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U.S.SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
Commission File: 0-11090
NAPA NATIONAL BANCORP
(Exact name of small business issuer in its charter)
California 94-2780134
(State of incorporation) (I.R.S. Employer Identification No.)
901 Main Street, Napa, California, 94559
(Address of principal executive offices)
Issuer's telephone number: (707) 257-2440
Securities registered under Section 12(b) of Act: None
Securities registered under Section 12(g) of Act: Common Stock, Without Par
Value (Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: X No:
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
Revenue earned for the year ended December 31, 1997: $10,815,000
Aggregate market value of voting stock and non-voting stock held by
nonaffiliates of the registrant, based on a market value of $16.00 per share as
of February 28, 1998: $2,822,400
Number of shares of the registrant's sole class of common equity (Common Stock,
without par value), as of February 28, 1998: 783,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for Registrant's 1998 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A are incorporated
by reference into Part III of this report.
Transitional small business disclosure format: Yes No X
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TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits
SIGNATURES
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL.
Certain statements in this Annual Report on Form 10-KSB,(excluding statements
of fact and historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Napa
County and the wine industry; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud; asset/liability
matching risks and liquidity risks; and changes in the securities markets. See
also "Certain Additional Business Risks" included herein in Item I and other
risk factors discussed elsewhere in this Report.
Napa National Bancorp (the "Company") was incorporated in 1981 in the State of
California and is headquartered in Napa, California. The Company is a bank
holding company. Its subsidiary, Napa National Bank (the "Bank"), was organized
as a national banking association in 1982. At December 31, 1997, the Company
had consolidated assets of $130,819,000 and shareholders' equity of $8,587,000.
The Bank is a full service commercial bank with three offices serving the Napa
Valley area in Northern California. The Company itself does not engage in any
business activities other than the ownership of the Bank and the ownership of
Napa National Leasing Corporation, an inactive subsidiary authorized to engage
in the leasing of equipment and other personal property (the "Leasing Company").
W. Clarke Swanson, Jr., Chairman of the Board and CEO, beneficially owns
approximately 70% of the outstanding shares of Common Stock of the Company. The
Company is registered under the Bank Holding Company Act of 1956, as amended.
The Bank provides a wide range of commercial banking services to individuals,
professionals and small- and medium-sized businesses in the Napa Valley area.
The services provided include those typically offered by commercial banks, such
as: checking, interest checking, savings, and time deposit accounts, commercial,
construction, personal, home improvement, mortgage, automobile and other
installment and term loans, travelers' checks, night depository facilities, wire
transfers, merchant card services, courier service and automated teller
machines.
The Bank does not provide international banking or trust services but has
arranged for its correspondent banks to offer these and other services to its
customers on an as needed basis.
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Individuals, small businesses and professionals, manufacturers, distributors,
retailers, wineries, vineyard owners, real estate developers and the Bank's
shareholders currently form the core of the Bank's customer and deposit base. In
order to attract these customers, the Bank offers extensive personalized
contact, specialized services and banking convenience, including Saturday
banking hours.
EMPLOYEES
At December 31, 1997, the Bank employed 74 employees, including 22 officers
and 10 part-time employees. At December 31, 1997, the Company employed one
employee.
NAPA NATIONAL LEASING CORPORATION - COMPANY SUBSIDIARY
This subsidiary was inactive during 1997.
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Bank are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of the Bank cannot be predicted.
Additionally, state and federal tax policies can impact banking organizations.
Applicable California bank and corporation tax rates were recently reduced by 5%
in order to keep California competitive with other western states.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to being affected by the enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other financial institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding Company
Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and
may be examined by, the FRB. The FRB also has the authority to examine the
Company's subsidiaries. The costs of any examination by the FRB are payable by
the Company.
The Company is a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner").
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The FRB has significant supervisory and regulatory authority over the
Company and its affiliates. The FRB requires the Company to maintain certain
levels of capital. See "Capital Standards." The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations or conditions imposed
in writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of the
FRB before it exercises a controlling influence over a bank, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Company is
required to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would be required to obtain
the approval of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership
or control of more than 5% of the voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. A bank holding company, with the approval of
the FRB, may engage, or acquire the voting shares of companies engaged, in
activities that the FRB has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. A bank
holding company must demonstrate that the benefits to the public of the proposed
activity will outweigh the possible adverse effects associated with such
activity.
A bank holding company may acquire banks in states other than its home
state without regard to the permissibility of such acquisitions under state law,
but subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the
requirement that the bank holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount of deposits of
insured depository institutions in the United States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
Banks may also merge across state lines, therefore creating interstate
branches. Furthermore, a bank is now able to open new branches in a state in
which it does not already have banking operations, if the laws of such state
permit such de novo branching.
Under California law,(a) out-of-state banks that wish to establish a
California branch office to conduct core banking business must first acquire an
existing 5 year old California bank or industrial loan company by merger or
purchase; (b) California state-chartered banks are empowered to conduct various
authorized branch-like activities on an agency basis through affiliated and
unaffiliated insured depository institutions in California and other states and
(c) the Commissioner is authorized to approve an interstate acquisition of
merger which would result in a deposit concentration exceeding 30% if the
Commissioner finds that the transaction is consistent with public convenience
and advantage. However, a state bank chartered in a state other than California
may not enter California by purchasing a California branch office of a
California bank or industrial loan company without purchasing the entire entity
or by establishing a de novo California branch office.
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The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See the
section entitled "Restrictions on Dividends and Other Distributions"for
additional restrictions.
Transactions between the Company and the Bank are subject to a number of
other restrictions. FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
The FRB has adopted comprehensive amendments to Regulation Y which became
effective April 21, 1997, and are intended to improve the competitiveness of
bank holding companies by, among other things: (i) expanding the list of
permissible nonbanking activities in which well-run bank holding companies may
engage without prior FRB approval, (ii) streamlining the procedures for well-run
bank holding companies to obtain approval to engage in other nonbanking
activities and (iii) eliminating most of the anti-tying restrictions imposed
upon bank holding companies and their nonbank subsidiaries. Amended Regulation
Y also provides for a streamlined and expedited review process for bank
acquisition proposals submitted by well-run bank holding companies and
eliminates certain duplicative reporting requirements when there has been a
further change in bank control or in bank directors or officers after an earlier
approved change. These changes to Regulation Y are subject to numerous
qualifications, limitations and restrictions. In order for a bank holding
company to qualify as "well-run," both it and the insured depository
institutions that it controls must meet the "well-capitalized" and "well-
managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater; (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
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To qualify as "well-managed": (i) each of the bank holding company, its
lead depository institution and its depository institutions holding 80% of the
total risk-weighted assets of all its depository institutions at their most
recent examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory; (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings; and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
BANK REGULATION AND SUPERVISION
As a national bank, the Bank is regulated, supervised and regularly
examined by the Office of the Comptroller of the Currency ("OCC"). Deposit
accounts at the Bank are insured by Bank Insurance Fund ("BIF"), as administered
by the Federal Deposit Insurance Corporation ("FDIC"), to the maximum amount
permitted by law. The Bank is also subject to applicable provisions of
California law, insofar as such provisions are not in conflict with or preempted
by federal banking law. The Bank is a member of the Federal Reserve System, and
is also subject to certain regulations of the FRB dealing primarily with check
clearing activities, establishment of banking reserves, Truth-in-Lending
(Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B).
The OCC may approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities in
which the parent bank is not permitted to engage. A national bank is permitted
to engage in activities approved for a bank holding company through a bank
operating subsidiary, such as acting as an investment or financial advisor,
leasing personal property and providing financial advice to customers. In
general, these activities are permitted only for well-capitalized or adequately
capitalized national banks.
By comparison, California state-chartered banks are regulated by the
California Department of Financial Institutions ("DFI"). The DFI was created
pursuant to AB 3351, effective July 1, 1997, and combines the State Banking
Department, the Department of Savings and Loan, and regulatory oversight over
industrial loan companies and credit unions with the DFI.
CAPITAL STANDARDS
The OCC and other federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and
credit equivalent amounts of off balance sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.
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In determining the capital level the Bank is required to maintain, the OCC
does not, in all respects, follow generally accepted accounting principles
("GAAP") and has special rules which have the effect of reducing the amount of
capital it will recognize for purposes of determining the capital adequacy of
the Bank.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
common stock, retained earnings, noncumulative perpetual preferred stock, other
types of qualifying preferred stock and minority interests in certain
subsidiaries, less most other intangible assets and other adjustments. Net
unrealized losses on available-for-sale equity securities with readily
determinable fair value must be deducted in determining Tier 1 capital. For
Tier 1 capital purposes, deferred tax assets that can only be realized if an
institution earns sufficient taxable income in the future are limited to the
amount that the institution is expected to realize within one year, or ten
percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, term
preferred stock and other types of preferred stock not qualifying as Tier 1
capital, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off
balance sheet items of 4%.
On September 16, 1997, the FDIC adopted a final rule lowering the risk-
based capital requirements for certain small business loans and leases sold with
recourse. The final rule on small business loans and leases sold with recourse
essentially makes permanent an interim interagency rule in effect since 1995
that reduced the minimum capital levels that institutions must maintain for
those transactions. Under the final rule, a qualifying institution that sells
small business loans and leases with recourse must hold capital only against the
amount of recourse retained. In general, a qualifying institution is one that
is well capitalized under the FDIC's prompt corrective action rules. The amount
of recourse that can receive the preferential capital treatment cannot exceed
15% of the institution's total risk-based capital.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
adjusted average total assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. It is improbable, however, that an
institution with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of the
regulators' rating. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, must be at least 4% or 5%. In addition to these uniform
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risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
The following tables present the capital ratios for the Company and the
Bank, compared to the standards for well-capitalized depository institutions, as
of December 31, 1997 (amounts in thousands except percentage amounts).
<TABLE>
<CAPTION>
The Company
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Actual Well Minimum
--------- Capitalized Capital
Capital Ratio Ratio Requirement
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<S> <C> <C> <C> <C>
Leverage................ $8,587 6.89% 5.0% 4.0%
Tier 1 Risk-Based....... 8,587 9.77 6.0 4.0
Total Risk-Based........ 9,691 11.03 10.0 8.0
</TABLE>
<TABLE>
<CAPTION>
The Bank
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Actual Well Minimum
--------- Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----- -----------
<S> <C> <C> <C> <C>
Leverage................ $8,552 6.86% 5.0% 4.0%
Tier 1 Risk-Based....... 8,552 9.74 6.0 4.0
Total Risk-Based........ 9,656 10.99 10.0 8.0
</TABLE>
Regulators must take into consideration concentrations of credit risk and
risks from non-traditional activities, as well as an institution's ability to
manage those risks, when determining the adequacy of an institution's capital.
This evaluation will be made as a part of the institution's regular safety and
soundness examination. Regulators must also consider interest rate risk (when
the interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency to take prompt corrective action
to resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital ratios.
The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
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Under the prompt corrective action provisions of FDICIA, an insured
depository institution generally will be classified in the following categories
based on the capital measures indicated below:
"Well capitalized" "Adequately capitalized"
- ------------------ ------------------------
Total risk-based capital of Total risk-based capital of
10%; 8%;
Tier 1 risk-based capital Tier 1 risk-based capital of
of 6%; and 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
- ------------------ --------------------------------
Total risk-based capital Total risk-based capital
less than 8%; less than 6%;
Tier 1 risk-based capital Tier 1 risk-based capital
less than 4%; or less than 3%; or
Leverage ratio less than Leverage ratio less than 3%.
4%.
"Critically undercapitalized"
- -----------------------------
Tangible equity to total
assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted. Additionally, a holding company's
inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
the holding company.
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SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound,
possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
The payment of dividends by a national bank is further restricted by
additional provisions of federal law, which prohibit a national bank from
declaring a dividend on its shares of common stock unless its surplus fund
exceeds the amount of its common capital (total outstanding common shares times
the par value per share). Additionally, if losses have at any time been
sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend shall be paid. Moreover, even if a bank's surplus exceeded its common
capital and its undivided profits exceed its losses, the approval of the OCC is
required for the payment of dividends if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by the Bank is
governed by the Bank's ability to maintain minimum required capital levels and
an adequate allowance for loan losses. Regulators also have authority to
prohibit a depository institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including payment of dividends or
other payments under certain circumstances even if such payment are not
expressly prohibited by statute.
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PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such
premiums must be sufficient to repay any borrowed funds within 15 years and
provide insurance fund reserves of $1.25 for each $100 of insured deposits.
FDICIA also provides authority for special assessments against insured deposits.
No assurance can be given at this time as to what the future level of premiums
will be.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective
measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into account
when regulating and supervising other activities.
RECENTLY ENACTED LEGISLATION
The Taxpayer Relief Act of 1997 provides for Education Individual
Retirement Accounts ("Education IRA"), a new type of tax-free savings vehicle to
pay qualified higher education expenses. A maximum of $500 per year may be
contributed to Education IRAs for any beneficiary under the age of 18 years,
provided the contributor has adjusted gross income for the year not exceeding
$95,000 ($150,000 for joint returns). No income tax deduction is provided for a
contribution to an Education IRA. Until a distribution is made from an
Education IRA, earnings on contributions to the account are not subject to tax.
Additional restrictions apply as well.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conversation and Recovery
Act to provide lenders and fiduciaries with greater protections from
environmental liability. In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the liability of lenders under
CERCLA as a result of the enactment of the Asset Conservation, Lender Liability
and Deposit Insurance Protection Act of 1996. California law provides that,
subject to numerous exceptions, a lender acting in the capacity of a lender
shall not be liable under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to undertake a cleanup,
pay damages, penalties or fines, or forfeit property as a result of the release
of hazardous materials at or from the property.
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In 1997, California adopted the Environmental Responsibility Acceptance Act
(Cal. Civil Code (S)(S) 850-855) to facilitate (i) the notification of
government agencies and potentially responsible parties (e.g., for cleanup) of
the existence of contamination and (ii) the cleanup or other remediation of
contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
PENDING LEGISLATION AND REGULATIONS
There are pending legislative proposals to reform the Glass-Steagall Act to
allow affiliations between banks and other firms engaged in "financial
activities," including insurance companies and securities firms.
On September 16, 1997, the FDIC proposed two new rules governing minimum
capital levels that FDIC-supervised banks must maintain against the risks to
which they are exposed. The first proposed rule would make risk-based capital
standards consistent for two types of credit enhancements (i.e., recourse
arrangements and direct credit substitutes) and would require different amounts
of capital for different risk positions in asset securitization transactions.
The second proposed rule would permit limited amounts of unrealized gains on
equity securities to be recognized for risk-based capital purposes.
Certain other pending legislative proposals include bills to let banks pay
interest on business checking accounts, to cap consumer liability for stolen
debit cards, and to give judges the authority to force high-income borrowers to
repay their debts rather than cancel them through bankruptcy.
COMPETITION
In the past, an independent bank's principal competitors for deposits and
loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.
The enactment of the Interstate Banking and Branching Act in 1994 as well
as the California Interstate Banking and Branching Act of 1995 will likely
increase competition within California. Regulatory reform, as well as other
changes in federal and California law will also affect competition. While the
impact of these changes, and of other proposed changes, cannot be predicted with
certainty, it is clear that the business of banking in California will remain
highly competitive.
13
<PAGE>
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Shares of Company Common Stock eligible for future sale could have a dilutive
effect on the market for Company Common Stock and could adversely affect the
market price. The Articles of Incorporation of the Company authorize the
issuance of 20,000,000 shares of common stock, and 1,000,000 shares of preferred
stock of which approximately 783,500 shares of common stock and no shares of
preferred stock were outstanding at December 31, 1997. As of December 31, 1997,
outstanding options to purchase Common Stock were 110,000, and Common Stock
available for grants under the Company's stock option plans was 83,300 shares.
The loan portfolio of the Company is dependent on real estate. At December
31, 1997, real estate served as the principal source of collateral with respect
to approximately 70% of the Company's loan portfolio. A worsening of current
economic conditions or rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing loans and the value of the
available-for-sale investment portfolio, as well as the Company's financial
condition and results of operations in general and the market value for Company
Common Stock. Acts of nature, including earthquakes and floods, which may cause
uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact the Company's financial condition.
The Company is subject to certain operations risk, including, but not limited
to, data processing system failures and errors and customer or employee fraud.
The Company maintains a system of internal controls to mitigate against such
occurrences and maintains insurance coverage for such risks, but should such an
event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan designed to resolve the issue. The Year 2000
problem arises because many software programs were written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize the two-digit date "00" as being
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
14
<PAGE>
The plans to utilize both internal and external resources to attempt to
identify, correct or replace, and test its systems for the Year 2000 compliance.
It is anticipated that all correct action and testing of key systems will be
completed by December 31, 1998. The Company has recently been working on
ensuring the Company's main frame is compliant and receiving confirmation from
vendors have been requested as to their plans for being Year 2000 compliant.
The Bank presently believes that, with modification to existing software
and/or the conversion to new software which is Year 2000 compliant, the Year
2000 problem should not pose significant operational problems for the Company's
computer systems as modified and converted. The Company is expensing all period
costs associated with the Year 2000 problem. To date the expense has not been
significant.
Other significant risks relating to the Year 2000 problem are that of the
unknown impact of this problem on the operations of the Bank's customers and
actions which banking regulators may take. The Bank is making efforts to ensure
that its customer base is aware of the Year 2000 problem. In addition to
seminars and mailings to its customer base, the Bank has amended its Credit
Policy and credit documentation to include consideration regarding the Year 2000
problem. It is not possible to predict the effect of this problem on the
economic viability of its customers and the related impact it may have on the
level of the Bank's provision for possible loan losses in future periods
ITEM 2. DESCRIPTION OF PROPERTY.
The Bank maintains its main offices on leased premises at 901 Main Street in
the Downtown part of Napa, California. The Company opened this banking facility
in 1995. This property is a two story building with an adjacent paved ground
level parking lot. The parking lot is approximately 10,860 square feet. The
lease term runs from December 1, 1994 to November 30, 1999, with three five (5)
year renewal options. The lease provides for inflationary increases in the
monthly rental amount during the renewal periods and also contains options to
purchase the facility at an agreed upon market value during certain defined
periods. The base rent is $9,900.00 per month. The base rent is subject to an
annual adjustment based on the Consumer Price Index beginning on the first day
of January of every year of the first option renewal term beginning in the year
2001. The adjusted rental will not exceed an 8% increase over the adjusted
rental of the preceding year nor will the adjusted rental be less than the
original base rent. Rent paid for the Downtown Napa Office was approximately
$119,000 during 1997. In addition, the Bank pays utilities, insurance and
maintenance relating to the branch.
The Company purchased its Claremont branch building for $558,000 in cash,
including fees, on September 6, 1989. The building, comprised of approximately
5,000 square feet, was remodeled so that it could be put into service as a full
service banking branch. The cost of the remodeling, security systems and
necessary furniture and equipment was approximately $600,000. This Office was
remodeled again in 1995 in order to accommodate the Bank's Electronic Data
Processing and Customer Service Departments. The cost of this remodel was
approximately $50,000.
15
<PAGE>
The Company leases the Bank's approximately 2,400 square foot branch office
located at 1015 Adams Street in downtown St. Helena, California. The lease term
ends in 1998, with two options to extend the term of the lease for five years
each. Rent paid for the St. Helena office was approximately $61,000 during
1997. In addition, the Bank pays utilities, insurance and maintenance relating
to the branch.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1997, neither the Company, the Bank nor the Leasing Company
was a party to, nor was any of their property the subject of, any material
pending legal proceedings, nor are any such proceedings known to be contemplated
by governmental authorities. At the same date, the Bank was involved as
plaintiff in ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is not listed on any exchange or the Nasdaq;
however, there has been limited trading in the Company's Common Stock which the
Company does not believe necessarily represents an established public trading
market. To the Company's knowledge, no broker-dealer other than Round Hill
Securities handles transactions of the Company's Common Stock.
The following table sets forth, for the fiscal quarters indicated, the range
of high and low sales prices, not including broker's commissions, based upon
known information as reported by management. These figures may not include
private transactions. Other than to this extent, there is no established public
trading market in the Company's Common Stock other than with Round Hill
Securities.
16
<PAGE>
<TABLE>
<CAPTION>
SALES PRICES OF THE COMPANY'S
COMMON STOCK
TRADING
YEAR HIGH LOW VOLUME
1997
<S> <C> <C> <C>
Fourth Quarter $16.00 $15.50 8,950
Third Quarter 15.50 14.50 430
Second Quarter 14.50 14.50 4,000
First Quarter 14.50 10.00 7,500
1996
Fourth Quarter $14.50 $14.50 100
Third Quarter 14.50 14.50 19,755
Second Quarter 14.50 14.50 250
First Quarter 10.00 10.00 450
</TABLE>
Because the Company's Common Stock is not listed on any exchange, accurate
trading volumes are difficult to ascertain. Trading volumes shown primarily
reflect known trades involving the Company's Employee Stock Ownership Trust
("ESOT"). The ESOT purchased 20,780 and 19,855 shares in 1997 and 1996,
respectively.
As of February 28, 1998, the outstanding shares of the Company's Common Stock
were held of record by 340 shareholders. The last known trade of the Company's
Common Stock occurred on December 23, 1997, for 100 shares, at a price per share
of $16.00.
During the third quarter of 1996, the Company's ESOT commenced a tender offer
to purchase up to 20,000 shares of the Company's Common Stock. The price of the
offer was set at $14.50 per share. From this offer, the ESOT purchased 19,755
shares of the Company's outstanding Common Stock.
During the first quarter of 1997, the Company declared and paid a cash
dividend of twelve and a half cents ($0.125) per share on outstanding stock.
The first quarter dividend was based on 1996 earnings and amounted to $94,000.
During the beginning of the second quarter of 1997, the Company declared a
second cash dividend of twelve and a half cents ($0.125) per share. This cash
dividend was based on the first quarter earnings of 1997 and amounted to
$96,000. During the third quarter of 1997, the Company declared and paid a
another cash dividend of twelve and a half cents ($0.125) per share for a
total of $97,000. During the fourth quarter of 1997, the Bank paid a $40,000
cash dividend to the Company, providing the Company with a portion of the
funds necessary for the Company to again declare and issue a twelve and a half
cents ($0.125) per share dividend. This fourth quarter dividend was based on
third quarter earnings and was paid to shareholders on December 1, 1997. Total
dividends paid by the Bank to the Company and from the Company to its
shareholders for 1997 amounted to $40,000 and $385,000 respectively. See
"Restrictions on Dividends and Other Distributions" included in Item 1 herein
for a discussion of certain restrictions on the ability of an insured
depository institution to declare dividends and other distributions.
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Certain statements in this Annual Report on Form 10-KSB (excluding statements
of fact and historical financial information) involve forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduces margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Napa
County and the wine industry; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud; asset/liability
matching risks and liquidity risks; and changes in the securities markets. See
also "Certain Additional Business Risks" included in Item 1 herein and other
risk factors discussed elsewhere in this Report.
The following analysis of the Company's financial condition for the years
ended December 31, 1997 and 1996 and results of operation for each of the two
years in the period ended December 31, 1997, should be read in conjunction with
the Consolidated Financial Statements, related Notes thereto and other
information presented elsewhere herein. Since the Company is a bank holding
company whose principal asset is, and is expected to be, the capital stock of
the Bank, the following relates principally to the financial condition and
results of operations of the Bank.
The consolidated financial statements of the Company are prepared in
conformity with generally accepted accounting principles and prevailing
practices within the banking industry. All material intercompany transactions
and accounts have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Average balances, including such balances used in calculating certain financial
ratios, are comprised of average daily balances. All dollar amounts are
rounded, except earnings per share data.
18
<PAGE>
The following presents selected consolidated financial information for the
Company for the five years ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
(IN 000'S EXCEPT EARNINGS PER SHARE AND RATIOS)
STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Total interest income $9,803 $9,173 $8,432 $6,226 $4,831
Total interest expense 3,075 2,814 2,634 1,658 1,551
Provision for loan losses 556 550 323 149 198
Net interest income after
provision for loan losses 6,172 5,809 5,475 4,419 3,082
Other income 1,012 806 800 627 594
Other expense 5,917 5,099 4,409 3,716 3,425
Income before
income tax 1,267 1,516 1,866 1,330 251
Income tax provision (credit) 521 614 765 550 (249)
Net income 746 902 1,101 777 500
Cash Dividends Paid $ 385 $ 378 $ 0 $ 0 $ 0
BALANCE SHEET INFORMATION (AT PERIOD END):
Total assets $130,819 $113,827 $104,851 $86,477 $77,241
Net loans 78,057 78,290 73,374 62,103 54,259
Total deposits 121,461 105,417 96,752 79,378 71,463
Shareholders' equity 8,587 7,971 7,447 6,346 5,569
Shareholders' equity
per share $ 10.96 $ 8.67 $ 8.44 $ 8.41 $ 7.38
SELECTED FINANCIAL RATIOS:
Net interest margin 6.27% 6.75% 6.98% 6.25% 5.38%
Allowance for loan losses
to average loans 1.92% 1.75% 1.93% 1.78% 1.80%
Nonperforming loans to
average loans 3.59% 4.41% 2.11% 1.63% 0.72%
Net charge-offs
to average loans 0.48% 0.60% 0.07% 0.02% 0.06%
Average earning assets to
total average assets 91.26% 92.15% 91.52% 92.00% 91.66%
Return on average assets .63% .94% 1.30% 1.05% 0.81%
Return on average
shareholders' equity 9.50% 11.61% 16.40% 14.02% 9.77%
Average equity to average
assets ratio 6.68% 7.46% 7.27% 6.87% 7.58%
Leverage Ratio (1) 6.86% 7.11% 7.16% 7.28% 7.04%
Total Risk based
capital ratio 10.99% 10.47% 10.40% 10.33% 9.84%
</TABLE>
(1) Calculated based on the Bank's capital and average assets.
The purpose of the following discussion is to address information pertaining
to the financial condition and results of operations of the Company that may not
be apparent from a review of the consolidated financial statements and related
notes. It also incorporates certain statistical information that is required by
Industry Guide 3 promulgated by the Securities and Exchange Commission.
19
<PAGE>
SUMMARY OF FINANCIAL RESULTS
The Company recorded net income of $746,000, or $.97 per share on a fully-
diluted basis for the year ended December 31, 1997 compared to $902,000 or $1.20
per share for the year ended December 31, 1996.
Net income declined in 1997 over 1996 by $156,000, or 17%. The primary reasons
for this decline were due to an increase in noninterest expense of $818,000, or
16%. That increase was partially offset by an increase in net interest income of
$369,000, or 6%, an increase in other income of $206,000 or 25%, and decreases
in taxes of $93,000, or 15%.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table sets forth the distribution of consolidated average assets,
liabilities and shareholders' equity for the years ended December 31, 1997 and
1996. Average balances have been computed using daily adjusted balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
Average Average
Balance Percent Balance Percent
(000's) of Total (000's) of Total
ASSETS
<S> <C> <C> <C> <C>
Cash and Due from Banks $ 6,932 5.9% $ 6,100 5.9%
Interest-Bearing Deposits
With Other Banks 3,715 3.2 4,210 4.0
Held-to-Maturity Investments
Taxable 1,710 1.5 2,087 2.0
Non-Taxable 25
Available-for-Sale Investments
Taxable 2,468 2.1
Non-Taxable 273 .2
Federal Funds Sold 17,703 15.0 10,844 10.4
Loans, Net (1) 79,570 67.6 77,064 74.0
Premises and Equipment, Net 2,543 2.2 2,484 2.4
Other Assets and Accrued
Interest Receivable 2,735 2.3 1,391 1.3
Total Assets $117,674 100.0% $104,180 100.0%
</TABLE>
20
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deposits:
<S> <C> <C> <C> <C>
Demand $ 25,748 21.9% $19,284 18.5%
Interest-Bearing
Transaction Accounts 30,545 25.9 27,970 26.8
Savings 12,759 10.8 12,071 11.6
Time 39,745 33.8 36,600 35.1
Total Deposits 108,797 92.4 95,925 92.0
Other Liabilities and
Accrued Interest 683 0.6 487 0.5
Shareholders' Equity 8,194 7.0 7,768 7.3
Total Liabilities and
Shareholder's Equity $117,674 100.0% $104,180 100.0%
</TABLE>
- --------------------
1) Average loans include net deferred loan fees and non-accrual loans and are
net of the allowance for loan losses.
INTEREST RATES AND DIFFERENTIALS
The following table sets forth information concerning interest-earning assets
and interest-bearing liabilities, respective average yields or rates, the amount
of interest income or expense, and the net interest margin and the net interest
spread. Loan fees of $299,000 in 1997 and $409,000 in 1996 are included, while
non-accrual interest is excluded from computations of interest income and
expense.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, Net (1,2) $ 79,570 $8,419 10.58%
Interest-Bearing Deposits
With Other Banks 3,715 209 5.63
Held-to-Maturity Investments
Taxable 1,710 93 5.44
Non-Taxable (3)
Available-for-Sale Investments
Taxable 2,468 155 6.2
Non-Taxable(3) 273 20 7.33
Federal Funds Sold 17,703 916 5.17
Total Average Interest-Earning
Assets $105,464 $9,812 9.30%
</TABLE>
21
<PAGE>
INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
Deposits:
<S> <C> <C> <C>
Interest-Bearing Transaction
Accounts $30,545 $ 656 2.15%
Savings 12,759 328 2.57
Time 39,745 2,091 5.26
Total Average Interest-Bearing
Liabilities $83,049 $3,075 3.70%
Net Interest Income and
Net Interest Margin (4) $6,737 6.39%
Net Interest Spread (5) 5.60%
</TABLE>
1) Average loans include net deferred loan fees and non-accrual loans and are
net of allowance for loan losses.
2) Loan interest income includes loan fees of $299,000.
3) Adjusted to a fully taxable equivalent basis using the federal statutory
rate.
4) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
5) Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing
liabilities.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Interest
Average Income/ Average
Balance Expense Yield/
(000's) (000's) Rate
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Loans, Net (1,2) $77,064 $8,277 10.74%
Interest-Bearing Deposits
With Other Banks 4,210 230 5.46
Held-to-Maturity Investments
Taxable 2,087 119 5.70
Federal Funds Sold 10,844 567 5.04
Total Average Interest-Earning
Assets $94,205 $9,173 9.74%
</TABLE>
22
<PAGE>
INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
Deposits:
<S> <C> <C> <C>
Interest-Bearing Transaction
Accounts $27,970 $ 563 2.01%
Savings 12,071 275 2.28
Time 36,600 1,976 5.40
Total Average Interest-Bearing
Liabilities $76,641 $2,814 3.67%
Net Interest Income and
Net Interest Margin (3) $6,359 6.75%
Net Interest Spread (4) 6.07%
</TABLE>
1) Average loans include net deferred loan fees and non-accrual loans and
are net of allowance for loan losses.
2) Loan interest income includes loan fees of $409,000.
3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
4) Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing
liabilities.
RATE AND VOLUME ANALYSIS
The following tables set forth, for the periods indicated, a summary of the
changes in average interest bearing asset and liability balances (volume) and
changes in average interest rates (rate). Where significant, the change in
interest due to both volume and rate has been allocated to the change due to
volume and rate in proportion to the relationship of absolute dollar amounts in
each. Insignificant changes have been allocated solely to the change due to
volume.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Compared to
Year Ended December 31, 1996
(In 000's)
Average Average Net
Volume Rate Change
INCREASE (DECREASE) IN INTEREST INCOME:
<S> <C> <C> <C>
Loans, Net (1) $269 $(127) $142
Interest-Bearing Deposits
With Other Banks (27) 6 (21)
Held-to-Maturity
Taxable (21) (5) (26)
Non-taxable
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Available-for-Sale
<S> <C> <C> <C>
Taxable 155 155
Non-Taxable 20 20
Federal Funds Sold 346 3 349
Total Increase (Decrease) 742 (123) 619
</TABLE>
INTEREST (DECREASE) IN INTEREST EXPENSE:
<TABLE>
<CAPTION>
Deposits:
<S> <C> <C> <C>
Interest-Bearing Transaction
Accounts 52 41 93
Savings 16 37 53
Time 170 (55) 115
Total Increase (Decrease) 238 23 261
Change in Net Interest Income $ 887 $(326) $ 561
</TABLE>
(1) The effect of changes in loan fees is included as an adjustment to the
average rate.
NET INTEREST INCOME
The Company's primary source of income is the difference between interest
income and fees derived from earning assets and interest paid on liabilities
incurred for the funding of those assets. This difference is referred to as
"net interest income." Net interest income expressed as a percentage of average
total earning assets is referred to as the "net interest margin" or "margin."
For the year ended December 31, 1997, net interest income increased by
$369,000, or 6%, over the same period of 1996. This number is a component of
total interest income and total interest expense. The $11,259,000 increase in
average earning assets in 1997 compared to 1996 contributed significantly to
this increase in net interest income.
As of December 31, 1997, total average earning assets were $105,464,000, an
increase of $11,259,000, or 12%, from the 1996 level of $94,205,000. The
decrease in net interest margin of 36 basis points in 1997 compared to 1996
offset some of the increase attributable to volume gains.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based upon management's assessment of the
amount that is necessary to maintain the allowance for loan losses at an
adequate level based on the Company's judgement as to the inherent risks
associated with the loan portfolio. As further described in the "Allowance for
Loan Losses" herein, management takes many factors into consideration when
determining the provision including loan portfolio growth. Since estimates of
the adequacy of the Company's allowance for loan losses are based on foreseeable
risks, such judgements are subject to changes based on Management's assessment
of risk.
24
<PAGE>
The provision for loan losses was $556,000 at December 31, 1997 compared to
$550,000 for 1996. This represents an increase of $6,000, or 1%, over the prior
year. The increase in the provision was due to increases in both average loans
and outstanding loan balances in 1997 over 1996 totals, projected loan growth,
increases in non-performing loans, and management's ongoing assessment of the
adequacy of the allowance for loan losses (See "Loans and Nonaccrual Loans"
herein).
OTHER INCOME
Noninterest income consists primarily of service charges on deposit accounts,
fees charged for other banking deposit and loan services, and merchant card
processing income. Noninterest income increased by $206,000 or 25% between 1997
and 1996. Service charges generated from deposit accounts continued to show
growth due to both increases in the number of outstanding accounts and a
continued emphasis on assessing service charges and other related fees.
Additionally, the Bank's merchant card processing program continued to show
gains in 1997 over earnings in 1996.
OTHER EXPENSE
Total noninterest expense was $5,917,000 in 1997, representing an increase of
$818,000, or 16%, over the 1996 total of $5,099,000.
Net salaries and employee benefit expense was $3,280,000 in 1997, an increase
of $558,000, or 20%, over 1996's total of $2,722,000. During the first half of
1997, the Company grew by approximately five full time equivalent employees, two
of which were senior officers. However, by year end, full time equivalent
employees were reduced by five as compared to 1996. Additionally, salaries
increased due to average bank-wide raises of approximately four percent which
took place in March 1997.
Occupancy and furniture, fixtures and equipment expenses increased in 1997 by
$48,000, or 5% over 1996 totals. This increase was due primarily to the Bank's
branch/headquarters tenant improvements and upgrades in electronic media
throughout the Company.
Professional fees decreased in 1997 by $12,000, or 3%, over 1996 totals. This
decrease was due primarily to the reduction in use of outside consultants for
both loan related legal reviews and audits and managerial issues.
The Company decreased its marketing and business development costs by $6,000,
or 4%, during 1997 over the same period of 1996. This decrease was primarily due
to the reduction in marketing and business development, management curtailed the
Bank's marketing costs greatly during the last three quarters of 1997.
Regulatory fees and related expenses decreased in 1997 by $11,000, or 8%, over
the same period of 1996. The decrease was primarily due to changes in the
annual Federal Deposit Insurance Corporation assessments.
Stationery and supply expense for 1997 was $17,000, or 15%, higher than 1996.
This increase was due to general growth in the Company and the enhanced
marketing oriented materials used within the branches.
25
<PAGE>
Data processing expenses have shown a steady increase, $18,000, during the two
years presented and have been in keeping with the overall growth of the Company.
Additionally, the $18,000, or 15%, growth in 1997 over 1996 was also due to
enhancements and upgrades made to the Company's personal computers.
Other noninterest expense increased by $184,000, or 38%, in 1997 over 1996
totals. The increase was due primarily to increase in miscellaneous loan
expenses and staff training and development.
INCOME TAXES
Income tax expense was 41% of pre-tax income for each of the years ending
December 31, 1997 and 1996.
EARNING ASSETS
Total earning assets consist of investment securities, loans, federal funds
sold and interest bearing deposits held in other institutions. Total earning
assets increased from $102,680,000 at December 31, 1996 to $117,281,000 at
December 31, 1997, an increase of $14,601,000, or 14%.
INVESTMENT SECURITIES
The following table shows the book value, unrealized gains and losses, and
fair value composition of the securities portfolio at December 31, 1997 and
1996. At December 31, 1997 there were no issuers of securities for which the
aggregate book value of securities of such issuer held by the Company exceeded
10% of the Company's shareholder equity.
DECEMBER 31, 1997 - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-For-Sale Securities:
Obligations of States and
Political Subdivisions $ 2,521,000 $ 45,000 $ 0 $ 2,566,000
Collateralized Mortgage
Obligations 14,690,000 15,000 21,000 14,684,000
------------------------------------------------------
$17,211,000 60,000 21,000 17,250,000
------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 1,723,000 $ 62,000 $ 1,785,000
Obligations of States and
Political Subdivisions 100,000 100,000
------------------------------------------------------
$ 1,823,000 $ 62,000 $ 1,885,000
------------------------------------------------------
</TABLE>
26
<PAGE>
December 31, 1996 - Investment Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
U.S. Treasury (HTM) $1,723,000 $27,000 $0 $1,750,000
</TABLE>
The Company had Federal Reserve and Federal Home Loan Bank Stocks totaling
$582,000 at December 31, 1997 and 1996.
Yields on securities have been calculated by dividing interest income,
adjusted for amortization of any premium and accretion of any discount, by the
book value of the related securities. The Company's Federal Reserve and Federal
Home Loan Bank Stocks have no maturity and a weighted average yield of 6.0%.
Investment securities classified as available for sale, which include
Collateralized Mortgage Obligations, Tax-Exempt Municipal Bonds are acquired
without the intent to hold until maturity. Any unrealized gain or loss on
investment securities available for sale is reflected in the carrying value of
the security and reported net of income taxes in the equity section of the
condensed consolidated balance sheet. The net unrealized gain on securities
available for sale as of December 31, 1997 was $23.
As of December 31, 1996, the Bank did not maintain available for sale
securities. In 1997, the Bank began to diversify its portfolio to include
mortgage backed securities and municipal bonds. The intention of management is
to attempt to increase earnings and improve asset liability management. The
Company's general policy is to acquire generally "A" rated or better, insured
state and municipal securities. Mortgage backed securities have an average life
of five years or less at purchase date.
The maturities and weighted-average yields of the investment portfolio at
December 31, 1997 are shown below:
<TABLE>
<CAPTION>
After One
Through After
One Year Five Five
Or Less Yield Years Yield Years Yield Total
(In 000's)
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale Securities:
Obligations of States and
Political Subdivisions $2,560 6.65% $ 2,560
Collaterized Mortgage
Obligations $7,345 5.85% 7,345 5.85% 14,690
--------------------------------------------------------------------
Total $7,345 $9,905 $17,250
Held-to-Maturity Securities:
U.S. Treasury $994 5.08% $750 5.75% $ 1,744
Obligations of States and
Political Subdivisions 100 100
-------------------------------------------------------------------------------------------------
Total $994 $850 $ 1,844
</TABLE>
27
<PAGE>
LOAN PORTFOLIO
Total loans, excluding the allowance for loan losses (see Notes 1 and 4 to the
Consolidated Financial Statements included herein at Item 7, for further
discussion of the allowance for loan losses), remained relatively flat
decreasing from $79,695,000 at December 31, 1996 to $79,623,000 at December 31,
1997. The Bank experienced an increase in commercial loans, however, decreases
in all other loan categories. Management attributes that lack of growth to
elimination of problem loans and early pay off of winery loans.
General economic and credit risks are inherent in the lending function and
within particular types of lending categories. The Bank primarily makes four
types of loans: Real estate construction, real estate mortgage, commercial and
consumer loans. The Bank generally takes a collateralized position, with
reasonable loan to value ratios on its loans (over 90% of the Bank's loan
portfolio is collateralized). The primary source of collateral is real estate
located within the Company's service area. An inherent risk in taking real
estate as collateral is the possibility of declines in real estate market
values.
The Company's primary service area is Napa County and the Carneros growing
region of Southern Sonoma County, which is located approximately fifty miles
northeast of the San Francisco Bay Area. Napa Valley is a very unique, and
rather isolated area that has been able to sustain higher than average real
estate market values. Approximately five years ago, given the economic trends
and possibility of declining market values, the Company took a more conservative
approach on its collateral base and began lowering its loan to value ratios on
new loans. Even though the Company's loan portfolio is heavily secured by
California real estate, management does not presently foresee any material
impact on the Company's operations, given the lower loan to value ratios it
adopted.
As of December 31, 1997, nonperforming loans were $2,922,000, a decrease of
$230,000, or 7%, over the December 31, 1996 balance of $3,152,000.
Nonperforming loans at December 31, 1997 represent 3.5% of total average loans
compared to 4.0% of total average loans for year end 1996. The decline in
nonperforming loans between 1997 and 1996 is in management's view primarily due
to the effort of management to improve the credit quality of the loan portfolio.
In early 1997, the Company's service area was subjected to severe weather
conditions that resulted in some flooding. Management believes that this
flooding will not have a direct or material impact on either collateral securing
part of the existing loan portfolio or future growth.
At December 31, 1997, the Company's real estate construction portfolio totaled
$3,329,000. Real estate loans consisted of single family residences to
developers and owner-builders with a history of successfully developing projects
in the Company's market area. The loan-to-value ratio on each real estate
construction loan required by the Company depends upon the amount of the loan,
the nature of the property, whether the property is residential or commercial
and whether or not it is owner occupied. For construction loans,
28
<PAGE>
the Company's policy is to require that the loan-to-value ratio generally be no
more than 70% when the loan is initially made and that the borrower generally
has no less than a 50% equity interest in the land. Substantially all of the
real estate construction portfolio is secured by real estate located within the
Company's service area.
Conventional real estate loans totaled $4,410,000 at December 31, 1997. The
loan-to-value ratio required by the Company on conventional real estate loans
depends upon the nature of the property and whether or not it is owner-occupied.
For owner-occupied conventional real estate loans, the Company usually requires
that the loan-to-value ratio be no more than 80% except when private mortgage
insurance is required, whereupon the Company may allow the loan-to-value ratio
to rise generally to no more than 85% when the loan is initially made.
Generally, non-owner-occupied conventional real estate loans must have loan-to-
value ratios not exceeding 70% when the loan is made. The entire real estate
mortgage portfolio is generally secured by first or second deeds of trust.
Substantially all of the secured property is located within the Company's
service area.
At December 31, 1997, commercial loans totaled $60,880,000. Commercial loans
are made primarily to professionals and companies with sales up to $10 million.
The Company's lending relationships generally involve companies with sales of no
more than $30 million. Substantially all of the commercial loan portfolio is
secured, some of which may include real estate collateral. Such loans are not
intended as permanent financing of real estate but are made for commercial
purposes and are secured by commercial real estate. The Company evaluates such
loans based upon the borrower's ability to service the debt through its business
operations and does not rely primarily on the value of the real estate
collateral for repayment. The remaining portfolio is secured by accounts
receivables, inventory, equipment, stock and deposits held by the Company.
Total consumer loans, including personal lines of credit, were $11,004,000 at
December 31, 1997. Included in consumer loans to individuals are home equity
lines of credit, totaling $7,509,000, which are secured primarily by second
trust deeds on single family residences. The Company requires a debt-to-value
ratio of not higher than 75% for most home equity loans when the loan is
initially made. The remaining portfolio is collateralized by automobiles,
computers and other equipment, and deposits held by the Company. Over 70% of
the Company's consumer portfolio is secured.
The Company had standby letters of credit outstanding of $1,061,000 and
$865,000 at December 31, 1997 and December 31, 1996, respectively. In addition,
the Company had commitments to fund real estate construction loans, commercial
loans and consumer loans of $1,392,315, $14,567,264 and $4,648,866 respectively,
at December 31, 1997.
The Company did not have any loans related to lease financing activities in
the loan portfolio at December 31, 1997.
29
<PAGE>
The following table shows the composition of the Bank's loan portfolio by type
of loan or borrower as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In 000's)
<S> <C> <C>
Commercial $60,880 $52,789
Real Estate--Construction 3,329 8,706
Real Estate--Mortgage 4,410 4,918
Installment Loans and Leases 3,495 4,216
Personal Lines of Credit
and Other 7,509 9,066
Total Loans 79,623 79,695
Less Allowance for
Loan Losses (1,566) (1,405)
Total Loans, Net $78,057 $78,290
</TABLE>
In recent years, California commercial real estate markets in general have
experienced some difficulties. While these developments have not, in the
judgment of management, had a material adverse impact on the Bank's business,
there can be no assurance that further softening of the California real estate
market will not occur, nor can any assurance be given as to the effect of any
such developments on the Bank's business. Further increases in interest rates
could adversely impact real estate values or the ability of borrower to satisfy
the material terms of such loans.
LOAN CONCENTRATIONS
At December 31, 1997, approximately $42,886,000, or 54% of the loan portfolio
was secured by commercial or residential real estate. Concentrations of the
Bank's lending activity in the real estate sector could have the effect of
intensifying the impact on the Bank if there are any adverse changes in the real
estate market in the Bank's lending area.
The Bank is located in the Napa Valley and a significant amount of its loans
are related to winery and vineyard operations. Loans related to winery and
vineyard operations constituted approximately $13,965,000, or 17% of total loans
at December 31, 1997, as compared to $10,933,000, or 14% of total loans, at
December 31, 1996. A downturn in the wine industry in the Napa Valley or a
disruption in wine production, which may result from extreme weather conditions,
plant diseases or other natural causes, competition, changes in governmental
regulatory or tax policies, or changes in consumer preferences, could have a
significant adverse impact on the Company's results of operations and financial
condition.
30
<PAGE>
NONPERFORMING ASSETS
The following table shows the Company's nonperforming assets by category as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In 000's)
<S> <C> <C>
Nonperforming assets:
Nonaccrual Loans including loans
past due 90 days $2,922 $3,152
Other Real Estate Owned 607 328
Total Nonperforming Assets $3,529 $3,480
</TABLE>
Management analyzes each loan on a case by case basis to determine when, in
management's opinion, interest should no longer be accrued. This occurs when
management determines the ultimate collectibility of principal or interest to be
unlikely or when loans become 90 days or more past due, unless they are well
secured and in the process of collection or unless other circumstances exist
which justify the treatment of the loan as fully collectible. When a loan is
placed on nonaccrual status, unpaid interest is reversed and charged against
current income.
Interest income on nonaccrual loans at December 31, 1997 which would have been
recognized during the year if the loans had been current in accordance with
their original terms and outstanding during the entire period totaled $165,000
versus $188,000 for the same period in 1996.
As of December 31, 1997 and 1996, other real estate owned totaled $607,000 and
$328,000 respectively, which at December 31, 1997 consisted of two separate
properties. It is the Company's policy to write foreclosed property down to the
lower of fair market value less estimated selling costs or cost at the time it
is reclassified into other real estate owned. Miscellaneous expenses relating
to the property are charged to other noninterest expenses as incurred.
As of the date of this filing, there are no other material loans, other than
those included in the table above, where known information concerning possible
credit problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with the present loan repayment terms such
that they may become nonperforming loans.
The average recorded investment in nonaccrual loans during 1997 and 1996 was
$3,372,000 and $2,123,000, respectively. Related interest income recognized on
impaired loans during the year ended December 31, 1997 and 1996, under the cash-
basis method of accounting, was approximately $90,000 and $44,000, respectively.
31
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
Inherent in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan being made
and the credit-worthiness of the borrower over the term of the loan. The Company
has an allowance for loan losses which is maintained at a level estimated to be
adequate to provide for losses that can be reasonably anticipated based upon
specific loan conditions as determined by management, historical loan loss
experience, the amount of past due and nonperforming loans, comments of third-
party loan review consultants, prevailing economic conditions and other factors.
While these factors are essentially judgmental and may not be reduced to a
mathematical formula, it is management's view that as of the date of this report
the $1,566,000 allowance, which constitutes 1.97% of total loans at December 31,
1997, was adequate as an allowance against foreseeable losses from the loan
portfolio. The allowance was $1,405,000, or 1.76%, of the total loan portfolio
at December 31, 1996. The allowance is increased by charges to the provision
for loan losses and reduced by net charge-offs. The continuing evaluation of
the loan portfolio and assessment of current economic conditions will dictate
future allowance levels.
An analysis of the allowance for loan losses for the years ending December 31,
1997 and 1996 follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In 000's)
<S> <C> <C>
Allowance for Loan Losses:
Balance, Beginning of Year $ 1,405 $ 1,325
Provision Charged to Expense 556 550
Loans Charged Off:
Commercial (331) (297)
Personal Lines of Credit and Other (46) (177)
Real Estate Construction (30) (70)
Total Loans Charged Off (407) (544)
Recoveries:
Commercial 12 71
Personal Lines of Credit and Other 3
Total Recoveries 12 74
Net Loans (Charged Off) Recovered (395) (470)
Balance, End of year $ 1,566 $ 1,405
Average Gross Loans Outstanding
During Period $79,570 $78,861
Total Gross Loans at End of Year $79,623 $79,695
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Ratios:
<S> <C> <C>
Net Loans Charged Off
to Average Loans Outstanding 0.50% 0.60%
Net Loans Charged Off to Total
Loans at End of Year 0.49% 0.59%
Allowance for Loan Losses to
Average Loans 1.97% 1.78%
Allowance for Loan Losses to
Total Loans at End of Year 1.96% 1.76%
Net Loans Charged Off
to Allowance for Loan
Losses at End of Year 25.22% 33.45%
Net Loans Charged Off
to Provision for
Loan Losses 71.04% 85.45%
</TABLE>
The table set forth below shows a breakdown of the portfolio of loans at the
dates indicated and the amount of the allowance that has been allocated as of
those dates to each of the loan categories. Management believes that any
breakdown or allocation of the allowance for possible loan losses into loan
categories lends an appearance of exactness which does not exist, in that the
reserve is ultimately utilized as a single unallocated allowance available for
all loans.
<TABLE>
<CAPTION>
December 31, 1997 December, 31, 1996
Percent Percent
of Loans of Loans
in Each in Each
Category Category
Balance at End of Amount of to Total Amount of to Total
Period Applicable to: Allowance Loans Allowance Loans
(000's) (000's)
<S> <C> <C> <C> <C>
Commercial $ 575 73% $ 920 74%
Real Estate-Construction 321 8 119 10
Real Estate-Mortgage 467 14 162 13
Installment Loans
and Leases 9 2 3 0
Personal Lines of
Credit and Other 44 3 44 3
Unallocated 150 157
Total $1,566 100% $1,405 100%
</TABLE>
33
<PAGE>
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturity distribution of the portfolio of loans
and leases in thousands as of December 31, 1997 and sets forth the sensitivity
to changes in interest rates by comparing total loans with fixed interest rates
and total loans with floating or adjustable rates.
<TABLE>
<CAPTION>
After One
Through After
One Year Five Five
Or Less Years Years Total
(In 000's)
<S> <C> <C> <C> <C>
Commercial $48,063 $4,205 $1,845 $54,113
Real Estate-Construction 7,579 26 0 7,605
Real Estate-Mortgage 12,414 1,142 211 13,767
Installment Loans & Leases 989 1,668 0 2,657
Personal Lines of Credit &
Other 1,165 316 0 1,481
Total $70,210 $7,357 $2,056 $79,623
Loans With Fixed Interest
Rates $ 912 $4,532 $2,056 $ 7,500
Loans With Floating
Interest Rates 69,298 1,699 0 74,247
Total $70,210 $7,357 $2,056 $79,623
</TABLE>
On 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 Disclosure". These statements
address the accounting and reporting by creditors for impairment of certain
loans. A loan is impaired when, based upon 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. These statements are applicable
to all loans, uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
such as credit cards, residential mortgage and consumer installment loans, loans
that are measured at fair value or at the lower of cost or fair value and
leases. Impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, the Company measures impairment based on a loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Loans are measured for impairment as part of the
Company's normal internal asset review process.
Interest income is recognized on impaired loans in a manner similar to that of
all loans. It is the Company's policy to place loans that are delinquent 90
days or more as to principal or interest on a nonaccrual of interest basis
unless secured and in the process of collection, and to reverse from current
income accrued but uncollected interest. Cash payments subsequently received on
nonaccrual loans are recognized as income only where the future collection of
principal is considered by management to be probable.
34
<PAGE>
At December 31, 1997, the Company's total recorded investment in impaired
loans was $2,922,000, of which there is a related allowance for credit losses of
$507,000.
The average recorded investment in the impaired loans during 1997 and 1996
were $3,372,000 and $2,123,000, respectively the related amount of interest
income recognized during the period that such loans were impaired recognized
under the cash basis method of accounting were $90,000 and $44,000.
Loans currently classified as special mention, substandard, doubtful or loss
do not, in management's view, represent or result from trends or uncertainties
which may have a material adverse effect on the entire loan portfolio, liquidity
or capital resources.
DEPOSITS
Deposits represent the principal source of funding. Most of the Bank's
deposits are obtained from professionals, small to medium sized businesses, and
individuals within the Bank's market area. The Bank's deposit base consists of
non-interest and interest-bearing demand deposits, savings and money market and
certificates of deposit.
The following table reflects average balances and the average rates paid for
the major categories of deposits (i.e., those in excess of ten percent of total
deposits) for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
Average Average Average Average
Balance Rate Balance Rate
(000's) (000's)
<S> <C> <C> <C> <C>
Noninterest-Bearing Demand $25,748 0.00% $19,284 0.00%
Interest-Bearing
Transaction Accounts 30,546 2.01 27,970 2.01
Savings Deposits 12,759 2.28 12,071 2.28
Time Deposits over 100,000 12,759 5.20 9,987 5.20
Other Time Deposits 27,173 5.47 26,613 5.47
Total Deposits $108,985 3.67% $95,925 3.67%
</TABLE>
The following table sets forth, by time remaining to maturity, the domestic
time deposits in amounts of $100,000 or more at December 31, 1997:
<TABLE>
<CAPTION>
Amount
Maturing In: (000's)
<S> <C>
Three Months or Less $ 9,168
Over Three Through Twelve Months 4,768
Over Twelve Months 1,053
-------
Total $14,989
</TABLE>
35
<PAGE>
Deposits totaled $121,461,000 at December 31, 1997, an increase of
$16,044,000, or 15%, from the December 31, 1996 balance of $105,417,000. In
1997, noninterest bearing transaction accounts grew by $7,658,000, or 30%,
savings accounts increased by $1,017,000, or 8%, and interest bearing
transaction accounts grew $5,240,000, or 18%, over 1996 totals. Time
certificates of deposit of $100,000 or more increased by $4,248,000, or 40%, and
other time deposits decreased by $2,119.00, or 8% over, during 1996. The
overall growth in deposit accounts in 1997 was primarily due to a comprehensive
marketing effort on the part of the Bank's staff and management, the
introduction of new and enhanced deposit products and increases in deposit
officers.
Non-interest bearing demand deposits were 27% of total deposits at December
31, 1997, as compared to 24% at December 31, 1996. Time certificates of deposit
were 33% of total deposits at December 31, 1997, and 36% for the same period of
1996.
ASSET-LIABILITY MANAGEMENT
Asset-liability management is a process whereby the Bank, through its Asset
and Liability Committee, monitors the maturities and repricing opportunities of
the various components of the balance sheet and initiates strategies designed to
maximize the net interest margin, while minimizing vulnerability to large
fluctuations in interest rates. The Bank is currently moving towards a policy
of maintaining a relative balance of asset and liability maturities within
similar time frames, while permitting a moderate amount of short-term interest
rate risk based on current interest rate projections, customers' credit demands
and deposit preferences.
At December 31, 1997, the Company's assets repricing in one year exceeded its
liabilities repricing in one year by $4,916,000, or 4%, of total assets. This
compares to $21,612,000, or 19% of total assets in 1996. The excess of assets
repricing over liabilities repricing means that if interest rates decline, the
Company's return on assets would be expected to decline more quickly than its
cost of funds, thereby reducing the Company's net interest margin. However, as
interest rates increase, the Company's return on assets would be expected to
increase more quickly than its cost of funds.
The following table represents the interest rate sensitivity profile of the
Company's consolidated assets, liabilities and shareholders' equity as of
December 31, 1997. Assets, liabilities and shareholders' equity are classified
by the earliest possible repricing opportunity or maturity date, whichever first
occurs. Assumptions used in constructing the table include the following: The
loans that are in the "Interest Rate Sensitivity Over One Year But Within 5
Years" and "Nonrate Sensitive or Over 5 Years" columns are all fixed-rate loans
and therefore mature in those time frames. The Bank's certificates of deposits
are substantially all fixed-rate, therefore they are in the columns which
represent the time frames in which they mature. All other interest-bearing
accounts reprice overnight and are therefore in the "Interest Rate Sensitivity
0-90 Days" column. Included in noninterest bearing liabilities is $33,386,000
in demand deposit accounts.
36
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Non-Rate
0-90 91-180 Over 1 Year Sensitive
Days Days But Within Or Over
(0-3 mo) (3-12 mo) 5 Yrs 5 Yrs Total
ASSETS
<S> <C> <C> <C> <C> <C>
Time deposits-other
financial
institutions $ 1,485 $ 297 $ $ $ 1,782
Federal funds sold 16,221 16,221
Investments 994 8,195 10,486 19,675
Loans 54,617 15,914 7,183 1,909 79,623
Noninterest-earning
assets net of loan
loss reserve 13,518 13,518
TOTAL ASSETS $73,317 $16,211 $15,378 $ 25,913 $130,819
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Time deposits over
$100,000 $ 9,168 $ 4,768 $ 1,054 $ $14,990
All other interest-
bearing deposits 58,257 12,738 2,062 35 73,092
Total interest-bearing
deposits 67,425 17,506 3,116 88,082
Noninterest-bearing
liabilities 34,150 34,150
Shareholders' equity 8,587 8,587
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $67,425 $17,506 $ 3,116 $ 42,772 $130,819
INTEREST RATE SENSITIVITY
GAP (1) $ 5,892 $(1,285) $12,262 $(16,859)
CUMULATIVE INTEREST RATE
SENSITIVITY GAP $ 5,892 $ 4,607 $26,219 $ 9,360
</TABLE>
- --------------------
1 Interest rate sensitivity gap is the difference between interest rate
sensitive assets and interest rate liabilities within the above time frames.
LIQUIDITY
Liquidity refers to the Company's ability to maintain cash flow adequate to
fund operations and meet obligations and other commitments on a timely basis.
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals. Liquidity requirements
are evaluated by taking into consideration factors such as deposit
concentrations, seasonality and maturities, loan demand, capital expenditures,
and prevailing and anticipated economic conditions. As shown in the Consolidated
Statements of Cash Flows ("Statement") for the years ended December 31, 1997 and
1996, the Company's usual and primary source of funds
37
<PAGE>
has been customer deposits and cash flow generated from operating activities.
While the usual and primary sources are expected to continue to provide
significant amounts of funds in the future, their mix, as well as those from
other sources, will depend on future economic and other market conditions.
In 1997, the Statement shows that operations and financing activities were
sources of net cash inflows ($1,579,000 and $15,891,000, respectively) for the
year. These sources were significant enough to increase the overall ending cash
and cash equivalents from $24,479,000 at December 31, 1996 to $26,147,000 at
December 31, 1997, an increase of $1,668,000.
In 1996, the Statement shows that operations and financing activities were
also sources of net cash inflows ($510,000 and $8,287,000, respectively) for the
year. These sources increased ending cash and cash equivalents by $2,593,000,
taking the total from $21,886,000 at December 31, 1995 to $24,479,000 at the end
of 1996.
Liquidity is measure by various ratios, the most common being the liquidity
ratio of cash less reserves, time deposits with other financial institutions,
federal funds sold, and unpledged investment securities compared to total
deposits. This ratio was 37% at December 31, 1997 and 26% at December 31, 1996.
The Company liquidity is maintained by cash flows stemming primarily from
dividends from the bank. The amount of dividends from the Bank is subject to
certain regulatory restrictions as discussed in Note 12 of the Notes to
Consolidated Financial Statements. The Parent Company financial statements are
presented in Note 17 of the Notes to Consolidated Financial Statements.
CAPITAL ADEQUACY
The Federal Reserve Bank and the Comptroller of the Currency have specified
guidelines for the purpose of evaluating the capital adequacy of bank holding
companies and banks. The table below summarizes the current requirements for
1997 and the Company's and the Bank's compliance therewith.
<TABLE>
Minimum Tier 1 Risk Total Risk
Leverage Based Capital Based Capital
Ratio Ratio Ratio
<S> <C> <C> <C>
Regulatory Requirements
for 1996 4.00% 4.00% 8.00%
Consolidated Company Ratio
at December 31, 1997 6.89% 9.77% 11.03%
Bank Ratio at
December 31, 1997 6.86% 9.74% 10.99%
</TABLE>
38
<PAGE>
The capital levels of both the Bank and the Company at December 31, 1997
currently exceed the regulatory requirements for a "well capitalized"
institution. Management anticipates that both the Company and the Bank will
continue to exceed the regulatory minimums in the foreseeable future. Therefore,
the Company and the Bank have adequate capital in order to expand in the
foreseeable future, either through loan generation or other means of expansion.
As of the date of this report, management is not aware of any trends, events
or uncertainties that will have, or are reasonable likely to have a material
effect on the Company's liquidity, capital resources, or results of operations.
Additionally, the Company is subject to no current recommendations by any
regulatory authorities which, if implemented, would have such an effect.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on an industrial concern, primarily because its assets and
liabilities consist largely of monetary items. The most direct effect of
inflation is higher interest rates. However, the Bank's earnings are affected
by the spread between the yield on earning assets and rates paid on interest-
bearing liabilities rather than the absolute level of interest rates.
Additionally, there may be some upward pressure on the Company's operating
expenses, such as adjustments in staff expense and occupancy expense, based upon
consumer price indices. In the opinion of management, inflation has not had a
material effect on the consolidated results of operations for the last two
years.
SELECTED FINANCIAL RATIOS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using daily figures):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Net income to:
Average earning assets 0.94% 0.94%
Average total assets 0.87 0.87
Average shareholders' equity 11.61 11.61
Average shareholders' equity to:
Average total assets 7.46% 7.46%
Average net loans 10.08 10.08
Average total deposits 8.10 8.10
Average earning assets to:
Average total assets 92.15% 92.15%
Average total deposits 100.08 100.08
Percent of average total deposits:
Average net loans 80.33% 80.33%
Average noninterest-bearing
deposits 20.10 20.10
Average savings and other
time deposits 50.74 50.74
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Total interest expense to:
Total gross interest income 30.68% 30.68%
Dividend Pay-out Ratio 41.82% 41.82%
</TABLE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets as of December 31, 1997 and 1996, and Consolidated
Statements of Income, Statements of Shareholders' Equity and Statements of Cash
Flows for each of the two years in the period ended December 31, 1997 are set
forth below:
(a) 1. Financial Statements.
Independent Auditors' Report
Consolidated Financial Statements of
Napa National Bancorp and Subsidiaries:
- Consolidated Balance Sheets as of
December 31, 1997 and 1996
- Consolidated Statements of Income
for the Years Ended December 31,
1997 and 1996
- Consolidated Statements of
Shareholders' Equity for the Years
Ended December 31, 1997 and 1996
- Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1997 and 1996
- Notes to Consolidated Financial
Statements
40
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Directors of
Napa National Bancorp
We have audited the accompanying consolidated balance sheets of Napa National
Bancorp and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of Napa National Bancorp's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Napa
National Bancorp and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
January 30, 1998
41
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
---------------- -----------------
(Dollars In Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 9,926 $ 7,929
Federal funds sold 16,221 16,550
Interest-bearing time deposits - other financial institutions 1,782 4,158
Securities held to maturity (market value: 1997 - $2,467;
1996 - $2,304) 2,405 2,277
Securities available for sale (cost: 1997 - $17,211) 17,250 -
Loans:
Commercial 60,880 52,789
Real estate construction 3,329 8,706
Real estate mortgage 4,410 4,918
Installment 3,495 4,216
Personal lines of credit and other 7,509 9,066
---------------- -----------------
Total loans 79,623 79,695
Less allowance for loan losses (1,566) (1,405)
---------------- -----------------
Loans - net 78,057 78,290
---------------- -----------------
Premises and equipment, net 2,612 2,519
Accrued interest receivable 934 647
Other assets 1,632 1,457
================ =================
Total assets $ 130,819 $ 113,827
================ =================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand $ 33,386 $ 25,728
Interest-bearing:
Savings 12,982 11,965
Transaction 34,557 29,317
Time, $100 and over 14,990 10,742
Other time 25,546 27,665
---------------- -----------------
Total deposits 121,461 105,417
Accrued interest payable 353 378
Other liabilities 418 61
---------------- -----------------
Total liabilities 122,232 105,856
---------------- -----------------
Shareholders' equity:
Preferred stock, no par value: authorized,
1,000,000 shares, no shares outstanding - -
Common stock, no par value: authorized,
20,000,000 shares, issued and outstanding - 783,500 shares in 7,147 6,915
1997 and 754,500 in 1996
Retained earnings 1,417 1,056
Net unrealized gain on available for sale securities, net of taxes 23 -
---------------- -----------------
Total shareholders' equity 8,587 7,971
================ =================
Total liabilities and shareholders' equity $ 130,819 $ 113,827
================ =================
</TABLE>
See accompanying notes.
42
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31
1997 1996
------------------ ------------------
(Dollars In Thousands Except
Earnings Per Share Amounts)
Interest income: <C> <C>
<S>
Loans (including fees) $ 8,419 $ 8,277
Federal funds sold 916 547
Time deposits with other financial institutions 209 230
Investment securities and Federal Reserve Bank stock 259 119
------------------ ------------------
Total interest income 9,803 9,173
------------------ ------------------
Interest expense:
Deposits:
Savings 328 275
Transaction 656 563
Time, $100 and over 655 519
Other time 1,436 1,457
------------------ ------------------
Total interest expense 3,075 2,814
------------------ ------------------
Net interest income 6,728 6,359
Provision for loan losses 556 550
------------------ ------------------
Net interest income after provision for loan losses 6,172 5,809
------------------ ------------------
Noninterest income:
Service charges on deposit accounts 597 509
Other customer fees and charges 231 207
Other 184 90
------------------ ------------------
Total noninterest income 1,012 806
Noninterest expense:
Salaries and employee benefits 3,280 2,722
Occupancy 468 453
Professional fees 437 449
Equipment 469 436
Marketing and business development 164 170
Regulatory fees and related expenses 149 138
Stationery and supplies 133 116
Data processing 142 124
Other 675 491
------------------ ------------------
Total noninterest expense 5,917 5,099
------------------ ------------------
Income before provision for income taxes 1,267 1,516
Income taxes 521 614
================== ==================
Net income $ 746 $ 902
================== ==================
Earnings per common share $ .97 $ 1.20
================== ==================
Earnings per common share - Assuming Dilution $ .91 $ 1.13
================== ==================
</TABLE>
See accompanying notes.
43
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Retained Unrealized
Number of Earnings Gain on
Shares Common (Accumulated Available-for-
Outstanding Stock Deficit) Sale Securities Total
---------------- ----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 754,500 $ 6,915 $ 532 $ - $ 7,447
Cash dividends paid
($.50 per share) - - (378) - (378)
Net income - - 902 - 902
---------------- ----------------- ----------------- ------------------ ------------------
Balance, December 31, 1996 754,500 6,915 1,056 - 7,971
Cash dividends paid
($.50 per share) - - (385) - (385)
Stock Options Exercised 29,000 232 - - 232
Valuation adjustments, net of
tax - - - 23 23
Net income - - 746 - 746
================ ================= ================= ================== ==================
Balance, December 31, 1997 783,500 $ 7,147 $ 1,417 $ 23 $ 8,587
================ ================= ================= ================== ==================
</TABLE>
See accompanying notes.
44
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years ended December 31
1997 1996
------------------ ------------------
Operating activities
<S> <C> <C>
Net income $ 746 $ 902
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization on premises
and equipment 460 437
Amortization of deferred loan fees and premiums on investment
securities (350) (376)
Provision for loan losses 556 550
Deferred income taxes (32) (31)
(Gain) on sale of other real estate (21) -
(Increase) decrease in accrued interest receivable (287) 19
Decrease (increase) in other assets 175 (778)
Increase(decrease) in accrued interest payable and other
liabilities 332 (213)
------------------ ------------------
Net cash provided by operating activities 1,579 510
Investing activities
Loan originations, net of repayments (72) (5,090)
Net decrease (increase) ininterest-bearing time deposits with other
financial institutions 2,376 198
Activity in securities held to maturity:
Purchases (1,797) (2,696)
Maturities 1,697 2,207
Activity in securities available for sale:
Purchases (17,555) -
Purchase of FRB and FHLB stock (28) (356)
Proceeds from sales of other real estate owned 130 -
Proceeds from sale of premises and equipment 2 -
Purchase of premises and equipment (555) (467)
------------------ ------------------
Net cash used by investing activities (15,802) (6,204)
Financing activities
Net increase in deposits 16,044 8,665
Proceeds from exercise of stock options 232 -
Cash dividends paid to shareholders (385) (378)
------------------ ------------------
Net cash provided by financing activities 15,891 8,287
Increase (decrease) in cash and cash equivalents 1,668 2,593
Cash and cash equivalents, beginning of year 24,479 21,886
================== ==================
Cash and cash equivalents, end of year $ 26,147 $ 24,479
================== ==================
Supplemental cash flow information:
Interest paid $ 3,099 $ 2,965
================== ==================
Income taxes paid (net of refunds received) $ 230 $ 1,020
================== ==================
</TABLE>
See accompanying notes.
45
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Napa National Bancorp is a bank holding company whose primary investment is Napa
National Bank (the "Bank"). Napa National Bancorp's only other investment is in
a wholly owned inactive leasing subsidiary. The Bank is a full service community
commercial bank with three offices in the Napa Valley area in Northern
California. The Bank's primary source of revenue is from providing loans to
customers, who are predominantly individuals, professionals and small to medium
sized businesses.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES IN PREPARATION OF FINANCIAL
STATEMENTS
The consolidated financial statements of Napa National Bancorp and subsidiaries
(the "Company") are prepared in conformity with generally accepted accounting
principles and prevailing practices within the banking industry. All material
intercompany transactions and accounts have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect the reported
amounts. These estimates are based on information available as of the date of
the financial statements. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold. Generally, federal funds sold are sold for one business day.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY INVESTMENT SECURITIES
The Company's securities portfolios include U.S. Treasury securities, municipal
securities, mortgage-backed securities, Federal Reserve Stock and Federal Home
Loan Bank Stock.
Held-to-maturity securities are those securities which management has the
ability and intent to hold to maturity. These securities are stated at cost,
adjusted for amortization of premiums and accretions of discounts to maturity
using methods approximating the interest method. Securities that the Company may
not hold to maturity are classified as available-for-sale securities. These
securities are reported at their fair values, with unrealized gains and losses
included on a net-of-tax basis as a separate component of stockholders' equity.
Dividend and interest income, including amortization of premiums and accretion
of discounts are included in interest income.
46
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are stated at the principal amount outstanding and net of any deferred
loan origination fees or costs. Interest income on loans is accrued daily on a
simple interest basis. The Bank places an asset on nonaccrual status when any
installment of principle or interest is 90 days past due, unless well secured
and in the process of collection, or when management determines that ultimate
collection of principal or interest on a loan is unlikely. When a loan is placed
on nonaccrual, all previously accrued but uncollected interest is reversed. Cash
payments subsequently received on nonaccrual loans are recognized as income only
where the collection of principal is considered by management as probable.
Interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal
and interest.
The Company evaluates a non homogeneous loan for impairment when it is placed on
nonaccrual status and all or a portion is internally risk rated as substandard
or doubtful. The Company has defined one to four family loans and consumer loans
as homogeneous loans. All homogeneous loans that are 90 days or more delinquent
or are in foreclosure are automatically placed on nonperforming status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through a provision for
loan losses which is charged to expense. Losses are charged against the
allowance when management believes that the collectibility of the principal is
unlikely. The allowance is maintained at an amount that management believes will
be adequate to absorb losses inherent in existing loans and commitments to
extend credit, based on evaluations of their collectibility and the Bank's
47
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
prior loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, and current and anticipated
economic conditions that may affect the borrowers' ability to repay.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization expenses are computed using the
straight-line method over the shorter of estimated useful lives of the related
assets (which are generally three to twenty years) or the lease terms.
Maintenance and repair costs are expensed as incurred, whereas expenditures that
improve or extend the service lives of assets are capitalized.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO"), which is recorded in other assets, includes
properties acquired through foreclosure or in full or partial satisfaction of
the related loan. OREO also includes loans where the Bank has obtained physical
possession of the related collateral. OREO is carried at the lower of fair
value, net of estimated selling and disposal costs, or cost. Fair value
adjustments are made at the time that real estate is acquired through
foreclosure or when full or partial satisfaction of the related loan is
received. These fair value adjustments are treated as loan losses.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred taxes arise from the effect of temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements, and from the effect of operating loss carryforwards on taxes payable
in future years based on currently enacted tax law. Deferred tax assets are
reduced by a valuation allowance if, based on available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
48
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued To Employees" and related interpretations, and provides pro forma
net income, pro forma earnings per share and stock-based compensation plan
disclosures set forth in of Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation".
NET INCOME PER COMMON SHARE
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS 128,
established standards for computing and presenting earnings per share. Under the
new requirements, the Company is required to change the method previously used
to compute earnings per share and to restate all prior periods presented. The
new requirements eliminate primary earnings per share and earnings per common
share, assuming full dilution, and requires the presentation of earnings per
common share and earnings per common share, assuming dilution. As a result,
under the new requirements, earnings per common share excludes any dilutive
effects of outstanding stock options. Earnings per common share, assuming
dilution, is based on the average market price of the Company's common stock for
the period.
RECLASSIFICATION
Certain amounts in prior periods have been reclassified in conform to the 1997
presentation.
2. CASH AND DUE FROM BANKS
The Bank is required to maintain reserves with the Federal Reserve Bank. The
average reserves required for 1997 and 1996 were $1,131 and $952, respectively.
49
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
3. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
The following is a summary of available-for-sale and held-to-maturity investment
securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Obligations of States and
Political Subdivisions $ 2,521 $ 45 $ - $ 2,566
Collateralized Mortgage
Obligations 14,690 15 (21) 14,684
================= ================ ================= =================
Total $ 17,211 $ 60 $ (21) $ 17,250
================= ================ ================= =================
HELD-TO-MATURITY SECURITIES
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ---------------- ----------------- -----------------
DECEMBER 31, 1997
Securities of U.S. Government
agencies $ 1,723 $ 62 $ - $ 1,785
Obligations of States and
Political Subdivisions 100 - - 100
Federal Home Loan Bank 346 - - 346
Federal Reserve Bank stock 236 - - 236
================= ================ ================= =================
Total $ 2,405 $ 62 $ - $ 2,467
================= ================ ================= =================
DECEMBER 31, 1996
Securities of U.S. Government
agencies $ 1,723 $ 27 $ - $ 1,750
Federal Reserve Bank stock 232 - - 232
Federal Home Loan Bank stock 322 - - 322
================= ================ ================= =================
Total $ 2,277 $ 27 $ - $ 2,304
================= ================ ================= =================
</TABLE>
50
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
3. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES (CONTINUED)
Total securities pledged under state regulation to secure deposits amounted to
$1,723 and $1,723 at December 31, 1997 and 1996, respectively.
The maturities of securities of U.S. Government agencies at December 31, 1997
are due within one year.
There were no sales of investment securities in 1997 and 1996.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are presented net of unearned income of $319 and $374 at December 31, 1997
and 1996, respectively. Nonaccrual loans past due 90 days or more as of December
31, 1997 and 1996, were approximately $2,922 and $3,152 respectively. The effect
on interest income had these loans been performing in accordance with
contractual terms as of December 31, 1997 and 1996 would have approximated $165
and $188, respectively.
At December 31, 1997, the Company had approximately $2,922 of loans considered
to be impaired. These loans were evaluated for impairment primarily using the
collateral method and required an allowance for credit losses of $507. Average
impaired loans for the years ended December 31, 1997 and 1996 amounted to
approximately $3,372 and $2,123, respectively. Related interest income
recognized on impaired loans during the years ended December 31, 1997 and 1996
was approximately $90 and $44, respectively.
The activity in the allowance for loan losses for the years ended December 31,
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Balance, beginning of year $ 1,405 $ 1,325
Provision for loan losses 556 550
Loans charged off (407) (544)
Recoveries 12 74
================== ==================
Balance, end of year $ 1,566 $ 1,405
================== ==================
</TABLE>
51
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
At December 31, 1997 and 1996, the Bank was servicing loans for the Federal Home
Loan Mortgage Corporation with unpaid principal balances of $20,303 and $23,020,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and conducting foreclosures proceedings. Loan servicing income is recorded on
the accrual basis and includes servicing fees from investors and certain charges
collected from borrowers, such as late payment fees. Income from loan servicing
amounted to $60 and $62 for the years ended December 31, 1997 and 1996,
respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Equipment $ 2,096 $ 1,674
Bank premises 941 941
Furniture and fixtures 590 576
Leasehold improvements 1,256 1,155
Automobiles 41 39
----------------- -----------------
Total 4,924 4,385
Less accumulated depreciation and amortization (2,312) (1,866)
================= =================
Total $ 2,612 $ 2,519
================= =================
</TABLE>
Depreciation and amortization of $460 and $437 was charged to expense for the
years ended December 31, 1997 and 1996, respectively.
52
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
6. DEPOSITS
The aggregate amount of time deposit accounts exceeding $100,000 was $14,990 and
$10,742 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled Maturities for all time deposits is as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 37,421
1999 2,887
2000 228
=================
$ 40,536
=================
</TABLE>
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Current:
Federal $ 414 $ 471
State 139 174
------------------ ------------------
Total 553 645
------------------ ------------------
Deferred:
Federal (25) (26)
State (7) (5)
------------------ ------------------
Total deferred (32) (31)
------------------ ------------------
Provision for income taxes $ 521 $ 614
================== ==================
</TABLE>
53
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
7. INCOME TAXES (CONTINUED)
The temporary differences and tax carryforwards which created deferred tax
assets and liabilities are detailed below:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible $ 826 $ 773
Deferred loan fees 31 36
Other - 14
------------------ ------------------
Gross deferred tax assets 857 823
Valuation allowance (170) (170)
------------------ ------------------
Deferred tax assets 687 653
------------------ ------------------
Deferred tax liabilities:
Tax over book depreciation (3) (13)
State Taxes (7) (10)
Other (15) -
------------------ ------------------
Gross deferred tax liabilities (25) (23)
================== ==================
Net deferred tax asset included in other assets $ 662 $ 630
================== ==================
</TABLE>
Deferred tax assets are recognized to the extent that their realization is
considered to be more likely than not. As of December 31, 1997 and 1996, the
Bank was unable to conclude that the realization of the Company's deferred tax
assets were more likely than not to be realized. Accordingly, a valuation
allowance has been reflected at December 31, 1997 and 1996 to reduce the Bank's
deferred tax assets to the amount likely to be realized.
The difference between the statutory federal income tax rate and the Company's
effective tax rate, expressed as a percentage of income before income taxes, is
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Federal statutory income tax rate 34% 34%
State franchise tax, net of federal income tax effect 7 7
================== ==================
Effective income tax rate 41% 41%
================== ==================
</TABLE>
54
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
8. TRANSACTIONS WITH RELATED PARTIES
The Company has had, and expects to have in the future, banking transactions,
primarily loans, in the ordinary course of business with directors, executive
officers and their associates. In accordance with Company policy, loans to
related parties are granted on the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others, and do not involve more than the normal risk of collectibility.
Loans to related parties for the years ended December 31, 1997 and 1996, are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Balance at beginning of year $ 1,879 $ 937
Additions 2,852 2,770
Payments (3,699) (1,739)
Other (89)
================= =================
Balance at end of year $ 1,032 $ 1,879
================= =================
</TABLE>
The Company also had commitments to extend credit to related parties of $146 at
December 31, 1997. Other activity in the table above represents loans to
directors or officers who left the Company during the year and are, therefore,
not considered related parties for purposes of this disclosure. At December 31,
1997 and 1996, an affiliated company of a member of the Board of Directors had
$3,137 and $779 (2.6% and 0.7% of total deposits), respectively, deposited with
the Company. These deposits were on the same terms as those prevailing at the
same time for comparable transactions with others.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. The instruments involve, to varying degrees elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
55
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
written standby letters of credit is represented by the contractual notional
amount of these instruments.
At December 31, 1997, financial instruments whose contract or notional amounts
represent credit risk were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Commitments to extend credit $ 16,647 $ 20,467
Standby letters of credit 1,061 865
================= =================
$ 17,708 $ 21,332
================= =================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral required varies
but may include accounts receivable, inventory, property, plant and equipment,
real estate and income producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loans to customer. At December 31, 1997, all standby
letters of credit were secured by normal business assets in accordance with the
Company's standard lending practices.
56
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
10. CONCENTRATION OF CREDIT RISK
The Company grants residential, commercial, construction, agricultural and
consumer loans to customers principally located in Napa County, California.
Although the Company has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their contracts is dependent on the economic
conditions of the wine industry. At December 31, 1997, the Company's loans to
companies in the wine industry were $13,971 with commitments to lend an
additional $5,375. The Company requires that loan customers meet the collateral
requirements described in Note 9 for commitments to extend credit.
As of December 31, 1997 and 1996, the Company's real estate loans were
collateralized primarily with real estate located in the Napa Valley area. As
such, the ultimate collectibility of a substantial portion of the Company's loan
portfolio is influenced by the overall condition of the Northern California real
estate market.
11. COMMITMENTS AND CONTINGENCIES
The Company and the Bank lease a portion of their banking and office facilities
under noncancelable operating leases. Total minimum future rental payments under
these operating leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 180
1999 129
=================
Total $ 309
=================
</TABLE>
Rental expense was $180 and $194 for the years ended December 31, 1997 and 1996,
respectively.
The Company is involved in various legal actions arising from normal business
activities. Management believes that the ultimate resolution of these actions
will not have a material effect on the consolidated financial statements.
57
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
12. RESTRICTIONS ON RETAINED EARNINGS
Under the U.S. National Bank Act and other federal laws, the Bank is subject to
prohibitions on the payment of dividends in certain circumstances and to
restrictions on the amount that it can pay without prior approval of the Office
of the Comptroller of the Currency. Without the Comptroller's approval,
dividends for a given year cannot exceed the Bank's retained net income for that
year and retained net profits from the preceding two years. In addition,
dividends may not be paid in excess of the Bank's undivided profits, subject to
other applicable provisions of law. Based upon these restrictions, the Bank
could have declared dividends for 1997 of $2,542 without prior regulatory
approval.
13. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
58
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
13. REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
MINIMUM
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
------------------------ ----------------------- ------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
NAPA NATIONAL BANCORP:
Leverage $ 8,587 6.89% $ 4,987 4.00% $ 6,235 5.00%
Tier 1 risk-based 8,587 9.77 3,514 4.00 5,272 6.00
Total risk-based 9,691 11.03 7,029 8.00 8,786 10.00
NAPA NATIONAL BANK:
Leverage 8,552 6.86 4,987 4.00 6,235 5.00
Tier 1 risk-based 8,552 9.74 3,512 4.00 5,271 6.00
Total risk-based 9,656 10.99 7,029 8.00 8,786 10.00
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
MINIMUM
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
------------------------ ----------------------- ------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
NAPA NATIONAL BANCORP:
Leverage $ 7,971 7.21% $ 4,423 4.00% $ 5,528 5.00%
Tier 1 risk-based 7,971 9.34 3,413 4.00 5,121 6.00
Total risk-based 9,376 10.99 6,825 8.00 8,531 10.00
NAPA NATIONAL BANK:
Leverage 7,862 7.11 4,423 4.00 5,529 5.00
Tier 1 risk-based 7,862 9.22 3,411 4.00 5,115 6.00
Total risk-based 8,932 10.47 6,822 8.00 8,531 10.00
</TABLE>
59
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN
The Company has a stock option plan that provides for issuance of incentive
stock options (ISO) to certain officers and nonstatutory stock options to
certain members of the Company's Board of Directors to purchase up to 250,000
shares of common stock. Each option entitles the holder to purchase one share of
common stock. Outstanding options that expire at various dates through 2007 have
been granted at a price of $8.00 to $15.50. This price approximates the market
value of the stock at the dates the options were granted. The right to exercise
options vests either immediately or at various rates in each year of future
service. There were 83,300 options available for grant at December 31, 1997.
Option information is summarized below:
<TABLE>
<CAPTION>
PRICE NONSTATUTORY NUMBER OF OPTIONS
---------------------------------------
PER SHARE 1997 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
Shares under option at beginning of year
$8.00 - $15.35 120,000 110,000
Options exercised $8.00 (21,500) -
Options granted $8.00 - $15.35 - 10,000
------------------- -------------------
Shares under option at end of year $8.00 - $15.35 98,500 120,000
=================== ===================
Shares under option exercisable
at end of year $8.00 - $15.35 91,000 102,500
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
Price ISO Number of Options
---------------------------------------
Per Share 1997 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
Shares under option at beginning of year
$8.00-$15.35 44,800 34,800
Options exercised $8.00 (7,500) -
Options granted $15.35 - $15.50 13,000 11,000
Options canceled $8.00-$10.00 (9,100) (1,000)
------------------- -------------------
Shares under option at end of year $8.00 - $15.50 41,200 44,800
=================== ===================
Shares under option exercisable
at end of year $8.00 - $15.35 19,000 32,400
=================== ===================
</TABLE>
60
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN (CONTINUED)
The table below reflects the Company's net income and net income per common
share (under the Treasury Stock method), if compensation cost for the Company's
stock plan had been determined based on the fair value at the grant date for
awards under their plan. Since pro forma compensation cost relates to all
periods over which the awards vest, the initial impact on pro forma net income
may not be representative of compensation cost in subsequent years.
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
<S> <C> <C>
Net income applicable to common stock $ 727 $ 866
Net income per common share $ 0.84 $ 0.97
</TABLE>
Fair values of the options were estimated at the date of grant using the
Black-Scholes option pricing model, which includes the following assumptions
used for the stock options awarded during 1997 and 1996, respectively: risk-free
weighted average interest rates of 5.83% and 6.52%; dividend yield of 0.67% and
0.16%; expected volatility of 1.0% and 5.0%; and expected option life for both
1997 and 1996 grants of 8.5 years.
The weighted average grant date fair values of the options granted during 1997
and 1996 were $6.35 and $6.57 per share, respectively. The exercise price of
each option approximates the market price of the Company's common stock on the
date of grant. Expiration dates range from September 16, 1998 to December 16,
2007 for options outstanding at December 31, 1997.
The Company also has an Employee Stock Ownership Trust (the "ESOT"), in which
all employees of the Company are eligible to participate. The ESOT is a
defined-contribution plan which invests in the common stock of the Company. A
portion of these contributions is matched by the Company. The Company's matching
contributions to the ESOT were $91 and $74 for the years ended December 31, 1997
and 1996, respectively.
61
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
15. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
1997 1996
----------------- --------------
<S> <C> <C>
Numerator:
Net Income $ 746 $ 902
Denominator:
Average Number of common shares outstanding 769,458 754,500
Effect of dilutive securities:
Employee Stock options 48,773 42,472
----------------- --------------
Denominator for diluted earnings per share 818,231 796,972
Earnings Per Common Share $ .97 $ 1.20
================= ==============
Earnings Per Common Share - Assuming Dilution $ .91 $ 1.13
================= ==============
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available market
information and appropriate valuation methodologies. However, these estimated
fair values are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in the market assumptions or estimation techniques could significantly affect
the fair value estimates. Because of the limitations, the aggregate fair value
amounts presented below are not necessarily indicative of the amounts that could
be realized in a current market exchange.
The carrying amounts and the estimated fair values of the Company financial
instruments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (a) $ 26,147 $ 26,147
Interest-bearing time deposits - other
financial institutions (b)
1,782 1,782
Securities held-to-maturity (c) 2,405 2,467
Securities available-for-sale (d) 17,250 17,250
Loans - net (e) 78,057 79,832
LIABILITIES
Deposits (f) 121,461 121,538
</TABLE>
62
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------------- ---------------
<S> <C> <C>
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (G)
Commitments to extend credit 16,647 16,647
Commercial letters of credit 1,061 1,061
</TABLE>
The carrying amounts and the estimated fair values of the Company financial
instruments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (a) $ 24,479 $ 24,479
Interest-bearing time deposits - other financial institutions (b) 4,158 4,158
Securities held-to-maturity (c) 2,304 2,304
Loans - net (e) 78,290 78,253
LIABILITIES
Deposits (f) 105,417 112,560
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (G)
Commitments to extend credit 20,467 20,467
Commercial letters of credit 865 865
</TABLE>
(a) Cash and cash equivalents: The carrying amount is a reasonable estimate of
fair value.
(b) Interest-bearing time deposits - other financial institutions: The
carrying value is a reasonable estimate of fair value.
(c) Securities held-to-maturity: Fair values of investment securities are
based on quoted market prices or dealer quotes. If a quoted market price
was not available, fair value was estimated using quoted market prices for
similar securities.
63
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(d) Securities available-for-sale: Fair value amounts were based on quoted
market prices, and are carried at their aggregate fair value.
(e) Loans - net: Fair values for certain commercial construction, revolving
consumer credit and other loans were estimated by discounting the future
cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and maturities. Certain adjustable
rate loans and leases have been valued at their carrying values, adjusted
for credit quality, if no significant changes in credit standing have
occurred since origination and the interest rate adjustment
characteristics of the loan or lease effectively adjust the interest rate
to maintain a market rate of return.
(f) Deposits: The fair value of noninterest-bearing, adjustable rate deposits
and deposits without fixed maturity dates is the amount payable upon
demand at the reporting date. The fair value of fixed-rate
interest-bearing deposits with fixed maturity dates was estimated by
discounting the cash flows using rates currently offered for deposits of
similar remaining maturities.
(g) Off-balance-sheet instruments: The fair value of commitments to extend
credit is estimated using fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. The fair values of
standby and commercial letters of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligations with the counterparties, reduced by
the remaining net deferred income associated with such obligations.
64
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
17. FINANCIAL STATEMENTS OF NAPA NATIONAL BANCORP (PARENT COMPANY ONLY)
The condensed financial statements of Napa National Bancorp are as follows:
BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 8 $ 93
Investments in subsidiaries 8,653 7,975
Accrued interest receivable and other assets 15 15
================= =================
Total assets $ 8,676 $ 8,083
================= =================
LIABILITIES
Accrued expenses and other liabilities $ 112 $ 112
Shareholders' equity:
Common Stock 7,147 6,915
Retained Earnings 1,417 1,056
----------------- -----------------
================= =================
Total liabilities and shareholders' equity $ 8,676 $ 8,083
================= =================
</TABLE>
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Income:
Interest income $ 1 $ 3
Dividend Income 40 200
Other income 51 -
------------------ ------------------
Total income 91 203
------------------ ------------------
Expenses:
Other expense 3 7
------------------ ------------------
Total expenses 3 7
------------------ ------------------
Income before applicable taxes and equity in net income of
subsidiaries 88 196
Applicable income taxes 20 -
------------------ ------------------
Income before equity in undistributed net income subsidiaries 68 196
Equity in undistributed net income of subsidiaries 678 706
================== ==================
Net income $ 746 $ 902
================== ==================
</TABLE>
65
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
17. FINANCIAL STATEMENTS OF NAPA NATIONAL BANCORP (PARENT COMPANY ONLY)
(CONTINUED)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income $ 746 $ 902
Reconciliation of net income to net cash provided (used) by
operating activities:
Equity in undistributed net income of subsidiaries (678) (706)
Decrease in accrued interest receivable 0 1
(Decrease) increase in accrued expenses and other
liabilities, net 0 (4)
------------------ ------------------
Net cash (used) provided by operating activities 68 193
Financing activities:
Cash dividends paid to shareholders (385) (378)
Proceeds from issuance of common stock 232 -
------------------ ------------------
Net cash (used) by financing activities (153) (378)
Net (decrease) increase in cash (85) (185)
Cash at beginning of year 93 278
================== ==================
Cash at end of year $ 8 $ 93
================== ==================
</TABLE>
66
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
As permitted by General Instruction E(3) to Form 10-KSB, the information
called for by this Item is incorporated by reference from the sections of the
Registrant's 1997 definitive proxy statement entitled "Election of Directors,"
and " Remuneration and Other Information with respect to Officers and
Directors,"which proxy statement will be filed no later than April 30, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
As permitted by General Instruction E(3) to Form 10-KSB, the information
called for by this Item is incorporated by reference from the section of the
Registrant's 1998 definitive proxy statement entitled "Remuneration and Other
Information With Respect to Officers and Directors," which proxy statement will
be filed no later than April 30, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As permitted by General Instruction E(3) to Form 10-KSB, the information
called for by this Item is incorporated by reference from the section of the
Registrant's 1998 definitive proxy statement entitled "Security Ownership of
Certain Beneficial Owners and Management," which proxy statement will be filed
no later than April 30, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As permitted by General Instruction E(3) to Form 10-KSB, the information
called for by this Item is incorporated by reference form the section of the
Registrant's 1998 definitive proxy statement entitled "Certain Relationships and
Related Transactions," which proxy statement will be filed no later than April
30, 1998.
ITEM 13. EXHIBITS.
(a) Exhibits. See Index to Exhibits to this Form 10-KSB, for a list of the
exhibits filed as a part of this report and incorporated herein by
reference.
(b) Reports on Form 8-k. No reports on Form 8-k were filed during the fourth
quarter of 1997.
67
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: March 27, 1998.
NAPA NATIONAL BANCORP
By /s/ Brian J. Kelly
President/COO
By /s/ Michael D. Irwin
Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Brian J. Kelly and Michael D. Irwin jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on Form
10-KSB, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C>
March 27, 1998 /s/ William A. Bacigalupi
Director
March 27, 1998 /s/ Dennis D. Groth
Director
March 27, 1998 /s/ E. James Hedemark
Director
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
March 27, 1998 /s/ Michael D. Irwin
Director
Chief Financial Officer
(Principal Accounting Officer)
March 27, 1998 /s/ Brian J. Kelly
President and COO
Director
March 27, 1998 /s/ C. Richard Lemon
Secretary and Director
March 27, 1998 /s/ Joseph G. Peatman
Director
March 27, 1998 /s/ A. Jean Phillips
Director
March 27, 1998 /s/ George M. Schofield
Director
March 27, 1998 /s/ W. Clarke Swanson, Jr.
Chairman of the Board and CEO
</TABLE>
69
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3(ii) * Bylaws, amended and restated, of the Registrant.
4.1 * A specimen copy of the certificates evidencing
Common Stock.
10.1 * Napa National Bancorp 1982 Stock Option Plan, as
amended and restated.
10.2 * Form of Incentive Stock Option Agreement
10.3 * Form of Nonstatutory Stock Options Agreement
24 Power of Attorney (located on signature page hereof)
27 Financial Data Schedule
</TABLE>
* Previously filed with and incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
70
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> OCT-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 0 9,926
<INT-BEARING-DEPOSITS> 0 1,782
<FED-FUNDS-SOLD> 0 16,221
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 17,250
<INVESTMENTS-CARRYING> 0 2,405
<INVESTMENTS-MARKET> 0 2,467
<LOANS> 0 79,623
<ALLOWANCE> 0 1,566
<TOTAL-ASSETS> 0 130,819
<DEPOSITS> 0 121,461
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 771
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 7,147
<OTHER-SE> 0 1,440
<TOTAL-LIABILITIES-AND-EQUITY> 0 130,819
<INTEREST-LOAN> 2,166 8,419
<INTEREST-INVEST> 163 259
<INTEREST-OTHER> 259 1,125
<INTEREST-TOTAL> 2,588 9,803
<INTEREST-DEPOSIT> 788 3,075
<INTEREST-EXPENSE> 788 3,075
<INTEREST-INCOME-NET> 1,800 6,728
<LOAN-LOSSES> 250 556
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,443 5,917
<INCOME-PRETAX> 391 1,267
<INCOME-PRE-EXTRAORDINARY> 391 1,267
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 226 746
<EPS-PRIMARY> .41 .97
<EPS-DILUTED> 0 .91
<YIELD-ACTUAL> 6.39 6.27
<LOANS-NON> 0 2,922
<LOANS-PAST> 0 90
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,530 1,405
<CHARGE-OFFS> 215 407
<RECOVERIES> 0 12
<ALLOWANCE-CLOSE> 1,566 1,566
<ALLOWANCE-DOMESTIC> 1,566 1,566
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
