NAPA NATIONAL BANCORP
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1995 AND 1994 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND INDEPENDENT AUDITORS' REPORT
NAPA NATIONAL BANCORP AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1995 and 1994 2
Statements of Income for the Years Ended December 31, 1995,
1994, and 1993 3-4
Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994, and 1993 5
Statements of Cash Flows for the Years Ended December 31, 1995,
1994, and 1993 6
Notes to Financial Statements 7-20
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Napa National Bancorp:
We have audited the accompanying consolidated balance sheets of Napa
National Bancorp and subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company'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, such consolidated financial statements present fairly,
in all material respects, the financial position of Napa National
Bancorp and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
-----------------------------
March 22, 1996
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 (DOLLARS IN
THOUSANDS)
- --------------------------------------------------------------
ASSETS 1995 1994
CASH AND EQUIVALENTS:
Cash and due from banks $ 7,106 $ 5,459
Federal funds sold 14,780 10,760
-------- -------
Total cash and equivalents 21,886 16,219
-------- -------
INTEREST-BEARING TIME DEPOSITS - Other financial institutions 4,356 4,357
-------- -------
INVESTMENT SECURITIES AND FEDERAL
RESERVE BANK STOCK (At cost
which approximates market) (Note 2) 1,432 1,381
-------- -------
LOANS (Notes 1, 3 and 7):
Commercial 48,407 35,856
Real estate:
Construction 7,850 8,588
Mortgage 4,729 6,458
Installment 3,376 2,510
Personal lines of credit and other 10,337 9,741
-------- -------
Total loans 74,699 63,153
Less allowance for loan losses (1,325) (1,050)
-------- -------
Loans - net 73,374 62,103
-------- -------
PREMISES AND EQUIPMENT, Net (Notes 1 and 4) 2,489 1,449
ACCRUED INTEREST RECEIVABLE 666 432
OTHER ASSETS 648 536
-------- -------
TOTAL $104,851 $86,477
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand $ 19,068 $18,098
Interest-bearing:
Savings 12,305 14,367
Transaction 28,060 24,431
Time, $100 and over 9,449 6,817
Other time 27,870 15,665
-------- -------
Total deposits 96,752 79,378
Accrued interest payable and other liabilities 652 753
-------- -------
Total liabilities 97,404 80,131
-------- -------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: authorized, 1,000,000 shares, no shares
outstanding
Common stock, no par value: authorized, 20,000,000 shares, 754,500 shares
issued and outstanding 6,915 6,915
Retained earnings 532 (569)
-------- -------
Total shareholders' equity 7,447 6,346
-------- -------
TOTAL $104,851 $86,477
======== =======
See notes to consolidated financial statements.
2
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------
1995 1994 1993
INTEREST INCOME:
Loans (including fees) $7,515 $5,619 $4,502
Federal funds sold 583 412 257
Time deposits with other financial
institutions 251 148 45
Investment securities and Federal 83 47 27
Reserve Bank stock ------ ------ ------
Total interest income 8,432 6,226 4,831
------ ------ ------
INTEREST EXPENSE:
Deposits:
Savings 292 323 372
Transaction 517 470 446
Time, $100 and over 392 237 163
Other time 1,433 628 570
------ ------ ------
Total interest expense 2,634 1,658 1,551
------ ------ ------
NET INTEREST INCOME 5,798 4,568 3,280
PROVISION FOR LOAN LOSSES 323 149 198
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,475 4,419 3,082
------ ------ ------
NONINTEREST INCOME:
Service charges on deposit accounts 469 382 265
Other customer fees and charges 250 228 226
Other 81 17 103
------ ------ ------
Total noninterest income 800 627 594
(Continued)
3
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------
1995 1994 1993
NONINTEREST EXPENSE:
Salaries and employee benefits $ 2,261 $ 1,964 $ 1,720
Occupancy 402 277 254
Professional fees 417 176 217
Equipment 380 341 326
Marketing and business development 124 135 108
Stationery and supplies 95 67 62
Other 730 756 738
-------- -------- --------
Total noninterest expense 4,409 3,716 3,425
-------- -------- --------
INCOME BEFORE INCOME TAXES 1,866 1,330 251
INCOME TAXES 765 553 (249)
-------- -------- --------
NET INCOME $ 1,101 $ 777 $ 500
======== ======== ========
NET INCOME PER COMMON SHARE $1.25 $1.03 $0.66
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 882,300 754,500 754,500
======== ======== ========
(Concluded)
See notes to consolidated financial statements.
4
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------
RETAINED
NUMBER OF EARNINGS
SHARES COMMON (ACCUMULATED
OUTSTANDING STOCK DEFICIT) TOTAL
BALANCE, January 1, 1993 754,500 $6,915 $(1,846) $5,069
NET INCOME 500 500
------- ------ ------- ------
BALANCE, December 31, 1993 754,500 6,915 (1,346) 5,569
NET INCOME 777 777
------- ------ ------- ------
BALANCE, December 31, 1994 754,500 6,915 (569) 6,346
NET INCOME 1,101 1,101
------- ------ ------- ------
BALANCE, December 31, 1995 754,500 $6,915 $ 532 $7,447
======= ====== ======= ======
See notes to consolidated financial statements.
5
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------
1995 1994 1993
OPERATING ACTIVITIES:
Net income $ 1,101 $ 777 $ 500
Reconciliation of net income to net
cash provided by
operating activities:
Depreciation and amortization on 325 273 267
premises and equipment
Amortization of deferred loan fees
and premiums
on investment securities (304) (241) (174)
Provision for loan losses 323 149 198
Deferred income taxes (160) (114) (292)
Loss on sale of fixed assets 2
Increase in accrued interest (234) (134) (32)
receivable
(Increase) decrease in other assets 48 (7) 96
(Decrease) increase in accrued
interest payable and
other liabilities (101) 544 67
-------- -------- -------
Net cash provided by 1,000 1,247 630
operating activities -------- -------- -------
INVESTING ACTIVITIES:
Loan originations, net of repayments (11,298) (7,752) (8,399)
Net decrease (increase) in time
deposits with
other financial institutions 1 (2,278) (1,089)
Activity in securities held to
maturity:
Purchases (487) (1,214)
Maturities 475 500
Purchase of investment securities (505)
Proceeds from maturities of 500
investment securities
Purchase of Federal Reserve Bank stock (32) (19)
Proceeds from sales of other real 612
estate owned
Purchase of premises and equipment (1,366) (76) (143)
-------- -------- -------
Net cash used by investing (12,707) (10,227) (9,636)
activities -------- -------- -------
FINANCING ACTIVITIES - Net increase in
deposits 17,374 7,915 13,220
-------- -------- -------
INCREASE (DECREASE) IN CASH AND 5,667 (1,065) 4,214
EQUIVALENTS
CASH AND EQUIVALENTS, BEGINNING OF YEAR 16,219 17,284 13,070
-------- -------- -------
CASH AND EQUIVALENTS, END OF YEAR $ 21,886 $ 16,219 $17,284
======== ======== =======
NONCASH INVESTING ACTIVITIES:
Loans transferred to other real $ - $ - $ 112
estate owned ======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,241 $ 1,630 $ 1,531
======== ======== =======
Income taxes paid (net of refunds $ 1,472 $ 89 $ (62)
received) ======== ======== =======
See notes to consolidated financial statements.
6
NAPA NATIONAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - Napa National Bancorp is a bank holding
company whose primary investment is Napa National Bank (the "Bank").
Napa National Bancorp's only other investment is in a wholly owned
inactive leasing subsidiary. The Bank is a full service community
commercial bank with three offices in the Napa Valley area in Northern
California. The Bank's primary source of revenue is from providing
loans to customers, who are predominantly individuals, professionals
and small to medium sized businesses.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES IN PREPARATION OF
FINANCIAL STATEMENTS - The consolidated financial statements of Napa
National Bancorp and subsidiaries (the "Company") are prepared in
conformity with generally accepted accounting principles and
prevailing practices within the banking industry. All material
intercompany transactions and accounts have been eliminated. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
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.
INVESTMENT SECURITIES - Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
Accounting for Certain Investments in Debt and Equity Securities, and
changed its accounting policy to classify investment securities as
held to maturity or available for sale. The Company classified all
investment securities as held to maturity at January 1, 1994, and the
effect of adopting SFAS No. 115 was not material.
Held to maturity securities are those securities which management has
the ability and intent to hold to maturity. These securities are
stated at cost, adjusted for amortization of premiums and accretions
of discounts to maturity using methods approximating the interest
method.
Securities available for sale are held for indefinite periods of time.
These securities are carried at market value, with unrealized gains
and losses, after applicable income taxes, recorded as a separate
component of stockholders' equity. Gains on the sale of securities
available for sale, determined on the specific cost identification
basis, are recorded in other income at the time of sale. Specific
cost is determined by using historical cost adjusted for any
previously recorded unrealized losses.
LOANS are stated at the principal amount outstanding and net of any
deferred loan origination fees or costs.
Interest income on loans is accrued daily on a simple interest basis.
The Company places an asset on nonaccrual status when any installment
of principal or interest is 90 days past due, unless well secured
7
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.
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 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 Company's prior loss experience with loans and
commitments to extend credit. 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.
The Company adopted Statement of Financial Accounting Standards No.
114 ("SFAS 114"), Accounting by Creditors for Impairment of a Loan,
effective January 1, 1995. SFAS 114 requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded
through a valuation allowance. The valuation allowance and provision
for loan losses are adjusted for changes in the present value of
impaired loans for which impairment is measured based on the present
value of expected future cash flows or for the changes in the
appraised value of loans that are collateral dependent. The adoption
of SFAS 114 did not have a material effect on the Company's financial
conditions or results of operations.
The Company also adopted Statement of Financial Accounting Standards
No. 118 ("SFAS 118") effective January 1, 1995. SFAS 118 allows a
creditor to use existing methods for recognizing interest income on an
impaired loan and modifies disclosure requirements concerning impaired
loans.
Under SFAS No. 114, a loan is impaired when it is "probable" that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 excludes large
groups of smaller balance homogeneous loans that are collectively
evaluated for impairment. The Company has defined 1-4 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. Homogeneous loans that have had a
modification of terms are individually reviewed to determine if they
meet the definition of a troubled debt restructuring.
PREMISES AND EQUIPMENT - Premises, furniture and fixtures, equipment
and leasehold improvements 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.
INCOME TAXES - The Company accounts for income taxes under the asset
and liability approach. Deferred taxes arise from the effect of
temporary differences between the tax bases of assets and liabilities
8
and their reported amounts in the financial statements, and from the
effect of operating loss carryforwards on taxes payable in future
years based on currently enacted tax law. Deferred tax assets are
reduced by a valuation allowance if, based on available evidence, it
is more likely than not that some or all of the deferred tax assets
will not be realized.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - During 1995, the Financial
Accounting Standards Board issued several Statements of Financial
Accounting Standards, (SFAS's) which are described below. Adoption of
these statements in 1996 is not expected to have a significant impact
on the Company's financial position or its results of operations.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of was issued in March 1995. The
statement addresses the accounting for the impairment of long-lived
assets, such as premises, furniture and equipment, certain
identifiable intangibles and goodwill related to those assets. Long-
lived assets and certain identifiable intangibles are to be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized when the sum of the future cash flows
(undiscounted and without interest charges expected from the use of
the asset and its eventual disposition) is less than the carrying
amount of the asset. The statement also requires that long-lived
assets and identifiable intangibles, except for assets of a
discontinued operation held for disposal, be accounted for at the
lower of cost or fair value less cost to sell. SFAS No. 121 is
effective for financial statements for the Company's fiscal year
ending December 31, 1996.
SFAS No. 123, Accounting for Stock-Based Compensation, was issued in
October 1995. This Statement prescribes accounting and reporting
standards for all stock-based compensation plans, including employee
stock options, restricted stock and stock appreciation rights. The
statement defines a "fair value based method" of accounting for
employee stock options and encourages all entities to adopt that
method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure
compensation for those plans using the "intrinsic value based method"
under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (Opinion No. 25).
Under the fair value based method, compensation cost is measured at
the grant date of the option based on the value of the award and is
recognized over the service period, which is usually the vesting
period. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant
date or other measurement date over the amount an employee must pay to
acquire the stock. The Company's stock options plans have no
intrinsic value at grant date, and under Opinion No. 25, no
compensation cost is recognized for them.
Beginning in 1996, SFAS No. 123 requires that an employer's financial
statements include certain disclosures about stock-based compensation
arrangements regardless of the method used to account for them. An
employer that continues to apply the accounting provisions of Opinion
No. 25 will disclose pro forma amounts that reflect the difference
between compensation cost, if any, included in results of operations
and the related cost measured by the fair value based method,
including tax effects, that would have been recognized in the income
statement if the fair value based method had been used. The Company
plans to adopt only the disclosure requirements of SFAS No. 123.
NET INCOME PER COMMON SHARE is computed by dividing net income by the
weighted average number of common shares and dilutive stock options
outstanding during the year.
9
RECLASSIFICATIONS - Certain amounts in the 1994 and 1993 consolidated
financial statements have been reclassified to conform to the 1995
presentation.
2. INVESTMENT SECURITIES AND FEDERAL RESERVE BANK STOCK
As discussed in Note 1, effective January 1, 1994, the Company adopted
SFAS No. 115 on a prospective basis. The amortized cost and fair value
of investment securities held to maturity as of December 31, 1995 and
1994, are summarized as follows (in thousands):
DECEMBER 31, 1995
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
Securities of U.S. government
agencies - held to maturity $1,235 $15 $1,250 $1,235
Federal Reserve Bank stock 197 197 197
------ -------- -------- ------ ------
Total $1,432 $15 $ - $1,447 $1,432
====== ======== ======== ====== ======
DECEMBER 31, 1994
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
Securities of U.S. government
agencies - held to maturity $1,216 $13 $1,203 $1,216
Federal Reserve Bank stock 165 165 165
------ -------- -------- ------ ------
Total $1,381 $ - $13 $1,368 $1,381
====== ======== ======== ====== ======
Total securities pledged under state regulation to secure deposits amounted to
$1,235 and $1,216 at December 31, 1995 and 1994, respectively.
The scheduled maturities of Securities of U.S. Government agencies at December
31, 1995 were as follows (in thousands):
AMORTIZED FAIR
COST VALUE
Due in one year or less $1,432 $1,447
Due from one year to five years - -
------ ------
Total $1,432 $1,447
====== ======
There were no sales of investment securities in 1995, 1994 and 1993.
10
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses for the years ended
December 31, 1995, 1994 and 1993 is summarized as follows (in
thousands):
1995 1994 1993
Balance, beginning of year $1,050 $ 912 $ 742
Provision for loan losses 323 149 198
Loans charged off (51) (12) (28)
Recoveries 3 1
------ ------ -----
Balance, end of year $1,325 $1,050 $ 912
====== ====== =====
Nonaccrual loans past due 90 days or more as of December 31, 1995
and 1994, were approximately $1,447 and $962, respectively. The
effect on interest income had these loans been performing in
accordance with contractual terms as of December 31, 1995 and 1994
would have approximated $291 and $85, respectively.
At December 31, 1995, the Company had approximately $1,447 of loans
considered to be impaired in accordance with SFAS No. 114. These
loans were evaluated for impairment primarily using the collateral
method and required an allowance for credit losses measured in
accordance with SFAS No. 114 of $236. Average impaired loans during
the year ended December 31, 1994 amounted to approximately $1,204.
Related interest income recognized on impaired loans during the year
ended December 31, 1995 was approximately $.001.
At December 31, 1995, 1994 and 1993, the Bank was servicing loans for
the Federal Home Loan Mortgage Corporation with unpaid principal
balances of $22,508, $22,692, and $21,943, 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 $51, $60 and $74 for the years
ended December 31, 1995, 1994 and 1993, respectively.
4. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1995 and 1994 consisted
of the following (in thousands):
1995 1994
Equipment $ 1,485 $ 1,230
Bank premises 941 855
Furniture and fixtures 530 553
Leasehold improvements 923 223
Automobiles 39 33
------- -------
Total 3,918 2,894
Less accumulated depreciation and (1,429) (1,445)
amortization ------- -------
Total $ 2,489 $ 1,449
======= =======
11
Depreciation and amortization of $325, $273, and $267 was charged
to expense for the years ended December 31, 1995, 1994, and 1993,
respectively. The Company and Bank relocated its head office in
1995. This resulted in the retirement of $341 in fully depreciated
assets.
5. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN
The Company has a stock option plan, amended in July 1988, that
provides for issuance of incentive stock options ("ISO") to certain
officers and nonstatutory stock options to certain members of the
Company's Board of Directors to purchase up to 250,000 shares of
common stock. Each option entitles the holder to purchase one
share of common stock. Outstanding options that expire at various
dates through 2005 have been granted at a price of $8.00 to $10.00.
This price corresponds to the market value of the stock at the
dates the options were granted. The right to exercise options
vests either immediately or at various rates in each year of future
service. There were 105,200 options available for grant at
December 31, 1995.
Option information is summarized below:
NONSTATUTORY
NUMBER OF
PRICE OPTIONS
PER ----------------------------
SHARE 1995 1994 1993
Shares under option
at beginning of year $ 8.00 - $8.09 90,000 100,000 130,000
Options canceled $ 8.00 - (20,000) (30,000)
Options granted $8.00 - $10.00 20,000 10,000 -
------- ------- -------
Shares under option at end of year $8.00 - $10.00 110,000 90,000 100,000
======= ======= =======
Shares under option exercisable
at end of year $ 8.00 - $8.09 95,000 90,000 100,000
======= ======= =======
ISO
NUMBER OF
PRICE OPTIONS
PER ----------------------------
SHARE 1995 1994 1993
Shares under option
at beginning of year $ 8.00 31,300 28,800 37,800
Options granted $8.00 - $10.00 3,500 7,500
Options canceled $ 8.00 - (5,000) (9,000)
------- ------- -------
Shares under option
at end of year $8.00 - $10.00 34,800 31,300 28,800
======= ======= =======
Shares under option exercisable
at end of year $8.00 - $10.00 32,800 29,800 25,800
======= ======= =======
The Company also has a 401(k) stock participation plan (the
"Plan"). All employees of the Company are eligible to participate
in the Plan. The Plan invests in the common stock of the Company.
The Company's matching contributions to the Plan were $60, $23, and
$19 for the years ended December 31, 1995, 1994 and 1993,
respectively.
12
6. INCOME TAXES
The provision for income taxes for the years ended December 31,
1995, 1994, and 1993 is summarized as follows (in thousands):
1995 1994 1993
Current:
Federal $ 667 $ 486 $ 15
State 258 181 28
----- ----- -----
Total current 925 667 43
----- ----- -----
Deferred:
Federal (126) (75) (203)
State (34) (39) (89)
----- ----- -----
Total deferred (160) (114) (292)
----- ----- -----
Provision (credit) for income taxes $ 765 $ 553 $(249)
===== ===== =====
The temporary differences and tax carryforwards which created
deferred tax assets and liabilities are detailed below (in
thousands):
DECEMBER 31,
-----------------------
1995 1994 1993
Deferred tax assets:
Reserves not currently deductible $ 545 $ 412 $ 338
Losses not currently deductible 227 227 226
Investment tax credit 40
Alternative minimum tax credit 9
State taxes 21 3
Deferred loan fees 18 33
Other 9 6 13
----- ----- -----
Gross deferred tax assets 820 681 626
Valuation allowance (170) (170) (170)
----- ----- -----
Deferred tax assets 650 511 456
----- ----- -----
Deferred tax liabilities:
Accrual to cash (15) (27)
Deferred loan fees (7)
Tax over book depreciation (43) (49) (52)
State taxes (37)
----- ----- -----
Gross deferred tax liabilities (43) (64) (123)
----- ----- -----
Net deferred tax asset included in
other assets $ 607 $ 447 $ 333
===== ===== =====
Under SFAS No. 109 "Accounting for Income Taxes", deferred tax
assets are recognized to the extent that their realization is more
likely than not. As of December 31, 1995, 1994 and 1993, the Bank
was unable to conclude that the realization of the Company's
deferred tax asset was more likely then not.
13
Accordingly, under SFAS No. 109, a valuation allowance has been
reflected at December 31, 1995, 1994 and 1993 to reduce the Bank's
deferred tax assets as the amount likely to be realized.
The difference between the statutory federal income tax rate and
the Company's effective tax rate, expressed as a percentage of
income before income taxes, is as follows:
1995 1994 1993
Federal statutory income tax rate 34 % 35 % 35 %
State franchise tax, less federal
income tax effect 8 7 7
Change in valuation allowance (138)
Other (2)
---- ---- ----
Effective income tax rate 42 % 42 % (98)%
==== ==== ====
7. 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, 1995 and 1994, are as follows (in thousands):
1995 1994
Balance at beginning of year $ 1,295 $1,890
Additions 1,493 281
Payments (1,653) (554)
Other - (322)
------- ------
Balance at end of year $ 1,135 $1,295
======= ======
The Company also had commitments to extend credit to related
parties of $2,288 at December 31, 1995. Other activity in the
table above represents loans to directors or officers who left the
Company during the year and are, therefore, not considered related
parties for purposes of this disclosure. At December 31, 1995 and
1994, an affiliated company of a member of the Board of Directors
had $445 and $1,182 (0.5% and 1.5% 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.
8. 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.
14
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 standby letters of credit written is represented by
the contractual notional amount of these instruments.
At December 31, 1995, financial instruments whose contract amounts
represent credit risk were as follows (in thousands):
1995
CONTRACT
AMOUNT
Commitments to extend credit $18,168
Standby letters of credit 646
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral
required varies but may include accounts receivable, inventory,
property, plant and equipment, real estate and income producing
commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
The credit risk involved in issuing standby letters of credit is
essentially the same as that involved in extending loans to customers.
At December 31, 1995, all standby letters of credit were secured by
normal business assets in accordance with the Company's standard
lending practices.
9. CONCENTRATION OF CREDIT RISK
The Company grants residential, commercial, construction, agricultural
and consumer loans to customers principally located in Napa County,
California. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts
is dependent on the economic conditions of the wine industry. At
December 31, 1995, the Company's loans to companies in the wine
industry were $6,913 with commitments to lend an additional $3,347.
The Company requires that loan customers meet the collateral
requirements described in Note 8 for commitments to extend credit.
As of December 31, 1995 and 1994, 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.
10. COMMITMENTS AND CONTINGENCIES
The Company and the Bank lease a portion of their banking and office
facilities under noncancellable operating leases, including a new
headquarters and branch facility in downtown Napa occupied in early
1995. The initial lease term for this new facility is from December
1, 1994 to November 30, 1999, with three five-year renewal options.
The new lease provides for inflationary increases in the monthly
rental
15
amount during the renewal periods and also contains options to
purchase the facility at an agreed upon market value during certain
defined periods.
Total minimum future rental payments under these operating leases
at December 31, 1995, are as follows (in thousands):
1996 $180
1997 180
1998 154
1999 109
----
Total $623
====
Rental expense was $201, $155 and $144 for the years ended December
31, 1995, 1994, and 1993, 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.
11. REGULATORY MATTERS
The Company is subject to capital adequacy guidelines adopted by
the Federal Reserve Board and Comptroller of the Currency for use
in their examination and regulation of bank holding companies and
banks. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. The regulations require
the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table below) of Tier 1 capital (as defined in the
regulations) to total average assets (as defined), and minimum
ratios of Tier 1 and total capital (as defined) to risk-weighted
assets (as defined). To be considered adequately capitalized (as
defined) under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier 1 leverage, Tier 1
risk-based and total risk-based ratios as set forth in the table.
The Bank's actual capital amounts and ratios are also presented in
the table.
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------------------------------
MINIMUM MINIMUM
ACTUAL REQUIREMENT ACTUAL REQUIREMENT
----------------------------------------------------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
Leverage $7,156 7.16% $4,000 4.00% $6,026 7.28% $3,309 4.00%
Tier 1 risk-based 7,156 9.14 3,132 4.00 6,026 9.07 2,656 4.00
Total risk-based 8,139 10.40 6,263 8.00 6,859 10.33 5,312 8.00
The capital ratios at December 31, 1995 were in excess of the
"well-capitalized" minimum as defined in the FDICIA. As of
December 31, 1995, management believes that the Bank meets all
capital requirements to which it is subject.
16
The Company is subject to regulation under the Bank Holding Company
Act of 1956 and to regulation by the Federal Reserve Board. The
regulations require the maintenance of cash reserve balances on
transaction accounts and nonpersonal time deposits at the Federal
Reserve Bank. The average reserve requirement for the Bank for the
years ended December 31, 1995 and 1994 was $703 and $642,
respectively.
12. SUBSEQUENT EVENTS
During the first quarter of 1996, the Board of Directors of the
Company declared a cash dividend of twelve and a half cents
($0.125) per share. The dividend was based on 1995 earnings and
amounted to $94. The dividend was paid to shareholders on March
15, 1996.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, Disclosure About 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, 1995 are as follows (dollars
in thousands):
CARRYING ESTIMATED
AMOUNT FAIR VALUE
ASSETS
Cash and cash equivalents (a) $21,886 $21,886
Interest-bearing time deposits - other
financial institutions (b) 4,356 4,356
Investments securities and Federal 1,432 1,447
Reserve Bank stock (c)
Loans - net (d) 73,374 73,302
LIABILITIES
Deposits (e) 96,752 95,560
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (f) - -
Commitments to extend credit
Commercial letters of credit
(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) Investment 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.
17
(d) 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.
(e) 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.
(f) Off-balance-sheet instruments: The fair value of commitments to
extend credit is estimated using fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements and the present creditworthiness of the
counterparties. The fair values of standby and commercial
letters of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties, reduced
by the remaining net deferred income associated with such
obligations.
14. 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, 1995 and 1994 (Dollars in thousands)
- ----------------------------------------------------------------------
1995 1994
Assets:
Cash $ 278 $ 308
Investments in subsidiaries 7,269 6,139
Accrued interest receivable and other 16 16
assets -------- ------
Total assets $ 7,563 $6,463
======== ======
Liabilities and shareholders' equity:
Accrued expenses and other liabilities $ 116 $ 117
Shareholders' equity:
Preferred stock, no par value:
1,000,000 shares authorized, no shares outstanding
Common stock, no par value:
20,000,000 shares authorized, 754,500 shares
issued and outstanding 6,915 6,915
Retained earnings 532 (569)
-------- ------
Total shareholders' equity 7,447 6,346
-------- ------
Total liabilities and shareholders' $ 7,563 $6,463
equity ======== ======
18
Statements of Income for the Years Ended
December 31, 1995, 1994, and 1993 (Dollars in thousands)
- --------------------------------------------------------
1995 1994 1993
Income:
Interest income $ 6 $ 6 $ 7
Other income 12 4
-------- ------ -----
Total income 18 6 11
-------- ------ -----
Expenses:
Salaries and employee benefits 46
Other expense 1 3 1
-------- ------ -----
Total expense 47 3 1
-------- ------ -----
(Loss) income before applicable taxes
and equity in net income of subsidiaries (29) 3 10
Applicable income taxes 1
--------- ------ -----
(Loss) income before equity in
undistributed net income of
subsidiaries (29) 3 9
Equity in undistributed net income of 1,130 774 491
subsidiaries -------- ------ -----
Net income $ 1,101 $ 777 $ 500
======== ====== =====
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1995, 1994, and 1993 (Dollars in thousands)
- -----------------------------------------------------------------
NUMBER COMMON ACCUMULATED
OF SHARES STOCK DEFICIT TOTAL
January 1, 1993 754,500 $6,915 $(1,846) $5,069
Net income - - 500 500
-------- ------ -------- -------
December 31, 1993 754,500 6,915 (1,346) 5,569
Net income - - 777 777
-------- ------ -------- -------
December 31, 1994 754,500 6,915 (569) 6,346
Net income - - 1,101 1,101
-------- ------ -------- -------
December 31, 1995 754,500 $6,915 $ 532 $7,447
======== ====== ======== =======
19
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993 (Dollars in thousands)
- --------------------------------------------------------
1995 1994 1993
Operating activities:
Net income $ 1,101 $ 777 $ 500
Reconciliation of net income to net cash
provided (used) by operating activities:
Equity in undistributed net income of
subsidiaries (1,130) (774) (491)
Decrease in other assets, net 2
(Decrease) increase in accrued expenses
and other liabilities, net 3
-------- ------ -----
Net cash (used) provided by (29) 3 14
operating activities -------- ------ -----
Net (decrease) increase in cash (29) 3 14
Cash at beginning of year 308 305 291
-------- ------ -----
Cash at end of year $ 278 $ 308 $ 305
======== ====== =====
* * * * * *
20