 1993 and $511,000 in 1994. Salary and employee benefit expense decreased by $659,000, or 9.3%, during 1994 primarily as a result of staff reductions. Total full time equivalent employees declined from 199 at December 31, 1993 to 141 at December 31, 1994. The decrease in employee benefits expense during 1994 reflected reduced employee health benefits and the savings of $635,000 compensation expense related to the ESOP loan, which was partially offset by $49,000 in 401(k) matching contributions. The ESOP loan, which remains outstanding, is secured by 185,840 shares of Common Stock held in a suspense account which would be released and allocated to the accounts of participants to the extent the Company makes future ESOP contributions. The Company also adopted Statement of Position ("SOP") 93-6 in 1994 which provides that future ESOP contributions, if any, shall be expensed at fair market value of the Common Stock at the time of the contribution rather than the historical cost of $9.00 per share. Adoption of SOP 93-6 had no impact on results of operations during 1994. The extent to which the adoption of SOP 93-6 will affect the Company's results of operations depends on the level of future ESOP contributions, if any, and the market value of the Common Stock, neither of which can be determined at this time. These salary and employee benefit expense reductions were partially offset by decreased deferred loan origination costs. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 91, the Company defers loan origination costs and amortizes them into loan interest income over the life of each loan. These deferred costs were $457,000 and $207,000 as of December 31, 1994 and 1993, respectively. In addition, occupancy expense decreased $491,000, or 19.0%, during 1994, as a result of a decrease in amortization expense related to leased space and an increase in income from subleases. During 1993 and 1994, 8 the Company sublet or terminated leases for office space formerly housing its commercial lending department, mortgage origination department and administrative personnel. The Company also negotiated a favorable renewal of the lease for its Central Operations office, and allowed the lease for one of its properties to expire during 1995. Equipment expense decreased $411,000, or 33.1%, during 1994, primarily due to a significant decrease in depreciation expense. The Company outsourced its data processing in May 1994 with monthly cost savings of approximately $52,000. The Company outsourced its courier service in September 1993, resulting in monthly reductions of approximately $8,000. Total other expense expressed as a percentage of net interest income plus other income, commonly referred to as the efficiency ratio, was 80.71% for 1994 and 95.89% for 1993. Provision For Loan Losses and Nonperforming Loans The Company maintains a loan loss reserve which it considers adequate to cover the risk of losses in the loan and lease portfolio. The charge to expense is based on management's evaluation of the quality of the loan and lease portfolio, the level of classified loans and leases, total outstanding loans and leases, losses previously charged against the reserve, and current and anticipated economic conditions. Management also considers certain elements in the portfolio and the grading systems used to measure the quality of the portfolio. These factors include industry concentrations and collateral concentrations. In response to the recession in Southern California and the decline in real estate values, the Company assessed the value of collateral for loans, particularly those secured by real estate. If during this process a shortfall ensued, the Company then recorded a charge-off or provided a specific reserve to reflect current market value of the loan. During 1994, the Company expanded the Loan Administration and Special Assets Departments to improve overall asset quality through problem loan management and risk and collateral value identification. In addition, regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's loan loss reserve. Such agencies may require the Company to recognize additions to the loan loss reserve based upon their judgment of the information available to them at the time of their examination. In connection with its examination of Frontier, the OCC required changes in the risk grading of certain credits which resulted in an additional provision for loan losses of $200,000 during 1994. The following table summarizes the Company's loan loss reserves and loan loss experience for the years indicated:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1994 1993 1992 1991 1990 ------ ------ ------ ---- ---- (DOLLARS IN THOUSANDS) Balance at beginning of period................... $14,313 $ 3,854 $ 2,845 $2,285 $1,863 Charge-offs Commercial, financial and agricultural......... 8,705 4,026 1,818 1,696 428 Real estate construction....................... 603 67 -- 100 0 Real estate mortgage........................... 254 1,476 -- 0 0 Installment.................................... 808 570 722 243 39 Lease financing................................ 69 52 3 29 86 ------- ------- ------- ------ ------ Total charge-offs................................ 10,439(1) 6,191 2,543 2,068 553 Recoveries Commercial, financial and agricultural......... 428 409 111 56 199 Real estate construction....................... -- -- -- 0 0 Real estate mortgage........................... 4 1 -- 0 0 Installment.................................... 117 16 38 35 11 Lease financing................................ 13 11 -- 0 22 ------- ------- ------- ------ ------ Total recoveries................................. 562 437 148 91 232 Net charge-offs.................................. 9,877 5,754 2,395 1,977 321 Provision charged to operations.................. 3,825 16,213 3,404 2,537 743 ------- ------- ------- ------ ------ Balance at end of period......................... $ 8,261 $14,313 $ 3,854 $2,845 $2,285 ======= ======= ======= ====== ====== Ratio of net charge-offs to average loans outstanding..................................... 4.66% 1.99% .76% .68% .12%
- -------- (1) Of this amount, $5.0 million was attributable to the bulk loan sale completed in May 1994. (2) Does not include $1,966,000 of TDRs that were performing at December 31, 1994. 9 Over the five year period ended December 31, 1994, the allocation of the allowance for loan losses for commercial, financial and agricultural loans increased steadily to correspond with increases in the total volume of loans and the level of loans losses in this category. The Company's current practice is to make specific allocations to large loans and unspecific allocations to each loan category based on management's risk assessment. The following table sets forth the allocation of the allowance for loan losses by loan category as of the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 --------------- --------------- --------------- --------------- --------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF TOTAL TOTAL TOTAL TOTAL TOTAL BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Commercial, Financial and Agriculture........ $6,704 3.99% $11,361 4.25% $3,132 1.00% $1,925 0.64% $1,427 0.47% Real Estate-- Construction........... 265 0.16 1,916 0.72 242 0.08 254 0.08 436 0.14 Real Estate--Mortgage... 964 0.57 420 0.16 70 0.02 238 0.08 338 0.11 Installment............. 325 0.19 555 0.21 362 0.12 399 0.13 34 0.01 Lease Financing......... 3 0.00 61 0.02 48 0.02 29 0.01 50 0.02 ------ ---- ------- ---- ------ ---- ------ ---- ------ ---- Total Allocated........ $8,261 4.92% $14,313 5.35% $3,854 1.24% $2,845 0.95% $2,285 0.76% ====== ==== ======= ==== ====== ==== ====== ==== ====== ====
In 1994 and 1993, the provision loan losses was $3,825,000 and $16,213,000, respectively. Loans charged off in 1994 and 1993 were $10,439,000 and $6,191,000, respectively, or 4.92% and 2.13% of average outstanding loans and leases, respectively. Of the 1994 chargeoffs, $5.0 million are attributable to the bulk loan sale which occurred in May 1994. In 1994 and 1993, loan and lease recoveries totaled $562,000 and $437,000, respectively, constituting 9% and 17% of the total loans charged off in the respective prior years. The reduction of loan loss provision from 1993 to 1994 is due to a significant decline in the migration of loans to nonaccrual status or REO during 1994. Twenty-two medium term commercial real estate loans aggregating $10.3 million are scheduled to mature during 1995, of which six loans in the aggregate amount of $3.2 million have been classified. All such classified loans have been reevaluated for collateral value within the past six months and additional loan loss reserves have been taken where appropriate. Of the $10.3 million, thirteen loans aggregating $7.0 million were loans for investment properties. Of that amount, nine loans aggregating $5.9 million are anticipated to be refinanced or repaid during 1995. The remaining $1.1 million consists of four loans, none of which exceeds $570,000 principal balance. None of such loans were classified at December 31, 1994, and based upon current information, management does not anticipate that additional loan loss reserves will be assessed with respect to such loans. At December 31, 1994, the loan loss reserve decreased to $8,261,000 compared to $14,313,000 at December 31, 1993. The ratio of the loan loss reserves to outstanding loans and leases at December 31, 1994 and 1993 was 4.92% and 5.35%, respectively. Nonperforming loans are those on which the borrower fails to perform under the original terms of the obligation. The Company's nonperforming loans fall within three categories: loans past due 90 days and still accruing, loans on nonaccrual status and restructured loans. The coverage ratio, or the ratio of loan loss reserves to nonperforming loans, was 103.98% and 72.15%, at December 31, 1994 and 1993, respectively. Loans past due 90 days or more and still accruing totaled $331,000 and $552,000 at December 31, 1994 and 1993, respectively. The decrease in loans past due 90 days and still accruing was primarily attributable to the migration of certain of these loans to nonaccrual status. Loans are automatically placed on nonaccrual status when principal or interest payments are past due greater than 90 days. If a loan is an SBA guaranteed loan and a deferral period has been negotiated or if the 10 loan is in the process of imminent collection in the normal course of business, the Company may remove the loan from nonaccrural status and continue to accrue interest. Loans are placed on nonaccrual status earlier if there is doubt as to the collectibility any amounts due according to the contractual terms of the loan agreement. At December 31, 1994, loans totaling $7,612,000 were on nonaccrual status, compared with $18,939,000 at December 31, 1993. As of December 31, 1994, the Company had restructured loans in the amount of $2,000, compared to $348,000 at December 31, 1993. Total nonperforming loans as a percent of total loans outstanding were 4.73% and 7.41% at December 31, 1994 and 1993, respectively. Income Taxes The Company recorded income tax expense of $285,000 in 1994. Applicable tax expense for 1994 was offset by the utilization of a tax valuation allowance. The charge of $285,000 was taken to increase the tax valuation allowance in accordance with the provisions of SFAS No. 109 and to reflect the filing of the Company's 1993 tax returns. The Company recorded income tax benefit of $3,233,000 in 1993, reflecting available carryback to tax years 1990 through 1992. The Company had a tax asset of $794,000 at December 31, 1994, representing the remaining benefit from the 1994 net operating loss carryback to 1992 and other refundable taxes. In addition, the Company had a net deferred tax asset of $3,115,000 which was fully offset by a tax valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers projected future taxable income and tax planning strategies in making this assessment. If future taxable income were deemed probable, the necessity for the valuation allowance would be reassessed, and all or a portion of the valuation allowance could be reversed in future periods, resulting in income recognition. No assurances may be given, however, as to the likelihood of any such future profitability or the timing or amount of any such income recognition. 1993 COMPARED WITH 1992 Net Interest Income Interest income for the Company decreased 10.5%, from $28,951,000 in 1992 to $25,911,000 in 1993, due to a decline and a change in the mix of interest earning assets. The proportion of interest income contributed by the loan portfolio decreased from 92.9% during 1992 to 89.5% during 1993. The yield on interest earning assets decreased from 8.15% in 1992 to 7.37% in 1993, reflecting increases in lower yielding investment securities as a percentage of total interest-earning assets and decreased interest rates over the two year period. Interest expense decreased 20.8%, from $11,365,000 in 1992 to $8,999,000 in 1993, due to a decline in deposit pay rates. Total deposits decreased 8.7% at December 31, 1993 as compared to December 31, 1992, while average deposits increased .6% from $331,592,000 in 1992 to $333,462,000 in 1993. Average interest bearing deposits increased to 73.8% of average total deposits in 1993 from 73.1% of average total deposits in 1992. The cost of total deposits decreased from 3.1% in 1992 to 2.5% in 1993 due to declines in interest rates during 1993. The cost of other borrowed funds decreased to 3.2% in 1993 from 3.8% in 1992. Average commercial paper sold decreased from $12,805,000 at 3.4% in 1992 to $6,987,000 at 2.7% in 1993. The Company utilized a line of credit with the Federal Home Loan Bank during 1993 resulting in average borrowings of $7,447,000 at 3.8%. 11 In November 1989, the Company borrowed $4,000,000 to fund the ESOP. In 1993, the Company raised $1,555,000 from a private placement of 719,580 shares of Common Stock and the issuance of $125,000 in notes payable and used the proceeds to retire the remaining principal on the ESOP loan. In 1993 and 1992, the Company paid $112,000 and $173,000, respectively, in interest expense on the ESOP loan. The yield on interest earning assets decreased from 8.2% in 1992 to 7.4% in 1993, while the cost of interest bearing liabilities decreased from 4.3% in 1992 to 3.4% in 1993. The net interest margin decreased from 5.0% in 1992 to 4.8% in 1993. Declines in interest rates during 1993 accounted for the decrease in yields and rates on interest sensitive balances from 1992, while the decrease in the net interest margin was a result of a lower ratio of higher yielding assets (loans) to average interest earning assets. Interest foregone on nonaccrual loans in 1993 and 1992 totaled $2,214,000 and $728,000, respectively. Other Income Other income in 1993 totaled $4,820,000, a 12.6% decrease compared to 1992. Service charges on deposits totaled $1,521,000 in 1993, an 11.9% increase over the $1,359,000 total in 1992. The increase in service charges on deposits in 1993 was a result of increased deposits subject to in-depth analyses of funds availability and peer group standards performed by the Company. Loan fees of $1,192,000 in 1993 represented a 23.7% decrease from loan fees in 1992 due to decreasing mortgage origination volume and increased mortgage servicing premium amortization. Miscellaneous fees decreased 6.5% to $590,000 in 1993 from $631,000 in 1992, as a result of the elimination of certain recordkeeping services for customers. Miscellaneous fees include cash management service charges, safe deposit box rentals, charges for items such as money orders, cashiers checks and ATM transactions. Included in the "Other" category in "Other Income" are premiums and fees collected on sales of mortgage loans, SBA loans less gains on sale, student loans and investments. Other income in 1993 totaled $1,131,000, a 24.6% increase over 1992. Other Expenses Total other expense was $20,839,000 in 1993, a 13.0% increase over the 1992 total of $18,438,000. The increase from 1992 to 1993 is primarily due to increased expenses associated with REO of $1.3 million, increased legal costs of $434,000 related to increased nonperforming assets and regulatory matters, and the complete write-off of $1,266,000 of goodwill as a result of the Company's decision to consider the sale of Frontier. Salary and employee benefit expense increased 4.2%, from $6,797,000 in 1992 to $7,082,000 in 1993, due to lower deferred loan origination costs. At December 31, 1993, the Company had 199 full-time equivalent employees, compared to 198 employees at December 31, 1992. Occupancy expense decreased from $2,809,000 in 1992 to $2,578,000 in 1993, due to reduced space occupied by the Company. Equipment expense increased from $1,102,000 in 1992 to 1,241,000 in 1993, as the Company accelerated depreciation on data processing equipment that would not be in use in 1994 as a result of its decision to outsource data processing services. Professional fees increased $487,000, or 35.0%, in 1993 compared to 1992, due to increased legal fees associated with increased levels of nonperforming assets. 12 Other miscellaneous expenses increased from $6,339,000 in 1992 to $8,060,000 in 1993. The significant increase in other miscellaneous expenses from 1992 to 1993 resulted from the write-off of goodwill, increased REO expense and legal costs, and higher FDIC assessment rates. See "Supervision and Regulation-- Premiums for Deposit Insurance." Other miscellaneous expenses in 1992 included a nonrecurring charge of $513,000 to decrease core deposit premiums related to the Westco acquisition. The Company wrote off the core deposit premium as an analysis of these deposits showed significant run off of Westco deposits due, in part, to the closing of a former Westco branch during 1992. As a result of the significant impairment of this intangible asset, the Company did not feel it was prudent to continue carrying such an asset in the financial statements. Provision For Loan Losses and Nonperforming Loans At December 31, 1993, the loan loss reserve increased to $14,313,000 compared to $3,854,000 at December 31, 1992. The ratio of the loan loss reserve to outstanding loans and leases at December 31, 1993 and 1992 was 5.35% and 1.24%, respectively. Loans past due 90 days or more and still accruing totaled $552,000 and $410,000, at December 31, 1993 and 1992, respectively. The decrease in loans past due 90 days and still accruing was primarily attributable to the placement of certain of these loans on nonaccrual status. At December 31, 1993, loans totaling $18,939,000 were on nonaccrual status, compared with nonaccrual loans of $2,464,000 at December 31, 1992. The Company had restructured loans in the amount of $348,000 at December 31, 1993, compared with $380,000 at December 31, 1992. Total nonperforming loans as a percent of total loans outstanding at December 31, 1993 and 1992 were 7.42% and 1.04%, respectively. Income Taxes The Company recorded income tax benefit of $3,233,000 in 1993, reflecting available carryback to tax years 1990 through 1992. Income tax expense totaled $571,000 for the year ended December 31, 1992. The effective combined tax rate for 1992 was 45.5%. INFLATION The assets and liabilities of the Company, except for fixed assets, are virtually all monetary items. Since the Company maintains a small portion of its total assets in fixed assets, 0.7% at December 31, 1994 and 0.5% at December 31, 1993, respectively, the potential for inflated earnings resulting from understated depreciation charges is minimal. High inflation rates could impact other expense items, such as salaries and occupancy expense. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT Liquidity management for banks requires that funds be available to pay all deposit withdrawals and maturing financial obligations and meet credit funding requirements promptly and fully in accordance with their terms. Over a very short time frame, for most banks, including the Banks, maturing assets provide only a limited portion of the funds required to pay maturing liabilities. The balance of the funds required is provided by liquid assets and the acquisition of additional liabilities, making liability management integral to liquidity management in the short term. The Banks maintain levels of liquidity that they consider adequate to meet their current needs. The Banks' principal sources of cash include incoming deposits, the repayment of loans and conversion of investment securities. When cash requirements increase faster than cash is generated, either through increased loan demand or withdrawal of deposited funds, the Banks can arrange for the sale of loan participations and liquidate investments and access their Federal Funds lines of credit with correspondent banks or other lines of credit with federal agencies. Ventura has credit totaling $5.0 million with an unaffiliated financial institution which enables it to borrow federal funds on an unsecured basis. In addition, the Banks have available lines of credit with the Federal Home Loan Bank of San Francisco equal to 15% of Ventura's assets and 10% of Frontier's assets which enables them to borrow funds on a secured basis. At December 31, 1994, the Banks where not obligated to any entity in connection with their federal funds lines of credit. In addition, the Banks could engage in other borrowings, including reverse repurchase agreements. 13 Management of the Company has set a minimum liquidity level of 20% as a target. The Company's average liquid assets (cash and cash equivalents, federal funds sold, interest bearing deposits with other financial institutions and investment securities available for sale, less securities pledged as collateral and outgoing cash letters) as a percentage of average assets of the Company during 1994, 1993, and 1992 was 18.6%, 13.6%, and 15.1%, respectively. Average liquidity for 1994, 1993 and 1992, expressed as a percent of average liabilities, was 20.0%, 16.6% and 16.5%, respectively. From 1992 to 1994, the Company underwent significant balance sheet restructuring, as evidenced by the substantial reductions in assets, loans, and deposits, which accounts for the improved liquidity. The Company's strategic plan is to build its core business by generating and maintaining banking relationships with small and medium sized businesses, professional firms, and individuals within its market area. The loan to deposit ratios for the Company at December 31, 1994, 1993, and 1992 were 67.6%, 79.6%, and 88.3%. Although the Banks do not currently purchase brokered deposits, in the past, both Ventura and Frontier have, to a certain degree, funded growth in their assets through demand deposits of title and escrow companies and by the issuance of certificates of deposit to persons, including other financial institutions, not otherwise having banking relationships with the Banks. Such liabilities are potentially unstable sources of deposits because they are generally attracted to the financial institution based primarily upon the interest rate paid by the institution and the general financial condition of the institution and may be withdrawn on relatively short notice. Furthermore, the proceeds of such liabilities are generally invested in relatively low yielding short term investment securities rather than higher yielding loans. In order to stabilize its funding sources, the Company has taken action to reduce title and escrow deposits and institutional deposits as a percentage of total deposits. Demand deposits owned by title and escrow companies represented 1.2% and 11.3% of total deposits at December 31, 1994 and 1993, respectively. Certificates of deposit held by other financial institutions represented 9.4% and 11.4% of total deposits at December 31, 1994 and 1993, respectively and brokered CDs represented 0% and 1.3% of total deposits at December 31, 1994 and 1993, respectively. There can be no assurances that the Company will be able to replace such deposits with core deposits in the future. Although liability management is the key to liquidity management in the short-term, long-term planning of both assets and liabilities is necessary to manage net yields. To the extent maturities of assets and liabilities do not match in a changing rate environment, net yields may be affected. Parent is a legal entity, separate and distinct from its subsidiaries, and it must separately meet its liquidity needs. Aside from raising capital on its own behalf or borrowing from outside sources, Parent may receive additional funds through dividends paid by, and fees from services provided to its subsidiaries. Future cash dividends paid to Parent by its subsidiaries will depend on each subsidiary's future profitability, capital requirements, restrictions imposed by regulatory agreements and other factors. See "Market Price of Common Stock and Dividends" and "Risk Factors--Dividend Restrictions." In addition, the Formal Agreement requires Ventura to seek reimbursement of $3.4 million in connection with interest paid to Parent on deposits of funds generated by commercial paper sales. See "Risk Factors--Regulatory Agreements and Capital Requirements." At December 31, 1994, Parent had notes payable in the amount of $125,000, scheduled to mature in December 1995, upon which Parent pays interest quarterly. Parent has sufficient cash available to meet its interest obligations during 1995. However, Parent does not presently have sufficient cash to repay the notes payable at maturity. A portion of the net proceeds of this Offering will be utilized to repay the notes payable at maturity. Should this Offering not be successful, Parent would attempt to renegotiate such notes. No assurances can be given that Parent would be successful in any such effort. See "Use of Proceeds." RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES The objective of asset/liability management is to provide stable growth in net interest income while minimizing the impact on earnings due to changes in interest rates. To reduce exposures to interest rate fluctuations, the Company attempts to match its interest sensitive assets with its interest sensitive liabilities, 14 and maintain the maturity and repricing of these assets and liabilities at appropriate levels. Rate sensitive assets and liabilities are those instruments on which interest rates can be adjusted within a short period of time. In recent years, assets and liabilities have become more interest rate sensitive as a result of deregulation and increased volatility in interest rates. One method the Company uses to monitor interest rate sensitivity is by attempting to match rate sensitive assets to rate sensitive liabilities over several time periods by using what is called GAP analysis. Set forth in the table below is the interest rate sensitivity or GAP position of the Company at December 31, 1994.
DECEMBER 31, 1994 -------------------------------------------------- OVER LESS ONE YEAR OVER THAN ONE THROUGH FIVE NONINTEREST YEAR FIVE YEARS YEARS BEARING TOTAL -------- ---------- ------- ----------- -------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks.. $ -- $ -- $ -- $11,442 $ 11,442 Interest-bearing deposits with other financial institutions............ 694 -- -- -- 694 Federal funds sold....... 27,000 -- -- -- 27,000 Securities held-to- maturity................ -- 14,922 4,286 -- 19,208(1) Securities available-for- sale.................... 14,749 8,475 9,380 -- 32,604(1) Loans, net fixed rate.... 9,489 15,989 4,277 -- 29,755 Loans, net floating rate. 130,567 -- -- 7,612 138,179 Noninterest bearing assets.................. -- -- -- 8,312 8,312 Less loan loss reserve... -- -- -- (8,261) (8,261) -------- ------- ------- ------- -------- Total assets........... $182,499 $39,386 $17,943 $19,105 $258,933 ======== ======= ======= ======= ======== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits................ $ -- $ -- $ -- $67,177 $ 67,177 Interest-bearing demand and savings deposits.... 80,646 -- -- -- 80,646 Time certificates of deposit................. 80,344 8,131 44 -- 88,519 Notes payable............ 125 -- -- -- 125 Other liabilities........ -- -- -- 2,236 2,236 Shareholders' equity..... -- -- -- 20,230 20,230(1) -------- ------- ------- ------- -------- Total liabilities and shareholders' equity.. $161,115 $ 8,131 $ 44 $89,643 $258,933 ======== ======= ======= ======= ======== Interest rate-sensitivity gap..................... $ 21,384 $31,255 $17,899 Cumulative interest rate- sensitivity gap......... $ 21,384 $52,639 $70,538 Cumulative interest rate- sensitivity gap as a percent of total assets. 8.3% 20.3% 27.2%
- -------- (1) Excludes unrealized losses of $745,000 on securities available for sale and $433,000 on securities previously available for sale and transferred to securities held to maturity in 1994. At December 31, 1994, the Company had net repriceable assets (a "positive" gap) as measured at one year of 8.26% of total assets. The net repriceable assets over a five-year time horizon totalled approximately $52.6 or 20.3% of total assets. A positive gap implies that the Company is asset sensitive, and therefore subject to a decline in net interest income as interest rates decline. In a relatively stable interest rate environment that follows a rise in interest rates, variable rate liabilities will continue to reprice upward while variable rate assets, particularly those indexed to prime rate, remain relatively constant, thereby narrowing net interest margin. As interest rates decline, variable rate assets reprice at lower rates immediately, while the variable rate liabilities reprice gradually, resulting in a narrowing of the net interest margin. The 1994 results reflect the situation in which net interest margin grew as rates increased, whereas, the 1993 and 1992 results reflect the opposite situation, with declines in net interest margin as rates declined. 15 To measure the earnings impact due to asset sensitivity, the Company has purchased software to simulate the effect of interest rate changes on the balance sheet. The Asset/Liability Committee ("ALCO") of the Company analyzes data produced by this software monthly to determine the most appropriate manner to counter interest rate risk. Based on the recommendations from ALCO, the Company has implemented strategies to counter the impact of changing interest rates, including the establishment of interest rate floors on 47% of the variable rate loans at December 31, 1994 to mitigate the effect on net interest margin if rates decline, and also by investing in fixed rate investment securities. Management believes that these strategies are effective in minimizing the impact on earnings from changes in interest rates. CAPITAL RESOURCES The FDIC Improvement Act requires that for banks to be considered "well capitalized", they must maintain a leverage ratio of 5.0%, a Tier 1 capital ratio of 6.0% and a risk-based capital ratio of 10.0% and not be under a written agreement or capital directive. Banks will be considered "adequately capitalized" if they maintain a leverage ratio of 4.0%, a Tier 1 risk-based capital ratio of 4.0%, and a total risk-based capital ratio of 8.0%. The Consent Order and the Formal Agreement require the Banks to maintain capital ratios at levels substantially higher than the levels generally applicable to other national banks. Frontier is required to maintain a Tier 1 risk-based capital ratio of 9.50% and a leverage capital ratio of 7.00%. Ventura is required to maintain a Tier 1 risk-based capital ratio of 12.00% and a leverage capital ratio of 7.00%. See "Supervision and Regulation--Potential and Existing Enforcement Actions". Tier 1 capital consists primarily of common stock, retained earnings and perpetual preferred stock, less goodwill and other ineligible items. Tier 2 capital is comprised limited life preferred stock, subordinated debt and loan loss reserves limited to 1.25% of total risk weighted assets. Total risk-based capital is Tier 1 plus Tier 2 capital; however, at least 50% of total capital must be comprised of Tier 1 capital. The capital standards specify that assets, including certain off-balance items be assigned risk weights based on credit and liquidity risk which range from 0% risk weight for cash to 100% risk weight for commercial loans and certain other assets. The leverage ratio is Tier 1 capital to adjusted average assets. The Tier 1 capital ratio is Tier 1 capital to risk weighted assets. The total risk- based capital ratio is Tier 1 plus Tier 2 capital to risk weighted assets. The following sets forth the capital ratios for the Company and the Banks at December 31, 1994 and 1993.
DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ----------------- Company(1) Risk-based Capital Ratio............ 12.61% 8.73% Tier 1 Capital Ratio................ 11.32% 7.43% Leverage Ratio...................... 7.53% 6.02% Ventura Risk-based Capital Ratio............ 12.21% 7.83% Tier 1 Capital Ratio................ 10.92% 6.52% Leverage Ratio...................... 7.21% 5.49% Frontier(1) Risk-based Capital Ratio............ 13.57% 11.31% Tier 1 Capital Ratio................ 12.29% 10.03% Leverage Ratio...................... 8.32% 7.30%
- -------- (1) In accordance with recent guidance from the Federal Financial Institutions Examination Council, regulatory capital includes $756,000, which represents a $792,000 cumulative effect adjustment to reduce the balance of SBA loans, a portion of which was offset by income recognized pursuant to generally accepted accounting principles. This amount is not reflected in the accompanying financial statements prepared in accordance with generally accepted accounting principles. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 109, "Accounting for Income Taxes," superseded SFAS No. 96, both of which changed the method of accounting for income taxes from the deferred method previously required by Accounting Principles Board Opinion No. 11, to the asset/liability method. The asset/liability method primarily 16 emphasizes the valuation of current and deferred tax assets and liabilities. The asset/liability method focuses first on the balance sheet, and the amount of income tax expense is determined by changes in the elements of the balance sheet. The amount of income tax expense for a period is the amount of income taxes currently payable or refundable, plus or minus the change in aggregate deferred tax assets and liabilities. A deferred tax asset or liability is computed based on the differences between the book and tax bases of an asset or liability and the reversal of these differences in future years applying current tax laws. The Company adopted SFAS No. 96 as of January 1, 1990, but elected not to restate any prior periods. The effect of the change on total income tax provision was not significant. The Company adopted SFAS No. 109 as of January 1, 1992. The effect on the financial statements of adopting SFAS No. 109 was not material. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of the Loan." SFAS No. 114 prescribes the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings. SFAS No. 114 states that a loan is impaired when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contracted terms of the loan agreement.A creditor is required to measure impairment by discounting expected future cash flows at the loan's effective interest rate, or by reference to an observable market price, or by determining that foreclosure is probable. SFAS No. 114 also clarifies the existing accounting for in-substance foreclosures by stating that a collateral-dependent real estate loan would be reported as real estate owned only if the lender had taken possession of collateral. SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing methods for recognizing interest income on an impaired loan. To accomplish that it eliminated the provisions in SFAS No. 114 that described how a creditor should report income on an impaired loan. SFAS No. 118 did not change the provisions in SFAS No. 114 that require a creditor to measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. SFAS No. 114 is effective for financial statements issued for fiscal years beginning after December 15, 1994. Although earlier application is encouraged, it is not required. SFAS No. 118 is effective concurrent with the effective date of SFAS No. 114. Although earlier application is encouraged, it is not required. The Company will adopt SFAS No. 114 during the first quarter of 1995 and management's preliminary studies reveal that the impact upon adoption should be immaterial. In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted SFAS No. 115 as of December 31, 1993. SFAS No. 115 addresses accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: (1) debt securities for which the Company has the positive intent and ability hold to maturity are classified as held-to-maturity securities and reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Accreted discounts and amortized premiums on investment securities are included as interest income, and unrealized gains or losses relating to holding or selling securities are calculated using the specific identification method. Effective January 1, 1994, the Company adopted the provisions of SOP 93-6, "Employer's Accounting for Employee Stock Ownership Plans." This SOP requires the Company to record compensation expense upon release of shares to employees at the current fair value of shares released. Prior to adoption of SOP 93-6, the Company recorded compensation expense for released shares based on the historical cost of the shares of $9.00. The adoption of SOP 93-6 had no effect on the reported results of operations of the Company, as the Company made no contributions to the ESOP during 1994, and no shares were released to participants. 17 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------ ASSETS 1994 1993 ------ -------- -------- (IN THOUSANDS OF DOLLARS) Cash and cash equivalents.................................. $ 11,442 $ 15,943 Federal funds sold......................................... 27,000 18,000 Interest-bearing deposits with other financial institutions.............................................. 694 2,180 Securities available-for-sale, at market (cost of $32,604 and $40,897, respectively)................................ 31,859 40,775 Securities held-to-maturity, at cost (market value of $17,963 in 1994).......................................... 18,775 -- Loans and leases, net of unearned income................... 167,934 267,514 Less loan loss reserve..................................... 8,261 14,313 Net Loans and Leases..................................... 159,673 253,201 Premises and equipment, net................................ 1,917 1,687 Other assets............................................... 6,395 8,743 -------- -------- Total Assets............................................. $257,755 $340,529 LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits: Non-interest-bearing demand.............................. $ 67,177 $ 99,502 Interest-bearing demand and savings...................... 80,646 101,224 Time..................................................... 88,519 117,563 -------- -------- Total Deposits........................................... 236,342 318,289 Notes payable.............................................. 125 125 Other liabilities.......................................... 2,236 1,745 -------- -------- Total Liabilities........................................ 238,703 320,159 Commitments and Contingencies: Shareholders' Equity: Contributed Capital, including common stock of no par value. Authorized 20,000,000 shares; issued 6,333,835 in 1994 and in 1993........................................ 30,949 30,949 Unrealized loss on securities............................ (1,178) (122) Retained deficit......................................... (10,719) (10,457) -------- -------- Total Shareholders' Equity............................... 19,052 20,370 -------- -------- Total Liabilities and Shareholders' Equity............... $257,755 $340,529 ======== ========
See notes to consolidated financial statements. 18 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1994 1993 1992 ------- -------- ------- (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Interest Income Loans and leases.................................. $18,740 $ 23,190 $26,892 Deposits with financial institutions.............. 67 263 256 Investment securities............................. 2,169 1,916 1,178 Federal funds sold................................ 1,160 542 625 ------- -------- ------- Total Interest Income........................... 22,136 25,911 28,951 ======= ======== ======= Interest Expense Deposits.......................................... 6,253 8,372 10,336 Other borrowings.................................. 15 627 1,029 ------- -------- ------- Total Interest Expense.......................... 6,268 8,999 11,365 ------- -------- ------- Net Interest Income............................... 15,868 16,912 17,586 Provision for loan losses......................... 3,825 16,213 3,404 ------- -------- ------- Net Interest Income After Provision for Loan Losses......................................... 12,043 699 14,182 ======= ======== ======= Other Income Service charges on deposit accounts............... 1,217 1,521 1,359 Loan fees......................................... 470 1,192 1,563 Miscellaneous fees................................ 354 590 631 Gain on sale of loan servicing rights............. 1,443 -- 46 Gain on sale of SBA loans......................... 305 386 875 Other............................................. 275 1,131 1,038 ------- -------- ------- Total Other Income.............................. 4,064 4,820 5,512 ======= ======== ======= Other Expense Salaries and employee benefits.................... 6,423 7,082 6,797 Net occupancy..................................... 2,087 2,578 2,809 Equipment......................................... 830 1,241 1,102 Professional services............................. 1,928 1,878 1,391 Other............................................. 4,816 8,060 6,339 ------- -------- ------- Total Other Expense............................. 16,084 20,839 18,438 ======= ======== ======= Income (Loss) Before Income Taxes................. 23 (15,320) 1,256 Income Taxes...................................... 285 (3,233) 571 ------- -------- ------- Net Income (Loss)................................. $ (262) $(12,087) $ 685 ======= ======== ======= Per share: Net Income (Loss)................................. (.04) $ (2.15) $ .12 ======= ======== =======
See notes to consolidated financial statements. 19 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RETAINED SHARES CONTRIBUTED LOSS ON EARNINGS OUTSTANDING CAPITAL SECURITIES (DEFICIT) TOTAL ----------- ----------- ---------- --------- -------- (IN THOUSANDS OF DOLLARS EXCEPT FOR SHARES OF STOCK) Balance at January 1, 1992................... 5,282,301 $26,941 $ (53) $ 2,291 $ 29,179 Net Income--1992...... -- -- -- 685 685 --------- ------- ------- -------- -------- Increase in unrealized loss on securities..... -- -- (73) -- (73) Decrease in unearned compensation related to ESOP................... -- 572 -- -- 572 Stock options exercised. 15,263 25 -- -- 25 Stock Dividend.......... 316,691 1,346 -- (1,346) -- --------- ------- ------- -------- -------- Balance at December 31, 1992................... 5,614,255 $28,884 $ (126) $ 1,630 $ 30,388 Net Loss--1993........ -- -- -- (12,087) (12,087) Decrease in unrealized loss on securities..... -- -- 4 -- 4 Decrease in unearned compensation related to ESOP................... -- 635 -- -- 635 Sale of common stock.... 719,580 1,430 -- -- 1,430 --------- ------- ------- -------- -------- Balance at December 31, 1993................... 6,333,835 $30,949 $ (122) $(10,457) $ 20,370 Net Loss--1994........ -- -- -- (262) (262) Increase in unrealized loss on securities..... -- -- (1,056) -- (1,056) Balance at December 31, 1994................... 6,333,835 $30,949 $(1,178) $(10,719) $ 19,052 ========= ======= ======= ======== ========
See notes to consolidated financial statements. 20 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------- 1994 1993 1992 -------- -------- -------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................................ $ (262) $(12,087) $ 685 Adjustments to reconcile net income (loss) to cash flows (applied to) provided by operating activities: Depreciation and amortization................... 739 2,446 1,692 Provision for loan losses....................... 3,825 16,213 3,404 Change in deferred loan fees.................... (250) (271) 122 Accretion of investment discount, net of amortization of investment premium............. 39 322 (36) Loss on sale of investment securities available for sale....................................... 195 -- -- Gain on sale of investment securities........... -- (56) -- Gain on sale of loan servicing rights........... (1,443) -- (46) Gain on sale of merchant card portfolio......... (174) -- -- Gain on sale of SBA loans....................... (305) (386) (875) Gain on sale of fixed assets.................... (9) (11) (26) (Gain)/loss on sale of REO...................... (511) (1) 346 REO write-downs................................. 959 1,408 -- Provision for deferred income taxes............. (1,200) (1,133) (261) Change in other assets.......................... (2,465) (1,515) (1,937) Change in other liabilities..................... 491 (427) 1,142 Decrease in deferred compensation related to ESOP........................................... -- 635 572 -------- -------- -------- Net Cash (Applied To) Provided By Operating Activities..................................... (371) 5,137 4,782 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment securities..... -- 44,930 -- Proceeds from sales of investment securities available-for-sale.............................. 8,732 -- -- Proceeds from maturities of investment securities...................................... -- 31,834 12,913 Proceeds from maturities of investment securities held-to-maturity................................ 3,466 -- -- Proceeds from maturities of investment securities available-for-sale.............................. 2,625 -- -- Purchase of investment securities................ -- (84,633) (32,528) Purchase of investment securities held-to- maturity........................................ (3,194) -- -- Purchase of investment securities available-for- sale............................................ (22,778) -- -- Purchase of premises and equipment............... (996) (373) (483) Proceeds from sale of premises and equipment..... 36 366 56 Payoff of senior obligations on REO.............. -- -- (1,377) Proceeds from sale of REO properties............. 5,345 833 1,130 Net change in loans.............................. 80,589 39,376 (15,207) Proceeds from the sale of SBA loans.............. 513 605 1,131 Proceeds from the sale of non-performing loans... 9,056 -- -- Change in Federal funds sold..................... (9,000) (18,000) 10,800 Change in deposits with other financial institutions.................................... 1,486 4,955 (5,053) Proceeds from sale of loan servicing rights...... 1,763 -- 46 Proceeds from sale of merchant card portfolio.... 174 -- -- -------- -------- -------- Net Cash Provided By (Applied To) Investing Activities..................................... 77,817 19,893 (28,572) CASH FLOWS FROM FINANCING ACTIVITIES Change in demand and savings deposits............ (52,903) (6,070) 18,781 Change in time deposits.......................... (29,044) (24,228) 5,320 Change in short-term borrowings.................. -- (16,860) 9,842 Issuance of common stock......................... -- 1,430 25 Repayment of note payable........................ -- (2,188) (572) Issuance of notes payable........................ -- 125 -- Net Cash (Applied To) Provided By Financing Activities..................................... (81,947) (47,791) 33,396 Net (Decrease) Increase In Cash and Cash Equivalents.................................... (4,501) (22,761) 9,606 Cash and Cash Equivalents at Beginning of Year... 15,943 38,704 29,098 -------- -------- -------- Cash and Cash Equivalents at End of Year......... $ 11,442 $ 15,943 $ 38,704 ======== ======== ========
See notes to consolidated financial statements. 21 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION Ventura County National Bank, a national banking organization (VCNB), was organized on February 17, 1982 and commenced business on October 25, 1982. Ventura County National Bancorp (separately "Ventura," and with its subsidiaries on a consolidated basis, the "Company") was organized and incorporated on February 22, 1984 for the purpose of becoming a bank holding company by acquiring all of the outstanding common stock of VCNB. Accordingly, on September 12, 1984, all of the Shareholders of VCNB exchanged their common stock for an equal number of shares of the Company's common stock. During 1989, the Company acquired all of the outstanding shares of Frontier Group, Incorporated, the parent holding company of Frontier Bank, N. A., in exchange for cash. The acquisition was accounted for as a purchase. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. VCNB conducts its banking operations through four branch offices located in Ventura County, California, approximately 60 miles northwest of downtown Los Angeles. VCNB's four branch offices are positioned in Ventura, Camarillo, Oxnard, and Westlake Village. Frontier is based in La Palma in northwestern Orange County and has a branch office in Wilmington in southern Los Angeles County. Ventura's headquarters are located in Oxnard, California. NOTE 2. ACCOUNTING POLICIES The Company and its subsidiaries follow generally accepted accounting principles and reporting practices applicable to the banking industry, the most significant of which are summarized below: Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. Investment Securities In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company adopted the provisions of the new standard in its financial statements as of December 31, 1993. SFAS No. 115 addresses accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: 1) debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and 3) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. 22 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Consistent with the provisions of No. SFAS 115, the Company classified its investment securities as available for sale upon adoption at December 31, 1993, and recorded an unrealized loss of $122,000, net of tax effect. No portion of such unrealized losses was previously recognized in operating results prior to the adoption of SFAS No. 115. Prior to the adoption of SFAS No. 115, all investment securities were stated at cost, with the exception of investments in mutual funds, which were deemed equity investments, with adjustments to lower of cost or market being recorded as a component of equity. During 1994, the Company purchased securities which were classified as either available for sale or held to maturity categories at the time of purchase, based on management's intent and ability to hold certain securities to maturity. Previously recorded unrealized losses of $433,000 on securities transferred from held to maturity to available for sale during 1994 are being amortized over the securities' remaining lives. Ventura had no trading securities at December 31, 1993 or 1994. Mortgage-backed securities consist entirely of Federal Home Loan Mortgage Corporation (FHLMC) backed securities; there are no stuctured notes, CMOs, or other derivative products in the investment portfolio. Accreted discounts and amortized premiums on investment securities are included in interest income, and unrealized and realized gains or losses relating to holding or selling securities are calculated using the specific identification method. Interest and Fees on Loans Interest on loans is accrued and credited to operations based on the principal amount outstanding, except that accruals are normally discontinued whenever payment of principal or interest is in doubt. When a loan is classified as non-accrual, all previously accrued interest is reversed. Loan origination fees and initial direct costs of loan origination are deferred and amortized over the life of the loan as an adjustment of yield throughout the life of the related loan. Such fees and costs related to loans held for sale are deferred and recognized in income as a component of gain on sale of loans when the related loans are sold. Gains on Sale of SBA Loans and Servicing Income Gains on sale of the guaranteed portion of SBA Loans are recognized to the extent sales proceeds less amounts necessary to provide required yield enhancement to the Company for retaining the unguaranteed portion of the loan exceed the carrying value of the guaranteed portion sold. Gains are determined using the specific identification method for loans sold and are deferred for 90 days (the recourse period), at which time they are recorded as Other Income. The Company sells SBA loans with servicing retained. At the time of the sale, an evaluation is made of the contractual servicing fee which is represented by the differential between the contractual interest rate of the loan and the interest rate payable to the investor. The present value of the amount by which the contractual servicing fee exceeds a nornal servicing fee, or the Company's cost of servicing such loans plus a normal profit, whichever is greater, after evaluation of estimated prepayments on such loans, is considered to be an adjustment of the sales proceeds, which in turn increases the gain recognized at the time of the sale. Such gains are only recognized to the extent they do not exceed the amount deferred as yield enhancement on the unguaranteed portion of the SBA loan sold. The resultant amount of deferred loan sales proceeds is amortized using a method which approximates a level yield over the estimated remaining lives of such loans. The contractual servicing fee is recognized as income over the lives of the related loans, net of the estimated normal amortization of the deferred loan sales proceeds. Loan servicing costs are charged to expense as incurred. When actual loan repayment experience differs from original estimates, amortization is adjusted accordingly through operations. 23 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Loan Loss Reserve The loan loss reserve is maintained at a level believed adequate by management to absorb potential losses on the loan and lease portfolios. Management's determination of that adequacy is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, composition of the portfolio and other relevant factors. In addition, regulatory authorities have recently required many California financial institutions to substantially increase their loan loss reserve in recognition of the inherent risk in the existing economic environment. Management also considers this factor in calculating the loan loss reserve. Although management believes the level of the loan loss reserve as of December 31, 1994 is adequate to absorb losses inherent in the loan portfolio, additional declines in the local economy may result in increasing losses that cannot be reasonably predicted at this time. The reserve is increased by provisions for loan losses charged against income. Loans and leases are charged against the loan loss reserve when management determines that collectibility of the principal is unlikely. Recoveries on loans previously charged off are credited to the reserve. In May, 1993, the Financial Accounting Standards Board issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 prescribes the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings. SFAS No. 114 states that a loan is impaired when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contracted terms of the loan agreement. A creditor is required to measure impairment by discounting expected future cash flows at the loan's effective interest rate, or by reference to an observable market price, or by fair value of collateral, if collateral dependent . SFAS No. 114 also clarifies the existing accounting for in- substance foreclosures by stating that a collateral-dependent real estate loan would be reported as real estate owned only if the lender had taken possession of collateral. SFAS No. 114 is effective for financial statements issued for fiscal years beginning after December 15, 1994. Although earlier application is encouraged, it is not required. The Company will adopt SFAS No. 114 on January 1, 1995. The Company's preliminary study of loan impairment under SFAS 114 revealed that the impact upon adoption is not anticipated to be material to the financial statements. SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing methods for recognizing interest income on an impaired loan. It eliminated the provisions in SFAS No. 114 which described how a creditor should report income on an impaired loan. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. SFAS No. 118 is effective concurrent with the effective date of SFAS No. 114, for financial statements issued for fiscal years beginning after December 15, 1994. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. The provisions for depreciation are generally computed on a straight-line basis, based upon the term of the lease or the estimated useful life of the related asset. Leasehold improvements are amortized over an average life of approximately eleven years, or the lease term, whichever is shorter. Furniture, fixtures and equipment are amortized over an average life of 5 years. Real Estate Owned Real estate acquired through foreclosure or deed-in-lieu-of foreclosure, is carried at cost or fair value less estimated costs to sell, whichever is lower. At the time of acquisition, any excess of cost over fair value is charged to the loan loss reserve. Gains and losses realized on sale are included in other income or expense, respectively, in the consolidated statements of operations. 24 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Taxes The financial statements reflect the adoption in 1992 of the liability method of accounting as prescribed by Statement of Financial Accounting Standards (SFAS) No. 109, which superseded SFAS No. 96. The effect on the financial statements of adopting SFAS No. 109 was not material. Income (Loss) Per Share Income (Loss) per share data is computed using the weighted-average number of shares of common stock and common stock equivalents outstanding. Stock options and warrants are considered to be common stock equivalents, except when their effect is antidilutive. Shares of Common Stock held by the Trustee of the Employee Stock Ownership Plan, in suspense as collateral for a loan, are not accounted for as common stock equivalents until such time as they are released to participants. The weighted-average number of shares outstanding has been retroactively adjusted for stock dividends and stock splits. The weighted- average number of shares used to compute income per share were 6,333,835, 5,635,941 and 5,610,792 in 1994, 1993 and 1992, respectively. Servicing Rights For the years ended December 31, 1992 and 1993, and for the first half of 1994, the cost of acquired loan servicing rights was capitalized and amortized over the estimated remaining term of the underlying loan portfolio. During May, 1994, the Company sold its mortgage loan servicing department and the related capitalized loan servicing rights. Reclassifications Certain reclassifications have been made to 1993 and 1992 amounts to conform to 1994 presentation. NOTE 3. STATEMENT OF CASH FLOWS For the years ended December 31, 1994, 1993 and 1992, the Company paid approximately $6,276,000, $9,124,000 and $11,445,000 in interest and $nil, $300,000 and $1,155,000 in income taxes, respectively. The Company acquired $6,197,000,$664,000 and $6,508,000 in real estate owned through foreclosures during the years ended December 31, 1994, 1993 and 1992, respectively. No loans were extended to buyers of Company-owned real estate during the year ended December 31, 1994. Loans of $603,000 were extended to buyers of Company-owned real estate during the year ended December 31, 1993. Securities with an amortized cost totaling $16,263,000, and with a fair value of $15,830,000, at December 31, 1994 were transferred from the available for sale to the held to maturity category during 1994. NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Company is required to maintain cash reserve balances on transaction accounts and non-personal time deposits with the Federal Reserve Bank. These reserve requirements can be offset by cash balances held at the Company. The average amount of these reserve balances for the year ended December 31, 1994 was $2,475,000. NOTE 5. INVESTMENT SECURITIES As a result of a temporary decline in the market value of securities- available-for-sale, the Company recorded unrealized losses totaling $1,178,000 and $122,000, which are included in shareholders' equity on the consolidated balance sheet at December 31, 1994 and 1993, respectively. Several mortgage- backed securities with a market value of $16,724,000 and an amortized cost of $17,196,000, at the time of transfer, were transferred from the available for sale to the held to maturity. Previously recorded unrealized losses with a balance of $433,000 at December 31, 1994 are included in shareholder's equity and are being amortized over the securities' remaining lives. The decline in the market value of the portfolio reflects the current interest rate environment; such decline is deemed temporary in nature. Accreted discounts and amortized premiums on investment securities are included in interest income. Unrealized and realized gains and losses related to holding or selling securities are calculated using the specific identification method. 25 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FHLB stock of $1,067,000 at December 31, 1994 is not deemed a marketable equity security, as it is not traded on a registered security exchange, and is carried at cost. Securities held-to-maturity carried at amortized cost of approximately $4,390,000, and with a fair value of $4,264,000, on December 31, 1994 were pledged as required by law. The amortized cost basis, gross unrealized holding gains and losses and estimated market values of securities-available-for-sale at December 31, 1994 were as follows: SECURITIES AVAILABLE-FOR-SALE
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING MARKET 1994 COST GAINS LOSSES VALUE ---- --------- ---------- ---------- ------- (IN THOUSANDS OF DOLLARS) U.S. Government securities........ $22,935 $ -- $229 $22,706 Mortgage-backed securities........ 8,067 -- 516 7,551 Federal Reserve Bank and FHLB Stock....................... 1,602 -- -- 1,602 ------- ------- ---- ------- Total........................... $32,604 $ -- $745 $31,859 ======= ======= ==== =======
The amortized cost, gross unrealized gains and losses and estimated market value of securities held-to-maturity at December 31, 1994 are as follows: SECURITIES HELD-TO-MATURITY
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET 1994 COST GAINS LOSSES VALUE ---- --------- ---------- ---------- ------- (IN THOUSANDS OF DOLLARS) U.S. Government securities........ $ 1,250 $ -- $ 28 $ 1,222 Mortgage-backed securities........ 17,525 -- 784 16,741 ------- ------- ---- ------- Total........................... $18,775 $ -- $812 $17,963 ======= ======= ==== =======
Securities available-for-sale as of December 31, 1993 included Federal Reserve Bank stock carried at $588,000, which approximates market. FHLB stock of $1,712,000 at December 31, 1993 is not deemed a marketable equity security, as it is not traded on a registered security exchange, and is carried at cost. Securities available for sale carried at approximately $4,142,000 and with a market value of $4,130,000 at December 31, 1993 were pledged as required by law. The amortized cost, gross unrealized holding gains and losses and estimated market values of securities available-for-sale at December 31, 1993 are as follows: SECURITIES AVAILABLE-FOR-SALE
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET 1993 COST GAINS LOSSES VALUE ---- --------- ---------- ---------- ------- (IN THOUSANDS OF DOLLARS) Mortgage-backed securities....... $38,597 $56 $178 $38,475 Federal Reserve Bank and FHLB Stock........................... 2,300 -- -- 2,300 ------- --- ---- ------- Total.......................... $40,897 $56 $178 $40,775 ======= === ==== =======
26 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Losses from the sale of available for sale debt securities in 1994 were $195,000. Net gains from the sale of debt and equity securities in 1993 were $56,000. No investment securities were sold during 1992. At December 31, 1994, the average life of mortgage-backed securites classified as available-for-sale was approximately 3.5 years, and the average maturity was approximately 10 years. At December 31, 1994, the scheduled maturities of debt securities available for sale were as follows:
AMORTIZED MARKET COST VALUE -------------------------- (IN THOUSANDS OF DOLLARS) Within one year U.S. Goverment Obligations............. $ 14,707 $ 14,648 After one year through five years U.S. Goverment Obligations............. 8,228 8,058 After five years through ten years Mortgage-backed Securities.............. 8,067 7,551 ------------ ------------ Total.................................................... $ 31,002 $ 30,257 ============ ============
At December 31, 1994, the scheduled maturities of debt securities held to maturity were as follows:
AMORTIZED MARKET COST VALUE -------------------------- (IN THOUSANDS OF DOLLARS) After one year through five years Mortgage-backed Securities.............. $ 13,696 $ 12,992 U.S. Goverment Obliga- tions.................. 1,250 1,222 After five years through ten years Mortgage-backed Securities.............. 3,829 3,749 ------------ ------------ Total.................................................... $ 18,775 $ 17,963 ============ ============
NOTE 6. LOANS AND LEASES The following is a summary of the loan and lease portfolio on December 31:
1994 1993 -------- -------- (IN THOUSANDS OF DOLLARS) Commercial, financial and agricultural................. $138,193 $197,384 Real estate--Mortgage.................................. 11,993 31,202 Real estate--Construction.............................. 7,734 23,559 Installment............................................ 9,897 14,961 Lease financing........................................ 129 447 -------- -------- Subtotal............................................. 167,946 267,553 Less unearned income................................... 12 39 -------- -------- Loans and leases, net of unearned income............. $167,934 $267,514 ======== ========
Included in the loan portfolio are loans on which the Company has ceased the accrual of interest or renegotiated the terms to provide for a reduction or deferral of interest. At December 31, 1994 and 1993, such loans amounted to approximately $7,614,000 and $19,287,000, respectively. Interest foregone on nonaccrual loans in 1994, 1993 and 1992 totaled $1,609,000, $2,214,000 and $728,000, respectively. 27 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Loan Loss Reserve Following is a summary of the activity in the loan loss reserve:
1994 1993 1992 ------- ------- ------ (IN THOUSANDS OF DOLLARS) Balance at beginning of year.................... $14,313 $ 3,854 $2,845 Provision charged to expense.................... 3,825 16,213 3,404 Loans charged off(1)............................ (10,439) (6,191) (2,543) Recoveries on loans previously charged off...... 562 437 148 Balance at end of year.......................... $ 8,261 $14,313 $3,854
- -------- (1) $5.0 million of total Charge-offs for the year ended December 31, 1994 were due to the discounted sale of $14.1 million in non-performing loans. NOTE 7. PREMISES AND EQUIPMENT Following is a summary of the premises and equipment accounts at December 31:
1994 1993 ------------ ------------ (IN THOUSANDS OF DOLLARS) Leasehold improvements......................... $ 1,962 $ 1,949 Furniture, fixtures and equipment.............. 4,723 4,214 ------------ ------------ 6,684 6,163 ============ ============ Less accumulated depreciation and amortization. 4,767 4,476 ------------ ------------ Premises and equipment, net.................... $ 1,917 $ 1,687 ============ ============
Depreciation and amortization expense related to property and leasehold improvements was $739,000, $948,000 and $1,555,000 for the years ended December 31, 1994, 1993 and 1992, respectively. NOTE 8. REAL ESTATE OWNED At December 31, 1994 and 1993, other assets include approximately $2,346,000 and $2,229,000, respectively, of real estate owned. Additionally, at December 31, 1994, other assets include approximately $878,000 of other foreclosed personalty. NOTE 9. TIME CERTIFICATES OF DEPOSIT, OTHER SHORT-TERM BORROWINGS AND INTEREST EXPENSE The following summarizes time certificates of deposit outstanding at December 31:
1994 1993 ------------ ------------- (IN THOUSANDS OF DOLLARS) Time certificates of deposit under $100,000... $ 63,186 $ 74,830 Time certificates of deposit, $100,000 and over......................................... 25,333 42,733 ------------ ------------- Total....................................... $ 88,519 $ 117,563 ============ =============
The Company terminated the issuance of commercial paper and retired advances from the Federal Home Loan Bank in December, 1993. During 1994, the Company made immaterial borrowings on its FHLB advance line and repaid them promptly. 28 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest expense relating to deposits and other borrowed funds for each of the three years ended December 31 is as follows:
1994 1993 1992 ------ ------ ------- (IN THOUSANDS OF DOLLARS) Time certificates of deposit under $100,000......... $2,638 $3,337 $ 3,839 Time certificates of deposit, $100,000 and over..... 1,254 2,178 3,144 Other deposits...................................... 2,361 2,857 3,353 Short-term borrowings............................... 6 515 856 Note payable........................................ 9 112 173 ------ ------ ------- Total Interest Expense............................ $6,268 $8,999 $11,365 ====== ====== =======
NOTE 10. OTHER INCOME AND OTHER EXPENSES December 31, 1994, 1993, and 1992 other loan fee income includes net mortgage servicing fees of $317,000, $618,000 and $812,000, respectively, and other loan processing fees and late charges. Miscellaneous fees include credit card fee income and other account servicing fees. The "other" category of other income includes the gain on the sale of the merchant card portfolio of $174,000 in 1994. Other income for 1994, 1993 and 1992, includes net gains related to the sale of mortgage loans of $272,000, $1,076,000 and $994,000 for the years ended December 31, 1994, 1993 and 1992, respectively, in addition to net losses on the sale of securities and fixed assets. The following is included in other expenses in the accompanying consolidated statements of operations at December 31:
1994 1993 1992 ------ ------ ------ (IN THOUSANDS OF DOLLARS) FDIC assessments.................................... $ 878 $ 921 $ 789 Office supplies and office expense.................. 612 800 1,000 Real estate owned................................... 641 1,733 479 Business development and advertising................ 364 271 371 Appraisal fees...................................... 309 257 57 Customer services................................... 286 382 687 Courier service..................................... 280 255 256 Amortization of goodwill............................ -- 1,266 105 Amortization of core deposits....................... -- -- 513 Other............................................... 1,446 2,175 2,082 ------ ------ ------ Total Other Expenses.............................. $4,816 $8,060 $6,339 ====== ====== ======
29 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11. INCOME TAXES The components of consolidated income tax (benefit) expense, for the three years ended December 31, 1994 are as follows:
1994 1993 1992 ------ ------- ----- (IN THOUSANDS OF DOLLARS) Current: Federal......................................... $ (923) $(2,100) $ 610 State........................................... 8 -- 222 ------ ------- ----- $ (915) $(2,100) $ 832 ====== ======= ===== Deferred: Federal......................................... $1,202 $(1,352) $(193) State........................................... (2) 219 (68) ------ ------- ----- 1,200 (1,133) (261) ====== ======= ===== $ 285 $(3,233) $ 571 ====== ======= =====
Deferred income taxes for 1994, 1993 and 1992 reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Principal items making up the deferred income tax provisions follow.
1994 1993 1992 ------ ------- ----- (IN THOUSANDS OF DOLLARS) Financial statement income from leases different from amounts recognized for tax................. $ 18 $ (93) $(134) Depreciation recognized for tax different from amount recognized for financial statement depreciation.................................... 86 (162) (33) Financial statement bad debt deduction different than tax bad debt deduction..................... 1,477 (2,488) (378) Financial statement deferred loan fees and costs different from amounts recognized for tax....... (293) 79 135 Prepaid expense recognized for tax different from amounts recognized for financial statement purposes........................................ (34) -- 293 Financial statement other real estate owned deduction different from tax other real estate owned deduction................................. 78 (629) -- State income tax benefit recognized for tax different from amounts recognized for financial statement purposes.............................. (413) (416) -- Other items, net................................. 261 (52) (144) Less: net deferred tax valuation allowance....... 20 2,628 -- ------ ------- ----- $1,200 $(1,133) $(261) ====== ======= =====
30 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The reasons for the difference between income tax benefit and expense and the amount computed by applying the statutory Federal income tax rate to the loss or income before income taxes are as follows:
1994 1993 1992 ---- ------- ---- (IN THOUSANDS OF DOLLARS) 35% of pre-tax (loss) income......................... $ 8 $(5,362) $440 State income taxes, net of Federal Tax benefit....... 4 (1,686) 91 Goodwill and other................................... (6) 771 40 State income tax limitation of net operating loss.... 259 416 -- Provision for deferred tax asset valuation allowance. 20 2,628 -- ---- ------- ---- $285 $(3,233) $571 ==== ======= ====
Net deferred tax asset and liabilities reflect the cumulative inventory of "temporary differences" resulting from the differences of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations which will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. As of December 31, 1994 the Company's gross deferred assets, deferred liabilities, and tax asset valuation allowance totaled $3,916,000, $801,000 and $3,115,000, respectively as compared to gross deferred assets, deferred liabilities, and tax asset valuation allowance of $4,978,000, $995,000 and $2,783,000, respectively, as of December 31, 1993. At December 31, the principal items making up the net deferred income tax (assets) and liabilities are as follows:
1994 1993 ------------ ------------ (IN THOUSANDS OF DOLLARS) Financial statement income from leases dif- ferent from amounts recognized for tax..... $ 0 $ (9) Depreciation recognized for tax different from amount recognized for financial state- ment depreciation.......................... 434 164 Financial statement bad debt deduction dif- ferent than tax bad debt deduction......... (2,276) (3,182) Financial statement deferred loan fees and costs different from amounts recognized for tax........................................ 294 652 Prepaid expense recognized for tax different from amounts recognized for financial statement purposes......................... 73 179 Financial statement other real estate owned deduction difference from tax other real estate owned deduction..................... (136) (629) Financial statement occupancy expense deduc- tion difference from tax occupancy expense deduction.................................. (390) (406) State income tax benefit recognized for tax different from amounts recognized for fi- nancial statement purposes................. (393) (416) Other items, net............................ (254) (288) Unrealized loss on available for sale secu- rities..................................... (467) (48) Less: net deferred tax valuation allowance.. 3,115 2,783 ------------ ------------ Net deferred tax asset...................... $ 0 $ (1,200) ============ ============
The net deferred tax asset for the year ended December 31, 1993, is included in other assets of the consolidated balance sheets. 31 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12. COMMON STOCK AND STOCK OPTIONS On February 20, 1992, the Company declared a 6% stock dividend for Shareholders of record on March 9, 1992. The weighted average number of shares outstanding at December 31, 1992 has been restated to reflect the 6% stock dividend in 1992. Under a stock option plan approved by the Board of Directors in 1982, options have been granted to key personnel for a term of ten years exerciseable at 25% annually at the fair market value at the date of grant. During 1991, the Company's Board of Directors adopted the Ventura County National Bancorp 1991 Stock Option Plan (1991 Plan). The 1991 Plan provides that incentive stock options be granted to full-time salaried officers and management level employees of the Company or its subsidiaries for a term of 10 years exerciseable at 20% annually at the fair market value at the date of the grant. The 1991 Plan also provides that non-qualified stock options be granted to directors, key full-time salaried officers and management level employees of the Company or its subsidiaries for a term of 10 years, exerciseable at 25% annually at the fair market value at the date of grant. Under the 1982 stock option plan, there were 21,813, 46,741 and 49,648 options outstanding at December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, there were 4,362 shares which were exercisable under the 1982 stock option plan at a price of $4.81 per share. During 1991, 46,640 options were granted while no options were granted during 1992, 1993, and 1994. During 1992, 15,263 options were exercised, while no options were exercised during 1994, 1993 or 1991. In 1994, 1993 and 1992 respectively, 24,928, 2,907 and 59,104 options expired. Under the 1991 Plan, there were 171,588, 167,418 and 136,730 options outstanding at December 31, 1994, 1993 and 1992, respectively, which are exerciseable at prices ranging from $2.13 to $6.84 per share. During 1994, 1993 and 1992, 25,000, 104,888 and 9,000 options were granted, respectively. At December 31, 1994, 69,955 of these options were exerciseable. Option prices and number of shares under option have been restated for stock dividends and stock splits. A total of 20,830 and 74,200 options were canceled in 1994 and 1993. In October 1989, the Company established an Employee Stock Ownership Plan (ESOP), for which all full-time employees who have completed one year of service at the Plan year end and all part-time employees who work at least 1,000 hours per year and have completed one year of service at the Plan year end are eligible. The ESOP was funded by a $4,000,000 loan to the Company from an independent third party. These debt proceeds were lent to the ESOP which used the proceeds to acquire 444,444 newly issued shares of the Company's common stock. The Company raised $1,555,000 from a private placement of 719,580 shares of common stock and issued $125,000 in notes payable during 1993 and used the proceeds to retire the remaining principal on the ESOP note payable to a third party. At December 31, 1994, there were 230,014, 185,840, and 28,590 shares released, held in suspense, and issued to individuals who are no longer employees of the Company, respectively. The fair market value of shares held in suspense at December 31, 1994 was $406,525. Effective January 1, 1994, the Company adopted the provisions of Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans." This SOP requires the Company to record compensation expense upon release of shares to employees at the current fair value of shares released. Prior to adoption of SOP 93-6, the Company recorded compensation expense for allocated shares based on the historical cost of $9.00 per share. The adoption of SOP 93-6 had no effect on the reported results of operations of the Company, as the Company made no contributions to the Plan in 1994 and no shares were released to participants. Unallocated shares held in a suspense account by the ESOP are released to the Plan participants in proportion to contributions required to service the debt between the Company and the Plan, in relation to the total debt outstanding, as specified in the debt agreement, within the limitations of Internal Revenue Code Section 415 and deductibility of ESOP contributions by the Company for tax purposes. 32 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1994, 1993 and 1992, the Company incurred $nil, $635,000, and $571,000 of compensation expense and $nil, $112,000, and $173,000 of interest expense, respectively, related to the ESOP and note payable. During 1989 the Company issued 649,647 shares of common stock and 295,294 warrants to purchase common stock under a common stock subscription rights offering. The warrants entitled the holder to purchase one share of common stock at $7.41 and expired on June 6, 1994. NOTE 13. 401(K) PLAN The Company established a 401(k) plan on July 1, 1994 for which all full- time employees who have completed 90 consecutive days of service and all part- time employees who work at least 1000 hours per year and have completed 90 consecutive days of service are eligible for enrollment. Employees may contribute a percentage of their salary pursuant to IRS regulatory maximums, and under the plan, the Company matches 50% of employee contributions up to 3%. During 1994, the Company contributed $48,844 to the 401(k) plan. NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of estimated fair value of financial instruments is made in accordance with SFAS No. 107. The estimates have been determined by the Company using available market information and appropriate valuation methodologies. The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1994 DECEMBER 31, 1993 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- ----- (IN THOUSANDS OF (IN THOUSANDS OF DOLLARS) DOLLARS) Assets: Cash and cash equivalents............... $ 11,442 $ 11,442 $ 15,943 $ 15,943 Federal funds sold...................... 27,000 27,000 18,000 18,000 Interest bearing deposits with other financial institutions................. 694 694 2,180 2,180 Investment securities................... 50,634 49,822 40,775 40,775 Net loans and leases.................... 159,673 148,692 233,582 233,437 Liabilities: Demand deposits and savings............. 147,823 147,823 200,726 200,726 Time deposits........................... 88,519 88,366 117,563 117,194 Other borrowings........................ 125 125 125 125 Off-balance-sheet instruments (unrealized gains (losses)): Commitments to extend credit............ 0 0 0 0 Standby letters of credit............... 0 0 0 0
Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. 33 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest Bearing Deposits with Other Financial Institutions The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the current market rates for deposits with similar remaining maturities. Investment Securities For securities held as investments, fair value equals quoted market prices. Estimated fair value for mortgage-backed securities issued by quasi- governmental agencies is based on quoted market prices. Net Loans and Leases The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. During the second quarter of 1994, $14.1 million in non-performing loans were sold in a bulk sale at 67% of book value. As such, management utilized this valuation factor in placing a fair value on non-performing loans of $7,945,000 at December 31, 1994. It was not practicable to reasonably assess the credit adjustment that would be applied in the marketplace for non-performing loans at December 31, 1993. Therefore, non-performing loans of $19,619,000 are excluded at December 31, 1993. Interest rates on such loans ranged from 7-10%, maturities ranged from zero to four and one half years, and approximately 95% were real estate secured. Demand Deposits, Savings and Time Deposits The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Other Borrowings and Notes Payable Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Fair value approximates carrying value in 1993 as other borrowings and notes payable had variable interest rates that adjust with the market. At December 31, 1994, the differential between the current note payable's carrying value and its discounted value is insignificant. Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter-parties at the reporting date. Current rates have increased since the commitments were made, yet the fee applied to the balance of commitments outstanding resulted in values which are insignificant for 1994 and 1993. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1994. Considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. Although management is not aware of 34 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. NOTE 15. COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance Sheet Risk The Company is a party to certain financial instruments in the normal course of business with a degree of off-balance sheet risk. These instruments include commitments to extend credit, standby, and commercial letters of credit, which are designed to meet the needs of the banks' customers. Commitments to extend credit and standby and commercial letters of credit are evaluated on a case-by-case basis dependent on each customer's credit worthiness. The Company has a rating process which is applied to each customer. The resulting rating establishes varying levels of required credit approvals and limits of lending. Monitoring procedures include, but are not limited to, monthly review of customer accounts by a management committee. The agreements with the customers normally require collateral and provide restrictive covenants under generally the same conditions as other lending activities of the Company. Such collateral varies but may include accounts receivable, inventories, property and equipment, and real property. The policy of the Company is to limit lending to 75% of the market value of the collateral. The Company's exposure to credit loss in the event of non-performance by the party related to these instruments is represented by the contractual amount of these instruments in the case of commitments to extend credit. As of December 31, 1994, the Company did not have commitments to borrowers that have additional borrowings which have been classified as nonperforming loans and/or as potential problem loans. The Company conducts business primarily in Southern California and the ability of the Company's customers to honor their loan agreements is dependent on the economic health of this service area. Although the Company generally provides loans and financial instruments to a broad variety of industries and customers, at December 31, 1994 and 1993, approximately $67.1 million and $91 million, respectively, represented loans, commitments and letters of credit to individuals and companies in the real estate industry (of which, $6.7 million and $13 million, respectively, consisted of mortgage loans to individuals). Further, a substantial portion of the collateral for commercial, financial and agricultural loans is real estate. Commitments to Extend Credit Commitments to extend credit represent agreements to lend, on demand and subject to the restrictive covenants, moneys to a customer up to a designated limit. The commitments generally have fixed expiration dates, variable interest rates, and normally require payment of an annual fee. Since many of the commitments historically expire without being fully drawn upon and are subject to regular monitoring and certain restrictions, the total commitment amounts outstanding do not necessarily represent future cash requirements. The total amount of commitments to extend credit at December 31, 1994 was $30,880,000, compared with $46,029,000 at December 31, 1993. Standby and Commercial Letters of Credit Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of their customers to a third party. Such letters of credit are normally issued to support performance bonds and private borrowing arrangements, which include guarantees to suppliers outside of the United States. Standby and commercial letters of credit amounting to $2,898,000 were outstanding at December 31, 1994, all of which are expected to expire by December 31, 1995. Standby and commercial letters of credit amounted to $5,147,000 as of December 31, 1993, all of which expired by December 31, 1994. 35 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Lease Commitments The Company leases office premises and certain equipment under operating leases which expire at various dates through 2006. Total rental expense, net of sublease income, for all non-cancelable operating leases amounted to approximately $1,528,000, $1,682,000 and $1,645,000 for the three years ended December 31, 1994, 1993 and 1992, respectively. Future minimum commitments under these leases of premises and equipment as of December 31, 1994, net of sublease income and including estimated CPI increases, are as follows:
IN THOUSANDS OF DOLLARS ------------ 1995......................................................... $1,234 1996......................................................... 984 1997......................................................... 958 1998......................................................... 1,068 1999......................................................... 1,108 Thereafter................................................... 5,634
Litigation In the normal course of business, the Company is subject to various legal actions. It is the opinion of management, based upon the opinion of legal counsel, that such litigation will not have a material impact on the financial position or results of operations of the Company. NOTE 16. RELATED PARTY TRANSACTIONS The Company and its subsidiaries have granted loans to certain officers and directors of the Company, and to businesses with which they are associated, in the ordinary course of business. These loans are made under terms which are consistent with the Company's normal lending policies. The amounts of these loans were approximately $7,730,000 and $12,775,000 at December 31, 1994 and 1993, respectively. During 1994, new loans totaling $4,608,000 were made, and net repayments of approximately $9,653,000 were received. During 1993, new loans totaling $6,093,000 were made, and net repayments of approximately $5,624,000 were received. Interest and fees earned on these loans approximated $762,000, $1,111,000 and $1,176,000 in 1994, 1993 and 1992, respectively. NOTE 17. RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES Certain restrictions exist regarding the ability of the subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. See Note 18 for discussion regarding restrictions placed on the Company per the Formal Agreement and Consent Order. Generally, the approval of the Comptroller of the Currency is required to pay dividends in excess of earnings retained in the current year plus retained net profits for the two preceding years. Also, under Federal Reserve regulation, a bank subsidiary is limited in the amount it may loan to affiliates, including the Company, unless such loans are collateralized by specific obligations. At December 31, 1994 and 1993, the Company had no loans to affiliates. NOTE 18. CAPITAL RESOURCES AND REGULATORY MATTERS The Company is required by federal regulation to meet certain capital standards. The risk-based capital standards require a minimum total capital of 8.0% of "risk-adjusted assets," as defined by the standard. At 36 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) least half of the required capital must contain Tier 1 capital, which consists primarily of common stock and retained earnings, less goodwill. As of December 31, 1994 and 1993, the Company was in compliance with the requirements. At December 31, 1994 and 1993, the Company's risk-based capital ratios were 12.61% and 8.73%, respectively. Additionally, the capital standards require the Company to maintain a minimum leverage ratio of Tier 1 capital to average assets and a Tier 1 capital to risk-weighted assets ratio of at least 4%. At December 31, 1994 and 1993, the Company's leverage capital ratios were 7.53% and 6.02%, respectively, and Tier 1 capital ratios were 11.32% and 7.43%, respectively. Regulatory Matters At periodic intervals, both the Office of the Comptroller of the Currency and the FDIC routinely examine the bank subsidiaries' financial statements as part of their legally prescribed oversight of the banking industry. Based on these examinations, the regulators can direct that the Company's financial statements be adjusted in accordance with their findings. VCNB entered into a Formal Agreement (Formal Agreement) with the OCC on March 19, 1993 while Frontier entered into a Consent Order (Consent Order) with the OCC on March 29, 1993. The significant common requirements of the Formal Agreement and the Consent Order with respect to reviewing and correcting certain deficiencies identified in the OCC examinations of VCNB and Frontier include conducting a program to evaluate and improve board supervision and management, developing a program designed to improve loan administration, developing a program regarding asset diversification, obtaining current credit information on any loans lacking such information, reviewing and revising loan policy, establishing an independent loan review program, developing and implementing a program to collect or strengthen criticized assets, reviewing and maintaining an adequate loan loss reserve, developing a new long-range strategic plan, developing and implementing a long-term capital program, reviewing and revising liquidity and funds management policy, correcting violations of law cited by the OCC and obtaining approval from the OCC to declare or pay a dividend. In addition, the Consent Order requires that Frontier appoint a full-time President and Chief Executive Officer and maintain, as of May 31, 1993 and beyond, a Tier 1 capital ratio of 9.50% and a leverage ratio of 7.00%. Kathleen L. Kellogg became President and Chief Executive Officer at Frontier in November 1994, and her predecessor, Larry Sallinger was hired May 5, 1993. At December 31, 1994, Frontier's Tier 1 capital and leverage ratios were 12.29% and 8.32%, respectively. The Formal Agreement, which was amended on February 3, 1994, required VCNB to achieve a Tier 1 risk-based capital ratio of 12.00% and a leverage ratio of 7.00% by September 30, 1994. At September 30, 1994, VCNB's Tier 1 risk based capital ratio was 9.44% and its leverage capital ratio was 6.88%, which did not meet the higher leverage and Tier 1 capital ratios required by the formal agreement. On October 18, 1994, VCNB submitted to the OCC its revised plan for restoring capital and the OCC did not object to the implementation of the plan, as proposed. VCNB applied for and received an extension of the date by which such ratios are required to be achieved to June 30, 1995. As of December 31, 1994, VCNB's Tier 1 capital ratio was 10.92%, and its leverage ratio was 7.21%. The Formal Agreement amendment further requires VCNB to seek reimbursement of $3.4 million for all interest paid by VCNB to Ventura in connection with a deposit account at VCNB which was related to the issuance of commercial paper. The Company has committed to the completion of a rights offering, which is scheduled to occur during the second quarter of 1995. The primary purpose of the offering is to increase the capital bases of the Company and each of its subsidiaries to permit growth in a post recessionary economy and to enable VCNB to meet the requirements of the Formal Agreement. As of December 31, 1994, VCNB 37 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) needed approximately $1.4 million in additional capital to bring its Tier 1 capital ratio to 12.00%. The Company believes that compliance with the 12% Tier 1 capital ratio requirement, if achieved from sources noted above, will satisfy the reimbursement requirement. Until such time as VCNB is reimbursed, the OCC must authorize any payment from VCNB to Ventura. VCNB and Frontier are in compliance with, or are in the process of complying with, all of the items required under the Formal Agreement and Consent Order, respectively, and management does not believe the Formal Agreement and Consent Order will have any adverse material impact on its future operations. However, any deficiency in compliance with the requirements of the Formal Agreement or Consent Order could result in further regulatory restrictions. The FDIC Improvement Act of 1991 (the 1991 Act) provides for a rating system for insured institutions based on capital adequacy. Institutions are categorized as critically undercapitalized, significantly undercapitalized, undercapitalized, adequately capitalized and well capitalized. Regulatory agencies have adopted definitions of how institutions are ranked for prompt corrective action purposes and are as follows; (i) a well capitalized institution is one that has a leverage ratio of 5%, a Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 10% and is not subject to any written order or final directive by the regulatory agency to meet and maintain a specific capital level, (ii) an adequately capitalized institution is one that meets the minimum required capital adequacy levels but not that of a well capitalized institution, (iii) an undercapitalized institution is one that fails to meet any one of the minimum required capital adequacy levels but not as undercapitalized as a significantly undercapitalized institution, (iv) a significantly undercapitalized institution is one that has a total risk-based capital ratio of less than 6% and/or a leverage ratio of less than 3% and (v) a critically undercapitalized institution is one with a leverage ratio of less than 2%. Under the "prompt correction" provisions of the 1991 Act, banks that become significantly undercapitalized are subject to a requirement to recapitalize, merge with another financial institution, restrict interest rates paid on deposits, or restrict transactions with affiliates. Critically undercapitalized financial institutions are subject to appointment of a receiver by the OCC. On February 2, 1993, Ventura County National Bancorp entered into a Memorandum of Understanding with the Federal Reserve Bank. The Memorandum specified the following actions to be taken: Fifteen days notice to the Reserve Bank is required prior to the payment of dividends and prior to incurring any debt for other than operating purposes. The Parent may not repurchase any of its outstanding stock without prior approval from the Reserve Bank. Within 45 days of each quarter end, the Company shall furnish to the Reserve Bank written progress reports detailing the form and manner of actions taken to attain compliance, as well as the Parent company only balance sheet and statement of operations for the quarter end. Thirty days advance notice must be given to the Reserve Bank prior to adding or replacing a director, employing a senior executive officer, or promoting an existing employee to an officer. Pursuant to the provisions of the Memorandum, the Company submitted a summary of measures that have or are being taken to improve the financial condition of the subsidiary banks, a summary of measures taken to improve the director's supervision of the subsidiary banks, and steps taken to improve the effectiveness of the audit and credit review functions. Board members were designated to be responsible for monitoring and coordinating adherence to the provisions of the Memorandum, which is to remain in effect until the individual provisions are stayed, modified, terminated, or suspended by the Reserve Bank. 38 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 19. PARENT COMPANY ONLY FINANCIAL INFORMATION The following financial information represents the balance sheets of Ventura County National Bancorp (Parent Company only) as of December 31, 1994 and 1993 and the related statements of income and cash flows for the periods indicated:
DECEMBER 31, ------------------------- 1994 1993 ------------ ------------ (IN THOUSANDS OF DOLLARS) Assets Cash......................................... $ 37 $ 90 Equity in Bank subsidiaries.................. 19,143 20,402 Other assets................................. -- 38 ------------ ------------ Total assets............................... $ 19,180 $ 20,530 ============ ============ Liabilities Note payable................................. $ 125 $ 125 Other liabilities............................ 3 35 ------------ ------------ Total liabilities.......................... 128 160 ============ ============ Shareholders' equity........................... 19,052 20,370 ------------ ------------ Total liabilities and shareholders' equity. $ 19,180 $ 20,530 ============ ============
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------ 1994 1993 1992 ------ -------- ------ (IN THOUSANDS OF DOLLARS) Income Interest...................................... $ -- $ 193 $ 509 Management fees............................... 1,067 1,729 1,710 ------ -------- ------ 1,067 1,922 2,219 ====== ======== ====== Expense Interest...................................... 9 199 454 Salaries and benefits......................... 1,059 1,249 1,211 Miscellaneous operating....................... 62 718 425 ------ -------- ------ 1,130 2,166 2,090 ====== ======== ====== Income (loss) before income taxes and undistrib- uted net income (loss) of subsidiaries......... (63) (244) 129 Income tax expense allocated.................... (2) -- 49 ------ -------- ------ (61) (244) 80 ====== ======== ====== Equity in undistributed net earnings (deficit) of Bank subsidiaries........................... (201) (11,843) 605 ------ -------- ------ Net income (loss)............................... $ (262) $(12,087) $ 685 ====== ======== ======
39 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STATEMENTS OF CASH FLOWS
1994 1993 1992 ----- -------- ------- (IN THOUSANDS OF DOLLARS) Cash flows provided by operating activities: Net income (loss).................................. $(262) $(12,087) $ 685 Adjustments to reconcile net income (loss) to cash flows provided by operating activities: Earnings (loss) from subsidiaries.................. 201 11,843 (605) Amortization....................................... -- 231 33 Change in other assets............................. 39 2 146 Change in other liabilities........................ (31) 24 (367) Decrease in deferred compensation related to ESOP.. -- 635 572 Net cash (applied to) provided by operating activities........................................ (53) 648 464 Cash flows from investing activities: Capital Contribution to Subsidiary................. -- (150) -- Change in interest-bearing deposits due from banks. -- 8,875 (1,698) Proceeds from maturity of investment............... -- -- -- Net cash provided by (applied to) investing activi- ties................................................ -- 8,725 (1,698) Cash flows from financing activities: Change in other short-term borrowings.............. -- (8,860) 1,842 Repayment of note payable.......................... -- (2,188) (572) Issuance of note payable........................... -- 125 -- Issuance of stock.................................. -- 1,430 25 Net cash (applied to) provided by financing activi- ties................................................ -- (9,493) 1,295 Net (decrease) increase in cash and cash equivalents. (53) (120) 61 Cash and cash equivalents at beginning of year..... 90 210 149 Cash and cash equivalents at end of year........... $ 37 $ 90 $ 210 Supplemental information: Cash paid during the year for interest............. $ 9 $ 199 $ 454 Cash paid during the year for income taxes......... $ 3 $ 300 $ 1,155
NOTE 20. ACQUISITION OF SERVICING RIGHTS On November 15, 1990, VCNB purchased the rights to service certain loans held by the RTC for $1,735,000. Amortization expense for 1994 and 1993 was $40,000 and $486,000, respectively. The remaining mortgage servicing rights, totaling $320,000, were written off during 1994 in conjunction with the sale of the mortgage servicing department. NOTE 21. INTANGIBLE ASSETS As a result of the acquisition of Frontier in October 1989, the Company recorded goodwill representing the difference between the cost of the acquisition and the fair value of the assets acquired. Goodwill amortization in 1993 includes a write-off in the amount of $1,167,000 based on the Company's intent to sell Frontier at or near tangible book value. At December 31, 1994, the Company is no longer actively marketing Frontier. 40 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 22. QUARTERLY INFORMATION, 1994 AND 1993 The following table sets forth the Company's unaudited results of operations for each of the quarters of 1994 and 1993. This information, in the opinion of management, includes all adjustments necessary to state fairly the information set forth herein. The operating results for any quarter are not necessarily indicative of results for any future period.
FOR THE YEAR ENDED DECEMBER 31, 1994 ---------------------------------- 4TH 3RD 2ND 1ST ------- ------- ------- ------- (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Interest Income............................ $ 5,640 $ 5,511 $ 5,593 $ 5,391 Interest Expense........................... 1,554 1,503 1,549 1,661 ------- ------- ------- ------- Net Interest Income........................ 4,086 4,008 4,044 3,730 Other Income............................... 374 591 1,956 1,143 Provision for Loan Losses.................. 550 400 2,075 800 Other Expenses............................. 3,864 3,559 4,474 4,187 ------- ------- ------- ------- Income (Loss) before taxes................. 46 640 (549) (114) Income taxes............................... (4) 75 214 0 ------- ------- ------- ------- Net Income (Loss).......................... $ 50 $ 565 $ (763) $ (114) ======= ======= ======= ======= Earnings per share: Net Income (Loss)........................ $ .01 $ .09 $ (.12) $ (.02) ======= ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1993 ---------------------------------- 4TH 3RD 2ND 1ST ------- ------- ------- ------- (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Interest Income............................ $ 5,977 $ 6,239 $ 6,816 $ 6,878 Interest Expense........................... 1,976 2,207 2,440 2,376 ------- ------- ------- ------- Net Interest Income........................ 4,001 4,032 4,376 4,502 Other Income............................... 1,081 1,000 1,220 1,519 Provision for Loan Losses.................. 1,800 6,062 4,326 4,025 Other Expenses............................. 6,151 4,489 5,542 4,657 ------- ------- ------- ------- Income (Loss) before taxes................. (2,869) (5,519) (4,272) (2,661) Income taxes............................... 671 (1,218) (1,602) (1,085) ------- ------- ------- ------- Net Income (Loss)........................ $(3,540) $(4,301) $(2,670) $(1,576) ======= ======= ======= ======= Earnings per share: Net Income (Loss)........................ $ (0.62) $ (0.77) $ (0.48) $ (0.28) ======= ======= ======= =======
41 INDEPENDENT AUDITORS' REPORT Board of Directors Ventura National Bancorp: We have audited the accompanying consolidated balance sheets of Ventura County National Bancorp and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ventura County National Bancorp and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 18 to the consolidated financial statements, Frontier Bank N.A. and Ventura County National Bank (VCNB) have entered into agreements with the Office of the Comptroller of the Currency (OCC). The agreement between VCNB and the OCC, as amended, requires VCNB to meet prescribed capital requirements by no later than June 30, 1995. Currently, VCNB has not achieved such capital requirements. Failure on the part of VCNB to meet the terms of the agreement may subject VCNB to significant regulatory sanctions. The financial statement impact, if any, that might result from the failure of VCNB to comply with the agreement and, ultimately, the capital requirements prescribed by the OCC cannot presently be determined. Accordingly, no adjustments that may result from the ultimate resolution of this uncertainty have been made in the accompanying financial statements. DELOITTE & TOUCHE LLP February 17, 1995 Los Angeles, California 42 EX-23.1 4 CONSENT OF DELOITTE EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statement on Form S-8 of Ventura County National Bancorp of our report dated February 17, 1995 (which expresses an unqualified opinion and includes an explanatory paragraph relating to noncompliance with regulatory capital requirements) incorporated by reference in the Annual Report on Form 10-K/A for the year ended December 31, 1994. DELOITTE & TOUCHE LLP Los Angeles, California April 14, 1995 -----END PRIVACY-ENHANCED MESSAGE-----