<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINTON, 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 JUNE 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 June 30, 1995 - Common stock no par value; issued
and outstanding: 9,226,723 shares.
Total No. of pages: 28
Exhibit Index at page: 26
<PAGE>
Ventura County National Bancorp
INDEX
June 30, 1995
<TABLE>
<C> <S> <C>
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheets at June
30, 1995 and December 31, 1994 4
Consolidated Statements of Operations for
the three and six months ended June 5
30, 1995 and 1994
Consolidated Statements of Cash Flows for
the six months ended June 30, 1995 6-7
and 1994
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of 15-25
Operations
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of
Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Selected Financial Data 28
</TABLE>
<PAGE>
Part I. Financial Information
The Consolidated Balance Sheet at June 30, 1995, the
Consolidated Statements of Operations for the three and six
months ended June 30, 1995 and 1994 and the Consolidated
Statements of Cash Flows for the six months ended June 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.
<PAGE>
Item I. Financial Statements
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $15,772 $11,442
Federal Funds Sold 31,250 27,000
Interest Bearing Deposits with
Other Financial Institutions 695 694
Securities available-for-sale 23,828 31,859
Securities held-to-maturity 21,594 18,775
Loans and Leases,
Net of Unearned Income:
Held for sale 2,009
Held for investment 153,605 167,934
Less: Loan Loss Reserve 6,617 8,261
Net Loans and Leases 148,997 159,673
Premises and Equipment, Net 2,150 1,917
Other Assets 6,880 6,395
TOTAL ASSETS $251,166 $257,755
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing Demand $ 62,142 $ 67,177
Interest Bearing Demand
and Savings 77,466 80,646
Time 83,576 88,519
Total Deposits 223,184 236,342
Notes Payable 125 125
Other Liabilities 1,661 2,236
Total Liabilities 224,970 238,703
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 June 30, 1995 and December 31,
1994, respectively 36,625 30,949
Unrealized Loss on Securities (507) (1,178)
Retained Deficit (9,922) (10,719)
Total Shareholders' Equity 26,196 19,052
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $251,166 $257,755
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest Income:
Loans and Leases
4,053 4,885 8,202 9,741
Interest on Deposits with
Other
Financial Institutions 8 21 16 48
Taxable Investments 727 419 1,398 835
Federal Funds Sold 362 268 723 360
Total Interest Income 5,150 5,593 10,339 10,984
Interest Expense:
Deposits 1,571 1,551 3,112 3,203
Other Borrowings 0 (2) 4 73
Total Interest Expense 1,571 1,549 3,116 3,210
Net Interest Income 3,579 4,044 7,223 7,774
Provision for Loan Losses 155 2,075 510 2,875
Net Interest Income After
Provision for Loan Losses 3,424 1,969 6,713 4,899
Other Income:
Service Charges on Deposit 245 301 480 624
Accounts
Loan Fees 23 (174) 64 102
Miscellaneous Fees 82 86 153 209
Other 84 1,743 343 2,164
Total Other Income 434 1,956 1,040 3,099
Other Expenses:
Salary and Employee Benefits 1,607 1,453 3,245 3,554
Net Occupancy 404 516 862 1,040
Equipment 163 210 355 429
Other 1,160 2,295 2,494 3,638
Total Other Expenses 3,334 4,474 6,956 8,661
Income (Loss) Before
Income Taxes 524 (549) 797 (663)
Applicable Income Taxes 0 214 0 214
Net Income (Loss) $ $ $ $
524 (763) 797 (877)
Net Income (Loss) Per Share
$ . 08 $(0.12) $.13 $(0.14)
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1995 1994
<S> <C> <C>
Cash flows from operating
activities:
Net income (loss) $797 ($877)
Adjustments to reconcile
net income to cash flows from
operating activities:
Gain on sale of fixed assets (2) --
Gain on sale of SBA loans (318) (111)
Gain on sale of mortgage servicing (1,443)
Depreciation and amortization 286 340
Provision for loan losses 510 2,875
Change in deferred loan fees (13) (317)
Accretion of investment discount,
net of amortization of
investment premium (146) 275
Loss on sale of
investment securities
available for sale (6) 150
Gain on sale of merchant card
portfolio -- (174)
(Gain) loss on sale of REO (246) 15
REO writedowns 105 311
Change in other assets (322) (2,748)
Change in other liabilities (575) 163
Net cash provided by (applied to)
operating activities 70 (1,541)
Cash flows from investing activities:
Principal reductions from
investment securities
available for sale 534 233
Principal reductions from
investment securities held
to maturity 1,164 3,384
Proceeds from sale of investment
securities available for sale 4,193 8,736
Purchase of investment securities
available for sale (4,859) (4,474)
Purchase of investment securities
held to maturity (3,997) --
Maturity of investment securities
<PAGE>
held to maturity 9,000 --
Purchase of premises and equipment (519) (322)
Proceeds from sales of premises and
equipment 2 24
Proceeds from sale of REO properties 1,920 1,571
Net change in loans 12,324 46,813
Proceeds from sale of SBA loans 187 193
Proceeds from sale of merchant
card portfolio -- 174
Increase in fed funds sold (4,250) (20,000)
Change in interest bearing
deposits with other financial
institutions (1) 694
Proceeds from sale of
non-performing loans 9,056
Proceeds from sale of loan
servicing rights 1,763
Purchases of loans (3,956)
Net cash provided by investing 11,742 47,845
activities
Cash flows from financing activities:
Change in demand and savings
deposits (8,215) (26,828)
Change in time deposits (4,943) (18,475)
Issuance of common stock 5,676
Net cash applied to
financing activities (7,482) (45,303)
Net increase in cash
and cash equivalents 4,330 1,001
Cash and Cash Equivalents
at December 31 11,442 15,943
Cash and Cash Equivalents
at June 30 $15,772 $16,944
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 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 six months ended June 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-
<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 June 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 June 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 $507,000 and $1,178,000 at June 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 six months of fiscal year 1995.
<PAGE>
The amortized cost, gross unrealized holding gains and
losses and estimated market values of securities-available-for-
sale at June 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
June 30, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $15,139 $50 $ 24 $15,165
Mortgage Backed
Securities 7,495 168 7,327
Federal Reserve Bank
and FHLB Stock 1,336 1,336
$23,970 $50 $192 $23,828
</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 $365,000
and $433,000 at June 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>
<PAGE>
The amortized cost, gross unrealized holding gains and
losses and estimated market values of securities-held-to-
maturity at June 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
June 30, 1995 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government
Securities $ 5,247 $ 57 $ 2 $ 5,302
Mortgage Backed
Securities 16,347 105 145 16,307
$21,594 $ 162 $ 147 $21,609
</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 June 30, 1995, U.S. government securities with a market value
totaling $9,117,000, and $6,048,000, 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 $7,327,000 at June 30, 1995,
which are classified as available-for-sale, mature in greater
than ten years. U.S. government securities with an amortized
cost of $5,247,000 classified as held-to-maturity at June 30,
1995, are scheduled to mature between one and five years.
Mortgage backed securities with an amortized cost of $12,810,000
and $3,537,000, at June 30, 1995, classified as held to maturity,
mature in one to five years and after ten years, respectively.
<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 June 30, 1995, the Banks had outstanding
loan commitments of $20,371,000, letters of credit outstanding
in the amount of $2,507,000, and available credit to credit card
customers totaling $6,379,000.
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 six
months ended June 30, 1995 and 1994 were $662,000 and $888,000,
respectively.
Note E. Income Tax Provisions
During the second 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 June 30, 1995, deferred tax assets of
approximately $2.8 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 six months ended June 30, 1995 were
6,245,037 and 6,211,206, 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
six months ended June 30, 1994 were 6,333,835.
Note G. Statement of Cash Flows
<PAGE>
For the three and six months ended June 30, 1995 and 1994, the
Company paid cash totaling approximately $1,562,000 and
$3,107,000 and $1,612,000 and $3,289,000 in interest,
respectively. The Company paid $328,000 and $328,000 in income
taxes during the three and six months ended June 30, 1995. The
Company paid no income taxes in 1994. The Company acquired
$1,875,000 and $1,942,000, and $4,267,000 and $4,488,000,
respectively, in real estate owned through foreclosures during
the three and six months ended June 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.
The following information relates to the recorded investment in
loans that meet the definition of an impaired loan per SFAS No.
114 at June 30, 1995.
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands)
The Amount of the The Amount of the
Recorded Recorded
Investment Investment
Total Recorded for Which There Is for Which There Is
a No
Investment in the Related Allowance Related Allowance
for for
Impaired Loans Credit Losses Credit Losses
<S> <C> <C>
$ 8,506 $ 8,506 $ nil
</TABLE>
For the three and six months ended June 30, 1995, the Company's
average investment in impaired loans noted above was $9,566,000
and $9,762,000, respectively. During both the three and six
months ended June 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 Six Months Year
Ended Ended Ended
June 30 June 30 December 31
1995 1995 1994
<S> <C> <C> <C>
Balance at the beginning
of the period $ 8,314 $ 8,261 $ 14,313
Provision charged to
expense 155 510 3,825
Loans charged off (1,963) (2,361) (10,439)
Recoveries on loans
previously charged off 111 207 562
Balance at the end
of the period $ 6,617 $ 6,617 $ 8,261
</TABLE>
Note I. Significant Second Quarter Events
The Company completed a rights offering to shareholders for
which proceeds of $6,500,000 were wired to the Company on June
29, 1995. Shareholders of record on May 10, 1995, received 1.0
right for each 3.17 shares of common stock held on the record
date. Each right entitled the holder to purchase 1.0 share of
common stock for $2.25. 2,888,888 shares were issued in
connection with this transaction and the net proceeds amounted to
$5,668,000.
<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 June 30, 1995 and for the three and six months
ended June 30, 1995 and 1994. The discussion should be read in
conjunction with the Company's Consolidated Financial Statements
and notes thereto.
General
At June 30, 1995, the Company had total assets of
$251,166,000 and net income of $524,000 or $0.08 per share and
net income of $797,000 or $.13 per share for the three and six
months ended June 30, 1995, respectively, as compared to total
assets of $257,755,000 at December 31, 1994 and a net loss of
$763,000 or $0.12 per share and $877,000 or $0.14 per share for
the three and six months ended June 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 increased to $12,817,000 at June 30,
1995 from $11,169,000 at December 31, 1994, due primarily to the
addition of $1.0 million in non-accrual loans during the first
six months of 1995. The Company continues to aggressively pursue
strategies for reducing nonperforming and classified assets,
which includes the sale of $2,009,000 of loans to further improve
asset quality.
Net Interest Income and Net Interest Margin
For the six months ended June 30, 1995, net interest income
decreased by $551,000, or 7%, from $7,774,000 at June 30, 1994.
The 1995 decrease in net interest income was due primarily to a
16% decrease in loan interest income for the comparative periods.
From June 30, 1994 to June 30, 1995, total average loans
decreased $58 million, or 27.5%, from $210,858,000 to
$152,827,000. 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 $46 million and $36 million
for the six months ended June 30, 1995 and 1994, respectively.
The earnings impact of reduced interest income was partially
offset by a $94,000, or 2.9% decrease in interest expense for the
first six months of 1995, as compared to the corresponding period
of 1994. The decrease in interest expense was primarily a result
<PAGE>
of the $20 million, or 10.3%, decrease in average 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 decreased from 29.42% for
the six months ended June 30, 1994 to 22.38% for the six months
ended June 30, 1995. The year-to-date cost of funds increase
from 2.23% to 2.74% was due to higher deposit pay rates and the
change in the deposit mix noted above, which were offset by the
decrease in total deposits.
Despite the decrease in interest income, net interest margin
improved from 5.28% to 6.21%, due to the yield on interest
earning assets increasing by a greater amount than the cost of
funds increase from June 30, 1994 to June 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 $465,000 or 11.5% to $3,579,000
for the three months ended June 30, 1995 as compared to the three
months ended June 30, 1994 for the reasons noted above.
Other Income
Other income decreased $2,059,000 to $1,040,000 for the six
months ended June 30, 1995, a 66% decrease over the corresponding
period in 1994. Loan fees decreased from $102,000 for the six
months ended June 30, 1994 to $64,000 for the six months ended
June 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 $2,164,000 to $343,000 for the six months ended
June 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 $144,000, or 23.07% to $480,000 for
the six months ended June 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
$209,000 for the six months ended June 30, 1994 to $153,000 for
the six months ended June 30, 1995 due to the reduction of
merchant card income due to the sale of that portfolio as
mentioned above.
Total other income decreased $1,522,000 to $434,000 for the three
months ended June 30, 1995, 77.8% decrease from the corresponding
period of 1994. The decrease is due primarily to the gain on
sale of mortgage servicing rights discussed above.
Other Expenses
<PAGE>
Total other expenses decreased from $8,661,000 to $6,956,000 for
the six months ended June 30, 1994 and 1995, respectively. The
$1,705,000, or 19.69%, decrease was primarily attributable to a
$573,000 decline in salaries and benefits, which was offset by a
$264,000 reduction in deferred loan origination costs and a
reduction in other real estate owned expenses of $456,000. 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 $154,000 and $418,000 for the six
months ended June 30, 1995 and 1994, respectively. The reduction
in the other real estate owned expense is due to gains on sales
of several properties. Additionally, occupancy costs, appraisal
fees, and legal expenses decreased $178,000, $144,000, and
$181,000 respectively for the six months ended June 30, 1995, as
compared to the six months ended June 30, 1994.
Total other expenses decreased $1,140,000 from $4,474,000 to
$3,334,000 for the three months ended June 30, 1995, as compared
to the three months ended June 30, 1994. Lower legal expenses,
consulting expenses, other real estate owned expenses, and
appraisal fees comprise the majority of this decrease.
The net REO expense and writedowns totaled ($118,000) and
($82,000) and $319,000 and $374,000 for the three and six months
ended June 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 83.08% and 84.18% and 74.57% and 79.66% for the three
and six months ended June 30, 1995 and 1994, respectively.
Provision for Loan Losses
For the six months ended June 30, 1995 and 1994, the Company
recorded $510,000 and $2,875,000 respectively, as provision for
loan losses. The Company's provision for loan losses during the
second quarter of 1995 was $155,000 compared to $2,075,000 during
the second quarter of 1994. The 1995 decrease in loan loss
provision corresponds to the $8 million decrease in classified
loans, from $31.3 million at June 30, 1994 to $23.6 million at
June 30, 1995, an improvement of 24.6%.
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
<PAGE>
current and anticipated economic conditions. Although management
believes the level of the loan loss reserve as of June 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.
At June 30, 1995, the loan loss reserve was $6,617,000 as
compared to $8,261,000 at December 31, 1994. The ratio of the
loan loss reserve to total outstanding loans and leases was 4.25%
at June 30, 1995 and 4.92% at December 31, 1994. The coverage
ratio, or the ratio of loan loss reserves to non-performing
assets, was 51.63% and 74.0% at June 30, 1995 and December 31,
1994, respectively. Despite the decrease in the coverage ratio,
management believes the loan loss reserve is adequate due to the
belief that certain nonaccrual loans are not considered to be
impaired. Loans charged off during the three and six months
ended June 30, 1995 were $1,963,000 and $2,361,000, respectively,
while loan recoveries totaled $110,000 and $207,000 during the
same periods. Loans charged off during the three and six months
ended June 30, 1994 and loan recoveries for the corresponding
periods were $6,021,000 and $7,590,000 and $102,000 and $171,000,
respectively.
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 June 30, 1995, and December 31, 1994, the Company had TDRs
totaling $2,950,000 and $1,968,000, respectively, of which
$2,583,000 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 June 30, 1995 and December
31, 1994, the Company had $923,000 and $331,000, respectively, in
loans past due greater than 90 days and still accruing
interest and non-accrual loans of $8,507,000 and
$7,612,000, respectively.
<PAGE>
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 June 30, 1995, the Company's total investment in and quarterly
average balance of impaired loans was $8,506,000 and $9,566,000,
respectively. During the six months ended June 30, 1995, $nil
interest income was recognized on impaired loans.
Financial Condition
Total assets at June 30, 1995 decreased $6.6 million or 2.56%
from December 31, 1994. Loans and leases decreased $12.3
million or 7.34% from prior year end, primarily due to
construction and other loan payoffs. Investment securities
decreased by $5.2 million or 10.29%. These decreases were
partially offset by increases in cash and due from banks and
federal funds sold totaling $4.33 million, or 37.84%, $4.25
million and 15.74%, respectively.
The Company's REO balances increased from $2,346,000 at
December 31, 1994 to $2,509,000 at June 30, 1995. The
increase in REO reflects the sale of 3 properties offset by the
repossession of 4 properties. At June 30, 1995, the Company's
REO consisted of 4 commercial properties with book values
totaling $1,830,000 and 3 parcels of land zoned for residential
purposes totaling $679,000.
Fixed assets, net of depreciation, increased from $1,917,000 at
December 31, 1994 to $2,150,000 at June 30, 1995 due to the
<PAGE>
purchase of an office building for one of the Company's banking
branches which was offset by increased accumulated depreciation
and amortization.
Total deposits at June 30, 1995 decreased $13.2 million or 5.6%
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
$5.0 million or 7.5%, savings deposits decreased $2.8 million or
%9.45, and time certificates of deposit decreased $4.9 million or
5.58%.
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 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 six months ended June 30, 1995 was 34.7%,
respectively, as compared to 24.57% for the corresponding period
in 1994. The average loan to deposit ratios for the Company at
June 30, 1995 and December 31, 1994 was 67.6%. The increase in
the liquidity ratio is the result of an increase in short term
liquid investments due to the proceeds from the rights offering,
investment securities and a decline in pledged securities,
outgoing cash letters and total assets during the first three and
six months of 1995 as compared to the same period during 1994.
<PAGE>
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 June 30, 1995, total average interest
earning assets decreased from $277,612,000 to $228,478,000, a
decrease of 17.7%, and average interest bearing liabilities
decreased from $197,658,000 to $175,817,000, or 11.0%. The ratio
of average rate sensitive assets to rate sensitive
liabilities was 1.4 at June 30, 1995 and December 31, 1994.
Since 53% 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 40% 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 $2.25 million increase in cash and short term liquid
investments at the Parent company level from December 31, 1994 to
June 30, 1995, as the Company successfully completed a rights
offering during the second quarter of 1995. This cash was
subsequently utilized to purchase $1.750 million in short term
liquid investments for the purpose of providing investment
interest income at the Parent company level. As discussed
further in the section entitled "Agreements with the Office of
the Comptroller of the Currency," the Company was substantially
in compliance with the provisions of the Formal Agreement as of
June 30, 1995, which required VCNB 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. At June 30, 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
<PAGE>
available to meet its principal and interest obligations during
1995. A portion of the rights offering net proceeds will be
utilized to repay the notes payable 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 June 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
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.
<PAGE>
The following sets forth the capital ratios for the Company
and each of the Banks at June 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
Consolidated Company June 30, December 31,
1995 1994
<S> <C> <C>
Company<F1>
Risk-Based Capital Ratio 17.12% 12.61%
Tier 1 Capital Ratio 15.84% 11.32%
Leverage Ratio 10.86% 7.53%
VCNB
Risk-Based Capital Ratio 16.02% 12.21%
Tier 1 Capital Ratio 14.74% 10.92%
Leverage Ratio 10.23% 7.21%
Frontier<F1>
Risk-Based Capital Ratio 14.63% 13.57%
Tier 1 Capital Ratio 13.35% 12.29%
Leverage Ratio 9.45% 8.32%
</TABLE>
[FN]
<F1> In accordance with recent guidance from the Federal
Financial Institutions Examination Council, regulatory capital
includes $720,000 and $756,000, at June 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 proceeds of $6,500,000 were wired to the Parent on June 29,
1995. Shareholders of record on May 10, 1995, received 1.0 right
for each 3.17 shares of common stock held on the record date.
Each right entitled the holder to purchase 1.0 share of common
stock for $2.25. 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, develop 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
<PAGE>
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,
required VCNB to achieve a Tier 1 capital ratio of 12.00% and a
leverage ratio of 7.00% by September 30, 1994. Toward that
end, the Company completed a rights offering of $6,500,000 as
discussed more fully above. 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. $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 contribution of a portion of the net proceeds from
the rights offering 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,
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
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. Any non-compliance with the requirements of the
<PAGE>
Formal Agreement, Consent Order or MOU could result in
penalties or further regulatory restrictions.
<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.
<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 August 14, 1995 By:
/s/ Richard S. Cupp
-------------------------
Richard S. Cupp
President/Chief
Executive Officer
Date August 14, 1995 By:
/s/ Simone Lagomarsino
-------------------------
Simone Lagomarsino
Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1995
<PERIOD-START> APR-01-1995 JAN-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 15,772 15,772
<INT-BEARING-DEPOSITS> 695 695
<FED-FUNDS-SOLD> 31,250 31,250
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 23,828 23,828
<INVESTMENTS-CARRYING> 21,594 21,594
<INVESTMENTS-MARKET> 21,609 21,609
<LOANS> 155,614 155,614
<ALLOWANCE> 6,617 6,617
<TOTAL-ASSETS> 251,166 251,166
<DEPOSITS> 223,184 223,184
<SHORT-TERM> 125 125
<LIABILITIES-OTHER> 1,661 1,661
<LONG-TERM> 0 0
<COMMON> 36,625 36,625
0 0
0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 251,166 251,166
<INTEREST-LOAN> 4,149 8,202
<INTEREST-INVEST> 671 1,398
<INTEREST-OTHER> 368 739
<INTEREST-TOTAL> 5,188 10,339
<INTEREST-DEPOSIT> 1,545 3,112
<INTEREST-EXPENSE> 1,545 3,116
<INTEREST-INCOME-NET> 3,643 7,223
<LOAN-LOSSES> 355 510
<SECURITIES-GAINS> 0 6
<EXPENSE-OTHER> 3,621 6,956
<INCOME-PRETAX> 273 797
<INCOME-PRE-EXTRAORDINARY> 273 797
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 273 797
<EPS-PRIMARY> .04 .13
<EPS-DILUTED> .04 .12
<YIELD-ACTUAL> 6.18 6.21
<LOANS-NON> 10,265 8,507
<LOANS-PAST> 0 923
<LOANS-TROUBLED> 2 0
<LOANS-PROBLEM> 33,652 23,758
<ALLOWANCE-OPEN> 8,261 8,261
<CHARGE-OFFS> 398 2,361
<RECOVERIES> 96 207
<ALLOWANCE-CLOSE> 8,314 6,617
<ALLOWANCE-DOMESTIC> 8,314 6,617
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
