<PAGE>
As filed with the Securities and Exchange Commission on January 28, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
WELLS FARGO & COMPANY
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
Delaware 6712 41-0449260
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
(800) 411-4932
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Stanley S. Stroup
Executive Vice President and General Counsel
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
415-396-6019
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
Robert J. Kaukol J. Michael Shephard
Wells Fargo & Company Brobeck, Phleger & Harrison LLP
1050 17th Street, Suite 120 Spear Street Tower
Denver, Colorado 80265 One Market
(303) 899-5802 San Francisco, California 94105
(415) 442-1669
</TABLE>
---------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum Proposed Maximum Amount Of
Title Of Securities To Amount To Be Offering Price Aggregate Registration
Be Registered Registered Per Share Offering Price(1) Fee(2)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $1-2/3 par
value (and associated
preferred stock
purchase rights) 775,000 N/A $25,515,000 $6,735.96
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
(1) Computed in accordance with Rule 457(f)(1) based on the aggregate market
value of the maximum number of shares of Napa National Bancorp common
stock expected to be received by the registrant in the merger and
calculated by multiplying (i) the last reported sale price of Napa
National Bancorp common stock ($27) by (ii) 945,000, representing the
maximum estimated number of shares of Napa National Bancorp common stock
expected to be received by the registrant in the merger.
(2) Based on .000264 of the proposed maximum aggregate offering price.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NAPA NATIONAL BANCORP
----------------
Notice of Special Meeting of Shareholders
To Be Held March 16, 2000
----------------
To the Shareholders of Napa National Bancorp:
A special meeting of shareholders of Napa National Bancorp, a California
corporation ("Napa"), will be held on Thursday, March 16, 2000, at 8:00 a.m.,
local time, at 901 Main Street, Napa, California 94559, for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Reorganization, dated as of November 18, 1999, and as amended as of
January 18, 2000 (as amended, the "Merger Agreement"), by and between
Napa and Wells Fargo & Company ("Wells Fargo"), pursuant to which, among
other things, a wholly-owned subsidiary of Wells Fargo will merge with
and into Napa upon the terms and subject to the conditions set forth in
the Merger Agreement, as more fully described in the proxy statement-
prospectus that follows this notice.
2. To transact such other business as may properly be brought before the
special meeting and any adjournments or postponements of the special
meeting.
The board of directors of Napa has fixed the close of business on February
7, 2000 as the record date for determining those shareholders entitled to vote
at the special meeting and any adjournments or postponements of the special
meeting. Only shareholders of record on this date are entitled to notice of,
and to vote at, the special meeting and any adjournments or postponements of
the special meeting.
Under Chapter 13 of the California General Corporation Law, Napa
shareholders are entitled to assert dissenters' rights in connection with the
merger described in Item 1 above. The provisions of Chapter 13 are included as
Appendix C to the proxy statement-prospectus that follows this notice. A
summary of these provisions, including a discussion of the procedures that must
be followed to exercise dissenters' rights, is included in the proxy statement-
prospectus.
By Order of the Board of Directors
C.Richard Lemon
Corporate Secretary
Napa, California
February 15, 2000
Please promptly complete, sign, date and return the enclosed proxy card
whether or not you plan to attend the special meeting. Failure to return a
properly executed proxy or to vote at the meeting will have the same effect
as a vote against the Merger Agreement and the merger. You may still vote at
the special meeting even if you have previously returned your proxy card.
<PAGE>
[Napa logo]
-------------------------------------
The board of directors of Napa National Bancorp has approved the sale of
Napa to Wells Fargo & Company. The sale requires the approval of Napa's
shareholders. A special meeting of shareholders will be held to vote on the
proposed sale. The date, time and place of the meeting are set forth in the
notice of special meeting on the preceding page.
If the merger is completed, based on the recent price range for Wells Fargo
common stock, Wells Fargo expects to exchange between 0.76 and 0.78 of a share
of its common stock for each share of Napa common stock then outstanding. The
actual exchange ratio, which could fall outside of the expected range of 0.76
to 0.78, will be determined based on a formula that will adjust the exchange
ratio for outstanding options and other rights to purchase shares of Napa
common stock. The degree of adjustment will depend in part on the average
closing price of Wells Fargo common stock during a specified measurement
period. The formula is described in more detail later in this document.
On November 18, 1999, the day before the proposed sale was announced, Wells
Fargo common stock closed at $47.94 a share, making 0.76 and 0.78 of a share of
Wells Fargo common stock equal on that date to $36.43 and $37.39, respectively.
On February , 2000, Wells Fargo common stock closed at $ a share, making
0.76 and 0.78 of a share of Wells Fargo common stock equal on that date to
$ and $ , respectively.
The merger is expected to be generally tax free to Napa shareholders, except
for cash received instead of fractional shares.
This proxy statement-prospectus provides detailed information about the
proposed sale. Please read this entire document carefully. You can find
additional information about Wells Fargo and Napa from documents filed with the
Securities and Exchange Commission.
Whether or not you plan to attend the meeting, please complete and mail the
enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be voted in favor of the sale.
If you fail to return your proxy card, or if you fail to instruct your broker
how to vote shares held for you in the broker's name, the effect will be the
same as a vote against the sale.
No vote of Wells Fargo's stockholders is required to approve the
transaction.
W. Clarke Swanson, Jr.
Chairman of the Board
and Chief Executive Officer
-------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Wells Fargo common stock to be
issued or determined if this proxy statement-prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The shares of Wells Fargo common stock to be issued in the merger are not
savings or deposit accounts or other obligations or any bank or non-bank
subsidiary of Wells Fargo, and they are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental
agency.
-------------------------------------
Proxy Statement-Prospectus dated February 15, 2000.
First mailed to Napa shareholders on or about February 15, 2000.
<PAGE>
ADDITIONAL INFORMATION
This proxy statement-prospectus incorporates important business and
financial information about Wells Fargo and Napa that is not included in or
delivered with this document. See "Where You Can Find More Information" on page
51 for a list of the documents that Wells Fargo and Napa have incorporated into
this proxy statement-prospectus. The documents are available to you without
charge upon written or oral request made as follows:
Wells Fargo Documents: Napa Documents:
Corporate Secretary Corporate Secretary
Wells Fargo & Company Napa National Bancorp
MAC N9305-173 901 Main Street
Sixth and Marquette Napa, California 94559
Minneapolis, Minnesota 55479 (707) 257-2440
(612) 667-8655
To obtain documents in time for the special meeting, your request should be
received by March 9, 2000.
Napa's Annual Report on Form 10-KSB for the year ended December 31, 1998,
its definitive Proxy Statement for its 1999 Annual Meeting of Shareholders and
its Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999
are included in this proxy statement-prospectus as Appendix D, Appendix E and
Appendix F, respectively. Napa's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders is incorporated by reference into Part III of Napa's
Form 10-KSB for the year ended December 31, 1998.
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THIS DOCUMENT
What is the purpose of this document?
This document serves as both a proxy statement of Napa and a prospectus of
Wells Fargo. As a proxy statement, it's being provided to you because Napa's
board of directors is soliciting your proxy for use at the special meeting of
shareholders called to consider and vote on the proposed sale of Napa to Wells
Fargo. As a prospectus, it's being provided to you because Wells Fargo is
offering to exchange shares of its common stock for your shares of Napa common
stock.
Do I need to read the entire document?
Absolutely. Much of this proxy statement-prospectus summarizes information
that is in greater detail elsewhere in this document or in the appendices to
this document. Each summary discussion is qualified by reference to the full
text. For example, the summary of the terms of the merger agreement is
qualified by the actual terms of the merger agreement, a copy of which is
attached as Appendix A.
Is there other information I should consider?
Yes. Much of the business and financial information about Wells Fargo and
Napa that may be important to you is not included in this document. Instead,
this information is incorporated by reference to documents separately filed by
Wells Fargo and Napa with the Securities and Exchange Commission (SEC). This
means that Wells Fargo and Napa may satisfy their disclosure obligations to you
by referring you to one or more documents separately filed by them with the
SEC.
See "Where You Can Find More Information" on page 51 for a list of documents
that Wells Fargo and Napa have incorporated by reference into this proxy
statement-prospectus and for instructions on how to obtain copies of these
documents. The documents are available to you without charge.
What if there is a conflict between documents?
You should rely on the later filed document. Information in this proxy
statement-prospectus may update information contained in one or more of the
Wells Fargo or Napa documents incorporated by reference. Similarly, information
in documents that Wells Fargo or Napa may file after the date of this proxy
statement-prospectus may update information in this proxy statement-prospectus
or information in previously filed documents.
What if I choose not to read the incorporated documents?
Information contained in a document that is incorporated by reference is
part of this proxy statement-prospectus, unless it is superseded by information
contained directly in this proxy statement-prospectus or in one or more
documents filed with the SEC after the date of this proxy statement-prospectus.
Information that is incorporated from another document is considered to have
been disclosed to you whether or not you choose to read the document.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................................... 1
The Merger................................................................ 1
The Companies............................................................. 1
What You Will Receive In The Merger....................................... 1
Federal Income Tax Consequences........................................... 2
Reasons For The Merger.................................................... 2
Fairness Opinion.......................................................... 2
Surrender Of Napa Shares.................................................. 2
Additional Benefits To Napa Management.................................... 3
Accelerated Vesting Of Stock Options...................................... 3
Dissenters' Rights........................................................ 3
Special Meeting........................................................... 3
Vote Required To Approve Merger........................................... 4
Support Agreements........................................................ 4
Differences In The Rights Of Shareholders................................. 4
Regulatory Approvals...................................................... 4
Other Conditions To Completing The Merger................................. 4
Termination Of The Merger Agreement....................................... 5
Accounting Treatment...................................................... 5
Regulation Of Wells Fargo................................................. 5
Market Price Information.................................................. 6
Selected Financial Data................................................... 7
Comparative Per Common Share Data......................................... 8
SPECIAL MEETING OF SHAREHOLDERS............................................. 9
Date, Time And Place...................................................... 9
Record Date............................................................... 9
Vote Required To Approve Merger........................................... 9
Agreements To Vote For The Merger......................................... 9
Voting And Revocation Of Proxies.......................................... 9
Solicitation Of Proxies................................................... 10
Other Matters Considered At The Meeting................................... 10
THE MERGER.................................................................. 11
Effect Of The Merger...................................................... 11
Background Of And Reasons For The Merger.................................. 11
Opinion Of Napa's Financial Advisor....................................... 13
Additional Interests Of Napa Management................................... 17
Accelerated Vesting Of Stock Options...................................... 20
Dissenters' Rights........................................................ 20
Exchange Of Certificates.................................................. 23
Regulatory Approvals...................................................... 24
Effect Of Merger On Napa's Employee Benefit Plans......................... 24
U.S. Federal Income Tax Consequences Of The Merger........................ 24
Support Agreements........................................................ 25
Resale Of Wells Fargo Common Stock Issued In The Merger................... 26
Stock Exchange Listing.................................................... 26
Accounting Treatment...................................................... 26
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
THE MERGER AGREEMENT....................................................... 27
Basic Plan Of Reorganization............................................. 27
Representations And Warranties........................................... 29
Certain Covenants........................................................ 29
Conditions To The Merger................................................. 31
Termination Of The Merger Agreement...................................... 32
Effect Of Termination.................................................... 32
Waiver And Amendment..................................................... 32
Expenses................................................................. 32
COMPARISON OF STOCKHOLDER RIGHTS........................................... 33
Introduction............................................................. 33
Authorized And Outstanding Capital Stock................................. 33
Rights Plan.............................................................. 33
Number And Election Of Directors......................................... 34
Amendment Of Governing Documents......................................... 34
Approval Of Mergers And Assets Sales..................................... 35
Preemptive Rights........................................................ 35
Appraisal Rights......................................................... 35
Special Meetings......................................................... 36
Directors' Duties........................................................ 36
Action Without A Meeting................................................. 37
Limitations On Directors' Liability...................................... 37
Indemnification Of Officers And Directors................................ 37
Dividends................................................................ 38
Corporate Governance Procedures; Nomination Of Directors................. 39
INFORMATION ABOUT WELLS FARGO.............................................. 40
General.................................................................. 40
Management And Additional Information.................................... 40
Information On Wells Fargo's Web Site.................................... 40
REGULATION AND SUPERVISION OF WELLS FARGO.................................. 41
Introduction............................................................. 41
Regulatory Agencies...................................................... 41
Bank Holding Company Activities.......................................... 41
Dividend Restrictions.................................................... 41
Holding Company Structure................................................ 41
Capital Requirements..................................................... 41
FDIC Insurance........................................................... 45
Fiscal And Monetary Policies............................................. 45
Competition.............................................................. 46
Financial Modernization.................................................. 46
INFORMATION ABOUT NAPA..................................................... 47
General.................................................................. 47
Certain Additional Information Incorporated By Reference And Delivered
Herewith................................................................ 47
PRICE RANGE OF COMMON STOCK AND DIVIDENDS.................................. 48
Wells Fargo Share Prices And Dividends................................... 48
Napa Share Prices And Dividends.......................................... 49
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
EXPERTS................................................................... 50
Wells Fargo's Independent Accountants................................... 50
Napa's Independent Accountants.......................................... 50
OPINIONS.................................................................. 50
Share Issuance.......................................................... 50
Tax Matters............................................................. 50
WHERE YOU CAN FIND MORE INFORMATION....................................... 51
SEC Filings............................................................. 51
Registration Statement.................................................. 51
Documents Incorporated By Reference..................................... 51
Documents Available Without Charge...................................... 52
FORWARD-LOOKING STATEMENTS................................................ 53
APPENDIX A Agreement and Plan of Reorganization and Amendment No. 1 to the
Agreement and Plan of Reorganization
APPENDIX B Opinion of First Security Van Kasper
APPENDIX C California Dissenters' Rights Statute
APPENDIX D Napa National Bancorp's Form 10-KSB for the year ended December
31, 1998
APPENDIX E Napa National Bancorp's definitive Proxy Statement for its 1999
Annual Meeting of Shareholders
APPENDIX F Napa National Bancorp's Form 10-QSB for the quarter ended
September 30, 1999
</TABLE>
v
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully, and for a more complete description of the legal terms of the
merger, you should carefully read this document and the other documents to
which this document refers you. See "Where You Can Find More Information" on
page 51. Each item in this summary includes a page reference to a more complete
description of that item.
The Merger (page 11)
In the proposed transaction, Wells Fargo will acquire Napa through the
merger of a Wells Fargo subsidiary with Napa. Napa will survive the merger as a
subsidiary of Wells Fargo. If the merger is completed, Wells Fargo will
exchange shares of its common stock for shares of Napa common stock so that,
after the merger is completed, Wells Fargo will own all of the outstanding
stock of Napa.
The merger agreement, as amended, is attached to this proxy statement-
prospectus as Appendix A. When used in this proxy statement-prospectus, the
term "merger agreement" refers to the merger agreement, as so amended. Please
read the merger agreement as it is the document that governs the merger.
The Companies (pages 40 and 47)
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
(800) 411-4932
Wells Fargo & Company is a diversified financial services company whose
subsidiaries and affiliates provide banking, insurance, investments, and
mortgage and consumer finance through stores located across North America. At
September 30, 1999, Wells Fargo had $207 billion of assets, 7th largest among
U.S. bank holding companies.
Napa National Bancorp
901 Main Street
Napa, California 94559
(707) 257-2440
Napa National Bancorp is a bank holding company whose only active subsidiary
and principal asset is Napa National Bank, a full service commercial bank with
four offices serving the Napa Valley area of Northern California. At September
30, 1999, Napa had assets of $152 million.
What You Will Receive In The Merger (page 27)
For Your Shares Of Napa Common Stock
If the merger is completed, you will receive a fraction of a share of Wells
Fargo common stock for each share of Napa common stock you own. That fraction
of a share is referred to as the exchange ratio.
Napa and Wells Fargo expect the exchange ratio to be between 0.76 and 0.78.
The actual exchange ratio will be calculated under a formula specified in
paragraph 1(a) of the merger agreement. The formula will adjust the exchange
ratio for options and other rights to purchase Napa common stock that have not
been exercised as of immediately prior to the merger. The extent of the
adjustment will depend in part on the average closing price of Wells Fargo
common stock during a specified measurement period. The actual exchange ratio
could fall outside of the expected range of 0.76 to 0.78. The exchange formula
is described in more detail in "The Merger Agreement--Basic Plan Of
Reorganization."
1
<PAGE>
For Your Options To Purchase Napa Common Stock
If the merger is completed, each option to purchase Napa common stock that
has not been exercised as of immediately before the merger will be converted
into shares of Wells Fargo common stock. Under a formula specified in paragraph
1(a) of the merger agreement, the number of shares of Wells Fargo common stock
into which an option will be converted will be based on a number of variables,
including the number of shares of Napa common stock subject to the option, the
exercise price of the option and the share exchange ratio. The option
conversion formula is described in more detail in "The Merger Agreement--Basic
Plan Of Reorganization."
For Your Fractional Shares Of Wells Fargo
Wells Fargo will not issue fractional shares in the merger. If the total
number of shares of Wells Fargo common stock you will receive in the merger
does not equal a whole number, you will receive cash instead of the fractional
share.
Federal Income Tax Consequences (page 24)
If, as anticipated based on an opinion of Napa's counsel, the merger
qualifies as a "reorganization" for federal income tax purposes, Napa
shareholders generally will not recognize gain or loss for U.S. federal income
tax purposes from the exchange of their shares of Napa common stock for shares
of Wells Fargo common stock. Napa shareholders will be taxed on cash they
receive instead of fractional shares. For a full discussion of the federal
income tax consequences of the merger and the opinion of Napa's counsel and the
qualifications of the opinion, see "The Merger--U.S. Federal Income Tax
Consequences Of The Merger."
The tax treatment described above may not apply to every Napa shareholder.
Determining the tax consequences of the merger to you may be complicated. You
should consult your own advisor for a full understanding of the merger's tax
consequences.
Reasons For The Merger (page 11)
Napa's board of directors believes that the merger is in the best interests
of Napa shareholders and recommends that Napa shareholders approve the merger.
Napa's board believes that, as a result of the merger, Napa shareholders will
have the potential for greater stock value appreciation than they would if Napa
had remained independent.
Fairness Opinion (page 13)
First Security Van Kasper has given its opinion to Napa's board of directors
that the consideration to be received in the merger by Napa shareholders is
fair from a financial point of view.
Surrender Of Napa Shares (page 23)
To receive certificates for your shares of Wells Fargo common stock, you
will need to surrender your Napa share certificates. After the merger is
completed, Wells Fargo's stock transfer agent will send you written
instructions for exchanging your stock certificates.
Please do not send in your certificates until you receive these
instructions.
2
<PAGE>
Additional Benefits To Napa Management (page 17)
Some of Napa's directors and executive officers have interests in the merger
that are different from yours. These interests include the following:
. conversion of stock options into shares of Wells Fargo common stock;
. special one-time cash payments and/or benefits to certain directors as a
result of the merger;
. continuation of indemnification and insurance benefits for directors and
officers;
. agreements continuing employment following the merger
. retention agreements that provide for payments upon completion of
specified periods of employment following the merger; and
. the right to purchase additional shares of Napa common stock, which
right will be immediately convertible into the right to receive shares
of Wells Fargo common stock.
The board of directors of Napa was aware of these additional interests when
it approved the merger agreement.
Accelerated Vesting Of Stock Options (page 20)
As a result of the merger, currently non-vested options to purchase 15,700
shares of Napa common stock granted under Napa's stock option plans will vest
and become exercisable before the merger. The options have exercise prices
ranging from $8.00 to $17.50 and would have otherwise vested periodically
through September 15, 2003. The merger will not affect the vesting of options
held by any directors or executive officers of Napa insofar as those options
will have already vested prior to the merger under their terms.
Dissenters' Rights (page 20)
Napa shareholders are entitled to dissenters' rights in connection with the
merger. Shareholders wishing to exercise their dissenters' rights must fully
comply with the applicable provisions of the California General Corporation
Law, including the requirement that they not vote their shares in favor of the
merger. If dissenters' rights are properly claimed (and no event resulting in
cessation of such rights occurs), a dissenting shareholder has the right to
require Napa to purchase for cash such shareholder's shares of Napa common
stock at the fair market value of the shares as of the day prior to the date
the merger was announced, excluding any appreciation or depreciation resulting
from the proposed merger.
The merger may be approved by a simple majority of the shares entitled to
vote at the special meeting called to consider and approve the merger. W.
Clarke Swanson, Napa's chairman and chief executive officer, owns more than the
number of shares required to approve the merger, and Mr. Swanson has signed an
agreement with Wells Fargo that provides that he will vote all of his shares in
favor of the merger.
Appendix C to this proxy statement-prospectus contains the relevant
provisions of the California General Corporation Law. The fair market value of
dissenting shares as determined under the California General Corporation Law
may be more or less than the value of Wells Fargo common stock to be received
in the merger.
Special Meeting (page 9)
Napa will hold the special meeting of shareholders at 8:00 a.m., local time,
on Thursday, March 16, 2000, at 901 Main Street, Napa, California 94559. You
can vote at the meeting if you owned Napa common stock at the close of business
on February 7, 2000, the record date for the meeting.
3
<PAGE>
Vote Required To Approve Merger (page 9)
Approval of the merger requires the affirmative vote of a majority of the
outstanding shares of Napa common stock entitled to vote at the special
meeting. Not voting, or failing to instruct your broker how to vote shares held
for you in the broker's name, will have the same effect as voting against the
merger.
At the record date for the special meeting, Napa's directors and executive
officers beneficially owned a total of shares of Napa common stock,
representing approximately % of the shares of Napa common stock entitled
to vote at the special meeting. At the record date, Wells Fargo and its
subsidiaries beneficially owned a total of approximately shares of Napa
common stock, representing approximately % of the shares of Napa common
stock entitled to vote at the special meeting.
Support Agreements (page 25)
At the same time that the merger agreement was signed, all of Napa's
directors and executive officers entered into individual support agreements
with Wells Fargo. Under the support agreements, these individuals agreed:
. to vote in favor of the merger all shares of Napa common stock owned by
the director at the record date for the special meeting;
. not to sell or transfer any shares of Napa common stock owned by the
director except in limited circumstances specified in the support
agreement;
. not to solicit inquiries or proposals or enter into any discussions
concerning a business combination involving Napa other than the
combination proposed with Wells Fargo; and
. not to vote in favor of any business combination involving Napa other
than the combination proposed with Wells Fargo.
At the record date for the special meeting, the directors beneficially owned
a total of shares of Napa common stock, representing approximately
% of the shares of Napa common stock entitled to vote at the special meeting
and enough to approve the merger without the concurrence of any other Napa
shareholders.
Differences In The Rights Of Shareholders (page 33)
Your rights as a Napa shareholder are currently governed by California law
and Napa's articles of incorporation and bylaws. Upon completion of the merger,
you will become a Wells Fargo stockholder, and your rights will be governed by
Delaware law and Wells Fargo's restated certificate of incorporation and
bylaws.
Regulatory Approvals (page 24)
The Board of Governors of the Federal Reserve System must approve the merger
before it can be completed. Wells Fargo believes that it has filed the required
application with the Federal Reserve Board. As of the date of this proxy
statement-prospectus, the Federal Reserve Board had not acted on Wells Fargo's
application for approval of the merger. Although Wells Fargo expects that the
Federal Reserve Board will approve the merger, it cannot be certain when or if,
or on what terms and conditions, the required approval will be given.
Other Conditions To Completing The Merger (page 31)
In addition to the receipt of regulatory approval, there are a number of
other conditions that must be met before the merger can be completed. These
conditions include:
. approval of the merger agreement by Napa shareholders;
4
<PAGE>
. receipt by Napa of an opinion of counsel concerning the tax consequences
of the merger;
. authorization for listing on the New York and Chicago Stock Exchanges of
the shares of Wells Fargo common stock to be issued in the merger to
Napa shareholders.
. absence of any court or governmental authority order prohibiting the
merger; and
. material compliance by each party with the terms and provisions of the
merger agreement.
Wells Fargo or Napa may waive a condition it is entitled to assert so long
as the law does not require the condition to be met.
Termination Of The Merger Agreement (page 32)
Wells Fargo and Napa can agree to terminate the merger agreement at any time
without completing the merger. Also, either company can terminate the merger
agreement without the consent of the other under the following circumstances:
. a court or other governmental authority prohibits the merger; or
. the merger is not completed by June 30, 2000, unless the failure to
complete the merger on or before that date is the fault of the company
seeking to terminate.
Accounting Treatment (page 26)
Wells Fargo expects to account for the merger under the purchase method of
accounting. Wells Fargo will record, at fair value, the acquired assets and
assumed liabilities of Napa. To the extent the total purchase price exceeds the
fair value of the assets acquired and liabilities assumed, Wells Fargo will
record goodwill.
Regulation Of Wells Fargo (page 41)
Wells Fargo, its banking subsidiaries and many of its nonbanking
subsidiaries are subject to extensive regulation by a number of federal and
state agencies. This regulation, among other things, may restrict Wells Fargo's
ability to diversify into other areas of financial services, acquire depository
institutions in certain states and pay dividends on its stock. It may also
require Wells Fargo to provide financial support to one or more of its
subsidiary banks, maintain capital balances in excess of those desired by
management and pay higher deposit premiums as a result of the deterioration in
the financial condition of depository institutions in general.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act of 1999 that, effective March 11, 2000, will permit bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that
are financial in nature. The Gramm-Leach-Bliley Act defines "financial in
nature" to include:
. securities underwriting, dealing and market making;
. sponsoring mutual funds and investment companies;
. insurance underwriting and agency;
. merchant banking activities; and
. activities that the Board of Governors of the Federal Reserve System has
determined to be closely related to banking.
5
<PAGE>
Under the Gramm-Leach-Bliley Act, securities firms and insurance companies
that elect to become financial holding companies may acquire banks and other
financial institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which Wells Fargo and its subsidiaries conduct
business.
Market Price Information (page 48)
Wells Fargo common stock is listed on the New York and Chicago Stock
Exchanges under the symbol "WFC." On November 18, 1999, the last trading day
before public announcement of the proposed merger, Wells Fargo common stock
closed on the New York Stock Exchange at $47.94 a share. On February , 2000,
Wells Fargo common stock closed at $ per share.
Napa common stock is not traded on any exchange or on the Nasdaq National
Market. Although there has been limited trading activity, there in not an
active market for Napa common stock.
6
<PAGE>
Selected Financial Data
The following financial information is to aid you in your analysis of the
financial aspects of the merger. The Wells Fargo balance sheet data for 1994
through 1998 is derived from Wells Fargo's audited consolidated balance sheets
as of December 31, 1998, 1997 and 1996 and its unaudited financial information
for 1995 and 1994. The Wells Fargo income statement data for 1994 through 1998
is derived from Wells Fargo's audited consolidated statement of income for each
of the years in the four-year period ended December 31, 1998 and its unaudited
financial information for 1994. The Wells Fargo data as of and for the nine
months ended September 30, 1999 and 1998 is derived from unaudited financial
statements for those periods. The Napa data is derived from its audited
consolidated financial statements for 1994 through 1998 and its unaudited
financial statements for the nine months ended September 30, 1999 and 1998. The
information in the table is only a summary and should be read with the full
financial statements and related notes of Wells Fargo and Napa. You should not
rely on the information for the nine months ended September 30, 1999 as being
indicative of the results expected for the entire year.
----------------
Wells Fargo & Company and Subsidiaries
<TABLE>
<CAPTION>
Nine Months
Ended September
30 Years Ended December 31
---------------- ---------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- ------- ------- ------- ------- -------
(dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income..... $ 6,959 6,689 8,990 8,648 8,222 5,923 5,414
Net income.............. 2,777 2,144 1,950 2,499 2,228 1,988 1,642
Diluted earnings per
share.................. 1.65 1.29 1.17 1.48 1.36 1.62 1.36
Cash dividends per
share.................. 0.585 0.515 0.700 0.615 0.525 0.450 0.383
Book value per share.... 13.17 12.40 12.35 11.92 11.66 10.27 5.86
Total assets............ 207,060 195,863 202,475 185,685 188,633 122,200 112,674
Long-term debt.......... 24,911 18,486 19,709 17,335 18,142 16,726 12,039
----------------
Napa National Bancorp and Subsidiaries
<CAPTION>
Nine Months
Ended September
30 Years Ended December 31
---------------- ---------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- ------- ------- ------- ------- ------- -------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income..... $ 5,193 5,273 7,074 6,728 6,359 5,798 4,568
Net income.............. 1,036 836 1,323 746 902 1,101 777
Diluted earnings per
share.................. 1.23 1.01 1.60 0.91 1.00 1.25 1.03
Cash dividends per
share.................. 0.375 0.375 0.50 0.50 0.50 -- --
Book value per share.... 12.90 12.07 12.41 10.98 10.56 9.87 8.41
Total assets............ 152,265 135,710 144,089 130,819 113,827 104,851 86,477
Long-term debt.......... -- -- -- -- -- -- --
</TABLE>
7
<PAGE>
Comparative Per Common Share Data
The following table shows comparative per share data for Wells Fargo common
stock on a historical and pro forma combined basis and for Napa common stock on
a historical and pro forma equivalent basis. The information in the table
assumes that Wells Fargo will account for the merger as a purchase and will
exchange 0.77 of a share of its common stock for each share of Napa common
stock. The pro forma equivalent information for Napa is calculated by
multiplying the pro forma basic and diluted earnings per share, the historical
cash dividends declared per share of Wells Fargo common stock and the pro forma
stockholders' equity per share by the assumed exchange ratio of 0.77.
You should read the data with the historical financial statements and
related notes of Wells Fargo and Napa. Wells Fargo's and Napa's historical
financial statements are included in documents filed with the SEC. See "Where
You Can Find More Information" on page 51. Amounts are in U.S. dollars.
<TABLE>
<CAPTION>
Wells Fargo Napa
-------------------- ---------------------
Pro Forma Pro Forma
Historical Combined Historical Equivalent
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings Per Share
Basic
Nine Months Ended September 30,
1999............................ 1.67 1.67 1.31 1.29
Year Ended December 31, 1998..... 1.18 1.18 1.68 0.91
Diluted
Nine Months Ended September 30,
1999............................ 1.65 1.65 1.23 1.27
Year Ended December 31, 1998..... 1.17 1.17 1.60 0.90
Cash Dividends Declared Per Share
Nine Months Ended September 30,
1999............................ 0.585 0.585 0.375 0.450
Year Ended December 31, 1998..... 0.700 0.700 0.500 0.540
Stockholders' Equity Per Share
September 30, 1999............... 13.17 13.17 12.90 10.14
December 31, 1998................ 12.35 12.35 12.41 9.51
</TABLE>
8
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
Date, Time And Place
The date, time and place of the special meeting of Napa shareholders called
to consider and vote on the merger agreement are:
Thursday, March 16, 2000
8:00 a.m., local time
901 Main Street
Napa, California 94559
Record Date
Napa's board of directors has established February 7, 2000 as the record
date for the meeting. Only shareholders of record on that date are entitled to
attend and vote at the special meeting.
Vote Required To Approve Merger
On the record date, there were shares of Napa common stock
outstanding and entitled to vote at the special meeting. The holders of Napa
common stock are entitled to one vote per share. The presence, in person or by
proxy, at the special meeting of the holders of a majority of the outstanding
shares entitled to vote is necessary for a quorum. Approval of the merger
requires the affirmative vote, in person or by proxy, of the holders of a
majority of the shares of Napa common stock outstanding on the record date.
At the record date for the special meeting, Napa's directors and executive
officers beneficially owned a total of shares of Napa common stock,
representing approximately % of the shares of Napa common stock entitled
to vote at the special meeting. At the record date, Wells Fargo and its
subsidiaries beneficially owned a total of approximately shares of Napa
common stock, representing approximately % of the shares of Napa common
stock entitled to vote at the special meeting.
Agreements To Vote For The Merger
All of Napa's directors and executive officers have agreed to vote in favor
of the merger all shares of Napa common stock beneficially owned by them at the
record date for the special meeting. At the record date, these individuals
beneficially owned a total of shares of Napa common stock,
representing approximately % of the shares of Napa common stock entitled to
vote at the special meeting and enough to approve the merger without the
concurrence of any other Napa shareholder. See "The Merger--Support
Agreements."
Voting And Revocation Of Proxies
All shares of Napa common stock represented at the special meeting by a
properly executed proxy will be voted in accordance with the instructions
indicated on the proxy, unless the proxy is revoked before a vote is taken. If
you sign and return a proxy without voting instructions, and do not revoke the
proxy, the proxy will be voted FOR the merger.
You may revoke your proxy at any time before it is voted by (a) filing
either an instrument revoking the proxy or a duly executed proxy, in either
case bearing a later date, with the corporate secretary of Napa before or at
the special meeting or (b) voting the shares subject to the proxy in person at
the special meeting. Attendance at the special meeting will not by itself
result in your proxy being revoked.
A proxy may indicate that all or a portion of the shares represented by the
proxy are not being voted with respect to a specific proposal. This could
occur, for example, when a broker is not permitted to vote shares held
9
<PAGE>
in the name of a nominee on certain proposals in the absence of instructions
from the beneficial owner. Shares that are not voted with respect to a specific
proposal will be considered as not present for that proposal, even though the
shares will be considered present for purposes of determining a quorum and
voting on other proposals. Abstentions on a specific proposal will be
considered as present but will not be counted as voting in favor of the
proposal.
The proposal to approve the merger must be approved by the holders of a
majority of the shares of Napa common stock outstanding at the record date.
Because approval of the merger requires the affirmative vote of a specified
percentage of outstanding shares, not voting on the proposal, or failing to
instruct your broker how to vote shares held for you by the broker, will have
the same effect as voting against the proposal.
Solicitation Of Proxies
In addition to solicitation by mail, directors, officers and employees of
Napa and its subsidiaries may solicit proxies from Napa shareholders, either
personally or by telephone or other form of communication. None of the
foregoing persons who solicit proxies will be specifically compensated for such
services. Napa does not anticipate that anyone will be specifically engaged to
solicit proxies or that special compensation will be paid for that purpose, but
Napa reserves the right to do so should it conclude that such efforts are
necessary or advisable.
Nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy material to beneficial owners.
Napa will bear its own expenses in connection with any solicitation of proxies
for the special meeting.
Other Matters Considered At The Meeting
If an insufficient number of votes for the merger is received before the
scheduled meeting date, Wells Fargo and Napa may decide to postpone or adjourn
the special meeting. If this happens, proxies that have been received that
either have been voted for the merger or contain no instructions will be voted
for adjournment.
Napa's board of directors is not aware of any business to be brought before
the special meeting other than the proposal to approve the merger. If other
matters are properly brought before the special meeting or any adjournments or
postponements of the meeting, the persons appointed as proxies will have
authority to vote the shares represented by properly executed proxies in
accordance with their discretion and judgment as to the best interests of Napa.
10
<PAGE>
THE MERGER
Effect Of The Merger
As a result of the merger:
. Wells Fargo will exchange shares of its common stock for shares of Napa
common stock.
. Wells Fargo will acquire all of the outstanding common stock of Napa,
resulting in Napa becoming a wholly-owned subsidiary of Wells Fargo.
. Napa shareholders will become Wells Fargo stockholders, with their
rights governed by Delaware law and Wells Fargo's restated certificate
of incorporation and bylaws. See "Comparison Of Stockholder Rights."
Background Of And Reasons For The Merger
Background of the Merger
The board of directors of Napa has long regarded enhancement of the value
and liquidity of Napa stock as among its most important obligations to Napa's
shareholders. Accordingly, management and the board have continually sought to
identify and evaluate various possible ways to improve Napa's overall
performance and thereby maximize returns to shareholders. At the same time, the
board has also acknowledged the inherent difficulty of enhancing the liquidity
of Napa's stock in light of Napa's limited regional presence and its
comparatively small number of shareholders.
In June 1998, W. Clarke Swanson, Jr., chairman of the board and chief
executive officer of Napa and owner of a majority of Napa's outstanding voting
shares, began to explore various alternatives for increasing shareholder value,
including assessments of the projected performance of Napa and possible merger
with a strategic partner. For purposes of confidentiality, Mr. Swanson agreed
to personally pay outside advisor fees associated with these activities,
subject to later reimbursement by Napa. As part of this effort, the board's
Negotiating Committee, comprising directors Swanson, Michael D. Irwin and C.
Richard Lemon, identified several potential partners for a strategic
combination with Napa. In October 1999, the full board considered the
alternatives available to Napa and decided to retain financial and legal
advisors to evaluate strategic alternatives for maximizing shareholder value
and render advice in connection with a possible transaction. Acting upon Mr.
Swanson's recommendation, the board retained the advisors Mr. Swanson had been
using, namely First Security Van Kasper and Brobeck, Phleger & Harrison LLP, as
Napa's financial and legal advisors, respectively.
First Security's first order of business was to update its general knowledge
of Napa by thoroughly familiarizing itself with Napa's structure, lines of
business, products and customer base. Believing that a business combination
with another carefully-selected banking organization would be the optimal means
of maximizing shareholder value, First Security next undertook a review and
analysis of Napa's local and regional banking markets in order to identify
potential merger candidates. Based upon its review and analysis, First Security
identified a number of banking organizations (including Wells Fargo) that it
considered to be potential candidates for combination with Napa, based upon,
among other factors, each organization's financial condition and capacity,
stock price and trading volume and perceived or known interest in expanding
through mergers or acquisitions. These institutions had total assets ranging
from approximately $900 million to approximately $207 billion and included both
Northern California-based and out-of-state organizations. First Security then
contacted these institutions to gauge their interest in acquiring or combining
with Napa. In some cases, First Security specifically identified Napa as the
organization that it was representing. In other cases, First Security
determined it to be in Napa's best interest to describe Napa only generically
(e.g., by asset size and location) when approaching a potential merger partner.
Two institutions (not counting Wells Fargo) that had responded with
preliminary indications of interest in acquiring or merging with Napa executed
confidentiality agreements and initiated substantive discussions with
11
<PAGE>
First Security about a possible transaction. However, discussions with these
two institutions were discontinued when it became clear that they were either
unable or unwilling to meet the threshold financial requirements for a business
combination that Napa's management and board had established in consultation
with First Security. First Security also held informal discussions with two
other institutions. One of these institutions decided not to pursue a possible
transaction with Napa because it determined that to do so would be inconsistent
with its strategic plan. The other institution with which First Security held
informal discussions concerning a possible transaction with Napa decided not to
go forward for internal reasons. With the exception of Wells Fargo, the larger
institutions that were approached by First Security on Napa's behalf (and to
which First Security generally described Napa only generically) generally
indicated a lack of interest in merging with or acquiring an institution of
Napa's size.
First Security had identified Wells Fargo as a potentially suitable merger
partner for Napa because Wells Fargo satisfied the initial screening criteria
established by Napa and First Security for potential merger candidates and
because of Wells Fargo's perceived interest in making strategic acquisitions of
community banking organizations in California. In addition, Napa and First
Security believed that combining Napa with an institution such as Wells Fargo,
with its diversified product line, multiple delivery channels and ready access
to the capital markets, would greatly enhance Napa's competitive position and
prospects. Encouraged by Wells Fargo's response to its initial inquiry, First
Security recommended to the Napa board's Negotiating Committee that it engage
in further discussions with Wells Fargo about the latter's interest in
acquiring Napa. Further discussions continued between Napa and its advisors and
Wells Fargo, including due diligence and the negotiation of the merger
agreement.
In evaluating whether to affiliate with Wells Fargo, Napa's board, in
consultation with Napa's management and outside advisors, considered the
following:
. alternatives for improving performance and maximizing shareholder value
without entering into a business combination;
. the value of Wells Fargo common stock;
. the appreciation in the price of Wells Fargo common stock in recent
years and Wells Fargo's dividend history;
. the fact that Wells Fargo stock is widely traded, thereby representing a
substantially more liquid investment than Napa common stock;
. Wells Fargo's financial condition;
. the business strategies of Napa and Wells Fargo, and Wells Fargo's
prospects for success in the communities served by Napa; and
. the terms and conditions of the proposed merger agreement.
Following arm's-length negotiations between representatives of Napa and
Wells Fargo, the parties entered into the merger agreement on November 18,
1999. The aggregate price to be paid to holders of Napa's common stock resulted
from negotiations which considered, among other things, the historical earnings
and dividends of Wells Fargo and Napa; the potential growth in Napa's market
and earnings, both as an independent entity and as part of a larger
organization such as Wells Fargo; Napa's and Wells Fargo's asset quality and
credit standards; and the effect of the merger on the shareholders, customers
and employees of Napa.
The merger agreement was executed on November 18, 1999, and a press release
announcing the terms of the merger was issued jointly by Wells Fargo and Napa
on November 19, 1999.
Napa's Board of Directors' Reasons for the Merger
The Napa board believes that the merger agreement and the merger are in the
best interests of Napa and Napa shareholders. Accordingly, Napa's board of
directors has unanimously approved and adopted the merger
12
<PAGE>
agreement and recommends approval of the merger by Napa's shareholders. In
reaching its decision, the board, as noted above, consulted with Napa's
management, legal counsel and financial advisor. The board also considered a
number of factors (to which relative weights were not assigned) including, in
addition to those mentioned above, the following:
. Napa's business, results of operations, financial conditions and future
prospects;
. Wells Fargo's business, results of operations, financial condition and
overall prospects, which the board believes would complement and greatly
enhance and strengthen the Napa franchise and help ensure its long-term
growth and success;
. the impact of the merger on Napa's customers, shareholders and
employees, and on the communities served by Napa;
. a comparison of key financial measures of recent comparable transactions
(including, but not limited to, the price-to-book value and price-to-
earnings ratios) to those implied by Wells Fargo's proposal; and
. First Security's presentation to the board and its opinion, as Napa's
financial advisor, that the merger consideration to be paid by Wells
Fargo was fair from a financial point of view to the shareholders of
Napa.
After giving careful consideration to all of the above factors, the Napa
board unanimously concluded that the merger would be in the best interests of
Napa's shareholders, customers and employees. Accordingly, for the reasons set
forth above, Napa's board of directors unanimously recommends that Napa
shareholders approve the merger agreement and the merger.
Opinion Of Napa's Financial Advisor
The fairness opinion of Napa's financial advisor, First Security Van Kasper,
is described below. To the extent that the description contains First
Security's projections, estimates and/or other forward-looking statements about
the future earnings or other measures of the future performance of Wells Fargo,
you should not rely on any of these statements as having been made or adopted
by Wells Fargo unless the statements have been made by Wells Fargo in a
document that is incorporated by reference. See "Where You Can Find More
Information."
Napa engaged First Security to act as its exclusive financial advisor in
connection with the merger. First Security agreed to assist Napa in analyzing,
structuring, negotiating and effecting a transaction with a potential acquirer,
which after discussions with multiple parties was Wells Fargo. Napa selected
First Security because First Security is a nationally recognized investment
banking firm with substantial experience in transactions similar to the merger
and is familiar with Napa and its business. As part of its investment banking
business, First Security is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions.
Representatives of First Security attended the meeting of Napa's board of
directors held on November 16, 1999 at which the Napa board considered and
approved the merger agreement. At the November 16, 1999 meeting, First Security
rendered an oral opinion that, as of that date, the exchange ratio was fair to
Napa and its shareholders from a financial point of view. That opinion was
reconfirmed in writing as of the date of this proxy statement-prospectus.
The full text of First Security's written opinion dated the date of this
proxy statement-prospectus is attached as Appendix B to this proxy statement-
prospectus and is incorporated herein by reference.
Napa shareholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken by First Security.
13
<PAGE>
First Security's opinion is directed to Napa's board of directors and
addresses only the exchange ratio. It does not address the underlying business
decision to proceed with the merger and does not constitute a recommendation to
any shareholder as to how the shareholder should vote at the special meeting
with respect to the merger or any matter related thereto.
In rendering its opinion, First Security:
. reviewed, among other things,
. the merger agreement,
. annual reports to stockholders and annual reports on Form 10-K of
Wells Fargo,
. annual reports on Form 10-KSB of Napa,
. quarterly reports on Form 10-Q of Wells Fargo,
. quarterly reports on Form 10-QSB of Napa,
. certain internal financial analyses and forecasts for Napa prepared
by its management, and
. certain publicly available research reports and earnings estimates
for Wells Fargo;
. held discussions with members of senior management of Napa regarding
its:
. past and current business operations,
. regulatory relationships,
. financial condition, and
. future prospects;
. compared certain financial and stock market information for Wells Fargo
and Napa with similar information for certain other companies with
publicly traded securities;
. reviewed the financial terms of certain recent business combinations in
the banking industry; and
. performed other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, First Security relied
upon and assumed the accuracy and completeness of all of the financial and
other information provided to it or publicly available. First Security did not
attempt to verify such information independently. First Security relied upon
the management of Napa as to the reasonableness and achievability of the
financial and operating forecasts and projections (and assumptions and bases
therefor) provided to First Security. First Security assumed that those
forecasts and projections reflected the best available estimates and judgments
of Napa management. First Security also assumed, without independent
verification, that the aggregate allowances for loan losses for Wells Fargo and
Napa are adequate to cover those losses. First Security did not make or obtain
any evaluations or appraisals of the property of Wells Fargo or Napa, and First
Security did not examine any individual credit files.
The projections furnished to First Security and used by it in certain of its
analyses were prepared by the senior management of Napa. Napa does not publicly
disclose internal management projections of the type provided to First Security
in connection with its review of the merger. As a result, such projections were
not prepared with a view towards public disclosure. The projections were based
on numerous variables and assumptions which are inherently uncertain, including
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in the
projections.
The following is a summary of the material analyses performed by First
Security related to the oral opinion rendered on November 16, 1999 to Napa's
board of directors.
14
<PAGE>
Transaction Summary
First Security calculated the merger consideration to be paid pursuant to
the exchange ratio as a multiple of Napa's book value and 1999 estimated
earnings. This computation was based on Napa's estimated earnings per share of
$1.82 in 1999, Napa's estimated earnings per share of $2.05 in 2000, an assumed
exchange ratio of 0.7759 Wells Fargo share for each Napa share and the closing
price of Wells Fargo's common stock on November 15, 1999 of $47.25. Based on
those assumptions, this analysis indicated that Napa shareholders would receive
shares of Wells Fargo common stock worth $36.65 for each share of Napa common
stock held and that this amount would represent a multiple of 3.19 times book
value per share, 20.14 times estimated 1999 earnings per share and 17.87 times
estimated 2000 earnings per share.
Discounted Cash Flow Analysis
First Security estimated the present value of future cash flows that would
accrue to a holder of a share of Napa common stock assuming that the
shareholder held the stock for five years and then sold it. The analysis was
based on earnings forecasts prepared by management on a stand-alone,
independent basis for the year 2000 and annual net income growth rates from
12.0% to 16.0% for the years 2001 through 2004. A 25% dividend payout ratio was
assumed for Napa through the year 2004. An estimated year 2004 year-end stock
price was estimated by multiplying the projected annual earnings by earnings
multiples ranging from 12 to 18 times. The estimated stock price for each year
and the estimated dividends were discounted at rates from 14% to 18%. These
rates were selected because, in First Security's experience, they represent the
risk-adjusted rates of return that investors in securities such as the common
stock of Napa would require. On the basis of these assumptions, First Security
calculated a range of present values ranging from $18.84 to $36.97. These
values were compared to the $36.65 offer from Wells Fargo.
The discounted cash flow present value analysis is a widely used valuation
methodology that relies on numerous assumptions, including asset and earnings
growth rates, terminal values and discount rates. The analysis did not purport
to be indicative of the actual values or expected values of Napa common stock.
Selected Transaction Analysis
Using publicly available information, First Security reviewed certain terms
and financial characteristics, including the historical price-to-earnings
ratio, the price-to-tangible book ratio, and the tangible book value premium to
core deposits paid in prior commercial banking institution merger or
acquisition transactions. The first comparable group ("Comparable Group One")
included nationwide transactions announced since January 1, 1999 with sellers
with assets between $100 million and $300 million that earned between 0.75% and
1.50% on total assets. Comparable Group One included 54 transactions. The
average price-to-last twelve month earnings for Comparable Group One was
21.07x, and ranged from 11.8x to 42.3x. The average price-to-tangible book
value for Comparable Group One was 242.0%, and ranged from 106.2% to 476.2%.
The average tangible book value premium to core deposits for Comparable Group
One was 16.43%, and ranged from 2.6% to 36.2%.
The second comparable group ("Comparable Group Two") included transactions
announced since January 1, 1999 with sellers located in California with assets
between $100 million and $300 million that earned between 0.75% and 1.50% on
total assets. Comparable Group Two included 14 transactions. The average price-
to-last twelve month earnings for Comparable Group Two was 19.5x, and ranged
from 12.5x to 27.1x. The average price-to-tangible book value for Comparable
Group Two was 252.4%, and ranged from 131.7% to 441.2%. The average tangible
book value premium to core deposits for Comparable Group Two was 18.9%, and
ranged from 7.2% to 32.5%.
No company or transaction used as a comparison in the above analysis is
identical to Wells Fargo, Napa or the merger. Accordingly, an analysis of these
results is not mathematical. Rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies to which they are being compared.
15
<PAGE>
Selected Peer Group Analysis
First Security compared the financial performance and market performance of
Wells Fargo with the following selected banking institutions with assets over
$50 billion (the "Comparable Bank Group") deemed relevant by First Security:
Bank of America (NC), Bank of New York (NY), Bank One (IL), Chase Manhattan
(NY), Citigroup (NY), First Union (NC), Firstar (WI), FleetBoston Financial
(MA), J.P. Morgan (NY), KeyCorp (OH), National City (OH), PNC (PA), Republic
(NY), SunTrust (GA), U.S. Bancorp (MN) and Wachovia (NC). The comparisons were
based on:
. various financial measures, including
. earnings performance,
. operating efficiency,
. capital adequacy and
. asset quality; and
. various measures of market performance, including
. market/book values,
. price to earnings and
. dividend yields.
To perform this analysis, First Security used the financial information as
of and for the twelve months ended September 30, 1999, and market price
information as of November 15, 1999.
First Security's analysis showed the following concerning Wells Fargo's
financial performance:
<TABLE>
<CAPTION>
Comparable
Bank Group
Performance Measure Wells Fargo Average
------------------- ----------- ----------
<S> <C> <C>
Return on Equity................................... 12.19% 18.44%
Return on Assets................................... 1.29% 1.39%
Net Interest Margin................................ 5.63% 3.65%
Efficiency Ratio................................... 57.05% 56.28%
Leverage Ratio..................................... 7.22% 7.13%
Non-Performing Assets to Total Assets.............. 0.46% 0.41%
Loan Loss Reserve to Nonperforming Assets.......... 335.13% 270.69%
</TABLE>
First Security's analysis showed the following concerning Wells Fargo's
market performance:
<TABLE>
<CAPTION>
Comparable
Bank Group
Performance Measure Wells Fargo Average
------------------- ----------- ----------
<S> <C> <C>
Price to Earnings Multiple, based on 1999
estimated earnings.............................. 21.10x 16.42x
Price to Earnings Multiple, based on 2000
estimated earnings.............................. 18.31x 14.80x
Price to Tangible Book Multiples................. 6.10x 3.79x
</TABLE>
For purposes of the above calculations, all earnings estimates are based
upon the Institutional Broker Estimate System (IBES) consensus estimates for
Wells Fargo. Because of the inherent differences in the businesses, operations,
financial conditions and prospects of Wells Fargo and the companies included in
the Comparable Bank Group, First Security believed that a purely quantitative
comparable company analysis would not be particularly meaningful in the context
of the merger. First Security believed that the appropriate use of a comparable
company analysis in this instance would involve qualitative judgments
concerning the differences between Wells Fargo and the companies included in
the Comparable Bank Group which would affect the trading values of the
comparable companies.
16
<PAGE>
Contribution Analysis
First Security analyzed the relative contribution of each of Wells Fargo and
Napa to certain pro forma balance sheet and income statement items of the
combined entity. The contribution analysis showed:
<TABLE>
<S> <C>
Napa Contribution To:
Combined Common Equity........................................... 0.05%
Combined 1999 Estimated Net Income Without Cost Savings.......... 0.04%
Combined Total Assets............................................ 0.07%
Napa Estimated Pro Forma Ownership............................... 0.04%
</TABLE>
First Security compared the relative contribution of the balance sheet and
income statement items with the estimated pro forma ownership for Napa
shareholders based on an exchange ratio of 0.7759.
Other Analyses
First Security reviewed the relative financial and market performance of
Napa and Wells Fargo to a variety of relevant industry peer groups and indices.
First Security also reviewed earnings estimates, balance sheet composition,
historical stock performance and other financial data for Wells Fargo.
In connection with its opinion dated as of the date of this proxy statement-
prospectus, First Security performed procedures to update, as necessary,
certain of the analyses described above. First Security reviewed the
assumptions on which the analyses described above were based and the factors
considered in connection therewith. First Security did not perform any analyses
in addition to those described above in updating its November 16, 1999 oral
opinion.
First Security Van Kasper
Napa's board of directors has retained First Security as an independent
contractor to act as financial adviser to Napa regarding the merger. As part of
its investment banking business, First Security is continually engaged in the
valuation of banking businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. First Security has
experience in, and knowledge of, the valuation of banking enterprises. In the
ordinary course of its business as a broker-dealer, First Security may, from
time to time, purchase securities from, and sell securities to, Napa and Wells
Fargo. As a market maker in securities First Security may from time to time
have a long or short position in, and buy or sell, debt or equity securities of
Napa and Wells Fargo for First Security's own account and for the accounts of
its customers. First Security has not previously provided investment banking
services to Wells Fargo or Napa.
Napa and First Security have entered into an agreement relating to the
services to be provided by First Security in connection with the merger. Napa
has agreed to pay First Security, at the time of closing, a cash fee equal to
1.50% of the market value of the aggregate consideration offered in exchange
for the outstanding shares of common stock of Napa in the merger. Pursuant to
the First Security engagement agreement, Napa also agreed to reimburse First
Security for reasonable out-of-pocket expenses and disbursements incurred in
connection with its retention and to indemnify First Security against certain
liabilities, including liabilities under the federal securities laws.
Additional Interests Of Napa Management
Certain directors and executive officers of Napa have interests in the
merger that are in addition to their interests as shareholders of Napa
generally. Napa's board of directors was aware of these interests and
considered them, among other things, when it approved the merger agreement.
17
<PAGE>
Conversion Of Stock Options
The following table sets forth the names of the directors and executive
officers of Napa who have options that, if not exercised as of immediately
before the merger, will convert into shares of Wells Fargo common stock. Also
set forth in the table are the number of shares of Napa common stock subject to
options held by each of these individuals. See "The Merger Agreement--Basic
Plan Of Reorganization" for the formula use to convert Napa stock options into
shares of Wells Fargo common stock.
<TABLE>
<CAPTION>
Name Option Shares
---- -------------
<S> <C>
William A. Bacigalupi....................................... 10,000
Dennis D. Groth............................................. 10,000
E. James Hedemark........................................... 10,000
Michael D. Irwin............................................ 10,000
Brian J. Kelly.............................................. 12,500
C. Richard Lemon............................................ 10,000
Joseph G. Peatman........................................... 10,000
A. Jean Phillips............................................ 10,000
George M. Schofield......................................... 6,000
W. Clarke Swanson, Jr....................................... 23,800
-------
Total..................................................... 112,300
=======
</TABLE>
Employment Agreements
Brian Kelly, president and chief operating officer of Napa, and certain non-
executive Napa officers have entered into employment and non-compete agreements
with Wells Fargo with substantially identical terms and conditions. The
agreements, which have a term of two years, provide for an annual salary and
performance-based incentive compensation, subject to terms of eligibility. In
addition, the agreements prohibit the subject officers from competing against
Wells Fargo, directly or indirectly, individually or in concert with others,
during the term of the agreement. The agreements will be effective as of 12:00
a.m. on the day immediately following the merger. Mr. Kelly's agreement
provides for an annual salary of $150,000.
Business Completion Payments
It is expected that certain officers of Napa will enter into business
completion payment agreements with Wells Fargo that will provide for cash
payments upon completion of continued employment through specified milestone
dates. The agreements will provide for payment in two installments, each equal
to one-half of the employee's 1999 annual salary. The first installment is to
be paid upon completion of the merger and the second is to be paid upon the
earlier to occur of (a) 30 days after the completion of the conversion to Wells
Fargo's systems or (b) December 31, 2000, provided, however, that no unpaid
installment will be paid to any employee who resigns or is terminated for cause
prior to the due date of the installment. Total gross payments are expected to
be approximately $500,000, or $300,000 on an after-tax basis. Mr. Kelly's total
business completion payment is expected to be $150,000 before taxes.
Special Payments To Two Directors
Following the successful completion of the merger negotiations with Wells
Fargo, the Napa board voted to award special one-time cash payments of $25,000
to each of directors Irwin and Lemon in recognition of their efforts in
connection with negotiating and concluding the merger agreement and the merger.
These payments will be made by Napa to the aforementioned directors immediately
prior to the closing of the merger.
Certain Retiree Benefits
The merger agreement grants Mr. Swanson access to the Wells Fargo Retiree
Medical Plan for himself and his eligible dependents beginning on the effective
date of the merger. Mr. Swanson will be entitled to receive
18
<PAGE>
medical plan benefits and coverage identical to those available to similarly
situated Wells Fargo retirees. Although Mr. Swanson may be required by Wells
Fargo to make premium payments in order to maintain his coverage, the merger
agreement provides that in no event may Wells Fargo charge Mr. Swanson a
premium which is greater than the premium being charged to similarly situated
Wells Fargo retirees during the same premium period.
Purchase Right
In 1987, Mr. Swanson acquired 300,701 shares of Napa's common stock through
a tender offer at $11.00 per share, net to the sellers in cash. The tender
offer was made pursuant to the terms of a purchase agreement with Napa, dated
as of February 5, 1987.
As disclosed to shareholders in materials related to the tender offer, the
purchase agreement provides, among other things, certain protections against
dilution of Mr. Swanson's stock ownership by requiring that if Napa should
desire to issue any Equity Securities (as defined below), it shall give Mr.
Swanson first right to purchase a portion of such Equity Securities up to an
amount which will enable Mr. Swanson to maintain the same percentage of
ownership of the outstanding common stock as held by Mr. Swanson on the date
immediately following his purchases in the tender offer. This right to purchase
under the purchase agreement is referred to as the "purchase right." In the
event that the number of shares of common stock owned by Mr. Swanson should
decline due to Mr. Swanson's failure to purchase shares pursuant to such right
or sales of shares of common stock by Mr. Swanson, the purchase agreement
provides that the purchase right entitles Mr. Swanson to purchase a portion of
new issuances of Equity Securities up to an amount which will enable
Mr. Swanson to maintain his percentage ownership of the outstanding common
stock as computed immediately prior to each issuance of such Equity Securities.
The term "Equity Securities" is defined in the purchase agreement to mean
common stock, rights, options (except stock options issued pursuant to stock
option plans), warrants to purchase common stock, any security other than
common stock having voting rights in the election of the board of directors
which are not contingent upon a failure to pay dividends, any security
convertible into or exchangeable for any of the foregoing, and any agreement or
commitment to issue any of the foregoing.
The purchase right also applies to issuances of Equity Securities to
employees, officers and directors under stock option plans approved by the
board of directors of Napa, provided, however, that common stock shall be
deemed to have been issued only upon the exercise of an employee stock option.
The purchase agreement further states that if Mr. Swanson has a right to
purchase common stock due to the exercise of a stock option by an employee,
officer or director of Napa, the purchase price of such common stock
purchasable by Mr. Swanson shall be equal to the exercise price of such option.
The purchase right terminates when Mr. Swanson ceases to own in excess of 10%
of the then outstanding shares of Napa common stock.
The merger agreement provides that all options to purchase Napa common stock
that are in effect but unexercised immediately prior to the merger will be
"deemed to have been exercised" and will be converted into the right to receive
a number of shares of Wells Fargo common stock determined according to the
conversion formula contained in the merger agreement. If, rather than being
"deemed to have been exercised," such options were in fact being exercised
(that is, exchanged for shares of Napa common stock at the prices specified in
such options), Mr. Swanson would then be entitled, under the express terms of
the purchase agreement, to invoke the purchase right with respect to the
exercise of such options and to purchase a specified number of Napa common
shares at the exercise price of the options being exercised.
At the request of Napa's board, First Security calculated the dilution of
Mr. Swanson's ownership interest that would result if such options were in fact
being exercised (rather than being "deemed to have been exercised" and
exchanged for something other than Napa common stock) in connection with the
merger. Based upon the information available to First Security at the time it
made its calculations, First Security determined that if all options to
purchase Napa common stock that will be in effect but unexercised immediately
prior to the merger were to be exercised, Mr. Swanson would be entitled,
pursuant to the purchase agreement and the purchase right, to acquire 13,800
additional shares of common stock.
19
<PAGE>
Although the definition of Equity Securities in the purchase agreement
includes options to purchase Napa common stock, under the express terms of the
purchase agreement the purchase right only applies when such options are
exercised; the purchase agreement and the purchase right do not expressly
contemplate a dilution of Mr. Swanson's ownership interest as a result of
options being "deemed exercised" and exchanged for something other than Napa
common stock. Nevertheless, after considering this issue and soliciting the
views of Napa's financial and legal advisors, Napa's board of directors (with
Mr. Swanson absent and not participating) concluded that the merger agreement's
treatment of options to purchase Napa common stock was functionally equivalent
to the actual exercise of such options for purposes of the purchase agreement
and the purchase right. The board further concluded that, at the time the
purchase agreement and the purchase right were negotiated, it was neither
Napa's nor Mr. Swanson's intent nor desire to deprive Mr. Swanson of the
purchase right in circumstances such as those contemplated by the merger
agreement. Accordingly, pursuant to the purchase agreement and the purchase
right, the board voted unanimously to give Mr. Swanson the right to acquire
13,800 shares of Napa common stock at a price of $10.63 per share, which is the
weighted average price of all options to purchase Napa common stock that are in
effect but unexercised immediately prior to the merger, and to accord to such
purchase right the same rights and privileges as are conferred by the merger
agreement upon all such options. Based upon an exchange ratio of 0.77 Wells
Fargo share for each Napa share, Mr. Swanson's right to purchase 13,800 shares
of Napa common stock will be convertible into the right to receive
approximately 10,626 shares of Wells Fargo common stock.
Indemnification and Insurance
Wells Fargo has agreed to ensure that all rights to indemnification and all
limitations of liability existing in Napa's articles of incorporation or bylaws
in favor of the present and former directors and officers of Napa with respect
to claims arising from (a) facts or events that occurred before the effective
time of the merger or (b) the merger agreement or any of the transactions
contemplated thereby will survive the merger and continue in full force and
effect.
Subject to certain exceptions and limitations, Wells Fargo has agreed to use
its best efforts to cause to be maintained for a period of four years following
the merger the current policies of directors' and officers' liability insurance
maintained by Napa with respect to claims or events that occur before the
merger becomes effective.
Accelerated Vesting Of Stock Options
As a result of the merger, currently non-vested options to acquire 15,700
shares of Napa common stock granted under Napa's stock option plans will vest
and become exercisable prior to the effective date of the merger. The options
have exercise prices ranging from $8.00 to $17.50 depending upon the date they
were granted and would have otherwise vested periodically until September 15,
2003. The vesting dates of options held by directors and executive officers of
Napa will not accelerate as a result of the merger insofar as the options will
have already vested prior to the merger under their terms.
The merger agreement provides that all options that are in effect but
unexercised immediately prior to the merger will be "deemed to have been
exercised" and will be converted into the right to receive a number of shares
of Wells Fargo common stock determined according to the conversion formula
contained in the merger agreement. See "The Merger Agreement--Basic Plan Of
Reorganization."
Dissenters' Rights
Napa shareholders are entitled to dissenters' rights in connection with the
merger. The procedures for obtaining dissenters' rights are set forth in
Chapter 13 of the California General Corporation law (CGCL), the relevant
provisions of which are attached to this proxy statement-prospectus as Appendix
C. The following description of dissenters' rights is not a complete discussion
of Chapter 13 of the CGCL and is qualified in its entirety by reference to
Appendix C. If you wish to exercise dissenters' rights or wish to preserve the
right to do so you should carefully read Appendix C. You must follow exactly
the required procedures set forth in Chapter 13 of the CGCL or your dissenters'
rights may be lost.
20
<PAGE>
Napa shareholders are hereby advised that the merger may be approved by a
simple majority of the shares entitled to vote at the shareholders' meeting at
which the merger is to be considered. W. Clarke Swanson, Napa's Chairman and
Chief Executive officer, owns more than the number of shares required to
approve the merger, and Mr. Swanson has signed an agreement with Wells Fargo
which provides that he will vote all of his shares in favor of the merger.
If the merger is completed, and you elect to exercise your dissenters'
rights and you comply with the procedures set forth in Chapter 13, you will be
entitled to receive an amount equal to the fair market value of your shares.
Chapter 13 provides that the fair market value shall be determined as of
November 18, 1999, the day before the public announcement of the merger. Napa
believes that the fair market value of its stock as of November 18, 1999, was
equal to $16.50, which is the price at which Napa's common stock most recently
traded on or prior to that date, based upon information reported to management
regarding actual trades.
Exercising Dissenters' Rights
You must satisfy each of the following requirements for your shares to be
considered dissenting shares under Chapter 13. Shares of Napa common stock must
be purchased by Napa from a dissenting shareholder if all applicable
requirements are complied with.
. You have shares of Napa common stock outstanding as of the record date
of the shareholder's meeting at which you may vote the shares.
. You do not vote the shares in favor of the merger.
. You make a written demand to have Napa purchase your Napa shares for
cash at their fair market value. The demand must include the information
specified below and must be received by Napa or its transfer agent
within 30 days after the date on which the notice of the approval by the
outstanding shares was mailed to you pursuant to subdivision (a) of
Section 1301.
If you return a proxy without voting instructions or with instructions to
vote FOR the proposal to approve the merger, your shares will automatically be
voted in favor of the merger and you will lose your dissenters' rights.
Notification of Merger Approval
If the merger is approved by the Napa shareholders, Napa will have 10 days
after the approval to mail to those shareholders who did not vote in favor or
the merger written notice of the approval along with a copy of Sections 1300
through 1304 of Chapter 13. In the notice of approval, Napa must state the
price it determines represents the fair market value of the dissenting shares.
This price constitutes an offer by Napa to purchase the dissenting shares at
the price stated. Additionally, Napa must set forth in the approval notice of
brief description of the procedures a shareholder must follow if he or she
desires to exercise dissenters' rights.
Demand for Purchase
A written demand is essential for dissenter's rights. In the written demand,
Chapter 13 requires you to specify the number of shares you hold of record
which you are demanding that Napa purchase. In the written demand, you must
also include a statement of the figure you claim to be the fair market value of
those shares as of the day before the terms of the merger were first announced,
excluding any appreciation of depreciation because of the proposed merger. It
is Napa's position that this day is November 18, 1999. You may take the
position in the written demand that a different date is applicable. The price
you indicate in your demand constitutes an offer by you to sell the dissenting
shares at the price stated.
In addition, it is recommended that you comply with the following conditions
to ensure that the demand is properly executed and delivered:
. The demand should be sent by registered or certified mail, return
receipt requested.
21
<PAGE>
. The demand should be signed by the shareholder of record, or his or her
duly authorized representative, exactly as his or her name appears on
the stock certificates evidencing the shares.
. A demand for the purchase of the shares jointly owned by more than one
person should identify and be signed by all such holders.
. Any person signing a demand for purchase in any representative capacity,
such as attorney-in-fact, executor, administrator, trustee or guardian,
should indicate his or her title, and, if Napa so requests, furnish
written proof of his or her capacity and authority to sign the demand.
. A shareholder may not withdraw a demand for payment without the consent
of Napa.
Submission of Share Certificates
Under California law, a demand by a shareholder is not effective for any
purpose unless it is received by Napa or its transfer agent within 30 days
after the date on which the notice of the approval by the outstanding shares
was mailed to such shareholder pursuant to subdivisions (a) of Section 1301.
Within 30 days after the date on which Napa mails the notice of the approval of
the merger, dissenting shareholders must also submit the certificates
representing the dissenting shares to Napa at the office it designates in the
notice of approval. Napa will stamp or endorse the certificates with a
statement that the shares are dissenting shares or Napa will exchange the
certificates with certificates of appropriate denomination that are so stamped
or endorsed. If a shareholder transfers any shares of Napa common stock before
submitting the shares for endorsement, then such shares will lose their status
as dissenting shares.
Agreement as to Fair Market Value
If Napa and you agree that the surrendered shares are dissenting shares and
agree upon the price of the shares, you are entitled to receive the agreed
price together with interest at the legal rate on judgments from the date of
the agreement between Napa and you. Napa will pay the fair value of the
dissenting shares within 30 days after Napa and you agree upon the price of the
shares or within 30 days after any statutory or contractual conditions to the
merger have been satisfied, whichever is later. Napa's duty to pay is subject
to you surrendering the certificates and is also subject to the restrictions
imposed under California law on the ability of Napa to purchase its outstanding
shares.
If Napa denies that the shares surrendered are dissenting shares or Napa and
you fail to agree upon the fair market value of such shares, then you may,
within six months after the notice of approval is mailed, file a complaint in
the Superior Court of the proper county requesting the court to make such
determinations. In the alternative, you may intervene in any pending action
brought by any other dissenting shareholder. If you fail to file such a
complaint or fail to intervene in a pending action within the specified six-
month period, your dissenting rights are lost. If the fair market value of the
dissenting shares is at issue, the court will determine, or will appoint one or
more impartial appraisers to determine, such fair market value. The costs of
the action will be assessed or apportioned as the court considers equitable,
but if the fair market value is determined to exceed 125% of the price offered
to the shareholder, Napa will be required to pay such costs.
Termination of Dissenting Shares and Shareholder Status
This summary has already described certain situations where shareholders of
Napa will cease to have dissenters' appraisal rights. In addition to the
situations described above, you will cease to have dissenters' appraisal rights
if:
. Napa abandons the merger, in which case Napa will pay any dissenting
shareholder who has filed a complaint, as described above, all necessary
expenses and reasonable attorneys' fees incurred in such proceedings;
22
<PAGE>
. you surrender your shares for conversion into shares of another class;
or
. you withdraw your demand for the purchase of the dissenting shares with
the consent of Napa.
Beneficial Ownership
A person who has a beneficial interest in Napa common stock that is held of
record in the name of another person (e.g., trustee or nominee) will need to
cause the record owner to exercise dissenters' rights on his or her behalf in
accordance with the requirements of Chapter 13 of the CGCL.
Demands, Notices, Etc.
Any demands, notices, certificates or other documents required to be
delivered to Napa may be sent to:
Brian Kelly
President and Chief Operating Officer
Napa National Bancorp
901 Main Street
Napa, California 94559-3044
Exchange Of Certificates
After completion of the merger, Norwest Bank Minnesota, National
Association, acting as exchange agent for Wells Fargo, will mail to each
holder of record of shares of Napa common stock a form of letter of
transmittal, together with instructions for the exchange of the holder's Napa
stock certificates for a certificate representing Wells Fargo common stock.
Napa shareholders should not send in their certificates until they receive
the letter of transmittal form and instructions.
No dividend or other distribution declared on Wells Fargo common stock
after completion of the merger will be paid to the holder of any certificates
for shares of Napa common stock until after the certificates have been
surrendered for exchange.
When the exchange agent receives a surrendered certificate or certificates
from a shareholder, together with a properly completed letter of transmittal,
it will issue and mail to the shareholder a certificate representing the
number of whole shares of Wells Fargo common stock to which the shareholder is
entitled, plus cash for the amount of any remaining fractional share and any
cash dividends that are payable with respect to the shares of Wells Fargo
common stock so issued. No interest will be paid on the fractional share
amount or amounts payable as dividends or other distributions.
A certificate for Wells Fargo common stock may be issued in a name other
than the name in which the surrendered certificate is registered if (a) the
certificate surrendered is properly endorsed and accompanied by all documents
required to transfer the shares to the new holder and (b) the person
requesting the issuance of the Wells Fargo common stock certificate either
pays to the exchange agent in advance any transfer and other taxes due or
establishes to the satisfaction of the exchange agent that such taxes have
been paid or are not due.
The exchange agent will issue stock certificates for Wells Fargo common
stock in exchange for lost, stolen or destroyed certificates for Napa common
stock upon receipt of a lost certificate affidavit and a bond indemnifying
Wells Fargo for any claim that may be made against Wells Fargo as a result of
the lost, stolen or destroyed certificates.
After completion of the merger, no transfers will be permitted on the books
of Napa. If, after completion of the merger, certificates for Napa common
stock are presented for transfer to the exchange agent, they will be canceled
and exchanged for certificates representing Wells Fargo common stock.
23
<PAGE>
None of Wells Fargo, Napa, the exchange agent or any other person will be
liable to any former holder of Napa common stock for any amount delivered in
good faith to a public official pursuant to applicable abandoned property,
escheat or similar laws.
Regulatory Approvals
The merger is subject to the prior approval of the Board of Governors of the
Federal Reserve System. The approval of the Federal Reserve Board is required
because Wells Fargo is a bank holding company registered under the Bank Holding
Company Act. On January 20, 2000, Wells Fargo filed an application with the
Federal Reserve Board requesting approval of the merger. As of the date of this
proxy statement-prospectus, the Federal Reserve Board had not acted on Wells
Fargo's application.
The approval of an application means only that the regulatory criteria for
approval have been satisfied or waived. It does not mean that the approving
authority has determined that the consideration to be received by Napa
shareholders is fair. Regulatory approval does not constitute an endorsement or
recommendation of the merger.
Wells Fargo and Napa are not aware of any governmental approvals or
compliance with banking laws and regulations that are required for the merger
to become effective other than those described above. Wells Fargo and Napa
intend to seek any other approval and to take any other action that may be
required to effect the merger. There can be no assurance that any required
approval or action can be obtained or taken prior to the special meeting.
The merger cannot be completed unless all necessary regulatory approvals are
granted. In addition, Wells Fargo may elect not to complete the merger if any
condition under which any regulatory approval is granted is unreasonably
burdensome to Wells Fargo. See "The Merger Agreement--Conditions To The Merger"
and "--Termination Of The Merger Agreement."
Effect Of Merger On Napa's Employee Benefit Plans
The merger agreement provides that, subject to any eligibility requirements
applicable to such plans, employees of Napa will be entitled to participate in
those Wells Fargo employee benefit and welfare plans specified in the merger
agreement. Eligible employees of Napa will enter each of such plans no later
than the first day of the calendar quarter which begins at least 32 days after
completion of the merger.
U.S. Federal Income Tax Consequences Of The Merger
The following is a discussion of the material U.S. federal income tax
consequences to Napa shareholders of the exchange of their shares of Napa stock
for Wells Fargo common stock in the merger. This discussion does not purport to
deal with all aspects of taxation that may be relevant to particular
shareholders in light of their personal circumstances, or to certain types of
investors, including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers and foreign shareholders. This discussion also
does not address the tax consequences to holders of Napa options or Napa
shareholders who received their stock in compensatory transactions.
The discussion is based on the U.S. federal income tax laws as currently in
effect and as currently interpreted. It does not cover issues of state, local
or foreign taxation. Future legislation, regulations, administrative rulings
and court decisions may alter the tax consequences summarized below.
Brobeck, Phleger & Harrison LLP, counsel to Napa, has rendered an opinion to
Napa that the merger will qualify as a "reorganization" for federal income tax
purposes and that, subject to the limitations and qualifications referred to
herein, the U.S. federal income tax consequences of the merger to Napa
shareholders will generally be as described below. The opinion of Brobeck,
Phleger & Harrison has been filed as an exhibit to the registration statement
of which this proxy statement-prospectus is a part.
. A shareholder who receives shares of Wells Fargo common stock in
exchange for shares of Napa common stock in the merger will not
recognize any gain or loss on the receipt of the shares of Wells
24
<PAGE>
Fargo common stock, except for cash received in lieu of a fractional
share. The shareholder's gain or loss on the receipt of cash in lieu of
a fractional share will equal the difference between the cash received
and the basis of the fractional share exchanged.
. A shareholder's tax basis in the shares of Wells Fargo common stock
received will be the same as the shareholder's tax basis in the shares
of Napa common stock exchanged in the merger (less any tax basis
attributable to fractional shares for which cash is received).
. The holding period of the shares of Wells Fargo common stock received by
a shareholder in the merger will include the holding period of the
shareholder's shares of Napa common stock exchanged for such Wells
Fargo's shares in the merger, but only if the shares of Napa common
stock were held as a capital asset at the time the merger is completed.
Counsel's opinion described above is based upon certain assumptions and
representations of Wells Fargo and Napa as to factual matters. Counsel's
opinion may not be relied upon if any of these representations or assumptions
is not accurate in all material respects. Counsel's opinion is also subject to
certain qualifications stated therein. Counsel's opinion reflects only its
judgment as to the federal income tax consequences of the merger under the
Internal Revenue Code and is not binding on the Internal Revenue Service.
No ruling will be obtained from the IRS and there is no assurance that the
IRS will not take a contrary position regarding the tax consequences of the
merger, nor is there any assurance that the IRS would not prevail in the event
the tax consequences of the merger were litigated. If the Merger were
determined not to qualify as a "reorganization" for federal income tax
purposes, a Napa shareholder would recognize taxable gain or loss upon the
merger based on the difference between the fair market value of the Wells
Fargo common stock received and the tax basis of the shareholder's shares of
Napa common stock exchanged in the merger.
The U.S. federal income tax discussion set forth above is included for
general information only and may or may not be applicable depending upon a
shareholder's particular situation. Shareholders should consult their tax
advisors with respect to the tax consequences to them of the merger, including
the tax consequences under state, local, foreign and other tax laws and the
possible effects of changes in federal or other tax law.
Support Agreements
At the same time that the merger agreement was signed, all of Napa's
directors and executive officers entered into individual support agreements
with Wells Fargo. Under the support agreements, these individuals agreed,
among other things:
. to vote in favor of the merger all shares of Napa common stock owned by
them at the record date for any meeting of shareholders of Napa called
to consider and vote on the merger;
. not to sell or transfer any shares of Napa common stock held by them
except (a) pursuant to the merger or (b) with Wells Fargo's prior
written consent;
. not to solicit any inquiries or proposals or enter into any discussions,
negotiations or agreements relating to a business combination, merger or
consolidation of Napa with any person other than Wells Fargo; and
. not to vote in favor of any business combination, merger or
consolidation of Napa with any person other than Wells Fargo.
At the record date for the special meeting, the individuals who signed
support agreements beneficially owned a total of shares of Napa
common stock, representing approximately % of the shares of Napa common
stock entitled to vote at the special meeting and enough to approve the merger
without the concurrence of any other Napa shareholder.
25
<PAGE>
Resale Of Wells Fargo Common Stock Issued In The Merger
The Wells Fargo common stock issued in the merger will be freely
transferable under the Securities Act of 1933, except for shares issued to Napa
shareholders who are considered to be "affiliates" of Napa or Wells Fargo under
Rule 145 under the Securities Act or of Wells Fargo under Rule 144 under the
Securities Act. The definition of "affiliate" is complex and depends on the
specific facts, but generally includes directors, executive officers, 10%
stockholders and other persons with the power to direct the management and
policies of the company in question.
Affiliates of Napa may not sell the shares of Wells Fargo common stock
received in the merger except (a) pursuant to an effective registration
statement under the Securities Act, (b) in compliance with an exemption from
the registration requirements of the Securities Act or (c) in compliance with
Rule 144 and Rule 145 under the Securities Act. Generally, those rules permit
resales of stock received by affiliates so long as Wells Fargo has complied
with certain reporting requirements and the selling stockholder complies with
certain volume and manner of sale restrictions.
Napa has agreed to use its best efforts to deliver to Wells Fargo signed
representations by each person who may be deemed to be an affiliate of Napa
that the person will not sell, transfer or otherwise dispose of the shares of
Wells Fargo common stock to be received by the person in the merger except in
compliance with the applicable provisions of the Securities Act and the rules
and regulations promulgated thereunder.
This proxy statement-prospectus does not cover any resales of Wells Fargo
common stock received by affiliates of Napa.
Stock Exchange Listing
The shares of Wells Fargo common stock to be issued in the merger will be
listed on the New York Stock Exchange and the Chicago Stock Exchange. The
listing of the Wells Fargo common stock to be issued in the merger is a
condition to Napa's obligation to complete the merger.
Accounting Treatment
Wells Fargo will account for the merger as a purchase. Wells Fargo will
record, at fair value, the acquired assets and assumed liabilities of Napa. To
the extent the total purchase price exceeds the fair value of the assets
acquired and liabilities assumed, Wells Fargo will record goodwill. Wells Fargo
will include in its results of operations the results of Napa's operations
after the merger.
The unaudited pro forma data included in this proxy statement-prospectus for
the merger have been prepared using the purchase method of accounting. See
"Summary--Comparative Per Common Share Data."
26
<PAGE>
THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement, as
amended. A copy of the merger agreement, as amended, is attached to this proxy
statement-prospectus as Appendix A and is incorporated by reference into this
proxy statement-prospectus. When used in this proxy statement-prospectus, the
term "merger agreement" refers to the merger agreement, as amended. This
summary is qualified in its entirety by reference to the full text of the
merger agreement. Napa shareholders are encouraged to read the merger agreement
carefully and in its entirety. Parenthetical references are to the relevant
paragraph or paragraphs of the merger agreement.
Basic Plan Of Reorganization
The merger agreement provides that a wholly-owned subsidiary of Wells Fargo
will merge by statutory merger with and into Napa, with Napa as the surviving
corporation. (paragraph 1(a))
Exchange Of Wells Fargo Shares For Napa Shares
In the merger, each share of Napa common stock outstanding immediately
before the merger will be converted into the right to receive the number of
shares of Wells Fargo common stock determined by dividing the 686,905 by the
Napa Common Stock Share Equivalents.
. The Napa Common Stock Share Equivalents will equal the sum of (A) the
number of shares of Napa common stock outstanding immediately before the
merger plus (B) the "Napa Option Shares."
. The Napa Option Shares will equal the number determined by dividing (A)
the difference between (1) the "Aggregate Wells Fargo Share Value" minus
(2) the product of (y) the number of shares of Napa common stock
outstanding immediately before the merger multiplied by (z) the "Fair
Market Value Per Share" by (B) the Fair Market Value Per Share.
. The Aggregate Wells Fargo Share Value will equal 686,905 multiplied by
the Wells Fargo Measurement Price.
. Fair Market Value Per Share will equal the number determined by dividing
(A) the sum of (1) the Aggregate Wells Fargo Share Value plus (2) the
aggregate exercise price of all Stock Options in effect, but
unexercised, immediately before the merger by (B) the sum of (1) the
number of shares of Napa common stock outstanding immediately before the
merger plus (2) the number of shares of Napa common stock subject to
Stock Options in effect, but unexercised, immediately before the merger.
. The Wells Fargo Measurement Price will be the average of the closing
prices of Wells Fargo common stock as reported on the New York Stock
Exchange for the period of 19 consecutive trading days ending on the day
that is two trading days before the special meeting of Napa
shareholders.
. Stock Options are options and other rights to purchase Napa common stock
pursuant to specified stock option plans of Napa and pursuant to the
stock purchase agreement between Napa and W. Clarke Swanson.
On November 18, 1999, the date of the merger agreement, there were
outstanding 792,675 shares of Napa common stock and Stock Options to purchase
150,725 shares of Napa common stock. The Stock Options have a weighted average
exercise price of approximately $10.63.
If the merger is completed, Wells Fargo expects to exchange between 0.76 and
0.78 of a share of Wells Fargo common stock for each share of Napa common stock
then outstanding. The expected exchange ratio of 0.76 to 0.78 is based on
assumptions about the Wells Fargo Measurement Price and the number of shares of
Napa common stock subject to Stock Options that are not exercised prior to the
merger. The following table shows the approximate exchange ratios that would
result from different Wells Fargo Measurement Prices. The first case assumes
that none of the Stock Options are exercised and instead are converted into
shares of Wells
27
<PAGE>
Fargo common stock. See "Exchange Of Wells Fargo Shares For Options To Purchase
Napa Common Stock" below. The second case assumes that all of the Stock Options
are exercised by cash payments.
<TABLE>
<CAPTION>
Share Exchange Ratio
Wells Fargo ------------------------------------------
Measurement Price No Options Exercised All Options Exercised
----------------- -------------------- ---------------------
<S> <C> <C>
$30.00....................... 0.78466 0.72812
$35.00....................... 0.77664 0.72812
$40.00....................... 0.77057 0.72812
$45.00....................... 0.76208 0.72812
$50.00....................... 0.75900 0.72812
</TABLE>
As the table shows, if none of the Stock Options are exercised prior to the
merger and instead are converted into shares of Wells Fargo common stock, the
share exchange ratio decreases as the Wells Fargo Measurement Price increases.
If all of the Stock Options are exercised prior to the merger, the exchange
ratio remains constant regardless of the Wells Fargo Measurement Price.
It is expected that no Stock Options will be exercised prior to the merger
and that instead all Stock Options will be converted into shares of Wells Fargo
common stock. Neither Napa nor Wells Fargo, however, can guarantee that no
Stock Options will be exercised prior to the merger.
Exchange Of Wells Fargo Shares For Options To Purchase Napa Common Stock
If the merger is completed, each option or other right to purchase Napa
common stock that has not been exercised as of immediately before the merger
will be exchanged for shares of Wells Fargo common stock. Under a formula
specified in paragraph 1(a) of the merger agreement, the number of shares of
Wells Fargo common stock that will be exchanged for each option or other right
to purchase Napa common stock will be determined by multiplying (A) the number
of shares of Napa common stock subject to the option by (B) the product of (1)
the number determined by dividing (y) the "Option Spread" of the option by (z)
the "Fair Market Value Per Share" multiplied by (2) the share exchange ratio.
. Option Spread as to a particular option will equal the Fair Market Value
Per Share minus the per share exercise price of the option.
. Fair Market Value Per Share has the same meaning as used in determining
the share exchange ratio above.
No Adjustments For Price Fluctuations
No adjustment will be made to the number of shares of Wells Fargo common
stock you will receive for your shares of Napa common stock or your options to
purchase Napa common stock to reflect fluctuations in the price of Wells Fargo
common stock occurring after the special meeting.
Adjustments For Changes In Capitalization
If before the merger is completed the outstanding shares of Wells Fargo are
increased or decreased in number or changed into or exchanged for a different
number or kind of shares or securities as a result of a reorganization,
reclassification, recapitalization, stock dividend, stock split or other
similar change in capitalization, then an appropriate and proportionate
adjustment will be made to the exchange ratio. (paragraph 1(b))
Cash In Lieu Of Fractional Shares
If the aggregate number of shares of Wells Fargo common stock you will
receive in the merger does not equal a whole number, you will receive cash
instead of the fractional share. The cash payment will be equal to the product
of the fractional part of the share of Wells Fargo common stock multiplied by
the average of the closing prices of a share of Wells Fargo common stock as
reported on the consolidated tape of the New York Stock Exchange for each of
the five trading days ending on the date immediately preceding the special
meeting. (paragraph 1(c))
28
<PAGE>
Effective Date And Time Of The Merger
The effective date of the merger will be the day on which articles of merger
are filed with and accepted by the California Secretary of State. The merger
agreement provides that articles of merger will be filed on March 17, 2000 or
within 10 business days after the satisfaction or waiver of all conditions to
the merger, whichever is later, or such other date not prior to March 15, 2000
as Wells Fargo and Napa may agree. The effective time of the merger will be
11:59 p.m., Napa, California time, on the effective date of the merger.
(paragraph 1(d))
Representations And Warranties
The merger agreement contains various representations and warranties by
Wells Fargo and Napa concerning (a) their organization and legal authority to
engage in their respective businesses; (b) their capitalization; (c) their
corporate authority to enter into the merger agreement and complete the merger,
(d) the absence of certain material changes; (e) compliance with laws; (f)
material contracts; (g) absence of certain litigation; and (h) undisclosed
liabilities. (paragraphs 2 and 3) Because the representations and warranties do
not survive completion of the merger, they function primarily as a due
diligence device and a closing condition (that is, they must continue to be
true in all material respects until the merger is completed).
Certain Covenants
The merger agreement has a number of covenants and agreements that govern
the actions of Napa and Wells Fargo pending completion of the merger. Some of
the covenants and agreements are summarized below.
Termination Of Napa Option Plan
Napa has agreed to terminate the Napa National Bancorp Stock Option Plan.
Any options issued under this plan that are not exercised prior to the
effective date of the merger will terminate.
Conduct Of Business
Napa
Except as otherwise permitted or required by the merger agreement, Napa
and each Napa subsidiary will:
. maintain its corporate existence in good standing;
. maintain the general character of its business;
. conduct its business in the ordinary and usual manner;
. extend credit in accordance with existing lending policies and
provide Wells Fargo access to its loan files, except that it will
not, without the prior written consent of Wells Fargo, which consent
will be deemed waived under certain specified circumstances;
. make any new loan (except pursuant to commitments made prior the
merger agreement) to any borrower if the amount of the resulting
loan, when aggregated with all other loans or extensions of credit
to such person, would exceed $150,000; or
. modify, restructure or renew any existing loan (except pursuant to
commitments made prior to the merger agreement) if the amount of the
resulting loan, when aggregated with all other loans or extensions
of credit to such person, would exceed $250,000. (paragraph 4(a))
Except as otherwise permitted or required by the merger agreement, Napa
and each Napa subsidiary will not:
. amend or otherwise change its articles of incorporation or
association or bylaws;
29
<PAGE>
. issue or sell, except pursuant to stock options already granted and
except as provided in a stock purchase agreement between Napa and
Clarke Swanson, or authorize for issuance or sale, or grant any
options or make other agreements with respect to the issuance or
sale or conversion of, any shares of its capital stock, phantom
shares or other share equivalents, or any other of its securities;
. authorize or incur any long-term debt (other than deposit
liabilities);
. mortgage, pledge or subject to a lien or other encumbrance any of
its properties, except in the ordinary course of business;
. enter into any material agreement, contract or commitment in excess
of $10,000 except banking transactions in the ordinary course of
business and in accordance with policies and procedures in effect as
of the date of the merger agreement;
. make any investments except:
. investments made by bank subsidiaries in the ordinary course of
business for terms of up to one year and in amounts of $100,000
or less;
. fed funds transactions by bank subsidiaries in the ordinary
course of business; or
. investments made with the written consent of Wells Fargo, which
consent will be deemed waived under certain circumstances.
. amend or terminate any employee benefit plans except as required by
law or the terms of the merger agreement;
. declare dividends other than any dividend declared by a subsidiary's
board of directors in accordance with applicable law and regulation,
except
. between November 18, 1999 and the effective date of the merger,
Napa may declare and pay cash dividends on Napa common stock, in
accordance with applicable law and regulation and consistent with
past practice, out of the net earnings of Napa between November
18, 1999 and the effective time of the merger, determined in
accordance with generally accepted accounting principles, in an
amount not to exceed a quarterly rate of $0.125 per share;
provided, however, that Napa shareholders will be entitled to a
dividend on Napa common stock or Wells Fargo common stock, but
not both, in the calendar quarter in which the merger closes; and
. any dividend declared by the board of directors of a subsidiary
of Napa in accordance with applicable law and regulation.
. redeem, purchase or otherwise acquire any capital stock of Napa;
. increase the compensation of any officers, directors or executive
employees, except pursuant to existing compensation plans,
agreements and practices;
. sell or otherwise dispose of any shares of capital stock of Napa or
any of its subsidiaries; or
. sell or otherwise dispose of any of its assets or properties other
than in the ordinary course of business. (paragraphs 4(a) and (b))
Wells Fargo
Wells Fargo has agreed to conduct its business and to cause its significant
subsidiaries to conduct their respective businesses in compliance with all
material obligations and duties imposed by laws, regulations, rules and
ordinances or by judicial orders, judgments and decrees applicable to them or
to their businesses or properties.
30
<PAGE>
Competing Transactions
Neither Napa or any Napa subsidiary nor any director, officer,
representative or agent of Napa or any Napa subsidiary may, directly or
indirectly, solicit, authorize the solicitation of or enter into any
discussions with any entity or group (other than Wells Fargo) concerning any
offer or possible offer to
. purchase its common stock, any security convertible into its common
stock, or any other equity security of Napa or any of its subsidiaries;
. make a tender or exchange offer for any shares of its common stock or
other equity security of Napa or any of its subsidiaries;
. purchase, lease or otherwise acquire the assets of Napa or any of its
subsidiaries except in the ordinary course of business; or
. merge, consolidate or otherwise combine with Napa or any of its
subsidiaries.
Napa and each of its subsidiaries, as applicable, has also agreed to promptly
inform Wells Fargo if any such entity or group makes an offer or inquiry
concerning any of the foregoing. (paragraph 4(h))
Year 2000 Compliance
Napa will cooperate with Wells Fargo to assess the impact of the merger on
Napa's continued compliance with the Year 2000 project management process as
set forth in the May 5, 1997 Federal Financial Institutions Examination Council
(FFIEC) Interagency Statement on the Year 2000 and subsequent guidance
documents. Napa will take such action, in consultation with Wells Fargo, as may
be necessary to amend Napa's Year 2000 project assessment and remediation plan.
Napa will continue its current preparations for compliance with the FFIEC
requirements and will not rely on the completion of the merger to satisfy its
FFIEC requirements. (paragraph 4(p))
Other Covenants
The merger agreement contains various other covenants, including covenants
relating to the preparation and distribution of this proxy statement-
prospectus, access to information, and the listing on the New York and Chicago
Stock Exchanges of the shares of Wells Fargo common stock to be issued in the
merger. In addition, Napa has agreed to (a) establish such additional accruals
and reserves as are necessary to conform its accounting and credit loss reserve
practices and methods to those of Wells Fargo and Wells Fargo's plans with
respect to the conduct of Napa's business after the merger and (b) use its best
efforts to deliver to Wells Fargo prior to completion of the merger signed
representations substantially in the form attached as Exhibit B to the merger
agreement from each executive officer, director or shareholder of Napa who may
reasonably be deemed an "affiliate" of Napa within the meaning of such term as
used in Rule 145 of the Securities Act. (paragraphs 4(l) and 4(m) and Exhibit
B) See "The Merger--Resale Of Wells Fargo Common Stock Issued In The Merger."
Conditions To The Merger
Under the merger agreement, various conditions are required to be met before
the parties are obligated to complete the merger. These conditions are
customary and include such items as the receipt of shareholder, regulatory and
listing approval, and the receipt by Napa of a favorable tax opinion.
(paragraphs 6 and 7) See "The Merger--U.S. Federal Income Tax Consequences Of
The Merger."
The obligations of the parties are also subject to the continued accuracy of
the other party's representations and warranties, the performance by the other
party of its obligations under the merger agreement, and, subject to certain
exceptions, the absence of any changes that have had or might be reasonably
expected to have an
31
<PAGE>
adverse effect on Napa. Some of the conditions to the merger are subject to
exceptions and/or a "materiality" standard. Certain conditions to the merger
may be waived by the party seeking to assert the condition. (paragraphs 6 and
7)
Termination Of The Merger Agreement
Termination by Mutual Consent
Wells Fargo and Napa can agree to terminate the merger agreement at any time
before completion of the merger. (paragraph 9(a)(i))
Termination by Either Wells Fargo or Napa
Either Wells Fargo or Napa can terminate the merger agreement without the
consent of the other if any of the following occurs:
. The merger has not been completed by June 30, 2000, unless the failure
to complete the merger is due to the failure of the party seeking to
terminate to perform or observe in all material respects the covenants
and agreements to be observed or performed by the party. (paragraph
9(a)(ii))
. A court or governmental authority of competent jurisdiction has issued a
final order restraining, enjoining or otherwise prohibiting the
transactions contemplated by the merger agreement. (paragraph 9(a)(iii))
Effect Of Termination
Generally, if either party terminates the merger agreement, it becomes void
without any liability to either party other than for willful and material
breaches occurring before termination; however, the provisions of the merger
agreement governing confidential information and expenses incurred in
connection with the merger continue in effect after termination of the merger
agreement. (paragraph 9(b))
Waiver And Amendment
Either Wells Fargo or Napa may waive any inaccuracies in the representations
and warranties of the other party or compliance by the other party with any of
the covenants or conditions contained in the merger agreement. (paragraph 16)
Wells Fargo and Napa can amend the merger agreement at any time before the
merger is completed; however, the merger agreement prohibits them from amending
the merger agreement after Napa shareholders approve the merger if the
amendment would change in a manner adverse to Napa shareholders the
consideration to be received by Napa shareholders in the merger. (paragraph 17)
Expenses
Wells Fargo and Napa will each pay their own expenses in connection with the
merger, including fees and expenses of their respective independent auditors
and counsel. (paragraph 10)
32
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of material differences between the rights of
Napa shareholders and the rights of Wells Fargo stockholders. It is not a
complete statement of the provisions affecting, and the differences between,
the rights of Napa shareholders and Wells Fargo stockholders. The summary is
qualified in its entirety by reference to the California General Corporation
Law (CGCL), the Delaware General Corporation Law (DGCL), Napa's articles of
incorporation and bylaws, and Wells Fargo's restated certificate of
incorporation and bylaws.
Introduction
Upon completion of the merger, holders of Napa common stock will become
stockholders of Wells Fargo. There are material differences in the rights of
Napa shareholders as compared to the rights of Wells Fargo stockholders. The
rights of Napa shareholders are governed by California law and Napa's articles
of incorporation and bylaws and the rights of Wells Fargo stockholders are
governed by Delaware law and Wells Fargo's restated certificate of
incorporation and bylaws.
A description of Wells Fargo's common stock is contained in Wells Fargo's
current report on Form 8-K filed October 14, 1997. A description of the
preferred stock purchase rights that are attached to shares of Wells Fargo
common stock is included in Wells Fargo's registration statement on Form 8-A
dated October 21, 1998. See "Where You Can Find More Information." These
descriptions may be updated from time to time by amendments or reports filed by
Wells Fargo with the SEC.
Authorized And Outstanding Capital Stock
Wells Fargo
Wells Fargo's restated certificate of incorporation currently authorizes the
issuance of 4,000,000,000 shares of Wells Fargo common stock, par value $1-2/3
per share, 20,000,000 shares of preferred stock, without par value, and
4,000,000 shares of preference stock, without par value. At September 30, 1999,
there were 1,649,763,637 shares of Wells Fargo common stock outstanding,
6,550,197 shares of Wells Fargo preferred stock outstanding, and no shares of
Wells Fargo preference stock outstanding.
Napa
Napa's articles of incorporation authorize the issuance of 20,000,000 shares
of common stock and 1,000,000 shares of preferred stock. An aggregate of
794,675 shares of common stock and no shares of preferred stock were issued and
outstanding as of January 26, 2000.
Rights Plan
Wells Fargo
Each share of Wells Fargo common stock (including shares that will be issued
in the merger) has attached to it one preferred share purchase right. Once
exercisable, each right allows the holder to purchase a fractional share of
Wells Fargo's Series C Junior Participating Preferred Stock. A right, by
itself, does not confer on its holder any rights of a Wells Fargo stockholder,
including the right to vote or receive dividends, until the right is exercised.
The rights trade automatically with shares of Wells Fargo common stock. The
rights are designed to protect the interests of Wells Fargo and its
stockholders against coercive takeover tactics. The rights are intended to
encourage potential acquirors to negotiate on behalf of all stockholders the
terms of any proposed takeover. Although not their purpose, the rights may
deter takeover proposals.
Napa
Napa has no comparable share purchase rights plan.
33
<PAGE>
Number And Election Of Directors
Wells Fargo
Wells Fargo's bylaws provide for a board of directors consisting of not less
than 10 nor more than 28 persons, each serving a term of one year or until his
or her earlier death, resignation or removal. The number of directors of Wells
Fargo is currently fixed at 25. Directors of Wells Fargo may be removed with or
without cause by the affirmative vote of the holders of a majority of the
shares of Wells Fargo capital stock entitled to vote thereon. Vacancies on
Wells Fargo's board of directors may be filled by majority vote of the
remaining directors or, in the event a vacancy is not so filled or if no
director remains, by the stockholders. Directors of Wells Fargo are elected by
plurality of the votes of shares of Wells Fargo capital stock entitled to vote
thereon present in person or by proxy at the meeting at which directors are
elected. Wells Fargo's restated certificate of incorporation does not currently
permit cumulative voting in the election of directors.
Napa
Napa's bylaws provide for a board of directors consisting of not fewer than
eight (8) nor more than fifteen (15) directors. Napa's bylaws further provide
that the exact number of directors shall be fixed from time to time, within the
foregoing range, by a bylaw or amendment thereof or by a resolution duly
adopted by a vote of a majority of shares entitled to vote represented at a
duly held meeting at which a quorum is present, by the written consent of the
holders of a majority of the outstanding shares entitled to vote or by
resolution of the board of directors. The number of directors on Napa's board
is currently fixed at ten (10). Each director is elected at each annual meeting
of shareholders, but if any such annual meeting is not held or the directors
are not elected at any annual meeting, the directors may be elected at any
special meeting of shareholders held for that purpose, or by written consent in
accordance with the relevant provisions of Napa's bylaws. Each director,
including a director elected to fill a vacancy, holds office until the
expiration of the term for which he or she is elected and until such director's
successor is elected and has qualified. In connection with the election of
directors, Napa's shareholders are entitled to vote their shares cumulatively
if a candidate's or candidates' names have been properly placed in nomination
prior to the voting and a shareholder has given notice at the meeting prior to
the voting of the shareholder's intention to cumulate the shareholder's votes.
If any one shareholder has given such notice, all shareholders may cumulate
their votes for candidates in nomination. Cumulative voting entitles a
shareholder to give one nominee as many votes as is equal to the number of
directors to be elected multiplied by the number of shares owned by such
shareholder, or to distribute his or her votes on the same principle between
two or more nominees as he or she deems appropriate. The candidates receiving
the highest number of votes, up to the number of directors to be elected, will
be elected.
Vacancies on the Napa board of directors (except for a vacancy created by
the removal of a director) may be filled by a majority of the remaining
directors, whether or not less than a quorum, or by the sole remaining
director. The shareholders may elect a director at any time to fill any vacancy
not filled by the directors or which occurs by reason of the removal of a
director.
Amendment Of Governing Documents
Wells Fargo
Wells Fargo's restated certificate of incorporation may be amended only if
the proposed amendment is approved by Wells Fargo's board of directors and
thereafter approved by a majority of the outstanding stock entitled to vote
thereon and by a majority of the outstanding stock of each class entitled to
vote thereon as a class. Wells Fargo's bylaws may be amended by a majority of
Wells Fargo's board of directors or by a majority of the outstanding stock
entitled to vote thereon. Shares of Wells Fargo preferred stock and Wells Fargo
preference stock currently authorized in Wells Fargo's restated certificate of
incorporation may be issued by Wells Fargo's board of directors without
amending Wells Fargo's restated certificate of incorporation or otherwise
obtaining the approval of Wells Fargo's Stockholders.
34
<PAGE>
Napa
In general, Napa's articles of incorporation may be amended only if the
proposed amendment is approved by Napa's board of directors and thereafter
approved by a majority of the outstanding Napa shares entitled to vote thereon.
Napa's bylaws may be amended by the affirmative vote of a majority of the
outstanding shares entitled to vote or by the written assent of shareholders
entitled to vote such shares; provided, however, that bylaws other than a bylaw
or amendment thereof changing the range of the authorized number of directors,
including an amendment to change the number of authorized directors within the
range fixed by the shareholders, may be adopted, amended or repealed by the
board of directors.
Approval Of Mergers And Assets Sales
Wells Fargo
Except as described below, the affirmative vote of a majority of the
outstanding shares of Wells Fargo common stock entitled to vote thereon is
required to approve a merger or consolidation involving Wells Fargo or the
sale, lease or exchange of all or substantially all of Wells Fargo's corporate
assets. No vote of the stockholders is required, however, in connection with a
merger in which Wells Fargo is the surviving corporation and (a) the agreement
of merger for the merger does not amend in any respect Wells Fargo's restated
certificate of incorporation, (b) each share of capital stock outstanding
immediately before the merger is to be an identical outstanding or treasury
share of Wells Fargo after the merger and (c) the number of shares of capital
stock to be issued in the merger (or to be issuable upon conversion of any
convertible instruments to be issued in the merger) does not exceed 20% of the
shares of Wells Fargo's capital stock outstanding immediately before the
merger.
Napa
The CGCL generally requires a vote by the shareholders of (a) each
constituent corporation to a merger, (b) a corporation selling all or
substantially all of its assets, (c) the acquiring corporation in either a
share-for-share exchange or a sale-of-assets reorganization, and (d) a parent
corporation (even though it is not a "constituent corporation") whose equity
securities are being issued in connection with a corporate reorganization such
as a triangular merger. The CGCL does not require shareholder approval in the
case of any corporation in a merger as to which such corporation and/or its
shareholders will hold five-sixths or more of the voting power of the surviving
or acquiring corporation after consummation of the merger (unless the shares
acquired in such merger have different rights, preferences, privileges or
restrictions than those surrendered).
Preemptive Rights
Wells Fargo
Neither Wells Fargo's restated certificate of incorporation nor its bylaws
grants preemptive rights to its stockholders.
Napa
Neither Napa's articles of incorporation nor its bylaws grant preemptive
rights to its stockholders.
Appraisal Rights
Wells Fargo
Section 262 of the DGCL provides for stockholder appraisal rights in
connection with consolidations and mergers generally; however, appraisal rights
are not available to holders of any class or series of stock that, at the
record date fixed to determine stockholders entitled to receive notice of and
to vote at the meeting to act upon the agreement of consolidation or merger,
were either (a) listed on a national securities exchange or
35
<PAGE>
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (b) held of
record by more than 2,000 stockholders, so long as stockholders receive shares
of the surviving corporation or another corporation whose shares are so listed
or designated or held by more than 2,000 stockholders. Wells Fargo common stock
is listed on the New York Stock Exchange and the Chicago Stock Exchange and
currently held by more than 2,000 stockholders. As a result, assuming that the
other conditions described above are satisfied, holders of Wells Fargo common
stock will not have appraisal rights in connection with consolidations and
mergers involving Wells Fargo.
Napa
Under the CGCL, if the approval of the outstanding shares of a corporation
is required for a reorganization or merger, each shareholder of the corporation
entitled to vote on the transaction, by complying with the provisions of
Chapter 13 of the CGCL, may require the corporation of which the shareholder
holds shares to purchase for cash at their fair market value the shares owned
by the shareholder which qualify as dissenting shares is determined as of the
day before the first announcement of the terms of the proposed reorganization
or merger, excluding any appreciation or depreciation in consequence of the
proposed action; however, "dissenting shares" do not include shares which
immediately prior to the reorganization or merger are either (a) listed on any
national securities exchange certified by California's Commissioner of
Corporations under subdivision (o) of Section 25100 or (b) listed on the list
of OTC margin stock issued by the Board of Governors of the Federal Reserve
System unless demands for payment with respect to such shares are filed with
respect to 5% or more of the outstanding shares of such class. See "The
Merger--Dissenters' Rights."
Special Meetings
Wells Fargo
Under the DGCL, special meetings of stockholders may be called by the board
of directors or by such persons as may be authorized in the certificate of
incorporation or bylaws. Wells Fargo's bylaws provide that a special meeting of
stockholders may be called only by the chairman of the board, a vice chairman,
the president or a majority of Wells Fargo's board of directors. Holders of
Wells Fargo common stock do not have the ability to call a special meeting of
stockholders.
Napa
Under the CGCL, a special meeting of shareholders of a California
corporation may be called by the board, the chairman of the board, the
president, the holders of shares entitled to cast not less than 10 percent of
the votes at the meetings or by such additional persons as may be provided in
the articles of incorporation or bylaws. Neither Napa's articles of
incorporation nor its bylaws alter the manner in which a special meeting of
shareholders may be called.
Directors' Duties
Wells Fargo
The DGCL does not specifically enumerate directors' duties. In addition, the
DGCL does not contain any provision specifying what factors a director must and
may consider in determining a corporation's best interests. However, judicial
decisions in Delaware have established that, in performing their duties,
directors are bound to use that degree of care which ordinarily prudent persons
would use in similar circumstances.
Napa
Pursuant to the CGCL, a director is obligated to perform his or her duties
in good faith, in a manner such director believes to be in the best interests
of the corporation and its shareholders and with such care, including
36
<PAGE>
reasonable inquiry, as an ordinarily prudent person in a like position would
use under similar circumstances. In performing the duties of a director, a
director is entitled to rely on information, opinions, reports or statements,
including financial statements and other financial data, prepared or presented
by officers or employees of the corporation, the corporation's counsel or
independent accountant or a committee of the board upon which the director does
not serve, so long as, in any such case, the director acts in good faith, after
reasonable inquiry when the need therefor is indicated by the circumstances and
without knowledge that would cause such reliance to be unwarranted.
Action Without A Meeting
Wells Fargo
As permitted by Section 228 of the DGCL and Wells Fargo's restated
certificate of incorporation, any action required or permitted to be taken at a
stockholders' meeting may be taken without a meeting pursuant to the written
consent of the holders of the number of shares that would have been required to
effect the action at an actual meeting of the stockholders.
Napa
As permitted by Section 603 of the CGCL, and as provided in Napa's bylaws,
any action required or permitted to be taken at a shareholders' meeting may be
taken without a meeting pursuant to the written consent of he holders of the
number of shares that would have been required to effect the action at an
actual meeting of the shareholders, provided that directors may not be elected
by written consent of shareholders unless the consent is unanimous. Prompt
notice must be given of any corporate action approved by shareholders without a
meeting by less than unanimous written consent to those shareholders entitled
to vote who have not consented in writing.
Limitations On Directors' Liability
Wells Fargo
Wells Fargo's restated certificate of incorporation provides that a director
(including an officer who is also a director) of Wells Fargo shall not be
liable personally to Wells Fargo or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability arising out of (a)
any breach of the director's duty of loyalty to Wells Fargo or its
stockholders, (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) payment of a dividend
or approval of a stock repurchase in violation of Section 174 of the DGCL or
(d) any transaction from which the director derived an improper personal
benefit. This provision protects Wells Fargo's directors against personal
liability for monetary damages from breaches of their duty of care. It does not
eliminate the director's duty of care and has no effect on the availability of
equitable remedies, such as an injunction or rescission, based upon a
director's breach of his duty of care.
Napa
Napa's articles of incorporation provide that the liability of the directors
of the corporation for monetary damages shall be eliminated to the fullest
extent permitted under California law. The CGCL provides that a director who
performs his duties in good faith, as discussed in more detail above under
"Directors' Duties," shall have no liability based upon any alleged failure to
discharge the person's obligations as a director.
Indemnification Of Officers And Directors
Wells Fargo
Wells Fargo's restated certificate of incorporation provides that Wells
Fargo must indemnify, to the fullest extent authorized by the DGCL, each person
who was or is made a party to, is threatened to be made a party
37
<PAGE>
to, or is involved in, any action, suit, or proceeding because he is or was a
director or officer of Wells Fargo (or was serving at the request of Wells
Fargo as a director, trustee, officer, employee, or agent of another entity)
while serving in such capacity against all expenses, liabilities, or loss
incurred by such person in connection therewith, provided that indemnification
in connection with a proceeding brought by such person will be permitted only
if the proceeding was authorized by Wells Fargo's board of directors. Wells
Fargo's restated certificate of incorporation also provides that Wells Fargo
must pay expenses incurred in defending the proceedings specified above in
advance of their final disposition, provided that if so required by the DGCL,
such advance payments for expenses incurred by a director or officer may be
made only if he undertakes to repay all amounts so advanced if it is ultimately
determined that the person receiving such payments is not entitled to be
indemnified. Wells Fargo's restated certificate of incorporation authorizes
Wells Fargo to provide similar indemnification to employees or agents of Wells
Fargo.
Pursuant to Wells Fargo's restated certificate of incorporation, Wells Fargo
may maintain insurance, at its expense, to protect itself and any directors,
officers, employees or agents of Wells Fargo or another entity against any
expense, liability or loss, regardless of whether Wells Fargo has the power or
obligation to indemnify that person against such expense, liability or loss
under the DGCL.
The right to indemnification is not exclusive of any other right which any
person may have or acquire under any statute, provision of Wells Fargo's
restated certificate of incorporation or Wells Fargo bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
Napa
Napa's bylaws provide that Napa may indemnify each of its officers,
directors, employees and agents against expenses, judgments, fines, settlements
and other amounts, actually and reasonably incurred by such person having been
made or having been threatened to be made a party to a proceeding to the
fullest extent possible by the provisions of the CGCL, and that Napa may
advance the expenses reasonably expected to be incurred by such officers,
directors, employees and agents in defending any such proceeding upon receipt
of the undertaking required by the CGCL. The CGCL permits such indemnification
if such individual has acted in good faith and in a manner the person
reasonably believed to be in the best interest of the corporation, and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
of the person was unlawful.
Dividends
Wells Fargo
Delaware corporations may pay dividends out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which declared and for the
preceding fiscal year. Section 170 of the DGCL also provides that dividends may
not be paid out of net profits if, after the payment of the dividend, capital
is less than the capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets. Wells Fargo is also
subject to Federal Reserve Board policies regarding payment of dividends, which
generally limit dividends to operating earnings. See "Regulation And
Supervision Of Wells Fargo."
Napa
The holders of Napa common stock are entitled to receive dividends when and
as declared by Napa's board of directors out of funds legally available
therefor. The CGCL provides that a corporation may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount
of the proposed distribution. The CGCL further provides that, in the event that
sufficient retained earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its shareholders if it
meets two conditions, which generally are as follows: (a) the corporation's
assets equal at least 1 1/4 times its liabilities; and (b) the corporation's
current assets equal at least its current liabilities, or, if the average of
the corporation's earnings before taxes on income and before interest expense
for two preceding fiscal years was less than the average of the interest
expense of the corporation for such fiscal years, then the corporation's
current assets must equal at least 1 1/4 times its current liabilities. Napa is
also subject to Federal Reserve Board policies regarding payment of dividends,
which generally limit dividends to operating earnings.
38
<PAGE>
Corporate Governance Procedures; Nomination Of Directors
Wells Fargo
Wells Fargo's bylaws contain detailed advance notice and informational
procedures which must be complied with in order for a stockholder to nominate a
person to serve as a director. Wells Fargo's bylaws generally require a
stockholder to give notice of a proposed nominee in advance of the stockholders
meeting at which directors will be elected. In addition, Wells Fargo's bylaws
contain detailed advance notice and informational procedures which must be
followed in order for a Wells Fargo stockholder to propose an item of business
for consideration at a meeting of Wells Fargo stockholders.
Napa
Napa's bylaws provide that nominations for election of directors may be made
by the board of directors or by any shareholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of
directors. The bylaws further provide that shareholder nominations of directors
must be made in accordance with certain procedures, including a requirement
that notice of intention to make any nominations be in writing and received by
Napa by the later of 21 days prior to any meeting of shareholders called for
the election of directors or 10 days after the date of mailing of notice of
such meeting is sent to shareholders. A notice of intention to nominate must
contain certain specified information regarding the nominating shareholder and
each proposed nominee
39
<PAGE>
INFORMATION ABOUT WELLS FARGO
General
Wells Fargo is a diversified financial services company. Through its
subsidiaries and affiliates, Wells Fargo provides retail, commercial, real
estate and mortgage banking, asset management and consumer finance, as well as
a variety of other financial services, including equipment leasing,
agricultural finance, securities brokerage and investment banking, insurance
agency services, computer and data processing services, trust services,
mortgage-backed securities servicing, and venture capital investment.
At September 30, 1999, Wells Fargo had consolidated total assets of $207.1
billion, consolidated total deposits of $131.6 billion and stockholders' equity
of $22.2 billion. Based on assets at September 30, 1999, Wells Fargo was the
7th largest commercial banking organization in the United States.
Wells Fargo expands its business in part by acquiring banking institutions
and other companies engaged in activities closely related to banking. Wells
Fargo continues to explore opportunities to acquire banking institutions and
other companies permitted by the Bank Holding Company Act of 1956. Discussions
are continually being carried on related to such acquisitions. It is not
presently known whether, or on what terms, such discussions will result in
further acquisitions. It is the policy of Wells Fargo not to comment on such
discussions or possible acquisitions until a definitive agreement with respect
thereto has been signed.
Wells Fargo is a legal entity separate and distinct from its banking and
nonbanking subsidiaries. As a result, the right of Wells Fargo--and thus the
right of Wells Fargo's creditors--to participate in any distribution of assets
or earnings of any subsidiary, other than in its capacity as a creditor of such
subsidiary, is subject to the prior payment of claims of creditors of such
subsidiary. The principal sources of Wells Fargo's revenues are dividends and
fees from its subsidiaries. See "Regulation And Supervision Of Wells Fargo--
Dividend Restrictions" for a discussion of the restrictions on the subsidiary
banks' ability to pay dividends to Wells Fargo.
Wells Fargo's executive offices are located at 420 Montgomery Street, San
Francisco, California 94163, and its telephone number is (800) 411-4932.
Management And Additional Information
Information concerning executive compensation, the principal holders of
voting securities, certain relationships and related transactions, and other
related matters concerning Wells Fargo is included or incorporated by reference
in its annual report on Form 10-K for the year ended December 31, 1998. Wells
Fargo's annual report on Form 10-K is incorporated by reference into this proxy
statement-prospectus. Napa shareholders who want a copy of this annual report
or any document incorporated by reference into the report may contact Wells
Fargo at the address or phone number indicated below under "Where You Can Find
More Information."
Information On Wells Fargo's Web Site
Information on the Internet web site of Wells Fargo or any subsidiary of
Wells Fargo is not part of this proxy statement-prospectus, and you should not
rely on that information in deciding whether to approve the merger unless that
information is also in this document or in a document that is incorporated by
reference into this proxy statement-prospectus.
40
<PAGE>
REGULATION AND SUPERVISION OF WELLS FARGO
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the full
text of those provisions. Also, such statutes, regulations and policies are
continually under review by Congress and state legislatures and federal and
state regulatory agencies. A change in statutes, regulations or regulatory
policies applicable to Wells Fargo could have a material effect on the business
of Wells Fargo.
Introduction
Wells Fargo, its banking subsidiaries and many of its nonbanking
subsidiaries are subject to extensive regulation by federal and state agencies.
The regulation of bank holding companies and their subsidiaries is intended
primarily for the protection of depositors, federal deposit insurance funds and
the banking system as a whole and not for the protection of security holders.
As discussed in more detail below, this regulatory environment, among other
things, may restrict Wells Fargo's ability to diversify into certain areas of
financial services, acquire depository institutions in certain states and pay
dividends on its capital stock. It may also require Wells Fargo to provide
financial support to one or more of its banking subsidiaries, maintain capital
balances in excess of those desired by management and pay higher deposit
insurance premiums as a result of the deterioration in the financial condition
of depository institutions in general.
Regulatory Agencies
Bank Holding Company
Wells Fargo & Company, as a bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956 and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act of 1956.
Subsidiary Banks
Wells Fargo's national banking subsidiaries are subject to regulation and
examination primarily by the Office of the Comptroller of the Currency (OCC)
and secondarily by the Federal Reserve Board and the Federal Deposit Insurance
Corporation (FDIC). Wells Fargo's state-chartered banking subsidiaries are
subject to primary federal regulation and examination by the FDIC or the
Federal Reserve Board and, in addition, are regulated and examined by their
respective state banking departments.
Nonbank Subsidiaries
Many of Wells Fargo's nonbank subsidiaries also are subject to regulation by
the Federal Reserve Board and other applicable federal and state agencies.
Wells Fargo's brokerage subsidiaries are regulated by the SEC, the National
Association of Securities Dealers, Inc. and state securities regulators. Wells
Fargo's insurance subsidiaries are subject to regulation by applicable state
insurance regulatory agencies. Other nonbank subsidiaries of Wells Fargo are
subject to the laws and regulations of both the federal government and the
various states in which they conduct business.
Bank Holding Company Activities
Banking-Related Requirement
Under the Bank Holding Company Act, bank holding companies generally may not
acquire the beneficial ownership or control of more than 5% of the voting
shares or substantially all of the assets of any company,
41
<PAGE>
including a bank, without the Federal Reserve Board's prior approval. Also,
bank holding companies generally may engage, directly or indirectly, only in
banking and such other activities as the Federal Reserve Board determines to be
closely related to banking.
Effective March 11, 2000, subject to certain conditions, bank holding
companies that elect to become financial holding companies may affiliate with
securities firms and insurance companies and engage in other activities that
are financial in nature. Also effective March 11, 2000, no regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board. See "Financial Modernization" below.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Act (Riegle-Neal
Act), a bank holding company may acquire banks in states other than its home
state, 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 not control, prior to or following
the proposed acquisition, more than 10% of the total amount of deposits of
insured depository institutions nationwide or, unless the acquisition is the
bank holding company's initial entry into the state, more than 30% of such
deposits in the state, or such lesser or greater amount set by the state.
The Riegle-Neal Act also authorizes banks to merge across state lines,
thereby creating interstate branches. States may opt out of the Interstate
Banking Act and thereby prohibit interstate mergers in the state. Wells Fargo
will be unable to consolidate its banking operations in one state with those of
another state if either state in question has opted out of the Riegle-Neal Act.
Of Wells Fargo's banking states, only Montana has opted out of the Interstate
Banking Act. Montana has opted out until at least the year 2001.
Regulatory Approval
In determining whether to approve a proposed bank acquisition, federal
banking regulators will consider, among other factors, the effect of the
acquisition on competition, the public benefits expected to be received from
the acquisition, the projected capital ratios and levels on a post-acquisition
basis, and the acquiring institution's record of addressing the credit needs of
the communities it serves, including the needs of low and moderate income
neighborhoods, consistent with the safe and sound operation of the bank, under
the Community Reinvestment Act of 1977.
Dividend Restrictions
Wells Fargo & Company is a legal entity separate and distinct from its
subsidiary banks and other subsidiaries. Its principal source of funds to pay
dividends on its common and preferred stock and debt service on its debt is
dividends from its subsidiaries. Various federal and state statutory provisions
and regulations limit the amount of dividends that Wells Fargo's bank
subsidiaries may pay without regulatory approval. Dividends payable by a
national bank without the express approval of the OCC are limited to the bank's
retained net profits for the preceding two calendar years plus retained net
profits up to the date of any dividend declaration in the current calendar
year. The OCC defines retained net profits as net income, less dividends
declared during the period, both of which are based on regulatory accounting
principles. Wells Fargo's state-chartered subsidiary banks also are subject to
state regulations that limit dividends.
Before Wells Fargo Bank, National Association can declare dividends in 1999
without the prior approval of the OCC, it must have net income of $1.5 billion
plus an amount equal to or greater than the dividends declared in 1999. Because
it is not expected to meet this requirement, Wells Fargo Bank, National
Association must obtain the prior approval of the OCC before it declares any
dividends in 1999.
42
<PAGE>
Federal bank regulatory agencies have the authority to prohibit Wells
Fargo's subsidiary banks from engaging in unsafe or unsound practices in
conducting their businesses. The payment of dividends, depending on the
financial condition of the bank in question, could be deemed an unsafe or
unsound practice. The ability of Wells Fargo's subsidiary banks to pay
dividends in the future is currently influenced, and could be further
influenced, by bank regulatory policies and capital guidelines.
Holding Company Structure
Transfer of Funds from Banking Subsidiaries
Wells Fargo's banking subsidiaries are subject to restrictions under federal
law that limit the transfer of funds or other items of value from these
subsidiaries to Wells Fargo and its nonbanking subsidiaries, including
affiliates, whether in the form of loans and other extensions of credit,
investments and asset purchases, or as other transactions involving the
transfer of value from a subsidiary to an affiliate or for the benefit of an
affiliate. Unless an exemption applies, these transactions by a banking
subsidiary with a single affiliate are limited to 10% of the subsidiary bank's
capital and surplus and, with respect to all covered transactions with
affiliates in the aggregate, to 20% of the subsidiary bank's capital and
surplus. Also, loans and extensions of credit to affiliates generally are
required to be secured in specified amounts.
Source of Strength Doctrine
The Federal Reserve Board has a policy that a bank holding company is
expected to act as a source of financial and managerial strength to each of its
subsidiary banks and, under appropriate circumstances, to commit resources to
support each such subsidiary bank. This support may be required at times when
the bank holding company may not have the resources to provide it. Capital
loans from Wells Fargo to any of its subsidiary banks are subordinate in right
of payment to deposits and certain other indebtedness of the subsidiary bank.
In addition, in the event of Wells Fargo's bankruptcy, any commitment by Wells
Fargo to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Depositor Preference
The Federal Deposit Insurance Act (FDI Act) provides that, in the event of
the "liquidation or other resolution" of an insured depository institution, the
claims of depositors of the institution, including the claims of the FDIC as
subrogee of insured depositors, and certain claims for administrative expenses
of the FDIC as a receiver will have priority over other general unsecured
claims against the institution. If an insured depository institution fails,
insured and uninsured depositors, along with the FDIC, will have priority in
payment ahead of unsecured, nondeposit creditors, including Wells Fargo.
Liability of Commonly Controlled Institutions
Under the FDI Act, an insured depository institution is generally liable for
any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (a) the default of a commonly controlled insured depository
institution or (b) any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. "Default" means generally
the appointment of a conservator or receiver. "In danger of default" means
generally the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
Capital Requirements
Wells Fargo and each of its subsidiary banks are subject to capital adequacy
requirements and guidelines administered by the Federal Reserve Board, the OCC
and/or the FDIC.
43
<PAGE>
The Federal Deposit Insurance Corporation Act of 1991 (FDICIA) required that
the Federal Reserve Board, the OCC and the FDIC adopt regulations defining five
capital tiers for banks: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a material adverse effect on Wells Fargo's
business.
Quantitative measures, established by the regulators to ensure capital
adequacy, require that Wells Fargo and each of its bank subsidiaries maintain
minimum ratios of total capital to risk-weighted assets of eight percent (8%)
and of Tier 1 capital to risk-weighted assets of four percent (4%).
There are two categories of capital under the guidelines. Tier 1 capital
includes common stockholders' equity, qualifying preferred stock and, for bank
holding companies, trust preferred securities, less goodwill and certain other
deductions, including the unrealized net gains and losses, after applicable
taxes, on available-for-sale securities carried at fair value. Tier 2 capital
includes preferred stock not qualifying as Tier 1 capital, mandatory
convertible debt, subordinated debt, certain unsecured senior debt issued by
Wells Fargo, the allowance for loans losses and net unrealized gains on
marketable securities, subject to limitations established by the guidelines. At
least half of total capital must be in the form of Tier 1 capital.
Under the guidelines, capital is compared to the relative risk related to
the balance sheet. To derive the risk included in the balance sheet, one of
four risk weights (0%, 20%, 50% and 100%) is applied to different balance sheet
and off-balance sheet assets, primarily based on the relative credit risk of
the counterparty. For example, claims guaranteed by the U.S. government or one
of its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan
commitments and derivative financial instruments, are also assigned one of the
above risk weights after calculating balance sheet equivalent amounts. For
example, certain loan commitments are converted at 50% and then risk-weighted
at 100%. Derivative financial instruments are converted to balance sheet
equivalents based on notional values, replacement costs and remaining
contractual terms. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. In addition, the federal banking agencies have specified minimum
"leverage ratio" (the ratio of Tier 1 capital to quarterly average total
assets) guidelines for bank holding companies and state member banks. The
minimum leverage ratio guideline is three percent (3%) for banking
organizations that meet certain specified criteria, including that they have
the highest regulatory rating. All other banking organizations and state member
banks are required to maintain a leverage ratio of three percent (3%) plus an
additional cushion of at least two percent (2%).
The Federal Reserve Board's capital guidelines provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets. Also,
the guidelines indicate that the Federal Reserve Board will consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 capital (excluding intangibles) to total assets
(excluding intangibles).
The Federal Reserve Board, the FDIC and the OCC have adopted rules to
incorporate market and interest rate risk components into their risk-based
capital standards. Amendments to the risk-based capital requirements,
incorporating market risk, became effective January 1, 1998. Under the new
market risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
At September 30, 1999, Wells Fargo's ratio of total capital (the sum of Tier
1 and Tier 2 capital) to risk-weighted assets was 11.30% and its ratio of Tier
1 capital to risk-weighted assets was 8.71%. Wells Fargo's leverage ratio at
September 30, 1999 was 7.22%. Wells Fargo's management believes that each of
Wells Fargo's subsidiary banks met all capital requirements to which they are
subject.
44
<PAGE>
As an additional means to identify problems in the financial management of
depository institutions, the FDI Act requires federal bank regulatory agencies
to establish certain non-capital safety and soundness standards for
institutions for which they are the primary federal regulator. The standards
relate generally to operations and management, asset quality, interest rate
exposure and executive compensation. The agencies are authorized to take action
against institutions that fail to meet such standards.
Under FDICIA's prompt corrective action provisions applicable to banks, the
most recent regulatory notification from the OCC concerning each of Wells
Fargo's subsidiary banks categorized them as well capitalized. To be
categorized as well capitalized, the institution must maintain a risk-based
total capital ratio of at least ten percent (10%), a risk-based Tier 1 capital
ratio of at least six percent (6%) and a leverage ratio of at least five
percent (5%), and not be subject to a capital directive order. There are no
conditions or events since that notification that management believes have
changed the risk-based capital category of our subsidiary banks.
The FDI Act requires federal bank regulatory agencies to take "prompt
corrective action" with respect to FDIC-insured depository institutions that do
not meet minimum capital requirements. A depository institution's treatment for
purposes of the prompt corrective action provisions will depend upon how its
capital levels compare to various capital measures and certain other factors,
as established by regulation.
FDIC Insurance
Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of
Wells Fargo's depository institution subsidiaries up to prescribed limits for
each depositor. The amount of FDIC assessments paid by each BIF member
institution is based on its relative risk of default as measured by regulatory
capital ratios and other factors. Specifically, the assessment rate is based on
the institution's capitalization risk category and supervisory subgroup
category. An institution's capitalization risk category is based on the FDIC's
determination of whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. An institution's supervisory
subgroup category is based on the FDIC's assessment of the financial condition
of the institution and the probability that FDIC intervention or other
corrective action will be required.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits. The FDIC may increase or decrease the assessment rate
schedule on a semi-annual basis. An increase in the BIF assessment rate could
have a material adverse effect on Wells Fargo's earnings, depending on the
amount of the increase. The FDIC is authorized to terminate a depository
institution's deposit insurance upon a finding by the FDIC that the
institution's financial condition is unsafe or unsound or that the institution
has engaged in unsafe or unsound practices or has violated any applicable rule,
regulation, order or condition enacted or imposed by the institution's
regulatory agency. The termination of deposit insurance for one or more of
Wells Fargo's subsidiary depository institutions could have a material adverse
effect on Wells Fargo's earnings, depending on the collective size of the
particular institutions involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-
insured depository institutions will continue to pay approximately 1.2 cents
per $100 of BIF-assessable deposits until the earlier of December 31, 1999 or
the date the last savings and loan association ceases to exist. Thereafter,
they will pay an assessment rate equal to the rate assessed on deposits insured
by the Savings Association Insurance Fund.
Fiscal And Monetary Policies
Wells Fargo's business and earnings are affected significantly by the fiscal
and monetary policies of the federal government and its agencies. Wells Fargo
is particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. Among the
instruments of monetary policy available to the Federal Reserve are (a)
conducting open market operations in United States
45
<PAGE>
government securities, (b) changing the discount rates of borrowings of
depository institutions, (c) imposing or changing reserve requirements against
depository institutions' deposits, and (d) imposing or changing reserve
requirements against certain borrowing by banks and their affiliates. These
methods are used in varying degrees and combinations to directly affect the
availability of bank loans and deposits, as well as the interest rates charged
on loans and paid on deposits. For that reason alone, the policies of the
Federal Reserve Board have a material effect on the earnings of Wells Fargo.
Competition
The financial services industry is highly competitive. Wells Fargo's
subsidiaries compete with financial services providers, such as banks, savings
and loan associations, credit unions, finance companies, mortgage banking
companies, insurance companies, and money market and mutual fund companies.
They also face increased competition from non-banking institutions such as
brokerage houses and insurance companies, as well as from financial services
subsidiaries of commercial and manufacturing companies. Many of these
competitors enjoy the benefits of advanced technology, fewer regulatory
constraints and lower cost structures.
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities firms
and insurance companies that elect to become financial holding companies may
acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may
significantly change the competitive environment in which Wells Fargo and its
subsidiaries conduct business. See "Financial Modernization" below. The
financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.
Financial Modernization
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act which will, effective March 11, 2000, permit bank holding companies
to become financial holding companies and thereby affiliate with securities
firms and insurance companies and engage in other activities that are financial
in nature. A bank holding company may become a financial holding company if
each of its subsidiary banks is well capitalized under the FDICIA prompt
corrective action provisions, is well managed, and has at least a satisfactory
rating under the Community Reinvestment Act (CRA) by filing a declaration that
the bank holding company wishes to become a financial holding company. No
regulatory approval will be required for a financial holding company to acquire
a company, other than a bank or savings association, engaged in activities that
are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board.
The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Board has determined to be closely related
to banking. A national bank also may engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment, through a financial subsidiary of the bank, if the
bank is well capitalized, well managed and has at least a satisfactory CRA
rating. Subsidiary banks of a financial holding company or national banks with
financial subsidiaries must continue to be well capitalized and well managed in
order to continue to engage in activities that are financial in nature without
regulatory actions or restrictions, which could include divestiture of the
financial in nature subsidiary or subsidiaries. In addition, a financial
holding company or a bank may not acquire a company that is engaged in
activities that are financial in nature unless each of the subsidiary banks of
the financial holding company or the bank has CRA rating of satisfactory or
better.
46
<PAGE>
INFORMATION ABOUT NAPA
General
Napa National Bancorp was incorporated in 1981 in the State of California
and is headquartered in Napa, California. Napa is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended. Its principal
subsidiary, Napa National Bank, was organized as a national banking association
in 1982. At September 30, 1999, Napa had consolidated assets of $152.3 million
and shareholders' equity of $10.2 million. Napa 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 Napa. W. Clarke
Swanson, Jr., chairman of the board and chief executive officer, beneficially
owns approximately 64% of the outstanding shares of common stock of Napa.
The bank is a full service commercial bank with four offices serving the
Napa Valley area in Northern California. 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. Individuals, small businesses and professionals, manufacturers,
distributors, retailers, wineries, vineyard owners, real estate developers and
Napa'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.
Napa's executive offices are located at 901 Main Street, Napa, California
94559, and its main telephone number is (707) 257-2440.
Certain Additional Information Incorporated By Reference And Delivered Herewith
Additional information concerning Napa, including information related to its
business, properties, financial condition, results of operations and market for
common equity is included in its annual report on Form 10-KSB for the year
ended December 31, 1998, which is included in this proxy statement-prospectus
as Appendix D. Additional information concerning the principal holders of
voting securities and related shareholder matters of Napa is included in Napa's
definitive Proxy Statement for its 1999 annual meeting of shareholders, which
is included in this proxy statement-prospectus as Appendix E. See "Where You
Can Find More Information."
47
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Wells Fargo Share Prices And Dividends
The following table shows, for the quarters indicated, the high and low
sales prices of Wells Fargo common stock and the cash dividends paid per share.
Wells Fargo common stock trades on the New York and Chicago Stock Exchanges
under the symbol "WFC." Before November 3, 1998, the common stock traded under
the symbol "NOB."
<TABLE>
<CAPTION>
High Low Dividend
----- ----- --------
<S> <C> <C> <C>
1998
First Quarter ...................................... 43.88 34.75 0.165
Second Quarter...................................... 43.75 34.00 0.165
Third Quarter....................................... 39.75 27.50 0.185
Fourth Quarter...................................... 40.88 30.19 0.185
1999
First Quarter ...................................... 40.44 32.13 0.185
Second Quarter...................................... 44.88 34.38 0.200
Third Quarter....................................... 45.31 36.44 0.200
Fourth Quarter...................................... 49.94 38.38 0.200
2000
First Quarter....................................... *
</TABLE>
- --------
* Wells Fargo's board of directors has declared a cash dividend of $0.22 a
share payable on March 1, 2000 to stockholders of record on February 4,
2000.
The timing and amount of future dividends will depend on earnings, cash
requirements, the financial condition of Wells Fargo and its subsidiaries,
applicable government regulations and other factors deemed relevant by Wells
Fargo's board of directors in its discretion. As described in "Regulation And
Supervision Of Wells Fargo--Dividend Restrictions," various federal and state
laws limit the ability of affiliate banks to pay dividends to Wells Fargo.
48
<PAGE>
Napa Share Prices And Dividends
Napa common stock does not trade on any exchange or on Nasdaq. Although
there has been limited trading in Napa common stock from time to time, there is
no established public trading market. To Napa's knowledge, no broker-dealer
other than Round Hill Securities handles transactions involving Napa common
stock.
The following table shows, for the quarters indicated, the high and low
sales prices of Napa common stock, excluding broker's commissions, and the cash
dividends paid per share. The high and low sales prices are based on
information as reported to Napa's management and may not include private
transactions. "N/A" means not available or no reported transaction.
<TABLE>
<CAPTION>
High Low Dividend
----- ----- --------
<S> <C> <C> <C>
1998
First Quarter ...................................... 15.50 15.50 0.125
Second Quarter...................................... N/A N/A 0.125
Third Quarter....................................... 15.50 15.50 0.125
Fourth Quarter...................................... 15.50 15.50 0.125
1999
First Quarter ...................................... 16.50 15.50 0.125
Second Quarter...................................... 16.50 16.50 0.125
Third Quarter....................................... 16.50 16.50 0.125
Fourth Quarter...................................... 16.50 16.50 0.125
2000
First Quarter (through February )................. 27.00 16.50 *
</TABLE>
- --------
* Napa's board of directors expects to declare a cash dividend of $0.125 a
share for the first quarter of 2000, payable on March 1, 2000 to
shareholders of record on February 16, 2000.
49
<PAGE>
EXPERTS
Wells Fargo's Independent Accountants
The consolidated financial statements of Wells Fargo and subsidiaries as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998, incorporated by reference herein, have been
incorporated herein in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
Napa's Independent Accountants
The consolidated financial statements of Napa appearing in its Annual Report
(Form 10-KSB) for the year ended December 31, 1998, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
OPINIONS
Share Issuance
Stanley S. Stroup, Executive Vice President and General Counsel of Wells
Fargo, has rendered a legal opinion that the shares of Wells Fargo common stock
offered hereby, when issued in accordance with the merger agreement, will be
validly issued, fully paid and nonassessable. Mr. Stroup beneficially owns
shares of Wells Fargo common stock and options to purchase additional shares of
Wells Fargo common stock. As of the date of this proxy statement-prospectus,
the total number of shares Mr. Stroup owns or has the right to acquire upon
exercise of his options is less than 0.1% of the outstanding shares of Wells
Fargo common stock.
Tax Matters
Brobeck Phleger & Harrison LLP has given an opinion regarding the material
U.S. federal income tax consequences of the merger. See "The Merger--U.S.
Federal Income Tax Consequences Of The Merger."
50
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
SEC Filings
Wells Fargo and Napa file annual, quarterly and current reports, proxy
statements and other information with the SEC. Wells Fargo's and Napa's SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You can also read and copy any document filed by Wells
Fargo or Napa with the SEC at the SEC's public reference rooms located at 450
Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. You can also obtain copies
of Wells Fargo's and Napa's SEC filings at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549.
Wells Fargo's SEC filings are also available from commercial document
retrieval services and from the New York and Chicago Stock Exchanges. For
information on obtaining copies of Wells Fargo's SEC filings at the New York
Stock Exchange, call (212) 656-5060, and at the Chicago Stock Exchange, call
(312) 663-2423. Napa's SEC filings are also available from commercial document
retrieval services.
Registration Statement
Wells Fargo has filed a registration statement on Form S-4 to register with
the SEC the Wells Fargo common stock to be issued to Napa shareholders in the
merger. This proxy statement-prospectus is part of that registration statement.
As allowed by SEC rules, this proxy statement-prospectus does not contain all
of the information you can find in the registration statement or the exhibits
to the registration statement.
Documents Incorporated By Reference
Some of the information you may want to consider in deciding how to vote on
the merger is not physically included in this proxy statement-prospectus.
Instead, the information is "incorporated by reference" to documents that have
been filed by Wells Fargo or Napa with the SEC.
Wells Fargo Documents
This proxy statement-prospectus incorporates by reference the Wells Fargo
SEC documents set forth below. All of the documents were filed under SEC File
No. 001-2979. Documents filed before November 3, 1998 were filed under the name
Norwest Corporation.
. Annual Report on Form 10-K for the year ended December 31, 1998,
including information specifically incorporated by reference into the
Form 10-K from Wells Fargo's 1998 Annual Report to Stockholders and
Wells Fargo's definitive Notice and Proxy Statement for Wells Fargo's
1999 Annual Meeting of Stockholders;
. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
. Current Reports on Form 8-K filed January 29, 1999, April 21, 1999,
April 28, 1999, July 19, 1999, July 28, 1999, September 29, 1999,
October 19, 1999 and January 18, 2000;
. The description of Wells Fargo common stock contained in the Current
Report on Form 8-K filed October 14, 1997, including any amendment or
report filed to update such description;
. The description of preferred stock purchase rights contained in the
Registration Statement on Form 8-A dated October 21, 1998, including any
amendment or report filed to update such description; and
51
<PAGE>
. All reports and definitive proxy or information statements filed by
Wells Fargo pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this proxy statement-
prospectus and before completion of the merger and the exchange of Wells
Fargo common stock for Napa common stock.
Napa Documents
This proxy statement-prospectus incorporates by reference the Napa SEC
documents set forth below. All of the documents were filed under SEC File No.
000-11090.
. Annual Report on Form 10-KSB for the year ended December 31, 1998,
including information specifically incorporated by reference into the
Form 10-KSB from Napa's definitive Notice and Proxy Statement for its
1999 Annual Meeting of Shareholders;
. Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999;
. Current Report on Form 8-K filed November 30, 1999.
. All reports and definitive proxy or information statements filed by Napa
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 after the date of this proxy statement-prospectus and before
completion of the merger and the exchange of Wells Fargo common stock
for Napa common stock.
Documents Available Without Charge
Wells Fargo and Napa will provide, without charge, copies of any report
incorporated by reference into this proxy statement-prospectus, excluding
exhibits other than those that are specifically incorporated by reference in
this proxy statement-prospectus. You may obtain a copy of any document
incorporated by reference by writing or calling Wells Fargo or Napa as follows:
Wells Fargo: Corporate Secretary Napa: Corporate Secretary 901 Main
Wells Fargo & Company MAC N9305-173 Street Napa, California 94559 (707)
Sixth and Marquette Minneapolis, MN 257-2440
55479 (612) 667-8655
To ensure delivery of the copies in time for the special meeting, your
request should be received by March 9, 2000.
In deciding how to vote on the merger, you should rely only on the
information contained or incorporated by reference in this proxy statement-
prospectus. Neither Wells Fargo nor Napa has authorized any person to provide
you with any information that is different from what is contained in this proxy
statement-prospectus. This proxy statement-prospectus is dated February 15,
2000. You should not assume that the information contained in this proxy
statement-prospectus is accurate as of any date other than such date, and
neither the mailing to you of this proxy statement-prospectus nor the issuance
to you of shares of Wells Fargo common stock will create any implication to the
contrary.
52
<PAGE>
FORWARD-LOOKING STATEMENTS
This proxy statement-prospectus, including information incorporated by
reference into this document, may contain forward-looking statements about
Wells Fargo and Napa, including one or more of the following:
. projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure or other financial items;
. descriptions of plans or objectives of management for future operations,
products or services;
. forecasts of future economic performance;
. ""Year 2000 Readiness Disclosures" under the "Year 2000 Information and
Readiness Disclosure Act;" and
. descriptions of assumptions underlying or relating to any of the
foregoing.
Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. They often include words such
as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of
similar meaning, or future or conditional verbs such as "will," "would,"
"should," "could" or "may."
Forward-looking statements consist of expectations or predictions of future
conditions, events or results. They are not guarantees of future performance.
By their nature, forward-looking statements are subject to risks and
uncertainties. There are a number of factors--many of which are beyond the
control of Wells Fargo and Napa--that could cause actual conditions, events or
results to differ significantly from those described in the forward-looking
statements.
Wells Fargo's and Napa's reports filed with the SEC, including Wells Fargo's
and Napa's Form 10-Q and Form 10-QSB, respectively, for the quarter ended
September 30, 1999, describe some of these factors. For example, Wells Fargo's
Form 10-Q for the quarter ended September 30, 1999 describes certain credit,
market, operational, liquidity, interest rate, and Year 2000 risks associated
with Wells Fargo's business and operations. Other factors described in Wells
Fargo's September 30, 1999 Form 10-Q include changes in business and economic
conditions, competition, fiscal and monetary policies, disintermediation,
legislation (including the Gramm-Leach-Bliley Act of 1999), the combination of
the former Norwest Corporation and the former Wells Fargo & Company, and other
mergers and acquisitions.
There are other factors besides these that could cause actual conditions,
events or results to differ significantly from those described in the forward-
looking statements or otherwise affect in the future Wells Fargo's and/or
Napa's business, results of operations and financial condition.
53
<PAGE>
APPENDIX A
----------------
AGREEMENT AND PLAN OF REORGANIZATION
by and between
NAPA NATIONAL BANCORP
and
WELLS FARGO & COMPANY
Dated as of November 18, 1999
----------------
AMENDMENT NO. 1 TO THE
AGREEMENT AND PLAN OF REORGANIZATION
by and between
NAPA NATIONAL BANCORP
and
WELLS FARGO & COMPANY
Dated as of January 18, 2000
----------------
<PAGE>
AMENDMENT NO. 1
TO THE
AGREEMENT AND PLAN OF REORGANIZATION
AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF REORGANIZATION ("Amendment
No. 1") entered into as of the 18th day of January, 2000, by and between Napa
National Bancorp. ("Napa") and Wells Fargo & Company.
WHEREAS, Napa and Wells Fargo entered into an Agreement and Plan of
Reorganization, dated as of November 18, 1999 (the "Agreement"). The parties
thereto now wish to amend paragraph 1(a) of the Agreement.
NOW, THEREFORE, to effect such amendment and in consideration of the
premises and the mutual covenants and agreements contained herein, the parties
hereto do hereby represent, warrant, covenant and agree as follows:
1. Paragraph 1 of the Agreement is hereby amended and restated to provide in
its entirety as follows:
(a) Merger. Subject to the terms and conditions contained herein, a
wholly-owned subsidiary of Wells Fargo (the "Merger Co.") will be merged by
statutory merger with and into Napa pursuant to the Merger Agreement, with
Napa as the surviving corporation, in which merger:
(i) Each share of Napa Common Stock outstanding immediately prior to
the Effective Time of the Merger (as defined below) (other than shares
as to which statutory dissenters' appraisal rights have been exercised)
will be converted into the right to receive a number of shares of Wells
Fargo Common Stock (the "Exchange Ratio") determined by dividing
686,905 by the Napa Common Stock Share Equivalents.
(ii) Each Stock Option (as defined in paragraph 4(b), but also
including, for purposes of this paragraph 1(a), the right to purchase
stock pursuant to the Purchase Agreement as defined in paragraph 4(b))
that is in effect, but unexercised, immediately prior to the Effective
Time of the Merger will be deemed to have been exercised and will be
converted into the right to receive a number of shares of Wells Fargo
Common Stock determined by multiplying (A) the number of shares of Napa
Common Stock subject to the Stock Option by (B) the product of (1) the
quotient of (y) the Option Spread of that Stock Option divided by (z)
the Fair Market Value Per Share, multiplied by (2) the Exchange Ratio.
"Wells Fargo Measurement Price" shall mean the average of the closing
prices of a share of Wells Fargo Common Stock as reported on the
consolidated tape of the New York Stock Exchange during the period of 19
consecutive trading days ending at the close of business of the second
trading day immediately preceding the meeting of shareholders required by
paragraph 4(c) of this Agreement.
"Aggregate Wells Fargo Share Value" shall equal 686,905 multiplied by
the Wells Fargo Measurement Price
"Fair Market Value Per Share" shall equal the quotient of (A) the sum of
(1) the Aggregate Wells Fargo Share Value plus (2) the aggregate exercise
price of all Stock Options in effect, but unexercised, immediately prior to
the Effective Time of the Merger, divided by (B) the sum of (1) the number
of shares of Napa Common Stock outstanding immediately prior to the
Effective Time of the Merger plus (2) the number of shares of Napa Common
Stock subject to Stock Options in effect, but unexercised, immediately
prior to the Effective Time of the Merger.
"Option Spread" as to a particular Stock Option shall equal the Fair
Market Value Per Share minus the exercise price of that Stock Option.
A-1
<PAGE>
"Napa Option Shares" shall equal the quotient of (A) the difference
between (1) the Aggregate Wells Fargo Share Value minus (2) the product of
(y) the number of shares of Napa Common Stock outstanding immediately prior
to the Effective Time of the Merger multiplied by (z) the Fair Market Value
Per Share, divided by (B) the Fair Market Value Per Share.
"Napa Common Stock Share Equivalents" shall equal the sum of the number
of shares of Napa Common Stock outstanding immediately prior to the
Effective Time of the Merger plus the Napa Option Shares.
2. Paragraph 4(r) is hereby amended in its entirety to read as follows:
(r) The stock option plans listed on Schedule 2(c), the Stock Options
and the Purchase Agreement shall have been amended, and any necessary
shareholder approval shall have been obtained, to the extent necessary to
permit such options and right of first refusal to be deemed exercised and
converted into the right to receive Wells Fargo Common Stock pursuant to
paragraph 1(a). Whenever an option holder or other person is required to
pay Napa an amount required to be withheld under applicable federal and
state tax laws in connection with the exercise of an option or right of
first refusal, Napa shall collect all applicable taxes in cash.
3. The Agreement shall otherwise be and remain in full force and effect.
4. This Amendment may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute but one
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
WELLS FARGO & COMPANY
/s/ John E. Ganoe
By ______________________________
Name: John E. Ganoe
Title: Executive Vice President
NAPA NATIONAL BANCORP
/s/ W. Clarke Swanson
By: _____________________________
Name: W. Clarke Swanson
Title: President and Chief
Executive
Officer
A-2
<PAGE>
AGREEMENT
AND
PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") entered into as of
the 18th day of November, 1999, by and between NAPA NATIONAL BANCORP ("Napa"),
a California corporation, and WELLS FARGO & COMPANY ("Wells Fargo"), a Delaware
corporation.
WHEREAS, the parties hereto desire to effect a reorganization whereby a
wholly-owned subsidiary of Wells Fargo will merge with and into Napa (the
"Merger") pursuant to an agreement and plan of merger (the "Merger Agreement")
in substantially the form attached hereto as Exhibit A, which provides, among
other things, for the exchange of the shares of Common Stock of Napa, no par
value ("Napa Common Stock") outstanding immediately prior to the time the
Merger becomes effective in accordance with the provisions of the Merger
Agreement into shares of voting Common Stock of Wells Fargo of the par value of
$1-2/3 per share ("Wells Fargo Common Stock"),
NOW, THEREFORE, to effect such reorganization and in consideration of the
premises and the mutual covenants and agreements contained herein, the parties
hereto do hereby represent, warrant, covenant and agree as follows:
1. Basic Plan of Reorganization
[This paragraph 1(a) has been amended and restated in its entirety pursuant
to Amendment No. 1 to the Agreement and Plan of Reorganization, dated as of
January 18, 2000, by and between Napa National Bancorp and Wells Fargo &
Company, a copy of which document appears at the beginning of this Appendix A.]
(a) Merger. Subject to the terms and conditions contained herein, a wholly-
owned subsidiary of Wells Fargo (the "Merger Co.") will be merged by statutory
merger with and into Napa pursuant to the Merger Agreement, with Napa as the
surviving corporation, in which merger:
(i) each share of Napa Common Stock outstanding immediately prior to the
Effective Time of the Merger (as defined below) (other than shares as to
which statutory dissenters' appraisal rights have been exercised) will be
exchanged for a number of shares of Wells Fargo Common Stock (the "Exchange
Ratio") determined by dividing 686,905 by the sum of (a) the number of
shares of Napa Common Stock then outstanding and (b) a number determined by
adding together the following number as computed for each Stock Option (as
defined in paragraph 4(b)) which is in effect, but unexercised, immediately
prior to the Effective Time of the Merger, (I) the fair market value of
Napa Common Stock as of the Effective Date of the Merger minus the exercise
price for such Stock Option, multiplied by (II) the number of shares
subject to such Stock Option, divided by (III) the fair market value of a
share of Napa Common Stock as of the Effective Date of the Merger;
(ii) each Stock Option which is in effect, but unexercised, immediately
prior to the Effective Time of the Merger will be deemed to have been
exercised and will be exchanged for the number of shares of Well Fargo
Common Stock determined by (I) subtracting the exercise price for such
Stock Option from the fair market value of Napa Common Stock as of the
Effective Date of the Merger, multiplying the result by (II) the number of
shares subject to such Stock Option, dividing the result by (III) the fair
market value of a share of Napa Common Stock as of the Effective Date of
the Merger, and multiplying the result by (IV) the Exchange Ratio; and
(iii) each share of Merger Co. common stock shall be exchanged by virtue
of the Merger into one share of the surviving corporation..
In no event shall the aggregate consideration paid in connection with the
Merger exceed 686,905 shares of Wells Fargo Common Stock.
A-3
<PAGE>
(b) Wells Fargo Common Stock Adjustments. If, between the date hereof and
the Effective Time of the Merger, shares of Wells Fargo Common Stock shall be
changed into a different number of shares or a different class of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment, or if a stock dividend thereon shall be
declared with a record date within such period (a "Common Stock Adjustment"),
then the number of shares of Wells Fargo Common Stock for which a share of
Napa Common Stock shall be exchanged pursuant to subparagraph (a), above, will
be appropriately and proportionately adjusted so that the number of such
shares of Wells Fargo Common Stock for which a share of Napa Common Stock
shall be exchanged will equal the number of shares of Wells Fargo Common Stock
which holders of shares of Napa Common Stock would have received pursuant to
such Common Stock Adjustment had the record date therefor been immediately
following the Effective Time of the Merger.
(c) Fractional Shares. No fractional shares of Wells Fargo Common Stock and
no certificates or scrip certificates therefor shall be issued to represent
any such fractional interest, and any holder thereof shall be paid an amount
of cash equal to the product obtained by multiplying the fractional share
interest to which such holder is entitled by the average of the closing prices
of a share of Wells Fargo Common Stock as reported by the consolidated tape of
the New York Stock Exchange for each of the five (5) trading days ending on
the day immediately preceding the meeting of shareholders required by
paragraph 4(c) of this Agreement.
(d) Mechanics of Closing Merger. Subject to the terms and conditions set
forth herein, the Merger Agreement shall be executed and Articles of Merger
shall be filed with the Secretary of State of the State of California on March
17, 2000 or within ten (10) business days following the satisfaction or waiver
of all conditions precedent set forth in Sections 6 and 7 of this Agreement,
whichever is later, or on such other date as may be agreed to by the parties
(the "Closing Date"), provided that the Closing Date shall not occur prior to
March 15, 2000 and shall not occur on the last business day of a calendar
month. Each of the parties agrees to use its best efforts to cause the Merger
to be completed as soon as practicable after the receipt of final regulatory
approval of the Merger and the expiration of all required waiting periods. The
time that the filing referred to in the first sentence of this paragraph is
made is herein referred to as the "Time of Filing." The day on which such
filing is made and accepted is herein referred to as the "Effective Date of
the Merger." The "Effective Time of the Merger" shall be 11:59 p.m. Napa,
California time on the Effective Date of the Merger. At the Effective Time of
the Merger on the Effective Date of the Merger, the separate existence of
Merger Co. shall cease and Merger Co. will be merged with and into Napa
pursuant to the Merger Agreement.
The closing of the transactions contemplated by this Agreement and the
Merger Agreement (the "Closing") shall take place on the Closing Date at the
offices of Wells Fargo, Sixth and Marquette, Minneapolis, Minnesota, or such
other place mutually agreed upon by Wells Fargo and Napa.
(e) Reservation of Right to Revise Structure. At Wells Fargo's election,
the Merger may alternatively be structured so that (1) Napa is merged with and
into any other direct or indirect wholly owned subsidiary of Wells Fargo, (2)
any direct or indirect wholly owned subsidiary of Wells Fargo is merged with
and into Napa, or (3) Napa is merged with and into Wells Fargo; provided,
however, that no such change shall (A) alter or change the amount or kind of
consideration to be issued to the Napa's shareholders in the Merger or under
such alternative structure (the "Merger Consideration"), (B) adversely affect
the tax treatment of Napa's shareholders as a result of receiving the Merger
Consideration or prevent the parties from obtaining the opinion referred to in
Paragraph 6(h), or (C) materially impede or delay consumation of the Merger.
In the event of such election, the parties agree to execute an appropriate
amendment to this Agreement in order to reflect such election.
2. Representations and Warranties of Napa. Napa represents and warrants to
Wells Fargo as follows:
(a) Organization and Authority. Napa is a corporation duly organized,
validly existing and in good standing under the laws of the State of
California, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and failure to be so qualified would
have a material adverse effect on Napa and the Napa Subsidiaries
A-4
<PAGE>
taken as a whole and has corporate power and authority to own its properties
and assets and to carry on its business as it is now being conducted. Napa is
registered as a bank holding company with the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). Napa has
furnished Wells Fargo true and correct copies of its articles of incorporation
and by-laws, as amended.
(b) Napa's Subsidiaries. Schedule 2(b) sets forth a complete and correct
list of all of Napa's subsidiaries as of the date hereof (individually a "Napa
Subsidiary" and collectively the "Napa Subsidiaries"), all shares of the
outstanding capital stock of each of which, except as set forth on Schedule
2(b), are owned directly or indirectly by Napa. No equity security of any Napa
Subsidiary is or may be required to be issued by reason of any option, warrant,
scrip, preemptive right, right to subscribe to, call or commitment of any
character whatsoever relating to, or security or right convertible into, shares
of any capital stock of such subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any Napa Subsidiary is
bound to issue additional shares of its capital stock, or any option, warrant
or right to purchase or acquire any additional shares of its capital stock. All
of such shares so owned by Napa are fully paid and nonassessable and are owned
by it free and clear of any lien, claim, charge, option, encumbrance or
agreement with respect thereto. Each Napa Subsidiary is a corporation or
national banking association duly organized, validly existing, duly qualified
to do business and in good standing under the laws of its jurisdiction of
incorporation, and has corporate power and authority to own or lease its
properties and assets and to carry on its business as it is now being
conducted. Except as set forth on Schedule 2(b), Napa does not own
beneficially, directly or indirectly, more than 5% of any class of equity
securities or similar interests of any corporation, bank, business trust,
association or similar organization, and is not, directly or indirectly, a
partner in any partnership or party to any joint venture. Napa National Leasing
Corporation has been inactive since 1989 and it has no liabilities, contingent
or otherwise.
(c) Capitalization. The authorized capital stock of Napa consists of
20,000,000 shares of common stock, no par value per share and 1,000,000 shares
of Preferred Stock, of which as of the close of business on September 30, 1999,
792,675 shares of common stock and no shares of preferred stock were
outstanding and no shares of common stock and no shares of preferred stock were
held in the treasury. The maximum number of shares of Napa Common Stock
(assuming for this purpose that phantom shares and other share-equivalents
constitute Napa Common Stock) that would be outstanding as of the Effective
Date of the Merger if all options, warrants, conversion rights and other rights
with respect thereto were exercised is 943,400 All of the outstanding shares of
capital stock of Napa have been duly and validly authorized and issued and are
fully paid and nonassessable. Except as set forth in Schedule 2(c), there are
no outstanding subscriptions, contracts, conversion privileges, options,
warrants, calls, preemptive rights or other rights obligating Napa or any Napa
Subsidiary to issue, sell or otherwise dispose of, or to purchase, redeem or
otherwise acquire, any shares of capital stock of Napa or any Napa Subsidiary.
Since September 30, 1999, no shares of Napa capital stock have been purchased,
redeemed or otherwise acquired, directly or indirectly, by Napa or any Napa
Subsidiary and such dividends as are permitted pursuant to paragraph 4(b) of
this Agreement, no dividends or other distributions have been declared, set
aside, made or paid to the shareholders of Napa.
(d) Authorization. Napa has the corporate power and authority to enter into
this Agreement and the Merger Agreement and, subject to any required approvals
of its shareholders, to carry out its obligations hereunder and thereunder. The
execution, delivery and performance of this Agreement and the Merger Agreement
by Napa and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors of Napa. Subject to
such approvals of shareholders and of government agencies and other governing
boards having regulatory authority over Napa as may be required by statute or
regulation, this Agreement and the Merger Agreement are valid and binding
obligations of Napa enforceable against Napa in accordance with their
respective terms.
Except as set forth on Schedule 2(d), neither the execution, delivery and
performance by Napa of this Agreement or the Merger Agreement, nor the
consummation of the transactions contemplated hereby and thereby, nor
compliance by Napa with any of the provisions hereof or thereof, will (i)
violate, conflict with, or
A-5
<PAGE>
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration of, or result in the creation
of, any lien, security interest, charge or encumbrance upon any of the
properties or assets of Napa or any Napa Subsidiary under any of the terms,
conditions or provisions of (x) its articles of incorporation or by-laws or (y)
any material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Napa or any Napa
Subsidiary is a party or by which it may be bound, or to which Napa or any Napa
Subsidiary or any of the properties or assets of Napa or any Napa Subsidiary
may be subject, or (ii) subject to compliance with the statutes and regulations
referred to in the next paragraph, to the best knowledge of Napa, violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to Napa or any Napa Subsidiary or any of their respective properties
or assets.
Other than in connection or in compliance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (the "Exchange Act"), the securities or
blue sky laws of the various states or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHC Act or the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"), and filings
required to effect the Merger under California law, no notice to, filing with,
exemption or review by, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Napa of the transactions
contemplated by this Agreement and the Merger Agreement.
(e) Napa Financial Statements. The consolidated balance sheets of Napa and
Napa's Subsidiaries as of December 31, 1998 and 1997 and related consolidated
statements of income, shareholders' equity and cash flows for the three years
ended December 31, 1998, together with the notes thereto, certified by Ernst &
Young LLP and included in Napa's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Napa 10-K") as filed with the Securities and
Exchange Commission (the "SEC"), and the unaudited consolidated statements of
financial condition of Napa and Napa's Subsidiaries as of September 30, 1999
and the related unaudited consolidated statements of income, shareholders'
equity and cash flows for the nine months then ended included in Napa's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999
as filed with the SEC (collectively, the "Napa Financial Statements"), have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis and present fairly (subject, in the case of
financial statements for interim periods, to normal recurring adjustments) the
consolidated financial position of Napa and Napa's Subsidiaries at the dates
and the consolidated results of operations and cash flows of Napa and Napa's
Subsidiaries for the periods stated therein.
(f) Reports. Since December 31, 1995, Napa and each Napa Subsidiary has
filed all reports, registrations and statements, together with any required
amendments thereto, that it was required to file with (i) the SEC, including,
but not limited to, Forms 10-K, Forms 10-Q and proxy statements, (ii) the
Federal Reserve Board, (iii) the Federal Deposit Insurance Corporation (the
"FDIC"), and (iv) any applicable state securities or banking authorities. All
such reports and statements filed with any such regulatory body or authority
are collectively referred to herein as the "Napa Reports." As of their
respective dates, the Napa Reports complied in all material respects with all
the rules and regulations promulgated by the SEC, the Federal Reserve Board,
the FDIC, and applicable state securities or banking authorities, as the case
may be, and did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. Copies of all the Napa Reports have been made
available to Wells Fargo by Napa.
(g) Properties and Leases. Except as disclosed on Schedule 2(g), Napa and
each Napa Subsidiary have good title free and clear of any material liens,
claims, charges, options, encumbrances or similar restrictions to all the real
and personal property reflected in Napa's consolidated balance sheet as of
September 30, 1999 included in Napa's Quarterly Report on Form 10-Q for the
period then ended, and all real and personal property acquired since such date,
except such real and personal property as has been disposed of in the ordinary
course of business. All leases of real property and all other leases material
to Napa or any Napa
A-6
<PAGE>
Subsidiary pursuant to which Napa or such Napa Subsidiary, as lessee, leases
real or personal property, which leases are described on Schedule 2(g), are
valid and effective in accordance with their respective terms, and there is
not, under any such lease, any material existing default by Napa or such Napa
Subsidiary or any event which, with notice or lapse of time or both, would
constitute such a material default. Substantially all Napa's and each Napa
Subsidiary's buildings and equipment in regular use have been well maintained
and are in good and serviceable condition, reasonable wear and tear excepted.
(h) Taxes. Each of Napa and the Napa Subsidiaries has filed all federal,
state, county, local and foreign tax returns, including information returns,
required to be filed by it, and paid all taxes owed by it, including those with
respect to income, withholding, social security, unemployment, workers
compensation, franchise, ad valorem, premium, excise and sales taxes, and no
taxes shown on such returns to be owed by it or assessments received by it are
delinquent. The federal income tax returns of Napa and the Napa Subsidiaries
for the fiscal year ended December 31, 1995, and for all fiscal years prior
thereto, are for the purposes of routine audit by the Internal Revenue Service
closed because of the statute of limitations, and no claims for additional
taxes for such fiscal years are pending. Except only as set forth on Schedule
2(h), (i) neither Napa nor any Napa Subsidiary is a party to any pending action
or proceeding, nor is any such action or proceeding threatened by any
governmental authority, for the assessment or collection of taxes, interest,
penalties, assessments or deficiencies and (ii) no issue has been raised by any
federal, state, local or foreign taxing authority in connection with an audit
or examination of the tax returns, business or properties of Napa or any Napa
Subsidiary which has not been settled, resolved and fully satisfied. Each of
Napa and the Napa Subsidiaries has paid all taxes owed or which it is required
to withhold from amounts owing to employees, creditors or other third parties.
The consolidated balance sheet as of September 30, 1999, referred to in
paragraph 2(e) hereof, includes adequate provision for all accrued but unpaid
federal, state, county, local and foreign taxes, interest, penalties,
assessments or deficiencies of Napa and the Napa Subsidiaries with respect to
all periods through the date thereof.
(i) Absence of Certain Changes. Since September 30, 1999 there has been no
change in the business, financial condition or results of operations of Napa or
any Napa Subsidiary, which has had, or may reasonably be expected to have, a
material adverse effect on the business, financial condition or results of
operations of Napa and the Napa Subsidiaries taken as a whole (other than
changes in banking laws or regulations, or interpretations thereof that affect
the banking industry generally, or changes in the general level of interest
rates).
(j) Commitments and Contracts. Except as set forth on Schedule 2(j), neither
Napa nor any Napa Subsidiary is a party or subject to any of the following
(whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination pay
liabilities or fringe benefits) with any present or former officer,
director, employee or consultant (other than those which are terminable at
will by Napa or such Napa Subsidiary);
(ii) any plan, contract or understanding providing for any bonus,
pension, option, deferred compensation, retirement payment, profit sharing
or similar arrangement with respect to any present or former officer,
director, employee or consultant;
(iii) any labor contract or agreement with any labor union;
(iv) any contract not made in the ordinary course of business
containing covenants which limit the ability of Napa or any Napa Subsidiary
to compete in any line of business or with any person or which involve any
restriction of the geographical area in which, or method by which, Napa or
any Napa Subsidiary may carry on its business (other than as may be
required by law or applicable regulatory authorities);
(v) any other contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K;
(vi) any lease with annual rental payments aggregating $10,000 or
more;
A-7
<PAGE>
(vii) any agreement or commitment with respect to the Community
Reinvestment Act with any state or federal bank regulatory authority or any
other party; or
(viii) any current or past agreement, contract or understanding with any
current or former director, officer, employee, consultant, financial
adviser, broker, dealer, or agent providing for any rights of
indemnification in favor of such person or entity.
(k) Litigation and Other Proceedings. Napa has furnished Wells Fargo copies
of (i) all attorney responses to the request of the independent auditors for
Napa with respect to loss contingencies as of December 31, 1998 in connection
with the Napa financial statements included in the Napa 10-K, and (ii) a
written list of legal and regulatory proceedings filed against Napa or any Napa
Subsidiary since said date. Neither Napa nor any Napa Subsidiary is a party to
any pending or, to the best knowledge of Napa, threatened, claim, action, suit,
investigation or proceeding, or is subject to any order, judgment or decree,
except for matters which, in the aggregate, will not have, or cannot reasonably
be expected to have, a material adverse effect on the business, financial
condition or results of operations of Napa and the Napa Subsidiaries taken as a
whole.
(l) Insurance. Napa and each Napa Subsidiary is presently insured, and
during each of the past five calendar years (or during such lesser period of
time as Napa has owned such Napa Subsidiary) has been insured, for reasonable
amounts with financially sound and reputable insurance companies against such
risks as companies engaged in a similar business would, in accordance with good
business practice, customarily be insured and has maintained all insurance
required by applicable law and regulation.
(m) Compliance with Laws. Napa and each Napa Subsidiary has all permits,
licenses, authorizations, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to
own or lease its properties and assets and to carry on its business as
presently conducted and that are material to the business of Napa or such Napa
Subsidiary; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to the best knowledge of Napa, no
suspension or cancellation of any of them is threatened; and all such filings,
applications and registrations are current. The conduct by Napa and each Napa
Subsidiary of its business and the condition and use of its properties does not
violate or infringe, in any respect material to any such business, any
applicable domestic (federal, state or local) or foreign law, statute,
ordinance, license or regulation. Neither Napa nor any Napa Subsidiary is in
default under any order, license, regulation or demand of any federal, state,
municipal or other governmental agency or with respect to any order, writ,
injunction or decree of any court. Except for statutory or regulatory
restrictions of general application and except as set forth on Schedule 2(m),
no federal, state, municipal or other governmental authority has placed any
restriction on the business or properties of Napa or any Napa Subsidiary which
reasonably could be expected to have a material adverse effect on the business
or properties of Napa and the Napa Subsidiaries taken as a whole.
(n) Labor. No work stoppage involving Napa or any Napa Subsidiary is pending
or, to the best knowledge of Napa, threatened. Neither Napa nor any Napa
Subsidiary is involved in, or threatened with or affected by, any labor
dispute, arbitration, lawsuit or administrative proceeding which could
materially and adversely affect the business of Napa or such Napa Subsidiary.
Employees of Napa and the Napa Subsidiaries are not represented by any labor
union nor are any collective bargaining agreements otherwise in effect with
respect to such employees.
(o) Material Interests of Certain Persons. Except as set forth on Schedule
2(o), to the best knowledge of Napa no officer or director of Napa or any Napa
Subsidiary, or any "associate" (as such term is defined in Rule l4a-1 under the
Exchange Act) of any such officer or director, has any interest in any material
contract or property (real or personal), tangible or intangible, used in or
pertaining to the business of Napa or any Napa Subsidiary.
Schedule 2(o) sets forth a correct and complete list of any loan from Napa
or any Napa Subsidiary to any present officer, director, employee or any
associate or related interest of any such person which was required under
Regulation O of the Federal Reserve Board to be approved by or reported to
Napa's or such Napa Subsidiary's Board of Directors.
A-8
<PAGE>
(p) Napa Benefit Plans.
(i) Schedule 2(p)(i) sets forth each employee benefit plan with respect
to which Napa or any Napa Subsidiary contributes, sponsors or otherwise has
any obligation (the "Plans"). For purposes of this Section 2(p) and
Schedule 2(p)(i), "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended, and the term "Plan" or "Plans" means all employee
benefit plans as defined in Section 3(3) of ERISA, and all other benefit
arrangements including, without limitation, any plan, program, agreement,
policy or commitment providing for insurance coverage of employees,
workers' compensation, disability benefits, supplemental unemployment
benefits, vacation benefits, retirement benefits, severance or termination
of employment benefits, life, health, death, disability or accidental
benefits.
(ii) Except as disclosed on Schedule 2(p)(ii), no Plan is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA.
(iii) Except as disclosed on Schedule 2(p)(iii), no Plan promises or
provides health or life benefits to retirees or former employees except as
required by federal continuation of coverage laws or similar state laws.
(iv) Except as disclosed on Schedule 2(p)(iv), (a) each Plan is and has
been in all material respects operated and administered in accordance with
its provisions and applicable law including, if applicable, ERISA and the
Code; (b) all reports and filings with governmental agencies (including but
not limited to the Department of Labor, Internal Revenue Service, Pension
Benefit Guaranty Corporation and the Securities and Exchange Commission)
required in connection with each Plan have been timely made; (c) all
disclosures and notices required by law or Plan provisions to be given to
participants and beneficiaries in connection with each Plan have been
properly and timely made; (d) there are no actions, suits or claims
pending, other than routine uncontested claims for benefits with respect to
each Plan; and (e) each Plan intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service stating that the Plan (including all amendments) is tax
qualified under Section 401(a) of the Code and Napa knows of no reason that
any such Plan is not qualified within the meaning of Section 401(a) of the
Code and knows of no reason that each related Plan trust is not exempt from
taxation under Section 501(a) of the Code.
(v) Except as disclosed on Schedule 2(p)(v), (a) all contributions,
premium payments and other payments required to be made in connection with
the Plans as of the date of this Agreement have been made; (b) a proper
accrual has been made on the books of Napa for all contributions, premium
payments and other payments due in the current fiscal year but not made as
of the date of this Agreement; (c) no contribution, premium payment or
other payment has been made in support of any Plan that is in excess of the
allowable deduction for federal income tax purposes for the year with
respect to which the contribution was made (whether under Sections 162,
280G, 404, 419, 419A of the Code or otherwise); and (d) with respect to
each Plan that is subject to Section 301 of ERISA or Section 412 of the
Code, Napa is not liable for any accumulated funding deficiency as that
term is defined in Section 412 of the Code and the projected benefit
obligations determined as of the date of this Agreement do not exceed the
assets of the Plan.
(vi) Except as disclosed in Schedule 2(p)(vi) and to best knowledge of
Napa, no Plan or any trust created thereunder, nor any trustee, fiduciary
or administrator thereof, has engaged in a "prohibited transaction," as
such term is defined in Section 4975 of the Code or Section 406 of ERISA or
violated any of the fiduciary standards under Part 4 of Title 1 of ERISA
which could subject such Plan or trust, or any trustee, fiduciary or
administrator thereof, or any party dealing with any such Plan or trust, to
a tax penalty or prohibited transactions imposed by Section 4975 of the
Code or would result in material liability to Napa and the Napa
Subsidiaries as a whole.
(vii) No Plan subject to Title IV of ERISA or any trust created
thereunder has been terminated, nor have there been any "reportable events"
as that term is defined in Section 4043 of ERISA, with respect to
A-9
<PAGE>
any Plan, other than those events which may result from the transactions
contemplated by this Agreement and the Merger Agreement.
(viii) Except as disclosed in Schedule 2(p)(viii), neither the execution
and delivery of this Agreement and the Merger Agreement nor the
consummation of the transactions contemplated hereby and thereby will (a)
result in any material payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due to
any director or employee or former employee of Napa under any Plan or
otherwise, (b) materially increase any benefits otherwise payable under any
Plan, or (c) result in the acceleration of the time of payment or vesting
of any such benefits to any material extent.
(q) Proxy Statement, etc. None of the information regarding Napa and the
Napa Subsidiaries supplied or to be supplied by Napa for inclusion in (i) a
Registration Statement on Form S-4 to be filed with the SEC by Wells Fargo for
the purpose of registering the shares of Wells Fargo Common Stock to be
exchanged for shares of Napa Common Stock pursuant to the provisions of the
Merger Agreement (the "Registration Statement"), (ii) the proxy statement to be
mailed to Napa's shareholders in connection with the meeting to be called to
consider the Merger (the "Proxy Statement") and (iii) any other documents to be
filed with the SEC or any regulatory authority in connection with the
transactions contemplated hereby or by the Merger Agreement will, at the
respective times such documents are filed with the SEC or any regulatory
authority and, in the case of the Registration Statement, when it becomes
effective and, with respect to the Proxy Statement, when mailed, be false or
misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements therein not misleading or, in
the case of the Proxy Statement or any amendment thereof or supplement thereto,
at the time of the meeting of shareholders referred to in paragraph 4(c), be
false or misleading with respect to any material fact, or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for such meeting. All documents
which Napa and the Napa Subsidiaries are responsible for filing with the SEC
and any other regulatory authority in connection with the Merger will comply as
to form in all material respects with the provisions of applicable law.
(r) Registration Obligations. Except as set forth on Schedule 2(r), neither
Napa nor any Napa Subsidiary is under any obligation, contingent or otherwise,
by reason of any agreement to register any of its securities under the
Securities Act.
(s) Brokers and Finders. Except for First Security Van Kasper, neither Napa
nor any Napa Subsidiary nor any of their respective officers, directors or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted directly or indirectly for Napa or any Napa
Subsidiary in connection with this Agreement and the Merger Agreement or the
transactions contemplated hereby and thereby.
(t) Administration of Trust Accounts. Napa and each Napa Subsidiary has
properly administered in all respects material and which could reasonably be
expected to be material to the financial condition of Napa and the Napa
Subsidiaries taken as a whole all accounts for which it acts as a fiduciary,
including but not limited to accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment
advisor, in accordance with the terms of the governing documents and applicable
state and federal law and regulation and common law. Neither Napa, any Napa
Subsidiary, nor any director, officer or employee of Napa or any Napa
Subsidiary has committed any breach of trust with respect to any such fiduciary
account which is material to or could reasonably be expected to be material to
the financial condition of Napa and the Napa Subsidiaries taken as a whole, and
the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account.
(u) No Defaults. Neither Napa nor any Napa Subsidiary is in default, nor has
any event occurred which, with the passage of time or the giving of notice, or
both, would constitute a default, under any material agreement, indenture, loan
agreement or other instrument to which it is a party or by which it or any of
its
A-10
<PAGE>
assets is bound or to which any of its assets is subject, the result of which
has had or could reasonably be expected to have a material adverse effect upon
Napa and the Napa Subsidiaries, taken as a whole. To the best of Napa's
knowledge, all parties with whom Napa or any Napa Subsidiary has material
leases, agreements or contracts or who owe to Napa or any Napa Subsidiary
material obligations other than with respect to those arising in the ordinary
course of the banking business of the Napa Subsidiaries are in compliance
therewith in all material respects.
(v) Environmental Liability. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition of, on Napa or any Napa Subsidiary, any liability
relating to the release of hazardous substances as defined under any local,
state or federal environmental statute, regulation or ordinance including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), pending or to the best of Napa's
knowledge, threatened against Napa or any Napa Subsidiary the result of which
has had or could reasonably be expected to have a material adverse effect upon
Napa and Napa's Subsidiaries taken as a whole; to the best of Napa's knowledge
there is no reasonable basis for any such proceeding, claim or action; and to
the best of Napa's knowledge neither Napa nor any Napa Subsidiary is subject to
any agreement, order, judgment, or decree by or with any court, governmental
authority or third party imposing any such environmental liability. Napa has
provided Wells Fargo with copies of all environmental assessments, reports,
studies and other related information in its possession with respect to each
bank facility and each non-residential OREO property.
(w) Compliance with Year 2000 Requirements. Except as set forth in Schedule
2(w), Napa is in full compliance with its Year 2000 project management process
as set forth in the May 5, 1997 Federal Financial Institutions Examination
Council ("FFIEC") Interagency Statement on the Year 2000 and subsequent
guidance documents (the "FFIEC Requirements"). Napa has made its Year 2000
project assessment and remediation plan available to Wells Fargo for review and
has furnished Wells Fargo with copies of all communications between Napa or any
Napa Subsidiary and regulators having responsibility for overseeing compliance
with such FFIEC Requirements.
3. Representations and Warranties of Wells Fargo. Wells Fargo represents and
warrants to Napa as follows:
(a) Organization and Authority. Wells Fargo is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
is duly qualified to do business and is in good standing in all jurisdictions
where its ownership or leasing of property or the conduct of its business
requires it to be so qualified and failure to be so qualified would have a
material adverse effect on Wells Fargo and its subsidiaries taken as a whole
and has corporate power and authority to own its properties and assets and to
carry on its business as it is now being conducted. Wells Fargo is registered
as a bank holding company with the Federal Reserve Board under the BHC Act.
(b) Wells Fargo Subsidiaries. Schedule 3(b) sets forth a complete and
correct list as of December 31, 1998, of Wells Fargo's Significant Subsidiaries
(as defined in Regulation S-X promulgated by the SEC) (individually a "Wells
Fargo Subsidiary" and collectively the "Wells Fargo Subsidiaries"), all shares
of the outstanding capital stock of each of which, except as set forth in
Schedule 3(b), are owned directly or indirectly by Wells Fargo. No equity
security of any Wells Fargo Subsidiary is or may be required to be issued to
any person or entity other than Wells Fargo by reason of any option, warrant,
scrip, right to subscribe to, call or commitment of any character whatsoever
relating to, or security or right convertible into, shares of any capital stock
of such subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Wells Fargo Subsidiary is bound to issue additional
shares of its capital stock, or options, warrants or rights to purchase or
acquire any additional shares of its capital stock. Subject to 12 U.S.C. (S) 55
(1982), all of such shares so owned by Wells Fargo are fully paid and
nonassessable and are owned by it free and clear of any lien, claim, charge,
option, encumbrance or agreement with respect thereto. Each Wells Fargo
Subsidiary is a corporation or national banking association duly organized,
validly existing, duly qualified to do business and
A-11
<PAGE>
in good standing under the laws of its jurisdiction of incorporation, and has
corporate power and authority to own or lease its properties and assets and to
carry on its business as it is now being conducted.
(c) Wells Fargo Capitalization. As of September 30, 1999, the authorized
capital stock of Wells Fargo consists of (i) 20,000,000 shares of Preferred
Stock, without par value, of which as of the close of business on September 30,
1999, 980,000 shares of Cumulative Tracking Preferred Stock, at $200 stated
value, 9,532 shares of ESOP Cumulative Convertible Preferred Stock, at $1,000
stated value, 19,790 shares of 1995 ESOP Cumulative Convertible Preferred
Stock, at $1,000 stated value, 21,111 shares of 1996 ESOP Cumulative
Convertible Preferred Stock, at $1,000 stated value, 13,639 shares of 1997 ESOP
Cumulative Convertible Preferred Stock, at $1,000 stated value, 8,472 shares of
1998 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value, 22,653
shares of 1999 ESOP Cumulative Convertible Preferred Stock, $1,000 stated
value, 1,500,000 shares of Adjustable-Rate Cumulative Preferred Stock, Series
B, $50 stated value, and 4,000,000 shares of 6.59% Adjustable Rate
Noncumulative Preferred Stock, Series H, $50 stated value, were outstanding;
(ii) 4,000,000 shares of Preference Stock, without par value, of which as of
the close of business on September 30, 1999, no shares were outstanding; and
(iii) 4,000,000,000 shares of Common Stock, $1-2/3 par value, of which as of
the close of business on September 30, 1999, 1,649,763,637 shares were
outstanding and 16,331,628 shares were held in the treasury. All of the
outstanding shares of capital stock of Wells Fargo have been duly and validly
authorized and issued and are fully paid and nonassessable.
(d) Authorization. Wells Fargo has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by Wells Fargo and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of Wells Fargo. No approval or consent by the
stockholders of Wells Fargo is necessary for the execution and delivery of this
Agreement and the Merger Agreement and the consummation of the transactions
contemplated hereby and thereby. Subject to such approvals of government
agencies and other governing boards having regulatory authority over Wells
Fargo as may be required by statute or regulation, this Agreement is a valid
and binding obligation of Wells Fargo enforceable against Wells Fargo in
accordance with its terms.
Neither the execution, delivery and performance by Wells Fargo of this
Agreement or the Merger Agreement, nor the consummation of the transactions
contemplated hereby and thereby, nor compliance by Wells Fargo with any of the
provisions hereof or thereof, will (i) violate, conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration of, or result in the creation of, any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Wells Fargo or any Wells Fargo Subsidiary under any of the terms,
conditions or provisions of (x) its certificate of incorporation or by-laws or
(y) any material note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Wells Fargo or any
Wells Fargo Subsidiary is a party or by which it may be bound, or to which
Wells Fargo or any Wells Fargo Subsidiary or any of the properties or assets of
Wells Fargo or any Wells Fargo Subsidiary may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
to the best knowledge of Wells Fargo, violate any judgment, ruling, order,
writ, injunction, decree, statute, rule or regulation applicable to Wells Fargo
or any Wells Fargo Subsidiary or any of their respective properties or assets.
Other than in connection with or in compliance with the provisions of the
Securities Act, the Exchange Act, the securities or blue sky laws of the
various states or filings, consents, reviews, authorizations, approvals or
exemptions required under the BHC Act or the HSR Act, and filings required to
effect the Merger under California law, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Wells Fargo of the transactions
contemplated by this Agreement and the Merger Agreement.
A-12
<PAGE>
(e) Wells Fargo Financial Statements. The consolidated balance sheets of
Wells Fargo and Wells Fargo's subsidiaries as of December 31, 1998 and 1997 and
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for the three years ended December 31,
1998, together with the notes thereto, certified by KPMG and included in Wells
Fargo's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
(the "Wells Fargo 10-K") as filed with the SEC, and the unaudited consolidated
balance sheets of Wells Fargo and its subsidiaries as of September 30, 1999 and
the related unaudited consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for the nine
months then ended included in Wells Fargo's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1999, as filed with the SEC
(collectively, the "Wells Fargo Financial Statements"), have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis and present fairly (subject, in the case of financial
statements for interim periods, to normal recurring adjustments) the
consolidated financial position of Wells Fargo and its subsidiaries at the
dates and the consolidated results of operations, changes in financial position
and cash flows of Wells Fargo and its subsidiaries for the periods stated
therein. The Year 2000 disclosure contained in Wells Fargo's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, as filed with the SEC
and designated as the Year 2000 Readiness Disclosures related to the Year 2000
Information and Readiness Disclosure Act, is true and correct in all material
respects as of the date hereof.
(f) Reports. Since December 31, 1993, Wells Fargo and each Wells Fargo
Subsidiary has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file with (i) the SEC,
including, but not limited to, Forms 10-K, Forms 10-Q and proxy statements,
(ii) the Federal Reserve Board, (iii) the FDIC, (iv) the United States
Comptroller of the Currency ("Comptroller"), and (v) any applicable state
securities or banking authorities. All such reports and statements filed with
any such regulatory body or authority are collectively referred to herein as
the "Wells Fargo Reports." As of their respective dates, the Wells Fargo
Reports complied in all material respects with all the rules and regulations
promulgated by the SEC, the Federal Reserve Board, the FDIC, the Comptroller
and any applicable state securities or banking authorities, as the case may be,
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(g) Properties and Leases. Except as may be reflected in the Wells Fargo
Financial Statements and except for any lien for current taxes not yet
delinquent, Wells Fargo and each Wells Fargo Subsidiary has good title free and
clear of any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Wells Fargo's
consolidated balance sheet as of September 30, 1999 included in Wells Fargo's
Quarterly Report on Form 10-Q for the period then ended, and all real and
personal property acquired since such date, except such real and personal
property has been disposed of in the ordinary course of business. All leases of
real property and all other leases material to Wells Fargo or any Wells Fargo
Subsidiary pursuant to which Wells Fargo or such Wells Fargo Subsidiary, as
lessee, leases real or personal property, are valid and effective in accordance
with their respective terms, and there is not, under any such lease, any
material existing default by Wells Fargo or such Wells Fargo Subsidiary or any
event which, with notice or lapse of time or both, would constitute such a
material default. Substantially all Wells Fargo's and each Wells Fargo
Subsidiary's buildings and equipment in regular use have been well maintained
and are in good and serviceable condition, reasonable wear and tear excepted.
(h) Taxes. Each of Wells Fargo and the Wells Fargo Subsidiaries has filed
all material federal, state, county, local and foreign tax returns, including
information returns, required to be filed by it, and paid or made adequate
provision for the payment of all taxes owed by it, including those with respect
to income, withholding, social security, unemployment, workers compensation,
franchise, ad valorem, premium, excise and sales taxes, and no taxes shown on
such returns to be owed by it or assessments received by it are delinquent. The
federal income tax returns of Wells Fargo and the Wells Fargo Subsidiaries for
the fiscal year ended December 31, 1982, and for all fiscal years prior
thereto, are for the purposes of routine audit by the Internal
A-13
<PAGE>
Revenue Service closed because of the statute of limitations, and no claims for
additional taxes for such fiscal years are pending. Except only as set forth on
Schedule 3(h), (i) neither Wells Fargo nor any Wells Fargo Subsidiary is a
party to any pending action or proceeding, nor to Wells Fargo's knowledge is
any such action or proceeding threatened by any governmental authority, for the
assessment or collection of taxes, interest, penalties, assessments or
deficiencies which could reasonably be expected to have any material adverse
effect on Wells Fargo and its subsidiaries taken as a whole, and (ii) no issue
has been raised by any federal, state, local or foreign taxing authority in
connection with an audit or examination of the tax returns, business or
properties of Wells Fargo or any Wells Fargo Subsidiary which has not been
settled, resolved and fully satisfied, or adequately reserved for. Each of
Wells Fargo and the Wells Fargo Subsidiaries has paid all taxes owed or which
it is required to withhold from amounts owing to employees, creditors or other
third parties.
(i) Absence of Certain Changes. Since December 31, 1998, there has been no
change in the business, financial condition or results of operations of Wells
Fargo or any Wells Fargo Subsidiary which has had, or may reasonably be
expected to have, a material adverse effect on the business, financial
condition or results of operations of Wells Fargo and its subsidiaries taken as
a whole.
(j) Commitments and Contracts. Except as set forth on Schedule 3(j), as of
December 31, 1998 neither Wells Fargo nor any Wells Fargo Subsidiary is a party
or subject to any of the following (whether written or oral, express or
implied):
(i) any labor contract or agreement with any labor union;
(ii) any contract not made in the ordinary course of business containing
covenants which materially limit the ability of Wells Fargo or any Wells
Fargo Subsidiary to compete in any line of business or with any person or
which involve any material restriction of the geographical area in which,
or method by which, Wells Fargo or any Wells Fargo Subsidiary may carry on
its business (other than as may be required by law or applicable regulatory
authorities); or
(iii) any other contract or agreement which is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K.
(k) Litigation and Other Proceedings. Neither Wells Fargo nor any Wells
Fargo Subsidiary is a party to any pending or, to the best knowledge of Wells
Fargo, threatened, claim, action, suit, investigation or proceeding, or is
subject to any order, judgment or decree, except for matters which, in the
aggregate, will not have, or cannot reasonably be expected to have, a material
adverse effect on the business, financial condition or results of operations of
Wells Fargo and its subsidiaries taken as a whole.
(l) Insurance. Wells Fargo and each Wells Fargo Subsidiary is presently
insured or self insured, and during each of the past five calendar years (or
during such lesser period of time as Wells Fargo has owned such Wells Fargo
Subsidiary) has been insured or self-insured, for reasonable amounts with
financially sound and reputable insurance companies against such risks as
companies engaged in a similar business would, in accordance with good business
practice, customarily be insured and has maintained all insurance required by
applicable law and regulation.
(m) Compliance with Laws. Wells Fargo and each Wells Fargo Subsidiary has
all permits, licenses, authorizations, orders and approvals of, and has made
all filings, applications and registrations with, federal, state, local or
foreign governmental or regulatory bodies that are required in order to permit
it to own or lease its properties or assets and to carry on its business as
presently conducted and that are material to the business of Wells Fargo or
such Subsidiary; all such permits, licenses, certificates of authority, orders
and approvals are in full force and effect, and to the best knowledge of Wells
Fargo, no suspension or cancellation of any of them is threatened; and all such
filings, applications and registrations are current. The conduct by Wells Fargo
and each Wells Fargo Subsidiary of its business and the condition and use of
its properties does not violate or infringe, in any respect material to any
such business, any applicable domestic (federal, state or local) or foreign
law, statute, ordinance, license or regulation. Neither Wells Fargo nor any
Wells Fargo Subsidiary is in
A-14
<PAGE>
default under any order, license, regulation or demand of any federal, state,
municipal or other governmental agency or with respect to any order, writ,
injunction or decree of any court. Except for statutory or regulatory
restrictions of general application, no federal, state, municipal or other
governmental authority has placed any restrictions on the business or
properties of Wells Fargo or any Wells Fargo Subsidiary which reasonably could
be expected to have a material adverse effect on the business or properties of
Wells Fargo and its subsidiaries taken as a whole. As of the date hereof, all
Wells Fargo Subsidiaries that are subject to the Community Reinvestment Act
("CRA") have received a rating of "outstanding" or "satisfactory" as of their
most current CRA examination by the appropriate federal regulator.
(n) Labor. No work stoppage involving Wells Fargo or any Wells Fargo
Subsidiary is pending or, to the best knowledge of Wells Fargo, threatened.
Neither Wells Fargo nor any Wells Fargo Subsidiary is involved in, or
threatened with or affected by, any labor dispute, arbitration, lawsuit or
administrative proceeding which could materially and adversely affect the
business of Wells Fargo or such Wells Fargo Subsidiary. Except as set forth on
Schedule 3(j), employees of Wells Fargo and the Wells Fargo Subsidiaries are
not represented by any labor union nor are any collective bargaining
agreements otherwise in effect with respect to such employees.
(o) Wells Fargo Benefit Plans.
(i) For purposes of this Section 3(o), the term "Wells Fargo Plan" or
"Wells Fargo Plans" means all employee benefit plans as defined in Section
3(3) of ERISA, to which Wells Fargo contributes, sponsors, or otherwise has
any obligations.
(ii) No Wells Fargo Plan is a "multiemployer plan" within the meaning of
Section 3(37) of ERISA.
(iii) Each Wells Fargo Plan is and has been in all material respects
operated and administered in accordance with its provisions and applicable
law, including, if applicable, ERISA and the Code.
(iv) Each Wells Fargo Plan intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service stating that the Wells Fargo Plan (including all
amendments) is tax qualified under Section 401(a) of the Code and Wells
Fargo knows of no reason that any such Wells Fargo Plan is not qualified
within the meaning of Section 401(a) of the Code and knows of no reason
that each related Wells Fargo Plan trust is not exempt from taxation under
Section 501(a) of the Code.
(v) All contributions, premium payments, and other payments required to
be made in connection with the Wells Fargo Plans as of the date of this
Agreement have been made.
(vi) With respect to each Wells Fargo Plan that is subject to Section
301 of ERISA or Section 412 of the Code, neither Wells Fargo nor any Wells
Fargo Subsidiary is liable for any accumulated funding deficiency as that
term is defined in Section 412 of the Code.
(vii) The present value of all benefits vested and all benefits accrued
under each Wells Fargo Plan that is subject to Title IV of ERISA does not,
in each case, exceed the value of the assets of the Wells Fargo Plans
allocable to such vested or accrued benefits as of the end of the most
recent Plan Year.
(p) Registration Statement, etc. None of the information regarding Wells
Fargo and its subsidiaries supplied or to be supplied by Wells Fargo for
inclusion in (i) the Registration Statement, (ii) the Proxy Statement, or
(iii) any other documents to be filed with the SEC or any regulatory authority
in connection with the transactions contemplated hereby or by the Merger
Agreement will, at the respective times such documents are filed with the SEC
or any regulatory authority and, in the case of the Registration Statement,
when it becomes effective and, with respect to the Proxy Statement, when
mailed, be false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements therein not
misleading or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the meeting of shareholders referred to in
paragraph 4(c), be false or misleading with respect to any material
A-15
<PAGE>
fact, or omit to state any material fact necessary to correct any statement in
any earlier communication with respect to the solicitation of any proxy for
such meeting. All documents which Wells Fargo and the Wells Fargo Subsidiaries
are responsible for filing with the SEC and any other regulatory authority in
connection with the Merger will comply as to form in all material respects with
the provisions of applicable law.
(q) Brokers and Finders. Neither Wells Fargo nor any Wells Fargo Subsidiary
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for Wells Fargo or any Wells Fargo Subsidiary in
connection with this Agreement and the Merger Agreement or the transactions
contemplated hereby and thereby.
(r) No Defaults. Neither Wells Fargo nor any Wells Fargo Subsidiary is in
default, nor has any event occurred which, with the passage of time or the
giving of notice, or both, would constitute a default under any material
agreement, indenture, loan agreement or other instrument to which it is a party
or by which it or any of its assets is bound or to which any of its assets is
subject, the result of which has had or could reasonably be expected to have a
material adverse effect upon Wells Fargo and its subsidiaries taken as a whole.
To the best of Wells Fargo's knowledge, all parties with whom Wells Fargo or
any Wells Fargo Subsidiary has material leases, agreements or contracts or who
owe to Wells Fargo or any Wells Fargo Subsidiary material obligations other
than with respect to those arising in the ordinary course of the banking
business of the Wells Fargo Subsidiaries are in compliance therewith in all
material respects.
(s) Environmental Liability. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition, on Wells Fargo or any Wells Fargo Subsidiary of any
liability relating to the release of hazardous substances as defined under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, CERCLA, pending or to the best of Wells Fargo's
knowledge, threatened against Wells Fargo or any Wells Fargo Subsidiary, the
result of which has had or could reasonably be expected to have a material
adverse effect upon Wells Fargo and its subsidiaries taken as a whole; to the
best of Wells Fargo's knowledge there is no reasonable basis for any such
proceeding, claim or action; and to the best of Wells Fargo's knowledge neither
Wells Fargo nor any Wells Fargo Subsidiary is subject to any agreement, order,
judgment, or decree by or with any court, governmental authority or third party
imposing any such environmental liability.
(t) Merger Co. As of the Closing Date, Merger Co. will be a corporation duly
organized, validly existing, duly qualified to do business and in good standing
under the laws of its jurisdiction of incorporation, and will have corporate
power and authority to own or lease its properties and assets and to carry on
its business. As of the Effective Date of the Merger, the execution, delivery
and performance by Merger Co. of the Merger Agreement will have been duly
authorized by Merger Co.'s Board of Directors and shareholders, and the Merger
Agreement will be a valid and binding obligation of Merger Co., enforceable
against Merger Co. in accordance with its terms.
4. Covenants of Napa. Napa covenants and agrees with Wells Fargo as follows:
(a) Except as otherwise permitted or required by this Agreement, from the
date hereof until the Effective Time of the Merger, Napa, and each Napa
Subsidiary will: maintain its corporate existence in good standing; maintain
the general character of its business and conduct its business in its ordinary
and usual manner; extend credit in accordance with existing lending policies
and provide Wells Fargo access to its loan files (including credits extended
after the date hereof), except that it shall not, without the prior written
consent of Wells Fargo (which consent requirement shall be deemed to be waived
as to any loan approval request to which Wells Fargo has made no response by
the end of the second complete business day following the receipt of the
request and accompanying information such as that ordinarily presented to the
Directors' Loan Committee by a Wells Fargo representative designated in
writing), make any new loan (except pursuant to commitments made prior to the
date of this Agreement) to any borrower if the amount of the resulting loan,
when aggregated with all other loans or extensions of credit to such person,
would be in excess of $150,000 or modify, restructure or renew
A-16
<PAGE>
any existing loan (except pursuant to commitments made prior to the date of
this Agreement) to any borrower if the amount of the resulting loan, when
aggregated with all other loans or extensions of credit to such person, would
be in excess of $250,000; maintain proper business and accounting records in
accordance with generally accepted principles; maintain its properties in good
repair and condition, ordinary wear and tear excepted; maintain in all material
respects presently existing insurance coverage; use its reasonable efforts to
preserve its business organization intact, to keep the services of its present
principal employees and to preserve its good will and the good will of its
suppliers, customers and others having business relationships with it; use its
best efforts to obtain any approvals or consents required to maintain existing
leases and other contracts in effect following the Merger; comply in all
material respects with all laws, regulations, ordinances, codes, orders,
licenses and permits applicable to the properties and operations of Napa and
each Napa Subsidiary the non-compliance with which reasonably could be expected
to have a material adverse effect on Napa and the Napa Subsidiaries taken as a
whole; and permit Wells Fargo and its representatives (including KPMG), upon
reasonable prior notice, to examine its and its subsidiaries books, records and
properties and to interview officers, employees and agents at all reasonable
times when it is open for business; provided, however, that such examination is
conducted in a manner designed to be least disruptive to Napa's operations.. No
such examination by Wells Fargo or its representatives either before or after
the date of this Agreement shall in any way affect, diminish or terminate any
of the representations, warranties or covenants of Napa herein expressed.
(b) Except as otherwise contemplated or required by this Agreement, from the
date hereof until the Effective Time of the Merger, Napa and each Napa
Subsidiary will not (without the prior written consent of Wells Fargo): amend
or otherwise change its articles of incorporation or association or by-laws;
issue or sell, except pursuant to the stock options already granted pursuant to
the stock option plans listed on Schedule 2(c) (the "Stock Options") and except
as provided in the Stock Purchase Agreement, dated as of February 5, 1987, (the
"Purchase Agreement") between Napa and W. Clarke Swanson, Jr., or authorize for
issuance or sale, or grant any options or make other agreements with respect to
the issuance or sale or conversion of, any shares of its capital stock, phantom
shares or other share-equivalents, or any other of its securities; authorize or
incur any long-term debt (other than deposit liabilities); mortgage, pledge or
subject to lien or other encumbrance any of its properties, except in the
ordinary course of business; enter into any material agreement, contract or
commitment in excess of $10,000 except banking transactions in the ordinary
course of business and in accordance with policies and procedures in effect on
the date hereof; make any investments except (i) investments made by bank
subsidiaries in the ordinary course of business for terms of up to one year and
in amounts of $100,000 or less, (ii) fed funds transactions by bank
subsidiaries in the ordinary couse of business; and (iii) investments made upon
written consent of Wells Fargo (which consent requirement shall be deemed to be
waived as to any investment approval request to which Wells Fargo has made no
response by the end of the second complete business day following the receipt
of the request by a Wells Fargo representative designated in writing); amend or
terminate any Plan except as required by law or the terms of this Agreement;
make any contributions to any Plan except as required by the terms of such Plan
in effect as of the date hereof; declare, set aside, make or pay any dividend
or other distribution with respect to its capital stock, except (A) between the
date hereof and the Effective Date of the Merger, Napa may declare and pay
dividends on Napa Common Stock, in accordance with applicable law and
regulation and consistent with past practice, out of the net earnings of Napa
between the date hereof and the Effective Date of the Merger, determined in
accordance with generally accepted accounting principles, in an amount not to
exceed a quarterly rate of $0.125 provided, however, that the shareholders of
Napa shall be entitled to a dividend on Napa Common Stock or Wells Fargo Common
Stock, but not both, in the calendar quarter in which the Closing shall occur,
and (B) any dividend declared by the Board of Directors of a Napa Subsidiary in
accordance with applicable law and regulation; redeem, purchase or otherwise
acquire, directly or indirectly, any of the capital stock of Napa; increase the
compensation of any officers, directors or executive employees, except pursuant
to existing compensation plans and practices or pursuant to arrangements
disclosed on Schedule 4(b); sell or otherwise dispose of any shares of the
capital stock of any Napa Subsidiary; or sell or otherwise dispose of any of
its assets or properties other than in the ordinary course of business.
(c) The Board of Directors of Napa will duly call, and will cause to be held
on a date mutually agreeable to Napa and Wells Fargo, but not later than
twenty-five (25) business days following the effective date of the
A-17
<PAGE>
Registration Statement referred to in paragraph 5(c) hereof, a meeting of its
shareholders and will direct that this Agreement and the Merger Agreement be
submitted to a vote at such meeting. The Board of Directors of Napa will (i)
cause proper notice of such meeting to be given to its shareholders in
compliance with the California Business Corporation Act and other applicable
law and regulation, (ii) recommend by the affirmative vote of the Board of
Directors a vote in favor of approval of this Agreement and the Merger
Agreement, and (iii) use its best efforts to solicit from its shareholders
proxies in favor thereof.
(d) Napa will furnish or cause to be furnished to Wells Fargo all the
information concerning Napa and its subsidiaries requested by Wells Fargo that
is required for inclusion in the Registration Statement referred to in
paragraph 5(c) hereof, or any statement or application made by Wells Fargo to
any governmental body in connection with the transactions contemplated by this
Agreement. Any financial statement for any fiscal year provided under this
paragraph must include the audit opinion and the consent of Ernst & Young LLP
to use such opinion in such Registration Statement.
(e) Napa will take all necessary corporate and other action and use its best
efforts to obtain all approvals of regulatory authorities, consents and other
approvals required of Napa to carry out the transactions contemplated by this
Agreement and will cooperate with Wells Fargo to obtain all such approvals and
consents required of Wells Fargo.
(f) Napa will use its best efforts to deliver to the Closing all opinions,
certificates and other documents required to be delivered by it at the Closing.
(g) Napa will hold in confidence all documents and information concerning
Wells Fargo and its subsidiaries furnished to Napa and its representatives in
connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to Napa's outside professional advisers in connection with this
Agreement, with the same undertaking from such professional advisers. If the
transactions contemplated by this Agreement shall not be consummated, such
confidence shall be maintained and such information shall not be used in
competition with Wells Fargo (except to the extent that such information can be
shown to be previously known to Napa, in the public domain, or later acquired
by Napa from other legitimate sources) and, upon request, all such documents,
any copies thereof and extracts therefrom shall immediately thereafter be
returned to Wells Fargo.
(h) Neither Napa, nor any Napa Subsidiary, nor any director, officer,
representative or agent thereof, will, directly or indirectly, solicit,
authorize the solicitation of or enter into any discussions with any
corporation, partnership, person or other entity or group (other than Wells
Fargo) concerning any offer or possible offer (i) to purchase any shares of
common stock, any option or warrant to purchase any shares of common stock, any
securities convertible into any shares of such common stock, or any other
equity security of Napa or any Napa Subsidiary, (ii) to make a tender or
exchange offer for any shares of such common stock or other equity security,
(iii) to purchase, lease or otherwise acquire the assets of Napa or any Napa
Subsidiary except in the ordinary course of business, or (iv) to merge,
consolidate or otherwise combine with Napa or any Napa Subsidiary. If any
corporation, partnership, person or other entity or group makes an offer or
inquiry to Napa or any Napa Subsidiary concerning any of the foregoing, Napa or
such Napa Subsidiary will promptly disclose such offer or inquiry, including
the terms thereof, to Wells Fargo.
(i) Napa shall consult with Wells Fargo as to the form and substance of any
proposed press release or other proposed public disclosure of matters related
to this Agreement or any of the transactions contemplated hereby.
(j) Napa and each Napa Subsidiary will take all action necessary or required
(i) to terminate or amend, if requested by Wells Fargo, all qualified pension
and welfare benefit plans and all non-qualified benefit plans and compensation
arrangements as of the Effective Date of the Merger, (ii) to submit application
to the Internal Revenue Service for a favorable determination letter for each
of the Plans which is subject to the qualification requirements of Section
401(a) of the Code prior to the Effective Date of the Merger, and (iii)
authorize and
A-18
<PAGE>
delegate the power to vote Napa Common Stock held in the Napa National Bancorp
401(k) to such Plan's independent third party fiduciary.
(k) [Intentionally omitted.]
(l) Napa shall use its best efforts to obtain and deliver prior to the
Effective Date of the Merger signed representations substantially in the form
attached hereto as Exhibit B to Wells Fargo by each executive officer, director
or shareholder of Napa who may reasonably be deemed an "affiliate" of Napa
within the meaning of such term as used in Rule 145 under the Securities Act.
(m) Following reasonable notice from Wells Fargo, Napa shall establish such
additional accruals and reserves as may be necessary (i) to conform Napa's
accounting and credit loss reserve practices and methods to those of Wells
Fargo, consistent with Wells Fargo's plans with respect to the conduct of
Napa's business following the Merger and (ii) to the extent permitted by
generally accepted accounting principles, to provide for the costs and expenses
relating to the consummation by Napa of the Merger and the other transactions
contemplated by this Agreement; provided, however, that (i) Napa shall not be
required to take such actions more than one day prior to the Closing Date, and
(ii) based upon consultation with counsel and accountants for Napa, no such
adjustment shall (x) require any filing prior to the Closing with any
governmental agency or regulatory authority, or (y) violate any law, rule or
regulation applicable to Napa; provided further that in any event no accrual or
reserve in and of itself (in contrast to the facts and circumstance that give
rise to the request for such accrual or reserve as to which the following
proviso shall not apply) made by Napa pursuant to this paragraph 4(m) shall
constitute or be deemed to be a breach, violation or failure to satisfy any
other representation, warranty or covenant contained in this Agreement, or
contribute to any determination that the Napa Financial Statements have been
prepared other that in accordance with generally accepted accounting
principles.
(n) Napa shall obtain, at its sole expense, Phase I environmental
assessments for each bank-owned facility and each non-residential OREO
property. Oral reports of such environmental assessments shall be delivered to
Wells Fargo no later than four (4) weeks and written reports shall be delivered
to Wells Fargo no later than eight (8) weeks from the date of this Agreement.
Napa shall obtain, at its sole expense, Phase II environmental assessments for
properties identified by Wells Fargo on the basis of the results of such Phase
I environmental assessments. Napa shall obtain a survey and assessment of all
potential asbestos containing material in owned or leased properties (other
than OREO property) and an oral report of such surveys and assessments shall be
delivered to Wells Fargo no later than four (4) weeks and a written report of
the results shall be delivered to Wells Fargo within eight (8) weeks of the
date of this Agreement.
(o) Napa shall obtain, at its sole expense, commitments for title insurance
and boundary surveys for each bank-owned facility which shall be delivered to
Wells Fargo no later than four (4) weeks from the date of this Agreement.
(p) Napa and Wells Fargo will work together to assess the impact of the
transactions contemplated by this Agreement on Napa's continued compliance with
the FFIEC Requirements and Napa will take such action, in consultation with
Wells Fargo, as may be necessary to amend Napa's Year 2000 project assessment
and remediation plan. Napa will continue its current preparations for
compliance with the FFIEC Requirements and will not rely on the consummation of
the transactions contemplated by this Agreement to satisfy its FFIEC
requirements. Napa will provide Wells Fargo with complete access to its Year
2000 project and remediation plan documentation and permit Wells Fargo to
review and investigate Napa's continuing Year 2000 compliance efforts and the
results thereof.
(q) Subject to the terms and conditions contained herein, Napa shall execute
and deliver such additional instruments and documents and shall take such
further actions as may be necessary or appropriate to effectuate, carry out and
comply with the terms of this Agreement and the transactions contemplated
hereby.
A-19
<PAGE>
(r) [This paragraph 4(r) has been amended and restated in its entirety
pursuant to Amendment No. 1 to the Agreement and Plan of Reorganization, dated
as of January 18, 2000, by and between Napa National Bancorp and Wells Fargo &
Company, a copy of which document appears at the beginning of this Appendix A.]
The stock option plans listed on Schedule 2(c) and the Stock Options shall have
been amended, and any necessary shareholder approval shall have been obtained,
to the extent necessary to permit the cashless exercise of such options
pursuant to paragraph 1(a). Whenever an option holder is required to pay Napa
an amount required to be withheld under applicable federal and state tax laws
in connection with the exercise of an option, Napa shall collect all applicable
taxes in cash.
5. Covenants of Wells Fargo. Wells Fargo covenants and agrees with Napa as
follows:
(a) From the date hereof until the Effective Time of the Merger, Wells Fargo
will maintain its corporate existence in good standing; conduct, and cause the
Wells Fargo Subsidiaries to conduct, their respective businesses in compliance
with all material obligations and duties imposed on them by all laws,
governmental regulations, rules and ordinances, and judicial orders, judgments
and decrees applicable to Wells Fargo or the Wells Fargo Subsidiaries, their
businesses or their properties; maintain all books and records of it and the
Wells Fargo Subsidiaries, including all financial statements, in accordance
with the accounting principles and practices consistent with those used for the
Wells Fargo Financial Statements, except for changes in such principles and
practices required under generally accepted accounting principles.
(b) Wells Fargo will furnish to Napa all the information concerning Wells
Fargo required for inclusion in a proxy statement or statements to be sent to
the shareholders of Napa, or in any statement or application made by Napa to
any governmental body in connection with the transactions contemplated by this
Agreement.
(c) As promptly as practicable after the execution of this Agreement, but on
a date mutually agreeable to Wells Fargo and Napa, Wells Fargo will file with
the SEC a registration statement on Form S-4 (the "Registration Statement")
under the Securities Act and any other applicable documents, relating to the
shares of Wells Fargo Common Stock to be delivered to the shareholders of Napa
pursuant to the Merger Agreement, and will use its best efforts to cause the
Registration Statement to become effective. At the time the Registration
Statement becomes effective, the Registration Statement will comply in all
material respects with the provisions of the Securities Act and the published
rules and regulations thereunder, and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not false or misleading, and at the
time of mailing thereof to the Napa shareholders, at the time of the Napa
shareholders' meeting referred to in paragraph 4(c) hereof and at the Effective
Time of the Merger the prospectus included as part of the Registration
Statement, as amended or supplemented by any amendment or supplement filed by
Wells Fargo (hereinafter the "Prospectus"), will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not false or misleading; provided, however, that
none of the provisions of this subparagraph shall apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished by Napa or any Napa
Subsidiary for use in the Registration Statement or the Prospectus.
(d) Wells Fargo will file all documents required to be filed to list the
Wells Fargo Common Stock to be issued pursuant to the Merger Agreement on the
New York Stock Exchange and the Chicago Stock Exchange and use its best efforts
to effect said listings.
(e) The shares of Wells Fargo Common Stock to be issued by Wells Fargo to
the shareholders of Napa pursuant to this Agreement and the Merger Agreement
will, upon such issuance and delivery to said shareholders pursuant to the
Merger Agreement, be duly authorized, validly issued, fully paid and
nonassessable. The shares of Wells Fargo Common Stock to be delivered to the
shareholders of Napa pursuant to the Merger Agreement are and will be free of
any preemptive rights of the stockholders of Wells Fargo.
(f) Wells Fargo will file all documents required to obtain, prior to the
Effective Time of the Merger, all necessary Blue Sky permits and approvals, if
any, required to carry out the transactions contemplated by this
A-20
<PAGE>
Agreement, will pay all expenses incident thereto and will use its best efforts
to obtain such permits and approvals.
(g) Wells Fargo will take all necessary corporate and other action and file
all documents required to obtain and will use its best efforts to obtain all
approvals of regulatory authorities, consents and approvals required of it to
carry out the transactions contemplated by this Agreement and will cooperate
with Napa to obtain all such approvals and consents required by Napa and will
file all necessary applications with regulatory authorities reasonably promptly
after the date hereof.
(h) Wells Fargo will hold in confidence all documents and information
concerning Napa and Napa's Subsidiaries furnished to it and its representatives
in connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to its outside professional advisers in connection with this
Agreement, with the same undertaking from such professional advisers. If the
transactions contemplated by this Agreement shall not be consummated, such
confidence shall be maintained and such information shall not be used in
competition with Napa (except to the extent that such information can be shown
to be previously known to Wells Fargo, in the public domain, or later acquired
by Wells Fargo from other legitimate sources) and, upon request, all such
documents, copies thereof or extracts therefrom shall immediately thereafter be
returned to Napa.
(i) Wells Fargo will file any documents or agreements required to be filed
in connection with the Merger under the California Business Corporation Act.
(j) Wells Fargo will use its best efforts to deliver to the Closing all
opinions, certificates and other documents required to be delivered by it at
the Closing.
(k) Wells Fargo shall consult with Napa as to the form and substance of any
proposed press release or other proposed public disclosure of matters related
to this Agreement or any of the transactions contemplated hereby.
(l) Wells Fargo shall furnish Napa with copies, prior to filing, of the non-
confidential portions of applications referred to in paragraph 7(e) and shall
give Napa notice of receipt of the regulatory approvals referred to therein.
(m) Subject to the terms and conditions contained herein, Wells Fargo shall
execute and deliver such additional instruments and documents and shall take
such further actions as may be necessary or appropriate to effectuate, carry
out and comply with the terms of this Agreement and the transactions
contemplated hereby.
(n) Wells Fargo shall use its best efforts to cause the Board of Directors
of Merger Co. to authorize and approve the Merger Agreement and the
transactions contemplated thereby.
(o) With respect to the indemnification of directors and officers and with
respect to directors' and officers' liability insurance, Wells Fargo agrees as
follows:
(i) Wells Fargo shall ensure that all rights to indemnification and all
limitations of liability existing in favor of any person who is now, or has
been at any time prior to the date hereof, or who becomes prior to the
Effective Time of the Merger, a director, officer or employee of Napa or
any Napa Subsidiary, (an "Indemnified Party" and, collectively, the
"Indemnified Parties") in Napa's Certificate of Incorporation or By-laws or
similar governing documents of any Napa Subsidiary, as applicable in the
particular case and as in effect on the date hereof, shall, with respect to
claims arising from (A) facts or events that occurred before the Effective
Time of the Merger, or (B) this Agreement or any of the transactions
contemplated by this Agreement, whether in any case asserted or arising
before or after the Effective Time of the Merger, survive the Merger and
shall continue in full force and effect. Nothing contained in this
paragraph 5(o)(i) shall be deemed to preclude the liquidation,
consolidation or merger of Napa or any Napa Subsidiary, in
A-21
<PAGE>
which case all of such rights to indemnification and limitations on
liability shall be deemed to survive and continue as contractual rights
notwithstanding any such liquidation or consolidation or merger; provided,
however, that in the event of liquidation or sale of substantially all of
the assets of Napa, Wells Fargo shall guarantee, to the extent of the net
asset value of Napa or any Napa Subsidiary as of the Effective Date of the
Merger, the indemnification obligations of Napa or any Napa Subsidiary to
the extent of indemnification obligations of Napa and the Napa Subsidiaries
described above. Notwithstanding anything to the contrary contained in this
paragraph 5(o)(i), nothing contained herein shall require Wells Fargo to
indemnify any person who was a director or officer of Napa or any Napa
Subsidiary to a greater extent than Napa or any Napa Subsidiary is, as of
the date of this Agreement, required to indemnify any such person;
(ii) any Indemnified Party wishing to claim indemnification under
paragraph 5(o)(i), upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify Wells Fargo thereof, but
the failure to so notify shall not relieve Wells Fargo of any liability it
may have to such Indemnified Party, except to the extent that Wells Fargo
is prejudiced thereby. In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time of the Merger), (A) Wells Fargo shall have the right to assume the
defense thereof and Wells Fargo shall not be liable to any Indemnified
Party for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Party in connection with the
defense thereof, except that if Wells Fargo elects not to assume such
defense or counsel for the Indemnified Party advises that there are issues
which raise conflicts of interest between Wells Fargo and the Indemnified
Party, the Indemnified Party may retain counsel satisfactory to them, and
Wells Fargo shall pay the reasonable fees and expenses of such counsel for
the Indemnified Party promptly as statements therefor are received;
provided, however, that Wells Fargo shall be obligated pursuant to this
subparagraph (ii) to pay for only one firm of counsel for all Indemnified
Parties in any jurisdiction unless the use of one counsel for such
Indemnified Parties would present such counsel with a conflict of interest
and (B) such Indemnified Party shall cooperate in the defense of any such
matter;
(iii) for a period of four years after the Effective Time of the Merger,
Wells Fargo shall use its best efforts to cause to be maintained in effect
the current policies of directors' and officers' liability insurance
maintained by Napa (provided that Wells Fargo may substitute therefor
policies of at least the same coverage and amount containing terms and
conditions which are substantially no less advantageous) with respect to
claims arising from facts or events which occurred before the Effective
Time of the Merger; provided, however, that Wells Fargo shall not be
required to maintain coverage for employees (other than directors and
officers) which may currently be included in the directors' and officers'
liability policies maintained by Napa; and provided, however, that in no
event shall Wells Fargo be obligated to expend, in order to maintain or
provide insurance coverage pursuant to this paragraph 5(o)(iii), any amount
per annum in excess of 125% of the amount of the annual premiums paid as of
the date hereof by Napa for such insurance (the "Maximum Amount") and
provided further that, prior to the Effective Time of the Merger, Napa
shall notify the appropriate directors' and officers' liability insurers of
the Merger and of all pending or threatened claims, actions, suits,
proceedings or investigations asserted or claimed against any Indemnified
Party, or circumstances likely to give rise thereto, in accordance with
terms and conditions of the applicable policies. If the amount of the
annual premiums necessary to maintain or procure such insurance coverage
exceeds the Maximum Amount, Wells Fargo shall use reasonable efforts to
maintain the most advantageous policies of directors' and officers'
insurance obtainable for an annual premium equal to the Maximum Amount;
(iv) if Wells Fargo or any of its successors or assigns (A) shall
consolidate with or merge into any other corporation or entity and shall
not be the continuing or surviving corporation or entity of such
consolidation or merger or (B) shall transfer all or substantially all of
its properties and assets to any individual, corporation or other entity,
then and in each such case, proper provision shall be made so that the
successors and assigns of Wells Fargo shall assume the obligations set
forth in this paragraph 5(o);
A-22
<PAGE>
(v) the provisions of this paragraph 5(o) are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives; and
(vi) notwithstanding anything to the contrary in this paragraph 5(o),
Bankers Professional Liability and Lending Act Liability coverage shall not
be continued or provided.
(p) For a period not exceeding fifteen days prior to the meeting of the
shareholders required by paragraph 4(c) of this Agreement, subject to
applicable securities laws and regulations and any obligations of
confidentiality to which Wells Fargo may be subject, Wells Fargo will permit
Napa and its representatives to examine its books, records and properties and
interview officers, employees and agents of Wells Fargo at all reasonable times
when it is open for business; provided, however, that such examination is
conducted in a manner designed to be least disruptive to Wells Fargo's
operations. No such examination by Napa or its representatives shall in any way
affect, diminish or terminate any of the representations, warranties or
covenants of Wells Fargo herein expressed.
6. Conditions Precedent to Obligation of Napa. The obligation of Napa to
effect the Merger shall be subject to the satisfaction at or before the Time of
Filing of the following further conditions, which may be waived in writing by
Napa:
(a) Except as they may be affected by transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or
transactions after the date of this Agreement made in the ordinary course of
business and not expressly prohibited by this Agreement, the representations
and warranties contained in paragraph 3 hereof shall be true and correct in all
respects material to Wells Fargo and its subsidiaries taken as a whole as if
made at the Time of Filing.
(b) Wells Fargo shall have, or shall have caused to be, performed and
observed in all material respects all covenants, agreements and conditions
hereof to be performed or observed by it and Merger Co. at or before the Time
of Filing.
(c) Napa shall have received a favorable certificate, dated as of the
Effective Date of the Merger, signed by the Chairman, the President or any
Executive Vice President or Senior Vice President and by the Secretary or
Assistant Secretary of Wells Fargo, as to the matters set forth in
subparagraphs (a) and (b) of this paragraph 6.
(d) This Agreement and the Merger Agreement shall have been approved by the
affirmative vote of the holders of the percentage of the outstanding shares of
Napa required for approval of a plan of merger in accordance with the
provisions of Napa's Articles of Incorporation and the California Business
Corporation Act.
(e) Wells Fargo shall have received approval by the Federal Reserve Board
and by such other governmental agencies as may be required by law of the
transactions contemplated by this Agreement and the Merger Agreement and all
waiting and appeal periods prescribed by applicable law or regulation shall
have expired.
(f) No court or governmental authority of competent jurisdiction shall have
issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(g) The shares of Wells Fargo Common Stock to be delivered to the
stockholders of Napa pursuant to this Agreement and the Merger Agreement shall
have been authorized for listing on the New York Stock Exchange and the Chicago
Stock Exchange.
(h) Napa shall have received an opinion, dated the Closing Date, of counsel
to Napa, substantially to the effect that, for federal income tax purposes: (i)
the Merger will constitute a reorganization within the meaning of Section 368
of the Code and (ii) no gain or loss will be recognized by the holders of Napa
Common Stock
A-23
<PAGE>
upon receipt of Wells Fargo Common Stock except for cash received in lieu of
fractional shares. Napa shall have received the opinion, dated the Closing
Date, of Ernst & Young LLP, substantially to the effect that (i) the basis of
the Wells Fargo Common Stock received by the shareholders of Napa will be the
same as the basis of Napa Common Stock exchanged therefor and (ii) the holding
period of the shares of Wells Fargo Common Stock received by the shareholders
of Napa will include the holding period of the Napa Common Stock, provided such
shares of Napa Common Stock were held as a capital asset as of the Effective
Time of the Merger.
(i) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and
be continuing, or have been threatened and be unresolved. Wells Fargo shall
have received all state securities law or blue sky authorizations necessary to
carry out the transactions contemplated by this Agreement.
(j) Since September 30, 1999, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial conditions, results of operations,
business or prospects of Wells Fargo and the Wells Fargo Subsidiaries taken as
a whole (other than changes in banking laws or regulations, or interpretations
thereof, that affect the banking industry generally or changes in the general
level of interest rates).
7. Conditions Precedent to Obligation of Wells Fargo. The obligation of
Wells Fargo to effect the Merger shall be subject to the satisfaction at or
before the Time of Filing of the following conditions, which may be waived in
writing by Wells Fargo:
(a) Except as they may be affected by transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or
transactions or events occurring after the date of this Agreement made in the
ordinary course of business and not expressly prohibited by this Agreement, the
representations and warranties contained in paragraph 2 hereof shall be true
and correct in all respects material to Napa and the Napa Subsidiaries taken as
a whole as if made at the Time of Filing.
(b) Napa shall have, or shall have caused to be, performed and observed in
all material respects all covenants, agreements and conditions hereof to be
performed or observed by it at or before the Time of Filing.
(c) This Agreement and the Merger Agreement shall have been approved by the
affirmative vote of the holders of the percentage of the outstanding shares of
Napa required for approval of a plan of merger in accordance with the
provisions of Napa's Articles of Incorporation and the California Business
Corporation Act.
(d) Wells Fargo shall have received a favorable certificate dated as of the
Effective Date of the Merger signed by the Chairman or President and by the
Secretary or Assistant Secretary of Napa, as to the matters set forth in
subparagraphs (a) through (c) of this paragraph 7.
(e) Wells Fargo shall have received approval by all governmental agencies as
may be required by law of the transactions contemplated by this Agreement and
the Merger Agreement and all waiting and appeal periods prescribed by
applicable law or regulation shall have expired. No approvals, licenses or
consents received from any regulatory authority in connection with the
transactions contemplated by this Agreement shall contain any condition or
requirement relating to Napa or any Napa Subsidiary that, in the good faith
judgment of Wells Fargo, is unreasonably burdensome to Wells Fargo.
(f) Napa and each Napa Subsidiary shall have obtained any and all material
consents or waivers from other parties to loan agreements, leases or other
contracts material to Napa's or such subsidiary's business
A-24
<PAGE>
required for the consummation of the Merger, and Napa and each Napa Subsidiary
shall have obtained any and all material permits, authorizations, consents,
waivers and approvals required for the lawful consummation by it of the Merger.
(g) No court or governmental authority of competent jurisdiction shall have
issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(h) [Intentionally omitted.]
(i) At any time since the date hereof the total number of shares of Napa
Common Stock outstanding and subject to issuance upon exercise (assuming for
this purpose that phantom shares and other share-equivalents constitute Napa
Common Stock) of all warrants, options, conversion rights, phantom shares or
other share-equivalents, other than any option held by Wells Fargo, shall not
have exceeded 943,400.
(j) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and
be continuing, or have been threatened or be unresolved. Wells Fargo shall have
received all state securities law or blue sky authorizations necessary to carry
out the transactions contemplated by this Agreement.
(k) Wells Fargo shall have received from the Chief Executive Officer, Chief
Operating Officer and Chief Financial Officer of Napa a letter, dated as of the
effective date of the Registration Statement and updated through the date of
Closing, in form and substance satisfactory to Wells Fargo, to the effect that:
(i) the interim quarterly financial statements of Napa included or
incorporated by reference in the Registration Statement are prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the audited financial statements of Napa;
(ii) the amounts reported in the interim quarterly financial statements
of Napa agree with the general ledger of Napa;
(iii) the annual and quarterly financial statements of Napa and the Napa
Subsidiaries included in, or incorporated by reference in, the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the published rules and
regulations thereunder;
(iv) other than as a result of changes in banking laws or regulations,
or interpretations thereof that affect the banking industry generally, or
changes in the general level of interest rates, from the date of the most
recent unaudited consolidated financial statements of Napa and the Napa
Subsidiaries as may be included in the Registration Statement to a date
five (5) days prior to the effective date of the Registration Statement or
five (5) days prior to the Closing, there are no increases in long-term
debt, changes in the capital stock or decreases in stockholders' equity of
Napa and the Napa Subsidiaries, except in each case for changes, increases
or decreases which the Registration Statement discloses have occurred or
may occur or which are described in such letters. For the same period,
there have been no decreases in consolidated net interest income,
consolidated net interest income after provision for credit losses,
consolidated income before income taxes, consolidated net income and net
income per share amounts of Napa and the Napa Subsidiaries, or in income
before equity in undistributed income of subsidiaries, in each case as
compared with the comparable period of the preceding year, except in each
case for changes, increases or decreases which the Registration Statement
discloses have occurred or may occur or which are described in such
letters;
(v) they have reviewed certain amounts, percentages, numbers of shares
and financial information which are derived from the general accounting
records of Napa and the Napa Subsidiaries, which appear in the Registration
Statement under the certain captions to be specified by Wells Fargo, and
have compared certain of such amounts, percentages, numbers and financial
information with the accounting records of Napa and the Napa Subsidiaries
and have found them to be in agreement with financial records
A-25
<PAGE>
and analyses prepared by Napa included in the annual and quarterly
financial statements, except as disclosed in such letters.
(l) Napa and the Napa Subsidiaries considered as a whole shall not have
sustained since September 30, 1999 any material loss or interference with their
business from any civil disturbance or any fire, explosion, flood or other
calamity, whether or not covered by insurance.
(m) There shall be no reasonable basis for any proceeding, claim or action
of any nature seeking to impose, or that could result in the imposition on Napa
or any Napa Subsidiary of, any liability relating to the release of hazardous
substances as defined under any local, state or federal environmental statute,
regulation or ordinance including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 as amended,
which has had or could reasonably be expected to have a material adverse effect
upon Napa and its subsidiaries taken as a whole.
(n) Since September 30, 1999, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial condition, results of operations,
business or prospects of Napa and the Napa Subsidiaries taken as a whole (other
than changes in banking laws or regulations, or interpretations thereof, that
affect the banking industry generally or changes in the general level of
interest rates). The establishment of additional accruals or reserves in
accordance with paragraph 4(m) hereof shall not be deemed to have a material
adverse effect for purposes of this paragraph 7(n).
(o) Napa shall be in full compliance with current FFIEC Requirements. There
shall be no feature of Napa's data processing, operating or platform systems
that would prevent those systems from continuing to run independently after
December 31, 1999 until such time as a subsequent conversion to Wells Fargo
systems can be completed. Napa's computer hardware and software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission, or other utilization of data or in the operation of mechanical
or electrical systems of any kind will function at least as effectively in all
material respects after December 31, 1999 as in the case of dates or time
periods occurring prior to January 1, 2000.
(p) Napa shall have delivered the resignations of each member of its Board
of Directors as of the Effective Time, and such resignations shall not have
been withdrawn.
(q) The Employment and Non-competition Agreements entered into as of the
date hereof among Napa, Wells Fargo and the employees listed on Schedule 7(q)
shall not have been amended and shall be in full force and effect.
(r) Napa shall have delivered the resignations of each member of its Board
of Directors as of the Effective Time, and such resignations shall not have
been withdrawn.
8. Employee Benefit Plans. Each person who is an employee of Napa or any
Napa Subsidiary as of the Effective Date of the Merger ("Napa Employees") shall
be eligible for participation in the employee welfare and retirement plans of
Wells Fargo, as in effect from time to time, as follows:
(a) Employee Welfare Benefit Plans. Each Napa Employee shall be eligible for
participation in the employee welfare benefit plans of Wells Fargo listed below
subject to any eligibility requirements applicable to such plans (and not
subject to pre-existing condition exclusions, except with respect to the Wells
Fargo Long Term Care Plan) and shall enter each plan no later than the first
day of the calendar quarter which begins at least thirty-two (32) days after
the Effective Date of the Merger ("Benefits Conversion Date") (provided that
A-26
<PAGE>
the transition from Napa's Plans to the Wells Fargo Plans will be facilitated
without gaps in coverage to the participants and without duplication of costs
to Wells Fargo):
Medical Plan
Dental Plan
Vision Plan
Short Term Disability Plan
Long Term Disability Plan
Long Term Care Plan
Flexible Benefits Plan
Basic Group Life Insurance Plan
Group Universal Life Insurance Plan
Dependent Group Life Insurance Plan
Business Travel Accident Insurance Plan
Accidental Death and Dismemberment Plan
Salary Continuation Pay Plan
Paid Time Off Program
For purposes of the foregoing, "Medical Plan" means any medical plan
sponsored by Wells Fargo that is available to similarly situated Wells Fargo
employees. Napa Employees shall receive credit for years of service to Napa,
the Napa Subsidiaries and any predecessors of Napa or the Napa Subsidiaries (to
the extent credited under the vacation and short-term disability programs of
Napa) for the purpose of determining benefits under the Wells Fargo Paid Time
Off Program, Salary Continuation Pay Plan, and Short Term Disability Plan. The
Napa Employees listed on Schedule 7(q) are ineligible for participation in the
Wells Fargo Salary Continuation Pay Plan until immediately after the second
anniversary of the "Effective Date" (as defined in the Employment and Non-
competition Agreements referred to in paragraph 7(q)). Napa employees shall be
eligible for participation in the Wells Fargo Salary Continuation Pay Plan
subject to any eligibility requirements applicable to such plans immediately
following the Effective Time of the Merger.
(b) Employee Retirement Benefit Plans. Each Napa Employee shall be eligible
to participate in the Wells Fargo 401(k) Plan (the "401(k) Plan"), subject to
any eligibility requirements applicable to the 401(k) Plan (with full credit
for years of past service to Napa and the Napa Subsidiaries for the purpose of
satisfying any eligibility and vesting periods applicable to the 401(k) Plan)
and shall enter the 401(k) Plan no later than the Benefits Conversion Date.
Each Napa Employee shall be eligible to participate in the Wells Fargo Cash
Balance Plan (the "Cash Balance Plan") subject to any eligibility requirements
applicable to the Cash Balance Plan. Wells Fargo shall not recognize a Napa
Employee's past service with Napa or any Napa Subsidiary for any purpose under
the Cash Balance Plan. Therefore, each Napa Employee shall be eligible for
participation, as a new employee, in the Wells Fargo Cash Balance Plan pursuant
to the terms thereof.
Each Napa Employee shall be eligible for access to Wells Fargo's retiree
medical benefit, subject to any eligibility requirements applicable to such
benefit. Wells Fargo shall recognize years of past service with Napa and the
Napa Subsidiaries for the purpose of eligibility to access Wells Fargo's
retiree medical benefit.
Wells Fargo covenants and agrees that, commencing on the Effective Date, W.
Clarke Swanson, Jr. ("Swanson") shall be eligible for access to the Wells Fargo
Retiree Medical Plan for himself and his eligible dependents. The benefits and
levels of coverage of such medical insurance shall be the same as the benefits
offered to other similarly situated retirees. Wells Fargo may require Swanson
to pay the premium for such medical insurance; provided, however, that in no
event shall the premium charged to Swanson for medical insurance in any given
premium period be greater than the premium for medical insurance being paid by
other similarly situated Wells Fargo retirees during the same premium period.
A-27
<PAGE>
9. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Time of
Filing:
(i) by mutual written consent of the parties hereto;
(ii) by either of the parties hereto upon written notice to the other
party if the Merger shall not have been consummated by June 30, 2000 unless
such failure of consummation shall be due to the failure of the party
seeking to terminate to perform or observe in all material respects the
covenants and agreements hereof to be performed or observed by such party;
or
(iii) by Napa or Wells Fargo upon written notice to the other party if
any court or governmental authority of competent jurisdiction shall have
issued a final order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(bc) Termination of this Agreement under this paragraph 9 shall not release,
or be construed as so releasing, either party hereto from any liability or
damage to the other party hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or
willful and material failure in performance of any of its covenants,
agreements, duties or obligations arising hereunder, and the obligations under
paragraphs 4(g), 5(h) and 10 shall survive such termination.
10. Expenses. All expenses in connection with this Agreement and the
transactions contemplated hereby, including without limitation legal and
accounting fees, incurred by Napa and Napa Subsidiaries shall be borne by Napa,
and all such expenses incurred by Wells Fargo shall be borne by Wells Fargo.
11. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by either party hereto without the prior
written consent of the other party hereto.
12. Third Party Beneficiaries. Each party hereto intends that this Agreement
shall not benefit or create any right or cause of action in or on behalf of any
person other than the parties hereto.
13. Notices. Any notice or other communication provided for herein or given
hereunder to a party hereto shall be in writing and shall be delivered in
person or shall be mailed by first class registered or certified mail, postage
prepaid, addressed as follows:
If to Wells Fargo:
Wells Fargo & Company
Sixth and Marquette
Minneapolis, Minnesota 55479
MAC N9305-173
Attention: Secretary
If to Napa:
Napa National Bancorp
901 Main Street
Napa, California 94559
Attn: Brian Kelly
and to:
Napa National Bancorp
901 Main Street
Napa, California 94559
Attn: W. Clarke Swanson, Jr.
A-28
<PAGE>
With a copy to:
Brobeck, Phleger & Harrison LLP
One Market Street
San Francisco, CA 94105
Attention: J. Michael Shepherd
or to such other address with respect to a party as such party shall notify the
other in writing as above provided.
14. Complete Agreement. This Agreement and the Merger Agreement contain the
complete agreement between the parties hereto with respect to the Merger and
other transactions contemplated hereby and supersede all prior agreements and
understandings between the parties hereto with respect thereto.
15. Captions. The captions contained in this Agreement are for convenience
of reference only and do not form a part of this Agreement.
16. Waiver and Other Action. Either party hereto may, by a signed writing,
give any consent, take any action pursuant to paragraph 9 hereof or otherwise,
or waive any inaccuracies in the representations and warranties by the other
party and compliance by the other party with any of the covenants and
conditions herein.
17. Amendment. At any time before the Time of Filing, the parties hereto, by
action taken by their respective Boards of Directors or pursuant to authority
delegated by their respective Boards of Directors, may amend this Agreement;
provided, however, that no amendment after approval by the shareholders of Napa
shall be made which changes in a manner adverse to such shareholders the
consideration to be provided to said shareholders pursuant to this Agreement
and the Merger Agreement.
18. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware.
19. Non-Survival of Representations and Warranties. No representation or
warranty contained in the Agreement or the Merger Agreement shall survive the
Merger or except as set forth in paragraph 9(b), the termination of this
Agreement. Paragraph 10 shall survive the Merger.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one instrument.
[The remainder of this page intentionally left blank]
A-29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
WELLS FARGO & COMPANY NAPA NATIONAL BANCORP
/s/ John E. Ganoe /s/ W. Clarke Swanson
By: _____________________________ By: _____________________________
Executive Vice President Chairman and CEO
Its: ____________________________ Its: ____________________________
A-30
<PAGE>
EXHIBIT A
to Agreement and Plan
of Reorganization
AGREEMENT AND PLAN OF MERGER
between
NAPA NATIONAL BANCORP
a California corporation
(the surviving corporation)
and
a California corporation
(the merged corporation)
This Agreement and Plan of Merger dated as of ,
between Napa National Bancorp, a California corporation (hereinafter sometimes
called "Napa" and sometimes called the "surviving corporation") and
, a California corporation ("Merger Co.")(said corporations being
hereinafter sometimes referred to as the "constituent corporations"),
WHEREAS, Merger Co., a wholly-owned subsidiary of Wells Fargo & Company, was
incorporated by Articles of Incorporation filed in the office of the Secretary
of State of the State of California on , and said corporation
is now a corporation subject to and governed by the provisions of the
California General Corporation Law. Merger Co. has authorized capital stock of
shares of common stock having a par value of $ per share
("Merger Co. Common Stock"), of which shares were outstanding as of
the date hereof; and
WHEREAS, Napa was incorporated by Articles of Incorporation filed in the
office of the Secretary of State of the State of California on
, and said corporation is now a corporation subject to and
governed by the provisions of the California General Corporation Law. Napa has
authorized capital stock of 20,000,000 shares of common stock, no par value per
share, and 1,000,000 shares of preferred stock, no par value per share, of
which shares of common stock and no shares of preferred stock were
outstanding and shares of common stock and no shares of preferred stock
were held in the treasury as of the date hereof (the "Napa Common Stock"); and
WHEREAS, Wells Fargo & Company and Napa are parties to an Agreement and Plan
of Reorganization, dated as of November 18, 1999 (the "Reorganization
Agreement"), setting forth certain representations, warranties and covenants in
connection with the merger provided for herein; and
WHEREAS, the directors, or a majority of them, of each of the constituent
corporations respectively deem it advisable for the welfare and advantage of
said corporations and for the best interests of the respective shareholders of
said corporations that said corporations merge and that Merger Co. be merged
with and into Napa, with Napa continuing as the surviving corporation, on the
terms and conditions hereinafter set forth in accordance with the provisions of
the California General Corporation Law, which statute permits such merger; and
WHEREAS, it is the intent of the parties to effect a merger which qualifies
as a tax-free reorganization pursuant to Sections 368 of the Internal Revenue
Code of 1986, as amended;
NOW, THEREFORE, the parties hereto, subject to the approval of the
shareholders of Napa and Merger Co., in consideration of the premises and of
the mutual covenants and agreements contained herein and of the benefits to
accrue to the parties hereto, have agreed and do hereby agree that Merger Co.
shall be merged with and into Napa pursuant to the laws of the State of
California, and do hereby agree upon, prescribe and set forth the terms and
conditions of the merger of Merger Co. with and into Napa, the mode of carrying
said merger
A-31
<PAGE>
Stock for shares of common stock, par value $1-2/3 per share, of Wells Fargo
("Wells Fargo Common Stock"), and such other provisions with respect to said
merger as are deemed necessary or desirable, as follows:
FIRST: At the time of merger, Wells MFC Merger Co. shall be merged with and
into MFC, one of the constituent corporations, which shall be the surviving
corporation, and the separate existence of Wells MFC Merger Co. shall cease and
the name of the surviving corporation shall remain "Michigan Financial
Corporation."
SECOND: The Articles of Incorporation of MFC at the time of merger shall be
the Articles of Incorporation of the surviving corporation until amended
according to law.
THIRD: The Bylaws of MFC at the time of merger shall be and remain the
Bylaws of the surviving corporation until amended according to the provisions
of the Articles of Incorporation of the surviving corporation or of said
Bylaws.
FOURTH: At the time of merger, the following-named persons shall become the
directors of the surviving corporation and shall hold office from the time of
merger until their respective successors are elected and qualify:
[To be provided by Wells Fargo]
FIFTH: At the time of merger, the following named persons shall become the
officers of the surviving corporation and shall hold office from the time of
merger until their respective successors are elected or appointed and qualify:
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
</TABLE>
[To be provided by Wells Fargo]
SIXTH: The manner and basis of converting the shares of MFC Common Stock
shall be as follows:
1. [To conform to Reorganization Agreement.]
2. As soon as practicable after the merger becomes effective, each
holder of a certificate which, prior to the effective time of the merger,
represented shares of MFC Common Stock outstanding immediately prior to the
time of merger shall be entitled, upon surrender of such certificate
representing a share of MFC Common Stock for cancellation to the surviving
corporation or to Norwest Bank Minnesota, National Association, as the
designated agent of the surviving corporation (the "Agent"), to receive a
new certificate representing the number of whole shares of Wells Fargo
Common Stock to which such holder shall be entitled on the basis set forth
in paragraph 1 above. Until so surrendered each certificate which,
immediately prior to the time of merger, represented shares of MFC Common
Stock shall not be transferable on the books of the surviving corporation
but shall be deemed to evidence only the right to receive (except for the
payment of dividends as provided below) the number of whole shares of Wells
Fargo Common Stock issuable on the basis above set forth; provided,
however, until the holder of such certificate for MFC Common Stock shall
have surrendered the same as above set forth, no dividend payable to
holders of record of Wells Fargo Common Stock as of any date subsequent to
the effective date of merger shall be paid to such holder with respect to
the shares of Wells Fargo Common Stock, if any, issuable in connection with
the merger, but, upon surrender and exchange thereof as herein provided,
there shall be paid by the surviving corporation or the Agent to the record
holder of such certificate representing Wells Fargo Common Stock issued in
exchange therefor an amount with respect to such shares of Wells Fargo
Common Stock equal to all dividends that shall have been paid or become
payable to holders of record of Wells Fargo Common Stock between the
effective date of merger and the date of such exchange.
3. If, between the date hereof and the time of merger, shares of Wells
Fargo Common Stock shall be changed into a different number of shares or a
different class of shares by reason of any reclassification,
A-32
<PAGE>
therefor an amount with respect to such shares of Wells Fargo Common Stock
equal to all dividends that shall have been paid or become payable to
holders of record of Wells Fargo Common Stock between the effective date of
merger and the date of such exchange.
3. If, between the date of the Reorganization Agreement and the time of
merger, shares of Wells Fargo Common Stock shall be changed into a
different number of shares or a different class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of
shares or readjustment, or if a stock dividend thereon shall be declared
with a record date within such period (a "Common Stock Adjustment"), then
the number of shares of Wells Fargo Common Stock, if any, issuable pursuant
to paragraph 1 above, will be appropriately and proportionately adjusted so
that the number of such shares of Wells Fargo Common Stock issuable in
connection with the Merger will equal the number of shares of Wells Fargo
Common Stock which the holders of shares of Napa Common Stock would have
received pursuant to such Common Stock Adjustment had the record date
therefor been immediately following the time of merger.
4. No fractional shares of Wells Fargo Common Stock and no certificates
or scrip certificates therefor shall be issued to represent any such
fractional interest, and any holder of a fractional interest shall be paid
an amount of cash equal to the product obtained by multiplying the
fractional share interest to which such holder is entitled by the average
of the closing prices of a share of Wells Fargo Common Stock as reported by
the consolidated tape of the New York Stock Exchange for each of the five
(5) trading days ending on the trading day immediately preceding the
meeting of the shareholders of Napa held to vote on the merger.
5. Each share of Merger Co. Common Stock issued and outstanding at the
time of merger shall be converted into and exchanged for one share of the
surviving corporation after the time of merger.
SEVENTH: The merger provided for by this Agreement shall be effective as
follows:
1. The effective date of merger shall be the date on which Articles of
Merger (as described in subparagraph 1(b) of this Article Seventh) shall be
delivered to and filed by the Secretary of State of the State of
California; provided, however, that all of the following actions shall have
been taken in the following order:
a. This Agreement shall be approved and adopted by Merger Co. and
Napa in accordance with the California General Corporation Law; and
b. Articles of Merger (with this Agreement attached as a part
thereof) with respect to the merger, setting forth the information
required by the California General Corporation Law, shall be executed by
the President or a Vice President of Merger Co. and by the President or
a Vice President of Napa and shall be filed in the office of the
Secretary of State of the State of California in accordance with the
California General Corporation Law.
2. The merger shall become effective as of 11:59 p.m. Napa, California
time (the "time of merger") on the effective date of merger.
EIGHTH: At the time of merger:
1. The separate existence of Merger Co. shall cease, and the corporate
existence and identity of Napa shall continue as the surviving corporation.
2. The merger shall have the other effects prescribed by Section 1107 of
the California General Corporation Law.
NINTH: The following provisions shall apply with respect to the merger
provided for by this Agreement:
1. The registered office of the surviving corporation in the State of
California shall be , and the name of the registered agent
of Napa at such address is Corporation Service Company.
A-33
<PAGE>
2. If at any time the surviving corporation shall consider or be advised
that any further assignment or assurance in law or other action is
necessary or desirable to vest, perfect or confirm in the surviving
corporation the title to any property or rights of Merger Co. acquired or
to be acquired as a result of the merger provided for herein, the proper
officers and directors of Napa and Merger Co. may execute and deliver such
deeds, assignments and assurances in law and take such other action as may
be necessary or proper to vest, perfect or confirm title to such property
or right in the surviving corporation and otherwise carry out the purposes
of this Agreement.
3. For the convenience of the parties and to facilitate the filing of
this Agreement, any number of counterparts hereof may be executed and each
such counterpart shall be deemed to be an original instrument.
4. This Agreement and the legal relations between the parties hereto
shall be governed by and construed in accordance with the laws of the State
of California without regard to the conflicts of laws provisions thereof.
5. This Agreement cannot be altered or amended except pursuant to an
instrument in writing signed by both of the parties hereto.
6. At any time prior to the filing of Articles of Merger with the
Secretary of State of California, subject to the provisions of the
Reorganization Agreement, this Agreement may be terminated upon approval by
the Boards of Directors of either of the constituent corporations
notwithstanding the approval of the shareholders of either constituent
corporation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Merger to be signed in their respective corporate names by the undersigned
officers pursuant to authority duly given by their respective Boards of
Directors, all as of the day and year first above written.
NAPA NATIONAL BANCORP
By: _____________________________
Name:
Title:
[MERGER CO.]
By: _____________________________
Name:
Title:
A-34
<PAGE>
Exhibit B
to Agreement and
Plan of Reorganization
Wells Fargo & Company
Sixth and Marquette
Minneapolis, MN 55479-1026
Attn: Secretary
Ladies and Gentlemen:
I have been advised that I might be considered to be an "affiliate," as that
term is defined for purposes of paragraphs (c) and (d) of Rule 145 ("Rule 145")
promulgated by the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), of Napa National
Bancorp, a California corporation ("Napa").
Pursuant to an Agreement and Plan of Reorganization, dated as of November
18, 1999 (the "Reorganization Agreement"), between Napa and Wells Fargo &
Company, a Delaware corporation ("Wells Fargo"), it is contemplated that a
wholly-owned subsidiary of Wells Fargo will merge with and into Napa (the
"Merger") and, as a result, I will receive, in exchange for each share of
common stock, no par value per share, of Napa ("Napa Common Stock") owned by me
immediately prior to the Effective Time of the Merger (as defined in the
Reorganization Agreement), a number of shares of common stock, par value $1 2/3
per share, of Wells Fargo ("Wells Fargo Common Stock"), as more specifically
set forth in the Reorganization Agreement.
I hereby agree as follows:
I will not offer to sell, transfer or otherwise dispose of any of the shares
of Wells Fargo Common Stock issued to me pursuant to the Merger (the "Stock")
except (a) in compliance with the applicable provisions of Rule 145, (b) in a
transaction that is otherwise exempt from the registration requirements of the
Securities Act, or (c) in an offering registered under the Securities Act.
I consent to the endorsement of the Stock issued to me pursuant to the
Merger with a restrictive legend which will read substantially as follows:
"The shares represented by this certificate were issued in a transaction
to which Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Act"), applies, and may be sold or otherwise transferred only in
compliance with the limitations of such Rule 145, or upon receipt by Wells
Fargo & Company of an opinion of counsel reasonably satisfactory to it that
some other exemption from registration under the Act is available, or
pursuant to a registration statement under the Act."
Wells Fargo's transfer agent shall be given an appropriate stop transfer
order and shall not be required to register any attempted transfer of the
shares of the Stock, unless the transfer has been effected in compliance with
the terms of this letter agreement.
It is understood and agreed that this letter agreement shall terminate and
be of no further force and effect and the restrictive legend set forth above
shall be removed by delivery of substitute certificates without such legend,
and the related stop transfer restrictions shall be lifted forthwith, if (i)
any such shares of Stock shall have been registered under the Securities Act
for sale, transfer or other disposition by me or on my behalf and are sold,
transferred or otherwise disposed of, or (ii) any such shares of Stock are sold
in accordance with the provisions of paragraphs (c), (e), (f) and (g) of Rule
144 promulgated under the Securities Act, or (iii) any such shares of Stock are
sold at a time when I am not at the time an affiliate of Wells Fargo and have
been the beneficial owner of the Stock for at least one year (or such other
period as may be prescribed thereunder) and
A-35
<PAGE>
Wells Fargo has filed with the Commission all of the reports it is required to
file under the Securities Exchange Act of 1934, as amended, during the
preceding twelve months, or (iv) I am not and have not been for at least three
months an affiliate of Wells Fargo and have been the beneficial owner of the
Stock for at least two years (or such other period as may be prescribed by the
Securities Act, and the rules and regulations promulgated thereunder), or (v)
Wells Fargo shall have received an opinion of counsel acceptable to Wells Fargo
to the effect that the stock transfer restrictions and the legend are not
required.
I have carefully read this letter agreement and the Reorganization Agreement
and have discussed their requirements and other applicable limitations upon my
ability to offer to sell, transfer or otherwise dispose of shares of Napa
Common Stock, Wells Fargo Common Stock or the Stock, to the extent I felt
necessary, with my counsel or counsel for Napa.
Dated:
Sincerely,
By: _____________________________
Name: ___________________________
A-36
<PAGE>
APPENDIX B
----------------
OPINION OF FIRST SECURITY VAN KASPER
<PAGE>
, 2000
Members of the Board of Directors
Napa National Bancorp
901 Main Street
Napa, CA 94559
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the shareholders of Napa National Bancorp
("Napa") of the Exchange Ratio as defined in Paragraph 1(a)(i) of the Agreement
and Plan of Reorganization dated as of November 18, 1999 and as amended as of
January 18, 2000 (as amended, the "Agreement"), in the proposed merger (the
"Merger") of Wells Fargo & Company ("Wells Fargo") and Napa. On the Effective
Date (as such term is defined in the Agreement), each share of Napa Common
Stock will be converted into the right to receive shares of Wells Fargo Common
Stock as defined in the Agreement.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Agreement; (ii) certain publicly available
financial and other data with respect to Wells Fargo and Napa, including
consolidated financial statements for recent years and interim periods to June
30, 1999; (iii) certain other publicly available financial and other
information concerning Wells Fargo and Napa and the trading markets for the
publicly traded securities of Wells Fargo and Napa; (iv) publicly available
information concerning other banks and bank holding companies, the trading
markets for their securities and the nature and terms of certain other merger
transactions we believed relevant to our inquiry; and (v) evaluations and
analyses prepared and presented to the Board of Directors of Napa or a
committee thereof in connection with the Merger. We have held discussions with
senior management of Napa concerning the company's past and current operations,
financial condition and prospects.
We have reviewed with the senior management of Napa earnings projections for
Napa as a stand-alone entity, assuming the Merger does not occur. We have
reviewed securities industry estimates of projected earnings per share from
published sources for Wells Fargo as a stand-alone entity.
In conducting our review and in arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied on
advice of counsel and independent accountants as to all legal and financial
reporting matters with respect to Wells Fargo, Napa, the Merger and the
Agreement. We have relied upon the management of Napa as to the reasonableness
of the financial and operating forecasts, projections and projected operating
cost savings (and the assumptions and bases therefor) provided to us, and we
have assumed that such forecasts, projections and projected operating cost
savings reflect the best currently available estimates and judgments of the
management of Napa. We have also assumed, without assuming any responsibility
for the independent verification of same, that the aggregate allowances for
loan losses for Napa and Wells Fargo are adequate to cover such losses. We have
not made or obtained any evaluations or appraisals of the property of Napa or
Wells Fargo, nor have we examined any individual loan credit files. For
purposes of this opinion, we have assumed that the Merger will have the tax,
accounting and legal effects (including, without limitation, that the Merger
will be accounted for as a pooling of interests) described in the Merger
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of the Common Stock of Napa of the
Exchange Ratio in the Merger and does not address Napa's underlying business
decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of Napa
and Wells Fargo, including interest income, interest expense, net interest
income, net interest margin, provision for loan losses, non-interest income,
non-interest expense, earnings, dividends,
B-1
<PAGE>
Napa National Bancorp
, 2000
Page Two
internal capital generation, book value, intangible assets, return on assets,
return on shareholders' equity, capitalization, the amount and type of non-
performing assets, loan losses and the reserve for loan losses, all as set
forth in the financial statements for Napa and for Wells Fargo; (ii) the assets
and liabilities of Napa and Wells Fargo, including the loan, investment and
mortgage portfolios, deposits, other liabilities, historical and current
liability sources and costs and liquidity; and (iii) the nature and terms of
certain other merger transactions involving banks and bank holding companies.
We have also taken into account our assessment of general economic, market and
financial conditions and our experience in other transactions, as well as our
experience in securities valuation and our knowledge of the banking industry
generally. Our opinion is necessarily based upon conditions as they exist and
can be evaluated on the date hereof and the information made available to us
through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of Napa. This letter does not constitute a recommendation to the
Board of Directors or to any shareholder of Napa with respect to any approval
of the Merger.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Exchange Ratio in the Merger is fair,
from a financial point of view, to the holders of the Common Stock of Napa.
Very truly yours,
FIRST SECURITY VAN KASPER
B-2
<PAGE>
APPENDIX C
CALIFORNIA DISSENTERS' RIGHTS STATUTE
<PAGE>
(S) 1300. Reorganization or short-form merger; dissenting shares; corporate
purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation is
required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in
a short-form merger may, by complying with this chapter, require the
corporation in which the shareholder holds shares to purchase for cash at
the fair market value the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value
shall be determined as of the day before the first announcement of the
terms of the proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed action, but
adjusted for any stock split, reverse stock split, or share dividend which
becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified
by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of
meeting of shareholders to act upon the reorganization summarizes this
section and Sections 1301, 1302, 1303 and 1304; provided, however, that
this provision does not apply to any shares with respect to which there
exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not
apply to any class of shares described in subparagraph (A) or (B) if
demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the reorganization, or
which were held of record on the effective date of a short-form merger;
provided, however, that subparagraph (A) rather than subparagraph (B)
of this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a meeting
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder of
dissenting shares and includes a transferee of record.
(S) 1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of reorganization, any shareholders of a corporation have a
right under Section 1300, subject to compliance with paragraphs (3) and (4)
of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a
notice of the approval of the reorganization by its outstanding shares
(Section 152) within 10 days after the dare of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement
of the price determined by the corporation to represent the fair market
value of the dissenting share, and a brief description of the procedure to
be followed if the share holder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as
defined in subdivision (b) of Section 1300, unless they lose their status
as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase the
shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who
C-1
<PAGE>
desires the corporation to purchase such shares shall make written demand
upon the corporation for the purchase of such shares and payment to the
shareholder in cash of their fair market value. The demand is not effective
for any purpose unless it is received by the corporation or any transfer
agent thereof (1) in the case of shares described in clause (i) or (ii) of
paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30
days after the date on which the notice of the approval by the outstanding
shares pursuant to subdivision (a) or the notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to
the fair market value of those shares as of the day before the
announcement of the proposed reorganization or short-form merger. The
statement of fair market value constitutes an offer by the shareholder to
sell the shares at such price
(S) 1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303. Payment of agreed price with interest; agreement fixing fair market
value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of the agreement. Any agreements
fixing the fair market value of any dissenting shares as between the
corporation and the holders thereof shall be filed with the secretary of
the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or
contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of
the certificates therefor, unless provided otherwise by agreement.
(S) 1304. Action to determine whether shares are dissenting shares or fair
market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after
the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, but not thereafter, may file a complaint in the
superior court of the proper county praying the court to determine whether
the shares are dissenting shares or the fair market value of the
dissenting shares or both or may intervene in any action pending on such a
complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting
shares is in issue, the court shall determine, or shall appoint one or
more impartial appraisers to determine, the fair market value of the
shares.
C-2
<PAGE>
(S) 1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has
intervened, is entitled to require the corporation to purchase, with
interest thereon at the legal rate from the date on which judgment was
entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as
the court considers equitable, but, if the appraisal exceeds the price
offered by the corporation, the corporation shall pay the costs (including
in the discretion of the court attorneys' fees, fees of expert witnesses
and interest at the legal rate on judgments from the date of compliance
with Sections 1300, 1301 and 1302 if the value awarded by the court for the
shares is more than 125 percent of the price offered by the corporation
under subdivision (a) of Section 1301).
(S) 1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting shares
after the date of approval of the reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by the corporation shall be
credited against the total amount to be paid by the corporation therefor.
(S) 1308. Rights of dissenting sharehaolders pending valuation; withdrawal of
demand of payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto
(S) 1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares
of another class in accordance with the articles.
C-3
<PAGE>
(c) The dissenting shareholder and the corporation do not agree upon the status
of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation, withdraws
the shareholder's demand for purchase of the dissenting shares.
(S)1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the votes
of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
(S) 1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
(S) 1312. Right of dissenting shareholder to attack, set aside or rescindmerger
or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have
any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have the reorganization or short-form merger
set aside or rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have been
legally voted in favor thereof; but any holder of shares of a class whose
terms and provisions specifically set forth the amount to be paid in
respect to them in the event of a reorganization or short-form merger is
entitled to payment in accordance with those terms and provisions or, if
the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with
the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, subdivision (a) shall not apply to
any shareholder of such party who has not demanded payment of cash for such
shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or
short- form merger or to have the reorganization or short-form merger set
aside or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the
reorganization or short-form merger or to have the reorganization or short-
form merger set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days' prior notice to the
corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is directly
or indirectly controlled by, or under common control with, another party to
the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short- form merger set aside or rescinded, (1) a party to
a reorganization or short- form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that
the transaction is just and reasonable as to the shareholders of the
controlled party, and (2) a person who controls two or more parties to a
reorganization shall have the burden of proving that the transaction is
just and reasonable as to the shareholders of any party so controlled.
C-4
<PAGE>
APPENDIX D
----------------
NAPA NATIONAL BANCORP'S FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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)
(707) 257-2440
Issuer's telephone number
----------------
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. [X] Yes [_]
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 [X] No
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
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..............................................................
</TABLE>
D-2
<PAGE>
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.
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.
D-3
<PAGE>
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").
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
D-4
<PAGE>
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.
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.
D-5
<PAGE>
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.
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
D-6
<PAGE>
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%.
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).
<TABLE>
<CAPTION>
The Company
--------------------------------------
Actual Well Minimum
------------- Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----------- -----------
<S> <C> <C> <C> <C>
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
<CAPTION>
The Bank
--------------------------------------
Actual Well Minimum
------------- Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
D-7
<PAGE>
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.
Under the prompt corrective action provisions of FDICIA, an insured
depository institution generally will be classified in the following categories
based on the capital measures indicated below:
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of
Leverage ratio of 5%. 4%; and
Leverage ratio of 4%.
"Undercapitalized" "Significantly
Total risk-based capital of less undercapitalized"
than 8%; Total risk-based capital of
Tier 1 risk-based capital of less less than 6%;
than 4%; or Tier 1 risk-based capital of
Leverage ratio of less than 4%. less than 3%; or
Leverage ratio of less than 3%.
"Critically undercapitalized"
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
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.
D-8
<PAGE>
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
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.
D-9
<PAGE>
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.
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.
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.
D-10
<PAGE>
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."
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
D-11
<PAGE>
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.
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
D-12
<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.
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.
D-13
<PAGE>
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 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.
D-14
<PAGE>
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.
Sales Prices of the Company's Common Stock
<TABLE>
<CAPTION>
Trading
Year High Low Volume
---- ------ ------ -------
<S> <C> <C> <C>
1998
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.
D-15
<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.
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.
D-16
<PAGE>
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
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%
</TABLE>
- --------
(1) Calculated based on the Bank's capital and average assets.
The purpose of the following discussion is to address information pertaining
to the financial condition and results of operations of the Company that may
not be apparent from a review of the consolidated financial statements and
related notes. It also incorporates certain statistical information that is
required by Industry Guide 3 promulgated by the Securities and Exchange
Commission.
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
D-17
<PAGE>
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.
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 Percent Average Percent
Balance of Balance of
(000's) Total (000's) Total
-------- ------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
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.
D-18
<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
----------------------------------
Average Interest
Balance Income/Expense Average
(000's) (000's) Yield/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.
D-19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------------
Average Interest
Balance Income/Expense Average
(000's) (000's) Yield/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.
D-20
<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
--------- ---------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME:
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.
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.
D-21
<PAGE>
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.
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.
D-22
<PAGE>
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.
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
Cost Gains Losses Fair 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>
December 31, 1997--Investment Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair 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>
D-23
<PAGE>
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.
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
One Year Through Through After
Or Less Yield Five Years Yield Ten Years Yield Ten Years Yield Total
-------- ----- ---------- ----- ---------- ----- --------- ----- -------
(In 000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
Securities:
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>
D-24
<PAGE>
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.
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.
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.
D-25
<PAGE>
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.
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
D-26
<PAGE>
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.
D-27
<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.
<TABLE>
<CAPTION>
December 31, 1998 December, 31, 1997
----------------------- -----------------------
Percent of Percent of
Loans in Loans in
Each Category Each Category
Amount of to Total Amount of to Total
Balance at End of Period Allowance Loans Allowance Loans
Applicable to: --------- ------------- --------- -------------
(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>
D-28
<PAGE>
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.
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
One Year Through After
Or Less Five Years Five 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>
D-29
<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
Balance Average Balance Average
(000's) Rate (000's) Rate
-------- ------- -------- -------
<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.
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
D-30
<PAGE>
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
----------------------------
Over 1
Year Non-Rate
91-365 But Sensitive
0-90 Days Days Within Or Over 5
(0-3 mo) (3-12 mo) 5 Yrs 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
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
D-31
<PAGE>
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.
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.
D-32
<PAGE>
Market Risk:
Expected Maturity Date
<TABLE>
<CAPTION>
There- Fair
1999 2000 2001 2002 2003 After Total Value
In Thousands ------ ----- ----- ----- ----- ------ ------ ------
<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%
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>
D-33
<PAGE>
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.
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.
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.
D-34
<PAGE>
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.
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>
D-35
<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
D-36
<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
D-37
<PAGE>
Napa National Bancorp and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
-------- --------
(Dollars In
Thousands)
<S> <C> <C>
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-
$17211).................................................. 13,590 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
======== ========
</TABLE>
<TABLE>
<S> <C> <C>
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 shars,
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.
D-38
<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.
D-39
<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.
D-40
<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.
D-41
<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.
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.
D-42
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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.
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
D-43
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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.
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.
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
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1998
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>
D-44
<PAGE>
3. Available-For-Sale and Held-To-Maturity Securities (continued)
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1997
Obligations of States and Political
Subdivisions......................... $ 2,521 $ 45 $ -- $ 2,566
Collateralized Mortgage Obligations... 14,690 15 (21) 14,684
------- ---- ----- -------
Total................................. $17,211 $ 60 $ (21) $17,250
======= ==== ===== =======
</TABLE>
<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.
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.
D-45
<PAGE>
4. Loans and Allowance for Loan Losses (continued)
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.
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>
D-46
<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>
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>
D-47
<PAGE>
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>
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>
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.
D-48
<PAGE>
9. Financial Instruments with Off-Balance Sheet Risk (continued)
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.
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.
D-49
<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.
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Minimum
Well-
Minimum 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
Well-
Minimum 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>
D-50
<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:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Price Shares Price Shares
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Nonstatutory
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 $ --
====== ======
<CAPTION>
1998 1997
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Price Shares Price Shares
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Incentive
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>
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.
D-51
<PAGE>
14. Stock Option Plan and Stock Ownership Plan (continued)
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>
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>
D-52
<PAGE>
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.
The carrying amounts and the estimated fair values of the Company financial
instruments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount 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
<CAPTION>
Estimated
Carrying Fair
Amount Value
-------- ---------
<S> <C> <C>
Off-balance sheet financial instruments (g)
Commitments to extend credit............................... $18,744 $18,744
Commercial letters of credit............................... 821 821
</TABLE>
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-53
<PAGE>
17. Fair Value of Financial Instruments (continued)
(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.
(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.
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>
D-54
<PAGE>
18. Financial Statements of Napa National Bancorp (Parent Company Only)
(continued)
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
======== ======
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997
<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.
D-55
<PAGE>
19. Year 2000 (unaudited) (continued)
The Company is in the process of finalizing a contingency plan to address
the recovery from unavoided or unavoidable Year 2000 problems, if any.
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.
D-56
<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
/s/ Brian J. Kelly
By ______________________________
President/COO
/s/ Michael D. Irwin
By ______________________________
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
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
D-57
<PAGE>
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
D-58
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
<C> <S>
3(ii) * Bylaws, amended and restated, of the Registrant.
4.1 * A specimen copy of the certificates evidencing Common stock.
Napa National Bancorp 1982 Stock Option Plan, as amended and
10.1 * restated.**
10.2 * Form of Incentive Stock Option Agreement.**
10.3 * 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
</TABLE>
- --------
* 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.
D-59
<PAGE>
APPENDIX E
----------------
NAPA NATIONAL BANCORP'S DEFINITIVE PROXY STATEMENTFOR ITS 1999 ANNUAL MEETING
OF SHAREHOLDERS
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
NAPA NATIONAL BANCORP
(Name of Registrant as Specified In Its Certificate)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3)Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
E-1
<PAGE>
NAPA NATIONAL BANCORP
901 Main Street
Napa, CA 94559
April 30, 1999
To Our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
Napa National Bancorp, a California corporation (the "Company"), which will be
held at the Company's principal executive office, located at 901 Main Street,
Napa, California 94559 on Tuesday, June 8, 1999, at 8:00 a.m.
You will be asked to elect as directors the ten individuals nominated by the
Board of Directors and ratify the appointment of Ernst & Young LLP as the
Company's independent public accountants. The attached Proxy Statement contains
more detailed information about the nominees and any other matters regarding
the meeting.
Whether or not you plan to attend, please sign and return the accompanying
proxy card in the postage-paid envelope provided as soon as possible so that
your shares will be represented at the meeting. The Board of Directors
recommends that you vote "FOR" each of the proposals listed on the proxy card.
If you attend the meeting and ask to vote in person, you may withdraw your
proxy at that time. It is important that your shares be represented.
W. Clarke Swanson, Jr.
Chairman of the Board
E-2
<PAGE>
NAPA NATIONAL BANCORP
901 Main Street
Napa, California 94559
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Tuesday, June 8, 1999
To Our Shareholders:
The Annual Meeting of Shareholders of Napa National Bancorp (the "Company"),
a California corporation and bank holding company for Napa National Bank (the
"Bank"), will be held at the Company's principal executive office, located at
901 Main Street, Napa, California 94559 on Tuesday, June 8, 1999, at 8:00 a.m.
for the following purposes:
1. To elect the following ten directors of the Company to serve until the
next Annual Meeting of Shareholders and until their respective successors shall
be elected and qualified:
William A. Bacigalupi C. Richard Lemon
Dennis D. Groth Joseph G. Peatman
E. James Hedemark A. Jean Phillips
Michael D. Irwin George M. Schofield
Brian J. Kelly W. Clarke Swanson, Jr.
2. To ratify the appointment of Ernst & Young LLP, as the Company's
independent public accountants for the 1999 fiscal year.
3. To consider and transact such other business as may properly come before
the meeting of any adjournment or postponement thereof.
Only shareholders of record at the close of business on April 23, 1999 are
entitled to notice of and to vote at this meeting and any adjournment(s)
thereof.
Provisions of the By-laws of the Company govern nominations for election of
members of the Board of Directors, as follows:
Nominations for election of members of the board of directors may be made
by the board of directors or by any shareholder of any outstanding class of
capital stock of the Company entitled to vote for the election of
directors. Notice of intention to make any nominations (other than for
persons named in the notice of the meeting at which such nomination is to
be made) shall be made in writing and shall be delivered or mailed to the
President of the Company by the later of the close of business twenty-one
(21) days prior to any meeting of shareholders called for the election of
directors or ten (10) days after the date of mailing of notice of the
meeting to shareholder. Such notification shall contain the following
information to the extent known to the notifying shareholder: (a) the name
and address of each proposed nominee; (b) the number of shares of capital
stock of the Company owned by each proposed nominee; (c) the name and
residence address of the notifying shareholder; (d) the number of shares of
capital stock of the Company owned by the notifying shareholder; (e) with
the written consent of the proposed nominee a copy of which shall be
furnished with the notification, whether the proposed nominee has ever been
convicted of a pleaded nolo contendere to any criminal offense involving
dishonesty or breach of trust, filed a petition in bankruptcy or been
adjudged bankrupt. The notice shall be signed by the nominating shareholder
and by the nominee. Nominations not made in accordance herewith shall be
disregarded by the chairperson of the meeting, and upon his or her
instruction, the inspectors of election shall disregard all votes cast for
each such nominee. The restrictions set forth in this paragraph shall not
apply to nomination of a person to replace a proposed nominee who has died
or otherwise become incapacitated to serve as a director between the last
day for giving notice hereunder and the date of election of directors if
the procedure called for in this paragraph was followed with respect to the
nomination of the proposed
E-3
<PAGE>
nominee. A copy of this paragraph shall be set forth in a notice to
shareholders of any meeting at which directors are to be elected.
All shareholders are cordially invited to attend the meeting in person. To
ensure your representation at the meeting you are requested to date, execute
and return the enclosed proxy card, without delay, in the enclosed postage-paid
envelope whether or not you plan to attend. Any shareholder present at the
meeting may vote personally on all matters brought before the meeting, in which
event such shareholder's proxy will not be used.
BY ORDER OF THE BOARD OF DIRECTORS
C. RICHARD LEMON
Secretary
Napa, California
April 30, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
E-4
<PAGE>
PROXY STATEMENT
INFORMATION CONCERNING PROXY
This statement is furnished in connection with the solicitation of proxies
to be used by the Board of Directors of Napa National Bancorp (the "Company")
at the Annual Meeting of Shareholders of the Company to be held at the
Company's principal executive office, located at 901 Main Street, Napa,
California 94559, on June 8, 1999 at 8:00 a.m., and at any adjournments or
postponements thereof (the "Meeting").
This Proxy Statement and the accompanying proxy are first being mailed to
holders of the Company's common stock ("Common Stock") on or about April 30,
1999.
A form of proxy for voting your shares at the Meeting is enclosed. Any
shareholder who executes and delivers a proxy has the right to revoke it at any
time before it is voted by filing with the Secretary of the Company an
instrument revoking it or a duly executed proxy bearing a later date. In
addition, the powers of the proxy holders will be revoked if the person
executing the proxy is present at the Meeting and advises the Chairman of the
Meeting of his or her election to vote in person. Where a signed proxy that
does not contain voting instructions is submitted to the Company, the proxy
holders will vote the shares represented by such proxy in favor of election of
the nominees specified and in favor of any specified proposals unless such
proxy is later revoked.
The enclosed form of proxy also confers discretionary authority to vote the
shares represented thereby on any matter that was not known at the time this
Proxy Statement was mailed which may properly be presented for action at the
Meeting, including but not limited to: approval of minutes of the prior annual
meeting which will not constitute ratification of the actions taken at such
meeting; action with respect to procedural matters pertaining to the conduct of
the Meeting; and election of any person to any office for which a bona fide
nominee is named herein if such nominee is unable to serve or for good cause
will not serve.
The enclosed proxy is being solicited by the Company's Board of Directors.
The principal method of proxy solicitation for the Meeting will be by mail,
although additional solicitation may be made by telephone, telegraph or
personal visits by directors, officers and employees of the Company and its
subsidiary, Napa National Bank (the "Bank"). The Company may, at its
discretion, engage the services of a proxy solicitation firm to assist in the
solicitation of proxies but has not done so as of April 30, 1999. The total
expense of the Board of Directors' proxy solicitation for the Meeting will be
borne by the Company and will include reimbursement paid to brokerage firms and
others for their expenses in forwarding soliciting material to beneficial
owners of Common Stock and such expenses as may be paid to any proxy
solicitation firm engaged by the Company.
VOTING SECURITIES
Shareholders of record as of the close of business on April 23, 1999 (the
"Record Date") will be entitled to notice of and to vote at the Meeting. As of
such date, the Company had 792,675 shares of Common Stock outstanding.
Each shareholder of record is entitled to one vote, in person or by proxy,
for each share held on all matters to come before the Meeting, except that
shareholders may have cumulative voting rights with respect to the election of
directors. Cumulative voting allows a shareholder to cast a number of votes
equal to the number of directors to be elected (ten) multiplied by the number
of votes held in his or her name on the Record Date. This total number of votes
may be cast for one nominee or may be distributed among as many candidates as
the shareholder desires.
Pursuant to California law, no shareholder can cumulate votes unless prior
to the voting at the Meeting, a shareholder has given notice of his or her
intention to cumulate votes at the Meeting and the nominee for which
E-5
<PAGE>
he or she intends to cumulate votes has properly been nominated. If any
shareholder gives notice of his or her intent to cumulate votes at the Meeting,
all shareholders may cumulate their votes for candidates in nomination. The
Board of Directors does not, at this time, intend to give such notice or to
cumulate the votes it may hold pursuant to the proxies solicited herein unless
the required notice by a shareholder is given, in which event votes represented
by proxies delivered pursuant to this Proxy Statement may be cumulated in the
discretion of the proxy holders, in accordance with the recommendation of the
Board of Directors. Therefore, discretionary authority to cumulate votes in
such event is solicited in this Proxy Statement.
The ten candidates for election of directors receiving the highest number of
votes will be elected, whether or not votes are cumulated. The ratification of
the appointment of Ernst & Young LLP as the Company's independent public
accountants for the 1999 fiscal year requires the approval of a majority of the
shares of Common Stock present or represented by proxy and voting at the
meeting.
Shares which abstain from voting and "broker non-votes" (shares as to which
brokerage firms have not received voting instructions from their clients and
therefore do not have the authority to vote at the Meeting) will be counted for
purposes of determining a quorum. Abstentions or broker non-votes will not
count as votes in favor of the election of directors, the ratification of the
appointment of the Company's independent public accountant, or any other
proposal.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record Date pertaining
to beneficial ownership of the Company's Common Stock by each of the persons
known to the Company to own 5% or more of the Company's Common Stock, current
directors of the Company (all of whom are nominees to be elected to the Board
of Directors), each of the current executive officers,(1) and all of the
directors of the Company and the named executive officers as a group. The
information contained herein has been obtained from the Company's records, from
information furnished directly by the individual or entity to the Company, or
from various filings made by the named individuals with the Securities and
Exchange Commission (the "SEC").
The table should be read with the understanding that more than one person
may be the beneficial owner or possess certain attributes of beneficial
ownership with respect to the same securities. Therefore, careful attention
should be given to the footnote references set forth in the column "Amount and
Nature of Beneficial Ownership." In addition, shares issuable pursuant to
options which may be exercised within 60 days of the Record Date are deemed to
be issued and outstanding and have been treated as outstanding in calculating
the percentage ownership of those individuals possessing such interest, but not
for any other individuals. Thus, the total number of shares considered to be
outstanding for the purposes of this table may vary depending upon an
individual's particular circumstances. For additional information, see the
section entitled "INFORMATION PERTAINING TO ELECTION OF DIRECTORS."
- --------
(1) As used throughout this Proxy Statement, the term "executive officers"
refers to the Company's Chief Executive Officer, the Company's President
and Chief Operating Officer and the Bank's President, Chief Information
Officer, Chief Financial Officer and Chief Credit Officer. The Bank's Chief
Credit Officer resigned in January 1999.
E-6
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name and Address of Beneficial Owner(1) Ownership(2) Class
- --------------------------------------- ----------------- ----------
<S> <C> <C>
William A. Bacigalupi............................ 10,200(3) 1.2%
Dale A. Brain.................................... 2,000(4) *
Dennis D. Groth.................................. 7,600(5) *
E. James Hedemark................................ 10,100(3) 1.2%
Michael D. Irwin................................. 12,000(3) 1.5%
Brian J. Kelly................................... 12,725(6) 1.6%
C. Richard Lemon................................. 11,300(7) 1.4%
Joseph G. Peatman................................ 10,125(3) 1.3%
A. Jean Phillips................................. 10,100(3) 1.3%
George M. Schofield.............................. 10,200(8) 1.3%
W. Clarke Swanson, Jr. .......................... 517,456(9) 64.5%
Rodney M. Wiessner............................... 1,000(10) *
All directors, nominees and current executive
officers as a Group (12 persons)................ 686,617(11) 77.0%
Napa National Bancorp Stock Participation
Plan(the "Stock Plan").......................... 71,311(12) 9.0%
Robert Fanucci................................... 71,311(12) 9.0%
</TABLE>
- --------
* Indicates that the percentage of outstanding shares beneficially owned is
less than one percent (1%).
(1) The address for all natural persons is: c/o Napa National Bancorp, 901 Main
Street, Napa, CA 94559. The Stock Plan's address is: Napa National Bancorp
Stock Participation Plan, Mr. Robert Fanucci, Trustee, 901 Main Street,
Napa, CA 94559.
(2) Includes shares beneficially owned, directly and indirectly, together with
associates. Subject to applicable community property laws and shared
voting or investment power with a spouse, the persons listed have sole
voting and investment power with respect to such shares unless otherwise
noted.
(3) Includes 10,000 shares which may be acquired upon the exercise of stock
options.
(4) Includes 2,000 shares which may be acquired upon the exercise of stock
options.
(5) Includes 7,500 shares which may be acquired upon the exercise of stock
options.
(6) Includes 12,500 shares which may be acquired upon the exercise of stock
options.
(7) Includes 10,000 shares which may be acquired upon the exercise of stock
options. Includes 800 shares held in an individual retirement account.
(8) Includes 6,000 shares which may be acquired upon the exercise of stock
options. Includes 4,000 shares held in an individual retirement account.
(9) Includes 10,000 shares which may be acquired upon the exercise of stock
options. Mr. Swanson may be deemed to be a "control person" of the Company
within the meaning of the rules and regulations of the SEC by virtue of
his ownership interest in the Company.
(10) Consists of 1,000 shares which may be acquired upon the exercise of stock
options.
(11) Includes 100,000 shares which may be acquired within 60 days of the
Record Date upon the exercise of stock options. Also includes 1,000
shares beneficially owned by a former executive officer who resigned
prior to the Record Date
(12) Voting and investment power with respect to the shares beneficially owned
by the Stock Plan is entrusted to Mr. Robert Fanucci, independent
trustee, who disclaims beneficial ownership of all of said shares.
E-7
<PAGE>
PROPOSAL 1: ELECTION OF DIRECTORS
Directors and Nominees
The By-laws of the Company provide that the number of directors of the
Company may be no less than eight and no more than fifteen, with the exact
number within such range to be fixed by amendment of the By-laws or by a
resolution duly adopted by the shareholders or by the Board of Directors. The
number of directors is presently fixed at ten.
The persons named below, all of whom are currently serving one-year terms as
members of the Company's Board of Directors, have been nominated for election
as directors to serve until the next Annual Meeting of Shareholders and until
their successors are duly elected and qualified. Proxies will be voted in such
a way as to effect the election of all nominees or as many as possible. If any
nominee should become unable or unwilling to serve as a director, proxies will
be voted for such substitute nominees as shall be designated by the Board of
Directors. The Board of Directors presently has no knowledge that any of the
nominees will be unable or unwilling to serve. The ten nominees receiving the
highest number of votes at the Meeting shall be elected.
The following table sets forth certain information with respect to those
persons nominated by the Board of Directors for election as directors, which
information is based on data furnished by each such nominee.
<TABLE>
<CAPTION>
Principal Occupation, Business Experience
Director During Past Five Years and Other
Nominee Age Since Information
------- --- -------- -----------------------------------------
<C> <C> <C> <S>
William A. Bacigalupi 61 1990 Political and Governmental Advisor for,
and former President of, Napa Garbage
Services, Inc., and Napa Valley Disposal
Services, Inc. Former President of
American Canyon Disposal, Inc.
Dennis D. Groth 56 1996 President of Groth Vineyards & Winery
Michael D. Irwin 56 1987 Chief Financial Officer of the Company
since 1989; Executive Vice President,
Chief Financial Officer and Director of
The Compass Group since 1993; Chief
Financial Officer and Director of Wild
Planet Toys, Inc. since 1996.
E. James Hedemark 50 1995 Director/CEO of Southern Pacific Funding
Corporation since 1998(1); Formerly,
Director of ITT Federal Bank from April
1994 to September 1995; President and
Chief Executive Officer of Napa Valley
Bank from June 1992 to May 1993; various
positions at Bank of America from 1972 to
1992.
Brian J. Kelly 48 1988 Director of the Company since 1988;
President and Chief Operating Officer of
the Company since 1992; President and
Chief Executive Officer of the Bank since
September 1989.
C. Richard Lemon 55 1981 Secretary of the Company and the Bank
since 1982; Director and Partner of
Dickenson, Peatman & Fogarty since 1979;
President of Exchange Holding Corp. since
1979; President of Temecula Vineyards,
Inc. since 1994; Partner of Silverado
Partners since 1995.
</TABLE>
- --------
(1) Southern Pacific Funding Group on October 1, 1998 filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Oregon (Case No. 398-37613).
This bankruptcy proceeding is still pending before the Bankruptcy Court as
of the date of this Proxy Statement and Southern Pacific Funding Group
continues to manage its business as debtor in possession. Director
Hedemark was the Chief Executive Officer and a director of Southern
Pacific Funding Group on the date of filing of its bankruptcy petition.
Management of the Company does not believe that director Hedemark's
position with Southern Pacific Funding Group, in light of its pending
bankruptcy proceeding, is material to an evaluation of director Hedemark
as a director of the Company.
E-8
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation, Business
Experience
Director During Past Five Years and Other
Nominee Age Since Information
------- --- -------- ----------------------------------------
<C> <C> <C> <S>
Joseph G. Peatman 65 1994 Founding Partner and Director of
Dickinson, Peatman & Fogarty since 1964;
A. Jean Phillips 54 1995 Owner of Screaming Eagle Winery since
1986; Partner and owner of Phillips &
Harris Land Brokers since 1979.
George M. Schofield 60 1990 President of George M. Schofield Co.,
financial consultant since 1984;
President of Unique Wines, Inc. since
1984; Chief Financial Officer and
Director of Folie A Deux Winery since
1995; Director of Delicato Vineyards
since 1996; Director of Vintage
Directions since 1997.
W. Clarke Swanson, Jr. 60 1987 Chairman of the Board of the Company
since 1994; Chief Executive Officer of
the Company since 1988; President of
Swanson Vineyards and Winery since 1986.
</TABLE>
Executive Officers
In addition to Directors Irwin, Kelly and Swanson, discussed above,
executive officers of the Company and Bank during 1998 included Dale A. Brain
(age 51), Frederick C. Hoey (age 56) and Rodney M. Wiessner (age 37). All
executive officers of the Company and the Bank serve at the pleasure of the
Board of Directors.
Mr. Brain became the Bank's Senior Vice President and Chief Information
Officer in November 1996. Prior to that time, Mr. Brain was Manager, Planning &
Control at Kaiser Permanente Medical from 1992 to 1996. Mr. Brain had
previously been in a variety of management positions with Bank of America from
1969 to 1992.
In March, 1997, the Bank expanded its senior management by hiring Frederick
C. Hoey. Mr. Hoey became the Bank's Senior Vice President and Chief Credit
Officer. Prior to joining the Bank, Mr. Hoey was with American Investors
Company as a regional representative since 1996, with Westamerica
Bancorporation as a Vice President from 1992 to 1996, and in a variety of
management positions with various financial institutions prior to 1992. Mr.
Hoey resigned from his position effective January 31, 1999.
In July 1997, the Bank hired Rodney M. Wiessner as the Bank's Senior Vice
President, Chief Financial Officer, Treasurer and Cashier. He is also the
Treasurer/ Cashier and Assistant Secretary of the Company. Prior to joining the
Bank, Mr. Wiessner had been Chief Financial Officer of Mid Valley Bank since
1995. Prior to joining Mid Valley Bank, Mr. Wiessner was an Audit Manager with
Perry-Smith and Company from 1990 to 1995.
Certain Relationships
All of the members of the Company's Board of Directors also serve as the
directors of the Bank. Director Lemon also serves as the sole director of the
Company's inactive and wholly-owned leasing subsidiary, Napa National Leasing
Company.
There is no family relationship among any of the Company's directors (all of
whom are nominees to be elected as Directors at the Meeting) and current
executive officers.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS INTENDS TO VOTE ALL PROXIES HELD BY IT IN FAVOR OF
THE ELECTION OF EACH OF THE NOMINEES. YOU ARE URGED TO VOTE FOR PROPOSAL 1: TO
ELECT THE TEN NOMINEES SET FORTH HEREIN TO SERVE UNTIL THE NEXT ANNUAL MEETING
OF SHAREHOLDERS AND UNTIL THEIR RESPECTIVE SUCCESSORS SHALL BE ELECTED AND
QUALIFIED.
E-9
<PAGE>
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Ernst & Young LLP, which served the Company as independent
public accountants since September 19, 1996, has been selected by the Audit
Committee of the Board of Directors of the Company as the Company's independent
public accountants for the 1999 fiscal year. Ernst & Young LLP has no interest,
financial or otherwise, in the Company.
A representative of Ernst & Young LLP is expected to attend the Meeting with
the opportunity to make a statement if he or she desires to do so and respond
to appropriate questions from shareholders present at the Meeting.
All Proxies will be voted for ratification of the appointment of Ernst &
Young LLP, unless authority to vote for the ratification of such selection is
withheld or an abstention is noted. If Ernst & Young LLP should for any reason
decline or be unable to act as independent public accountants, the Proxies will
be voted for a substitute independent public accounting firm to be designated
by the Audit Committee of the Board of Directors.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS INTENDS TO VOTE ALL PROXIES HELD BY IT IN FAVOR OF
THE RATIFICATION OF ERNST & YOUNG L.L.P. YOU ARE URGED TO VOTE FOR PROPOSAL 2:
TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR THE 1999 FISCAL YEAR.
INFORMATION PERTAINING TO ELECTION OF DIRECTORS
Committees of the Board of Directors; Director Attendance
The Board of Directors of the Bank maintains an Audit Committee which
consists of the following individuals: Directors Hedemark, Irwin, Kelly,
Peatman, Phillips and Swanson. The functions of the Audit Committee are to
recommend the appointment of and oversee a firm of independent public
accountants who audit the books and records of the Company for the fiscal year
for which they are appointed, to approve each professional service rendered by
such accountants, and to evaluate the possible effect of each such service on
the independence of the Company's accountants. The Audit Committee met five
times during 1998.
The Board of Directors maintains a Compensation Committee which consists of
Directors Peatman, Bacigalupi, Kelly, and Swanson. Mr. Peatman is the Chairman
of the Committee. The function of the Compensation Committee is to review
director and executive compensation of the Company and recommend to the Board
of Directors both director and executive officer compensation packages. The
Compensation Committee did not meet during 1998. Accordingly, the Board of
Directors performed the functions of the Compensation Committee during 1998 and
let the compensation for the Chairman and directors stand for 1999. The salary
of the President and Chief Operating Officer increased from $135,000 to
$150,000 a year in 1999. No bonuses were awarded during 1998.
During 1998, the Company did not have a standing Nominating Committee. The
Executive Committee of the Board of Directors of the Company performs the
functions of this committee and consists of the following individuals:
Directors Kelly and Swanson. The Executive Committee did not meet during 1998,
and the Company's nominees to the Board of Directors for 1999 were selected by
the current Board of Directors. Nominations by shareholders will be considered
by the Executive Committee provided such nominations comply with the Company's
By-laws and the notice provisions included in the Notice of Meeting which
accompanies this Proxy Statement. This By-law provision is designed to give the
Board of Directors advance notice of third-party nominations, if any, and the
qualifications of such nominees, and may have the effect of precluding third-
party nominations if not followed.
E-10
<PAGE>
The Board of Directors of the Company held 12 regular meetings and one
organizational and one special meeting during 1998. Each director of the
Company attended at least 75% of the following meetings with the exception of
C. R. Lemon, 50% and J. G. Peatman, 68%, of the following meetings: (i) the
total number of meetings of the Board of Directors and (ii) the total number of
meetings of committees of the Board on which he or she served (during the
period for which he or she served).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's directors and executive officers and
persons who beneficially own more than ten percent of a registered class of the
Company's equity securities to file with the Securities and Exchange Commission
("SEC") initial reports of ownership and reports of changes in beneficial
ownership of Common Stock and other equity securities of the Company.
Directors, certain officers and greater than ten percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file with the SEC.
To the Company's knowledge, based solely on a review of such reports
furnished to the Company and written representations furnished to the Company
by such directors, officers and ten percent shareholders, during the fiscal
year ended December 31, 1998, all Section 16(a) filing requirements applicable
to its directors, officers and ten percent shareholders were complied with.
E-11
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth for service in all
capacities to the Company and the Bank for the periods indicated the
compensation with respect to the Company's Chief Executive Officer and those
executive officers of the Company and the Bank whose salary and bonus exceeded
$100,000 in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus Compensation(1) Options Compensation
- ------------------ ---- -------- ------ --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
W. Clarke Swanson,
Jr.................... 1998 $124,200(2) $ 0 $2,520 10,000(3) $ 0
CEO 1997 124,800(2) 0 2,425 0 0
1996 125,300(2) 0 2,770 0 0
Brian J. Kelly......... 1998 $135,000(4) 0 7,723 2,500(3) 10,696(6),(7)
President and COO 1997 135,000(4) 0 9,600 0 8,489(6),(7)
1996 135,000(4) 20,500 8,834 0 12,788(6)
Dale A. Brain.......... 1998 96,000(4) 7,500 6,710 0 9,209(6),(7)
SVP, Chief Information 1997 105,667(4) 8,500(5) 3,000 0 3,203(6),(7)
Officer, of the Bank 1996 10,625(4) 0 0 5,000 0
Frederick C. Hoey...... 1998 94,167(4) 7,500 0 0 7,137(6),(7)
Chief Credit Officer,
of the Bank(8) 1997 67,298(4) 0 0 5,000 0
Rodney M. Wiessner..... 1998 94,167(4) 3,750 4,350 0 8,809(6),(7)
Chief Financial
Officer, of the Bank 1997 36,585(4) 0 0 5,000 0
</TABLE>
- --------
(1) Consists of country club membership for Mr. Swanson in the amount of
$2,520; country club membership and auto allowance for Mr. Kelly in the
amount of $1,560 and $6,163 respectively; country club membership and auto
allowance for Mr. Brain in the amount of $3,110 and $3,600 respectively;
country club membership for Mr. Wiessner in the amount of $4,350.
(2) Includes payments for attending meetings of the Board of Directors and the
committees thereof.
(3) See discussion under "Option Grants in Last Fiscal Year" below for a
discussion of the extension during 1998 of certain options previously
granted to Messrs. Swanson and Kelly.
(4) Includes amounts contributed by Mr. Kelly, Mr. Brain, Mr. Hoey and Mr.
Wiessner to the Stock Plan.
(5) Includes moving bonus.
(6) Consists of contributions by the Company to the Stock Plan for the benefit
of Mr. Kelly, Mr. Brian, Mr. Hoey and Mr. Wiessner.,
(7) Includes unpaid vacation for Mr. Kelly, Mr. Brain, Mr. Hoey and Mr.
Wiessner.
(8) Mr. Hoey resigned in January 1999.
E-12
<PAGE>
The following table provides certain information concerning options granted
to the Company's Chief Executive Officer and those executive officers executive
officers of the Company and the Bank whose salary and bonus exceeded $100,000
in 1998:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of
Total Number
Number of of Options Market
Securities Granted to Price on
Underlying Employees Exercise Date
Name Options in 1998 Price of Grant Expiration Date
- ---- ---------- ------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
W. Clarke Swanson, Jr.
CEO.................... 10,000 29% $8.00 $16.00 September 16, 2000
Brian J. Kelly,
President and COO...... 2,500 7% $8.00 $16.00 September 16, 2000
</TABLE>
The options noted in the above table were treated as granted by action of
the Board of Directors on August 18, 1998 as a result of its decision to extend
for a period of two years under the Napa National Bancorp 1998 Amended and
Restated Stock Option Plan certain non-statutory stock options previously
granted to Messrs. Swanson (10,000 shares), Kelly (2,500 shares), Irwin (10,000
shares) and Lemon (10,000 shares) under the Napa National Bancorp 1982 Stock
Option Plan (the "Options"). See also "Compensation of Directors" below.
Because the per share exercise price for the Options was below the per share
market price on the date of grant ($16.00, based on an independent third party
evaluation), the extension of the exercise periods for the Options resulted in
the Company taking a charge against 1998 earnings in the amount of $153,400.
This amount was offset, however, by an increase in the Company's shareholders
equity of $106,600 due to a future tax benefit of $106,600 that the Company
will be able to realize.
The following table sets forth the options exercised in 1998 and the
December 31, 1998, unexercised value of both vested and unvested options for
the Company's Chief Executive Officer and those executive officers of the
Company whose salary and bonus exceeded $100,000 in 1998.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares of Common Value of Unexercised
Stock Underlying Unexercised In-The-Money Options
Shares at December 31, 1998 at December 31, 1998(1)
Acquired Value --------------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Clarke Swanson, Jr.,
CEO.................... 0 0 10,000 0 $90,000 0
Brian J. Kelly,
President and COO...... 0 0 12,500 0 111,600 0
Dale A. Brain, SVP,
Chief Information
Officer, of the Bank... 0 0 2,000 3,000 3,300 4,950
Frederick C. Hoey, SVP,
Chief Credit Officer,
of the Bank............ 0 0 1,000 4,000 1,650 0
Rodney M. Wiessner, SVP,
Chief Financial
Officer, of the Bank... 0 0 1,000 4,000 1,500 6,000
</TABLE>
- --------
(1) The per share fair market value of the Company's Common Stock as of
December 31, 1998 was $17.00, based upon an independent evaluation, dated
February 1, 1999, prepared by L.F. Sherman Evaluation Research Consultants.
Compensation of Directors
In January 1999, the Board of Directors of the Company left the director
compensation package unchanged from the 1998 plan.
E-13
<PAGE>
The 1998 director compensation package included paying each director $200
for every board or committee meeting he or she attends. Mr. Kelly, as a full-
time employee of the Company, does not receive director compensation.
Chairpersons for the committees receive $300 for each meeting they chair. This
fee structure is intended to compensate the Chairpersons for their additional
time and effort required in fulfilling this role. This fee schedule was
effective for all of 1998. During 1998, the Board of Directors as a group
received a total of $74,700 for attendance at all meetings.
As discussed under "Option Grants in Last Fiscal Year," the Board of
Directors on August 18, 1998 extended for a period of two years certain Options
previously granted to directors Swanson, Kelly, Irwin and Lemon.
Certain Relationships and Related Transactions
Purchase Right
In 1987, Mr. Swanson acquired 300,701 shares of the Company's common stock
("Common Stock") through a tender offer at $11.00 per share (the "Tender
Offer"), net to the sellers in cash. The Tender Offer was made pursuant to the
terms of an agreement with the Company, dated as of February 5, 1987 (the
"Purchase Agreement").
As disclosed to shareholders in materials related to the Tender Offer, the
Purchase Agreement provides, among other things, certain protections against
dilution of Mr. Swanson's stock ownership by requiring that if the Company
should desire to issue any Equity Securities (as defined below), it shall give
Mr. Swanson first right to purchase (the "Purchase Right") a portion of such
Equity Securities up to an amount which will enable Mr. Swanson to maintain the
same percentage of ownership of the outstanding Common Stock as held by Mr.
Swanson on the date immediately following his purchases in the Tender Offer
(i.e., 60.14%). In the event that the number of shares of Common Stock owned by
Mr. Swanson should decline due to Mr. Swanson's failure to purchase shares
pursuant to such right or sales of shares of Common Stock by Mr. Swanson, the
Purchase Agreement provides that the Purchase Right entitles Mr. Swanson to
purchase a portion of new issuances of Equity Securities up to an amount which
will enable Mr. Swanson to maintain his percentage ownership of the outstanding
Common Stock as computed immediately prior to each issuance of such Equity
Securities.
The Purchase Right also applies to issuances of Equity Securities to
employees, officers and directors under stock option plans approved by the
Board of Directors of the Company, provided, however, that Common Stock shall
be deemed to have been issued only upon the exercise of an employee stock
option. The Purchase Agreement further states that if Mr. Swanson has a right
to purchase Common Stock due to the exercise of a stock option by an employee,
officer or director of the Company, the purchase price of such Common Stock
purchasable by Mr. Swanson shall be equal to the exercise price of such option.
The term "Equity Securities" is defined in the Purchase Agreement to mean
Common Stock, rights, options (except stock options issued pursuant to stock
option plans), warrants to purchase Common Stock, any security other than
Common Stock having voting rights in the election of the Board of Directors
which are not contingent upon a failure to pay dividends, any security
convertible into or exchangeable for any of the foregoing, and any agreement or
commitment to issue any of the foregoing.
The Purchase Right terminates when Mr. Swanson ceases to own in excess of
10% of the then outstanding shares of Common Stock.
Certain Transactions
Directors Lemon and Peatman are directors of the Bank and of the Company.
Both are shareholders in Dickenson, Peatman & Fogarty, a Professional Law
Corporation, which provided legal services to the Company and the Bank during
1997 and 1998 and from which the Company expects to receive legal services
during 1999. The amount of fees and expenses paid to Dickenson, Peatman &
Fogarty in 1998 for legal services rendered was $89,203.80.
E-14
<PAGE>
Indebtedness of Management
Some of the Company's directors and executive officers, as well as their
immediate family and associates, are customers of, and have had banking
transactions with, the Bank in the ordinary course of the Bank's business, and
the Bank expects to continue to have such ordinary banking transactions with
these persons in the future. In the opinion of management of the Company, all
loans and commitments to lend included in such transactions were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing for comparable transactions with
other persons of similar creditworthiness, and did not involve more than a
normal risk of collectibility or present other unfavorable features. Although
the Bank does not have any limits on the aggregate amount it would be willing
to lend to directors and officers as a group, loans to individual directors and
officers must comply with the Bank's respective lending policies and statutory
lending limits, and prior approval of the Bank's board of directors is required
for these types of loans.
SHAREHOLDER PROPOSALS
Under certain circumstances, shareholders are entitled to present proposals
at shareholder meetings. For any such proposal to be considered for inclusion
in the proxy statement prepared for the 2000 Annual Meeting of Shareholders,
the proposal must be received at the Company's principal executive offices at
901 Main Street, Napa, California 94559 prior to December 31, 1999. Any such
proposal received by the Company's principal executive offices after such date
will be considered untimely and may be excluded from the proxy statement and
form of proxy. The deadline for submission of stockholder proposals to be
presented at the 2000 Annual Meeting of Stockholders, but which will not be
included in the proxy statement and form of proxy relating to such meeting, is
March 16, 2000. Any such proposal received by the Corporation's principal
executive offices after such date will be considered untimely and the persons
named in the proxy for such meeting may exercise their discretionary voting
power with respect to such proposal.
FORM 10-KSB
If any shareholder would like a copy of the Company's Annual Report to the
SEC on Form 10-KSB, for the fiscal year ended December 31, 1998, including
financial statements and financial statement schedules, it may be obtained
without charge. Exhibits to the Form 10-KSB will be furnished upon payment of
reasonable charges. Written requests should be directed to Napa National
Bancorp, 901 Main Street, Napa, CA 94559.
OTHER MATTERS
Management is not aware of any other matters to come before the Meeting. If
any other matter not mentioned in this Proxy Statement is brought before the
Meeting, the persons named in the enclosed form of proxy will have
discretionary authority to vote all proxies with respect thereto in accordance
with their judgment.
By Order of the Board of Directors
C. Richard Lemon, Secretary
Dated: April 30, 1999
Napa, California
E-15
<PAGE>
APPENDIX F
----------------
NAPA NATIONAL BANCORP'S FORM 10-QSBFOR THE QUARTER ENDED SEPTEMBER 30, 1999
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999
Commission file number: 0-11090
----------------
NAPA NATIONAL BANCORP
(Exact name of Small Business Issuer as specified in its charter)
<TABLE>
<CAPTION>
California 94-2780134
<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
901 Main Street, Napa, California 94559
(Address of principal executive offices) (Zip Code)
----------------
(707) 257-2440
(Issuer's telephone number)
----------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [X]
Yes [_] No
The number of shares of the registrant's Common Stock, no par value,
outstanding as of September 30, 1999, was 792,675.
Transitional Small Business Disclosure Format:
[_] Yes [X] No
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-1
<PAGE>
NAPA NATIONAL BANCORP
Page
----
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION.............................................. F-
ITEM 1--FINANCIAL STATEMENTS............................................... F-
Consolidated Balance Sheets:
September 30, 1999..................................................... F-
December 31, 1998...................................................... F-
Consolidated Statements of Income:
Three Months ended September 30, 1999.................................. F-
Three Months ended September 30, 1998.................................. F-
Nine Months ended September 30, 1999................................... F-
Nine Months ended September 30, 1998................................... F-
Consolidated Statements of Cash Flows: F-
Nine Months ended September 30, 1999................................... F-
Nine Months ended September 30, 1998................................... F-
Notes to Consolidated Financial Statements............................... F-
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......... F-
PART II--OTHER INFORMATION................................................. F-
ITEM 1--LEGAL PROCEEDINGS.................................................. F-
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS.......................... F-
ITEM 3--DEFAULTS UPON SENIOR SECURITIES.................................... F-
ITEM 4--OTHER INFORMATION.................................................. F-
ITEM 5--EXHIBITS AND REPORTS ON FORM 8-K................................... F-
SIGNATURES................................................................. F-
INDEX TO EXHIBITS.......................................................... F-
F-2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
The following interim consolidated financial statements of Napa National
Bancorp and its subsidiary Napa National Bank are unaudited and prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. However, they reflect all
adjustments (which included only normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of financial
position, results of operations, and cash flows for the interim periods
presented and are normal and recurring.
Results for the period as presented are not necessarily indicative of
results to be expected of the year as a whole.
F-3
<PAGE>
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in 000's)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................ $ 8,578 $ 9,969
Federal funds sold................................. 1,480 13,590
Investment securities: Available for Sale, at
market value...................................... 36,878 33,844
Investment securities: Held to Maturity, at
amortized cost.................................... 2,705 1,798
Federal Reserve and Federal Home Loan Bank Stock... 592 553
Loans, less allowance for loan losses of $1,786 and
$1,671 at
September 30, 1999 and December 31, 1998.......... 94,836 77,647
Premises, furniture, fixtures and equipment,net.... 4,144 3,908
Accrued interest receivable........................ 1,286 1,211
Other real estate owned............................ -- 262
Other assets....................................... 1,766 1,307
-------- --------
TOTAL ASSETS....................................... $152,265 $144,089
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand....................... $ 38,518 $ 36,557
Interest-bearing:
Savings.......................................... 26,395 20,534
Transaction...................................... 34,436 33,042
Time certificates................................ 41,714 43,118
-------- --------
Total deposits................................... 141,063 133,251
Accrued interest payable and other liabilities..... 977 1,025
-------- --------
TOTAL LIABILITIES.................................. 142,040 134,276
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value, 20,000,000 shares
authorized;
792,675 and 791,000 shares issued and outstanding
at
September 30, 1999 and December 31, 1998,
respectively...................................... 7,223 7,207
Retained earnings.................................. 3,443 2,607
Net unrealized loss on available for sale
securities, net of taxes.......................... (441) (1)
-------- --------
TOTAL SHAREHOLDERS' EQUITY......................... 10,225 9,813
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $152,265 $144,089
======== ========
</TABLE>
(See notes to the unaudited consolidated financial statements)
F-4
<PAGE>
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in 000's, except earnings per share)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Interest income:
Interest and fees on loans................................... $ 2,025 $ 2,010
Interest on federal funds sold............................... 65 98
Interest on time deposits with other financial institutions.. -- 2
Interest and dividends on investment securities.............. 549 533
------- -------
Total interest income...................................... 2,639 2,643
Interest expense:
Interest expense on deposits................................. 816 879
Interest expense on Fed Funds Purchased...................... 2 --
------- -------
Total interest expense..................................... 818 879
------- -------
Net interest income........................................ 1,821 1,764
Provision for loan losses...................................... -- 75
------- -------
Net interest income after provision for loan losses........ 1,821 1,689
------- -------
Non-interest income:
Service charges on deposit accounts.......................... 156 151
Mortgage loan service fees................................... 8 12
Other........................................................ 136 146
------- -------
Total non-interest income.................................. 300 309
------- -------
Non-interest expense:
Salaries and employee benefits............................... 1,000 1,075
Occupancy.................................................... 104 127
Furniture, fixtures and equipment............................ 107 75
Other........................................................ 401 403
------- -------
Total non-interest expense................................. 1,612 1,680
------- -------
Income before income taxes................................. 509 318
Income taxes................................................... 174 112
------- -------
Net income................................................. $ 335 $ 206
======= =======
Earnings per common share...................................... $ 0.42 $ 0.26
======= =======
Earnings per common share--Assuming Dilution................... $ 0.40 $ 0.25
======= =======
Weighted average common shares outstanding used to compute net
earnings
per common share.............................................. 792,675 787,000
======= =======
Weighted average common shares outstanding used to compute net
earnings
per common share--Assuming Dilution........................... 841,672 830,392
======= =======
</TABLE>
(See notes to the unaudited consolidated financial statements)
F-5
<PAGE>
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in 000's, except earnings per share)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Interest income:
Interest and fees on loans................................... $ 5,720 $ 6,043
Interest on federal funds sold............................... 353 509
Interest on time deposits with other financial institutions.. -- 18
Interest and dividends on investment securities.............. 1,525 1,330
------- -------
Total interest income...................................... 7,598 7,900
Interest Expense:
Interest expense on deposits................................. 2,403 2,627
Interest on Fed Funds Purchased.............................. 2 --
------- -------
Total Interest Expense..................................... 2,405 2,627
------- -------
Net interest income........................................ 5,193 5,273
Provision for loan losses...................................... -- 265
------- -------
Net interest income after provision for loan losses........ 5,193 5,008
------- -------
Non-interest income:
Service charges on deposit accounts.......................... 456 396
Mortgage loan service fees................................... 26 38
Other........................................................ 422 427
------- -------
Total non-interest income.................................. 904 861
------- -------
Non-interest expense:
Salaries and employee benefits............................... 2,685 2,687
Occupancy.................................................... 281 366
Furniture, fixtures and equipment............................ 306 282
Other........................................................ 1,227 1,180
------- -------
Total non-interest expense................................. 4,499 4,515
------- -------
Income before income taxes................................. 1,598 1,354
Income taxes................................................... 562 518
------- -------
Net income................................................. $ 1,036 $ 836
======= =======
Earnings per common share...................................... $ 1.31 $ 1.07
======= =======
Earnings per common share--Assuming Dilution................... $ 1.23 $ 1.01
======= =======
Weighted average common shares outstanding used to compute net
earnings
per common share.............................................. 792,247 784,333
======= =======
Weighted average common shares outstanding used to compute net
earnings
per common share--Assuming Dilution........................... 840,741 827,203
======= =======
</TABLE>
(See notes to the unaudited consolidated financial statements)
F-6
<PAGE>
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in 000's)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,036 $ 836
Reconciliation of net income to net cash provided by
operating activities:
Depreciation on premises and equipment................... 303 303
Extension of non-statutory stock options................. 60 153
(Gain) loss on sale of other real estate owned........... (9) 6
Amortization of deferred loan fees and discounts/premiums
on securities........................................... 347 230
Provision for loan losses................................ -- 265
Decrease/(Increase) in accrued interest receivable....... (75) (347)
Decrease/(Increase) in other assets, net.................. (119) (209)
Decrease in accrued interest payable and other
liabilities.............................................. (48) (7)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 1,495 1,230
-------- --------
Cash flows from investing activities:
Loan originations, net of repayments...................... (17,184) (2,216)
Proceeds from maturities of time deposits with other
financial institutions................................... -- 1,782
Activity in securities held to maturity:
Purchases............................................... (2,611) (1,923)
Maturities.............................................. 1,698 1,948
Principal Paydowns...................................... 6 --
Activity in securities available for sale:
Purchases............................................... (12,027) (21,248)
Principal Paydowns...................................... 7,157 4,603
Funds from Call on Available for sale................... 738 792
(Purchases) Sale of Federal Reserve and Federal Home Loan
Bank stock............................................... (39) 35
Purchases of furniture and equipment...................... (538) (274)
Proceeds on sale of other real estate owned............... 275 340
-------- --------
NET CASH USED BY INVESTING ACTIVITIES..................... (22,525) (16,161)
-------- --------
Cash flows from financing activities:
Net increase in deposits.................................. 7,810 3,940
Stock options exercised................................... 16 --
Cash dividends............................................ (297) (294)
Compensation expense related to the exercise of incentive
stock options............................................ -- 60
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. 7,529 3,706
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS..................... (13,501) (11,225)
Cash and cash equivalents at beginning of period.......... 23,559 26,147
-------- --------
Cash and cash equivalents at end of period................ $ 10,058 $ 14,922
======== ========
CASH AND CASH EQUIVALENTS AT SEPTEMER 30:
Cash and due from banks................................. $ 8,578 $ 7,647
Federal funds sold ..................................... 1,480 7,275
-------- --------
$ 10,058 $ 14,922
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 2,473 $ 2,672
======== ========
Cash paid for income taxes.............................. $ 675 $ 623
======== ========
</TABLE>
(See notes to the unaudited consolidated financial statements)
F-7
<PAGE>
NAPA NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income or
loss and its components; however, the adoption of the Statement had no impact
on the Company's net income or shareholders' equity. SFAS 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 or loss.
The following is a summary of the components of total comprehensive income,
net of related income taxes:
<TABLE>
<CAPTION>
1999 1998
----------------------- -------------------------------
Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income.............. $335 $383 $318 $487 $206 $338 $292
Net unrealized
gain(loss) on
available-for-sale
securities............. (105) (278) (57) (120) 175 (6) (73)
---- ---- ---- ---- ---- ---- ----
Total Comprehensive
income.................. $230 $105 $261 $367 $381 $332 $219
==== ==== ==== ==== ==== ==== ====
</TABLE>
Note 3--Extension of Non-Statutory Stock Options
On July 20, 1999, The Board of Directors approved the extension of 10,000
non-statutory options that expired on September 16, 1999. The new expiration
date is September 16, 2000. Based on current market value of the Company's
Common Stock of $17.85, the extension of the exercise periods for these non-
statutory options resulted in the Company taking a charge against third quarter
earnings of $60,512, net of taxes.
F-8
<PAGE>
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. The following discussion
and analysis by the Company's management compares the results of the Company's
operations for the nine months ended September 30, 1999 and 1998 and the
financial condition and liquidity of the Company as of September 30, 1999 and
December 31, 1998.
Certain matters discussed in this report are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the competitive
environment and its impact on the Company's net interest margin, changes in
interest rates, asset quality risks, concentrations of credit and the economic
health of Napa County (particularly the health of the wine industry),
volatility of rate sensitive deposits, asset/liability matching risks, the
dilutive impact which might occur upon the issuance of new shares of common
stock, and liquidity risks. Therefore, the matters set forth below should be
carefully considered when evaluating the Company's business and prospects. For
additional information concerning these risks and uncertainties, please refer
to the Company's Annual Report on Form 10-KSB for the year ended December 31,
1998.
Financial Condition
The Company's assets increased approximately $8.2 million during the first
nine months of 1999 as compared to the period ended December 31, 1998. The
substantial portion of that increase was due to the increase in non-interest
bearing deposits of $2.0 million, savings deposits of $5.9 million, and
interest bearing transaction deposits of $1.4 million. Time certificates of
deposit comparatively declined $1.4 million. Total assets were $152.3 million
at September 30, 1999 compared with $144.1 million at December 31, 1998. Total
deposits increased to $141.1 million at September 30, 1999 compared with $133.3
million at December 31, 1998.
The loan portfolio of $94.8 million at September 30, 1999 increased $17.2
million as compared to the December 31, 1998 total of $77.6 million. The
allowance for loan losses on September 30, 1999 was $1,786,000 or 1.88% of
total gross loans outstanding. Loan recoveries exceeded loan charge-offs for
the first nine months of 1999 by $115,000. In the opinion of management, the
allowance for loan losses was considered adequate at September 30, 1999 based
on management's analysis of the risks inherent in the loan portfolio.
The Company's "held to maturity securities" consist of Treasury bonds,
municipals and stock in the Federal Reserve and Federal Home Loan Bank and are
classified as such in accordance with SFAS No. 115. At September 30, 1999, the
"held to maturity" investment portfolio's amortized cost and fair market value
was $3,297,000.
The Company's available for sale portfolio include collateralized mortgage
obligations and municipal bonds. The Company's general policy is to acquire "A"
rated or better, insured tax-free municipal bonds. Collateralized mortgage
obligations have an average life of five years or less at purchase date. At
September 30, 1999, collateralized mortgage obligations and municipal
securities had an amortized cost of $27,721,000 and $9,904,000, respectively,
and a fair value of $27,359,000 and $9,522,000, respectively.
Results of Operations
The Company's after-tax earnings were $1,036,000 during the first nine
months of 1999 compared with $836,000 during the same period in 1998.
Net interest income, the principal source of the Company's earnings,
represents the difference between interest and fees earned from lending and
investment activities and the interest paid on deposits used to fund
F-9
<PAGE>
those activities. Variations in the volume and mix of loans, investments, and
deposits and their relative sensitivity to movements in interest rates impact
net interest income.
During the first nine months of 1999, net interest income at $5,193,000 was
$80,000 behind the same period in 1998. The primary cause of the decrease was
the overall decline in interest rates and the impact it had on the loan
portfolio. Yield on loans declined approximately 125 basis points for the nine
months of 1999 as compared to the same period in 1998. That decrease was
mitigated by the decrease in interest expense on interest bearing deposits.
Yield on interest bearing deposits for the first nine months of 1999 was 43
basis points lower than the same time period of 1998. Yield on investments also
showed a decline in yield of approximately 50 basis points. That was in part
due to the decline in Federal Funds rate of 67 basis points. In addition, the
decline in overall rates resulted in the prepayment factor on the
collateralized mortgage obligations to increase. That caused the return of
principal faster than originally predicted. That required premiums on the
collateralized mortgage obligations to be amortized at a more expedited rate
and returned principal to be reinvested at a lower rate. That also assisted in
reducing net interest income as compared to prior year. Fortunately, the Bank
has continued to grow and the increased volume of earning assets has provided
the opportunity to increase net interest income.
Non-interest income increased by $43,000 in the nine months of 1999 as
compared to the same period in 1998. The increase in service charges on deposit
accounts was $60,000. That was mainly a result of increased charges on NSF
related items that increased $54,000 from 1998. Mortgage loan servicing fees
have declined as the Bank has curtailed its interest in processing those types
of transactions.
Non-interest expenses consist of salaries and benefits provided to employees
of the Bank, expenses related to premises and equipment, and operating expenses
associated with the business affairs of the Company. Total non-interest
expenses decreased $16,000 during the first nine months of 1999 when compared
with the first nine months of 1998. Salaries and benefits remained relatively
flat when compared to the same period in 1998. Occupancy expense declined
$85,000. At the end of 1998, the Bank purchased its Main Street building that
it had previously been leasing. That purchase provided the savings experienced
in the occupancy expense category. The remaining non-interest expense increased
$71,000 or 4.9% for the first nine months of 1999 compared to the same period
in 1998. This is primarily the result of normal increases in operating
expenses.
Capital Ratios and Adequacy
Shareholders equity was $10.2 million or 6.7% of total assets at September
30, 1999 compared with $9.8 million or 6.8% of total assets at December 31,
1998. The ratio of capital to risk-weighted assets at September 30, 1999 was
11.11% for the Company and 10.98% for the Bank. Both ratios exceeded the
regulatory requirements for a "well-capitalized" institution. Management
anticipates that both the Company and the Bank will continue to exceed the
regulatory minimums for "well-capitalized" institutions in the foreseeable
future. Therefore, in management's opinion, the Company and the Bank have
adequate capital in order to support future growth.
Inflationary Factors
Since the assets and liabilities of the Bank are primarily monetary in
nature, the performance of the Bank is affected more by changes in interest
rates than by inflation.
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."
F-10
<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.
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,
F-11
<PAGE>
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
has completed secondary testing, where it was 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
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.
F-12
<PAGE>
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.
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 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 has completed 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
involved, 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 has tested this plan as of
September 30, 1999.
F-13
<PAGE>
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
As of September 30, 1999, the Company was not party to any significant
legal proceeding.
ITEM 2--CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no changes in the Company's securities during the quarter.
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
No securities of this nature.
ITEM 4--OTHER INFORMATION
None.
ITEM 5--EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits. See Index to Exhibits to this Form 10-QSB, for a list of the
exhibits filed as a part of this report and incorporated herein by
reference.
(b) Reports on Form 8-K:
The Company did not file a report on Form 8-K during the third quarter
of 1999.
F-14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NAPA NATIONAL BANCORP
(Registrant)
Date: November 9, 1999 /s/ Brian J. Kelly
-------------------------------------
Brian J. Kelly
President/COO
Date: November 9, 1999 /s/ Michael D. Irwin
-------------------------------------
Michael D. Irwin
Chief Financial Officer
F-15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
3(i)* Articles of Incorporation of the Registrant, as amended.
3(ii)* Restated Bylaws of the Registrant.
4.1* A specimen copy of the certificates evidencing Common Stock.
10.1* Napa National Bancorp 1992 Stock Option Plan.
10.2* Form of Incentive Stock Option Agreement.
10.3* Form of Nonstatutory Stock Option Agreement.
27 Financial Data Schedule.
</TABLE>
*Previously filed.
F-16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes
indemnification of directors and officers of a Delaware corporation under
certain circumstances against expenses, judgments and the like in connection
with an action, suit or proceeding. Article Fourteenth of the Registrant's
Restated Certificate of Incorporation provides for broad indemnification of
directors and officers.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. See Exhibit Index.
(b) Financial Statement Schedules. Not Applicable.
(c) Report, Opinion or Appraisal. See Exhibits 5.1 and 8.1
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a posteffective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a posteffective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-1
<PAGE>
(c) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, state of
California, on January 28, 2000.
WELLS FARGO & COMPANY
/s/ Richard M. Kovacevich
By: _________________________________
Richard M. Kovacevich
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 28, 2000 by the following
persons in the capacities indicated:
<TABLE>
<S> <C>
/s/ Richard M. Kovacevich
__________________________________________ President and Chief Executive Officer
Richard M. Kovacevich (Principal Executive Officer)
/s/ Ross J. Kari
__________________________________________ Executive Vice President and Chief Financial
Ross J. Kari Officer (Principal Financial Officer)
/s/ Les L. Quock
__________________________________________ Senior Vice President and Controller
Les L. Quock (Principal Accounting Officer)
</TABLE>
LES S. BILLER ) BENJAMIN F. MONTOYA )
J.A. BLANCHARD III ) CYNTHIA H. MILLIGAN )
MICHAEL R. BOWLIN ) PHILIP J. QUIGLEY )
DAVID A. CHRISTENSEN ) DONALD B. RICE )
SUSAN E. ENGEL ) JUDITH M. RUNSTAD )
PAUL HAZEN ) SUSAN G. SWENSON ) A majority of
WILLIAM A. HODDER ) DANIEL M. TELLEP ) the Board of
ROBERT L. JOSS ) CHANG-LIN TIEN ) Directors*
REATHA CLARK KING ) MICHAEL W. WRIGHT )
RICHARD M. KOVACEVICH ) JOHN A. YOUNG )
RICHARD D. McCORMICK )
- --------
* Richard M. Kovacevich, by signing his name hereto, does hereby sign this
document on behalf of each of the directors named above pursuant to powers
of attorney duly executed by such persons.
/s/ Richard M. Kovacevich
_____________________________________
Richard M. Kovacevich
Attorney-in-Fact
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of November 18, 1999,
and as amended as of January 18, 2000, by and between Napa National
Bancorp and Wells Fargo & Company, included as Appendix A to the
accompanying proxy statement-prospectus.
3.1 Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated June
28, 1993. Certificates of Amendment of Certificate of Incorporation,
incorporated by reference to Exhibit 3 to the Registrant's Current
Report on Form 8-K dated July 3, 1995 (authorizing preference stock),
and Exhibits 3(b) and 3(c) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (changing the
Registrant's name and increasing authorized common and preferred
stock, respectively).
3.2 Certificate of Designations for the Registrant's ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994.
3.3 Certificate of Designations for the Registrant's Cumulative Tracking
Preferred Stock, incorporated by reference to Exhibit 3 to the
Registrant's Current Report on Form 8-K dated January 9, 1995.
3.4 Certificate of Designations for the Registrant's 1995 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
3.5 Certificate Eliminating the Certificate of Designations for the
Registrant's Cumulative Convertible Preferred Stock, Series B,
incorporated by reference to Exhibit 3(a) to the Registrant's Current
Report on Form 8-K dated November 1, 1995.
3.6 Certificate Eliminating the Certificate of Designations for the
Registrant's 10.24% Cumulative Preferred Stock, incorporated by
reference to Exhibit 3 to the Registrant's Current Report on Form 8-K
dated February 20, 1996.
3.7 Certificate of Designations for the Registrant's 1996 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K dated February 26, 1996.
3.8 Certificate of Designations for the Registrant's 1997 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K dated April 14, 1997.
3.9 Certificate of Designations for the Registrant's 1998 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K dated April 20, 1998.
3.10 Certificate of Designations for the Registrant's Adjustable Cumulative
Preferred Stock, Series B, incorporated by reference to Exhibit 3(j)
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
3.11 Certificate of Designations for the Registrant's Fixed/Adjustable Rate
Noncumulative Preferred Stock, Series H, incorporated by reference to
Exhibit 3(k) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
3.12 Certificate of Designations for the Registrant's Series C Junior
Participating Preferred Stock, incorporated by reference to Exhibit
3(l) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.13 Certificate Eliminating the Certificate of Designations for the
Registrant's Series A Junior Participating Preferred Stock,
incorporated by reference to Exhibit 3(a) to the Registrant's Current
Report on Form 8-K dated April 21, 1999.
3.14 Certificate of Designations for the Registrant's 1999 ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 3(b)
to the Registrant's Current Report on Form 8-K dated April 21, 1999.
3.15 By-Laws, incorporated by reference to Exhibit 3(m) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.
4.1 See Exhibits 3.1 through 3.15.
4.2 Rights Agreement, dated as of October 21, 1998, between the Registrant
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A dated October 21, 1998.
5.1 Opinion of Stanley S. Stroup as to the legality of the shares to be
issued (including consent).
8.1 Opinion of Brobeck Phleger & Harrison LLP regarding the U.S. federal
income tax consequences of the merger (including consent).*
23.1 Consent of Stanley S. Stroup (included in Exhibit 5.1).
23.2 Consent of KPMG LLP relating to the audited financial statements of
Wells Fargo & Company.
23.3 Consent of Ernst & Young LLP relating to the audited financial
statements of Napa National Bancorp.
23.4 Consent of Brobeck Phleger & Harrison LLP regarding its tax opinion
(included in Exhibit 8.1).
24.1 Powers of Attorney.
99.1 Form of proxy for special meeting of shareholders of Napa National
Bancorp.
99.2 Consent of First Security Van Kasper relating to Napa National
Bancorp.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 5.1
[LETTERHEAD OF STANLEY S. STROUP
EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL OF WELLS FARGO & COMPANY]
January 28, 2000
Board of Directors
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
Ladies and Gentlemen:
In connection with the proposed registration under the Securities Act of 1933,
as amended, of a maximum of 775,000 shares of common stock, par value $1-2/3 per
share, of Wells Fargo & Company, a Delaware corporation (the "Company"), and
associated preferred stock purchase rights (such shares and rights collectively
referred to as the "Shares"), which are proposed to be issued by the Company in
connection with the merger (the "Merger") of a wholly-owned subsidiary of the
Company with Napa National Bancorp, I have examined such corporate records and
other documents, including the registration statement on Form S-4 relating to
the Shares, and have reviewed such matters of law as I have deemed necessary for
this opinion, and I advise you that in my opinion:
1. The Company is a corporation duly organized and existing under the
laws of the state of Delaware.
2. All necessary corporate action on the part of the Company has been
taken to authorize the issuance of the Shares in connection with the
Merger, and when issued as described in the registration statement,
the Shares will be legally and validly issued, fully paid and
nonassessable.
I consent to the filing of this opinion as an exhibit to the registration
statement.
Sincerely,
/s/ Stanley S. Stroup
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
of Wells Fargo & Company
We consent to the incorporation by reference in the proxy statement-prospectus
included in this registration statement on Form S-4 of Wells Fargo & Company
related to the acquisition of Napa National Bancorp of our report dated January
19, 1999, with respect to the consolidated balance sheet of Wells Fargo &
Company and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998, and to the reference to our firm under the
heading "Experts" in the proxy statement-prospectus.
/s/ KPMG LLP
San Francisco, California
January 28, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the proxy
statement-prospectus included in this Registration Statement of Wells Fargo &
Company and to the incorporation by reference therein of our report dated
February 5, 1999, with respect to the consolidated financial statements of Napa
National Bancorp and subsidiaries included in its Annual Report (Form 10-KSB)
for the year ended December 31, 1998, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
San Francisco, California
January 27, 2000
<PAGE>
Exhibit 24.1
WELLS FARGO & COMPANY
Power of Attorney
of Director and/or Officer
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of WELLS FARGO & COMPANY, a Delaware corporation, does hereby make,
constitute and appoint RICHARD M. KOVACEVICH, LES BILLER, RODNEY L. JACOBS,
STANLEY S. STROUP, AND LAUREL A. HOLSCHUH, and each or any one of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution, for
the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of said Company to
a Registration Statement on Form S-4 or other applicable form, and all
amendments, including post-effective amendments, thereto, to be filed by said
Company with the Securities and Exchange Commission, Washington, D.C., in
connection with the registration under the Securities Act of 1933, as amended,
of up to 775,000 shares of Common Stock of the Company and any preferred stock
purchase rights associated with such shares, adjusted for any change in the
number of outstanding shares of Common Stock resulting from stock splits,
reverse stock splits, or stock dividends occurring after the date hereof, which
may be issued in connection with the acquisition by the Company of Napa National
Bancorp and its subsidiaries, and to file the same, with all exhibits thereto
and other supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 25th day of January, 2000.
/s/ Les S. Biller /s/ Richard D. McCormick
/s/ J. A. Blanchard III /s/ Cynthia H. Milligan
/s/ Michael R. Bowlin /s/ Benjamin F. Montoya
/s/ Philip J. Quigley
/s/ David A. Christensen /s/ Donald B. Rice
/s/ Susan E. Engel /s/ Judith M. Runstad
/s/ Paul Hazen /s/ Susan G. Swenson
/s/ William A. Hodder /s/ Daniel M. Tellep
/s/ Robert L. Joss /s/ Chang-Lin Tien
/s/ Reatha Clark King /s/ Michael W. Wright
/s/ Richard M. Kovacevich /s/ John A. Young
<PAGE>
Exhibit 99.1
Form of Proxy for Special Meeting of
Shareholders of Napa National Bancorp
The undersigned hereby appoints ______________ and ______________, or
either of them, as proxies to vote all shares of common stock the undersigned is
entitled to vote at the special meeting of shareholders of Napa National Bancorp
("Napa") to be held on Wednesday, March 15, 2000, or at any adjournment or
postponement thereof, as follows, hereby revoking any proxy previously given:
1. To approve the Agreement and Plan of Reorganization, dated as of
November 18, 1999, and as amended as of January 18, 2000 (as amended,
the "Merger Agreement"), by and between Napa and Wells Fargo & Company
("Wells Fargo") pursuant to which, among other things, a wholly-owned
subsidiary of Wells Fargo will merge with and into Napa (the "Merger")
upon the terms and subject to the conditions set forth in the Merger
Agreement, a copy of which is included as Appendix A in the
accompanying Proxy Statement-Prospectus; and to authorize such further
action by the Board of Directors and officers of Napa as may be
necessary or appropriate to carry out the intent and purposes of the
Merger.
_______ FOR _______ AGAINST _______ ABSTAIN
2. In the discretion of the persons appointed proxies hereby to vote on
such other matters as may properly come before the special meeting.
Shares represented by this proxy will be voted as directed by the
shareholder. The Board of Directors recommends a vote "FOR" proposal 1. If no
direction is supplied, the proxy will be voted "FOR" proposal 1.
Dated: _______________________________.
----------------------------------------
----------------------------------------
(Please sign exactly as name appears at left.)
(If stock is owned by more than one person,
all owners should sign. Persons signing as
executors administrators, trustees, or in
similar capacities should so indicate.)
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF NAPA NATIONAL BANCORP
<PAGE>
Exhibit 99.2
CONSENT OF FIRST SECURITY VAN KASPER
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Napa National Bancorp as Appendix B to the Registration Statement
on Form S-4 ("Registration Statement") of Wells Fargo & Company and to all
references to our firm and such opinion in the Prospectus-Proxy Statement
included in such Registration Statement. In giving such consent, we do not admit
that we come within the category of persons whose consent is required under, and
we do not admit and we disclaim that we are "experts" for purposes of the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.
/s/ FIRST SECURITY VAN KASPER
San Francisco, CA
January 28, 2000
