-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QpL1YtN2BrGfaJb5UK61qv2SK0RCidcLwPG7blPHfGwFyDesE4IRjzwodA1TJTOS GY3hTGggTfYWgEE97CX6eg== 0000898430-96-001037.txt : 19960329 0000898430-96-001037.hdr.sgml : 19960329 ACCESSION NUMBER: 0000898430-96-001037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15814 FILM NUMBER: 96540350 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1995 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, no 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. [_] There were 9,228,723 shares of Common Stock, no par value, issued and outstanding as of March 19, 1996. The aggregate market value of such shares held by nonaffiliates was $28,989,120 as of March 19, 1996. _______________________________ Documents Incorporated by Reference: Part II. Items 5,6,7,8 and 9, 1995 Annual Report to Shareholders Part III. Items 10,11,12, and 13, Proxy Statement for 1996 Meeting 1 VENTURA COUNTY NATIONAL BANCORP FORM 10-K INDEX
PAGES PART I ITEM 1. Business 3 ITEM 2. Properties 20 ITEM 3. Legal Proceedings 20 ITEM 4. Submission of Matters to a Vote of Security Holders 21 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 ITEM 6. Selected Financial Data 21 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 ITEM 8. Financial Statements and Supplementary Data 21 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III ITEM 10. Directors and Executive Officers of the Registrant 22 ITEM 11. Executive Compensation 22 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 22 ITEM 13. Certain Relationships and Related Transactions 22 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23 Signatures 24
2 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, 1995, the Company had total consolidated assets of $267.8 million, total consolidated deposits of $236.1 million and total consolidated shareholders' equity of $29.5 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. First Interstate Bank of California and Wells Fargo & Company have received regulatory approval for a merger and the resulting institution will likely be a dominant competitor in the market areas of both Banks. As of most recent data available, Ventura had approximately 5% of total bank deposits in Ventura County, while Frontier's share of total bank deposits in Orange County was 0.17% and Los Angeles County was 0.8%. 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' portfolios comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Banks. Accordingly, the earnings and growth of the Company are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. 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 Board of Governors of the Federal Reserve System (the Federal Reserve Board"). The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating 3 recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions 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 institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. The Financial Services Modernization Act recently proposed in the House of Representatives would generally permit banks to expand activities further into the areas of securities and insurance, and would reduce the regulatory and paperwork burden that currently affects banks. Additionally, the proposed legislation would force the conversion of savings and loan holding companies into bank holding companies, although unitary savings and loan holding companies authorized to engage in activities as of January 1, 1995 would be exempted. Similar legislation has also been proposed in the Senate. In addition, legislation was recently introduced in Congress that would merge the deposit insurance funds applicable to commercial banks and savings associations and impose a one-time assessment on savings associations to recapitalize the deposit insurance fund applicable to savings associations. The likelihood of any major legislative changes and the impact such changes might have on the Company are impossible to predict. See "Item 1. Business - Supervision and Regulation." Supervision and Regulation - -------------------------- Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of the Company and the Banks. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. The Company ----------- The Company, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (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 subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. 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 "Item 1. Business - 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 and 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 4 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, subject to the prior approval of the Federal Reserve Board, may 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. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. 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 BHC 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 Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California State Banking Department. Regulations have not been adopted to implement the powers of the California Superintendent of Banks 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 --------- The Banks, as national banking associations, are subject to primary supervision, examination and regulation by the Office of the Comptroller of the Currency (the "OCC"). If, as a result of an examination of either Bank, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank's operations are unsatisfactory or that the 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. The FDIC has 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. The deposits of the Banks are insured by the FDIC in the manner and to the extent provided by law. 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 "Item 1. Business - Supervision and Regulation -- Premiums for Deposit Insurance." The Banks are also subject to certain regulations of the Federal Reserve Board and applicable provisions of California law, insofar as they do not conflict with or are not preempted by federal banking law. 5 Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Banks. Federal and California statutes and regulations relate to many aspects of the Banks' operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obligations to depositors and borrowers. Further, the Banks are required to maintain certain levels of capital. See "Item 1. Business - Supervision and Regulation - Capital Standards." 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 the Company 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). The Company is a legal entity separate and distinct from the Banks. The Company's ability to pay cash dividends is limited by state law. At present, substantially all of the Company's revenues, including funds available for the payment of dividends and other operating expenses, are earnings on investment of cash at the parent Company. In the future, the Company's ability to pay cash dividends will depend primarily on dividends paid by the Banks. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Banks. The prior approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits (as defined) for the preceding two years, less any transfers to surplus. Under the prompt corrective action rules of the Federal Deposit Insurance Corporation Improvement Act, 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 has authority to prohibit the Banks from engaging in activities that, in the OCC's opinion, constitute unsafe or unsound practices 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 and the restrictions that are or may be imposed under the prompt corrective action provisions of federal 6 law could limit the amount of dividends which the Banks or the Company may pay. See "Item 1. Business - Supervision and Regulation - Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and - "Capital Standards" for a discussion of these additional restrictions on capital distributions. Frontier is currently prohibited by the terms of its Consent Order with the OCC from paying any dividends without the prior consent of the OCC. See "Supervision and Regulation -- Potential and Existing Enforcement Actions." At December 31, 1995, Ventura had $ 4.8 million in retained net profits available for the payment of cash dividends. 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, the Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Banks unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Banks to or in the Company or to or in any other affiliate is limited to 10% of each Banks' capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of each Banks' capital and surplus (as defined by federal regulations). Additional restrictions on transactions with affiliates may be imposed on the Banks under the prompt corrective action provisions of federal law. See "Item 1. Business -Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms." Capital Standards ----------------- The Federal Reserve Board and the OCC have 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 high 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 primarily 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, long term preferred stock, eligible 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. 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 risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the 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 is 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. In August 1995, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates 7 on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate federal banking agency. Because this proposal has only recently been issued, the Company currently is unable to predict the impact of the proposal on the Banks if the policy statement is adopted as proposed. In January 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. The federal banking agencies recently issued final rules, effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized for 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 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 for 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 Banks to grow and could restrict the amount of profits, if any, available for the payment of dividends.
- ------------------------------------------------------------------------------------------------------ as of December 31, 1995 Ventura Frontier - ------------------------------------------------------------------------------------------------------ MINIMUM AMOUNT RATIO AMOUNT RATIO REQUIREMENT - ------------------------------------------------------------------------------------------------------ Leverage capital ratio $ 17,709 10.03% $ 8,289 9,80% 4.00% Tier 1 risk-based capital ratio $ 17,709 15.97% $ 8,289 13.78% 4.00% Total risk-based capital ratio $ 19,126 17.25% $ 9,051 15.04% 8.00% - ------------------------------------------------------------------------------------------------------
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: 8
"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% (3% if the institution receives the highest rating from its primary regulator) "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%; Tier 1 risk-based capital less than 3%; or or or Leverage ratio less than 4% (3% Leverage ratio less than 3%. if the institution receives the highest rating from its primary regulator) "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 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 9 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. 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 ------------------------------ In July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. 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. 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 10 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 result of these provisions is that the assessment rate on deposits of BIF members could increase in the future. The FDIC also has authority to impose special assessments against insured deposits. The FDIC implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," 1.25%, the total amount raised from BIF members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023% of deposits. On August 8, 1995, the FDIC announced that the designated reserve ratio had been achieved and, accordingly, issued final regulations adopting an assessment rate schedule for BIF members of 4 to 31 basis points effective on June 1, 1995. On November 14, 1995, the FDIC further reduced deposit insurance premiums to a range of 0 to 27 basis points effective for the semi-annual period beginning January 1, 1996. Under the risk-based assessment system, a BIF member institution such as the Banks is categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and one of three categories based on supervisory evaluations by its primary federal regulator (in the Bank's case, the FDIC). The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration (Group B), and poses a substantial probability of loss (Group C). The capital ratios used by the FDIC to define well-capitalized, adequately capitalized and undercapitalized are the same in the FDIC's prompt corrective action regulations. The BIF assessment rates are summarized below; assessment figures are expressed in terms of cents per $100 in deposits. Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C ------------------------------------------- Well Capitalized...................................... 23 26 29 Adequately Capitalized................................ 26 29 30 Undercapitalized...................................... 29 30 31 Assessment Rates Effective through the Second Half of 1995 Group A Group B Group C ------------------------------------------- Well Capitalized...................................... 4 7 21 Adequately Capitalized................................ 7 14 28 Undercapitalized...................................... 14 28 31 Assessment Rates Effective January 1, 1996 Group A Group B Group C ------------------------------------------- Well Capitalized...................................... 0* 3 17 Adequately Capitalized................................ 3 10 24 Undercapitalized...................................... 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual period (which also applies to all other assessment risk classifications). A number of proposals have recently been introduced in Congress to address the disparity in bank and thrift deposit insurance premiums. On September 19, 1995, legislation was introduced and referred to the House Banking Committee that would, among other things: (i) impose a requirement on all SAIF member institutions to 11 fully recapitalize the SAIF by paying a one-time special assessment of approximately 85 basis points on all assessable deposits as of March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread the responsibility for FICO interest payments across all FDIC-insured institutions on a pro-rata basis, subject to certain exceptions; (iii) require that deposit insurance premium assessment rates applicable to SAIF member institutions be no less than deposit insurance premium assessment rates applicable to BIF member institutions; (iv) provide for a merger of the BIF and the SAIF as of January 1, 1998; (v) require savings associations to convert to state or national bank charters by January 1, 1998; (vi) require savings associations to divest any activities not permissible for commercial banks within five years; (vii) eliminate the bad-debt reserve deduction for savings associations, although savings associations would not be required to recapture into income their accumulated bad-debt reserves; (viii) provide for the conversion of savings and loan holding companies into bank holding companies as of January 1, 1998, although unitary savings and loan holding companies authorized to engage in activities as of September 13, 1995 would have such authority grandfathered (subject to certain limitations); and (ix) abolish the OTS and transfer the OTS' regulatory authority to the other federal banking agencies. The legislation would also provide that any savings association that would become undercapitalized under the prompt corrective action regulations as a result of the special deposit premium assessment could be exempted from payment of the assessment, provided that the institution would continue to be subject to the payment of semiannual assessments under the current rate schedule following the recapitalization of the SAIF. The legislation was considered and passed by the House Banking Committee's Subcommittee on Financial Institutions on September 27, 1995, and has not yet been acted on by the full House Banking Committee. On September 20, 1995, similar legislation was introduced in the Senate, although the Senate bill does not include a comprehensive approach for merging the savings association and commercial bank charters. The Senate bill remains pending before the Senate Banking Committee. The future of both these bills is linked with that of pending budget reconciliation legislation since some of the major features of the bills are included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill, which was passed by both the House and Senate on November 17, 1995 and vetoed by the President on December 6, 1995, would: (i) recapitalize the SAIF through a special assessment of between 70 and 80 basis points on deposits held by institutions as of March 31, 1995; (ii) provide an exemption to this rule for weak institutions, and a 20% reduction in the SAIF-assessable deposits of so- called "Oakar banks;" (iii) expand the assessment base for FICO payments to include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1, 1998, only if no insured depository institution is a savings association on that date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi) prohibit the FDIC from setting semiannual assessments in excess of the amount needed to maintain the reserve ratio of any fund at the designated reserve ratio. The bill does not include a provision to merge the charters of savings associations and commercial banks. In light of ongoing debate over the content and fate of the budget bill, the different proposals currently under consideration and the uncertainty of the Congressional budget and legislative processes in general, management cannot predict whether any or all of the proposed legislation will be passed, or in what form. Accordingly, the effect of any such legislation on the Banks cannot be determined. Interstate Banking and Branching -------------------------------- In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became law. 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 BHC Act 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 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 12 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. In October 1995, California adopted "opt in" legislation under the Interstate Act that permits out-of-state banks to acquire California banks that satisfy a five-year minimum age requirement (subject to exceptions for supervisory transactions) by means of merger or purchases of assets, although entry through acquisition of individual branches of California institutions and de novo branching into California are not permitted. The Interstate Act and the California branching statute will likely increase competition from out-of-state banks in the markets in which the Company operates, although it is difficult to assess the impact that such increased competition may have on the Company's operations . 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. 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. The OCC has rated Ventura "satisfactory" and Frontier "needs to improve" in complying with their respective CRA obligations. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 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. Based upon an examination of Ventura completed during the fourth quarter of 1995, the OCC terminated Ventura's Formal Agreement as of November 30, 1995. The significant requirements of Frontier's Consent Order 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, 13 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. In addition, 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, 1995, Frontier's Tier 1 risk based capital ratio was 13.78% and its leverage capital ratio was 9.80%. The Consent Order also requires Frontier to retain a new president and to continue to develop a program of asset diversification. The Company entered into the MOU with the Federal Reserve Bank of San Francisco (the "Reserve Bank") acting under delegated authority from the Federal Reserve Board 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. Management believes Frontier and the Company are in full compliance with all of the items required under the Consent Order and MOU, respectively. 14 Statistical Financial Data - -------------------------- Investment Portfolio - -------------------- The following table sets forth cost and market value of investment securities at the dates indicated. SECURITIES AVAILABLE-FOR-SALE
- ---------------------------------------------------------------------------------------------------------------- As of December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) Cost Market Cost Market Cost Market ---- ------ ---- ------ ---- ------ U.S. Government securities $13,491 $13,575 $22,935 $22,706 $38,597 $38,475 Mortgage-backed securities 21,882 21,648 8,067 7,551 -- -- Federal Reserve Bank and FHLB Stock 1,365 1,365 1,602 1,602 2,300 2,300 - ----------------------------------------------------------------------------------------------------------------- Total securities, available-for-sale $36,738 $36,588 $32,604 $31,859 $40,897 $40,775 ================================================================================================================== SECURITIES HELD-TO-MATURITY - ---------------------------------------------------------------------------------------------------------------- As of December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) Cost Market Cost Market Cost Market ---- ------ ---- ------ ---- ------ U.S. Government securities $ -- $ -- $ 1,250 $ 1,222 $ -- $ -- Mortgage-backed securities -- -- 17,525 16,741 -- -- - ---------------------------------------------------------------------------------------------------------------- Total securities, held-to-maturity $ -- $ -- $18,775 $17,963 $ -- $ -- =================================================================================================================
The following table sets forth the maturity distribution of the investment portfolio at December 31, 1995:
Weighted Amortized Market Average Cost Value Yield - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) U.S. Government securities: Within one year $ 7,493 $ 7,504 5.61% After one but within five years 5,998 6,071 6.79 After five but within ten years -- -- -- After ten years -- -- -- - ------------------------------------------------------------------------------------------------------------- Total U.S. Government securities $13,491 $13,575 6.14% ============================================================================================================= Mortgage-backed securities: Within one year $ -- -- % After one but within five years 11,574 11,448 5.45 After five but within ten years 10,308 10,200 6.68 After ten years -- -- -- - ------------------------------------------------------------------------------------------------------------- Total Mortgage-backed securities $21,882 $21,648 6.03% ============================================================================================================= Federal Reserve Bank and FHLB Stock Within one year $ -- $ -- % After one but within five years -- -- -- After five but within ten years -- -- -- After ten years 1,365 1,365 7.04 - ------------------------------------------------------------------------------------------------------------- Total FRB and FHLB Stock $ 1,365 1,365 7.04% ============================================================================================================= Total Investment Securities $36,738 $36,588 6.11% =============================================================================================================
15 Loan Portfolio - -------------- The following table sets forth the amounts of loans at December 31, according to the type of loan:
as of December 31, 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------- (dollars in thousands) Commercial, Financial and Agriculture $142,427(1) $138,193 $197,384 $221,553 $190,076 Real Estate -Construction 1,537 7,734 23,559 31,264 40,860 Real Estate - Mortgage 6,710 11,993 31,202 36,775 37,045 Installment 7,043 9,897 14,961 21,242 30,068 Lease Financing, net of unearned income 48 117 408 867 1,218 - ---------------------------------------------------------------------------------------------- Total Loans $157,765 $167,934 $267,514 $311,701 $299,267 ==============================================================================================
(1) Includes $2.24 million of SBA loans held for sale at December 31, 1995. 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, 1995 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.
Loans Maturing In ------------------------------------------- Between Greater Less Than One-Five Than Five One Year Years Years Total -------------------------------------------------------- (dollars in thousands) Commercial, Financial and Agricultural $39,939 $60,010 $42,478 $ 142,427(1) Real Estate Construction 961 576 -- 1,537 Real Estate Mortgage. 316 1,568 4,826 6,710 Installment 3,717 3,183 143 7,043 Lease Financing 9 39 -- 48 -------------------------------------------------------- Total Maturities of Loans $44,942 $65,376 $47,447 $ 157,765 ======================================================== Loans with fixed interest rates $14,027 $19,255 $ 6,341 $ 39,623 Loans with variable interest rates 30,915 46,121 41,106 118,142 -------------------------------------------------------- Total Repricing of Loans $44,942 $65,376 $47,447 $157,765 ========================================================
(1) Includes $2.24 million of SBA loans held for sale at December 31, 1995. Nonperforming Assets: 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 121.62% and 103.98%, at December 31, 1995, and 1994, respectively. Loans past due 90 days or more and still accruing totaled $101 thousand and $331 thousand at December 31, 1995, and 1994, respectively. Total nonperforming loans as a percent of total loans outstanding were 2.81% and 4.73% at December 31, 1995 and 1994, respectively. The decrease in nonaccrual loans was primarily attributable to the collection of the same and the overall improvement in the credit quality of the loan portfolio. 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 loan is in the process of imminent collection in the normal course of business, the Company may remove the loan from nonaccrual status and continue to accrue interest. Loans are placed on nonaccrual status earlier, if there is doubt as to the collectibility of any amounts due according to the contractual terms of the loan agreement. At December 31, 1995, loans totaling $4.3 million were on nonaccrual status, compared to $7.6 million at December 31, 1994. As of December 31, 1995, the Company had $3.643 million in restructured loans, of which $3.326 million were performing in accordance with their restructured terms for a specified period of time, typically at least six months. The remaining balance is included within loans on nonaccrual status. As of December 31, 1994, the Company had 16 $1.968 million in restructured loans, of which $1.966 million were performing in accordance with their restructured terms. Allocation for Allowance for Loan Losses: Over the five year period ended - ----------------------------------------- December 31, 1995, 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 loan losses in this category. The Company's current practice is to make specific allocations to large loans and unspecified allocations to each loan category based on management's risk assessment. While management has allocated reserves to various portfolio categories, the reserve is general in nature and is available for the loan portfolio The following table sets forth the allocation of the allowance for loan losses by loan category as of the dates indicated.
as of December 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------- % 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 4,926 3.12% $6,704 3.99% $11,361 4.25% $3,132 1.00% $1,925 0.64% Real Estate-- Construction 17 0.01 265 0.16 1,916 0.72 242 0.08 254 0.08 Real Estate-- Mortgage 88 0.06 964 0.57 420 0.16 70 0.02 238 0.08 Installment 369 0.23 325 0.19 555 0.21 362 0.12 399 0.13 Lease Financing 1 0.00 3 0.00 61 0.02 48 0.02 29 0.01 ------------------------------------------------------------------------------ Total Allocated $5,401 3.42% $8,261 4.92% $14,313 5.35% $3,854 1.24% $2,845 0.95% ==============================================================================
Potential Problem Loans: The level of nonperforming assets will depend to a - ------------------------ great extent on the future economic environment. Currently, management of the Company has identified $9.3 million in potential problem loans at December 31, 1995, in addition to its nonperforming assets, performing restructured loans and accruing loans 90 days or more past due, as to which it has serious doubts as to the ability of the borrowers to comply with the present repayment terms and which may become nonperforming assets, based on known information about possible credit problems of the borrower. 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, 1995, 1994, 1993, 1992 and 1991 would have increased by $1.3 million, $1.6 million, $2.2 million, $728 thousand and $429 thousand, respectively. The following summarizes foregone interest income for 1995: Interest income at original terms $ 1,669,000 Less: Interest income included in 1995 income (415,000) --------- Foregone interest income $ 1,254,000 =========
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 demand 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 average daily balances. 17
for the years ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate - ----------------------------------------------------------------------------------------------- (dollars in thousands) Demand Deposits: Interest-bearing $ 52,895 2.63% $58,114 2.65% $66,167 2.73% Noninterest-bearing 62,980 -- 75,568 -- 87,383 -- Savings deposits 27,707 2.36% 34,575 2.37% 37,892 2.78% Time deposits 84,337 5.12% 104,671 3.72% 142,020 3.88% ----------------------------------------------------------- Total deposits $ 227,919 2.79% $272,928 2.29% $333,462 2.51% ===========================================================
With respect to the Company's time certificates of deposit of $100 thousand or more, at December 31, 1995, such deposits had the following schedule of maturity:
as of December 31, 1995 (dollars in thousands) ------------------------------------------------- Three months or less $10,139 Three to six months 8,184 Six to twelve months 8,814 Over twelve months 614 ------- Total $27,751 =======
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.
as of and for the years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------- (dollars in thousands) Maximum month end balance outstanding during the year $ -- $ -- $ 8,616 Average amount outstanding during the year $ -- $ -- $ 6,987 Weighted average interest rate -- -- 2.66%
The Company utilized credit lines with FHLB during 1994 and 1993.
as of and for the years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------- (dollars in thousands) Maximum month end balance 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%
Employees - --------- At December 31, 1995, the Company had 127 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. 18 Return on Equity and Assets - --------------------------- The following table shows consolidated operating and capital ratios of the Company:
for the years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------- Return on Assets (1) 1.49% (0.09%) (3.17%) Return on Equity (2) 15.64% (1.29%) (45.12%) Dividend Payout Ratio -- -- -- Capital to Assets Ratio (3) 9.48% 6.81% 7.03%
___________________________ (1) Return on assets: Net income to average total assets. (2) Return on equity: Net income to average total shareholders' equity. (3) Capital to assets ratio: Average shareholders' equity to average total assets. 19 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, from which the Company anticipates annual cost savings of approximately $134,000. Ventura leases a 3,100 square foot building at 4730 Telephone Road in Ventura for its Ventura branch office under a lease expiring November 1996. Ventura does not have an option to renew this lease. The Company anticipates that it will attempt to negotiate a renewal of this lease or look for another suitable location in the third quarter of 1996. 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 for its Camarillo and Westlake Village branch offices, respectively. 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 2005, 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 Central Operations is housed in 8,105 square feet at 2125 Knoll Drive in Ventura. The lease 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. Frontier's main office occupies 17,588 square feet at One Centerpointe Drive in La Palma, California and Frontier 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 purchased a 9,007 square foot building located at 131 West Anaheim Street in Wilmington for its South Bay branch office during June of 1995. Frontier purchased the building and lot from the FDIC as a receiver for Maritime Bank for $265,000 cash. Frontier terminated the month to month lease on its previous Wilmington branch location and began operating at the current branch location in September 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. 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. Bankamerica Corporation, 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. VCNB appears to have made $4.2 million in loans to students at WCC who are sought to be included in the class. 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. 20 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, plaintiffs filed a Notice of Appeal with the Court of Appeal of the State of California and briefs on appeal have been filed. Oral arguments are scheduled for December 1996. Bank of America reached a settlement with plaintiffs and plaintiffs and the other Bank Defendants have engaged in settlement negotiations but, to date, no settlement has been reached. Based upon the advice of counsel, should the appellate court find reason to reverse the demurrer, management is currently unable to estimate the likelihood of an unfavorable outcome or the amount or range of potential loss. 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 1995. Part II - ------- Item 5: Market for Common Stock and Related Shareholder Matters - ---------------------------------------------------------------- See "Market for Common Stock and Related Shareholder Matters" section of 1995 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 1995 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 1995 Annual Report to shareholders which is incorporated by reference herein. Item 8: Financial Statements and Supplementary Data - ----------------------------------------------------- See "Financial Statements" section of the 1995 Annual Report to shareholders which is incorporated by reference herein. Item 9: Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosures - --------------------- Not applicable. 21 Part III - -------- Item 10: Directors and Executive Officers - ------------------------------------------ Contained in the Proxy Statement for the 1996 Annual Meeting which is to be filed within 120 days after December 31, 1995, which is incorporated by reference. Item 11: Executive Compensation - -------------------------------- Contained in the Proxy Statement for the 1996 Annual Meeting which is to be filed within 120 days after December 31, 1995, which is incorporated by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Contained in the Proxy Statement for the 1996 Annual Meeting which is to be filed within 120 days after December 31, 1995, which is incorporated by reference. Item 13: Certain Relationships and Related Transactions - -------------------------------------------------------- Contained in the Proxy Statement for the 1996 Annual Meeting which is to be filed within 120 days after December 31, 1995, which is incorporated by reference. 22 Part IV - ------- 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 1995 Annual Report to shareholders: . Consolidated Balance Sheets at December 31, 1995, and December 31, 1994. . Consolidated Statements of Operations for the years ended December 31, 1995, 1994, and 1993. . Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994, and 1993. . Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993. . 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) + 10.10 -Management Incentive Compensation Program + 11 -Computation of per share income (loss) 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 Ventura Management Services Company Inc. Frontier Bank, N.A., a National Association 23.1 -Consent of Deloitte & Touche LLP 27 -Financial Data Schedule ____________________________________________ (+) Management contract or compensatory plan or arrangement. (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 on Form 8-K were filed during the last quarter of 1995. (c) Exhibits -------- See Index to Exhibits included in this Annual Report on Form 10-K. 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: March 7, 1996 VENTURA COUNTY NATIONAL BANCORP ------------------------------- (Registrant) By: /s/ RICHARD S. CUPP ------------------------------------- RICHARD S. CUPP President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated above. SIGNATURE TITLE SIGNATURE TITLE - --------- ----- --------- ----- /s/ JAMES B. HUSSEY /s/ MICHAEL ANTIN - --------------------------------------- -------------------------------- James B. Hussey, Chairman of the Board Michael Antin, Director /s/ RALPH R. BENNETT /s/ RICHARD S. CUPP - --------------------------------------- -------------------------------- Ralph R. Bennett, Director Richard S. Cupp, Director Chief Executive Officer (Principal Executive Officer) /s/ JAMES M. DAVIS /s/ BART M. HACKLEY - --------------------------------------- -------------------------------- James M. Davis, Director Bart M. Hackley, Director /s/ W. E. HARTMAN /s/ RICHARD A. LAGOMARSINO - --------------------------------------- -------------------------------- W. E. Hartman, Director Richard A. Lagomarsino, Director /s/ ZELLA A. RUSHING /s/ RAYMOND E. SWIFT - --------------------------------------- -------------------------------- Zella A. Rushing Director Raymond E. Swift, Director /s/ SIMONE LAGOMARSINO - --------------------------------------- Simone Lagomarsino Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 24 EX-10 2 MANAGEMENT INCENTIVE PROGRAM EXHIBIT 10.10 VENTURA COUNTY NATIONAL BANCORP (Ventura County National Bank and Frontier Bank, N.A.) MANAGEMENT INCENTIVE COMPENSATION PROGRAM - Confidential - March 1995 THE MARGADY GROUP, INC. TABLE OF CONTENTS ----------------- I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW ....................... 1 A. PROGRAM DESIGN OBJECTIVES .................................... 1 B. PROGRAM OVERVIEW ............................................. 2 II. ANNUAL INCENTIVE PLAN DESIGN ........................................... 4 A. BASIS FOR INCENTIVES ......................................... 4 B. PROFIT OBJECTIVE PERFORMANCE (POP) MEASURE ................... 5 C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE ..................... 6 D. INDIVIDUAL PERFORMANCE MEASURE ............................... 9 E. ANNUAL INCENTIVES AND PERFORMANCE ........................... 12 III. ANNUAL INCENTIVE PROGRAM ADMINISTRATION ............................... 16 A. OVERALL RESPONSIBILITY ...................................... 16 B. GUIDELINES TO PLAN PARTICIPANT SELECTION .................... 16 C. GUIDELINES TO THE TIMING OF AWARDS AND PAYMENT .............. 17 D. GUIDELINES TO DETERMINING THE SIZE OF AWARDS ................ 17 E. FORM AND TIME OF PAYMENT .................................... 17 F. PLAN SAFEGUARDS AND LIMITATIONS ............................. 18 G. SELECTION OF THE PEER GROUPS ................................ 21 APPENDIX A: POP AND ROAR FACTOR WEIGHTS, 1995-98 PERFORMANCE ............... 22 APPENDIX B: SAMPLE PEER COMPARISON GROUPS .................................. 24 APPENDIX C: CALCULATION OF ROAR MEASURE .................................... 27
I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW ------------------------------------------------ A. PROGRAM DESIGN OBJECTIVES ------------------------- . Limit to groups of participants at Ventura County National Bancorp (VCNB), Ventura National Bank (Ventura), and Frontier Bank (Frontier) who can significantly contribute to profits, revenues, cost containment .. Group I: CEO/President-VCNB, President-Frontier .. Group II: Executive/Senior Vice Presidents reporting to the Presidents .. Group III: Selected managers reporting to Group II executives and other selected managers . Reward achievement of annual profit and other objectives as indicated in ------ the strategic plan . Reflect participants' varying impact on profits and other results .. Incorporated individual performance evaluation .. Link to participants' accomplishment of specific individual objectives . Plan elements flexible, will be adjusted over time 1 I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW, Cont'd ------------------------------------------------ B. PROGRAM OVERVIEW ---------------- . Incentives will be based on a combination of: .. VCNB, Ventura and Frontier results .. Peer bank comparisons .. Individual performance . Incentives will be determined based on profitability after accruing (deducting) incentive costs. . Depending upon the unit to which the participant reports, the annual incentive plan is based on: .. Annual VCNB or Ventura or Frontier Bank performance compared with plan .. Profitability relative to VCNB or Ventura or Frontier peers .. Individual performance assessments 2 I. ANNUAL INCENTIVE PROGRAM OBJECTIVES AND OVERVIEW, Cont'd ------------------------------------------------ B. PROGRAM OVERVIEW ---------------- . Each position has a target incentive opportunity ------ .. Target set as a percentage of participant's base salary .. Differing percentages reflecting participants' potential to affect his or her unit's performance ANNUAL INCENTIVE OPPORTUNITY ---------------------------- (PERCENT OF BASE SALARY)
MINIMUM TARGET MAXIMUM GROUP PERFORMANCE PERFORMANCE PERFORMANCE - ----- ----------- ----------- ----------- I 0.0% 20-25% 36-46% II 0.0% 15-20% 27-36% III 0.0% 10-15% 18-27%
. Incentives earned will depend on performance results . Target incentives may increase over time .. As VCNB and Banks grow in assets and profits .. Any future increase in incentive opportunity must be accompanied by reduced rate of base salary increases 3 II. ANNUAL INCENTIVE PLAN DESIGN ---------------------------- A. BASIS FOR INCENTIVES -------------------- . Three performance measures determine incentives: .. $ profit objective performance (POP) .. Return on assets relative to peers (ROAR) .. Individual performance assessment . Two financial performance measures are weighted: .. Weights to change over time, 1995 proportions shown below: - Profit Objective Performance (POP) 70% - Relative Return on Assets (ROAR) 30% .. Appendix A provides schedule of POP/ROAR proportions . Earned annual incentive award: INCENTIVE = (ROAR MEASURE + POP MEASURE) x INDIVIDUAL PERFORMANCE MEASURE . Individual performance assessment increases or decreases the Incentive amount that can be earned by each participant . For Groups I and II: .. Primary emphasis on achievement of ROAR and POP .. But, individual performance can increase award by 40% or reduce it to 0% . For Group III: .. Primary emphasis on personal goal achievement .. ROAR and POP factors may increase award by 20% or decrease it by 40% 4 II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D ---------------------------- B. PROFIT OBJECTIVE PERFORMANCE (POP) MEASURE ------------------------------------------ . Based on achieving a "stretching" pre-tax income target .. Agreed upon each year .. Adopted by Board of Directors .. For each unit (VCNB, Ventura and Frontier) . Incentive awards begin to fund close to target .. Awards increase substantially as income approaches "stretching" target . Awards level off after profit target is reached, rising slowly up to maximum amount over target . Objective is to manage toward accomplishment of plan .. Strong motivation to reach target .. Limited benefits from windfalls . "POP" performance levels for incentives:
THRESHOLD TARGET MAXIMUM PERFORMANCE PERFORMANCE PERFORMANCE ----------- ----------- ----------- 80% OF 100% OF 120% PROFIT PLAN PROFIT PLAN PROFIT PLAN
. In 1995, comprises 70% of target incentive for Groups I and II . Comprises 70% of the adjustment factor applied to Group III participants' individual performance measure .. Appendix A presents a four year schedule of POP influence on incentives. 5 II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D ---------------------------- C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE ---------------------------------------- . Factor based on the Holding Company or Bank profitability (ROA) vs. group of comparable peers, depending on the plan participant's unit. .. The profitability measure, return on average assets (ROA), will be measured net of extraordinary gains or losses as determined by GAAP, additionally, the inclusion or exclusion of other extraordinary gains and losses will be subject to Board approval. . Three different peer groups: .. VCNB: 24 California bank holding companies closest in size to VCNB .. Ventura County National Bank: 24 banks closest in size in Ventura, Santa Barbara and Los Angeles Counties -- Will include Ventura and Santa Barbara banks with +-50% of the assets of the Ventura County National Bank .. Frontier Bank: 24 banks closest in size in Los Angeles and Orange Counties . Peer institutions must have equity capital to assets of 4% or greater . In 1995, target relative return on assets performance for each unit set at the 60th percentile level relative to the appropriate peer group . Performance above or below relative ROA target results in upward or downward adjustment of incentive awards .. Threshold performance - at the 45th percentile of the peer group .. Maximum incentive - at the 75th percentile of peers 6 II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D ---------------------------- C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE ---------------------------------------- . "ROAR" performance levels for incentives:
THRESHOLD TARGET MAXIMUM PERFORMANCE PERFORMANCE PERFORMANCE ----------- ----------- ----------- 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE
. ROAR performance levels for incentives in 1996 and beyond will be increased according the schedule in Appendix A . Comprises 30% of target incentive for Group I and II . For 1995, comprises 30% of the adjustment factor applied to Group III participants' individual performance measure . Appendix A presents a four year schedule of ROAR influence on incentives . For Groups I and II, after Holding Company or Bank performance results (POP and ROAR) are determined, individual performance is evaluated . For Group III, this is the primary factor . Should be based on specific objectives agreed to by participant and his/her manager each year . Provides flexibility in assessing contribution by participant 7 II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D ---------------------------- C. RELATIVE RETURN ON ASSETS (ROAR) MEASURE ---------------------------------------- . For Groups I and II, incentives earned based on financial performance (sum of ROAR + POP) and are adjusted up or down based on individual performance evaluations .. Achieving individual targets results in payout of earned award .. Exceeding individual targets can increase award by 40% .. Individual performance below minimum acceptable level reduces award to zero . For Group III, emphasis is on personal goal achievement .. POP and ROAR performance factors may increase award By 20% or decrease it by 40% . Calculation of the ROAR measure may be found in Appendix C 8 II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D ---------------------------- D. INDIVIDUAL PERFORMANCE MEASURE ------------------------------ . For Groups I and II, after VCNB, Ventura or Frontier performance results (POP and ROAR) are determined, individual performance is evaluated . For Group III, this is the primary factor . Should be based on specific objectives agreed to by participant and his/her manager each year . Provides flexibility in assessing contribution by participant . For Groups I and II, incentives earned based on unit performance -- VCNB or Ventura or Frontier -- (sum of ROAR + POP) and are adjusted up or down, based on individual performance evaluations .. Achieving individual targets results in payout of earned award .. Exceeding individual targets can increase award by 40% .. Individual performance below minimum acceptable level reduces award to zero . For Group III, emphasis in on personal goal achievement .. POP and ROAR performance factors may increase award by 20% or decrease it by 40% 9 II. ANNUAL INCENTIVE PLAN DESIGN, Cont'd ---------------------------- D. INDIVIDUAL PERFORMANCE MEASURE ------------------------------ INDIVIDUAL PERFORMANCE RATINGS RATING GUIDE - ------------ A = OUTSTANDING: Performance that SIGNIFICANTLY EXCEEDS EXPECTATIONS. As an ----------------------------------- overall evaluation rating, this level is for individuals who significantly exceed most of their objectives. Overall objectives achievement is significantly above most others in similar positions. B = COMMENDABLE: Performance that is FULLY ACCEPTABLE and MEETS ALL (MET OBJECTIVES) ---------------- --------- EXPECTATIONS. As an overall evaluation rating, this level is ------------- for individuals who generally achieved their objectives. C = MODERATE: Performance that is SOMEWHAT BELOW EXPECTATIONS and falls --------------------------- somewhat short (75-80% achievement or more) of objectives being evaluated. As an overall evaluation rating, this is for individuals who, while achieving some objectives, fall short of other objectives. D = MARGINAL: Performance that is CLEARLY BELOW EXPECTATIONS and falls -------------------------- significantly short (less than 70-75% achievement) of objectives being evaluated. As an overall evaluation rating, performance is clearly below expected results, with few important objectives achieved. RATING VARIANCE - --------------- When evaluating individual objectives, "+" or "-" is used to indicate an exceedingly difficult objective or an easy objective. As part of an overall evaluation rating, the "+" or "-" indicates overall performance between the four primary rating levels. 10 II. ANNUAL INCENTIVE PLAN DESIGN, CONT'D ---------------------------- D. INDIVIDUAL PERFORMANCE MEASURE ------------------------------ . Individual performance evaluation and corresponding incentive adjustment factor: ANNUAL INCENTIVE PLAN --------------------- INDIVIDUAL PERFORMANCE RATING AND MEASURE -----------------------------------------
INDIVIDUAL PERFORMANCE FACTOR APPLIED TO PERSONAL INCENTIVE PERFORMANCE LEVEL RATING OPPORTUNITY ----------------- ------ ----------- OUTSTANDING A 1.4 (MAXIMUM) A- 1.3 B+ 1.2 COMMENDABLE B* 1.0* (MET OBJECTIVES) B- 0.8 C+ 0.6 MODERATE ACHIEVEMENT C 0.5 C- 0.3 MARGINAL OR BELOW D+, D 0.0 * TARGET INCENTIVE LEVEL
11 E. ANNUAL INCENTIVES AND PERFORMANCE --------------------------------- . Below threshold performance, the board of directors may establish discretionary awards for plan participants . For performance between threshold and target or target and maximum levels, use straight-line interpolation to determine incentive amounts . 1995 annual incentive opportunity for Group I participant:
GROUP I INCENTIVE OPPORTUNITY AS % BASE SALARY* AT VARIOUS PERFORMANCE LEVELS ----------------------------------- PERFORMANCE MEASURE THRESHOLD TARGET MAXIMUM AND WEIGHT PERFORMANCE PERFORMANCE PERFORMANCE - ----------- ----------- ----------- ----------- PROFIT OBJECTIVE 80% OF PLAN 100% OF PLAN 120% OF PLAN PERFORMANCE (70%) (0.0%) (17.5%) (22.75%) RELATIVE RETURN 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE ON ASSETS (30%) (0.0%) (7.5%) (9.75%) ----------- ----------- ----------- TOTAL INCENTIVE OPPORTUNITY 0.0% 25.0% 32.50%
* Individual Award Target Incentives may range between 20-25% . Individual performance evaluations will increase or decrease incentive amount. Amount of incentive will be: .. Threshold performance: Award is $0 .. Target performance: 1.0 x incentive opportunity .. Maximum performance: 1.4 x incentive opportunity 12 E. ANNUAL INCENTIVES AND PERFORMANCE, CONT'D ---------------------------------- . Annual incentive opportunity for Group II participants:
GROUP II INCENTIVE OPPORTUNITY AS % BASE SALARY* AT VARIOUS PERFORMANCE LEVELS ----------------------------------- PERFORMANCE MEASURE THRESHOLD TARGET MAXIMUM AND WEIGHT PERFORMANCE PERFORMANCE PERFORMANCE - ----------- ----------- ----------- ----------- PROFIT OBJECTIVE 80% OF PLAN 100% OF PLAN 120% OF PLAN PERFORMANCE (75%) (0.0%) (14.0%) (18.2%) RELATIVE RETURN 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE ON ASSETS (25%) (0.0%) (6.0%) (7.8%) ----------- ----------- ----------- TOTAL INCENTIVE OPPORTUNITY 0.0% 20.0% 26.0%
* Individual Award Target Incentives may range between 15-20% . Individual performance evaluations will increase or decrease incentive amount. Amount of incentive will be: .. Threshold performance: Award is $0 .. Target performance: 1.0 x incentive opportunity .. Maximum performance: 1.4 x incentive opportunity 13 E. ANNUAL INCENTIVES AND PERFORMANCE, CONT'D ---------------------------------- . Annual incentive opportunity for Group III participants (as a percent of base salary)*: .. Below minimum performance for personal goals = 0% .. At target performance for personal goals = 15.0%** .. At maximum performance for personal goals = 21.0% * Based on weighted average of personal goal achievement ratings, as determined by the Individual Performance Measure ** Target incentive may range from 10% to 15% of base salary, depending on position; to be determined by CEO/President of VCNB . Financial performance measures for each participant's unit (for 1995) increase or decrease Group III participants' awards by the following amounts:
GROUP III INCENTIVE OPPORTUNITY ADJUSTMENTS AT VARIOUS PERFORMANCE LEVELS ----------------------------------- PERFORMANCE MEASURE THRESHOLD TARGET MAXIMUM AND WEIGHT PERFORMANCE PERFORMANCE PERFORMANCE - ----------- ----------- ----------- ----------- PROFIT OBJECTIVE 80% OF PLAN 100% OF PLAN 120% OF PLAN PERFORMANCE (70%) OR LESS (0.7) (0.84) (0.42) RELATIVE RETURN 45TH PERCENTILE 60TH PERCENTILE 75TH PERCENTILE ON ASSETS (30%) 0R LESS (0.3) (0.36) (0.18) ----------- ----------- ----------- INCENTIVE OPPORTUNITY NEVER LESS 1.0 1.2 MODIFIER THAN 0.60
. At their minimum level of performance, POP and ROAR measures will reduce incentive by 40% . At their maximum level of performance, POP and ROAR measures will increase incentive by 20% 14 E. ANNUAL INCENTIVES AND PERFORMANCE, CONT'D ---------------------------------- . The table below presents an example of payouts under the annual plan, at various performance levels. EXAMPLE OF 1995 ANNUAL INCENTIVE AWARD CALCULATIONS
================================================================================================== INCENTIVE AMOUNTS' ----------------------------------------- Individual ROAR Factor ROAR Factor Perfor- 60th Percentile 75th Percentile Partici- Target mance ----------------------------------------- Group pant Salary Incentive Factor 100% 120% 100% 120% POP POP POP P0P - -------------------------------------------------------------------------------------------------- I A $125,000 25% 1.0 $31,250 $37,813 $34,063 $40,625 - -------------------------------------------------------------------------------------------------- II B 90,000 20% 1.2 21,600 26,136 23,544 28,080 - -------------------------------------------------------------------------------------------------- III C 60,000 15% 0.8 7,200 8,208 7,632 8,640 ==================================================================================================
1. Subject to Plan Safeguards 15 III. ANNUAL INCENTIVE PROGRAM ADMINISTRATION --------------------------------------- A. OVERALL RESPONSIBILITY ---------------------- . The incentive program has been designed to provide flexibility in its implementation: .. It is to be administered by the Compensation Committee of the Board of Directors of VCNB, excluding program participants and excluding those eligible to participate in the plans .. The Compensation Committee, acting on the recommendations of the VCNB President, will select annual plan participants, determine when awards should be made to participants and ratify the size of each participant's target award. B. GUIDELINES TO PLAN PARTICIPANT SELECTION ---------------------------------------- . Participation in the annual plan is to be determined by the Compensation Committee, acting upon the recommendations of the President of VCNB. Participation in 1995 will be limited to: .. Group I: Comprising the CEO/President of VCNB/Ventura and the President of Frontier (List) .. Group II: Comprising Executive and Senior Vice President reporting to the President of VCNB/Ventura or the President of Frontier (List) .. Group III: Comprising selected managers as recommended by the President of VCNB (List) III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D -------------------------------- C. GUIDELINES TO THE TIMING OF AWARDS AND PAYMENT ---------------------------------------------- . Each annual plan participant will receive payment in cash for the amount of his/her earned incentive as soon as practical after fiscal year-end. .. With the consent of the compensation committee, a participant may, in advance of the annual plan year, elect to defer receipt of payment of the incentive award beyond the date when such payment would normally be made. If a participant elects to defer receipt of payment, such deferral will be stipulated using a written agreement between the committee and the participant. Any such election will be irrevocable for that award payment. D. GUIDELINES TO DETERMINING THE SIZE OF AWARDS -------------------------------------------- . The program provides recommended annual target incentive ranges for participating positions. . The Compensation Committee, with the recommendation and concurrence of the President and CEO of VCNB, has the right to determine the size of the target of an annual award. E. FORM AND TIME OF PAYMENT ------------------------ . Unless the participant has elected to defer an award, each participant in the annual plan will receive the awards in cash in the amount determined by plan criteria. Payment will be made as soon as practical after the plan year-end. 17 III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D --------------------------------- F. PLAN SAFEGUARDS AND LIMITATIONS ------------------------------- . The plan has the following controls to prevent inappropriate payments: .. The Board of Directors may, without notice, amend or terminate the annual plan, or from time-to-time, suspend it. . No annual incentive compensation other than discretionary awards may be paid to VCNB participants when the Holding Company's return on assets falls below 0.3%. Similarly, should either Ventura or Frontier's ROA fall below 0.3%, no annual incentive compensation, other than discretionary awards, may be paid to respective Bank incentive plan participants. . When either VCNB's, Ventura's or Frontier's performance eliminates annual incentives, the Compensation Committee, with the approval of the board, may award discretionary bonuses to selected participants upon recommendations from the President/CEO of VCNB. . In the event that participants are only eligible for discretionary awards, these awards will be limited to those participants who have achieved an individual performance rating of B + or better. . In no circumstances will individual discretionary awards be greater than: .. 20% of a Group I participant's base salary .. 15% of Group II participant's base salary .. 10% of Group III participant's base salary 18 III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D --------------------------------- F. PLAN SAFEGUARDS AND LIMITATIONS ------------------------------- . The maximum total amount of annual plan incentive compensation that may be paid to participants each year is limited: .. GROUPS I AND II: To the aggregate of participant's incentive opportunity times 1.2 before applying the individual performance measure. If the application of the individual performance measure to all participants results in aggregated awards which exceed this amount, the incentive payouts are pro rated downward for each participant to equal the sum of the ROAR measure and the POP measure incentives for all participants times 1.2. .. GROUP III: To the aggregate of participants' incentive opportunity times 1.03 before applying the POP and ROAR adjustment factors. If the application of the POP and ROAR factors to all participants results in aggregated awards which exceed this amount, the incentive payouts are pro rated downward for each participant so that their sum equals the individual performance awards times 1.03. . Regardless of Holding Company or individual Bank performance, payments under the annual plan are forfeited in any year if at year-end the Holding Company falls below regulatory capital requirements. 19 III. INCENTIVE PROGRAM ADMINISTRATION, Contd -------------------------------- F. PLAN SAFEGUARDS AND LIMITATIONS ------------------------------- . The maximum total amount of annual incentive compensation paid out under the annual plan shall not exceed in any circumstances 14% of after net income for that year, after the accrual of annual incentive compensation expense. .. Should the annual incentives exceed 14% of net after tax income, then all annual awards will be pro-rated downward until the total incentives for all Groups were equal to no more than 14% of after tax net income. . In the event that a participant's full-time employment with VCNB or its subsidiary Banks should terminate for any reason other than death, total and permanent disability or retirement (including early retirement), that participant will forfeit any annual incentive plan compensation for that fiscal year. .. A participant's earned but deferred awards (if any) will become payable upon termination of employment of the plan participant due to death, permanent and total disability or retirement (including early retirement). . Notwithstanding any other provisions of this plan, the Board of Directors, acting upon the recommendation of the Compensation Committee, will retain the right to make payments to participants whose employment with VCNB or its subsidiary Banks terminates for reasons other than specified, if it is deemed in the best interests of VCNB to do so. .. A leave of absence, unless otherwise determined by the compensation committee shall not constitute a cessation of employment. 20 III. INCENTIVE PROGRAM ADMINISTRATION, CONT'D --------------------------------- G. SELECTION OF THE PEER GROUPS ---------------------------- . The peer comparison group used to determine the relative return on assets (ROAR) performance measure will depend upon the unit in which the participant is employed. . VCNB: 24 California bank holding companies closest in size to VCNB. . Ventura County National Bank: 24 banks closest in size in Ventura, Santa Barbara and Los Angeles Counties. .. Will include those Ventura and Santa Barbara banks with assets plus or minus 50% of the size of Ventura County National Bank. . Frontier Bank: 24 banks closest in size of Los Angeles and Orange Counties. . Each fiscal year, the peer comparison groups will be re-established and those institutions failing the above size criteria will be eliminated. .. Peer group selection for each plan year will be based on data available from Call Reports or private vendors for the September quarter of the prior year. . The relative return on assets performance measure for each fiscal year for each unit will be determined using four quarters of cumulative data ending in the prior calendar year's third quarter. .. Cumulative four quarter performance data (ending with the September quarter) for each appropriate VCNB unit will be measured against comparable data for the corresponding appropriate peer group each year. 21 APPENDIX A ---------- POP AND ROAR FACTOR WEIGHTS --------------------------- AND REQUIRED PERFORMANCE LEVELS 1995-1998 ----------------------------------------- POP AND ROAR FACTOR WEIGHTS - --------------------------- The Annual Management Incentive Plan takes into consideration recent historical performance of VCNB, Ventura and Frontier compared to their respective peer groups. Initially, the Plan recognizes that the Holding Company and its subsidiary Bank's probable performance will continue to lag behind the peer averages. However, management desires to improve performance over time so that eventually, performance of all units will exceed peer group averages. It is appropriate to encourage management to take the necessary actions in the shortrun that will enable it to achieve and exceed parity with its peers in the future. As a result, the plan calls for emphasis on achievement of internal profit benchmarks in the first few years, rather than on peer comparisons. The schedule below presents the Profit Objective Performance (POP) and Relative Return on Performance (ROAR) weights to be used in the Plan for 1995-1998:
============================================================================== YEAR ROAR POP ============================================================================== 1995 30% 70% - ------------------------------------------------------------------------------ 1996 35% 65% - ------------------------------------------------------------------------------ 1997 40% 60% - ------------------------------------------------------------------------------ 1998 50% 50% ==============================================================================
These weights will be used to determine the influence of internal profitability achievement and external peer comparison on Group I and II participants' incentive opportunity. They will also be used as modifiers for determining adjusted Group III incentive awards. The objective will be to meet a 50-50 weighting by 1998. 22 APPENDIX A: CONT'D ----------- POP AND ROAR FACTOR WEIGHTS --------------------------- AND REQUIRED PERFORMANCE LEVELS 1995-1998 ----------------------------------------- REQUIRED PERFORMANCE LEVELS - --------------------------- Over time, VCNB and its subsidiary Banks will be required to meet progressively more challenging performance levels with respect to their peers. The following schedule indicates the levels of achievement with respect to peer performance required to meet threshold, target and maximum levels of ROAR-based incentive payouts, expressed in percentiles:
=============================================================================== RELATIVE RETURN ON ASSETS COMPARED TO PEERS (PERCENTILE) YEAR ---------------------------------------------------------------- THRESHOLD TARGET MAXIMUM =============================================================================== 1995 45th Percentile 60th Percentile 75th Percentile - ------------------------------------------------------------------------------- 1996 45th 65th 80th - ------------------------------------------------------------------------------- 1997 50th 70th 85th - ------------------------------------------------------------------------------- 1998 50th 75th 90th ===============================================================================
23 APPENDIX B SAMPLE PEER COMPARISON GROUP VCNB - THIRD QUARTER 1994
Return on Average Holding Company City Total Assets Assets (%) 9/94 9/94 ($ 000) (Y-T-D) TRICO BANCSHARES CHICO $595,310 0.97 HOME INTERSTATE BANCORP SIGNAL HILL $463,466 0.77 SC BANCORP DOWNEY $404,358 0.62 TRANSWORLD BANCORP SHERMAN OAKS $384,990 0.64 FREMONT VANCORPORATION FREMONT $344,580 1.39 PACIFIC CAPITAL BANCORP SALINAS $339,074 1.22 FOOTHILL INDEPENDENT BANCORP GLENDORA $325,711 1.03 CCB BANCORP, INC. SANTA ANA $314,366 -2.1 ELDORADO BANCORP TUSTIN $311,382 0.76 CALIFORNIA COMMERCIAL BKSHRS NEWPORT BEACH $305,264 0.17 PROFESSIONAL BANCORP SANTA MONICA $304,186 0.26 RCB CORPORATION SACRAMENTO $302,980 0.28 VENTURA COUNTY NATL BANCORP OXNARD $281,049 0.21 CU BANCORP ENCINO $280,436 0.95 SIERRA TAHOE BANCORP TRUCKEE $264,357 1.01 LANDMARK BANCORP LA HABRA $264,111 0.72 CIVIC BANCORP OAKLAND $257,938 0.58 NORTH COUNTY BANCORP ESCONDIDO $252,935 0.53 ORIENT BANCORPORATION SAN FRANCISCO $243,989 0.36 AKTIV BANK HOLDING COMPANY LONG BEACH $242,670 0.71 NATIONAL MERCANTILE BANCORP LOS ANGELES $234,334 -1.63 CUPERTINO NATIONAL BANCORP CUPERTINO $216,319 0.79 NORTH VALLEY BANCORP REDDING $213,709 1.43 MONTECITO BANCORP SANTA BARBARA $202,804 0.46 ORANGE NATIONAL BANCORP ORANGE $196,573 0.36
24 APPENDIX B SAMPLE PEER COMPARISON GROUP VENTURA COUNTY NATIONAL BANK THIRD QUARTER 1994
Return Total on Average Assets Assets Institution Name City County 9/94 9/94 ($ 000) (Y-T-D) HANMI BK LOS ANGELES LOS ANGELES $340,655 1.11 FOOTHILL INDEPENDENT BK GLENDORA LOS ANGELES $324,148 1.08 WESTERN BK LOS ANGELES LOS ANGELES $312,478 0.81 FIRST PROFESSIONAL BK LA NA SANTA MONICA LOS ANGELES $302,997 0.45 CALIFORNIA UNITED BK NA ENCINO LOS ANGELES $280,434 1.03 AMERICAN PACIFIC ST BK SHERMAN OAKS LOS ANGELES $277,579 0.67 CALIFORNIA CENTER BANK LOS ANGELES LOS ANGELES $244,950 1.01 NATIONAL BK OF LONG BEACH LONG BEACH LOS ANGELES $242,298 0.72 MERCANTILE NB LOS ANGELES LOS ANGELES $234,333 -1.6 BANK OF SANTA MARIA SANTA MARIA SANTA BARBARA $214,031 1.03 UNITED NB MONTEREY PARK VENTURA $211,300 1.33 BANK OF MONTECITO SANTA BARBARA LOS ANGELES $202,118 0.51 VENTURA COUNTY NB OXNARD LOS ANGELES $196,592 0.04 HARBOR BK LONG BEACH LOS ANGELES $179,887 0.36 PREFERRED BK LOS ANGELES LOS ANGELES $177,220 1.07 CENTURY BANK LOS ANGELES LOS ANGELES $175,090 -3.81 US TC OF CALIFORNIA NA LOS ANGELES LOS ANGELES $168,608 1.74 PACIFIC HERITAGE BK TORRANCE LOS ANGELES $156,275 -3.1 FIRST CHARTER BK NA BEVERLY HILLS LOS ANGELES $156,071 -1.76 INTERNATIONAL BK OF CA LOS ANGELES LOS ANGELES $152,406 -0.9 FIRST CREDIT BK LOS ANGELES LOS ANGELES $147,335 2.32 CITIZENS COMMERCIAL T&SB PASADENA LOS ANGELES $138,415 0.52 FIRST VALLEY BK LOMPOC SANTA BARBARA $113,698 1.08 CITY COMMERCE BK SANTA BARBARA SANTA BARBARA $111,303 0.76 AMERICAN COMMERCIAL BK VENTURA VENTURA $111,271 0.76
25 APPENDIX B SAMPLE PEER COMPARISON GROUP: FRONTIER BANK-THIRD QUARTER 1994
Return Total on Average Institution Name City Assets Assets 9/94 9/94 ($ 000) (Y-T-D) FIRST CENTRAL BK NA CERRITOS $113,498 -0.25 FOUNDERS NB LOS ANGELES $112,080 0.86 BANK AUDI CA LOS ANGELES $109,957 0.75 MARINE NB IRVINE $106,821 -0.33 LIPPOBANK LOS ANGELES $106,288 0.21 NATIONAL BK OF CALIFORNIA LOS ANGELES $102,947 0.2 MARATHON NB LOS ANGELES $ 98,960 0.01 CERRITOS VALLEY BK NORWALK $ 97,430 0.6 HUNTINGTON NB HUNTINGTON BEACH $ 95,066 0.52 FIRST CONTINENTAL BK ROSEMEAD $ 94,930 1.47 GRAND NB SANTA ANA $ 89,955 1.4 WILSHIRE ST BK LOS ANGELES $ 89,584 -0.13 FRONTIER BK NA LA PALMA $ 89,100 0.56 TRANS NB MONTEREY PARK $ 88,620 2.49 EASTERN INTERNATIONAL BK ALHAMBRA $ 87,787 0.92 GILMORE COMMERCIAL & SVG BK LOS ANGELES $ 81,963 0.93 LOS ANGELES NB BUENA PARK $ 81,684 0.85 SOUTH BAY BK TORRANCE $ 81,361 -2.1 MARINERS BK SAN CLEMENTE $ 80,310 -0.1 PACIFIC WESTERN NB PICO RIVERA $ 79,216 0.93 VALENCIA NB VALENCIA $ 79,148 0.4 CHARTER PACIFIC BK AGOURA HILLS $ 77,467 -1.38 CORPORATE BK SANTA ANA $ 77,378 0.39 COMMERCE NB COMMERCE $ 75,540 0.62 PACIFIC INLAND BK ANAHEIM $ 72,449 -3.31
26 APPENDIX C ---------- CALCULATION OF THE RELATIVE RETURN ON ASSETS (ROAR) MEASURE ----------------------------------------------------------- DETERMINING PERFORMANCE LEVELS - ------------------------------ 1. VCNB and its subsidiary Banks' performance levels are determined by calculating their percentile rankings in their respective Peer Group based on ROA ratios. This example will use the VCNB peer group. 2. After obtaining four cumulative quarters of data for the 24 VCNB Peer Group bank holding companies, arrange the Peer Group ROA ratios in descending order and sequentially number each entry beginning at the ---------------- bottom. (See example 1). Place VCNB in the group, as determined by its ------ ROA. 3. VCNB performance level (expressed as a percentile) = VCNB rank with Peer Group - 0.5 ------------------------------- # of institutions 4. Determine VCNB's performance Level (See Example 1) VCNB rank = 4th from the bottom of the group # institutions = 25 VCNB Performance Level = (4-0.5) ------- 25 VCNB Performance Level = 14th Percentile 27 EXAMPLE 1 SAMPLE PEER COMPARISON GROUP VCNB-THIRD QUARTER 1994 TWENTY-FOUR CLOSEST IN SIZE (DOLLARS IN THOUSANDS)
Return on Average Holding Company City Total Assets Assets (%) 9/94 9/94 ($ 000) (Y-T-D) 25 NORTH VALLEY BANCORP REDDING $213,709 1.43 24 FREMONT BANCORPORATION FREMONT $344,580 1.39 23 PACIFIC CAPITAL BANCORP SALINAS $339,074 1.22 22 FOOTHILL INDEPENDENT BANCORP GLENDORA $325,711 1.03 21 SIERRA TAHOE BANCORP TRUCKEE $264,357 1.01 20 TRICO BANCSHARES CHICO $595,310 0.97 19 CU BANCORP ENCINO $280,436 0.95 18 CUPERTINO NATIONAL BANCORP CUPERTINO $216,319 0.79 17 HOME INTERSTATE BANCORP SIGNAL HILL $463,466 0.77 16 ELDORADO BANCORP TUSTIN $311,382 0.76 15 LANDMARK BANCORP LA HABRA $264,111 0.72 14 AKTIV BANK HOLDING COMPANY LONG BEACH $242,670 0.71 13 TRANSWORLD BANCORP SHERMAN OAKS $384,990 0.64 12 SC BANCORP DOWNEY $404,358 0.62 11 CIVIC BANCORP OAKLAND $257,938 0.58 10 NORTH COUNTY BANCORP ESCONDIDO $252,935 0.53 9 MONTECITO BANCORP SANTA BARBARA $202,804 0.46 8 ORANGE NATIONAL BANCORP ORANGE $196,573 0.36 7 ORIENT BANCORPORATION SAN FRANCISCO $243,989 0.36 6 RCB CORPORATION SACRAMENTO $302,980 0.28 5 PROFESSIONAL BANCORP SANTA MONICA $304,186 0.26 4 VENTURA COUNTY NATL BANCORP OXNARD $281,049 0.21 3 CALIFORNIA COMMERCIAL BKSHRS NEWPORT BEACH $305,264 0.17 2 NATIONAL MERCANTILE BANCORP LOS ANGELES $234,334 -1.63 1 CCB BANCORP, INC. SANTA ANA $314,366 -2.1
28 EX-11 3 COMPUTATION OF PER SHARE INCOME EXHIBIT 11 Computation of per share income (loss)(a) - -----------------------------------------
for the years ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) Net Income (loss) used to compute primary earnings per share $ 3,768 $ (262) $ (12,087) Net Income (loss) used to compute fully diluted earnings per share $ 3,768 $ (262) $ (12,087) Primary Earnings (Loss) per Share: Average Number of shares and equivalents outstanding: Common Stock and Common Stock equivalents 7,833,058 6,333,835 5,635,941 Primary earnings per share $ .48 $ (.04) $ (2.15) ===================================================================================================================== Fully Diluted Earnings (Loss) per Share: Average Number of shares and equivalents outstanding: Common Stock and Common Stock equivalents 7,833,058 6,333,835 5,635,941 Fully diluted earnings (loss) per share $ .48 (a) (a) =====================================================================================================================
(a) Nothing is reported for fully diluted per share amounts for loss years, as conversion of common stock equivalents is antidilutive. EX-13 4 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 Annual Report 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 eight quarters ended December 31, 1995, as reported by the Nasdaq National Market.
QUARTER ENDED HIGH LOW ------------- ---- --- 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 March 31, 1995................ 2.38 2.13 June 30, 1995................. 2.50 2.25 September 30, 1995............ 4.13 2.38 December 31, 1995............. 4.00 3.38
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 fromVentura or Frontier. Frontier is also limited in the amount of dividends which it may distribute according to the terms of the Consent Order. Pursuant to the Consent Order, the Board of Directors may declare or pay dividends only: (i) when Frontier is in compliance with 12 U.S.C. sections 56, 60, and 1831o(d)(1); (ii) when Frontier is in compliance with the capital program developed pursuant to the Consent Order; (iii) when such dividend payment is consistent with the capital levels specified in paragraph (1) of the Consent Order; and (iv) with prior written approval of 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. 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, 1995. The data as of and for each of the five years in the period ended December 31, 1995 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.
as of and for the years ended December 31, 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) BALANCE SHEET DATA: Total Assets $267,756 $257,755 $340,529 $400,195 $364,734 Loans and leases, net of unearned income 157,765 167,934 267,514 312,592 299,267 Reserve for Loan Losses 5,401 8,261 14,313 3,854 2,845 Total Deposits 236,072 236,342 318,289 348,587 324,486 Shareholders' equity 29,459 19,052 20,370 30,388 29,179 Outstanding shares of common stock, no par value 9,226,723 6,333,835 6,333,835 5,614,255 5,282,301 Shareholders of record 1,024 1,057 1,078 1,122 1,139
1
as of and for the years ended December 31, 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) ASSET QUALITY: Nonperforming loans (1) $ 4,442 $ 7,945 $ 19,839 $ 3,254 $ 9,454 Nonperforming assets (1) 8,022 11,169 22,068 7,194 11,660 ASSET QUALITY RATIOS: Nonperforming loans to total loans 2.81% 4.73% 7.41% 1.04% 3.16% Nonperforming assets to total assets 3.00 4.33 6.48 1.79 3.15 Loan loss reserves to nonperforming loans 121.62 103.98 72.15 118.44 30.09 Loan loss reserves to nonperforming assets 67.33 73.96 64.86 53.57 24.78 Classified assets to loan loss reserve plus shareholders' equity 44.44 113.27 186.27 84.71 67.45 OTHER DATA: Full time equivalent employees 127 141 199 198 221 STATEMENT OF OPERATIONS DATA: Net interest income $14,437 $15,868 $ 16,912 $17,586 $17,931 Provision for loan losses 410 3,825 16,213 3,404 2,537 Noninterest income 2,246 4,064 4,820 5,512 5,364 Noninterest expenses 14,937 16,084 20,839 18,438 19,239 Income (loss) before income taxes (benefit) 1,336 23 (15,320) 1,256 1,519 Provision for income taxes (benefit) (2,432) 285 (3,233) 571 713 - -------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,768 $ (262) $(12,087) $ 685 $ 806 ==================================================================================================================== PER SHARE DATA:(2) Income (loss) before income taxes (benefit) $ .17 $ .00 $ (2.73) $ .22 $ .27 Net income (loss) per share .48 (0.04) (2.15) .12 .14 Period end book value per share 3.19 3.01 3.22 5.41 5.21 SELECTED PERFORMANCE RATIOS: Return on average equity 15.64% (1.29)% (45.12)% 2.30% 2.79% Return on average assets 1.49 (0.09) (3.18) 0.18 0.22 Efficiency ratio (3) 89.53 80.71 95.89 79.83 82.59 Noninterest expense to average assets 5.89 5.45 5.47 4.74 5.14 Net interest margin 6.15 5.68 4.81 4.95 5.34 Net interest rate spread 5.00% 4.80% 3.96% 4.27% 5.06%
______________________________ (1) Does not include $3.3 million and $2.0 million in troubled debt restructuring that were performing at December 31, 1995, and 1994. (2) All per share data included herein have been adjusted to reflect the stock splits and stock dividends to shareholders of record on March 7, 1991, and March 9, 1992. (3) The efficiency ratio is other expenses divided by the sum of net interest income before provision for loan losses plus other income. 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, 1995, 1994, and 1993. The discussion should be read in conjunction with the Company's audited Consolidated Financial Statements and Notes. OVERVIEW The Company had net income of $3.8 million or $0.48 per share for the year ended December 31, 1995, compared to a net loss of $262 thousand or $0.04 per share for the year ended December 31, 1994. The significant improvement over 1994 was a result of a decrease in the provision for loan losses, reduced noninterest expenses and the release of the valuation reserve previously held against deferred tax assets, offset by lower net interest income and noninterest income. The net loss incurred in 1994 was partially offset by gains on the sale of mortgage servicing rights and the merchant card portfolio totaling $1.4 million and $174 thousand, respectively. The decrease in the provision for loan losses was a result of decreases in gross loans and classified loan balances of $10.2 million and $15.3 million, respectively, from 1994 to 1995. The decrease in noninterest expense results from lower holding 2 costs and reduced fair value adjustments on the sale of Real Estate Owned ("REO") properties, lower legal and consulting fees, reduced appraisal fees and mortgage servicing expenses, and lower FDIC/Comptroller assessments. Current year net income includes the release of the valuation reserve previously held against the deferred tax assets, which resulted in a net tax benefit of $2.4 million. Total assets increased 3.9% from December 31, 1994, to December 31, 1995, as a result of increased capital from the common stock rights offering completed during the second quarter of 1995 and funding from the Company's profitability. The Company had a net loss of $262 thousand for the year ended December 31, 1994, compared to a net loss of $12.1 million for the year ended December 31, 1993. The improvement over 1993 was due to a significant decrease in the provision for loan losses, reduced noninterest expense and improved net interest income in 1994. Total assets decreased 24.3% from December 31, 1993, to December 31, 1994. During 1994, the balance sheet was reduced for liquidity purposes, as well as to achieve compliance with the capital requirements of the Banks' regulatory agreements. FINANCIAL CONDITION Total assets at December 31, 1995, increased $10.0 million, or 3.9% to $267.8 million, from $257.8 million at December 31, 1994. Most of the increase is in cash and overnight Federal funds investments offset by lower year end balances for investment securities and loans. The Company raised gross proceeds of $6.5 million in capital during 1995 through the common stock rights offering. Net loans and leases decreased $7.3 million or 4.6% from year end 1994, primarily due to the planned payoff of loans and the reduction in classified loans. The reduction in classified loans is due to loan payoffs and from transfers to OREO of $4.4 million, of which $4.1 million were subsequently sold prior to year end. Total assets decreased $83.0 million from $340.6 million at December 31, 1993, to $257.8 million at December 31, 1994. This decrease resulted from 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, to reduce volatility in the Banks' deposit bases, the Company allowed significant runoff of title and escrow demand deposits and institutional certificates of deposit during 1994. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, deposits at correspondent banks and interest-bearing amounts due from banks. The Company maintains balances at correspondent banks adequate to cover daily inclearings and other charges. In accordance with Federal regulations, average reserve balances of $1.7 million were maintained in the form of deposits with the Federal Reserve Bank for the year ended December 31, 1995. Cash and cash equivalents increased $8.5 million from $11.4 million at year end 1994 to $19.9 million at December 31, 1995. Most of the increase resulted from the increase in the compensating balance requirements with correspondent banks due to volume increases. Cash and cash equivalents decreased $4.5 million from $15.9 million at December 31, 1993 to $11.4 million at December 31, 1994. Federal funds sold The Company invests or sells its excess cash balances in overnight Federal funds. federal funds sold at December 31, 1995, were $47.5 million as compared to $27.0 million at December 31, 1994. During 1995, the yield curve inverted; overnight federal funds yields were the equivalent of US Treasury securities with 5 or 7 year maturities. Management decided to maintain high levels of overnight federal funds investments to increase net interest income and margins during this yield curve inversion. Federal funds sold at December 31, 1994, increased $9.0 million from $18.0 million at December 31, 1993, due to improvements in the Company's liquidity during 1994. Investment Securities Investment securities at December 31, 1995, were $36.6 million and did not include any securities classified at held-to-maturity. In November 1995, the Financial Accounting Standards Board ("FASB") issued a "Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities: Questions and Answers" (the "Guide"). The Guide allowed for a one time reassessment of the classification of all securities 3 and, in connection with such reassessment, permitted the reclassification of securities from the held-to-maturity classification to the available-for-sale classification as of a single date no later than December 31, 1995, without calling into question management's intent to hold to maturity the remaining securities classified as held-to-maturity. On December 21, 1995, the Company transferred its entire portfolio of held-to-maturity securities with an amortized cost of $20.2 million to the available-for-sale classification to allow for greater flexibility in the Company's investment portfolio. The transfer resulted in an unrealized gain of $186 thousand, net of the unamortized portion of unrealized loss recorded when certain securities were transferred from the available-for-sale to held-to-maturity classification during 1994. The unrealized gain will remain as a separate component of shareholders' equity until the securities are sold or mature. Investment securities consist of U.S. Government, U.S. Government Agency and mortgage-backed securities. Mortgage-backed securities consisted entirely of Federal Home Loan Mortgage Corporation pass through certificates at December 31, 1995. The Company did not have structured notes, CMOs or other derivative products in the portfolios at December 31, 1995 or 1994. Investment securities decreased $14.0 million to $36.6 million at December 31, 1995, from $50.6 million at December 31, 1994. Available-for-sale securities were sold at a slight net gain during 1995. The proceeds from sales were reinvested in overnight federal funds to take advantage of the inverted yield curve. At December 31, 1995, the average life of the mortgage-backed securities was approximately 3 years; the average maturities of mortgage-backed securities was approximately 9 years. The net unrealized loss on available-for-sale securities decreased $563 thousand to $615 thousand from $1.2 million at December 31, 1995, and 1994, respectively. In accordance with SFAS No. 115, the net unrealized gain or loss from increases or decreases in the fair value of available-for-sale securities is reported as a separate component of shareholders' equity, net of related income tax effects. The decrease in the unrealized loss from 1994, was due to an increase in the fair values of the available-for-sale securities and a net gain of $186 thousand upon transfer from the held-to-maturity portfolio. On December 31, 1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." 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 thousand, 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. The Company transferred mortgage backed securities with unrealized losses of $472 thousand from available-for-sale to held-to-maturity during 1994 due to a change in intent to hold the securities to maturity. Certain of these securities were transferred back to the available-for-sale portfolio during 1995 in accordance with the one-time reclassification of held-to-maturity securities permitted by the Guide. As of December 31, 1994, approximately $18.8 million of securities were classified at their amortized cost as held-to-maturity. Most of this balance was comprised of mortgage-backed securities that were transferred from the available-for-sale portfolio. Unrealized losses of $433 thousand previously recorded for these securities were included in shareholders' equity at December 31, 1994. At December 31, 1994, the average life of mortgage-backed securities was approximately 3.5 years; the average maturities of mortgage-backed securities was approximately 10 years. 4 Loans The Company engages in loans to small to medium-sized businesses in its service areas. The Company also originates and sells Small Business Administration ("SBA") loans. The interest rates charged for the loans made by the Company vary with the degree of risk, the size and maturity of the loan, whether the loan has a fixed or variable rate, the borrowers' depository relationship with the Company, and prevailing market interest rates. The Company is primarily a commercial lender, and most of its loans are floating rate loans tied to prime. The balance of loans outstanding at year end decreased for the second straight year from $167.9 million to $157.8 million at December 31, 1995, and 1994, respectively. Approximately $3.3 million of the decrease was due to the repayment of nonaccrual loans, which decreased to $4.3 million, down from $7.6 million at December 31, 1995, and 1994, respectively. A discussion of the activity in the Company's loan portfolios follows. Commercial, Financial, and Agricultural This category includes secured commercial loans, SBA loans, asset based loans, loans to developers, unsecured commercial loans, and medium-term real estate loans. Commercial, financial and agricultural loans increased slightly to $142.4 million from $138.2 million at December 31, 1995, and 1994, respectively. Commercial Loans This category constitutes the core of the Company's business. Included in this category are commercial loans made to medium-sized businesses which include revolving lines of credit, term loans for working capital or short-term commercial needs, and medium-term commercial real estate loans. Management will generally require the borrower to pledge certain of the borrower's assets to support the credits with terms limited to one year or less. Medium-term commercial real estate loans are those credits made for the financing of a commercial or industrial building where the property has income derived from tenants ("investment properties") or used by the owner for business purposes ("owner-user properties"). Commercial loans decreased $18.8 million to $112.3 million as of December 31, 1995. Most of this decrease was in medium-term commercial real estate loans, particularly those loans secured by investment properties, that was partially offset by increased balances for non-real estate secured commercial loans. To the extent that medium-term commercial real estate loans are made, they are generally limited to owner-user properties or for companies that also have other banking relationships with the Company. Management believes these medium-term commercial real estate loans have less risk as the Company has a broader knowledge and better control over the overall borrowing relationship. As of December 31, 1994, commercial loans decreased $59.2 million to $167.9 million from $227.1 million as of December 31, 1993. The Company sold approximately $25 million of loans in a bulk sale during May 1994. Another decrease of approximately $10 million was due to loan workouts and collections, and finally, management believes that additional prepayments of approximately $7 million were a result of the market conditions at that time. SBA Loans Through its SBA Division, Frontier offers loans for equipment, working capital, debt repayment and construction, and acquisition of owner-user commercial real estate. Frontier originates loans under both the 7(a) and 504 loan programs, with a particular emphasis on the 7(a) program. Frontier has been authorized by the SBA to make 7(a) loans since 1983. Frontier has been designated as a PLP lender in the 7(a) program by the SBA. This designation, which has been granted to fewer than 1% of all SBA lenders nationwide, allows Frontier to directly approve the guaranty request on behalf of SBA, and requires Frontier send to SBA only a streamlined informational loan file. The guaranteed portions of SBA 7(a) loans are normally sold by Frontier to secondary market investors at a premium. Frontier continues to service the whole loan, and is required by the SBA to maintain a minimum 1% servicing spread on the sold portion. The guaranteed portion of SBA loans originated for sale is reported at the lower of cost or fair value in the consolidated balance sheets. SBA loans acquired for investment are reported at amortized cost in the consolidated balance sheets. SBA loans increased $17.3 million from $12.8 million to $30.1 million at December 31, 1995, and 1994, respectively. Most of this increase resulted from the purchase of approximately $11 million of SBA loans by Ventura. The rest of the increase was due to the Frontier SBA loan program. 5 Real Estate - Mortgage Loans Included in this category are loans for single family residences (conforming loans) and home equity loans. The Company sold its residential mortgage origination operations in 1994, and no longer originates residential mortgages for the acquisition of homes, unless it is for the sole purpose of accommodating an existing business borrower. The $4.1 million decrease in mortgage loans during 1995 was due to the programmed reduction in mortgage loans and reduced mortgage activity after the Company sold its mortgage operations in 1994. From December 31, 1993 to December 31, 1994, mortgage loans decreased $31.2 million, which reflects the 1994 sale. Real Estate - Construction Loans Ventura provides real estate construction loans for custom residential and residential tract development projects, as well as commercial developments. Management has implemented a policy to maintain real estate construction loans at 10% to 15% of the total portfolio. Real estate construction loans decreased from $7.7 million at December 31, 1994, to $1.5 million at December 31, 1995. The decreases in real estate construction loans reflects the absence of demand for new construction in the Banks' service areas during the past two years. Installment Loans Installment loans consist mainly of fully amortizing credits for the purchase of capital goods and consumer purchases. Installment loans decreased $2.9 million from $9.9 million at December 31, 1994, to $7.0 million at December 31, 1995. The decrease in installment loans principally resulted from the sale of the Company's merchant credit card operations in 1994. ASSET QUALITY Loan Loss Reserves 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 the current market value of the loan. 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. 6 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" ("TDRs"), real estate owned ("REO") and potential problem loans at the dates indicated.
as of December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------- (dollars in thousands) Loans accounted for on a nonaccrual basis $4,341 $7,612 $18,939 $2,464 $2,142 Accruing loans which are 90 days or more past due as to interest or principal 101 331 552 410 7,296 TDR's (1) -- 2 384 380 16 ------------------------------------------------- Total nonperforming loans 4,442 7,945 19,839 3,254 9,454 Foreclosed personalty 878 878 -- -- -- REO 2,702 2,346 2,229 3,940 2,206 ------------------------------------------------- Total nonperforming assets $8,022 $11,169 $22,068 $7,194 $11,660 =================================================
___________________________________ (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, 1995 and 1994, the Company had such loans in the amounts of $3.3 million and $2.0 million, respectively. Premises and Equipment, Net Fixed assets, net of depreciation, increased from $1.9 million at December 31, 1994 to $2.4 million at December 31, 1995, due to the purchase of the Wilmington branch and related building improvements that were made to the facility, net of an inventory adjustment of $115 thousand. Fixed assets, net of depreciation, increased from $1.7 million at December 31, 1993 to $1.9 million at December 31, 1994. The fluctuations since 1993 have resulted from accumulated depreciation charges and the acceleration of depreciation related to data processing equipment and leaseholds, offset by the purchase of and capitalized costs related to the Wilmington branch during 1995. Other Assets Other assets increased $2.6 million to $9.0 million at December 31, 1995. Most of the increase resulted from the reversal of valuation reserves against the Company's deferred tax assets. Other assets decreased from $8.7 million to $6.4 million at December 31, 1993, and 1994, respectively. This reduction was primarily a result of the reduction in tax assets. REO At December 31, 1995, the Company had $2.7 million in REO comprised of eight commercial properties with carrying values totaling $2.0 million and three parcels of land zoned for residential purposes valued at $679 thousand. The Company sold $4.2 million of REO during 1995 and incurred REO valuation adjustments and property maintenance expenses of $525 thousand. At December 31, 1994, the Company had $2.3 million in REO comprised of three commercial properties with carrying values totaling $2.2 million, one single family residence valued at $100 thousand and land zoned for residential purposes of $50 thousand. The Company sold $4.8 million of REO during 1994 and incurred REO valuation adjustments and property maintenance expenses of $641 thousand; these net expenses were reported as noninterest expense in the consolidated statements of operations. REO is carried at the lower of cost or current fair market value less estimated selling costs in the consolidated balance sheets as a component of other assets. As of December 31, 1995, all REO properties held at December 31, 1994, with the exception of one residential lot, had been sold. Loans to facilitate the sale of REO during 1995 totaled $2.2 million. These loans were made in accordance with the Company's credit policies and under similar terms extended to credit-worthy borrowers. There were no loans to facilitate the sale of REO during 1994. Deposits Total deposits remained relatively constant at $236.1 million and $236.3 million as of December 31, 1995, and 1994, respectively. The year end composition of deposits changed slightly from December 31, 1994. Interest-bearing demand and savings account balances decreased $3.5 million to $77.1 million from $80.6 million at December 31, 1995. Time certificates of deposit increased $2.4 million to $90.9 million from $88.5 million at December 31, 1994. The increase in year end balances resulted from a special promotion by Ventura in December 1995. 7 Notes Payable and Other Liabilities The Company repaid $125 thousand of notes payable during 1995 from the proceeds raised through the common stock rights offering during the second quarter of 1995. The Company did not purchase federal funds during 1995, as compared to average federal funds purchased in 1994 of $44 thousand. Shareholders' Equity The Company completed a rights offering to shareholders for which gross proceeds of $6.5 million were wired to the Parent in June 1995. A total of 2,888,888 common shares were issued in connection with this transaction and the net proceeds amounted to $5.5 million. A substantial portion of the proceeds from the offering were paid to Ventura for reimbursement of $3.3 million in connection with interest paid to the Parent on deposits of funds generated by commercial paper sales. Shareholders' equity totaled $29.5 million at December 31, 1995, an increase of 54.6% from $19.1 million at December 31, 1994. RESULTS OF OPERATIONS 1995 COMPARED WITH 1994 Net Interest Income and Net Interest Margin The following tables present, for the periods indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances. Nonacccrual loans are included in loans. 8
- ------------------------------------------------------------------------------------------------------------------------------ Years ended December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Average Income/ Yield/ Average Income/ Yield/ Average balance Expense Rate balance Expense Rate balance - ------------------------------------------------------------------------------------------------------------------------------ ASSETS (dollars in thousands) Interest-earning assets: Loans, net of deferred fees (1) $ 159,899 $ 16,375 10.24% $ 212,029 $ 18,740 8.84% $ 289,675 Investment securities 43,290 2,586 5.97% 37,736 2,169 5.75% 37,935 Bank-owned TCD 391 21 5.37% 1,311 67 5.11% 5,645 Fed funds sold 31,332 1,816 5.80% 26,536 1,160 4.37% 18,431 - ------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets/interest income 234,912 20,798 8.85% 277,612 22,136 7.97% 351,686 - ------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks 16,600 19,353 25,717 Allowance for loan losses (7,108) (11,237) (9,309) Premises and equipment 2,091 1,862 2,273 Other assets 7,706 7,704 10,594 - ------------------------------------------------------------------------------------------------------------------------------ Noninterest earning assets 19,289 17,682 29,275 - ------------------------------------------------------------------------------------------------------------------------------ Total average assets $ 254,201 $ 295,294 $ 380,961 ============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY NOW/MMDA $ 52,895 $ 1,390 2.63% $ 58,114 $ 1,540 2.65% $ 66,167 Savings 27,707 653 2.36% 34,575 821 2.37% 37,892 TCDs 84,337 4,314 5.12% 104,671 3,892 3.72% 142,020 - ------------------------------------------------------------------------------------------------------------------------------ Deposits 164,939 6,357 3.85% 197,360 6,253 3.17% 246,079 - ------------------------------------------------------------------------------------------------------------------------------ Notes payable 68 4 5.88% 125 9 7.20% 1,908 Commercial paper - - - - - - 6,987 Fed funds purchased - - - 44 1 2.27% 1,376 Repurchase agreements - - - 129 5 3.88% 7,447 - ------------------------------------------------------------------------------------------------------------------------------ Other interest-bearing liabilities 68 4 5.88% 298 15 5.03% 17,718 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities/interest expense 165,007 6,361 3.85% 197,658 6,268 3.17% 263,797 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 62,980 75,568 87,383 Other liabilities 2,128 1,965 (7,008) - ------------------------------------------------------------------------------------------------------------------------------ Noninterest bearing liabilities 65,108 77,533 80,375 Shareholders' equity 24,086 20,103 36,789 - ------------------------------------------------------------------------------------------------------------------------------ Total average liabilities and equity $ 254,201 $ 295,294 $ 380,961 ============================================================================================================================== NET INTEREST INCOME/NET INTEREST MARGIN $ 14,437 6.15% $ 15,868 5.68% ============================================================================================================================== - ---------------------------------------------------------------------- Years ended December 31, 1993 - ---------------------------------------------------------------------- Income/ Yield/ Expense Rate - ---------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees (1) $ 23,190 8.01% Investment securities 1,916 5.05% Bank-owned TCD 263 4.66% Fed funds sold 542 2.94% - ---------------------------------------------------------------------- Total interest earning assets/interest income 25,911 7.37% - ---------------------------------------------------------------------- Cash and due from banks Allowance for loan losses Premises and equipment Other assets - ---------------------------------------------------------------------- Noninterest earning assets - ---------------------------------------------------------------------- Total average assets ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY NOW/MMDA $ 1,805 2.73% Savings 1,052 2.78% TCDs 5,515 3.88% - ---------------------------------------------------------------------- Deposits 8,372 3.40% - ---------------------------------------------------------------------- Notes payable 112 5.87% Commercial paper 186 2.66% Fed funds purchased 44 3.20% Repurchase agreements 285 3.83% - ---------------------------------------------------------------------- Other interest-bearing liabilities 627 3.54% - ---------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 8,999 3.41% - ---------------------------------------------------------------------- Demand deposits Other liabilities - ---------------------------------------------------------------------- Noninterest bearing liabilities Shareholders' equity - ---------------------------------------------------------------------- Total average liabilities and equity ====================================================================== NET INTEREST INCOME/NET INTEREST MARGIN $ 16,912 4.81% ======================================================================
(1) Includes loans on nonaccrual status of approximately $4.3 million, $7.6 million, and $19.3 million at December 31, 1994, and 1993, respectively. The amount of interest foregone on loans that were on nonaccrual status were approximately $1.3 million, $1.6 million, and $2.2 million for the years ended December 31, 1995, 1994, and 1993, respectively. Interest income on loans includes amortization of net loan fees of approximately $139 thousand, $237 thousand, and $77 thousand for the years ended December 31, 1995, 1994, and 1993, respectively. The Company's primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. The Company's net interest income is affected by changes in the amount and mix of interest on interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest- earning assets and rates paid on interest-bearing liabilities. The table below sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in average interest rates (rate) and changes in average asset and liability balances (volume). The change in interest due to both rate and volume has been allocated to change due to rate and volume in proportion to the relationship of absolute dollar amounts in each. Nonaccrual loans are included in average loan balances. 9
1995 and 1994 1994 and 1993 Increase (decrease) Increase (decrease) due to change in due to change in Rate Volume Net Change Rate Volume Net Change - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans, net of deferred fees $ 2,973 $ (5,338) $ (2,365) $ 2,412 $ (6,861) $ (4,449) Investment securities 85 332 417 262 (11) 251 Bank-owned TCD 3 (49) (46) 26 (221) (195) Fed funds sold 378 278 656 264 354 618 - --------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets/interest income 3,439 (4,777) (1,338) 2,964 (6,739) $ 3,775 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY NOW/MMDA (13) (137) (150) (52) (213) (265) Savings (6) (162) (168) (152) (78) (230) TCDs 1,463 (1,041) 422 (236) (1,388) (1,624) - --------------------------------------------------------------------------------------------------------------------------------- Total Deposits 1,444 (1,340) 104 (440) (1,679) (2,119) - --------------------------------------------------------------------------------------------------------------------------------- Notes payable (2) (3) (5) 25 (128) (103) Commercial paper - - - (186) - (186) Fed funds purchased (1) - (1) (13) (30) (43) Repurchase agreements (5) - (5) 4 (284) (280) - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities/interest expense 1,436 (1,343) 93 (610) (2,121) (2,731) - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME/NET INTEREST MARGIN $ 2,003 $ (3,434) $ (1,431) $ 3,574 $ (4,618) $ (1,044) =================================================================================================================================
Net interest income decreased by $1.4 million, or 9.0%, to $14.4 million during 1995 compared to 1994, primarily due to a significant decrease in average interest earning assets. This decrease reflects overall balance sheet shrinkage to improve liquidity, as well as to achieve compliance with the capital requirements of the Banks' regulatory agreements. The decrease is partially offset by a higher net interest margin during 1995, due to changes in interest bearing liabilities, the reduction in nonperforming assets and higher market interest rates. Interest income decreased $1.3 million to $20.8 million for the year ended December 31, 1995. The decrease in interest income was primarily attributable to a significant decrease in interest earning assets, principally loans. However, the net interest margin increased 0.47% and yields on average earning assets increased 0.88%. The increased yields resulted in part from the overall increase in market rates during 1995, together with changes in the Company's asset mix, and the reduction in nonperforming assets. Average interest earning assets were $234.9 million during 1995, a 15.4% decrease from average earning assets of $277.6 million for 1994. The Company reduced average interest earning assets to fund a planned reduction of volatile deposits, particularly title and escrow demand deposits, and institutional certificates of deposit. Average interest earning assets as a percent of total average assets decreased from 94.0% to 92.41% for the years ended December 31, 1995, and 1994, respectively. Average balances for loans, the largest and highest yielding component of earning assets, decreased 24.6% during 1995. Loan yields increased by 1.40% reflecting a decrease in nonaccrual loans, and higher yields on new loans and repricing loans. Average investment securities increased $5.6 million to $43.3 million for the year ended December 31, 1995, and average yields increased 0.22% largely because of the yield curve inversion noted during 1995. Average balances for federal funds sold and average yields increased $4.8 million and 1.43% to $31.3 million and 5.80% for the year ended December 31, 1995. Management noted the inversion of the yield curve at midyear and was able to maintain relatively high balances invested in federal funds sold through the remainder of 1995. 10 Interest expense increased $100 thousand to $6.4 million from $6.3 million for the years ended December 31, 1995, and 1994, respectively. The increase in interest expense was primarily attributable to an increase in the Company's average cost of funds on interest-bearing deposits to 3.85% during 1995 from 3.17% due primarily to rising market interest rates. The increase in the cost of funds was offset by a 16.4% decrease in average interest bearing deposits from $197.4 million to $164.9 million for the years ended December 31, 1995, and 1994, respectively. Average deposits decreased from $272.9 million to $227.9 million for the years ended December 31, 1995, and 1994, respectively, a decrease of 16.5%. During 1995, within the TCD category, approximately $12.3 million or 55% of the institutional TCDs were replaced by local market area customer TCDs. Average deposits were $227.9 million, $272.9 million, and $333.5 million, for the years ended December 31, 1995, 1994, and 1993, respectively. The 18.2% and 16.5% decreases in average deposits from 1993 to 1994 and from 1994 to 1995, respectively, were due to the planned run-off of title and escrow demand deposits, and institutional and brokered certificates of deposit designed to improve the Banks' core deposit bases and reduce potentially volatile liabilities, offset by increases in December 1995 that resulted from marketing programs designed to improve the public's perception of the Banks, enhance business development, generate core deposit growth and a renewed expansion of total banking relationships. Average interest-bearing deposits decreased 16.4% to $164.9 million from $197.4 million for the years ended December 31, 1995, and 1994. Average balances for interest -bearing demand and savings accounts decreased $5.2 million and $6.9 million to $52.9 million and $27.7 million for the year ended December 31, 1995, from the run-off of escrow and title company accounts. Rates on these deposits remained relatively constant for the year ended December 31, 1995. Average balances for time certificates of deposits decreased $20.4 million to $84.3 million from $104.7 million for the years ended December 31, 1995, and 1994, respectively. This decrease which accounts for the largest percentage of the overall decrease on average deposits consists principally of institutional time certificates of deposit that the Company successfully reduced during 1995. Rates on average time deposits, which comprised 37.0% of average total deposits for 1995, increased 37.6% to 5.12% from 3.72% for the years ended December 31, 1995, and 1994, respectively. This increase was primarily a result of the higher market rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Rate Sensitive Assets/Rate Sensitive Liabilities". Provision For Loan Losses For the years ended December 31, 1995, and 1994, the provision for loan losses was $410 thousand and $3.8 million, respectively. Net loan charge-offs were $3.3 million and $9.9 million, or 2.05% and 4.66% of average loans and leases, respectively. Of the 1994 charge-offs, $5.0 million are attributable to the bulk loan sale which occurred in May 1994. The reduction of loan loss provision from 1994 to 1995 is due to the continuing improvement in the Company's credit quality. 11 The following table summarizes the Company's loan loss reserves and loan loss experience for the years indicated:
for the years ended December 31, 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------- (dollars in thousands) Balance at beginning of period $ 8,261 $14,313 $ 3,854 $ 2,845 $2,285 Charge-offs Commercial, financial and agricultural 2,812 8,705 4,026 1,818 1,696 Real estate construction 151 603 67 -- 100 Real estate mortgage 339 254 1,476 -- -- Installment 295 808 570 722 243 Lease financing 64 69 52 3 29 ---------------------------------------------- Total charge-offs 3,661 10,439(1) 6,191 2,543 2,068 Recoveries Commercial, financial and agricultural 338 428 409 111 56 Real estate construction -- -- -- -- -- Real estate mortgage 1 4 1 -- -- Installment 52 117 16 38 35 Lease financing -- 13 11 -- -- ---------------------------------------------- Total recoveries 391 562 437 148 91 Net charge-offs 3,270 9,877 5,754 2,395 1,977 Provision charged to operations 410 3,825 16,213 3,404 2,537 ---------------------------------------------- Balance at end of period $ 5,401 $8,261 $14,313 $ 3,854 $2,845 ==============================================
for the years ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------ Ratio of net charge-offs to average loans outstanding 2.05% 4.66% 1.99% 0.76% 0.68% Loan loss reserves to nonperforming loans(2) 121.62 103.98 72.15 118.44 30.09 Loan loss reserves to nonperforming assets(2) 67.33 73.96 64.86 53.57 24.78 Classified assets to loan loss reserve plus shareholders' equity 44.44 113.27 186.27 84.71 67.45
______________________________ (1) Of this amount, $5.0 million was attributable to the bulk loan sale completed in May 1994. (2) Does not include $3.3 million and $2.0 million of TDRs that were performing at December 31, 1995 and 1994, respectively. Noninterest income Noninterest income decreased $1.8 million, or 44.7%, for the year ended December 31, 1995. However, noninterest income for the year ended December 31, 1994, included one-time gains for the sales of the Company's mortgage servicing rights and merchant credit card operations of $1.4 million and $174 thousand, respectively. As adjusted for these one-time gains, noninterest income decreased $200 thousand for the year ended December 31, 1995. This adjusted net decrease is partially offset by increased gains on the sale of SBA loans of $400 thousand realized during 1995. Service charges on deposit accounts decreased by $250 thousand or 20.5% during 1995 primarily as a result of the 16.5% reduction in average deposits. Loan fees, which are comprised of late charges and other service fees related to the Company's credit products, decreased $347 thousand to $123 thousand for the year ended December 31, 1995, from the sale of the mortgage servicing rights. The sale of the merchant credit card operations in 1994 resulted in a $42 thousand reduction in fee income during 1995, which is reported with miscellaneous fee income. The reduction in mortgage servicing and merchant credit card activity led to a corresponding decrease in noninterest expenses. Noninterest 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 noninterest income were $589 thousand and $1.7 million for the years ended December 31, 1994, and 1993, respectively; no fee income from mortgage servicing was reported for the year ended December 31, 1995. 12 Noninterest expense The following table sets forth the Company's noninterest expense for the periods indicated:
for the years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------- (dollars in thousands) Salaries and employee benefits $ 6,861 $ 6,423 $ 7,082 Net occupancy 1,719 2,087 2,578 Equipment 670 830 1,241 Professional services 1,618 1,928 1,878 Real Estate Owned 169 641 1,733 Amortization of goodwill -- -- 1,266 Courier services 275 280 255 Office supplies and office expense 513 612 800 FDIC/OCC assessments 698 996 1,053 Business development and advertising 518 364 271 Other 1,896 1,923 2,682 --------------------------------------- Total Noninterest Expense $14,937 $16,084 $20,839 =======================================
Noninterest expense decreased $1.1 million or 7.1%, in 1995, due primarily to decreases in REO expenses, occupancy and equipment expenses, professional services and FDIC/OCC assessments, partially offset by increases in salaries and employee benefit expenses. Total noninterest expense expressed as a percentage of net interest income plus other income, commonly referred to as the efficiency ratio, was 89.53% and 80.71% for the years ended December 31, 1995, and 1994, respectively. Salary and employee benefit expense increased by $438 thousand, or 6.8%, during 1995, primarily as a result of increases in ESOP expenses and a decrease in loan origination costs. ESOP expenses in 1995 totaled $547 thousand due to compensation expense recorded for contributions made. As a result, the Trustee of the ESOP paid off the loan to the Company and all of the shares previously held in the suspense account, which totalled 185,840 shares as of December 31, 1994, were released to the eligible plan participants. Therefore, as of December 31, 1995, there is no longer any requirement for the Company to contribute to the ESOP, and there is no longer any loan outstanding between the Company and the ESOP. No ESOP contributions were made in 1994. The Company also adopted Statement of Position ("SOP") 93-6 in 1994 which provided for future ESOP contributions to 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. The expense recorded is based on the average market value of the stock during the year. Deferred loan origination costs decreased as a result of decreases in the number of loan originations from 1994 to 1995, which is evidenced by lower average loan balances during the respective years, and a decrease in the origination cost recorded per loan as a result of a cost analysis performed during 1995. 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 $142 thousand and $207 thousand as of December 31, 1995, and 1994, respectively. These increases during 1995 are offset by decreases in salary expenses and other employee benefits due to staff reductions, as total full time equivalent employees declined from 141 at December 31, 1994, to 127 at December 31, 1995. Occupancy expense decreased $368 thousand, or 17.6%, during 1995, as a result of a decrease in amortization on leasehold improvements, lower rent expenses and an increase in sublease income, offset by an inventory adjustment to premises and equipment. During 1994 and 1995, the Company sublet or terminated leases for office space formerly housing its commercial lending department, mortgage origination department and administrative personnel, along with the Wilmington branch location. 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 $160 thousand, or 19.3%, during 1995, primarily due to a significant decrease in depreciation expense due to the decline in fixed asset additions during 1995 and in computer maintenance expenses associated with outsourcing of the data processing operations in 1994. Professional services expense decreased $310 thousand, or 16.1%, during 1995, as a result of a decrease in the legal fees related to the settlement and collection of problem loans, as evidenced by the Company's significant reduction in nonperforming and classified assets, and the reversal of legal fees incurred during 1995 that were related to and offset against a legal settlement. FDIC/OCC assessments decreased $298 thousand or 29.9%, during 1995, 13 primarily due to a reduction in the semi-annual BIF insurance assessment percentage and a decrease in average deposits from 1994 to 1995, as the premium is determined as a percentage of FDIC adjusted deposit balances. REO expense declined $472 thousand during 1995. REO expense resulting from fair value adjustments to the REO properties was $263 thousand for the year ended December 31, 1995, rather than $959 thousand for the year ended December 31, 1994. The reduction in fair value adjustments reflects a stabilization in the market for distressed properties. When a property is taken into REO, if the fair value of the property is less than the Company's recorded loans plus estimated selling costs, a writedown is taken immediately and charged to the loan loss reserve. Subsequent reductions in fair value based on appraisals are charged to noninterest expense as writedowns. In addition, REO maintenance expenses were $263 thousand as compared to $193 thousand for the years ended December 31, 1995, and 1994, respectively. This increase resulted primarily from a change in the composition of REO properties held during 1995 towards commercial rental properties. These writedowns and expenses were partially offset by gains on sale of REO of $358 thousand and $511 thousand for the years ended December 31, 1995, and 1994, respectively. Income Taxes The Company recorded an income tax benefit of $2.4 million for the year ended December 31, 1995, resulting primarily from the reversal of valuation allowances that had been established against deferred tax assets in prior years to fully offset net deferred tax assets. 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. The necessity for the valuation allowance was reassessed during 1995 and the valuation allowance was reversed, resulting in income recognition. Income tax expense of $285 thousand was recorded for the year ended December 31, 1994, reflecting the charge 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 had current tax assets of $1.5 million at December 31, 1995, representing the remaining benefit from the 1994 and 1995 net operating loss carrybacks to 1992 and other refundable taxes. In addition, the Company had a net deferred tax asset of $1.4 million, which resulted primarily from timing differences in the deduction of bad debts between the financial statements and the tax return. 1994 COMPARED WITH 1993 Net Interest Income and Net Interest Margin Net interest income decreased by $1.0 million, or 6.2%, to $15.9 million for the year ended December 31, 1994, compared to $16.9 million for the year ended December 31, 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 Banks' regulatory agreements. Interest income for 1994 decreased $3.8 million, or 14.6%, compared to $22.1 million in 1993, while interest expense decreased $2.7 million, or 30.4%, for the same period to $6.3 million. The decrease in interest income during 1994 was primarily attributable to a significant decrease in interest earning assets, primarily loans. 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 were $277.6 million during 1994, a 21.1% decrease from the average balance of $351.7 million 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. Average interest earning assets as a percent of total average assets increased from 92.3% for 1993 to 94.0% for 1994. Loans, the largest and highest yielding component of earning assets, decreased 26.8% during 1994. The decrease in interest expense during 1994 was primarily attributable to a 19.8% decrease in average interest bearing deposits from $246.1 million for 1993 to $197.4 million for 1995. 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 $333.5 million for 1993 to $272.9 million for 1994, a decrease of 18.2%. Average certificates of deposit 14 greater than $100 thousand 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. Net interest margin increased to 5.68% from 4.81% for the years ended December 31, 1994 and 1993, respectively. Most of the increase resulted from the reduction in non-performing assets and higher market interest rates, which was partially offset by a decrease in average earning assets, primarily loans. Noninterest income Noninterest income decreased $756 thousand, or 15.7%, during 1994, primarily due to a lower level of mortgage activity. Loan fees decreased 60.6% from $1.2 million in 1993 to $470 thousand in 1994, reflecting a significant decrease in income resulting from mortgage loan originations and servicing during the year. Net mortgage servicing fees were $317 thousand in 1994, compared with $618 thousand in 1993, a decrease of 48.7%. The Company sold its mortgage servicing rights for a net gain of $1.4 million in May 1994, which was offset by a write- off of $320 thousand. The Company also sold its mortgage origination unit in June 1994 in return for residual income on future loan originations by the acquirer. However, due to significant reductions in mortgage origination activity subsequent to the sale, the acquirer closed the mortgage origination unit, and no residual income will be generated. Noninterest income increased in 1994, due to the gain on sale of mortgage servicing and a gain of $174 thousand 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 gains 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 thousand in 1993 to $354 thousand 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. Noninterest 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 noninterest income were $589 thousand and $1.7 million in 1994 and 1993, respectively. Provision For Loan Losses and Nonperforming Loans In 1994 and 1993, the provision for loan losses was $3.8 million and $16.2 million, respectively. Net loan charge-offs in 1994 and 1993 were $9.9 million and $5.8 million, respectively, or 4.66% and 1.99% of average loans and leases, respectively. Of the 1994 charge-offs, $5.0 million are attributable to the bulk loan sale which occurred in May 1994. 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. At December 31, 1994, the loan loss reserve decreased to $8.3 million compared to $14.3 million 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. 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 thousand and $552 thousand at December 31, 1994, and 1993, respectively. At December 31, 1994, loans totaling $7.6 million were on nonaccrual status, compared with $18.9 million at December 31, 1993. As of December 31, 1994, the Company had restructured loans in the amount of $2 thousand, compared to $348 thousand 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. 15 Noninterest expense Noninterest expense decreased $4.8 million, or 22.8%, in 1994, due primarily to a decrease in REO expense, the write-off of goodwill during 1993, and decreased salaries and employee benefits, occupancy and equipment expenses. Total noninterest 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. REO expense declined $1.1 million during 1994. The Company incurred writedowns on REO of $1.4 million during 1993 due to declining market values on properties that were principally raw land and commercial real estate. REO writedowns in 1994 totaled $959 thousand. These writedowns were partially offset by gains on sale of REO of $1 thousand in 1993 and $511 thousand in 1994. Salary and employee benefit expense decreased by $659 thousand, 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 thousand compensation expense related to the ESOP, which was partially offset by $49 thousand in 401(k) matching contributions. These salary and employee benefit expense reductions were partially offset by decreased deferred loan origination costs. These deferred costs were $457 thousand and $207 thousand as of December 31, 1994, and 1993, respectively. Occupancy expense decreased $491 thousand, 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, the Company sublet or terminated leases for office space formerly housing its commercial lending department, mortgage origination department and administrative personnel. Equipment expense decreased $411 thousand, 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 thousand. The Company outsourced its courier service in September 1993, resulting in monthly reductions of approximately $8 thousand. Income Taxes The Company recorded income tax expense of $285 thousand in 1994. The charge of $285 thousand 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 an income tax benefit of $3.2 million in 1993, reflecting available carryback to tax years 1990 through 1992. The Company had a tax asset of $794 thousand 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 $3.1 million which was fully offset by a tax valuation allowance. 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, 0.9% at December 31, 1995, and 0.7% at December 31, 1994, 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 and Frontier have credit lines, for $8 million and $3 million, respectively, with an unaffiliated financial institution which enable them 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 16 which enable them to borrow funds on a secured basis. At December 31, 1995, the Banks were not obligated to any entity in connection with their federal funds lines of credit. 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 1995, 1994, and 1993 was 23.3%, 18.6% and 13.6%, respectively. Average liquidity for 1995, 1994, and 1993, expressed as a percent of average liabilities, was 25.7%, 20.0%, and 16.6%, respectively. From 1993 to 1995, 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 loan to deposit ratios for the Company at December 31, 1995, 1994, and 1993 were 64.5%, 67.6% and 79.6%, respectively. 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 0.1%, 1.2% and 11.3% of total deposits at December 31, 1995, 1994, and 1993, respectively. Certificates of deposit held by other financial institutions represented 4.2%, 9.4%, and 11.4% of total deposits at December 31, 1995, 1994, and 1993, respectively, and brokered CDs represented 1.3% of total deposits at December 31, 1993; the Company did not have any brokered CDs at December 31, 1995, or 1994. 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 required the Parent to reimburse Ventura for $3.3 million in connection with interest paid to Parent on deposits of funds generated by commercial paper sales. The reimbursement was made during 1995. See "Risk Factors--Regulatory Agreements and Capital Requirements." During 1995, Parent paid off notes payable in the amount of $125 thousand with proceeds from the rights offering and had no notes payable outstanding as of December 31, 1995. Parent has sufficient cash available to meet its obligations during 1996. 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, 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. 17 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, 1995.
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 $ -- $ -- $ -- $19,920 $ 19,920 Interest-bearing deposits with other financial institutions 100 -- -- -- 100 Federal funds sold 47,450 -- -- -- 47,450 Securities available-for-sale 11,674 17,572 7,492 -- 36,738 (1) Loans, net fixed rate 14,027 19,255 6,341 -- 39,623 Loans, net floating rate 113,882 -- -- 4,260 118,142 Noninterest bearing assets -- -- -- 11,334 11,334 Less loan loss reserve -- -- -- (5,401) (5,401) -------------------------------------------------------------- Total assets $187,133 $36,827 $13,833 $30,113 $267,906 ============================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest bearing deposits $ -- $ -- $ -- $68,074 $68,074 Interest-bearing demand and savings deposits 77,085 -- -- -- 77,085 Time certificates of deposit 84,171 6,742 -- -- 90,913 Other liabilities -- -- -- 2,225 2,225 Shareholders' equity -- -- -- 29,609 29,609 (1) -------------------------------------------------------------- Total liabilities and shareholders' equity $161,256 $ 6,742 $ -- $ 99,908 $267,906 ============================================================== Interest rate-sensitivity gap $ 25,877 $30,085 $ 13,833 Cumulative interest rate-sensitivity gap 25,877 55,962 69,795 Cumulative interest rate-sensitivity gap as a percent of total assets 9.7% 20.9% 26.1%
_____________________________________ (1) Excludes unrealized losses of $150 thousand on securities available for sale as of December 31, 1995. At December 31, 1995, the Company had net repriceable assets (a "positive" gap) as measured at one year of 9.7% of total assets. The net repriceable assets over a five-year time horizon totaled approximately $56 million or 20.9% 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 1995 and 1994 results reflect the situation in which the net interest margin grew as rates increased, whereas, the 1993 results reflect the opposite situation, with declines in the net interest margin as rates declined. 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 Committees ("ALCO") of the Banks analyze data produced by this software monthly to determine the most appropriate manner to counter interest rate risk. Based on the recommendations from ALCO, the Banks have implemented strategies to counter the impact of changing interest rates, including the establishment of interest rate floors on 37% of the variable rate loans at December 31, 1995, to mitigate the effect on the net interest margin if rates decline, and also by investing in fixed rate investment securities and increased percentages of fixed rate loans in the portfolio. Management believes that these strategies are effective in minimizing the impact on earnings from changes in interest rates. However, no assurances can be given that this strategy will be successful if market rates decline below the floors and customers attempt to refinance such loans. 18 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 requires Frontier 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%. 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 of 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, 1995, and 1994.
as of December 31, 1995 1994 - ------------------------------------------------------------- Company (1) Risk-based Capital Ratio 18.83% 12.61% Tier 1 Capital Ratio 17.56% 11.32% Leverage Ratio 11.40% 7.53% Ventura Risk-based Capital Ratio 17.25% 12.21% Tier 1 Capital Ratio 15.97% 10.92% Leverage Ratio 10.03% 7.21% Frontier (1) Risk-based Capital Ratio 15.04% 13.57% Tier 1 Capital Ratio 13.78% 12.29% Leverage Ratio 9.80% 8.32%
____________ (1) In accordance with recent guidance from the Federal Financial Institutions Examination Council, regulatory capital includes $548 thousand, which represents a $792 thousand cumulative effect adjustment to reduce the balance of SBA loans, a portion of which was offset by income recognized through amortization and gains on the sales of SBA loans during the 90 day recourse period 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 On January 1,1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." This statement amends SFAS No. 5, "Accounting for Contingencies" and SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." This statement prescribes that a loan is impaired when it is probable that the creditor will be unable to collect all contractual principal and interest payments under the terms of the loan agreement. This statement generally requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as an expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Creditors may select the measurement method on a loan by loan basis, except that collateral dependent loans must be measured at the fair value of the collateral if foreclosure is probable. The statement also prescribes measuring impairment of a restructured loan by discounting the total expected future cash flows at the loan's effective rate of interest in the original loan agreement. The effect of initially adopting this statement is reported as part of the provision for credit losses. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material impact on the results of operations or the financial position of the Company taken as a whole. The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as of December 31, 1993. SFAS No. 115 addresses accounting and reporting for investments in equity securities that 19 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. 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. The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. This Statement does not require the application of the fair value method and allows the continuance of current accounting method, which requires accounting for stock compensation awards based on their intrinsic value as of the grant date. However, SFAS No. 123 requires proforma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied. The accounting and disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995, though earlier adoption is encouraged. The Company has elected not to adopt the fair value provisions of this statement. 20 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED BALANCE SHEETS
as of December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------- (in thousands of dollars) ASSETS - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 19,920 $ 11,442 Federal funds sold 47,450 27,000 Interest-bearing deposits with other financial institutions 100 694 Securities, available for sale at fair value, (amortized cost $36,738 and $32,604, respectively) 36,588 31,859 Securities, held to maturity at amortized cost, (market at December 31, 1994, $17,963) - 18,775 Loans and leases, net of unearned income 157,765 167,934 Less: loan loss reserve (5,401) (8,261) - ------------------------------------------------------------------------------------------------------------------- Loans and leases, net 152,364 159,673 Premises and equipment, net 2,371 1,917 Other assets 8,963 6,395 - ------------------------------------------------------------------------------------------------------------------ Total Assets $267,756 $257,755 =================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest bearing demand $ 68,074 $ 67,177 Interest bearing demand and savings 77,085 80,646 Time certificates of deposit 90,913 88,519 - ------------------------------------------------------------------------------------------------------------------- Total deposits 236,072 236,342 Notes payable - 125 Other liabilities 2,225 2,236 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 238,297 238,703 Commitments and contingencies Shareholders' equity Contributed capital, including common stock, no par value, 20,000,000 shares authorized; issued and outstanding, 9,226,723 and 6,333,835 at December 31, 1995, and 1994, respectively 37,025 30,949 Unrealized loss on securities, available for sale, net of tax at December 31, 1995 (615) (1,178) Retained deficit (6,951) (10,719) - ----------------------------------------------------------------------------------------------------------------- Total shareholders' equity 29,459 19,052 - ----------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $267,756 $257,755 =================================================================================================================
See notes to consolidated financial statements. 21 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) Interest Income Loans and leases $ 16,375 $ 18,740 $ 23,190 Deposits with financial institutions 21 67 263 Investment securities 2,586 2,169 1,916 Federal funds sold 1,816 1,160 542 ------------------------------------------------------------------------------------------------------- Total interest income 20,798 22,136 25,911 Interest Expense Deposits 6,357 6,253 8,372 Other borrowings 4 15 627 ------------------------------------------------------------------------------------------------------- Total interest expense 6,361 6,268 8,999 ------------------------------------------------------------------------------------------------------- Net Interest Income 14,437 15,868 16,912 Provision for loan losses 410 3,825 16,213 - ------------------------------------------------------------------------------------------------------------ Net Interest Income after Provision for Loan Losses 14,027 12,043 699 Noninterest Income Service charges on deposit accounts 967 1,217 1,521 Loan servicing fees 123 470 1,192 Miscellaneous fees 308 354 590 Gains (losses) on sales of investment securities 47 (195) 56 Gain on sale of loan servicing rights - 1,443 - Gains on sales of SBA loans 696 305 386 Other 105 470 1,075 ------------------------------------------------------------------------------------------------------- Total noninterest income 2,246 4,064 4,820 Noninterest Expense Salaries and employee benefits 6,861 6,423 7,082 Occupancy, net 1,719 2,087 2,578 Equipment 670 830 1,241 REO 169 642 1,733 Goodwill amortization - - 1,266 Professional services 1,618 1,928 1,878 FDIC/OCC assessments 698 996 1,053 Business development and advertising 518 364 271 Office supplies and expense 513 612 800 Courier 275 280 255 Loan workout 579 111 - Other 1,317 1,811 2,682 ------------------------------------------------------------------------------------------------------- Total noninterest expense 14,937 16,084 20,839 ------------------------------------------------------------------------------------------------------- Income (Loss) before Income Taxes 1,336 23 (15,320) Provision for income taxes (benefit) (2,432) 285 (3,233) - ------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ 3,768 $ (262) $ (12,087) ============================================================================================================ Per share: Net income (loss) $ 0.48 $ (0.04) $ (2.14)
See notes to consolidated financial statements 22 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
RETAINED SHARES CONTRIBUTED LOSS ON EARNINGS OUTSTANDING CAPITAL SECURITIES (DEFICIT) TOTAL ----------- ------- ---------- --------- ----- (dollars in thousands, except for shares of stock) Balance at January 1, 1993 5,614,255 $28,884 $ (126) $ 1,630 $ 30,388 Net Loss--1993 -- --- -- (12,087) (12,087) Increase 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 Stock Options Exercised 4,000 8 -- -- 8 Sale of Common Stock 2,888,888 5,521 -- -- 5,521 Net Income--1995 -- -- -- 3,768 3,768 Decrease in unearned compensation related to ESOP -- 547 -- -- 547 Decrease in unrealized loss on securities -- -- 563 -- 563 --------- ------- ------- -------- -------- Balance at December 31, 1995 9,226,723 $37,025 $ (615) $ (6,951) $ 29,459 ========= ======= ======= ======== ========
See notes to consolidated financial statements. 23 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASHFLOWS
for the years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................... $3,768 $(262) $(12,087) Adjustments to reconcile net income (loss) to cash flows provided by (applied to) operating activities: Depreciation and amortization......................... 572 739 2,446 Provision for loan losses............................. 410 3,825 16,213 Change in deferred loan fees.......................... (65) (250) (271) Accretion of investment discount, net of amortization of investment premium............................... (163) 39 322 (Gain) loss on sale of investment securities available for sale.................................. (47) 195 - Gain on sale of investment securities................. - - (56) Gain on sale of loan servicing rights................. - (1,443) - Gain on sale of merchant card portfolio............... - (174) - Gain on sale of SBA loans............................. (696) (305) (386) (Gain) loss on sale of fixed assets................... 105 (9) (11) Gain on sale of REO................................... (358) (511) (1) REO write-downs....................................... 263 959 1,408 Provision for deferred income taxes................... (1,868) 1,200 (1,133) Change in other assets................................ (811) (4,865) (1,515) Change in other liabilities........................... (126) 491 (427) Decrease in deferred compensation related to ESOP..... 547 - 635 ------------------------------------------------- Net Cash Provided by (Applied To) Operating Activities 1,531 (371) 5,137 ------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment securities.......... - - 44,930 Proceeds from sales of investment securities available-for-sale.................................... 7,229 8,732 Proceeds from maturities of investment securities...... - - 31,834 Proceeds from maturities of investment securities held-to-maturity...................................... 2,853 3,466 - Proceeds from maturities of investment securities available-for-sale.................................... 14,084 2,625 Purchase of investment securities...................... - - (84,633) Purchase of investment securities held-to- maturity.... (3,997) (3,194) - Purchase of investment securities available-for- sale.. (4,883) (22,778) - Purchase of premises and equipment..................... (1,034) (996) (373) Proceeds from sale of premises and equipment........... 18 36 366 Proceeds from sale of REO properties................... 1,942 5,345 833 Net change in loans.................................... 11,303 74,364 34,380 Proceeds from the sale of SBA loans.................... 5,574 6,738 5,601 Proceeds from the sale of non-performing loans........ - 9,056 - Change in Federal funds sold........................... (20,450) (9,000) (18,000) Change in deposits with other financial institutions... 594 1,486 4,955 Proceeds from sale of loan servicing rights........... - 1,763 - Proceeds from sale of merchant card portfolio.......... - 174 - Purchases of bulk loans................................ (11,420) - - ----------------------------------------------- Net Cash Provided By Investing Activities......... 1,813 77,817 19,893 -----------------------------------------------
24 VENTURA COUNTY NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASHFLOWS
for the years ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- (dollars in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Change in demand and savings deposits.................... (2,664) (52,903) (6,070) Change in time deposits.................................. 2,394 (29,044) (24,228) Change in short-term borrowings.......................... -- -- (16,860) Issuance of common stock................................. 5,529 -- 1,430 Repayment of note payable................................ (125) -- (2,188) Issuance of notes payable................................ -- -- 125 ------------------------------------------- Net Cash Provided by (Applied To) Financing Activities.. 5,134 (81,947) (47,791) ------------------------------------------- Net Increase (Decrease) In Cash and Cash Equivalents.... 8,478 (4,501) (22,761) ------------------------------------------- Cash and Cash Equivalents at Beginning of Year........... 11,442 15,943 38,704 ------------------------------------------- Cash and Cash Equivalents at End of Year................. $19,920 $ 11,442 $ 15,943 ======== ======== ========= SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS AND NONCASH TRANSACTIONS Interest payments $ 6,295 $ 6,276 $ 9,124 Income taxes paid 188 -- 300 Foreclosures 4,428 6,197 664 Change in unrealized loss on available- for-sale investment securities (186) 433 -- Loans to facilitate sales of REO 2,225 -- 603
See notes to consolidated financial statements. 25 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 intercompany balances and transactions have been eliminated in consolidation. The Company's primary operations are related to traditional banking activities, including the acceptance of deposits and the lending of cash and investing of money. The Company's customers consist of small to medium-sized businesses and individuals located primarily in Ventura, Santa Barbara, Orange, and Los Angeles counties. The Company also originates and sells Small Business Administration ("SBA") loans through its normal operations. 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 preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements. 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. Investments are 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 in the Consolidated Balance Sheets, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity, net of tax. Consistent with the provisions of SFAS No. 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 loss 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 amotized cost, with the exception of investments in mutual funds, which were deemed equity investments, with adjustments to lower of cost 26 or market being recorded as a component of equity. During 1994 and 1995, 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. Ventura had no trading securities at December 31, 1994, or 1995. Mortgage-backed securities consist entirely of Federal Home Loan Mortgage Corporation (FHLMC) securities; there are no structured notes, CMOs, or other derivative products in the investment portfolio. Accreted discounts and amortized premiums on all investment securities are included in interest income, along with dividend and interest income. 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 nonaccrual, 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 or loss on sale of loans when the related loans are sold. SBA Loans and Servicing Income The portion of loans guaranteed by the SBA, which are originated and are intended for sale in the secondary market, is carried at the lower of cost or estimated market value. Funding for SBA programs depends on annual appropriations by the U.S. Congress, and accordingly, the sale of loans under this program is dependent on the continuation of such programs. Gains on sale of the guaranteed portion of SBA loans are recognized to the extent sales proceeds less amounts necessary to provide required yield enhancement to the Company for retaining the unguaranteed portion of the loan exceed the carrying value of the guaranteed portion sold. Gains or losses are determined using the specific identification method for loans sold and are recorded as noninterest income as of the date of sale. The Company sells SBA loans and retains servicing. At the time of 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 normal 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. 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. 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. Although management believes the level of the loan loss reserve as of December 31, 1995, 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. 27 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On January 1,1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." This statement amends SFAS No. 5, "Accounting for Contingencies" and SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." This statement prescribes that a loan is impaired when it is probable that the creditor will be unable to collect all contractual principal and interest payments under the terms of the loan agreement. This statement generally requires impaired loans to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as an expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Creditors may select the measurement method on a loan by loan basis, except that collateral dependent loans must be measured at the fair value of the collateral if foreclosure is probable. The statement also prescribes measuring impairment of a restructured loan by discounting the total expected future cash flows at the loan's effective rate of interest in the original loan agreement. The effect of initially adopting this statement is reported as part of the provision for credit losses. The adoption of SFAS No. 114 and SFAS No. 118 did not have a material impact on the results of operations or the financial position of the Company taken as a whole. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization computed on a straight-line basis over the estimated useful lives of the assets or terms of the leases. Net gains and losses on retirement of disposal of premises are included in net gains on sales of assets. Real Estate Owned Real estate acquired through foreclosure or deed-in-lieu-of foreclosure, is carried at the lower of cost or fair value less estimated costs to sell. At the time of acquisition, any excess of cost over fair value is charged to the loan loss reserve. Gains realized on sales and operating income are included in noninterest income; losses realized on sale, holding expenses and subsequent declines in fair value are included in noninterest expense, respectively, in the consolidated statements of operations. Intangible Assets and Deferred Loan Servicing Fees For the year ended December 31, 1993, and for the first half 1994, the cost of acquired loan servicing rights was capitalized and amortized over the estimated remaining term of the underlying loan pertfolio. During May, 1994, the Company sold its mortgage loan servicing department and the related capitalized loan servicing rights were written off. Income Taxes Deferred tax assets or liabilities shown on the balance sheet are adjusted to reflect differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The adjustments to deferred tax assets and liabilities plus income taxes currently payable or refundable represents the income tax provision for the year. The parent files consolidated U.S. federal and California state income tax returns. Income (Loss) Per Share Income (loss) per share is computed by dividing net income or (loss) by the weighted-average number of common shares outstanding and the additional dilutive effect of stock options outstanding during the period. The dilutive effect of stock options is computed using the average market price of the Company's common stock for the period. 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 used to compute income per share were 7,833,058, 6,333,835, and 5,635,941 for the years ended December 31, 1995, 1994, and 1993, respectively. Fully diluted income per share has not been reported for 1995, as the additional dilutive effect of outstanding stock options was immaterial. Fully diluted per share amounts are not reported in loss years as such amounts are antidilutive. 28 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Current Accounting Pronouncements FASB has issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. This statement does not require the application of the fair value method and allows the continuance of current accounting method, which requires accounting for stock compensation awards based on their intrinsic value as of the grant date. However, SFAS No. 123 requires proforma disclosure of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in this Statement had been applied. The accounting and disclosure requirements of this statement are effective for financial statements for fiscal years beginning after December 15, 1995, although earlier adoption is encouraged. The Company has elected not to adopt the fair value provisions of this statement. Reclassifications Certain reclassifications have been made to prior years' amounts to conform to current year presentation. NOTE 3. 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, 1995, was $1,714,000. NOTE 4. INVESTMENT SECURITIES As a result of a temporary decline in the market value of securities-available- for-sale, the Company recorded unrealized losses totaling $615,000 and $1,178,000, which are included in shareholders' equity on the consolidated balance sheets at December 31, 1995, and 1994, respectively. The decline in the market value of the portfolio reflects the current interest rate environment; such decline is deemed temporary in nature. 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 category. Previously recorded unrealized losses with a balance of $297,000 and $433,000 at December 31, 1995, and 1994, respectively, are included in shareholders' equity and are being amortized over the securities' remaining lives. In November 1995, the Financial Accounting Standards Board ("FASB") issued a "Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities: Questions and Answers" (the "Guide"). The Guide allows for a one time reassessment of the classification of all securities and, in connection with such reassessment, permits the reclassification of securities from the held-to-maturity classification to the available-for-sale classification as of a single date no later than December 31, 1995, without calling into question management's intent to hold to maturity the remaining securities classified as held-to-maturity. In December 1995, the Company transferred its entire portfolio of held-to-maturity securities with an amortized cost of $20,213,000 to the available-for-sale classification to allow for greater flexibility in the Company's investment portfolio. The transfer resulted in an unrealized gain of $186,000, net of the unamortized portion of unrealized loss recorded when certain securities were transferred from the available-for-sale to held-to-maturity classification during 1994. This gain is included in the unrealized gains/losses on available-for-sale securities in a separate component of shareholders' equity. FHLB stock of $821,000 at December 31, 1995, is not deemed a marketable equity security, as it is not traded on a registered security exchange, and is carried at cost. Securities with a fair value of $9,568,000, on December 31,1995, were pledged as required by law. 29 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost basis, gross unrealized holding gains and losses and estimated market values of securities at December 31, 1995, were as follows:
SECURITIES AVAILABLE-FOR-SALE -------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING MARKET December 31, 1995 COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------- (dollars in thousands) U.S. Government securities $ 13,491 $ 85 $ 1 $ 13,575 Mortgage-backed securities 21,882 230 464 21,648 Federal Reserve Bank and FHLB Stock 1,365 -- -- 1,365 ------------------------------------- Total $ 36,738 $ 315 $ 465 $ 36,588 =====================================
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, gross unrealized holding gains and losses and estimated market values of securities at December 31, 1994, are as follows:
SECURITIES AVAILABLE-FOR-SALE -------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING MARKET December 31, 1994 COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------- (dollars in thousands) 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 ===================================== SECURITIES HELD-TO-MATURITY -------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING MARKET December 31, 1994 COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------- (dollars in thousands) U.S. Government securities $ 1,205 $ -- $ 28 $ 1,222 Mortgage-backed securities 17,525 -- 784 16,741 ------------------------------------- Total $ 18,775 $ -- $ 812 $ 17,963 =====================================
30 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1995, the average expected life of mortgage-backed securities classified as available-for-sale was approximately 3 years, and the average maturity was approximately 9 years. At December 31, 1995, the scheduled maturities of debt securities available-for-sale were as follows:
AMORTIZED MARKET COST VALUE ---- ----- (dollars in thousands) Within one year U.S. Government Obligations $ 7,493 $ 7,504 After one year through five years U.S. Government Obligations 5,998 6,071 Mortgage-backed Securities 11,574 11,448 After ten years Mortgage-backed Securities 10,308 10,200 ----------------------- Total $ 35,373 $ 35,223 =======================
NOTE 5. LOANS AND LEASES The following is a summary of the loan and lease portfolio at December 31:
1995 1994 ---- ---- (dollars in thousands) Commercial, financial and agricultural $140,187 $138,193 SBA loans held for sale 2,240 -- Real estate--Mortgage 6,710 11,993 Real estate--Construction 1,537 7,734 Installment 7,043 9,897 Lease financing 51 129 -------------------------- Subtotal 157,768 167,946 Less unearned income 3 12 -------------------------- Loans and leases, net of unearned income $157,765 $167,934 ==========================
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, 1995, and 1994, such loans amounted to approximately $4,341,000 and $7,614,000, respectively. Interest foregone on nonaccrual loans in 1995, 1994 and 1993 totaled $1,254,000, $1,609,000 and $2,214,000, respectively. Loan Loss Reserve At December 31, 1995, the Company had classified $1,942,000 of its loans as impaired with a specific reserve of $349,000 and $2,399,000 of its loans impaired with no specific loss reserve determined in accordance with SFAS No. 114. The average recorded investment in impaired loans during the year ended December 31, 1995, was $7,195,000. Once a loan has been identified as impaired, the Company discontinues recognition of interest income and applies the full amount of all payments received, whether principal or interest, to the principal balance of the loan. 31 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the activity in the loan loss reserve:
for the years ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------------- (dollars in thousands) Balance at beginning of year $ 8,261 $ 14,313 $ 3,854 Provision charged to expense 410 3,825 16,213 Loans charged off (1) (3,661) (10,439) (6,191) Recoveries on loans previously charged off 391 562 437 ---------------------------------- Balance at end of year $ 5,401 $ 8,261 $14,313 ==================================
(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 nonperforming loans. NOTE 6. PREMISES AND EQUIPMENT Following is a summary of the premises and equipment accounts at December 31:
1995 1994 ---- ---- (dollars in thousands) Land $ 95 $ -- Buildings & building improvements 456 -- Leasehold improvements 2,077 1,962 Furniture, fixtures and equipment 5,027 4,723 ---------------------------- 7,655 6,684 Less accumulated depreciation and amortization 5,284 4,767 ---------------------------- Premises and equipment, net $2,371 $1,917 ============================
Depreciation and amortization expense related to property and improvements was $572,000, $739,000 and $948,000 for the years ended December 31, 1995, 1994, and 1993, respectively. NOTE 7. REAL ESTATE OWNED At December 31, 1995, and 1994, other assets include approximately $2,702,000 and $2,346,000, respectively, of real estate owned. Additionally, at December 31, 1995, and 1994, other assets include approximately $878,000 of other foreclosed personalty. NOTE 8. INTANGIBLE ASSETS and MORTGAGE SERVICING RIGHTS On November 15, 1990, the Company purchased the rights to service certain loans held by the RTC for $1,735,000. Amortization 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, accordingly, no amortization was recorded for 1995. 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 for the balance of goodwill 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, 1995, the Company is no longer actively marketing Frontier. 32 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. TIME CERTIFICATES OF DEPOSIT, OTHER SHORT-TERM BORROWINGS AND INTEREST EXPENSE The following summarizes time certificates of deposit outstanding at December 31:
1995 1994 - -------------------------------------------------------------------------------------- (dollars in thousands) Time certificates of deposit under $100,000 $63,162 $63,186 Time certificates of deposit, $100,000 and over 27,751 25,333 ------------------------- Total $90,913 $88,519 =========================
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. No borrowings were made on the FHLB advance line during 1995. Interest expense relating to deposits and other borrowed funds for each of the three years ended December 31 is as follows:
for the years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ (dollars in thousands) Time certificates of deposit under $100,000 $ 3,044 $ 2,638 $ 3,337 Time certificates of deposit, $100,000 and over 1,270 1,254 2,178 Other deposits 2,043 2,361 2,857 Short-term borrowings -- 6 515 Note payable 4 9 112 ---------------------------------------- Total Interest Expense $ 6,361 $ 6,268 $ 8,999 ========================================
NOTE 10. INCOME TAXES The provision for income taxes (benefit) are as follows for the three years ended December 31:
for years ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------------- (dollars in thousands) Current: Federal $ (604) $(923) $(2,100) State 40 8 -- ----------------------------------------- $ (564) $(915) $(2,100) ----------------------------------------- Deferred: Federal $ (848) $1,202 $(1,352) State (1,020) (2) 219 ---------------------------------------- (1,868) 1,200 (1,133) ---------------------------------------- $(2,432) $285 $(3,233) ========================================
Deferred income taxes for 1995, 1994 and 1993 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. 33 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principal items making up the deferred income tax provisions follow.
for the years December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) Financial statement income from leases different from amounts recognized for tax $ -- $ 18 $ (93) Depreciation recognized for tax different from amount recognized for financial statement depreciation 32 86 (162) Financial statement bad debt deduction different than tax bad debt deduction 1,422 1,477 (2,488) Financial statement deferred loan fees and costs different from amounts recognized for tax (147) (293) 79 Prepaid expense recognized for tax different from amounts recognized for financial statement purposes (7) (34) -- Financial statement other real estate owned deduction different from tax other real estate owned deduction (11) 78 (629) State income tax benefit recognized for tax different from amounts recognized for financial statement purposes -- (413) (416) Other items, net (41) 261 (52) Less: net deferred tax valuation allowance (3,116) 20 2,628 ------------------------------------------- $(1,868) $ 1,200 $(1,133) ===========================================
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:
Rate Reconciliation for the years ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------- (dollars in thousands) Taxes (benefit) at 35% $ 468 $ 8 $(5,362) Adjustment of prior year tax and other 132 -- -- State income taxes, net of federal tax benefits 35 4 (1,686) Goodwill and permanent differences -- (6) 771 State income tax limitation on net operating loss 49 259 416 Provision for deferred tax asset valuation allowance (3,116) 20 2,628 ---------------------------------- $(2,432) $285 $(3,233) ==================================
Net deferred tax assets 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, 1995 the Company's gross deferred assets, deferred liabilities, and tax asset valuation allowance totaled $2,465,000, $1,065,000 and $0, respectively as compared to gross deferred assets, deferred liabilities, and tax asset valuation allowance of $3,916,000, $801,000 and $3,115,000, respectively, as of December 31, 1994. 34 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, the principal items making up the net deferred income tax (assets) and liabilities are as follows:
as of December 31, 1995 1994 - ---------------------------------------------------------------------------------------------------- Depreciation recognized for tax different from amount recognized for financial statement depreciation $ 457 $ 434 Financial statement bad debt deduction different than tax bad debt deduction (1,350) (2,276) Financial statement deferred loan fees and costs different from amounts recognized for tax 178 294 Prepaid expense recognized for tax different from amounts recognized for financial statement purposes 64 73 Financial statement other real estate owned deduction difference from tax other real estate owned deduction (63) (136) Financial statement occupancy expense deduction difference from tax occupancy expense deduction (385) (390) State income tax benefit recognized for tax different from amounts recognized for financial statement purposes (242) (393) Other items, net 3 (254) Unrealized loss on available-for-sale securities (62) (467) Less: net deferred tax valuation allowance -- 3,115 ---------------------------- Net deferred tax asset $(1,400) $ 0 ============================
The net deferred tax assets at December 31, 1995, is included in other assets in the consolidated balance sheets. NOTE 11. COMMON STOCK AND STOCK OPTIONS 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 nonqualified 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. The following table sets forth activity under the 1982 option plan for the years ended December 31,
---------------------------------------------------------------------------- (Number of shares) 1995 1994 1993 ---------------------------------------------------------------------------- Balance, January 1 21,813 46,741 49,648 Options granted - - - Options exercised - - - Options expired (21,813) (24,928) (2,907) ---------------------------------------------------------------------------- Balance, December 31 - 21,813 46,741 ============================================================================ Shares exercisable - 4,362 46,741 Exercise price N/A $4.81 $3.61 to $4.81
35 The following table sets forth activity under the 1991 option plan for the years ended December 31,
---------------------------------------------------------------------------- (Number of shares) 1995 1994 1993 ---------------------------------------------------------------------------- Balance, January 1 171,588 167,418 136,730 Options granted 93,228 25,000 104,888 Options exercised (4,000) - - Options expired or cancelled (20,500) (20,830) (74,200) ---------------------------------------------------------------------------- Balance, December 31 240,316 171,588 167,418 ============================================================================ Options exercisable 111,597 69,955 37,576 Exercise price $1.51 to $6.84 $2.13 to $6.84 $2.13 to $6.84
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. During 1995, there were 185,840 shares allocated to eligible plan participants. 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 in 1994, as the Company made no contributions to the Plan in 1994 and no shares were released to participants. The Company contributed $547,000 during 1995, and settled all required contributions between the Company and the ESOP. As a result, the Trustee of the ESOP paid off the loan to the Company and all of the shares previously held in the suspense account, which totalled 185,840 shares as of December 31, 1994, were released to the eligible plan participants. During 1995, 1994 and 1993, the Company incurred $547,000, $nil and $635,000 of compensation expense and $nil, $nil and $112,000 of interest expense, respectively, related to the ESOP and note payable. NOTE 12. 401(K) PLAN The Company established a 401(k) plan on October 1, 1987, for which all full-time employees who have completed 90 consecutive days of service, and all part-time employees who work at least 1,000 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 has a discretionary matching provision. For the years ended December 31, 1995, and 1994, the Company contributed $48,000 and $49,000, respectively, to the 401(k) plan and reported such as salaries and benefits expense. NOTE 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995. 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 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. 36 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1995 DECEMBER 31, 1994 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ----------------------------------------------------------------------------------------------------------- (dollars in thousands) Assets: Cash and cash equivalents $ 19,920 $ 19,920 $ 11,442 $ 11,442 Federal funds sold 47,450 47,450 27,000 27,000 Interest bearing deposits with other financial institutions 100 100 694 694 Investment securities 36,588 36,588 50,634 49,822 Net loans and leases 148,023 147,386 159,673 148,692 Liabilities: Demand deposits and savings 145,159 145,159 147,823 147,823 Time deposits 90,913 91,378 88,519 88,366 Other borrowings 0 0 125 125 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. 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 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 nonperforming 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 nonperforming loans at December 31, 1995. Therefore, nonperforming loans of $4,341,000 are excluded from the carrying amount and fair value balances at December 31, 1995. Interest rates on such loans ranged from 8.5% - 11.75%, maturities ranged from 0 to 20 years, and approximately 85% 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 37 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. At December 31, 1994, the differential between the note payable's carrying value and its discounted value was 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 credit-worthiness 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 1995 and 1994. NOTE 14. 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, 1995, 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, 1995, approximately $49.3 million represented loans, commitments and letters of credit to individuals and companies in the real estate industry. 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, monies 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. Fees collected for credit commitments and standby letters of credit, are generally deferred and amortized over the commitment term on a straight-line basis. The total amount of commitments to extend credit at December 31, 1995 was $36,304,000, compared with $30,880,000 at December 31, 1994. 38 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $2,498,000 were outstanding at December 31, 1995, all of which are expected to expire by December 31, 1996. Standby and commercial letters of credit amounted to $2,898,000 as of December 31, 1994, all of which expired by December 31, 1995. 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 $1,259,000, $1,528,000 and $1,682,000 for the three years ended December 31, 1995, 1994 and 1993, respectively. Future minimum commitments under these leases of premises and equipment as of December 31, 1995, net of sublease income and including estimated CPI increases, are as follows:
(dollars in thousands) 1996....................................... $ 1,170 1997....................................... 1,091 1998....................................... 1,161 1999....................................... 1,202 2000....................................... 1,115 Thereafter................................. 4,324
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 15. 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 $6,291,000 and $7,730,000 at December 31, 1995 and 1994, respectively. During 1995, new loans totaling $528,000 were made, and net repayments of approximately $1,914,000 were received. During 1994, new loans totaling $4,608,000 were made, and net repayments of approximately $9,653,000 were received. Interest and fees earned on these loans approximated $548,000, $762,000 and $1,111,000 in 1995, 1994 and 1993, respectively. NOTE 16. 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 17 for discussion regarding restrictions placed on Frontier per the 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, 1995 and 1994, the Company had no loans to affiliates. NOTE 17. 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 least half of the required capital must contain Tier 1 capital, which consists primarily of common stock and retained earnings, less goodwill. Additionally, the capital standards require the Company to maintain a minimum leverage ratio of Tier 1 39 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS capital to average assets and a Tier 1 capital to risk-weighted assets ratio of at least 4%. As of December 31, 1995, and 1994, the Company was in compliance with the requirements. The following table sets for the capital ratios for the Company as of December 31, 1995, and 1994:
----------------------------------------------------- December 31, 1995 1994 ----------------------------------------------------- Leverage capital ratio 11.40% 7.53% Tier 1 risk-based capital ratio 17.56% 11.32% Risk-based capital ratio 18.83% 12.61%
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. Ventura 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. Based upon an examination of Ventura completed during the fourth quarter of 1995, the OCC terminated Ventura's Formal Agreement as of November 30, 1995. The significant requirements of the Consent Order include conducting a program to evaluate and improve board supervision and management, developing a program designed to improve lending staff and loan administration, 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 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. In addition, the Consent Order requires that Frontier appoint a full- time President and Chief Executive Officer, maintain, as of May 31, 1993 and beyond, a Tier 1 capital ratio of 9.50% and a leverage ratio of 7.00% and to continue to develop a program of asset diversification. Kathleen L. Kellogg became President and Chief Executive Officer at Frontier in November 1994. At December 31, 1995, Frontier's Tier 1 capital and leverage ratios were 13.78% and 9.75%, respectively. The Company entered into a Memorandum of Understanding ("MOU") with the Federal Reserve Bank of San Francisco (the "Reserve Bank") acting under delegated authority from the Federal Reserve Board 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. Management believes Frontier and the Company are in full compliance with all of the items required under the Consent Order and MOU, respectively. 40 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. 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, 1995, and 1994, and the related statements of operations and cash flows for the periods indicated:
BALANCE SHEETS (Dollars in thousands) December 31, - --------------------------------------------------------------------------------------------------------------------- Assets: 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Cash $ 243 $ 37 Federal funds sold 3,250 - Equity in Bank subsidiaries 25,520 19,143 Other assets 608 - - --------------------------------------------------------------------------------------------------------------------- Total Assets $ 29,621 $ 19,180 ===================================================================================================================== - --------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - --------------------------------------------------------------------------------------------------------------------- Note payable $ - $ 125 Other liabilities 162 3 - --------------------------------------------------------------------------------------------------------------------- Total Liabilities 162 128 - --------------------------------------------------------------------------------------------------------------------- Shareholders' equity 29,459 19,052 - --------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 29,621 $ 19,180 =====================================================================================================================
STATEMENTS OF OPERATIONS (Dollars in thousands) Years ended December 31, - --------------------------------------------------------------------------------------------------------------------- Income: 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Interest $ 76 $ - $ 193 Management fees 1,003 1,067 1,729 Other 2 - - - --------------------------------------------------------------------------------------------------------------------- 1,081 1,067 1,922 - --------------------------------------------------------------------------------------------------------------------- Expenses: - --------------------------------------------------------------------------------------------------------------------- Interest 4 9 199 Salaries and benefits 1,048 1,059 1,249 Miscellaneous operating 118 62 718 Commercial paper reimbursement 3,306 - - - --------------------------------------------------------------------------------------------------------------------- 4,476 1,130 2,166 - --------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and equity in undistributed income (losses) of subsidiary (3,395) (63) (244) Provision for income taxes (benefit) allocated (1,349) (2) - Equity in undistributed net earnings (deficit) of Bank subsidiaries 5,814 (201) (11,843) - --------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,768 $ (262) $ (12,087) =====================================================================================================================
41 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS (Dollars in thousands) Years ended December 31, - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3,768 $ (262) $ (12,087) Adjustments to reconcile net income (loss) to net cash provided by (applied to) operating activities (Earnings) deficit from Bank subsidiaries (5,814) 201 11,843 Amortization - - 231 Change in other assets (608) 39 2 Change in other liabilities 159 (31) 24 Deferred compensation related to ESOP 547 - 635 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (applied to) operating activities (1,948) (53) 648 - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital contribution to subsidiary - - (150) Change in interest-bearing deposits due from banks - - 8,875 Change in Federal funds sold (3,250) - - - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (applied to) investing activities (3,250) - 8,725 - --------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Change in short-term borrowings - - (8,860) Repayment of note payable (125) - (2,188) Issuance of note payable - - 125 Issuance of stock 5,529 - 1,430 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 5,404 - (9,493) - --------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash 206 (53) (120) Cash and cash equivalents at beginning of year 37 90 210 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 243 $ 37 $ 90 ===================================================================================================================== Supplemental information: Cash paid during the year for interest $ 4 $ 9 $ 199 Cash paid during the year for income taxes $ 3 $ 3 $ 300
42 VENTURA COUNTY NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19. QUARTERLY INFORMATION, 1995 AND 1994 The following table sets forth the Company's unaudited results of operations for each of the quarters of 1995 and 1994. 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.
(Unaudited, dollars in thousands, except per share data) 1995 Quarter Ended - --------------------------------------------------------------------------------------------------------------------- 31-Dec 30-Sep 30-Jun 31-Mar - --------------------------------------------------------------------------------------------------------------------- Interest income $ 5,206 $ 5,254 $ 5,150 $ 5,188 Interest expense 1,628 1,617 1,571 1,545 - --------------------------------------------------------------------------------------------------------------------- Net interest income 3,578 3,637 3,579 3,643 - --------------------------------------------------------------------------------------------------------------------- Provision for possible loan losses - (100) 155 355 Noninterest income 582 624 434 606 Noninterest expense 4,301 3,681 3,334 3,621 - --------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (141) 680 524 273 - --------------------------------------------------------------------------------------------------------------------- Provision for income taxes (benefit) (2,462) 30 - - - --------------------------------------------------------------------------------------------------------------------- Net income $ 2,321 $ 650 $ 524 $ 273 ===================================================================================================================== Net income per share $ 0.30 $ 0.08 $ 0.07 $ 0.03 =====================================================================================================================
(Unaudited, dollars in thousands, except per share data) 1994 Quarter Ended - --------------------------------------------------------------------------------------------------------------------- 31-Dec 30-Sep 30-Jun 31-Mar - --------------------------------------------------------------------------------------------------------------------- Interest income $ 5,641 $ 5,511 $ 5,593 $ 5,391 Interest expense 1,555 1,503 1,549 1,661 - --------------------------------------------------------------------------------------------------------------------- Net interest income 4,086 4,008 4,044 3,730 - --------------------------------------------------------------------------------------------------------------------- Provision for loan losses 550 400 2,075 800 Noninterest income 374 591 1,956 1,143 Noninterest expense 3,864 3,559 4,474 4,187 - --------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 46 640 (549) (114) - --------------------------------------------------------------------------------------------------------------------- Provision for income taxes (benefit) (4) 75 214 - - --------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 50 $ 565 $ (763) $ (114) ===================================================================================================================== $ 0.01 $ 0.09 $ (0.12) $ (0.02) =====================================================================================================================
43 INDEPENDENT AUDITORS' REPORT Board of Directors Ventura County National Bancorp: We have audited the accompanying consolidated balance sheets of Ventura County National Bancorp and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 audit 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 9, 1996 Los Angeles, California 44 EX-23 5 IND. AUDITOR'S CONSENT 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 9, 1996 appearing in the Annual Report on Form 10-K for the year ended December 31, 1995. DELOITTE & TOUCHE LLP March 27, 1996 Los Angeles, California EX-27 6 ARTICLE 9 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1995 DEC-31-1995 19,920 100 47,450 0 36,558 0 0 157,765 5,401 267,756 236,072 0 2,225 0 0 0 37,025 0 267,756 16,375 2,586 1,837 20,798 6,357 6,361 14,437 410 47 14,937 1,336 1,336 0 0 3,768 0.48 0.48 6.15 4,341 101 0 9,300 8,261 3,661 391 5,401 5,401 0 0
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