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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Commission File No.
Ended June 30, 1994 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
OXNARD, CALIFORNIA 93030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 981-2600
Securities registered pursuant to Section 12(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, 1994 - Common stock no par value; issued and
outstanding: 6,333,835 shares.
Total No. of page: 19
Exhibit Index at page: 18
=============================================================<PAGE>
Ventura County National Bancorp
INDEX
June 30, 1994
Part 1. Financial Information 3
Item I. Financial Statements 4
Consolidated Balance Sheets at June 30, 1994
and December 31, 1993 4
Consolidated Statements of Operations for the
three and six months ended June 30, 1994 and 1993 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1994 and 1993 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2 Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 11
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
Part 1. Financial Information
The Consolidated Balance Sheet at June 30, 1994, the Consolidated
Statements of Operations for the three and six months ended
June 30, 1994 and 1993 and the Consolidated Statements of Cash
Flows for the six months ended June 30, 1994 and 1993 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
<TABLE>
<CAPTION>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands of dollars)
June 30, December 31,
1994 1993
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $16,944 $ 15,943
Federal Funds Sold 38,000 18,000
Interest Bearing Deposits with
Other Financial Institutions 1,486 2,180
Securities held-to-maturity 8,648 --
Securities available-for-sale 23,043 40,775
Loans and Leases,
Net of Unearned Income 202,903 267,514
Less: Loan Loss Reserve 9,769 14,313
------- -------
Net Loans and Leases 193,134 253,201
Premises and Equipment, Net 1,636 1,687
Other Assets 10,845 8,743
------- --------
TOTAL ASSETS $293,736 $340,529
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY Deposits:
Non-Interest Bearing Demand $ 85,087 $ 99,502
Interest Bearing Demand and
Savings 88,811 101,224
Time 99,088 117,563
------- -------
Total Deposits 272,986 318,289
Notes Payable 125 125
Other Liabilities 1,908 1,745
------- -------
Total Liabilities 275,019 320,159
Commitments and Contingencies
Shareholders' Equity:
Contributed Capital,
including common
stock of no par value.
Authorized, 20,000,000 shares;
Issued 6,333,835 30,949 30,949
Unrealized Loss on Securities (898) (122)
Retained Earnings (11,334) (10,457)
-------- --------
Total Shareholders' Equity 18,717 20,370
------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $293,736 $340,529
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.<PAGE>
<TABLE>
<CAPTION>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands of dollars, except per share amounts)
Three Months Six Months
Ended June 30 Ended June 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest Income:
Loans and Leases $4,885 $6,127 $9,741 $12,395
Interest on Deposits
with Other Financial
Institutions 21 73 48 152
Taxable Investments 419 500 836 1,017
Federal Funds Sold 268 116 360 131
------ ------ ------ -------
Total Interest Income 5,593 6,816 10,984 13,695
Interest Expense:
Deposits 1,551 2,332 3,203 4,464
Other Borrowings (2) 108 73 353
------ ------ ------ -------
Total Interest Expense 1,549 2,440 3,210 4,817
------ ------ ------ -------
Net Interest Income 4,044 4,376 7,774 8,878
Provision for Loan
Losses 2,075 4,326 2,875 8,351
------ ------ ------ -------
Net Interest Income
(Loss) After Provision
for Loan Losses 1,969 (50) 4,899 527
Other Income:
Service Charges on
Deposit Accounts 301 380 624 804
Loan Fees (174) 288 102 645
Miscellaneous Fees 86 151 209 291
Other 1,743 401 2,164 999
------ ------ ------ -------
Total Other Income 1,956 1,220 3,099 2,739
Other Expenses:
Salary and Employee
Benefits 1,453 1,389 3,554 3,501
Net Occupancy 516 673 1,040 1,346
Equipment 210 315 429 650
Other 2,295 3,165 3,638 4,702
------ ------ ------ -------
Total Other Expenses 4,474 5,542 8,661 10,199
Income (Loss) Before
Income Taxes (549) (4,272) (663) (6,933)
Applicable Income
Taxes (Benefit) 214 (1,602) 214 (2,687)
------ ------ ------ ------
Net Income (Loss) ($763) $2,670) ($877) $4,246)
====== ====== ====== ======
Net Income (Loss)
Per Share ($0.12) ($0.48) ($0.14) ($0.76)
</TABLE>
See accompanying notes to Consolidated Financial Statements.<PAGE>
<TABLE>
<CAPTION>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands of dollars)
For the six months ended: June 30, 1994 June 30, 1993
<S> <C> <C>
Cash flows from operating
activities:
Net income (Loss) ($877) ($4,246)
Gain on sale of
Mortgage Servicing (1,443) 0
Gain on sale of
merchant card (174) 0
Gain on sale of SBA loans (111) (325)
Adjustments to reconcile
net income to cash flows
from operating activities:
Depreciation and 340 1,157
Provision for loan losses 2,875 8,351
Change in deferred loan fees (317) (44)
Amortization of investment
premium, net of investment
discount 275 109
Loss on sale of investment
securities 0 15
Loss on sale of investment
securities available for sale 150 0
Loss (gain) on sale of REO 15 (1)
REO writedowns 311 1,011
Change in other assets (2,748) (3,034)
Change in other liabilities 163 127
Decrease in deferred
compensation related to ESOP 0 296
--------- ---------
Net cash provided by
operating activities (1,541) 3,416
Cash flows from investing activities:
Proceeds from sale of investment
securities 0 1,003
Proceeds from sale of investment
securities available-for-sale 8,736 0
Principal reductions from
investment securities 0 4,772
Principal reductions from
investment securities
available-for-sale 233 0
Principal reductions from
investment securities
held-to-maturity 3,384 0
Purchases of investment securities 0 (12,010)
Purchases of investment securities
available-for-sale (4,474) 0
Purchase of premises and equipment (322) (340)
Proceeds from sales of premises
and equipment 24 55
Proceeds from sale of
merchant card 174 0
Proceeds from sale of REO properties 1,571 833
Net decrease in loans and leases
made to customers 46,813 18,681
Increase in fed funds sold (20,000) (29,000)
Decrease in interest bearing
deposits with other
financial institutions 694 2,080
Proceeds from sale of
nonperforming loans 9,056 0
Proceeds from sale of SBA loans 193 436
Proceeds from sale of servicing 1,763 0
------ -------
Net cash provided by (applied to)
investing activities 45,845 (13,491)
Cash flows from financing activities:
Change in demand and savings
deposits (26,828) 912
Change in time deposits (18,475) 1,776
Change in short term borrowings 0 (800)
Change in notes payable 0 (296)
------ -------
Net cash (applied to) provided
by financing activities (45,303) 1,592
Net increase (decrease)
in cash and cash equivalents 1,001 (8,483)
------ --------
Cash and Cash Equivalents at
December 31 15,943 38,704
======= =======
Cash and Cash Equivalents at
June 30 $16,944 $30,221
</TABLE>
See accompanying notes to Consolidated Financial Statements.<PAGE>
VENTURA COUNTY NATIONAL BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1994
Note A. Basis or 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 of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the
three and six months ended June 30, 1994 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1994. For further information, refer to the
Consolidated Financial Statements and footnotes included in the
Company's Annual Report for the year ended December 31, 1993.
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 Commercial Finance 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 to be classified in three
categories and accounted for as follows: 1) debt securities for
which the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported
at amortized cost; 2) debt and equity securities that are bought
and held principally for the purpose of selling in the near term
are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings; and 3) debt
and equity securities not classified as either held-to-maturity
securities or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in
a separate component of shareholders' equity. The Company had no
trading securities at June 30, 1994 or December 31, 1993.
Mortgage-backed securities consist entirely of Federal Home Loan
Mortgage Corporation backed securities. The Company did not have
structured notes, CMOs or other derivative products in the
portfolio at June 30, 1994 or December 31, 1993. Unrealized losses
totaling $898,000 and $122,000 at June 30, 1994 and December 31,
1993, respectively, were due to the interest rate environment; as
such, these unrealized losses were deemed temporary in nature.
The amortized cost basis, gross unrealized holding gains and losses
and estimated market values of securities-available-for-sale at
June 30, 1994 and December 31, 1993 are as follows:
Securities-Available-for-Sale
(in thousands of dollars)
<TABLE>
<CAPTION>
Amortized Gross Gross
Cost Unrealized Unrealized
Holding Holding Market
Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 1994
U.S. Government
Securities $ 4,224 $ 0 $ 63 $ 4,161
Mortgage Backed
Securities 19,717 0 835 18,882
------- ------- -------- -------
$23,941 $ 0 $ 898 $23,043
======= ======= ======== =======
December 31, 1993
U.S. Government
Securities $ 0 $ 0 $ 0 $ 0
Mortgage Backed
Securities 38,597 56 178 38,475
------- ------- -------- -------
$38,597 $ 56 $ 178 $38,475
======= ======= ======== =======
</TABLE>
As a result of a decline in the market value of investment
securities-available-for-sale, the Company recorded an unrealized
loss totaling $898,000 in shareholders' equity on the consolidated
balance sheet at June 30, 1994, an increase of $776,000 from
December 31, 1993.
The amortized cost basis, gross unrealized holding gains and losses
and estimated market values of securities-held-to-maturity at June
30, 1994 are as follows:
Securities-Held-to-Maturity
(in thousands of dollars)
<TABLE>
<CAPTION>
Amortized Gross Gross
Cost Unrealized Unrealized
Holding Holding Market
Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 1994
U.S. Government
Securities $ 250 $ 0 $ 0 $ 250
Mortgage Backed
Securities 6,823 0 343 6,480
Federal Reserve Bank
& FHLB Stock 1,575 0 0 1,575
------ ------ ------ ------
$8,648 0 $ 343 $8,305
====== ====== ====== ======
</TABLE>
Securities-held-to-maturity at December 31, 1993 included Federal
Reserve Bank and FHLB stock carried at $2,300,000, which
approximates market. At June 30, 1994, all debt securities-held-to-maturity
and available-for-sale mature after one year and before
five years. During the six months ended June 30, 1994, the Company
received $8,736,000 in proceeds from the sale of investment
securities-available-for-sale, resulting in gross losses of
$150,000.
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, 1994, the Banks had outstanding loan commitments of
$29,708,000 and letters of credit outstanding in the amount of
$3,055,000.
Note D. Lease Commitments
The Company has commitments for non-cancelable operating leases of
premises and equipment. Rental payments for the six months ended
June 30, 1994 and 1993 were $888,000 and $735,000, respectively.
Note E. Income Tax Provisions
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 six months ended June 30, 1994 and 1993 were 6,333,835 and
5,614,255, respectively.
Note G. Significant Second Quarter Events
The Company sold its mortgage servicing rights for a gain of
$1,443,000 in May 1994 and also sold its mortgage origination unit
in June 1994 in return for residual income on future loan
originations. In addition, the Company completed a bulk sale of
$14.1 million in non-performing loans in May 1994 which resulted in
a charge of $1.5 million to the loan loss provision.
Note H. Statement of Cash Flows
For the three and six months ended June 30, 1994 and 1993, the
Company paid approximately $1,612,000 and $3,289,000 and $2,661,000
and $4,995,000 in interest, respectively. The Company paid no
income taxes in 1994 and paid $230,000 and $70,000 in income taxes
during the three and six months ended June 30, 1993. The Company
acquired $4,267,000 and $4,488,000 in real estate owned through
foreclosures during the three and six months ended June 30, 1994.
<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 managements 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, 1994 and for the three and six months
ended June 30, 1994 and 1993. The discussion should be read in
conjunction with the Company's Consolidated Financial Statements
and notes thereto.
General
At June 30, 1994, the Company had total assets of $293,736,000 and
a net loss of $763,000 or $0.12 per share for the three months
ended June 30, 1994 and a net loss of $877,000 or $0.14 per share
for the six months ended June 30, 1994, as compared to total assets
of $340,529,000 at December 31, 1993 and net losses of $2,670,000
or $0.48 per share and $4,246,000 or $0.76 per share for the
corresponding periods of 1993. The significant improvement in
operating results for the three and six months ended June 30, 1994,
as compared to the three and six months ended June 30, 1993 were
due to a substantial reduction in the contribution to the loan loss
reserve, increased non-interest income and reduced non-interest
expenses.
Net Interest Income and Net Income
Total interest income for the six months ended June 30, 1994
decreased $2,711,000 or 19.8% over the six month period ended June
30, 1993 to $10,984,000 while total interest expense decreased
$1,807,000 or 36.0% to $3,210,000. The yield on interest earning
assets and the cost of funds was 7.5% and 2.2%, respectively, for
the six months ended June 30, 1994 versus a 7.9% yield on interest
earning assets and a 2.9% cost of funds for the corresponding
period of 1993. Net interest income decreased by $904,000 or 10.4%
to $7,774,000 for the six months ended June 30, 1994 as compared to
the six months ended June 30, 1993. The Company's net interest
margin increased from 5.0% to 5.2% for the six months ended June
30, 1993 and 1994, respectively. Net interest income decreased by
$228,000 or 5.3% to $4,044,000 for the three months ended June 30,
1994 as compared to the three months ended June 30, 1993. The
Company's net interest margin increased from 4.9% to 5.6% for the
three months ended June 30, 1993 and 1994, respectively. The
decrease in total and net interest income is the result of a
significant decrease in average interest earning assets. The
decrease in interest expense is due to a decline in total interest
bearing liabilities and interest rates on deposit products since
June 30, 1993. For the six months ended June 30, 1994 and 1993,
net loan fees of $160,000 and $49,000, respectively, were amortized
to interest income.
Other Income
Other income increased $360,000 to $3,099,000 for the six months
ended June 30, 1994, a 13.1% increase over the corresponding period
in 1993. Service charges on deposit accounts decreased $180,000
or 22.4% to $624,000 for the six months ended June 30, 1994, as
compared to the corresponding period in 1993, as a result of
customers maintaining higher average balances to offset service
charge assessments. Loan fees decreased from $645,000 for the six
months ended June 30, 1993 to $102,000 for the six months ended
June 30, 1994, reflective of a significant decrease in mortgage
loan originations and related fee income and a charge of $330,000
related to purchased mortgage servicing. The Company sold its
mortgage servicing rights for a gain of $1,744,000 in May, 1994 and
also sold its mortgage origination unit in June, 1994 in return for
residual income on future loan originations. Miscellaneous fee
income decreased from $291,000 for the six months ended June 30,
1993 to $209,000 for the six months ended June 30, 1994. Other fee
income increased from $999,000 to $2,164,000 for the six months
ended June 30, 1993 and 1994, respectively, due to the gain on sale
of mortgage servicing and a gain of $175,000 on the sale of the
merchant credit card operation in March, 1994, which were offset by
a decrease in gains on the sale of SBA loans during the comparative
periods.
Other income increased $643,000 to $1,863,000 for the three months
ended June 30, 1994, a 52.7% increase over the corresponding period
in 1993. The increase is a result of the gain on the sale of
mortgage servicing rights as discussed above, which was offset by
lower service charge, miscellaneous and other income from the sale
of SBA loans.
Other Expenses
Total other expenses decreased from $9,998,000 to $8,661,000 for
the six months ended June 30, 1993 and 1994, respectively. Salary
and employee benefit expense increased by $53,000 or 1.5% from
$3,501,000 for the six months ended June 30, 1993 to $3,554,000 for
the corresponding period in 1994 as a result of a decline in
deferred loan origination costs, which was partially offset by a
decrease in salary expense as a result of staff reductions. There
was a decline in total employees from 201 to 158 at June 30, 1993
and 1994, respectively, and a decrease in employee benefits expense
as ESOP contributions were replaced in 1994 with 401K matching
contributions. The Company also adopted Statement of Position
("SOP") 93-6 in 1994 which provides that future ESOP contributions,
if any, shall be expensed at fair market value of the Common Stock
at the time of the contribution rather than the historical cost of
$9.00 per share. Adoption of SOP 93-6 had no impact on results of
operations during 1994. The extent to which the adoption of SOP
93-6 will affect the Company's results of operations depends on the
level of future ESOP contributions, if any, and the market value of
the Common Stock, neither of which can be determined at this time.
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 $418,000 and $889,000 at June 30, 1994 and
1993, respectively.
Occupancy expense decreased from $1,254,000 to $1,040,000 for the
six months ended June 30, 1993 and 1994, respectively, as a result
of a decrease in amortization expense related to leased space and
an increase in income from subleases. Equipment expense decreased
from $619,000 to $429,000 for the six months ended June 30, 1993
and 1994, respectively, primarily due to a significant decrease in
depreciation expense.
A decrease in net real estate owned (REO) expense of $792,000
accounts for the majority of the $986,000 or 21.3% decrease in
other expenses for the six months ended June 30, 1994 over the
corresponding period in 1993. Total other expense expressed as a
percentage of net interest income plus other income, commonly
referred to as the efficiency ratio, was 79.7% and 87.6% for the
six month ended June 30, 1994 and 1993, respectively.
Total other expenses decreased from $5,438,000 to $4,381,000 for
the three months ended June 30, 1993 and 1994, respectively. This
significant decrease was largely attributable to a decline in REO
expense, while decreases were also realized in salary, occupancy
and equipment expenses.
Loan Loss Reserve and Non Performing Loans
The Company maintains a loan loss reserve which it considers
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 June 30, 1994 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.
For the six months ended June 30, 1994, the provision for loan
losses was $2,875,000, as compared to $8,351,000 for the
corresponding period in 1993. For the three months ended June 30,
1994, the provision for loan losses was $2,075,000, as compared to
$4,326,000 for the corresponding period in 1993. At June 30, 1994,
the loan loss reserve was $9,769,000 as compared to $14,313,000 at
December 31, 1993. The ratio of the loan loss reserve to total
outstanding loans and leases was 4.80% at June 30, 1994 and 5.35%
at December 31, 1993. The level of loan loss reserves reflects 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
Department to improve overall asset quality.
Non-performing loans are those on which the borrower fails to
perform under the original terms of the obligation. The Company's
non-performing loans fall within three categories: restructured
loans, loans past due greater than 90 days and still accruing and
loans on non-accrual status. As of June 30, 1994, and December 31,
1993, the Company had restructured loans of $697,000 and $348,000,
respectively, on which the terms have been renegotiated to provide
for a reduction or a deferral of interest or principal payments on
concessionary terms. Those renegotiated terms include, in some
instances, strengthening the collateral underlying the loan. All
restructured loans are current and performing according to the
negotiated terms.
Loans are generally 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, or the loan is in the process of renewal in the normal
course of business, in which case the Company continues to accrue
interest. Loans are placed on non-accrual status earlier, if there
is doubt as to the collectability of all amounts due according to
the contractual terms of the loan agreement. At June 30, 1994 and
December 31, 1993, the Company had $24,000 and $552,000,
respectively, in loans past due greater than 90 days and still
accruing interest and non-accrual loans of $9,577,000 and
$18,939,000, respectively. The Company's REO balances increased
from $2,229,000 at December 31, 1993 to $4,592,000 at June 30,
1994. The decrease in non-accrual loans from December 31, 1993 to
June 30, 1994 reflects the bulk sale of $14.2 million in
non-performing loans in May, 1994 which resulted in a charge of
$1.5 million to the loan loss provision and the pay-off or
restoration to performing status of other credits. The increase in
REO reflects the repossession of several properties which greatly
improved the Company's ability to resolve those impaired assets.
Non-performing loans totaled $10,298,000 at June 30, 1994 or 5.1%
of total outstanding loans and leases, as compared to $19,839,000
or 7.4% of total loans and leases at December 31, 1993.
Loans charged off during the six months ended June 30, 1994 and
1993 totaled $7,590,000 and $1,825,000, respectively, or 3.2% and
0.60% of average outstanding loans and leases, respectively. The
level of charge offs in 1994 is largely attributable to the bulk
sale of non-performing loans discussed above.
For the six months ended June 30, 1994 and 1993, loans and lease
recoveries were $171,000 and $48,000, respectively. Loans charged
off during the three months ended June 30, 1994 and 1993 totaled
$6,021,000 and $1,442,000, respectively, while loans and lease
recoveries were $102,000 and $32,000, respectively.
Taxes
Applicable tax benefits for the six months ended June 30, 1994 were
offset by a tax valuation allowance and an additional charge of
$214,000 was taken to increase the tax valuation allowance in
accordance with the provisions of SFAS 109 and to reflect the
filing of the Company's 1993 tax returns. Applicable tax benefits
for the six months ended June 30, 1993 were $2,686,000.
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 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. Average liquidity as a percentage of average assets
of the Company during the six months ended June 30, 1994 was 20.1%
as compared to 11.1% for the corresponding period in 1993. The
loan to deposit ratios for the Company at June 30, 1994 and
December 31, 1993 were 74.6% and 84.0%, respectively. The increase
in the liquidity ratio and decrease in the loan to deposit ratio is
the result of a decrease in pledged securities and a decline in
loans and total assets during the first six months of 1994 as
compared to the same period during 1993.
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. Interest rate sensitivity is discussed
further in the section entitled "Interest Earning Assets, Interest
Bearing Liabilities, Other Assets and Other Liabilities".
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" Parent may owe a reimbursement to VCNB. There was
no material change in cash at the Parent company level from
December 31, 1993 to June 30, 1994.
Interest Earning Assets, Interest Bearing Liabilities, Other Assets
and Other Liabilities
From December 31, 1993 to June 30, 1994, total interest earning
assets decreased from $328,647,000 to $274,872,000, a decrease of
16.4%, and interest bearing liabilities decreased from $218,912,000
to $188,024,000, or 14.2%. The ratio of rate sensitive assets to
rate sensitive liabilities was 1.4 at June 30, 1994 and December
31, 1993. Since 65% 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, as assets reprice faster than
liabilities. 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 55% of the
variable rate loans to mitigate the affect on net interest margin
if interest rates decline.
Average total loans and leases, net of unearned income, were
$239,987,000 for the six months ended June 30, 1994, a 21.7%
decrease from the average balance of $306,378,000 for the six
months ended June 30, 1993. Average earning assets as a percent of
total average assets for the six months ended June 30, 1993 and
1994, increased from 92.7% to 94.2%, respectively.
Average interest bearing liabilities decreased from $273,886,000 to
$212,231,000 for the six months ended June 30, 1993 and 1994,
respectively. Average deposits decreased from $336,970,000 to
$292,852,000 or 13.1 % for the six months ended June 30, 1993 and
1994, respectively. In addition, average non-interest bearing
deposits as a percent of total average deposits increased from
24.6% at June 30, 1993 to 27.7% at June 30, 1994, due to a
significant decrease in interest bearing time deposits. Average
certificates of deposit greater than $100,000 decreased 36.2% to
$37,894,000 or 12.9% of average deposits for the six months ended
June 30, 1994, as compared to $59,398,000 or 17.6% of average
deposits for the six months ended June 30, 1993. The Company
discontinued the issuance of commercial paper on December 31, 1993.
Average commercial paper sold for the first six months of 1993 was
$6,773,000. Average Federal Funds purchased for the six months
ended June 30, 1994 declined to $88,000, compared to $2,774,000
for the corresponding period in 1993. In 1993, the Company retired
the remaining principal on the ESOP loan. Principal outstanding on
the ESOP loan was $1,892,000 at June 30, 1993.
Fixed assets, net of depreciation, decreased slightly from
$1,687,000 at December 31, 1993 to $1,636,000 at June 30, 1994.
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, 0.6% at June 30,
1994 and 0.5% at December 31, 1993, respectively, the potential for
inflated earnings resulting from understated depreciation charges
is minimal. High inflation rates could impact other expense items,
such as salaries and occupancy expense.
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 I 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 I risk based capital ratio of 4.0% and a
total risk based capital ratio of 8.0%. Tier I capital consists
primarily of common stock, retained earnings and perpetual
preferred stock, less goodwill and 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 I plus Tier 2 capital;
however, at least 50% of total risk based capital must be comprised
of Tier I 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 I capital to adjusted average
assets. The Tier I capital ratio is based on Tier 1 capital to
risk weighted assets. The total risk-based capital ratio is based
on Tier I plus Tier 2 capital to risk weighted assets. The
following sets forth the capital ratios for the Company and each of
the Banks at June 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
Consolidated Company June 30, 1994 December 31, 1993
<S> <C> <C>
Risk-Based Capital Ratio 10.28%<F1> 8.73%
Tier 1 Capital Ratio 8.99%<F1> 7.43%
Leverage Ratio 6.62%<F1> 6.02%
VCNB
Risk-Based Capital Ratio 9.55% 7.83%
Tier I Capital Ratio 8.26% 6.52%
Leverage Ratio 6.16% 5.49%
Frontier
Risk-Based Capital Ratio 11.88%<F1> 11.31%
Tier I Capital Ratio 10.60%<F1> 10.03%
Leverage Ratio 7.61%<F1> 7.30%
<FN>
<F1> In accordance with recent guidance from the Federal
Financial Institutions Examination Council, regulatory capital
includes $792,000, which represents a cumulative effect
adjustment to reduce the balance of deferred gains on the sale of
SBA loans. This adjustment is not reflected in the accompanying
financial statements prepared in accordance with generally
accepted accounting principles.
</TABLE>
Agreements with the Office of the Comptroller of the Currency
VCNB entered into a Formal Agreement with the OCC on March 19,
1993 while 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
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 I 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 I capital ratio of 12.00% and a
leverage ratio of 7.00% by September 30, 1994. The Company has
engaged an investment banking firm to evaluate external sources
of capital and the sale of non-strategic assets, including
Frontier. The Formal Agreement amendment further 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
compliance with the 12% Tier I Capital Ratio requirement, if
achieved from sources outside VCNB, will satisfy the
reimbursement requirement. Until such time as VCNB is
reimbursed, the OCC must authorize any payment from VCNB to
Parent.
VCNB and Frontier are in compliance with or in the process of
complying with all of the items required under the Formal
Agreement and Consent Order, respectively, and management does
not believe the Formal Agreement and Consent Order will have any
adverse material impact on 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 or Consent Order could
result in penalties or further regulatory restrictions.<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
None.
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.
The Annual Meeting of Shareholders was held on May 4, 1994. The
following four (Class III) directors were reelected for a three
year term, having received the votes as indicated:
<TABLE>
<CAPTION>
Name Votes For Withhold
Authority
<S> <C> <C>
Richard S. Cupp 4,452,983 74,728
W. E. Hartman 4,424,257 103,454
James B. Hussey 4,196,109 331,502
George H. Rees 4,450,530 77,181
</TABLE>
In addition, non-management nominee Ed Jones received 180,488
votes.
The following directors' terms of office continued after the
meeting: Class I directors Michael Antin, James M. Davis and
Raymond E. Swift and Class II directors Bart M. Hackley, Jr.,
Richard A. Lagomarsino, Zella A. Rushing and Ralph R. Bennett.
Item 5. Other Information.
The Company announced the signing of a letter of intent by
Peninsula National Bank to buy Frontier Bank, N.A., the Company's
Orange County subsidiary. This prospective sale, which represents
one of the major alternatives to raising the capital needed to
comply with VCNB's Formal Agreement with the OCC, requires the
completion of a definitive agreement and regulatory approval.
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
accompanying Notes to the Consolidated Financial Statements.
(b) Reports on Form 8-K. Form 8-K filed June 9, 1994.
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: March 28, 1995 By: /s/ Richard S. Cupp
President/Chief Executive Officer
Date: March 28, 1995 By: /s/ Simone Lagomarsino
Chief Financial Officer
