<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 March 31, 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 March 31, 1995 - Common stock no par value; issued and outstanding:
6,333,835 shares.
Total No. of pages: 25
Exhibit Index at page: 23
1
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Ventura County National Bancorp
INDEX
March 31, 1995
<TABLE>
<C> <S> <C>
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheets at March
31, 1995 and December 31, 1994 4
Consolidated Statements of Operations for
the three months ended March 5
31, 1995 and 1994
Consolidated Statements of Cash Flows for
the three months ended March 31, 1995 6
and 1994
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 13-22
Operations
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of
Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Selected Financial Data 25
</TABLE>
2
<PAGE>
Part I. Financial Information
The Consolidated Balance Sheet at March 31, 1995, the Consolidated Statements of
Operations for the three months ended March 31, 1995 and 1994 and the
Consolidated Statements of Cash Flows for the three months ended March 31, 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>
March 31, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 15,619 $ 11,442
Federal Funds Sold 25,000 27,000
Interest Bearing Deposits with
Other Financial Institutions 595 694
Securities available-for-sale 27,598 31,859
Securities held-to-maturity 22,057 18,775
Loans and Leases,
Net of Unearned Income 162,593 167,934
Less: Loan Loss Reserve 8,314 8,261
Net Loans and Leases 154,279 159,673
Premises and Equipment, Net 1,842 1,917
Other Assets 6,522 6,395
TOTAL ASSETS $253,512 $257,755
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Non-Interest Bearing Demand $ 62,390 $ 67,177
Interest Bearing Demand
and Savings 87,488 80,646
Time 82,402 88,519
Total Deposits 232,280 236,342
Notes Payable 125 125
Other Liabilities 1,424 2,236
Total Liabilities 233,829 238,703
Commitments and Contingencies
Shareholders' Equity:
Contributed Capital, including
common stock of no par value.
Authorized, 20,000,000 shares;
Issued 6,333,835 30,949 30,949
Unrealized Loss on Securities (820) (1,178)
Retained Earnings (10,446) (10,719)
Total Shareholders' Equity 19,683 19,052
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $253,512 $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 Ended March 31
1995 1994
<S> <C> <C>
Interest Income:
Loans and Leases $4,149 $ 4,856
Interest on Deposits with Other
Financial Institutions 8 27
Taxable Investments 671 416
Federal Funds Sold 360 92
------ -------
Total Interest Income 5,188 5,391
Interest Expense:
Deposits 1,545 1,652
Other Borrowings 0 9
------ -------
Total Interest Expense 1,545 1,661
------ -------
Net Interest Income 3,643 3,730
Provision for Loan Losses 355 800
------ -------
Net Interest Income (Loss) After
Provision for Loan Losses 3,288 2,930
Other Income:
Service Charges on Deposit Accounts 235 323
Loan Fees 41 276
Miscellaneous Fees 71 124
Other 259 420
------ -------
Total Other Income 606 1,143
Other Expenses:
Salary and Employee Benefits 1,638 1,830
Net Occupancy 458 524
Equipment 192 219
Other 1,333 1,614
------ -------
Total Other Expenses 3,621 4,187
Income (Loss) Before Income Taxes
273 (114)
Applicable Income Taxes (Benefit) 0 0
------ -------
Net Income (Loss) $ 273 ($114)
------ -------
Net Income (Loss) Per Share $0.04 ($0.02)
------ -------
</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 three months ended
March 31,
1995 1994
<S> <C> <C>
Cash flows from operating
activities:
Net income (loss) $ 273 ($114)
Adjustments to reconcile
net income to
cash flows from
operating activities:
Gain on sale of fixed assets (2) --
Gain on sale of SBA loans (255) (74)
Depreciation and amortization 147 152
Provision for loan losses 355 800
Change in deferred loan fees 37 (152)
Accretion of investment discount,
net of amortization of
investment premium (80) 207
Loss on sale of
investment securities -- 97
Gain on sale of merchant card
portfolio -- (174)
Loss on sale of REO -- 21
REO writeups -- (12)
Change in other assets (110) 47
Change in other liabilities (812) (268)
Net cash provided by (applied to)
operating activities (447) 530
Cash flows from investing activities:
Principal reductions from
investment securities
available for sale 304 2,001
Principal reductions from
investment securities held
to maturity 691 68
Proceeds from sale of investment
securities available for sale 277 8,695
Purchase of investment securities
available for sale (4,858) (4,253)
Purchase of investment securities
held to maturity (3,997) (249)
Maturity of investment securities
available for sale 9,000 --
Purchase of premises and equipment (72) (161)
Proceeds from sales of premises and
equipment 2 --
Proceeds from sale of REO properties 50 1,401
Net change in loans 5,121 21,993
Proceeds from sale of SBA loans 69 42
Proceeds from sale of merchant
card portfolio -- 174
Decrease (increase)in fed funds sold 2,000 (3,700)
Change in interest bearing
deposits with other financial
institutions 99 396
Net cash provided by investing
activities 8,686 26,407
Cash flows from financing activities:
Change in demand and savings
deposits 2,055 (17,259)
Change in time deposits (6,117) (6,089)
Net cash (applied to)
financing activities (4,062) (23,348)
Net increase in cash
and cash equivalents 4,177 3,589
Cash and Cash Equivalents
at December 31 11,442 15,943
Cash and Cash Equivalents
at March 31 $15,619 $ 19,532
</TABLE>
See accompanying notes to Consolidated Financial Statements.
6
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 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 months ended March
31, 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-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 March 31, 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 March 31, 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
$820,000 and $1,178,000 at March 31, 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.
7
<PAGE>
The amortized cost, gross unrealized holding gains and losses and estimated
market values of securities-available-for-sale at March 31, 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
March 31, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $18,955 $ 11 $ 74 $18,892
Mortgage Backed
Securities 7,738 0 358 7,380
Federal Reserve Bank
and FHLB Stock 1,326 1,326
$28,019 $ 11 $432 $27,598
</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
$399,000 and $433,000 at March 31, 1995 and December 31, 1994, respectively,
were 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>
8
<PAGE>
The amortized cost, gross unrealized holding gains and losses and estimated
market values of securities-held-to-maturity at March 31, 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
March 31, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $ 5,246 $ 0 $ 19 $ 5,227
Mortgage Backed
Securities 16,811 29 390 16,450
$22,057 $29 $409 $21,677
</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 March 31, 1995, U.S. government securities with a market value totaling
$12,902,000, and $5,990,000, 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 $7,380,000, at
March 31, 1995, which are classified as available-for-sale, mature in greater
than ten years. U.S. government securities with an amortized cost of $250,000
and $4,996,000, classified as held-to-maturity at March 31, 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 $13,145,000 and $3,666,000,
at March 31, 1995, classified as held to maturity, mature in one to five years
and after ten years, respectively.
9
<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 March 31, 1995, the Banks had
outstanding loan commitments of $21,141,000, letters of credit outstanding in
the amount of $2,387,000, and available credit to credit card customers totaling
$6,376,000.
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 three months ended March 31, 1995 and 1994 were $335,000 and
$424,000, respectively.
Note E. Income Tax Provisions
During the first 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 March 31, 1995, deferred tax assets
of approximately $3 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 both the three months ended March 31, 1995 and 1994 were 6,361,397 and
6,333,835, respectively.
Note G. Statement of Cash Flows
For the three months ended March 31, 1995 and 1994, the Company paid cash
totaling approximately $1,544,000 and $1,522,000 in interest, respectively. The
Company paid $nil in income taxes for the first quarter of 1995 and 1994. The
Company acquired $67,000 and $1,575,000, respectively, in real estate owned
through foreclosures during the three months ended March 31, 1995 and 1994,
respectively.
10
<PAGE>
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.
The following information relates to the recorded investment in loans that meet
the definition of an impaired loan per SFAS No. 114 at March 31, 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>
$ 9,829 $9,829 $ Nil
</TABLE>
11
<PAGE>
At March 31, 1995, the Company's quarterly average investment in impaired loans
noted above was $10,165,000. During the quarter ended March 31, 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)
March 31 December 31
1995 1994
<S> <C> <C>
Balance at the beginning
of the period $8,261 $ 14,313
Provision charged to expense 355 3,825
Loans charged off (398) (10,439)
Recoveries on loans previously
charged off 96 562
Balance at the end
of the period $8,314 $ 8,261
</TABLE>
12
<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 March 31, 1995 and for the three months
ended March 31, 1995 and 1994. The discussion should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto.
General
At March 31, 1995, the Company had total assets of $253,512,000 and net income
of $273,000 or $0.04 per share for the three months ended March 31, 1995, as
compared to total assets of $257,755,000 at December 31, 1994 and a net loss of
$114,000 or $0.02 per share for the three months ended March 31, 1994. The 1995
improvement in operating results was primarily attributable to reduced other
expenses, a significant decrease in the provision for loan losses and an
improved net interest margin.
Total nonperforming assets increased to $13,508,000 at March 31, 1995 from
$11,169,000 at December 31, 1994, due primarily to the addition of one non-
accrual loan in the amount of $2.2 million. This loan was taken into REO
subsequent to March 31, 1995. The Company continues to aggressively pursue
strategies for reducing nonperforming and classified assets, which may include a
selective sale of such assets to further improve asset quality.
Net Interest Income and Net Interest Margin
For the first quarter of 1995, net interest income decreased by $87,000, or
2.3%, from $3,730,000 at March 31, 1994. The 1995 decrease in net interest
income was due primarily to a 14.6% decrease in loan interest income for the
comparative quarters. From March 31, 1994 to March 31, 1995, total average loans
decreased $85 million, or 33.7%, from $252,269,000 to $167,324,000. The decrease
was partially offset by increased average balances of investment securities,
together with higher yields on earning assets in the current rising rate
environment. Average investment securities were $72 million and $30 million at
March 31, 1995 and 1994, respectively.
The earnings impact of reduced interest income was partially offset by a
$116,000, or 7.0% decrease in interest expense for the first quarter of 1995, as
compared to the corresponding period of 1994. The decrease in interest expense
was primarily a result of the $48.1 million, or 22.0%, decrease in average
13
<PAGE>
interest bearing deposits, which was offset slightly by increases in deposit pay
rates. In addition, the decrease in 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 26.1% for the
three months ended March 31, 1994 to 26.5% for the three months ended March 31,
1995, and interest bearing time deposits decreased over the same period, from
37.8% of total deposits at March 31, 1994 to 35.5% of total deposits at March
31, 1995. The quarterly cost of funds increase from 2.23% to 2.69% was due to
higher deposit pay rates, which were offset by the change in the mix noted
above.
Despite the decrease in interest income, net interest margin improved from 5.34%
to 6.18%, due to the yield on interest earning assets increase of 150 basis
points versus the cost of funds increase of 46 basis points from March 31, 1994
to March 31, 1995. Additionally, the reduction in the volume of average interest
bearing liabilities exceeded the reduction in interest earning assets.
Other Income
Other income decreased $537,000 to $606,000 for the three months ended March 31,
1995, a 47% decrease over the corresponding period in 1994. Loan fees decreased
from $276,000 for the three months ended March 31, 1994 to $41,000 for the three
months ended March 31, 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. Mortgage servicing fee income and net gains on sale of mortgage
loans represented 21.3% of total other income for the three months ended March
31, 1994. Other fee income decreased from $420,000 to $259,000 for the three
months ended March 31, 1994 and 1995, respectively, due to the gain on sale of
the merchant card portfolio, recorded in March 1994, totaling $174,000, and a
related decrease in merchant card income of $33,000, which were offset by an
increase in gains on the sale of SBA loans during the comparative periods.
Merchant card income represented 3% of total other income for three months ended
March 31, 1994. Service charges on deposit accounts decreased $88,000, or 27.2%
to $235,000 for the three months ended March 31, 1995, as compared to the
corresponding period in 1994, as a result of the lower deposit levels noted
above. Miscellaneous fee income decreased from $124,000 for the three months
ended March 31, 1994 to $71,000 for the three months ended March 31, 1995.
14
<PAGE>
Other Expenses
Total other expenses decreased from $4,187,000 to $3,621,000 for the three
months ended March 31, 1994 and 1995, respectively. The $566,000, or 13.5%,
decrease was primarily attributable to a $381,000 decline in salaries and
benefits, which was offset by a $189,000 reduction in deferred loan origination
costs. In accordance with Statement of Financial Accounting Standards 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 $54,000 and
$243,000 at March 31, 1995 and 1994, respectively. The Company adopted Statement
of Position ("SOP") 93-6 in 1994 which provides that future ESOP contributions,
if any, shall be expensed at fair market value of the Common Stock at the time
of the contribution rather than the historical cost of $9.00 per share. Adoption
of SOP 93-6 had no impact on results of operations during the first quarter of
1995 or 1994. The extent to which the adoption of SOP 93-6 will affect the
Company's results of operations depends on the level of future ESOP
contributions, if any, and the market value of the Common Stock, neither of
which can be determined at this time. Additionally, occupancy costs, appraisal
fees, and FDIC assessments decreased $66,000, $64,000, and $59,000,
respectively.
REO expense and writedowns totaled $36,000 and $29,000 for the three months
ended March 31, 1995 and 1994, respectively.
Total other expense expressed as a percentage of net interest income plus other
income, commonly referred to as the efficiency ratio, was 85.2% and 85.9% for
the three months ended March 31, 1995 and 1994, respectively.
Provision for Loan Losses
The Company's provision for loan losses during the first quarter of 1995 was
$355,000, compared to $800,000 during the first quarter of 1994, resulting from
the significant reductions in the level of classified assets. Classified assets
at March 31, 1995 were $33.7 million, compared with $62.1 million at March 31,
1994, an improvement of 45.7%
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 March 31, 1995
15
<PAGE>
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.
At March 31, 1995, the loan loss reserve was $8,314,000 as compared to
$8,261,000 at December 31, 1994. The ratio of the loan loss reserve to total
outstanding loans and leases was 5.11% at March 31, 1995 and 4.92% at December
31, 1994. The coverage ratio, or the ratio of loan loss reserves to non-
performing assets, was 61.6% and 74.0% at March 31, 1995 and December 31, 1994,
respectively. Nonperforming assets consist of nonperforming loans plus REO and
other foreclosed personalty. 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. The Company has expanded the Loan Administration and
Special Assets Departments to improve overall asset quality.
Non-performing loans are those on which the borrower fails to perform under the
original terms of the obligation. As of March 31, 1995, and December 31, 1994,
the Company had TDRs totaling $1,959,000 and $1,968,000, respectively, of which
$1,957,000 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 March 31, 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 $10,265,000 and
$7,612,000, respectively. Several loans which are on non-accrual status at March
31, 1995, per regulatory accounting principles, are not deemed by management to
be impaired per the provisions of SFAS No. 114 and SFAS No. 118, as full
recovery of principal and interest is deemed probable based on the current
market value of collateral.
The decrease in loans past due greater than 90 days reflects the migration of
certain loans to non-accrual or REO status combined with a strengthened credit
administration unit which has improved collection efforts. The increase in non-
accrual loans from December 31, 1994 to March 31, 1995 reflects primarily the
addition of one loan totaling $2.2 million during the first
16
<PAGE>
quarter. Subsequent to March 31, 1995, this loan was transferred to REO. Non-
performing loans totaled $10,267,000 at March 31, 1995 or 6.3% of total
outstanding loans and leases, as compared to $7,945,000 or 4.7% of total loans
and leases at December 31, 1994.
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 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 March 31, 1995, the Company's total investment in and quarterly average
balance of impaired loans was $9,829,000 and $10,165,000, respectively. During
the quarter ended March 31, 1995, $nil interest income was recognized on
impaired loans.
Financial Condition
Total assets at March 31, 1995 decreased $4.2 million or 1.6% from December 31,
1994. Net loans and leases decreased $5.4 million or 3.4% from prior year end,
primarily due to construction and other loan payoffs which funded deposit
outflows of $4.1 million. Federal funds sold decreased $2.0 million. These
decreases were partially offset by increases in cash and due from banks and
shareholder's equity totaling $4.2 million, or 26.7%, and $0.6 million, or 3.3%,
respectively.
The Company's REO balances increased from $2,346,000 at December 31, 1994 to
$2,363,000 at March 31, 1995. The increase in REO reflects the repossession of
one property, net of a $50,000 cash deposit on another previously existing
property. At March 31, 1995, the Company's REO consisted of three commercial
properties with book values totaling $2,146,000,
17
<PAGE>
one single family residence totaling $100,000, and two parcels of land zoned for
residential purposes totaling $117,000.
Fixed assets, net of depreciation, decreased from $1,917,000 at December 31,
1994 to $1,842,000 at March 31, 1995 due primarily to increased accumulated
depreciation and amortization and the sale of several pieces of furniture in
conjunction with the subleasing of the Company's executive offices, which
occurred in April 1995.
Total deposits at March 31, 1995 decreased $4.1 million or 1.7% 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 $4.8
million or 7.1%, savings deposits decreased $2.0 million or 6.6%, and time
certificates of deposit decreased $6.1 million or 6.9%. These decreases were
offset by an increase in money market deposits of $8.8 million, or 17.5%.
Liquidity and Asset/Liability Management
Liquidity management for banks requires that funds be available to pay all
deposit withdrawals and maturing financial obligations and meet credit funding
requirements promptly and fully in accordance with their terms. Over a very
short time frame, for most banks, including the Banks, maturing assets provide
only a limited portion of the funds required to pay maturing liabilities. The
balance of the funds required is provided by liquid assets and the acquisition
of additional liabilities, making liability management important to liquidity
management 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 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 three months ended March 31, 1995 was 24.0% as compared to 17.0% for the
corresponding period in 1994. The average loan to deposit ratios for the Company
at March 31, 1995 and December 31, 1994 were 71.9% and 67.6%, respectively. The
18
<PAGE>
increase in the liquidity ratio is the result of an increase in investment
securities and a decline in pledged securities, outgoing cash letters and total
assets during the first three months of 1995 as compared to the same period
during 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.
From December 31, 1994 to March 31, 1995, total average interest earning assets
decreased from $277,612,000 to $239,081,000, a decrease of 13.9%, and average
interest bearing liabilities decreased from $197,658,000 to $171,050,000, or
13.5%. The ratio of average rate sensitive assets to rate sensitive liabilities
was 1.4 at March 31, 1995 and December 31, 1994. Since 69% 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 47% 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. As
discussed further in the section entitled "Agreements with the Office of the
Comptroller of the Currency" the Formal Agreement requires VCNB to seek
reimbursement of $3.4 million in connection with interest paid to Parent on
deposits of funds generated by commercial paper sales. At March 31, 1995, Parent
had notes payable in the amount of $125,000, scheduled to mature in December
1995, upon which Parent pays interest quarterly. Parent has sufficient cash
available to meet its interest obligations during 1995. However, Parent does not
have sufficient cash to repay the notes payable at maturity. A portion of the
rights offering net proceeds will be utilized to repay the notes payable at
maturity. Should the rights offering not be successful, Parent would attempt to
renegotiate such notes. No assurances can be given that Parent would be
successful in any such effort. There was no material change in cash at the
Parent company level from December 31, 1994 to March 31, 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, 0.7% at March 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.
Capital Resources
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.
19
<PAGE>
The following sets forth the capital ratios for the Company and each of the
Banks at March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
Consolidated Company March 31, December 31,
1995 1994
<S> <C> <S>
Company
Risk-Based Capital Ratio 13.23% 12.61%
Tier 1 Capital Ratio 11.93% 11.32%
Leverage Ratio 8.21% 7.53%
VCNB
Risk-Based Capital Ratio 12.78% 12.21%
Tier 1 Capital Ratio 11.48% 10.92%
Leverage Ratio 7.86% 7.21%
Frontier
Risk-Based Capital Ratio 14.17% 13.57%
Tier 1 Capital Ratio 12.88% 12.29%
Leverage Ratio 9.06% 8.32%
</TABLE>
In accordance with recent guidance from the Federal Financial Institutions
Examination Council, regulatory capital includes $738,000 and $756,000, at March
31, 1995 and December 31, 1994, respectively, which represents a $792,000
cumulative effect adjustment to record an intangible servicing asset, a portion
of which has been recognized through amortization of such amount. This
adjustment is not reflected in the accompanying financial statements prepared in
accordance with generally accepted accounting principles.
The Company is proceeding with a rights offering to shareholders of $4,500,000
to $6,500,000. Shareholders of record on May 10, 1995, will receive 1.0 right
for each 3.17 shares of common stock held on the record date. Each right will
entitle the holder to purchase 1.0 share of common stock for $2.25. The offering
will terminate on June 21, 1995, unless extended. The offering will only be made
by means of a prospectus. Substantially all of the net proceeds of the offering
would be contributed as capital to VCNB for purposes of satisfying the minimum
capital requirements of VCNB's Formal Agreement with the Comptroller of the
Currency.
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, develop a program designed to improve loan administration,
developing a program regarding asset
20
<PAGE>
diversification, obtaining current credit information on any loans lacking such
information, reviewing and revising loan policy, establishing an independent
loan review program, developing and implementing a program to collect or
strengthen criticized assets, reviewing and maintaining an adequate loan loss
reserve, developing a new long range strategic plan, developing and 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, requires VCNB to
achieve a Tier 1 capital ratio of 12.00% and a leverage ratio of 7.00% by
September 30, 1994. At September 30, 1994, VCNB needed $4.2 million additional
capital to reach its Tier 1 capital requirement of 12%, and $0.6 million
additional capital to reach its leverage ratio requirement of 7%. Toward that
end, the Company is proceeding with a rights offering of $4,500,000 to
$6,500,000 as discussed more fully above, the proceeds of which are intended to
be contributed to VCNB to satisfy the capital requirements of the Formal
Agreement. 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.
The Company believes that contribution of the net proceeds from the rights
offering will satisfy the reimbursement requirement. Until such time as the
reimbursement requirement is satisfied, 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, evaluate and improve board supervision and management,
exit the commercial paper market, comply with Federal Reserve policy regarding
management or service fees assessed by the Holding 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 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
21
<PAGE>
Formal Agreement, Consent Order and MOU, respectively, and management does not
believe the Formal Agreement, Consent Order or MOU will have any adverse
material impact on their future operations. However, the ability of VCNB to meet
the capital requirements of the Formal Agreement is dependent on the successful
acquisition of capital from external sources. Any deficiency in compliance with
the requirements of the Formal Agreement, Consent Order or MOU could result in
penalties or further regulatory restrictions.
22
<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.
23
<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 May 15, 1995 By: /s/ Richard S. Cupp
-----------------------
Richard S. Cupp
President/Chief
Executive Officer
Date May 15, 1995 By: /s/ Simone Lagomarsino
-----------------------
Simone Lagomarsino
Chief Financial
Officer
24
<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 QUARTER
ENDED MARCH 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 15,619
<INT-BEARING-DEPOSITS> 595
<FED-FUNDS-SOLD> 25,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,598
<INVESTMENTS-CARRYING> 22,057
<INVESTMENTS-MARKET> 21,677
<LOANS> 162,593
<ALLOWANCE> 8,314
<TOTAL-ASSETS> 253,512
<DEPOSITS> 232,280
<SHORT-TERM> 125
<LIABILITIES-OTHER> 1,424
<LONG-TERM> 0
<COMMON> 30,949
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 253,512
<INTEREST-LOAN> 4,149
<INTEREST-INVEST> 671
<INTEREST-OTHER> 368
<INTEREST-TOTAL> 5,188
<INTEREST-DEPOSIT> 1,545
<INTEREST-EXPENSE> 1,545
<INTEREST-INCOME-NET> 3,643
<LOAN-LOSSES> 355
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,621
<INCOME-PRETAX> 273
<INCOME-PRE-EXTRAORDINARY> 273
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<YIELD-ACTUAL> 6.18
<LOANS-NON> 10,265
<LOANS-PAST> 0
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,261
<CHARGE-OFFS> 398
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 8,314
<ALLOWANCE-DOMESTIC> 8,314
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
