<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
Commission File No. 0-15814
VENTURA COUNTY NATIONAL BANCORP
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 77-0038387
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 ESPLANADE DRIVE 93030
OXNARD, CALIFORNIA (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(805) 981-2600
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
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 in the past 90 days. Yes [x] No [_]
Indicate the number of shares of each of the issuer's classes of common
stock as of the latest practicable date.
As of September 30, 1995 - Common stock no par value; issued and
outstanding: 9,226,723 shares.
Total No. of pages: 27
Exhibit Index at page: 25
1
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Ventura County National Bancorp
INDEX
September 30, 1995
<TABLE>
<S> <C>
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheets at September
30, 1995 and December 31, 1994 4
Consolidated Statements of Operations for
the three and nine months ended September
30, 1995 and 1994 5
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1995
and 1994 6- 7
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15-24
Part II. Other Information 25
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of
Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Selected Financial Data 27
</TABLE>
2
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Part I. Financial Information
The Consolidated Balance Sheet at September 30, 1995, the Consolidated
Statements of Operations for the three and nine months ended September 30, 1995
and 1994 and the Consolidated Statements of Cash Flows for the nine months ended
September 30, 1995 and 1994 are unaudited. However, in the opinion of
management, all adjustments have been made for a fair presentation of the
financial condition and results of operations and cash flows of Ventura County
National Bancorp and Subsidiaries (the Company). The accompanying notes are
considered an integral part of these financial statements.
3
<PAGE>
Item I. Financial Statements
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 20,572 $ 11,442
Federal Funds Sold 33,400 27,000
Interest Bearing Deposits with
Other Financial Institutions 100 694
Securities available-for-sale 18,689 31,859
Securities held-to-maturity 20,793 18,775
Loans and Leases,
Net of Unearned Income 157,937 167,934
Less: Loan Loss Reserve 5,753 8,261
Net Loans and Leases 152,184 159,673
Premises and Equipment, Net 2,315 1,917
Other Assets 7,830 6,395
TOTAL ASSETS $255,883 $257,755
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing Demand $ 67,222 $ 67,177
Interest Bearing Demand
and Savings 78,381 80,646
Time 80,641 88,519
Total Deposits 226,244 236,342
Notes Payable 125
Other Liabilities 2,911 2,236
Total Liabilities 229,155 238,703
Commitments and Contingencies
Shareholders' Equity:
Contributed Capital, including
common stock of no par value.
Authorized, 20,000,000 shares;
Issued 9,226,723 and 6,333,835
at September 30, 1995 and December 31,
1994, respectively 36,478 30,949
Unrealized Loss on Securities (478) (1,178)
Retained Deficit (9,272) (10,719)
Total Shareholders' Equity 26,728 19,052
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $255,883 $257,755
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest Income:
Loans and Leases $ 4,147 $ 4,584 $12,349 $14,325
Interest on Deposits with Other
Financial Institution 4 10 20 58
Taxable Investments 636 541 2,034 1,376
Federal Funds Sold 467 376 1,190 736
--- --- ----- ---
Total Interest Income 5,254 5,511 15,593 16,495
Interest Expense:
Deposits 1,617 1,501 4,729 4,704
Other Borrowings 0 2 4 9
- - - -
Total Interest Expense 1,617 1,503 4,733 4,713
----- ----- ----- -----
Net Interest Income 3,637 4,008 10,860 11,782
Provision for Loan Losses (100) 400 410 3,275
----- --- --- -----
Net Interest Income After
Provision for Loan Losses 3,737 3,608 10,450 8,507
Other Income:
Service Charges on Deposit Accounts 233 313 713 937
Loan Fees 14 25 78 127
Miscellaneous Fees 66 73 219 282
Other 311 180 654 2,344
--- --- --- -----
Total Other Income 624 591 1,664 3,690
Other Expenses:
Salary and Employee Benefits 1,720 1,350 4,965 4,904
Net Occupancy 432 573 1,294 1,613
Equipment 150 216 505 645
Other 1,379 1,420 3,873 5,058
----- ----- ----- -----
Total Other Expenses 3,681 3,559 10,637 12,220
Income (Loss) Before
Income Taxes 680 640 1,477 (23)
Applicable Income Taxes 30 75 30 289
-- -- -- ---
Net Income (Loss) $650 $565 $1,447 $(312)
==== ==== ====== ======
Net Income (Loss) Per Share $.07 $.09 $.20 $(.05)
==== ==== ==== ======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
5
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1995 1994
<S> <C> <C>
Cash flows from operating
activities:
Net income (loss) $1,447 $(312)
Adjustments to reconcile
net income to cash flows from
operating activities:
Gain on sale of fixed assets (2) --
Gain on sale of SBA loans (428) (261)
Gain on sale of mortgage servicing (1,443)
Depreciation and amortization 430 573
Deferred income taxes 600
Provision for loan losses 410 3,275
Change in deferred loan fees (43) (340)
Accretion of investment discount,
net of amortization of
investment premium (181) 280
(Gain) loss on sale of
investment securities
available for sale (47) 150
Gain on sale of merchant card
portfolio -- (174)
Loss on sale of REO (289) (520)
REO writedowns 105 796
Change in other assets (922) (5,658)
Change in other liabilities 75 (87)
Net cash provided by (applied to)
operating activities 1,155 (3,721)
Cash flows from investing activities:
Principal reductions from
investment securities
available for sale 794 2,354
Principal reductions from
investment securities held
to maturity 1,971 2,789
Proceeds from sale of investment
securities available for sale 7,227 8,756
Purchase of investment securities
available for sale (4,916) (10,126)
Purchase of investment securities
held to maturity (3,996) (3,194)
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
Maturity of investment securities
available for sale 11,000 --
Purchase of premises and equipment (828) (773)
Proceeds from sales of premises and
equipment 2 31
Proceeds from sale of REO properties 3,794 5,208
Net change in loans 13,281 70,892
Proceeds from sale of SBA loans 321 282
Proceeds from sale of merchant
card portfolio 174
Increase in fed funds sold (6,400) (15,500)
Change in interest bearing
deposits with other financial
institutions 594 1,486
Proceeds from sale of
non-performing loans 1,245 9,056
Proceeds from sale of loan
servicing rights 1,763
Purchases of loans (11,420)
Net cash provided by investing
activities 12,669 73,198
Cash flows from financing activities:
Change in demand and savings
deposits (2,220) (40,279)
Change in time deposits (7,878) (27,403)
Issuance of common stock 5,529
Repayment of notes payable (125)
Net cash applied to
financing activities (4,694) (67,682)
Net increase in cash
and cash equivalents 9,130 1,795
Cash and Cash Equivalents
at December 31 11,442 15,943
Cash and Cash Equivalents
at September 30 $ 20,572 $ 17,738
</TABLE>
See accompanying notes to Consolidated Financial Statements.
7
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1995
Note A. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S -X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair pre-
sentation have been included. Operating results for the three and nine months
ended September 30, 1995 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1995. For further information,
refer to the Consolidated Financial Statements and footnotes included in the
Company's Annual Report for the year ended December 31, 1994.
The Consolidated Financial Statements include the accounts of the Company and
the following subsidiaries: Ventura County National Bank (VCNB) and Frontier
Bank, N.A. (Frontier) (jointly, the Banks), Frontier Services, Inc., Venco
Mortgage Company, Ventura County Management Service Co., Inc., and Ventura
Capital Fund, Inc. Of these subsidiaries, the latter four companies are
currently inactive. All significant inter-company balances and transactions have
been eliminated in consolidation.
Note B. Investment Securities
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115 Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 addresses accounting and reporting for investments in
equity securities that have a readily determinable fair value and for all
investments in debt securities. Those 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
market value, with unrealized gains and losses included in earnings; and 3) debt
and equity securities not classified as either held-to-
8
<PAGE>
maturity securities or trading securities are classified as available-for-sale
securities and reported at market value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
equity. The Company had no trading securities at September 30, 1995 or December
31, 1994. Mortgage-backed securities consist entirely of Federal Home Loan
Mortgage Corporation backed pass through certificates. The Company did not have
structured notes, CMOs or other derivative products in the portfolio at
September 30, 1995 or December 31, 1994. Unrealized losses on available-for-sale
securities and fiscal year 1994 transfers from the available-for-sale to
held-to-maturity category, totaling $478,000 and $1,178,000 at September 30,
1995 and December 31, 1994, respectively, which were included as a separate
component of shareholder's equity, were due to the interest rate environment; as
such, these unrealized losses were deemed temporary in nature. The temporary
nature of such unrealized losses is further evidenced by the decrease in this
balance during the first nine months of fiscal year 1995.
9
<PAGE>
The amortized cost, gross unrealized holding gains and losses and estimated
market values of securities-available-for-sale at September 30, 1995 and
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Securities-Available-for-Sale
(in thousands of dollars)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Market
September 30, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $10,216 $14 $ 13 $10,217
Mortgage Backed
Securities 7,220 148 7,072
Federal Reserve Bank
and FHLB Stock 1,400 1,400
$18,836 $14 $161 $18,689
</TABLE>
During fiscal year 1994, the Company transferred 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, from the available for sale to the held to
maturity category. Previously recorded unrealized losses with a balance of
$331,000 and $433,000 at September 30, 1995 and December 31, 1994, respectively,
are included in shareholder's equity and are being amortized over the
securities' remaining lives.
<TABLE>
<CAPTION>
Securities-Available-for-Sale
(in thousands of dollars)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994
U.S. Government
Securities $22,935 $0 $229 $22,706
Mortgage Backed
Securities 8,067 0 516 7,551
Federal Reserve Bank
and FHLB Stock 1,602 0 0 1,602
$32,604 $0 $745 $31,859
</TABLE>
10
<PAGE>
The amortized cost, gross unrealized holding gains and losses and estimated
market values of securities-held-to-maturity at September 30, 1995 and December
31, 1994 are as follows:
<TABLE>
<CAPTION>
Securities-Held-to-Maturity
(in thousands of dollars)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Market
September 30, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $ 5,247 $ 53 $ 1 $ 5,299
Mortgage Backed
Securities 15,546 137 165 15,518
$20,793 $190 $166 $20,817
</TABLE>
<TABLE>
<CAPTION>
Securities-Held-to-Maturity
(in thousands of dollars)
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Market
December 31, 1994 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $ 1,250 $ 0 $ 28 $ 1,222
Mortgage Backed
Securities 17,525 0 784 16,741
$18,775 $ 0 $ 812 $17,963
</TABLE>
At September 30, 1995, U.S. government securities with a market value totaling
$8,207,000 and $2,010,000, which are classified as available-for-sale, are
scheduled to mature in less than one year and between one and five years,
respectively. Mortgage backed securities with a market value of $7,072,000 at
September 30, 1995, which are classified as available-for-sale, mature in
greater than ten years. U.S. government securities with an amortized cost of
$1,250,000 and $3,997,000 classified as held-to-maturity at September 30, 1995,
are scheduled to mature in less than one year and between one and five years,
respectively. Mortgage backed securities with an amortized cost of $12,153,000
and $3,393,000, at September 30, 1995, classified as held to maturity, mature in
one to five years and after ten years, respectively.
11
<PAGE>
Note C. Commitments and Contingencies
In the ordinary course of business, the Banks enter into various commitments to
make loans or extend credit in the form of lease financing arrangements or to
provide lines of credit to customers. At September 30, 1995, the Banks had
outstanding loan commitments of $27,627,000, letters of credit outstanding in
the amount of $2,537,000, and available credit to credit card customers totaling
$5,699,000.
Note D. Lease Commitments
The Company has commitments for non-cancelable operating leases of premises and
equipment. Rental payments, net of sublease income, on such non-cancelable
leases for the nine months ended September 30, 1995 and 1994 were $1,165,000 and
$1,170,000, respectively.
Note E. Income Tax Provisions
During the third quarter of 1995, the amount of income tax provisions that would
have been necessary was fully offset by a reduction of the valuation allowance
on the Company's net deferred tax asset. At September 30, 1995, deferred tax
assets of approximately $2.5 million are reserved by this valuation allowance.
Amounts provided for income taxes are based on the income or loss reported in
the consolidated financial statements at current tax rates. Such amounts include
taxes deferred to future periods resulting from temporary differences in the
recognition of items for tax and financial statement purposes.
Note F. Stock Dividend and Income Per Share
Income per share data is calculated using the weighted average number of shares
of common stock and common stock equivalents outstanding. Stock options are
considered to be common stock equivalents except when their effect is anti-
dilutive. The weighted average number of shares used to compute income per share
for the three and nine months ended September 30, 1995 were 9,069,925 and
7,168,218, respectively. In accordance with Statement of Position 93-6
"Employers' Accounting for Employee Stock Ownership Plans", the 1995 weighted
average number of shares do not include 185,840 shares that are considered
unallocated by the Company's Employee Stock Ownership Plan. These shares were
considered to be outstanding in previous years. The weighted average number of
shares for the both the three and nine months ended September 30, 1994 were
6,333,835.
Note G. Statement of Cash Flows
12
<PAGE>
For the three months ended September 30, 1995 and 1994, the Company paid cash
totaling approximately $1,592,000 and $1,522,000 in interest, respectively. For
the nine months ended September 30, 1995 and 1994, the Company paid cash
totaling approximately $4,707,000 and $4,780,000 in interest, respectively. The
Company paid $nil and $328,000 in income taxes during the three and nine months
ended September 30, 1995. The Company paid no income taxes in 1994. The Company
acquired $2,181,000 and $4,123,000, and $1,575,000 and $6,063,000, respectively,
in real estate owned through foreclosures during the three and nine months ended
September 30, 1995 and 1994, respectively.
Note H. Loan Loss Reserve
Effective January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures. SFAS No. 114 requires a
creditor to measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 118 amended SFAS No.
114 to require information about the recorded investment in certain impaired
loans and about how a creditor recognizes interest income related to those
impaired loans. SFAS No. 114 defines impairment as when, "based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan
agreement...contractual interest payments and the contractual principal
payments." The adoption of SFAS No. 114 and SFAS No. 118 had no material effect
on the recorded balances or the results of operations of the Company.
Restructured loans are not considered impaired if the restructured interest rate
is equal to or greater than the market rate at the time of restructure, and if
the loan is performing per its restructured terms.
The Company utilizes the cash-basis method of accounting for recognizing
interest income on impaired loans, with any payments received from the borrower
first being recorded as an adjustment to the allowance for loan losses as a
recovery of principal. If the Company has a recorded investment in an impaired
loan that is less than the present value of expected future cash flows (or,
alternatively, the observable market price of the loan or the fair value of the
collateral), changes in estimates are recognized through the allowance for loan
losses. Income effects of the passage of time and changes in estimates are
recognized currently.
13
<PAGE>
The following information relates to the recorded investment in loans that meet
the definition of an impaired loan per SFAS No. 114 at September 30, 1995.
<TABLE>
<CAPTION>
(dollars in thousands)
The Amount of the The Amount of the
Recorded Investment Recorded Investment
Total Recorded for Which There Is a for Which There Is No
Investment in the Related Allowance for Related Allowance for
Impaired Loans Credit Losses Credit Losses
<S> <C> <C>
$ 5,255 $ 5,255 $ nil
</TABLE>
For the three and nine months ended September 30, 1995, the Company's average
investment in impaired loans noted above was $9,241,000 and $10,150,000,
respectively. During both the three and nine months ended September 30, 1995,
$nil interest income was recognized on impaired loans.
The following is a summary of the activity in the loan loss reserve:
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Nine Months Year
Ended Ended Ended
September 30 September 30 December 31
1995 1995 1994
<S> <C> <C> <C>
Balance at the beginning
of the period $ 6,617 $ 8,261 $ 14,313
Provision charged to
expense (100) 410 3,825
Loans charged off (853) (3,214) (10,439)
Recoveries on loans
previously charged off 89 296 562
Balance at the end
of the period $ 5,753 $ 5,753 $ 8,261
</TABLE>
14
<PAGE>
Part 1, Item 2
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
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 Ventura County National Bancorp
(separately "Parent" and, with its subsidiaries on a consolidated basis, the
"Company"), and its subsidiaries as of September 30, 1995 and for the three and
nine months ended September 30, 1995 and 1994. The discussion should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto.
General
At September 30, 1995, the Company had total assets of $255,883,000 and net
income of $650,000 or $0.07 per share and net income of $1,447,000 or $.20 per
share for the three and nine months ended September 30, 1995, respectively, as
compared to total assets of $257,755,000 at December 31, 1994 and a net income
(loss) of $565,000 or $0.09 per share and ($312,000) or ($0.05) per share for
the three and nine months ended September 30, 1994, respectively. The 1995
improvement in operating results was primarily attributable to reduced other
expenses and a significant decrease in the provision for loan losses.
Total nonperforming assets decreased to $8,976,000 at September 30, 1995 from
$11,169,000 at December 31, 1994, due primarily to the reduction in non-accrual
loans during the first nine months of 1995. The Company continues to
aggressively pursue strategies for reducing nonperforming and classified assets.
Net Interest Income and Net Interest Margin
For the nine months ended September 30, 1995, net interest income decreased by
$922,000, or 7.8%, from $11,782,000 at September 30, 1994. The 1995 decrease in
net interest income was due primarily to a 13.8% decrease in loan interest
income for the comparative periods. From September 30, 1994 to September 30,
1995, total average loans decreased $25 million, or 13.5%, from $185,642,000 to
$160,803,000. The decrease was partially offset by increased average balances of
investment securities, together with higher yields on earning assets in the
recent rising rate environment. Average investment securities were $45 million
and $35 million for the nine months ended September 30, 1995 and 1994,
respectively.
Interest expense increased by $20,000 or .4% for the first nine months of 1995,
as compared to the corresponding period of 1994. The increase in interest
expense was primarily a result of an increase in the cost of funds from 2.23%
for the period ended September 30, 1994 to 2.78% for the period ended September
30,
15
<PAGE>
1995 which was offset by a decrease in average interest bearing deposits of $38
million. In addition, interest expense was also affected by a change in the mix
of interest-bearing liabilities. Average noninterest bearing deposits as a
percent of total average deposits increased from 26.7% for the nine months ended
September 30, 1994 to 28.3% for the nine months ended September 30, 1995.
Despite the decrease in interest income, the net interest margin improved from
5.44% to 6.21%, due to the yield on interest earning assets which increased by a
greater amount than the cost of funds from September 30, 1994 to September 30,
1995. Additionally, the reduction in the volume of average interest bearing
liabilities exceeded the reduction in interest earning assets.
Net interest income decreased by $371,000 or 9.2% to $3,637,000 for the three
months ended September 30, 1995 as compared to the three months ended September
30, 1994 for the reasons noted above.
Other Income
Other income decreased $2,026,000 to $1,664,000 for the nine months ended
September 30, 1995, a 54.9% decrease over the corresponding period in 1994. Loan
fees decreased from $127,000 for the nine months ended September 30, 1994 to
$78,000 for the nine months ended September 30, 1995, reflective of a
significant decrease in income from mortgage loan originations and servicing.
The Company sold its mortgage servicing rights in May, 1994, and also sold its
mortgage origination unit in June, 1994. Other fee income decreased from
$2,344,000 to $654,000 for the nine months ended September 30, 1994 and 1995,
respectively, due to the gain on the sale of mortgage servicing rights, recorded
in May 1994, totaling $1,443,000 and the gain on sale of the merchant card
portfolio, recorded in March 1994, totaling $175,000. Service charges on deposit
accounts decreased $224,000, or 23.9% to $713,000 for the nine months ended
September 30, 1995, as compared to the corresponding period in 1994, as a result
of the lower deposit levels noted above. Miscellaneous fee income decreased from
$282,000 for the nine months ended September 30, 1994 to $219,000 for the nine
months ended September 30, 1995 due to the reduction of merchant card income
resulting from the sale of that portfolio as mentioned above.
Total other income increased $33,000 to $624,000 for the three months ended
September 30, 1995, which represents a 5.6% increase from the corresponding
period of 1994. The increase is due primarily to the receipt of a legal
settlement which was partially offset by a reduction in service charges due to
the decrease in deposit accounts noted above.
Other Expenses
16
<PAGE>
Total other expenses decreased from $12,220,000 to $10,637,000 for the nine
months ended September 30, 1994 and 1995, respectively. The $1,583,000, or
13%, decrease was primarily attributable to a reduction in the other real estate
owned expense of $286,000 due to gains on sales of several properties. In
addition, occupancy costs, appraisal fees, legal expenses and FDIC assessments
decreased $319,000, $209,000, $166,000 and $211,000 respectively for the nine
months ended September 30, 1995, as compared to the nine months ended September
30, 1994.
Total other expenses increased $122,000 from $3,559,000 to $3,681,000 for the
three months ended September 30, 1995, as compared to the three months ended
September 30, 1994. Increased salaries and benefits expense comprise the
majority of this increase due in part to severance payments.
The net REO expense and writedowns totaled $73,000 and ($9,000) and ($97,000)
and $277,000 for the three and nine months ended September 30, 1995 and 1994,
respectively. The 1995 amounts reflect gains on sales of other real estate
owned.
Total other expense expressed as a percentage of net interest income plus other
income, commonly referred to as the efficiency ratio, was 86.38% and 77.4% for
the three months ended September 30, 1995 and 1994, respectively. The
efficiency ratio was 84.93% and 78.98% for the nine months ended September 30,
1995.
Provision for Loan Losses
For the nine months ended September 30, 1995 and 1994, the Company recorded
$410,000 and $3,275,000 respectively, as provision for loan losses. The
Company's provision for loan losses during the third quarter of 1995 was
($100,000) compared to $400,000 during the third quarter of 1994. The 1995
decrease in loan loss provision corresponds to the $12 million decrease in
classified loans, from $31 million at September 30, 1994 to $19 million at
September 30, 1995, an improvement of 38.4%.
Loan Loss Reserve and Non Performing Loans
The Company maintains a loan loss reserve which it believes is adequate to cover
the risk of loss 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. Although management believes the level of the loan loss reserve as
of September 30, 1995 is adequate to absorb losses inherent in the loan
portfolio, additional declines in the local economy may result in increased
losses that cannot be reasonably predicted at this time.
17
<PAGE>
At September 30, 1995, the loan loss reserve was $5,753,000 as compared to
$8,261,000 at December 31, 1994. The ratio of the loan loss reserve to total
outstanding loans and leases was 3.64% at September 30, 1995 and 4.92% at
December 31, 1994. The coverage ratio, or the ratio of loan loss reserves to
non-performing assets, was 64.09% and 74.0% at September 30, 1995 and December
31, 1994, respectively. Despite the decrease in the coverage ratio, management
believes the loan loss reserve is adequate. Loans charged off during the three
and nine months ended September 30, 1995 were $853,000 and $3,214,000,
respectively, while loan recoveries totaled $89,000 and $296,000 during the same
periods. Loans charged off during the three and nine months ended September 30,
1994 were $1,323,000 and $8,913,000 while loan recoveries totaled $184,000 and
$355,000, respectively during the same periods.
Nonperforming assets consist of nonperforming loans plus REO and other
foreclosed properties. The Company's nonperforming loans fall within three
categories: troubled debt restructurings ("TDRs"), loans past due greater than
90 days and still accruing and loans on nonaccrual status. The level of loan
loss reserves reflects management's assessment of the inherent risk associated
with the Company's classified assets and ongoing economic weakness within the
Banks' service area.
As of September 30, 1995, and December 31, 1994, the Company had TDRs totaling
$4,032,000 and $1,968,000, respectively, of which $2,572,000 and $1,966,000,
respectively, were performing.
Loans are automatically placed on non-accrual status when principal or interest
payments are past due greater than 90 days, unless the loan is an SBA guaranteed
loan and a deferral period has been negotiated. If the loan is in the process of
imminent collection in the normal course of business, the Company may continue
to accrue interest. Loans are placed on non- accrual status earlier, if there is
doubt as to the collectability of any amounts due according to the contractual
terms of the loan agreement. At September 30, 1995 and December 31, 1994, the
Company had $nil and $331,000, respectively, in loans past due greater than 90
days and still accruing interest and non-accrual loans of $4,540,000 and
$7,612,000, respectively.
Effective January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures. SFAS No. 114 requires a
creditor to measure impairment based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 118 amended SFAS No.
114 to require information about the recorded investment in certain
18
<PAGE>
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. SFAS No. 114 defines impairment as when, "based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan
agreement...contractual interest payments and the contractual principal
payments." The adoption of SFAS No. 114 and SFAS No. 118 had no material effect
on the recorded balances or the results of operations of the Company.
Restructured loans are not to be considered impaired if the restructured
interest rate is equal to or greater than the market rate at the time of
restructure, and if the loan is performing per its restructured terms.
At September 30, 1995, the Company's total investment in and quarterly average
balance of impaired loans was $5,255,000 and $9,240,000, respectively. During
the nine months ended September 30, 1995, $nil interest income was recognized on
impaired loans.
Financial Condition
Total assets at September 30, 1995 decreased $1.8 million or .72% from December
31, 1994. Loans and leases decreased $9.9 million or 5.9% from prior year end,
primarily due to construction and other loan payoffs and sales of loans.
Investment securities decreased by $11.1 million or 22%. These decreases were
partially offset by increases in cash and due from banks and federal funds sold
totaling $9.1 million, or 80%, and $6.4 million or 23.7%, respectively.
The Company's REO balances increased from $2,346,000 at December 31, 1994 to
$2,859,000 at September 30, 1995. The increase in REO reflects the sale of 7
properties offset by the repossession of 10 properties. At September 30, 1995,
the Company's REO consisted of 4 commercial properties with book values totaling
$2,004,000 and 4 parcels of land zoned for residential purposes totaling
$855,000.
Fixed assets, net of depreciation, increased from $1,917,000 at December 31,
1994 to $2,315,000 at September 30, 1995 due to the purchase of an office
building and related improvements for one of the Company's banking branches
which was offset by increased accumulated depreciation and amortization.
Total deposits at September 30, 1995 decreased $10 million or 4.3% from December
31, 1994, due primarily to the run-off of institutional and other certificates
of deposit in an attempt to improve the core deposit base and reduce potentially
volatile liabilities. Non-interest bearing demand deposits decreased $45,000,
savings and interest bearing demand deposits decreased $2.3 million or 2.8%, and
time certificates of deposit decreased $7.9 million or 8.9%.
19
<PAGE>
Stockholder's equity increased due to the completion of the rights offering
during the second quarter of 1995.
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 depository institutions, including the Banks,
maturing assets provide only a limited portion of the funds required to pay
maturing liabilities. The balance of the funds required is provided by liquid
assets and the acquisition of additional liabilities, making liability
management important to liquidity management in the short-term.
The Banks maintain a level of liquidity that they consider adequate to meet
their current needs. The Banks' principal sources of cash include incoming
deposits, 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 loans and investments and access their Federal Funds lines of credit with
correspondent banks or lines of credit with federal agencies.
Management of the Company has set a minimum liquidity level of 20% as a target.
The Company's average liquid assets (cash and cash equivalents, federal funds
sold, interest bearing deposits with other financial institutions and investment
securities, less investment securities held to maturity, pledged securities, and
outgoing cash letter) as a percentage of average assets of the Company during
the nine months ended September 30, 1995 was 27.47% as compared to 22.47% for
the corresponding period in 1994. The average loan to deposit ratios for the
Company for September, 1995 and December, 1994 were 71.31% and 67.6%,
respectively. The decrease in the liquidity ratio is the result of a decrease in
investment securities and an increase in pledged securities as compared to the
same period during 1994.
Although liability management is the key to liquidity management in the short-
term, long-term planning for 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.
From December, 1994 to September, 1995, total average interest earning assets
decreased from $277,612,000 to $231,870,000, a decrease of 16.5%, and average
interest bearing liabilities decreased from $197,658,000 to $157,953,000, or
20%. The ratio of average rate sensitive assets to rate sensitive liabilities
was 1.4 for September, 1995 and December, 1994.
20
<PAGE>
Since 50% of interest earning assets have variable interest rate structures and
therefore reprice immediately upon a change in prime rate, a rising interest
rate environment results in net interest margin improvement for the Company, as
assets reprice faster than liabilities. In a relatively stable interest rate
environment, 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 Banks have established floors on 37% of the variable rate
loans to mitigate the effect on net interest margin if interest rates decline.
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 and other factors. There
was a $3 million increase in cash and short term liquid investments at the
Parent company level from December 31, 1994 to September 30, 1995, as the
Company successfully completed a rights offering during the second quarter of
1995. As discussed further in the section entitled "Regulatory Agreements" the
Company and both Banks were substantially in compliance with the provisions of
their respective Regulatory Agreements as of September 30, 1995. One requirement
of VCNB's Formal Agreement was to seek reimbursement of $3.3 million in
connection with interest paid to Parent on deposits of funds generated by
commercial paper sales. The Parent applied a substantial portion of the rights
offering proceeds to such reimbursement. A portion of the rights offering net
proceeds was utilized to repay the notes payable that were outstanding at
December 31, 1995 during the third quarter of 1995.
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 September 30, 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.
Capital Resources
21
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 requires that
for banks to be considered "well capitalized," they must maintain a leverage
ratio of 5.0%, a Tier 1 risk based capital ratio of 6.0% and a total 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%. 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 risk based capital must be comprised of Tier 1 capital. The
capital standards specify that assets, including off-balance sheet 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.
22
<PAGE>
The following sets forth the capital ratios for the Company and each of the
Banks at September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
Consolidated Company September 30, December 31,
1995 1994
<S> <C> <C>
Company<F1>
Risk-Based Capital Ratio 18.04% 12.61%
Tier 1 Capital Ratio 16.77% 11.32%
Leverage Ratio 10.81% 7.53%
VCNB
Risk-Based Capital Ratio 17.63% 12.21%
Tier 1 Capital Ratio 16.35% 10.92%
Leverage Ratio 10.28% 7.21%
Frontier<F1>
Risk-Based Capital Ratio 14.88% 13.57%
Tier 1 Capital Ratio 13.61% 12.29%
Leverage Ratio 9.38% 8.32%
</TABLE>
<F1> In accordance with recent guidance from the Federal Financial Institutions
Examination Council, regulatory capital includes $702,000 and $756,000, at
September 30, 1995 and December 31, 1994, respectively, which represents the
unamortized balance of a cumulative effect adjustment to record an intangible
servicing asset. This adjustment is not reflected in the accompanying financial
statements prepared in accordance with generally accepted accounting principles.
The Company completed a rights offering to shareholders for which gross proceeds
of $6,500,000 were wired to the Parent on June 29, 1995. 2,888,888 shares were
issued in connection with this transaction and the net proceeds amounted to
$5,668,000. A substantial portion of the net proceeds of the offering were paid
to VCNB for reimbursement of $3.3 million in connection with interest paid to
Parent on deposits of funds generated by commercial paper sales.
Regulatory Agreements
VCNB 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 significant
common requirements of the Formal Agreement and the Consent Order for VCNB and
Frontier include conducting a program to evaluate and improve board supervision
and management, developing a program designed to improve loan administration,
developing a program regarding asset diversification, obtaining current credit
information on any loans lacking such information, reviewing and revising loan
policy, establishing an independent loan review program, developing and
implementing a program to collect or strengthen
23
<PAGE>
criticized assets, reviewing and maintaining an adequate loan loss reserve,
developing a new long range strategic 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 maintain as of May 31, 1993, and beyond, a
Tier 1 capital ratio of 9.50% and a leverage ratio of 7.00%, respectively.
The Formal Agreement, which was amended on February 3, 1994, required VCNB to
achieve a Tier 1 capital ratio of 12.00% and a leverage ratio of 7.00% by
September 30, 1994. In addition, the Formal Agreement amendment requires VCNB to
seek reimbursement for all interest paid by VCNB to Parent in connection with a
deposit account at VCNB which was related to the issuance of commercial paper.
Toward that end, the Company completed a rights offering of $6,500,000 as
discussed more fully above. $3.3 million of the net proceeds was paid to VCNB as
reimbursement of the interest on the commercial paper program as required by the
Formal Agreement. The Company believes that this $3.3 contribution satisfies the
reimbursement requirement. As long as the Formal Agreement is in effect, VCNB
may not make any distribution, payment or dividend to Parent without the prior
written consent of the OCC.
The Company entered into a Memorandum of Understanding (MOU) with The Federal
Reserve Bank of San Francisco (FRBSF) on March 19, 1994. The significant
requirements of the MOU include submitting a program to improve the financial
condition of the Banks, evaluating and improving board supervision and
management, exiting the commercial paper market, complying with Federal Reserve
policy regarding management or service fees assessed by the Holding Company and
paid by the Banks and implementing 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 the prior
approval of the FRBSF. 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.
VCNB, Frontier and the Company are in compliance with or in the process of
complying with all of the items required under the Formal Agreement, Consent
Order and MOU, respectively. Any non-compliance with the requirements of the
Formal Agreement, Consent Order or MOU could result in penalties or further
regulatory restrictions.
24
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
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, except as reported in the Company's 10-K for fiscal year ended
December 31, 1994, such litigation will not have a material impact on the
financial position or results of operations of the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(11) Statement re: computation of per share earnings incorporated
by reference in the Statement of Operations and Note F. in the accompanying
Notes to the Consolidated Financial Statements.
(b) Reports on Form 8-K.
None.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date November 14, 1995 By:
/s/ Richard S. Cupp
-----------------------------
Richard S. Cupp
President/Chief
Executive Officer
Date November 14, 1995 By:
/s/ Simone Lagomarsino
-----------------------------
Simone Lagomarsino
Chief Financial
Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE NINE
MONTHS ENDED SETEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 20,572
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 33,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,689
<INVESTMENTS-CARRYING> 20,793
<INVESTMENTS-MARKET> 20,817
<LOANS> 157,937
<ALLOWANCE> 5,753
<TOTAL-ASSETS> 255,883
<DEPOSITS> 226,244
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,911
<LONG-TERM> 0
<COMMON> 36,478
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 255,883
<INTEREST-LOAN> 12,349
<INTEREST-INVEST> 2,034
<INTEREST-OTHER> 1,210
<INTEREST-TOTAL> 15,593
<INTEREST-DEPOSIT> 4,729
<INTEREST-EXPENSE> 4,733
<INTEREST-INCOME-NET> 10,860
<LOAN-LOSSES> 410
<SECURITIES-GAINS> 47
<EXPENSE-OTHER> 10,637
<INCOME-PRETAX> 1,477
<INCOME-PRE-EXTRAORDINARY> 1,477
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,447
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 6.21
<LOANS-NON> 4,539
<LOANS-PAST> 0
<LOANS-TROUBLED> 700
<LOANS-PROBLEM> 19,385
<ALLOWANCE-OPEN> 8,261
<CHARGE-OFFS> 3,214
<RECOVERIES> 296
<ALLOWANCE-CLOSE> 5,753
<ALLOWANCE-DOMESTIC> 5,753
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
