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U.S.SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - KSB
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: December 31, 1998
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 fiscal year ended December 31, 1998: $11,953,000
Aggregate market value of voting stock and non-voting stock held by
nonaffiliates of the registrant, based on a market value of $17.00 per share as
of February 28, 1999: $3,474,000
Number of shares of the registrant's sole class of common equity (Common stock,
without par value), as of February 28, 1999: 791,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for Registrant's 1999 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A not later than
April 30, 1999) 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 7A. Quantitative and Qualitative Disclosure about Market Risk
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 and Reports on Form 8-K
SIGNATURES
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
This Annual Report on Form 10-KSB includes forward-looking information
which is subject to a "safe harbor" created by Section 27A of the Securities Act
of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements (which involve the Company's plans,
beliefs and goals, refer to estimates or use similar terms) 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: increasing competitive
pressure; changes in the interest rate environment; general economic conditions,
deterioration in credit quality which could cause 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 interest rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; risks associated with the Year 2000 which could cause
disruptions in the Company's operations and changes in the securities markets.
See also "Certain Additional Business Risks"and "Year 2000" included herein in
Item I and other risk factors discussed elsewhere in this Report.
GENERAL
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 principal subsidiary, Napa National Bank (the "Bank"), was
organized as a national banking association in 1982. At December 31, 1998, the
Company had consolidated assets of $144,089,000 and shareholders' equity of
$9,813,000. 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 of
the Company. W. Clarke Swanson, Jr., Chairman of the Board and CEO, beneficially
owns approximately 64% 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, 1998, the Bank employed 83 employees, including 21 officers
and 11 part-time employees. At December 31, 1998, the Company employed one
employee.
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.
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 prior 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. However, 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 five 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 bank.
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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 on the ability on the Company and the Bank to pay
dividends.
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.
Comprehensive amendments to the FRB's Regulation Y became effective in
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.
CAPITAL STANDARDS
The 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
federal banking agencies do 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%.
October 1, 1998, the FDIC adopted two rules governing minimum capital
levels that FDIC-supervised banks must maintain against the risks to which they
are exposed. The first rule makes risk-based capital standards consistent for
two types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to be recognized for
risk-based capital purposes as of September 1, 1998. The FDIC rules also provide
that 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, the federal banking agencies
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 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 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%.
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In addition to these uniform 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.
As of December 31, 1998, the Bank's capital ratios exceeded applicable
regulatory requirements. 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, 1998 (amounts in thousands except percentage
amounts).
The Company
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Well Minimum
Actual Capitalized Capital
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Capital Ratio Ratio Requirement
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Leverage............. $ 9,813 6.92% 5.0% 4.0%
Tier 1 Risk-Based.... 9,813 10.69 6.0 4.0
Total Risk-Based..... 10,965 11.95 10.0 8.0
The Bank
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Well Minimum
Actual Capitalized Capital
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Capital Ratio Ratio Requirement
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Leverage............. $ 9,689 6.84% 5.0% 4.0%
Tier 1 Risk-Based.... 9,689 10.57 6.0 4.0
Total Risk-Based..... 10,841 11.83 10.0 8.0
The federal banking agencies 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. The federal banking
agencies 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"
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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"
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Total risk-based capital of Total risk-based capital of less
less than 8%; than 6%;
Tier 1 risk-based capital of Tier 1 risk-based capital of
less than 4%; or less than 3%; or
Leverage ratio of less than 4%. Leverage ratio of less than 3%.
"Critically undercapitalized"
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Tangible equity to total assets of
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 banking agencies 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.
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
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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.
The federal banking agencies 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. Based upon these restrictions, the Bank could
have declared dividends for 1998 of $2,342,000 without prior regulatory approval
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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. During 1998, the Company paid premiums in the amount of $18,000
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
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.
The Company cannot be certain of the effect of the foregoing recently
enacted legislation on its business.
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.
Certain other pending legislative proposals include bills to let banks pay
interest on business checking accounts, to require "know your customer"
policies, 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 and the
California Interstate Banking and Branching Act of 1995 have increased
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 the Company's common stock eligible for future sale could have a
dilutive effect on the market for the Company's 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 791,000 shares of common stock and no
shares of preferred stock were outstanding at December 31, 1998. As of December
31, 1998, outstanding options to purchase common stock were 134,200, and common
stock available for grants under the Company's stock option plans was 118,300
shares.
The loan portfolio of the Company is dependent on real estate. At December
31, 1998, real estate served as the principal source of collateral with respect
to approximately 67% 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 the
Company's 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 risks, 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 risks associated with the "Year 2000" problem involve both operational
issues relating to the Bank's data processing systems and the impact of this
problem on the operations of the Bank's customers. Both of these issues could
have a significant negative impact on the Company's financial condition or
results of operations including the level of the Bank's provision for possible
loan and lease losses in future periods. See "Year 2000 Problem."
14
<PAGE>
YEAR 2000 PROBLEM
The "Year 2000" problem relates to the fact that many computer programs and
other technology utilizing microprocessors only use two digits to represent a
year, such as "98" to represent "1998." In the year 2000, such
programs/processors could incorrectly treat the year 2000 as the year 1900. The
Company's business is dependent on technology and data processing. As a result,
it has created a Year 2000 team whose members are familiar with the Company's
business and operations. This issue has grown in importance as the use of
computers and microprocessors has become more pervasive throughout the economy,
and interdependencies between systems has multiplied. The issue must be
recognized as a business problem, rather than simply a computer problem, because
of the way its effects could ripple through the economy. The Company could be
affected either directly or indirectly by the Year 2000 issue. This could happen
if any of its critical computer systems or equipment containing embedded logic
fail, if the local infrastructure (electric power, communications, or water
system) fails, if its significant vendors are adversely impacted, or if its
borrowers or depositors are significantly impacted by their internal systems or
those of their customers or suppliers.
The Company utilizes ITI banking software which processes on Unisys
equipment for its data processing and mission critical needs. The Company does
not have access to the programming code of the software. The Company is
dependent on this system, as well as personal computers connected on a local
area network.
The Company's business also involves non-IT products and services, some of
which have embedded technology which might not be Year 2000 compliant. Some non-
IT products and services involve various infrastructure issues such as power,
communications and water, as well as elevators, ventilation and air conditioning
equipment. The Company classifies power and communications as non-IT mission
critical systems.
The Company's application software, data processing vendors, computer
operating systems, local area network and the power and communication
infrastructure provide critical support to substantially all of its business and
operations. Failure to successfully complete renovation, validation and
implementation of its mission critical IT systems could have a material adverse
effect on the operations and financial performance of the Company. Moreover,
Year 2000 problems experienced by significant vendors or customers of the
Company or power or communications systems could negatively impact the business
and operations of the Company even if its own critical IT systems are capable of
functioning satisfactorily. Due to the numerous issues and problems which might
arise and lack of guarantees concerning Year 2000 readiness from non-IT service
providers such as power and communication systems vendors, the Company cannot
quantify the potential cost of problems if the Company's renovation and
implementation efforts or the efforts of significant vendors or customers are
not successful.
15
<PAGE>
State of Readiness
The Company has conducted a comprehensive review of its IT systems to
identify the systems that could be affected by the Year 2000 problem and has
developed a plan designed to resolve the problem. The Company believes it has
made continuous progress in addressing all material aspects of the Year 2000
problem.
The Company completed the Awareness and Assessment Phases, as defined by
the Federal Financial Institutions Examination Council (FFIEC), for its IT
systems and Company facilities in 1998 and continues to update its assessment as
needed. The Company has identified mission-critical systems, assessed the state
of Year 2000 compliance of those systems, and developed a plan to correct non-
compliant systems. The Company reports on a regular basis to the Board of
Directors on Year 2000 progress.
The target date established by the FFIEC for substantial completion of
testing for internal mission-critical IT systems was December 31, 1998. At
December 31, 1998, the Company had substantially completed testing of non-Year
2000 compliant IT Systems that were identified as mission-critical. By March 31,
1999 FFIEC Guidelines require that testing by companies relying on service
providers for mission-critical systems should be substantially complete.
External testing with material other third parties (customers, other financial
institutions, business partners, payment system providers, etc.) should have
begun. By June 30, 1999 testing of mission-critical systems should be complete
and implementation should be substantially complete.
Based on information provided by outside service providers and its testing
process the Company believes that its mission critical IT systems are
substantially Year 2000 compliant. The Company intends to work with its vendors
to resolve any other issues discovered during the testing process. The Company
plans to complete secondary testing, where it is deemed appropriate, by June 30,
1999. The Company is also monitoring the Year 2000 readiness of outside product
and service vendors. The Company cannot test for Year 2000 readiness of its
power and telecommunications vendors, although the Company is monitoring their
readiness. Additionally, at the date of this report, management of the Company
had not identified any serious problems with its mission-critical systems.
Costs
The Company is expensing all period costs associated with the Year 2000
problem. Through December 31, 1998, the amount of such expense had been
approximately $50,000. Management estimates that the Company will incur
approximately an additional $200,000 in Year 2000 related expenses in fiscal
1999. There can be no assurance that these expenses will not increase as further
testing and assessment of vendor and customer readiness and contingency planning
for the Year 2000 continues. The above cost estimates include costs for
consultants, running tests and technical assistance from vendors, as well as
development of contingency plans and costs of communicating with customers
concerning Year 2000 issues
16
<PAGE>
Risks
Because the Company recognizes that its business and operations could be
adversely affected if key business partners fail to achieve timely Year 2000
compliance, the Company is evaluating strategies to manage and mitigate the
risks to the Company of their Year 2000 failures.
Management has identified a long-range, most reasonably likely, worst case
scenario. This scenario suggests that the Year 2000 problem might negatively
impact some significant customers and non-IT vendors/products through the
failure of the customer and/or vendor to be prepared or the impact on them of
the failure of their own vendors and customers. Management believes that this
scenario could occur in conjunction with an economic recession arising from the
Year 2000 problem. The Bank's asset quality and earnings could be adversely
impacted in that event. It is not possible to predict the effect of this Year
2000 scenario on the economic viability of the Bank's customers and the related
adverse impact it may have on Company's financial position and results of
operations, including the level of the Bank's provision for possible loan losses
in future periods. Further there can be no assurance that other possible adverse
scenarios will not occur.
The Company presently believes that, based upon its Year 2000 testing
program and assuming representations of Year 2000 readiness from significant
vendors and customers are accurate, the Year 2000 issue should not pose
significant operational risks for the Company's IT systems. However, 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 vendors,
the impact of infrastructure failures such as power, communications and water on
the Company's IT systems, the economy and future actions which banking or
securities regulators may take.
The Company is making efforts to ensure that its customer base is aware of
the Year 2000 problem. In addition to seminars for and mailings to its customer
base, the Bank has amended its credit policy and credit authorization
documentation to include consideration regarding the Year 2000 problem.
Significant customer relationships have been identified, and such customers are
being contacted by the Bank's account officers to determine whether they are
aware of Year 2000 risks and whether they are taking preparatory actions. An
initial assessment of these customers was substantially completed in late 1998.
The Company is taking follow-up action in 1999 based on the results of this
assessment.
The Company has also attempted to contact major vendors and suppliers of
non-software products and services (including those where products utilize
embedded technology) to determine the Year 2000 readiness of such organizations
and/or the products and services which the Company purchases from such
organizations. The Company is monitoring reports provided by such vendors
regarding their preparations for Year 2000. This is an ongoing process and the
Company intends to continue to monitor information provided by such vendors
through the century date change.
17
<PAGE>
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether they have an effective plan for
identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Examiners are also required to
assess the soundness of an institution's internal controls and to identify
whether further corrective action may be necessary to ensure an appropriate
level of attention to Year 2000 processing capabilities. Management believes it
is currently in compliance with the federal bank regulatory guidelines and
timetables.
Contingency Plans
The FFIEC guidelines indicate that remediation contingency plans may be
necessary for mission-critical applications or systems that have not been
certified as Year 2000 ready. In September 1998, the Company began to develop
high-level remediation contingency plans for applications and systems used by
the Company that are deemed mission-critical. Generally this has involved the
identification of an alternate vendor or other expected actions the Company
could take, as well as the establishment of a trigger date to implement the
contingency plan. The Company is currently working to develop further
contingency plans to address potential business disruptions which might result
from Year 2000 issues.
By June 1999, the Company expects to complete a Year 2000 business
resumption plan based on a review of reasonable worst-case scenarios. This
business resumption plan is intended to enable the Company to continue to
conduct its core business despite unexpected Year 2000-related failures of
systems or services. This will involve, among other things procedures to be
followed in the event of a power failure, communications failure, or system
failure which occurs despite the testing which has been performed. The Company
intends to test and refine this plan by September 1999.
ITEM 2. DESCRIPTION OF PROPERTY.
The Bank maintains its main offices 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 approximately 10,000 square feet with an
adjacent paved ground level parking lot. The parking lot is approximately 10,860
square feet. The Company had leased the facility until December 4, 1998. At that
time, the Company purchased the building for $2.3 million.
The Company owns its Claremont branch. 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
building 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.
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 1999, 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
1998. In addition, the Bank pays utilities, insurance and maintenance relating
to the branch. The Company has exercised its first
18
<PAGE>
option to extend the lease an additional five years after the term ends in 1999.
The monthly rent on the option is currently being negotiated.
All properties owned or leased by the Company are considered to be in good
condition and appropriate for the general business conducted at each location.
All properties, in management's opinion are adequately insured for fire and
hazard damage.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1998, 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, excluding broker's commissions, based upon
information as reported to management regarding actual trades. 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
trades effected through Round Hill Securities.
19
<PAGE>
<TABLE>
<CAPTION>
SALES PRICES OF THE COMPANY'S
COMMON STOCK
TRADING
YEAR HIGH LOW VOLUME
1998
<S> <C> <C> <C>
Fourth Quarter $15.50 $15.50 1,100
Third Quarter N/A N/A 0
Second Quarter 15.50 15.50 300
First Quarter 15.50 15.50 600
1997
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
</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 2,000 and 20,780 shares in 1998 and 1997,
respectively.
As of February 28, 1999, the outstanding shares of the Company's Common
stock were held of record by 301 shareholders. The last known trade of the
Company's Common stock occurred on December 7, 1998, for 400 shares, at a price
per share of $15.50.
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.
20
<PAGE>
During the first quarter of 1998, 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 first quarter 1998 earnings and amounted to
$98,000. The Bank provided $98,000 in funding to the Company for payment of the
dividend. During the second quarter of 1998, the Company declared a second cash
dividend of twelve and a half cents ($0.125) per share. This cash dividend was
based on the second quarter earnings of 1998 and amounted to $98,000. The Bank
provided $96,000 in funding to the Company for payment of the dividend. During
the third quarter of 1998, the Company declared and paid a another cash dividend
of twelve and a half cents ($0.125) per share for a total of $98,300. The Bank
provided $70,400 in funding to the Company for payment of the dividend. During
the fourth quarter of 1998, the Bank paid a $63,000 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 in the amount of $99,000 was based on
fourth quarter earnings and was paid to shareholders on December 1, 1998. Total
dividends paid by the Bank to the Company and from the Company to its
shareholders for 1998 amounted to $327,000 and $393,000 respectively. See
"Restrictions on Dividends and Other Distributions" included in Item 1 herein
for a discussion of certain restrictions on the ability of the Company and Bank
to declare dividends and other distributions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This Annual Report on Form 10-KSB includes forward-looking information
which is subject to a "safe harbor" created by Section 27A of the Securities Act
of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements (which involve the Company's plans,
beliefs and goals, refer to estimates or use similar terms) 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: increasing competitive
pressure; changes in the interest rate environment; general economic conditions,
deterioration in credit quality which could cause 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 interest rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; risks associated with the Year 2000 which could cause
disruptions in the Company's operations and changes in the securities markets.
See also "Certain Additional Business Risks"and "Year 2000" included herein in
Item I and other risk factors discussed elsewhere in this Report.
The following analysis of the Company's financial condition for the years
ended December 31, 1998 and 1997 and results of operation for each of the two
years in the period ended December 31, 1998, 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 analysis relates principally to the financial condition
and results of operations of the Bank.
21
<PAGE>
The consolidated financial statements of the Company are prepared in
conformity with already defined as "GAAP" above and prevailing practices within
the banking industry. All material intercompany transactions and accounts have
been eliminated. The preparation of financial statements in conformity with GAAP
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. 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.
The following presents selected consolidated financial information for the
Company for the five years ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
($ IN 000'S EXCEPT EARNINGS PER SHARE AND RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Total interest income $ 10,535 $ 9,803 $ 9,173 $ 8,432 $ 6,226
Total interest expense 3,461 3,075 2,814 2,634 1,658
Provision for loan losses 265 556 550 323 149
Net interest income after
provision for loan losses 6,809 6,172 5,809 5,475 4,419
Other income 1,418 1,012 806 800 627
Other expense 6,078 5,917 5,099 4,409 3,716
Income before
income tax 2,149 1,267 1,516 1,866 1,330
Income tax 826 521 614 765 550
Net income 1,323 746 902 1,101 777
Cash Dividends Paid $ 393 $ 385 $ 378 $ 0 0
BALANCE SHEET INFORMATION (AT PERIOD END):
Total assets $144,089 $130,819 $113,827 $104,851 $86,477
Net loans 77,647 78,057 78,290 73,374 62,103
Total deposits 133,251 121,461 105,417 96,752 79,378
Shareholders' equity 9,813 8,587 7,971 7,447 6,346
Shareholders' equity
per share $ 12.41 $ 10.96 $ 8.67 $ 8.44 8.41
</TABLE>
22
<PAGE>
SELECTED FINANCIAL RATIOS:
Net interest margin 5.77% 6.27% 6.75% 6.98% 6.25%
Allowance for loan losses
to average loans 2.08% 1.92% 1.75% 1.93% 1.78%
Nonperforming loans to
average loans 0.13% 3.59% 4.41% 2.11% 1.63%
Net charge-offs
to average loans 0.20% 0.48% 0.60% 0.07% 0.02%
Average earning assets to
total average assets 89.61% 91.26% 92.15% 91.52% 92.00%
Return on average assets 0.97% .63% .94% 1.30% 1.05%
Return on average
shareholders' equity 14.43% 9.50% 11.61% 16.40% 14.02%
Average equity to average
assets ratio 6.70% 6.68% 7.46% 7.27% 6.87%
Leverage Ratio (1) 6.92% 6.86% 7.11% 7.16% 7.28%
Total Risk based
capital ratio 11.95% 10.99% 10.47% 10.40% 10.33%
(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.
SUMMARY OF FINANCIAL RESULTS
The Company recorded net income of $1,323,000, or $1.60 per share on
earnings per common share - assuming dilution for the year ended December 31,
1998 compared to $746,000 or $.91 per share on earnings per common share -
assuming dilution for the year ended December 31, 1997.
Net income increased in 1998 over 1997 by $577,000, or 77%. The primary
reason for this increase was due to an increase in interest income of $732,000
or 7% and a decrease in the provision for loan loss of $291,000. This increase
was affected by a $1,565,000 increase in investment security income. This was
primarily the result of an enhanced investment strategy. The increase in
interest income was partially offset by an increase in interest expense of
$386,000 or 13%, in non-interest expense of $161,000 and income tax of $305,000.
Another large increase in income included an increase of $406,000 in non-
interest income. The large increase in non-interest income is due to the
redemption of security collateral in connection with Sign Tech. The recovery
was in the amount of $250,000.
23
<PAGE>
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, 1998 and
1997. Average balances have been computed using daily adjusted balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
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 $ 8,855 6.5% $ 6,932 5.9%
Interest-Bearing Deposits
With Other Banks 289 .2 3,715 3.2
Held-to-Maturity Investments
Taxable 1,742 1.3 1,710 1.5
Non-Taxable 100 .1 25
Available-for-Sale Investments
Taxable 25,405 18.6 2,468 2.1
Non-Taxable 4,267 3.1 273 .2
Federal Funds Sold 12,249 8.9 17,703 15.0
Loans, Net (1) 78,605 57 .4 79,570 67.6
Premises and Equipment, Net 2,707 2.0 2,543 2.2
Other Assets and Accrued
Interest Receivable 2,657 1.9 2,735 2.3
Total Assets $136,876 100 .0% $117,674 100.0%
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 31,346 22.9% $ 25,748 21.9%
Interest-Bearing
Transaction Accounts 34,550 25.2 30,545 25.9
Savings 19,024 13.9 12,759 10.8
Time 41,914 30.6 39,745 33.8
Total Deposits 126,834 92.6 108,797 92.4
Other Liabilities and
Accrued Interest 909 0.7 683 0.6
Shareholders' Equity 9,133 6.7 8,194 7.0
Total Liabilities and
Shareholders' Equity $136,876 100.0% $117,674 100.0%
</TABLE>
- --------------------
1) Average loans include net deferred loan fees and non-accrual loans and are
net of the allowance for loan losses.
24
<PAGE>
INTEREST RATES AND DIFFERENTIALS
The following table sets forth information for the periods indicated
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 $119,000 in 1998 and
$299,000 in 1997 are included in computations of interest income and expense,
while interest on non-accrual loans is excluded from computations of interest
income and expense.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
INTEREST
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/
(000'S) (000'S) RATE
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans, Net (1,2) $ 78,605 $ 8,041 10.23%
Interest-Bearing Deposits
With Other Banks 289 18 6.23
Held-to-Maturity Investments
Taxable 1,742 94 5.40
Non-Taxable (3) 100 7 7.00
Available-for-Sale Investments
Taxable 25,405 1,518 5.98
Non-Taxable(3) 4,267 282 6.61
Federal Funds Sold 12,249 652 5.32
Total Average Interest-Earning
Assets $122,657 $10,612 8.65%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction
Accounts $ 34,550 $ 708 2.05%
Savings 19,024 584 3.07
Time 41,914 2,169 5.17
Total Average Interest-Bearing
Liabilities $ 95,488 $ 3,461 3.62%
Net Interest Income and
Net Interest Margin (4) $ 7,151 5.83%
Net Interest Spread (5) 5.03%
</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 $119,000.
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.
25
<PAGE>
<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 6.20
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%
INTEREST-BEARING LIABILITIES
Deposits:
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.
26
<PAGE>
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, 1998
COMPARED TO
YEAR ENDED DECEMBER 31, 1997
(IN 000'S)
AVERAGE AVERAGE NET
VOLUME RATE CHANGE
INCREASE (DECREASE) IN INTEREST INCOME:
<S> <C> <C> <C>
Loans, Net (1) $ (102) $(276) $ (378)
Interest-Bearing Deposits
With Other Banks (193) 2 (191)
Held-to-Maturity
Taxable 2 (1) 1
Non-taxable 7 7
Available-for-Sale
Taxable 1,422 (59) 1,363
Non-Taxable 293 (31) 262
Federal Funds Sold (282) 18 (264)
Total Increase (Decrease) 1,147 (347) 800
INTEREST (DECREASE) IN INTEREST EXPENSE:
Deposits:
Interest-Bearing Transaction
Accounts 86 (34) 52
Savings 161 95 256
Time 114 (36) 78
Total Increase (Decrease) 361 25 386
Change in Net Interest Income $ 786 $(372) $ 414
</TABLE>
1) The effect of changes in loan fees is included as an adjustment to the
average rate.
27
<PAGE>
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, 1998, net interest income increased by
$346,000, or 5%, over the same period of 1997. This number derives from the
difference between total interest income and total interest expense. The
$17,193,000 increase in average earning assets in 1998 compared to 1997
contributed significantly to this increase in net interest income.
As of December 31, 1998, total average earning assets were $122,657,000, an
increase of $17,193,000, or 16%, from the 1997 level of $105,464,000. The
decrease in net interest margin to 5.83% in 1998 from 6.39% in 1997 offset some
of the increase attributable to volume gains. The decline in net interest margin
was due rate cuts in prime rate and competitive pressure.
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 judgment as to the inherent risks
associated with the loan portfolio at a particular date. 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 judgments are subject to changes based on
Management's assessment of risk.
The provision for loan losses was $265,000 at December 31, 1998 compared to
$556,000 for 1997. This represents a decrease of $291,000, or 52%, over the
prior year. The decrease in the provision was due to a large decrease in non-
performing loans and management's ongoing assessment of the adequacy of the
allowance for loan losses (See "Loans and Nonaccrual Loans" herein).
NON-INTEREST INCOME
Non-interest income consists primarily of service charges on deposit
accounts, fees charged for other banking deposit and loan services, and merchant
card processing income. Non-interest income increased by $406,000 or 40% between
1998 and 1997. A large portion of this increase, $250,000, was a one-time gain
related to the sale of an asset which the Company acquired as the result of a
loan default. 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 1998 over 1997 in the amount of $22,000.
28
<PAGE>
NON-INTEREST EXPENSE
Total non-interest expense was $6,078,000 in 1998, representing an increase
of $161,000, or 3%, over the 1997 total of $5,917,000.
Net salaries and employee benefit expense was $3,529,000 in 1998, an
increase of $249,000, or 8%, over 1997's total of $3,280,000. This increase is
due to the addition of four full time equivalent employees. Additionally,
salaries increased due to average bank-wide raises of approximately four percent
which took place in March 1998.
Occupancy and furniture, fixtures and equipment expenses increased in 1998
by $3,000 or 1%, over 1997 totals. This increase was due primarily to the
Bank's branch/headquarters tenant improvements and upgrades in electronic media
throughout the Company.
Professional fees increased in 1998 by $62,000, or 14%, over 1997 totals.
This increase was due primarily to the hiring of an outside firm to assist in
Human Resource Management and training. The increase is also attributed to fees
associated with the recovery for Sign Tech collateral which is related to the
sale of an asset which the Company acquired as the result of a loan default.
The Company decreased its marketing and business development costs by
$12,000, or 7%, during 1998 over the same period of 1997. This decrease was
primarily due to a more conservative marketing and business development campaign
throughout 1998.
Regulatory fees and related expenses increased in 1998 by $8,000, or 5%,
over the same period of 1997. The increase was primarily due to changes in the
annual FDIC assessments.
Stationery and supply expense for 1998 was $10,000, or 8%, lower than 1997.
This decrease was due to better control of supply ordering and overall cost
control.
Data processing expenses have shown a steady increase, $18,000, during the
two years presented and have increased with the overall growth of the Company.
The $18,000, or 13%, growth in 1998 over 1997 was also due to enhancements and
upgrades made to the Company's personal computers.
Other noninterest expense decreased by $72,000, or 11%, in 1998 over 1997
totals. The decrease was due primarily to a decrease in loan related expenses
and overall improved cost control management.
29
<PAGE>
INCOME TAXES
Income tax expense was 38% and 41% of pre-tax income for each of the years
ending December 31, 1998 and 1997, respectively. The decrease was due to the
enhanced investment strategy which included the purchase of tax-free municipal
investment securities.
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 $117,281,000 at December 31, 1997 to $129,274,000 at
December 31, 1998, an increase of $11,993,000, or 10%.
INVESTMENT SECURITIES
The following table shows the book value, unrealized gains and losses, and
fair value composition of the securities portfolio at December 31, 1998 and
1997. At December 31, 1998, except for securities of the U.S. Government and its
agencies and corporations, there was no single issuer of securities for which
the aggregate book value of securities of such issuer held by the Company
exceeded 10% of the Company's shareholders' equity.
DECEMBER 31, 1998 - 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 $ 7,578,000 $ 187,000 $ (3,000) $ 7,762,000
Collateralized Mortgage
Obligations 26,267,000 105,000 (290,000) 26,082,000
------------------------------------------------------------------
$33,845,000 292,000 (293,000) 33,844,000
--------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury $ 1,698,000 $ 9,000 $ 1,707,000
Obligations of States and
Political Subdivisions 100,000 2,000 102,000
---------------------------------------------------------------
$ 1,798,000 $ 11,000 $ 1,809,000
-----------------------------------------------------------------
</TABLE>
30
<PAGE>
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>
The Company had Federal Reserve and Federal Home Loan Bank Stocks totaling
$552,500 at December 31, 1998 and $582,000 at December 31, 1997.
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, Obligations of States and Political
Subdivisions 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
(loss)gain on securities available for sale as of December 31, 1998 and December
31, 1997 was $1,000 and $39,000, respectively.
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 approximate average
life of five years or less at purchase date.
31
<PAGE>
The maturities and weighted-average tax equivalent yields of the investment
portfolio at December 31, 1998 based on amortized cost are shown below:
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
THROUGH THROUGH AFTER
ONE YEAR FIVE TEN TEN
OR LESS YIELD YEARS YIELD YEARS YIELD YEARS YIELD TOTAL
(In 000's)
AVAILABLE-FOR-SALE SECURITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of States and
Political Subdivisions $7,578 6.97% $ 7,578
Collaterized Mortgage
Obligations $ 9,801 5.79% $12,705 5.91% 3,761 5.89% 26,267
--------------------------------------------------------------------------
Total $ 9,801 $12,705 $ 3,761 $7,578 $33,845
--------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 1,698 5.08% $ $ 1,698
Obligations of States and
Political Subdivisions 100 100
--------------------------------------------------------------------------
Total $ 1,698 $ 100 $ 1,798
--------------------------------------------------------------------------
</TABLE>
LOAN PORTFOLIO
The following table shows the composition of the Bank's loan portfolio by type
of loan or borrower as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
(IN 000'S)
<S> <C> <C>
Commercial $62,535 $60,880
Real Estate--Construction 1,826 3,329
Real Estate--Mortgage 6,092 4,410
Installment Loans and Leases 2,183 3,495
Personal Lines of Credit
and Other 6,682 7,509
Total Loans 79,318 79,623
Less Allowance for
Loan Losses (1,671) (1,566)
Total Loans, Net $77,647 $78,057
</TABLE>
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 $79,623,000 at December 31, 1997 to $79,318,000 at December 31,
1998. The Bank experienced a decrease in commercial and construction loans;
however, all other loan categories increased. Management attributes the lack of
growth to elimination of problem loans and early pay off of commercial loans.
32
<PAGE>
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 98% 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, 1998, nonperforming loans were $108,000, a decrease of
$2,814,000, or 96%, over the December 31, 1997 balance of $2,922,000.
Nonperforming loans at December 31, 1998 represent .1% of total average loans
compared to 3.5% of total average loans for year end 1997. The large decline in
nonperforming loans between 1998 and 1997 is in management's view primarily due
to the effort of management to improve the credit quality of the loan portfolio
and maximum effort to resolve problem loan situatons.
The following table shows the Company's nonperforming assets by category as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
(IN 000'S)
<S> <C> <C>
Nonperforming assets:
Nonaccrual Loans including loans
past due 90 days $ 108 $2,922
Other Real Estate Owned 266 607
Total Nonperforming Assets $ 374 $3,529
</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. 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.
33
<PAGE>
Interest income on nonaccrual loans at December 31, 1998 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 or since
origination totaled $17,000 versus $165,000 for the same period in 1997.
The average recorded investment in nonaccrual loans during 1998 and 1997
was $1,840,000 and $3,372,000, respectively. Related interest income recognized
on impaired loans during the year ended December 31, 1998 and 1997, under the
cash-basis method of accounting, was approximately $278,000 and $90,000,
respectively.
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.
As of December 31, 1998 and 1997, other real estate owned totaled $266,000
and $607,000 respectively, which at December 31, 1998 consisted of one property.
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.
At December 31, 1998, the Company's real estate construction portfolio
totaled $1,826,000. Real estate loans were related to single family residences
being built by 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,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 $6,092,000 at December 31, 1998. 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.
34
<PAGE>
At December 31, 1998, commercial loans totaled $62,766,000. 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 $8,865,000
at December 31, 1998. Included in consumer loans to individuals are home equity
lines of credit, totaling $5,644,000, 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 90% of the
Company's consumer portfolio is secured.
The Company had standby letters of credit outstanding of $821,000 and
$1,061,000 at December 31, 1998 and December 31, 1997, respectively. In
addition, the Company had commitments to fund real estate construction loans,
commercial loans and consumer loans of $2,595,000, $19,409,000 and $5,042,000
respectively, at December 31, 1998. The Company did not have any loans related
to lease financing activities in the loan portfolio at December 31, 1998.
In recent years, California commercial real estate markets in general have
improved. There can be no assurance that, however, the California real estate
market will not weaken, 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, 1998, approximately $53,648,000, or 67% 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 $13,713,000, or 17% of total loans
at December 31, 1998, as compared to $13,965,000, or 17% of total loans, at
December 31, 1997. 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.
35
<PAGE>
ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the years ending December 31,
1998 and 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
(IN 000'S)
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance, Beginning of Year $ 1,566 $ 1,405
Provision Charged to Expense 265 556
Loans Charged Off:
Commercial (153) (331)
Personal Lines of Credit and Other (108) (46)
Real Estate Construction (0) (30)
Total Loans Charged Off (261) (407)
Recoveries:
Commercial 52 12
Personal Lines of Credit and Other 49
Total Recoveries 101 12
Net Loans (Charged Off) Recovered (160) (395)
Balance, End of year $ 1,671 $ 1,566
Average Gross Loans Outstanding
During Period $80,272 $81,096
Total Gross Loans at End of Year $79,318 $79,623
RATIOS:
Net Loans Charged Off to:
Average Loans Outstanding 0.20% 0.50%
Total Loans at End of Year 0.20% 0.49%
Allowance for Loan
Losses at End of Year 9.58% 25.22%
Provision for Loan Losses 60.38% 71.04%
Allowance for Loan Losses to:
Average Loans 2.08% 1.93%
Total Loans at End of Year 2.10% 1.97%
</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.
36
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER, 31, 1997
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 $ 956 79% $ 575 73%
Real Estate-Construction 228 2 321 8
Real Estate-Mortgage 217 8 467 14
Installment Loans
and Leases 37 3 9 2
Personal Lines of
Credit and Other 35 8 44 3
Unallocated 198 150
Total $1,671 100% $1,566 100%
</TABLE>
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 $1,671,000 allowance, which constitutes 2.10% of total loans at December 31,
1998, was adequate as an allowance against foreseeable losses from the loan
portfolio. The allowance was $1,566,000, or 1.97%, of the total loan portfolio
at December 31, 1997. 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.
The Company records loan impairment in accordance with 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.
37
<PAGE>
At December 31, 1998, the Company's total recorded investment in impaired
loans was $108,000, of which there is a related allowance for credit losses of
$17,000. The average recorded investment in the impaired loans during 1998 and
1997 were $1,840,000 and $3,372,000, respectively.
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.
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, 1998 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 $50,280 $ 9,359 $2,896 $62,535
Real Estate-Construction 1,826 0 0 1,826
Real Estate-Mortgage 3,580 2,317 195 6,092
Installment Loans & Leases 319 1,864 2,183
Personal Lines of Credit &
Other 6,429 253 0 6,682
Total $62,434 $13,793 $3,091 $79,318
Loans With Fixed Interest
Rates $ 1,226 $ 5,862 $3,091 $10,179
Loans With Floating
Interest Rates 61,208 7,931 0 69,139
Total $62,434 $13,793 $3,091 $79,318
</TABLE>
38
<PAGE>
DEPOSITS
Deposits represent the Bank's 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, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
(000'S) (000'S)
<S> <C> <C> <C> <C>
Noninterest-Bearing Demand $ 31,346 0.00% $ 25,748 0.00%
Interest-Bearing
Transaction Accounts 34,550 2.05 30,546 2.01
Savings Deposits 19,024 3.07 12,759 2.28
Time Deposits over 100,000 16,638 5.13 12,759 5.20
Other Time Deposits 25,276 5.21 27,173 5.47
Total Deposits $126,834 2.73% $108,985 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, 1998:
<TABLE>
<CAPTION>
Amount
Maturing In: (000's)
<S> <C>
Three Months or Less $10,842
Over Three Months Through Six Months 3,412
Over Six Through Twelve Months 2,274
Over Twelve Months 1,920
-------
Total $18,448
</TABLE>
Deposits totaled $133,251,000 at December 31, 1998, an increase of
$11,790,000, or 10%, from the December 31, 1997 balance of $121,461,000. In
1998, noninterest bearing transaction accounts grew by $3,171,000, or 10%,
savings accounts increased by $7,552,000, or 58%, and interest bearing
transaction accounts decreased by $1,515,000, or 4%, under 1997 totals. Time
certificates of deposit of $100,000 or more increased by $3,458,000, or 23%, and
other time deposits decreased by $876,000, or 3% over, during 1997. The overall
growth in deposit accounts in 1998 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.
Noninterest bearing demand deposits were 27% of total deposits at December
31, 1998, as compared to 27% at December 31, 1997. Time certificates of deposit
were 32% of total deposits at December 31, 1998, and 33% for the same period of
1997.
39
<PAGE>
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, 1998, the Company's assets repricing in one year is less
than its liabilities repricing in one year by $7,045,000, or 6%, of total
assets. This compares to $4,916,000, or 4% of total assets in 1997. The excess
of liabilities repricing over assets repricing means that if interest rates
decline, the Company's return on assets would be expected to decline less
quickly than its cost of funds, thereby increasing the Company's net interest
margin. However, as interest rates increase, the Company's return on assets
would be expected to decline 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, 1998. 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 "Non-rate 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 $36,557,000 in
demand deposit accounts.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY NON-RATE
0-90 91-365 OVER 1 YEAR SENSITIVE
DAYS DAYS BUT WITHIN OR OVER
(0-3 MO) (3-12 MO) 5 YRS 5 YRS TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold 13,590 13,590
Investments 520 6,417 15,848 13,410 36,195
Loans 48,232 15,103 13,066 3,089 79,490
Noninterest-earning
assets net of loan
loss reserve 14,814 14,814
TOTAL ASSETS $62,342 $21,520 $28,914 $31,313 $144,089
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Time deposits over
$100,000 $10,841 $ 5,687 $ 1,920 $ $ 18,448
All other interest-
bearing deposits 61,863 12,516 3,867 78,246
Total interest-bearing
deposits 72,704 18,203 5,787 97,694
Noninterest-bearing
liabilities 37,582 37,582
Shareholders' equity 9,813 9,813
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $72,704 $18,203 $ 5,787 $47,395 $144,089
INTEREST RATE SENSITIVITY
GAP (1) ($10,362) $ 3,317 $23,127 ($16,082)
CUMULATIVE INTEREST RATE
SENSITIVITY GAP ($10,362) ($ 7,045) $16,082
</TABLE>
________________
1. Interest rate sensitivity gap is the difference between interest rate
sensitive assets and interest rate liabilities within the above time frames.
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to reprice, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market interest rates. Further, certain earning assets have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. The Company considers the anticipated effects of these various
factors in implementing its interest rate risk management activities.
The Company's success is largely dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates. Although
the Company manages other risks, including credit and liquidity risks in the
normal course of its business, management considers interest rate risk to be a
significant market risk exposure that may potentially have a material effect on
the Company's financial position, results of operations, and cash flows. The
Company's interest rate risk generally is caused by short term maturities and
repricing dates on the Company's interest earning assets when compared to those
of its interest bearing liabilities. Thus, increases in interest rates will
affect the interest income generated by its assets faster than the interest
expense generated by its liabilities.
The Company's interest rate risk management is the responsibility of the
Asset and Liability Committee (ALCO), which reports to the Finance Committee.
The ALCO is comprised of Senior Management of the Bank. The ALCO establishes
policies that monitor and coordinate the Company's sources, uses and prices of
funds.
41
<PAGE>
The Company continues to attempt to reduce volatility of its net interest
income by managing the relationship of interest rate sensitive assets to
interest rate sensitive liabilities. To accomplish this, management has
undertaken steps to increase the percentage of fixed rate assets, as a
percentage of its total assets. In recent years, the Company has developed a new
investment strategy that includes more fixed rate, longer term maturity
investments. The Company has also increased the percentage of fixed rate loans
to total loans.
The table below represents in the prescribed tabular form the contractual
balances of the Company's market risk sensitive instruments at the expected
maturity dates as well as the fair value of those instruments for the period
ended December 31, 1998. All instruments are denominated in U.S. dollars, the
Company's reporting currency. The expected maturity categories take into
consideration, to the best of the Company's reporting capabilities, historical
prepayment trends experienced by the Company as well as actual amortization of
principal and does not take into consideration reinvestment of cash. The
Company's assets and liabilities that do not have a stated maturity date, such
as its cash equivalents and certain deposits are considered to be long term in
nature by the Company and are reported in the "thereafter" column. The Company
does not consider these financial instruments to be materially sensitive to
interest rate fluctuations and historically the balances have remained fairly
constant over various economic conditions. The weighted average interest rates
for various fixed rate assets and liabilities presented are based on the actual
rates that existed as of December 31, 1998. The weighted average interest rates
for various variable rate assets and liabilities presented are based on implied
rate based indices the financial instruments are tied.
The fair value of cash and cash equivalents approximate their book value
due to their short maturities. The fair value of available-for-sale securities
is based on bid quotations from security dealers. The fair value of loans is
estimated in portfolios with similar financial characteristics and takes into
consideration discounted cash flows through the estimated maturity or repricing
dates using estimated market discount rates that reflect debtors' credit risk.
The fair value of demand deposits, money market, and savings accounts is the
amount payable on demand. The fair value of time deposits is based on the
discounted value of contractual cash flows, which is estimated using current
rates offered for deposits of similar remaining terms.
42
<PAGE>
Market Risk:
<TABLE>
<CAPTION>
Expected Maturity Date
There- Fair
In Thousands 1999 2000 2001 2002 2003 After Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
AVAILABLE FOR SALE SECURITIES
OBLIGATIONS OF STATES & POLITICAL
SUBDIVISIONS
Fixed Rate 7,415 7,415 7,762
Weighted Average
Interest Rate 4.87% 4.87%
MORTGAGE BACKED SECURITIES
Fixed Rate 9,627 5,401 3,144 2,161 1,470 3,589 25,391 26,082
Weighted Average
Interest Rate 5.79% 6.04% 5.60% 5.97% 6.03% 5.89% 5.85%
HELD TO MATURITY SECURITIES
TREASURY SECURITIES
Fixed Rate 1,698 1,698 1,732
Weighted Average
Interest Rate 5.37% 5.37%
OBLIGATIONS OF STATES & POLITICAL
SUBDIVISIONS
Fixed Rate 50 50 100 102
Weighted Average
Interest Rate 4.10% 4.15% 4.13%
EQUITY SECURITIES
Fixed Rate 553 553 553
Weighted Average
Interest Rate 5.60% 5.60%
LOANS
RESIDENTIAL MORTGAGE LOANS
Fixed Rate 368 48 21 122 69 - 628 648
Weighted Average
Interest Rate 8.25% 10.75% 11.00% 11.00% 9.38% 9.19%
Variable Rate 4,682 1,517 1,350 1,651 2,597 5,224 17,021 17,552
Weighted Average
Interest Rate 9.49% 9.32% 9.22% 9.35% 8.71% 8.60% 9.05%
COMMERCIAL REAL ESTATE
Fixed Rate 308 203 299 297 932 1,629 3,669 3,784
Weighted Average
Interest Rate 9.88% 8.00% 9.67% 9.34% 8.37% 8.88% 8.88%
Variable Rate 2,049 673 4,020 2,890 1,732 20,960 32,324 33,333
Weighted Average
Interest Rate 9.00% 9.90% 9.95% 9.35% 8.73% 8.44% 8.80%
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date
There- Fair
In Thousands 1999 2000 2001 2002 2003 After Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Fixed Rate 180 333 235 347 564 - 1,659 1,664
Weighted Average
Interest Rate 9.39% 9.75% 10.25% 10.50% 9.43% 0.00% 9.83%
Variable Rate 11,652 850 1,386 876 717 6,101 21,581 21,641
Weighted Average
Interest Rate 9.95% 10.03% 9.85% 10.25% 9.98% 9.77% 9.91%
CONSUMER
Fixed Rate 451 375 432 242 197 - 1,697 1,614
Weighted Average
Interest Rate 10.66% 11.04% 11.68% 11.67% 10.07% 0.00% 11.07%
Variable Rate 329 39 173 206 150 13 909 865
Weighted Average
Interest Rate 10.56% 9.53% 8.92% 11.85% 11.43% 10.72% 10.66%
FINANCIAL LIABILITIES
DEPOSITS WITH NO STATED MATURITY
DEMAND DEPOSITS 19,523 19,523 19,524
Weighted Average
Interest Rate 1.06% 1.06%
MONEY MARKET 13,519 13,519 13,519
Weighted Average
Interest Rate 2.26% 2.26%
REGULAR SAVINGS 20,534 20,534 20,535
Weighted Average
Interest Rate 2.58% 2.58%
TIME DEPOSITS
Fixed Rate 37,380 5,345 394 - - - 43,119 43,400
Weighted Average
Interest Rate 4.60% 4.97% 4.93% 4.90% 4.65%
</TABLE>
The degree of market risk inherent in loans with prepayment features may
not be fully reflected in the above disclosures. Although the Company has taken
into consideration historical prepayment trends experienced by the Company to
determine expected maturity categories, prepayment features are triggered by,
among other things, changes in the market rates of interest. Abnormal unexpected
changes may increase the rates of prepayments above those expected. As such, the
potential loss from such market rate changes may be significantly larger.
44
<PAGE>
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"), see Section 7, for the years ended
December 31, 1998 and 1997, the Company's usual and primary source of funds 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 1998, the Statement shows that operations and financing activities were
sources of net cash inflows ($2,274,000 and $11,457,000 respectively) for the
year. However, net cash outflows from investing activities were $16,319,00
resulting in a decrease in the overall ending cash and cash equivalents from
$26,147,000 at December 31, 1997 to $23,559,000 at December 31, 1998, a decrease
of $2,588,000.
In 1997, the Statement shows that operations and financing activities were
also sources of net cash inflows ($1,579,000 and $15,891,000, respectively) for
the year. These sources increased ending cash and cash equivalents by
$1,668,000, taking the total from $24,479,000 at December 31, 1996 to
$26,147,000 at the end of 1997.
Liquidity is measured 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 43% at December 31, 1998 and 37% at December
31, 1997. The increase stemmed from the relatively flat loan growth in 1998 with
deposit growth being utilized in the investment portfolio.
The Company's 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 Company's financial statements are
presented in Note 18 of the Notes to Consolidated Financial Statements.
45
<PAGE>
CAPITAL ADEQUACY
The Federal Reserve Board and the Comptroller of the Currency have
specified guidelines for the purpose of evaluating the capital adequacy of bank
holding companies and banks.
The capital levels of both the Bank and the Company at December 31, 1998
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,
management believes 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 reasonably 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 the assets and
liabilities of a financial institution 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.
46
<PAGE>
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,
1998 1997
<S> <C> <C>
Net income to:
Average earning assets 1.08% 0.94%
Average total assets .97 0.97
Average shareholders' equity 14.43 9.50
Average shareholders' equity to:
Average total assets 6.70% 7.46%
Average net loans 11.38 10.08
Average total deposits 7.23 8.10
Average earning assets to:
Average total assets 89.61% 92.15%
Average total deposits 96.70 100.08
Percent of average total deposits:
Average net loans 61.97% 80.33%
Average noninterest-bearing
deposits 24.71 20.10
Average savings and other
time deposits 48.04 50.74
Total interest expense to:
Total gross interest income 32.85% 30.68%
Dividend Pay-out Ratio 29.71% 41.82%
</TABLE>
47
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets as of December 31, 1998 and 1997, 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, 1998 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, 1998 and 1997
- Consolidated Statements of Income
for the Years Ended December 31,
1998 and 1997
- Consolidated Statements of
Shareholders' Equity for the Years
Ended December 31, 1998 and 1997
- Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1998 and 1997
- Notes to Consolidated Financial
Statements
48
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
Napa National Bancorp
We have audited the accompanying consolidated balance sheets of Napa National
Bancorp and subsidiaries as of December 31, 1998 and 1997, 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
February 5, 1999
49
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------
<S> <C> <C>
(Dollars In Thousands)
ASSETS
Cash and due from banks $ 9,969 $ 9,926
Federal funds sold 13,590 16,221
Interest-bearing time deposits - other financial institutions - 1,782
Securities available-for-sale (cost: 1998 -$33,845; 1997 -$17,211) 33,844 17,250
Securities held-to-maturity (market value: 1998 -$2,362;
1997 - $2,467) 2,351 2,405
Loans:
Commercial, including agriculture 62,535 60,880
Real estate construction 1,826 3,329
Real estate mortgage 6,092 4,410
Installment 2,183 3,495
Personal lines of credit and other 6,682 7,509
-------------------------
Total loans 79,318 79,623
Less allowance for loan losses (1,671) (1,566)
-------------------------
Loans - net 77,647 78,057
Premises and equipment, net 3,908 2,612
Accrued interest receivable 1,211 934
Other assets 1,569 1,632
-------------------------
Total assets $144,089 $130,819
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand $ 36,557 $ 33,386
Interest-bearing:
Savings 20,534 12,982
Transaction 33,042 34,557
Time, $100 and over 18,448 14,990
Other time 24,670 25,546
-------------------------
Total deposits 133,251 121,461
Accrued interest payable 344 353
Other liabilities 681 418
-------------------------
Total liabilities 134,276 122,232
-------------------------
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 -
791,000 shares in 1998 and 783,500 in 1997 7,207 7,147
Retained earnings 2,607 1,417
Net unrealized gain (loss) on available for sale
securities, net of taxes (1) 23
-------------------------
Total shareholders' equity 9,813 8,587
-------------------------
Total liabilities and shareholders' equity $144,089 $130,819
=========================
</TABLE>
See accompanying notes.
50
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
----------------------------------
(Dollars In Thousands
Except Earnings Per Share Amounts)
<S> <C> <C>
Interest income:
Loans (including fees) $ 8,041 $8,419
Federal funds sold 652 916
Time deposits with other financial institutions 18 209
Investment securities and Federal Reserve Bank stock 1,824 259
----------------------------------
Total interest income 10,535 9,803
----------------------------------
Interest expense:
Deposits:
Savings 584 328
Transaction 708 656
Time, $100 and over 69 655
Other time 2,100 1,436
----------------------------------
Total interest expense 3,461 3,075
----------------------------------
Net interest income 7,074 6,728
Provision for loan losses 265 556
----------------------------------
Net interest income after provision for loan losses 6,809 6,172
----------------------------------
Noninterest income:
Service charges on deposit accounts 724 597
Other customer fees and charges 349 231
Other 345 184
----------------------------------
Total noninterest income 1,418 1,012
Noninterest expense:
Salaries and employee benefits 3,529 3,280
Occupancy 471 468
Professional fees 499 437
Equipment 384 469
Marketing and business development 152 164
Regulatory fees and related expenses 157 149
Stationery and supplies 123 133
Data processing 160 142
Other 603 675
----------------------------------
Total noninterest expense 6,078 5,917
----------------------------------
Income before provision for income taxes 2,149 1,267
Income taxes 826 521
----------------------------------
Net income $ 1,323 $ 746
==================================
Earnings per common share $ 1.68 $ .97
==================================
Earnings per common share - Assuming Dilution $ 1.60 $ .91
==================================
</TABLE>
See accompanying notes.
51
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER OF UNREALIZED
SHARES COMMON RETAINED GAIN ON
OUTSTANDING STOCK EARNINGS SECURITIES TOTAL
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996
754,500 $6,915 $1,056 $ - $7,971
Comprehensive income
Net Income - - 746 - 746
Unrealized gain on securities,
net of taxes - - - 23 23
-----------
Comprehensive income - - - - 769
-----------
Cash dividends paid
($.50 per share) - - (385) - (385)
Stock options exercised 29,000 232 - - 232
----------------------------------------------------------------------------
Balance, December 31, 1997 783,500 7,147 1,417 23 8,587
Comprehensive income
Net income - - 1,323 - 1,323
Unrealized loss on securities,
net of taxes - - - (24) (24)
-----------
Comprehensive income 1,299
-----------
Cash dividends paid
($.50 per share) - - (393) - (393)
Stock options extended - - 260 260
Stock options exercised 7,500 60 - - 60
----------------------------------------------------------------------------
Balance, December 31, 1998 791,000 $7,207 $2,607 $ (1) $9,813
============================================================================
</TABLE>
See accompanying notes.
52
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997
--------------------------
(Dollars in Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,323 $ 746
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization on premises and equipment
407 460
Amortization of deferred loan fees and premiums
on investment securities 335 (350)
Provision for loan losses 265 556
Deferred income taxes (129) (32)
Extension of non-statutory stock options 260 -
(Gain) loss on sale of other real estate 6 (21)
(Increase) in accrued interest receivable (277) (287)
Decrease (increase) in other assets (170) 175
Increase in accrued interest payable and other liabilities
254 332
--------------------------
Net cash provided by operating activities 2,274 1,579
INVESTING ACTIVITIES
Loan originations, net of repayments 292 (72)
Net decrease in interest-bearing time deposits
with other financial institutions 1,782 2,376
Activity in securities available-for-sale:
Purchases (25,825) (17,555)
Paydowns 7,949 -
Calls 792 -
Activity in securities held-to-maturity:
Purchases (1,923) (1,797)
Maturities 1,948 1,697
Purchase (sales) of FRB and FHLB stock 29 (28)
Proceeds from sales of other real estate owned 340 130
Proceeds from sale of premises and equipment - 2
Purchase of premises and equipment (1,703) (555)
--------------------------
Net cash used by investing activities (16,319) (15,802)
FINANCING ACTIVITIES
Net increase in deposits 11,790 16,044
Proceeds from exercise of stock options 60 232
Cash dividends paid to shareholders (393) (385)
--------------------------
Net cash provided by financing activities 11,457 15,891
Increase in cash and cash equivalents (2,588) 1,668
Cash and cash equivalents, beginning of year 26,147 24,479
Cash and cash equivalents, end of year $ 23,559 $ 26,147
==========================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 3,470 $ 3,099
==========================
Income taxes paid (net of refunds received) $ 806 $ 230
==========================
</TABLE>
See accompanying notes.
53
<PAGE>
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
(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 a
wholly-owned inactive leasing subsidiary. The Bank is a full service community
commercial bank with three offices in the Northern California Napa Valley area.
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 affect 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, collateralized mortgage obligations, 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 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. Fair values
for actively traded securities are based on quoted market prices. Dividend and
interest income, including amortization of premiums and accretion of discounts,
are included in interest income.
54
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are stated at the principal amount outstanding, net of any discount.
Interest income on loans is accrued daily on a simple interest basis. The Bank
places a loan on nonaccrual status when any installment of principal 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 nonhomogeneous 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 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 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 where the Bank has obtained physical possession of the related
collateral through foreclosure or in full or partial satisfaction of the related
loan. 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.
55
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 rates or 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.
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 Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation.
NET INCOME PER COMMON SHARE
Effective December 15, 1998, 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.
56
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in the fair
value of assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Under the new Statement, the cumulative effect on income and the cumulative
effect on accumulated other comprehensive income are required to be disclosed in
the applicable financial statements. These amounts would appear on the face of
the income statement and the statement that includes other comprehensive income.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company. Given the complexity of
the new Standard and that the impact hinges on market values at the date of
adoption, it is difficult to estimate the impact of adoption.
57
<PAGE>
2. CASH AND DUE FROM BANKS
The Bank is required to maintain reserves with the Federal Reserve Bank. The
average reserves required for 1998 and 1997 were $1,872 and $1,131,
respectively.
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
DECEMBER 31,1998 COST GAINS LOSSES VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of
States and
Political
Subdivisions $ 7,578 $187 $ (3) $ 7,762
Collateralized
Mortgage
Obligations 26,267 105 (290) 26,082
------------------------------------------------------------
Total $33,845 $292 $(293) $33,844
============================================================
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31,1997 COST GAINS LOSSES VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
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
============================================================
</TABLE>
58
<PAGE>
3. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31,1998
Securities of
U.S. Government
agencies $ 1,698 $ 9 $ - $ 1,707
Obligations of
States and
Political
Subdivisions 100 2 - 102
Federal Home
Loan Bank stock 398 - - 398
Federal Reserve
Bank stock 155 - - 155
-----------------------------------------------------------
Total $ 2,351 $ 11 $ - $ 2,362
===========================================================
DECEMBER 31,1997
Securities of
U.S. Government
agencies $ 1,723 $ 62 $ - $ 1,785
Obligations of
States and
Political
Subdivisions 100 - - 100
Federal Reserve
Bank stock 346 - - 346
Federal Home
Loan Bank stock 236 - - 236
-----------------------------------------------------------
Total $ 2,405 $ 62 $ - $ 2,467
===========================================================
</TABLE>
Total securities pledged under state regulation to secure deposits amounted to
$1,698 and $1,743 at December 31, 1998 and 1997, respectively.
The maturities of securities of U.S. Government agencies at December 31, 1998
are due within one year.
Certain securities, such as mortgage-backed securities, may not become due at a
single maturity date. Those mortgage-backed securities with no specified
maturities are included as having contractual maturities of greater than ten
years. Issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
There were no sales of investment securities in 1998 and 1997.
59
<PAGE>
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are presented net of unearned loan fees of $172 and $319 at December 31,
1998 and 1997, respectively. Nonaccrual loans past due 90 days or more as of
December 31, 1998 and 1997 were approximately $108 and $2,922, respectively.
The effect on interest income had these loans been performing in accordance with
contractual terms as of December 31, 1998 and 1997 would have been to increase
interest income approximately $17 and $165, respectively.
At December 31, 1998, the Company had approximately $108 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 $17. Average
impaired loans for the years ended December 31, 1998 and 1997 amounted to
approximately $1,840 and $3,372, respectively. Related interest income
recognized on impaired loans during the years ended December 31, 1998 and 1997
was approximately $138 and $90, respectively.
The activity in the allowance for loan losses for the years ended December 31,
1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Balance, beginning of year $ 1,566 $ 1,405
Provision for loan losses 265 556
Loans charged off (261) (407)
Recoveries 101 12
---------------------------------------
Balance, end of year $ 1,671 $ 1,566
=======================================
</TABLE>
At December 31, 1998 and 1997, the Bank was servicing loans for the Federal Home
Loan Mortgage Corporation with unpaid principal balances of $14,950 and $20,303,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and conducting foreclosure 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 $44 and $60 for the years ended December 31, 1998 and 1997,
respectively.
60
<PAGE>
5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------
<S> <C> <C>
Equipment $ 2,297 $ 2,096
Bank premises 3,443 941
Furniture and fixtures 604 590
Leasehold improvements 242 1,256
Automobiles 41 41
-----------------------------------
Total 6,627 4,924
Less accumulated depreciation and amortization (2,719) (2,312)
-----------------------------------
Total $ 3,907 $ 2,612
===================================
</TABLE>
Depreciation and amortization of $406 and $460 was charged to expense for the
years ended December 31, 1998 and 1997, respectively.
6. DEPOSITS
The aggregate amount of time deposit accounts exceeding $100 was $18,448 and
$14,990 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled Maturities for all time deposits is as
follows:
<TABLE>
<S> <C>
1999 $ 37,380
2000 5,345
2001 394
2002 -
2003 -
Thereafter -
---------
$ 43,119
=========
</TABLE>
61
<PAGE>
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Current:
Federal $ 696 $ 414
State 243 139
---------------------------------------
Total 939 553
---------------------------------------
Deferred:
Federal (120) (25)
State 7 (7)
---------------------------------------
Total deferred (113) (32)
---------------------------------------
Provision for income taxes $ 826 $ 521
=======================================
</TABLE>
The temporary differences and tax carryforwards which created deferred tax
assets and liabilities are detailed below:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible $ 808 $ 826
Deferred loan fees - 31
Book over tax depreciation 12 -
State taxes 13 -
Other 133 -
---------------------------------
Gross deferred tax assets 966 857
Valuation allowance (149) (170)
---------------------------------
Deferred tax assets 817 687
---------------------------------
Deferred tax liabilities:
Tax over book depreciation - (3)
State taxes - (7)
Other (26) (15)
---------------------------------
Gross deferred tax liabilities (26) (25)
---------------------------------
Net deferred tax asset included in other assets $ 791 $ 662
==================================
</TABLE>
62
<PAGE>
7. INCOME TAXES (CONTINUED)
Deferred tax assets are recognized to the extent that their realization is
considered to be more likely than not. As of December 31, 1998 and 1997, the
Bank was unable to conclude that the realization of a portion 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, 1998 and 1997 to reduce
the Bank's deferred tax assets to the amount likely to be realized.
In 1998, a deferred tax benefit of $16 relating to net unrealized losses on
available-for-sale securities was charged directly to stockholders' equity.
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>
1998 1997
---------------------------------------
<S> <C> <C>
Federal statutory income tax rate 34% 34%
State franchise tax, net of federal income tax effect 8 7
Permanent differences and change in valuation allowed (4) -
---------------------------------------
Effective income tax rate 38% 41%
=======================================
</TABLE>
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, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Balance at beginning of year $ 1,032 $ 1,879
Additions 193 2,852
Payments (304) (3,699)
-------------------------
Balance at end of year $ 921 $ 1,032
=========================
</TABLE>
63
<PAGE>
8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The Company also had commitments to extend credit to related parties of $210 at
December 31, 1998. At December 31, 1998 and 1997, an affiliated company of a
member of the Board of Directors had $3,895 and $3,137 (and 2.9% 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.
At December 31, 1998 the company had a loan to the Employee Stock Ownership
Trust on their books. The outstanding balance was $152 at December 31, 1998.
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.
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, 1998 and 1997, financial instruments whose contract or notional
amounts represent credit risk were as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Commitments to extend credit $ 27,046 $ 16,647
Standby letters of credit 821 1,061
-----------------------------
$ 27,867 $ 17,708
=============================
</TABLE>
64
<PAGE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
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 counterparty. 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 customers. At December 31, 1998, all standby
letters of credit were secured by normal business assets in accordance with the
Company's standard lending practices.
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 and other agriculture industries. At December
31, 1998, the Company's loans to companies in the wine and other agricultural
industry were $13,713 with commitments to lend an additional $7,741.
As of December 31, 1998 and 1997, 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.
The Company requires that loan customers meet the collateral requirements
described in Note 9 for commitments to extend credit.
65
<PAGE>
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, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 62
2000 62
2001 62
2002 62
2003 62
Thereafter 21
--------
Total $ 331
========
</TABLE>
Rental expense was $161 and $194 for the years ended December 31, 1998 and 1997,
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.
As of December 31, 1998, one operating lease was to expire on May 1, 1999. The
bank has notified the lessor that the Bank will exercise the option to extend an
additional 5 years. The future minimum lease payments for these 5 years is
included in the totals above.
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 1998 of $2,342 without prior regulatory
approval.
66
<PAGE>
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
result in 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
following table) 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 that, as of December 31, 1998,the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
67
<PAGE>
13. REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
MINIMUM
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-----------------------------------------------------------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAPANATIONALBANCORP:
Leverage $ 9,813 6.92 $5,663 4.00 $7,079 5.00%
Tier 1 risk-based 9,813 10.69 3,667 4.00 5,501 6.00
Total risk-based 10,965 11.95 7,335 8.00 9,168 10.00
NAPANATIONAL BANK:
Leverage 9,689 6.84 5,663 4.00 7,079 5.00
Tier 1 risk-based 9,689 10.57 3,667 4.00 5,500 6.00
Total risk-based 10,841 11.83 7,333 8.00 9,167 10.00
<CAPTION>
DECEMBER 31, 1997
MINIMUM
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-----------------------------------------------------------------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAPANATIONALBANCORP:
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
NAPANATIONAL 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>
68
<PAGE>
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its employee stock options. The exercise price of the
Company's employee stock option equals the market price of the underlying stock
on the date of grant and as a result no compensation expense is recognized under
APB 25. As discussed below, the alternative fair value accounting provided for
under Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS No. 123"), requires use of option valuation models
that were not developed for use in valuing employee stock options.
At December 31, 1998, the Company had two stock-based compensation plans: Stock
Option Plan and Stock Ownership Plan. The Stock Option Plan authorizes grants
of nonstatutory and incentive stock options to directors and officers. Stock
options granted under the Stock Option Plan have an exercise price equal to the
fair market value of the Company's common stock at the date of grant and a
maximum contractual lives of ten years. The Stock Option Plan permits the
issuance of options to purchase a total of 250,000 shares of common stock
issuable in conjunction with the exercise of stock options. As of December 31,
1998, the number of common shares available for future grants under the Stock
Option Plan was 118,300 shares.
Stock options granted in 1998 and 1997 generally vest over a five-year period.
During 1998, the expiration date on 32,500 nonstatutory stock options granted to
directors was extended by two years to 2000. The company recognized $260 of
compensation expense related to the extension of these options. A summary of
the Company's stock option activity and related information for the years ended
December 31, 1998 and 1997, following:
69
<PAGE>
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN (CONTINUED)
<TABLE>
<CAPTION>
NONSTATUTORY 1998 1997
----------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE SHARES PRICE SHARES
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning of year $ 9.16 98,500 $ 8.95 120,000
Options exercised $ 0.00 - $ 8.00 (21,500)
Options granted $ 8.00 32,500 $ - -
Options forfeited $ 8.00 (32,500) $ - -
----------------------------------------------------------------
Outstanding end of year $ 9.16 98,500 $ 9.16 98,500
================================================================
Exercisable at end of year $ 9.00 96,000 $ 8.76 91,000
================================================================
Weighted average fair value of
options granted during the year
$ 9.20 $ -
============== ===========
INCENTIVE 1998 1997
---------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
PRICE SHARES PRICE SHARES
---------------------------------------------------------------
Outstanding beginning of year $12.30 41,200 $ 9.84 44,000
Options exercised $ 8.00 (7,500) $ 8.00 (7,500)
Options granted $15.75 2,000 $15.42 13,000
Options forfeited $ 0.00 - $ 8.22 (9,100)
---------------------------------------------------------------
Outstanding end of year $13.39 35,700 $12.30 41,200
===============================================================
Exercisable at end of year $11.24 16,500 $ 8.96 19,000
Weighted average fair value of
options granted during the year
$ 4.01 $ 5.64
============== =========
</TABLE>
70
<PAGE>
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998, ranged from
$8.00 to $15.75. The weighted-average remaining contractual life of those
options is 6.8 years.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rates of 4.84% and 5.83% for 1998 and 1997, respectively; dividend
yield of 0.80% for 1998 and 0.67% for 1997; volatility factor of the expected
market price of the Company's common stock of 0.011 and 0.013 for 1998 and 1997,
respectively; and a weighted-average expected life of the option of 7 years for
1998 and 1997.
The table below reflects the Bank's pro forma net income, earnings per common
share, and diluted earnings per common share as if compensation expense for the
Bank's stock plan had been determined based on fair value at grant dates for
awards under the plan. Since pro forma compensation expense relates to all
periods over which awards vest, the initial impact of pro forma compensation
expense on pro forma income may not be representative of compensation expense in
subsequent years.
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Pro forma net income $1,093 $ 727
Pro forma earning per share:
Primary $ 1.39 $0.84
Diluted $ 1.32 $0.89
</TABLE>
71
<PAGE>
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company also has an Employee Stock Ownership Plan (the "ESOP"), in which
employees of the Company who work over 30 hours per week and have worked for 6
months are eligible to participate. The ESOP 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 ESOP were $100 and $91 for the years ended December 31, 1998 and 1997,
respectively. The stock for the ESOP is purchased by the Employee Stock
Ownership Trust.
15. DEFINED CONTRIBUTION
The Company has made available to all employees over 18 years of age who
regularly work over 30 hours per week and have completed six months of service
participation in a 401(k) defined contribution plan. Under the terms of the
401(k) plan, the Company does not contribute to the plan.
16. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Numerator:
Net income $ 1,323 $ 746
Denominator:
Average number of common shares outstanding 786,250 769,458
Effect of dilutive securities:
Employee Stock options 41,247 48,773
--------------------------------------
Denominator for diluted earnings per share 827,497 818,231
Earnings Per Common Share $ 1.68 $ .97
======================================
Earnings Per Common Share - Assuming Dilution $ 1.60 $ .91
======================================
</TABLE>
17. 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.
72
<PAGE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and the estimated fair values of the Company financial
instruments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR
VALUE
----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (a) $ 23,559 $ 23,559
Interest-bearing time deposits - other financial
institutions (b) - -
Securities available-for-sale (c) 33,845 33,844
Securities held-to-maturity (d) 2,350 2,362
Loans - net (e) 77,647 81,102
LIABILITIES
Deposits (f) 133,251 133,535
CARRYING ESTIMATED
AMOUNT FAIR
VALUE
----------------------------------
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (G)
Commitments to extend credit $ 18,744 $ 18,744
Commercial letters of credit 821 821
</TABLE>
73
<PAGE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and the estimated fair values of the Company financial
instruments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
AMOUNT 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 available-for-sale (c) 17,250 17,250
Securities held-to-maturity (d) 2,405 2,467
Loans - net (e) 78,057 79,832
LIABILITIES
Deposits (f) 121,461 121,538
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (g)
Commitments to extend credit 16,647 16,647
Commercial letters of credit 1,061 1,061
</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 available-for-sale: Fair value amounts were based on quoted
market prices, and are carried at their aggregate fair value.
(d) 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.
74
<PAGE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(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 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.
75
<PAGE>
18. 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, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
ASSETS
Cash $ 2 $ 8
Investments in subsidiaries 9,800 8,653
Accrued interest receivable and other assets
123 15
------------------------------
Total assets $ 9,925 $ 8,676
==============================
LIABILITIES
Accrued expenses and other liabilities $ 112 $ 112
Shareholders' equity:
Common stock 7,207 7,147
Retained earnings 2,606 1,417
------------------------------
Total liabilities and shareholders' equity $ 9,925 $ 8,676
==============================
</TABLE>
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Income:
Interest income $ - $ 1
Dividend income 328 40
Other income - 50
------------------------------------
Total income 328 91
------------------------------------
Expenses:
Compensation Expense 260 -
Other expense (107) 3
------------------------------------
Total expenses 153 3
------------------------------------
Income before applicable taxes and equity in net
income of subsidiaries
175 88
Applicable income taxes (44) 20
------------------------------------
Income before equity in undistributed
net income subsidiaries 219 68
Equity in undistributed net income of
subsidiaries 1,104 678
------------------------------------
Net income $ 1,323 $ 746
====================================
</TABLE>
76
<PAGE>
18. FINANCIAL STATEMENTS OF NAPA NATIONAL BANCORP (PARENT COMPANY ONLY)
(CONTINUED)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,323 $ 746
Reconciliation of net income to net
cash provided (used) by operating
activities:
Equity in undistributed net income
of subsidiaries (1,104) (678)
(Increase) in accrued interest
receivable 108 -
---------------------------------------
Net cash (used) provided by operating
activities 327 68
Financing activities:
Cash dividends paid to shareholders (393) (385)
Proceeds from issuance of common stock
60 232
---------------------------------------
Net cash (used) by financing activities
(333) (153)
Net (decrease) increase in cash (6) (85)
Cash at beginning of year 8 93
---------------------------------------
Cash at end of year $ 2 $ 8
=======================================
</TABLE>
19. YEAR 2000 (UNAUDITED)
Like other financial and business organizations and individuals around the
world, the Company could be adversely affected if the computer systems it uses
and those used by the Company's clients and major service providers do not
properly process and calculate date-released information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Issue."
Management has assessed its computer systems and the systems compliance issues
of its brokers and other major service providers. The Company has taken steps
that it believes are reasonably designed to address the Year 2000 Issue with
respect to computer systems that it uses and has obtained satisfactory
assurances that comparable steps are being taken by its major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to address all Year 2000 Issues. The inability of the Company or its
third party providers to timely complete all necessary procedures to address the
Year 2000 Issue could have a material adverse effect on the Company's
operations. Management will continue to monitor the status of and its exposure
to this issue. The Company expects to incur costs up to $300 to address the
Year 2000 Issue.
The Company is in the process of finalizing a contingency plan to address the
recovery from unavoided or unavoidable Year 2000 problems, if any.
77
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. THE
INFORMATION IS CONSIDERED UNDER "ASSET-LIABILITY MANAGEMENT" OF THIS REPORT AND
IS INCORPORATED HEREIN BY REFERENCE.
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
Company's 1999 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, 1999.
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
Company's 1999 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, 1999.
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
Company's 1999 definitive proxy statement entitled "Security Ownership of
Certain Beneficial Owners and Management," which proxy statement will be filed
no later than April 30, 1999.
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
Company's 1999 definitive proxy statement entitled "Certain Relationships and
Related Transactions," which proxy statement will be filed no later than April
30, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(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 1998.
78
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 26, 1999.
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.
March 26, 1999
/s/ William A. Bacigalupi
Director
March 26, 1999
/s/ Dennis D. Groth
Director
March 26, 1999
/s/ E. James Hedemark
Director
79
<PAGE>
March 26, 1999
/s/ Michael D. Irwin
Director
Chief Financial Officer
(Principal Accounting Officer)
March 26, 1999
/s/ Brian J. Kelly
President and COO
Director
March 26, 1999
/s/ C. Richard Lemon
Secretary and Director
March 26, 1999
/s/ Joseph G. Peatman
Director
March 26, 1999
/s/ A. Jean Phillips
Director
March 26, 1999
/s/ George M. Schofield
Director
March 26, 1999
/s/ W. Clarke Swanson, Jr.
Chairman of the Board and CEO
80
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3(ii) * Bylaws, amended and restated, of the Registrant.
* A specimen copy of the certificates evidencing
Common stock.
* Napa National Bancorp 1982 Stock Option Plan, as
amended and restated.**
10.2 * Form of Incentive Stock Option Agreement.**
* Form of Nonstatutory Stock Option Agreement.**
10.4 * Napa National Bancorp 1998 Amended, and Restated
Stock Option Plan.**
10.5 Form of Amended Nonstatutory Option Agreement.***
10.6 Purchase Contract for Headquarters Building.
21 Subsidiaries of Napa National Bancorp
24 Power of Attorney (located on signature page
hereof)
27 Financial Data Schedule
* Previously filed with and incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 31, 1997.
** Compensation Plan and Management Contract
*** Previously filed with and incorporated by references to the Company's
Definitive Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on May 22, 1998.
81
<PAGE>
EXHIBIT 10.5
NAPA NATIONAL BANCORP
1998 AMENDED AND RESTATED STOCK OPTION PLAN
AMENDED NONSTATUTORY STOCK OPTION AGREEMENT
Napa National Bancorp, a California corporation (the "Company"), hereby
amends the option to purchase Shares of its common stock that was previously
granted on ___________ ("Original Option") to the optionee named below. The
terms and conditions of this amended option are set forth in this cover sheet,
in the attachment and in the Company's 1998 Amended and Restated Stock Option
Plan (the "Plan"). Pursuant to actions approved by the Company's Board of
Directors and shareholders, the unexercised portion of the Original Option has
been assumed under the Plan and, in consideration of future services to be
rendered by the optionee, has had its time period for exercise extended until
__________ (subject to all earlier option termination provisions set forth in
the attachment). This amended option incorporates all the terms and conditions
of the Original Option's agreement with the exception of the extended expiration
date.
Amended Option's Expiration Date: _________________
Name of Optionee: ______________________
Optionee's Social Security Number: ____-___-____
Number of Shares of Common Stock Covered by Amended Option: ________________
Exercise Price per Share: $____________
BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS
DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS
ALSO ENCLOSED.
Optionee: ________________________________________________________________
(Signature)
Company: ________________________________________________________________
(Signature)
Title: ___________________________________
Attachment
- ----------
1
<PAGE>
EXHIBIT 10.6
REAL ESTATE PURCHASE AGREEMENT
THIS REAL ESTATE PURCHASE AGREEMENT is made this ____ day of December,
1998, (the Effective Date") by and between Napa Main Street Investors, a
California limited partnership, ("Seller"), and Napa National Bank, a California
Corporation ("Buyer") who agree as follows:
1. PURCHASE AND SALE OF THE PROPERTY.
Subject to the terms and conditions set forth below, Seller agrees to sell
to Buyer and Buyer agrees to purchase from Seller the real property located at
901 Main Street, Napa, Napa County, California, known as Assessors Parcel Number
003-221-012 ("Bank Parcel"), more particularly described in, EXHIBIT "A"
attached hereto (the "Property").
2. PURCHASE PRICE.
(a) PURCHASE PRICE. The purchase price for the Property (the
"Purchase Price") to be paid by Buyer to Seller is One Million Three Hundred
Seventy-Five Thousand Dollars ($1,375,000.00) subject to adjustment as set forth
in paragraph 2(b) below.
(b) PAYMENT OF PURCHASE PRICE. Within three (3) days of the Effective
Date, Buyer and Seller shall open an escrow (the "Escrow") with First American
Title Company in Napa, California (the "Title Company"), 1700 Second Street,
Napa, California. The purchase price shall be adjusted on the close of escrow so
as to create Two Hundred Thousand Dollars ($200,000.00) of net cash proceeds
payable to Seller after payment of the principal amount of indebtedness owing to
Napa National Bank under loan number 7549001 in the amount of One Million Forty-
One Thousand Ninety-Seven Dollars and Thirty-Four Cents ($1,041,097.34), loan
interest in the amount of Seventy-two Thousand Four Hundred Dollars
($72,400.00), unpaid real property taxes for the Bank Parcel, Assessor's Parcel
Nos. 003-221-011 and 003-221-013 prorated as of the close of escrow in the
approximate amount of Forty-Six Thousand Five Hundred Dollars ($46,500.00),
transfer taxes, escrow fees, and title insurance and other expenses arising out
of the "Approved Exceptions", and closing costs in the estimated amount of
Fifteen Thousand Dollars ($15,000.00).
One day prior to the Close of Escrow, Buyer shall deposit into Escrow in
cash the balance of the Purchase Price in excess of the principal owing to Napa
National Bank under loan number 7549001.
3. CONDITION PRECEDENT.
(a) As a condition precedent to Buyer's obligations to purchase the Bank
Parcel, Buyer and Seller shall have entered into a Lease (in the form attached
hereto as Exhibit "B"), for Assessor's Parcel No. 003-221-011 and Assessor's
Parcel No. 003-221-013 which two parcels constitute the
1
<PAGE>
parking lot adjoining the Property ("Parking Lot Parcels"). The Lease shall
provide that Lessee (Buyer) shall have an option to purchase the Parking Lot
Parcels on the terms and conditions therein provided.
(b) The Buyer and Seller acknowledge that Buyer's agreement to purchase the
Property for the total purchase price set forth in paragraph 2(b) constitutes
material consideration for the Lease and Option to Purchase the Parking Lot
Parcels granted by Seller.
(c) As a further condition precedent to Buyer's obligations to purchase
the Bank Parcel, the Seller shall obtain all authorizations from the State of
California Water Resources Quality Control Board as may be required to record a
Covenant and Environmental Restriction on Property ("Covenant") in the form
attached hereto as Exhibit "C". Seller and Buyer acknowledge that said Covenant
was recorded on the Napa County Records on November 25, 1998, and the condition
precedent has been satisfied.
(d) As a further condition precedent to Buyer's obligations to purchase
the Bank Parcel, Buyer and Seller shall execute a Settlement Agreement and
Mutual General Release in the form attached hereto as Exhibit "D".
4. TITLE.
(a) CONDITION OF TITLE. At the Close of Escrow, Seller shall convey fee
simple title to the Property to Buyer by grant deed, subject only to the
following matters (the "Permitted Exceptions"): (i) a lien for current real
property taxes; (ii) matters of title respecting the Property permitted by Buyer
in accordance with Subparagraph 4(b), below; and (iii) matters affecting the
condition of title to the Property created by or with the consent of Buyer.
(b) PERMITTED TITLE EXCEPTIONS. Attached hereto and incorporated by
reference as Exhibit "E" is the Preliminary Report issued by Title company under
Order No. 115940 dated as of November 9, 1998. Buyer hereby approves said
Preliminary Report together with exceptions 1 through 10, and 12 through 17,
which exceptions shall constitute the Permitted Title Exceptions.
5. ESCROW.
(a) ESCROW. To accomplish the purchase and sale of the Property, the
parties shall establish an escrow with the Title Company (the "Escrow"). Each
party shall execute such instructions to the Title Company which are consistent
with this Agreement and deliver such instructions within two (2) days prior to
the Close of Escrow of the Bank Parcel, as defined below. On the day before the
Close of Escrow, as defined below, Seller and Buyer shall make the deliveries
into Escrow set forth in Subparagraphs 5(b) and 5(c).
(b) SELLER'S DELIVERIES INTO ESCROW. Seller hereby covenants and agrees
to deliver or cause to be delivered to Title Company prior to the Close of
Escrow of the Bank Parcel, as defined below,
2
<PAGE>
the following instruments and documents, the failure of delivery of which shall
constitute a default by Seller hereunder:
(i) A good and sufficient grant deed properly executed and
acknowledged by Seller in favor of Buyer, the delivery and recordation of which
shall vest in Buyer fee title in and to the Bank Parcel, subject only to the
Permitted Exceptions;
(ii) A certificate duly and validly executed by Seller in favor of
Buyer, certifying that Seller is not a "foreign person," as that term is defined
in Section 1445(f) of the Internal Revenue Code of 1986, as amended;
(iii) A certificate duly executed by Seller in favor of Buyer as
required by California Revenue and Taxation Code Sections 18805 and 26131; and
(iv) Such proof of Seller's authority to enter into this Agreement
and the transactions contemplated hereby, and such proof of the power and
authority of the individual(s) executing and/or delivering any instruments,
documents or certificates on behalf of Seller to act for and bind Seller as may
be reasonably required by Title Company written documentation of the
substitution of Stephen D. Cole, Trustee of the Cole Family Trust as general
partner of Napa Main Street Investors.
(vi) Lease attached hereto as Exhibit "B" executed by Seller.
(vi) Executed Covenant and Environmental Restriction on Property
together with written evidence of authorization from the State of California
Water Resources Control Board authorizing recordation of the Covenant.
(vii) Settlement Agreement and Mutual General Release (Exhibit "D")
executed by Seller.
(c) BUYER'S DELIVERIES INTO ESCROW. Buyer hereby covenants and agrees to
deliver or cause to be delivered to Title Company on or prior to the Close of
Escrow, as defined below, the following instruments and documents, the failure
of delivery of which shall constitute a default of Buyer hereunder:
(i) The Purchase Price in accordance with Paragraph 2 above; and
(ii) Such proof of Buyer's authority and authorization to enter into
this Agreement and the transaction contemplated hereby, and such proof of the
power and authority of the individuals(s) executing and/or delivering any
instruments, documents or certificates on behalf of Buyer to act for and bind
Buyer as may be reasonably required by Seller or the Title Company.
(iii) Lease attached hereto as Exhibits "B" executed by Buyer.
3
<PAGE>
(iv) Settlement Agreement and Mutual General Release (Exhibit "D")
executed by Buyer.
(d) CLOSE OF ESCROW. The Close of Escrow shall occur on December 7, 1998,
by 5:00 p.m.
6. DELIVERY OF POSSESSION; COSTS AND PRORATIONS.
(a) POSSESSION. The Bank will have sole and exclusive possession of the
Bank Parcel effective upon The Close of Escrow.
(b) COSTS AND PRORATIONS. The following costs and expenses shall be borne
or prorated at the Close of Escrow as follows:
(i) All property taxes for the Bank Parcel and the parking lot
parcels, shall be paid by Buyer, and shall be prorated at the Close of Escrow of
the Bank Parcel based on the most current real property tax bill available,
including any escaped property taxes which may be assessed after Close of Escrow
pertaining to the period prior to transfer of title to Buyer, regardless of when
notice thereof is delivered or who receives such notice;
(ii) Any bond or assessment which become a lien after the execution
of the contract (determined as of the Close of Escrow) shall be assumed by Buyer
at Close of Escrow;
(iii) All title insurance premiums charged in connection with the
issuance of the Title Policy shall be paid by Buyer at the Close of Escrow;
(iv) Any transfer taxes due as a result of the transfer of title to
Buyer shall be paid by Buyer at the Close of Escrow;
(v) All escrow fees shall be paid by Buyer;
(vi) All other costs and expenses shall be paid by Buyer in
accordance with customary practice in Napa County, California; and
(vii) Any legal fees and expenses incurred in connection with the
transaction contemplated herein shall be paid by the Party incurring such fees
and expenses.
7. WARRANTIES.
(a) SELLER WARRANTIES. Seller hereby warrants:
(i) There are no known violations of any statutes, ordinances,
regulations, or administrative or judicial order or holding, whether or not
appearing in public records, existing with respect to such improvements or
with respect to the Property;
4
<PAGE>
(ii) At the Close of Escrow, no leases of the Property are or will be
in force, except otherwise specifically stated herein.
(iii) There is no litigation threatened by third parties or pending
respecting the ownership, possession, use or operation of the Property or
the leased premises described on Exhibit AE@ attached hereto;
(iv) To the best of Seller's knowledge, the Bank Parcel has not been
the site of a disposal, release, threatened release or transportation of
any materials or substances defined as "hazardous" or "toxic" under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 41 U.S.C. Section 9601, et. seq.; the Resource
Conversation and Recovery Act, 42 U.S.C. Section 6901, et seq.; or Sections
25115, 25117 25122.7, 25140, 25249.5, 25249.8, 25281, 25316 or 25501 of the
California Health and Safety Code, except as may be disclosed in that
certain Remedial Investigation and Risk Analysis Report for Napa Main
Street Investors dated April 20, 1998, prepared by Faultline Associates,
Inc. and the Assessment of Suspected Asbestos-Containing Materials dated
March 13, 1991, prepared by Clayton Environmental Consultants;
(v) Seller is a limited partnership duly and validly existing under
the laws of the State of California. It shall be a further condition
precedent to the obligations of Buyer under this Agreement that Seller
provide to Buyer, and Buyer approve in its discretion the documents
presented by Seller to Buyer relating to the substitution of Stephen D.
Cole, Trustee of the Cole Family Trust, as general partner of Napa Main
Street Investors, Fairfield Mortgage Corporation, a California corporation,
the former general partners of Napa Main Street Investors.
(b) PARTIES' WARRANTIES CONCERNING AUTHORITY. The parties hereby warrant
and represent that the persons executing this Agreement on their behalf are
authorized to do so and upon his or her execution of this Agreement, this
Agreement shall be valid and binding upon and enforceable against Buyer or
Seller, as the case may be, in accordance with the terms and conditions herein
set forth.
8. COMMISSION.
Each party is free to employ a real estate broker of its choice. The party
engaging said broker shall be responsible for the payment of any broker's
commission and agrees to indemnify the other party from any liability or claims,
including reasonable attorneys fees and costs, for payment of said commission.
9. NOTICES.
5
<PAGE>
Any notice required or permitted to be given under this Agreement shall be
in writing, shall be personally delivered or sent by registered or certified
mail, postage pre-paid, return receipt requested, telecopy or similar means,
addressed as follows:
BUYER: Napa National Bank
901 Main Street
P.O. Box 3400
Napa, CA 94558
Tel No.: (707)257-2440
Fax No.: (707)257-6119
WITH COPY TO: Dickenson, Peatman & Fogarty
James W. Terry
809 Coombs Street
Napa, CA 94559
Tel No.: (707)252-7122
Fax No.: (707)255-6876
SELLER: Stephen D. Cole
Napa Main Street Investors
1100 Lincoln Avenue, Suite 106
P.O. Box 10524
Napa, CA 94581
WITH COPY TO: Jill E. Barwick
Attorney at Law
1100 Lincoln Avenue, Suite 106
Napa, CA 94558
10. MISCELLANEOUS PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement, including all the attached Exhibits,
contains the entire agreement of the parties; any previous understandings of the
parties regarding the subject matter hereof are expressly declared null and void
and are superseded hereby.
(b) ASSIGNMENT. This agreement shall not be assigned by Buyer without the
express written consent of Seller which consent Seller may grant or withhold in
its reasonable discretion.
(c) SEVERABILITY. If any term or provision of this Agreement shall, to any
extent, be held invalid or unenforceable, the remainder of this Agreement shall
not be affected thereby.
(d) ATTORNEYS' FEES. In the event any legal action is commenced between
the parties
6
<PAGE>
hereto to enforce the terms of this Agreement, the prevailing party in any such
action and in any appeals therefrom shall be entitled to recover from the non-
prevailing party all reasonable attorneys' fees and costs incurred by the
prevailing party. "Prevailing party" shall include without limitation (i) a
party who dismisses an action in exchange for sums allegedly due; (ii) the party
which receives performance from the other party of an alleged breach of covenant
or a desired remedy where such is substantially equal to the relief sought in an
action; or (iii) the party determined to be the prevailing party by a court of
law.
(e) WAIVERS. No waiver or any breach of any covenant or provision herein
contained shall be deemed a waiver of any other covenant or provision herein
contained, and no waiver shall be valid unless in writing and executed by the
waiving party. No extension of time for performance of any obligation or act
shall be deemed an extension of the time for performance of any other obligation
or act.
(f) INTERPRETATION. Headings at the beginning of each section and
subsection are solely for the convenience of the parties and are not a part of
and shall not be used to interpret this Agreement. This Agreement is the product
of negotiations and shall not be construed as if it had been prepared by one of
the parties, but rather as if both parties have prepared the same. Unless
otherwise indicated, all references to Paragraphs are to this Agreement. All
exhibits referred to in this Agreement are attached hereto and incorporated
herein by this reference.
(g) NO MERGER. Each and every representation, warranty, covenant and
obligation of Seller and Buyer shall not merge with transfer of title, but shall
survive the Close of Escrow subject to any expressed survivability limitations
set forth in this Agreement.
(h) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute but one and the same instrument. The execution of
this Agreement shall be deemed to have occurred, and this Agreement shall be
enforceable and effective, only upon the complete execution of this Agreement by
Seller and Buyer.
(i) TIME OF THE ESSENCE. Time is of the essence of each and every
condition herein, and of each term and provision herein.
//
//
//
//
(j) GOVERNING LAW. This Agreement shall be governed and construed in
accordance
7
<PAGE>
with California law.
WHEREFORE, the parties have executed this Agreement on or as of the date
first written above.
SELLER: NAPA MAIN STREET INVESTORS
A California Limited Partnership
By:_______________________________________________
Stephen D. Cole, Trustee, Cole Family Trust,
General Partner
BUYER: NAPA NATIONAL BANK
a California corporation
By: ______________________
8
<PAGE>
EXHIBIT 21
NAPA NATIONAL BANCORP
SUBSIDIARIES OF NAPA NATIONAL BANCORP
Napa National Bank
A California Corporation
Napa National Leasing Corporation
A California Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1998 JAN-01-1998
<PERIOD-END> DEC-30-1998 DEC-31-1998
<CASH> 0 9,969
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 13,590
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 33,844
<INVESTMENTS-CARRYING> 0 2,351
<INVESTMENTS-MARKET> 0 2,387
<LOANS> 0 79,318
<ALLOWANCE> 0 1,671
<TOTAL-ASSETS> 0 144,089
<DEPOSITS> 0 133,251
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 0 1,025
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 7,207
<OTHER-SE> 0 2,607
<TOTAL-LIABILITIES-AND-EQUITY> 0 144,089
<INTEREST-LOAN> 1,998 8,041
<INTEREST-INVEST> 512 1,842
<INTEREST-OTHER> 125 652
<INTEREST-TOTAL> 2,635 10,535
<INTEREST-DEPOSIT> 834 3,461
<INTEREST-EXPENSE> 834 3,461
<INTEREST-INCOME-NET> 1,801 7,074
<LOAN-LOSSES> 0 265
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,563 6,078
<INCOME-PRETAX> 795 2,149
<INCOME-PRE-EXTRAORDINARY> 795 2,149
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 487 1,323
<EPS-PRIMARY> 0.61 1.68
<EPS-DILUTED> 0.59 1.60
<YIELD-ACTUAL> 5.58 5.77
<LOANS-NON> 0 108
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,658 1,566
<CHARGE-OFFS> 17 261
<RECOVERIES> 30 101
<ALLOWANCE-CLOSE> 1,671 1,671
<ALLOWANCE-DOMESTIC> 1,671 1,671
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
