UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(x) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996, or:
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-11090
NAPA NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
California 94-2780134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
901 Main Street, Napa, California 94559
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(707) 257-2440
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of May 10, 1996, the number of shares outstanding of the registrant's Common
Stock, without par value, was 754,500. Fully diluted shares outstanding at this
date were 882,300.
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
The following interim consolidated financial statements are unaudited.
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.
Results for the quarter as presented are not necessarily indicative of
results to be expected of the year as a whole.
2
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In 000s)
March 31, December 31,
1996 1995
(Unaudited)
ASSETS
Cash and due from banks $ 5,781 $ 7,106
Federal funds sold 8,040 14,780
Time deposits with other financial institutions 4,356 4,356
Investment securities: Held to maturity 1,724 1,235
Federal Reserve Stock 215 197
Loans, less allowance for loan losses of
$1,343 and $1,325 at March 31, 1996 and
December 31, 1995 73,639 73,374
Premises, furniture, fixtures and equipment, net 2,488 2,489
Accrued interest receivable 720 666
Other assets 655 648
TOTAL ASSETS $97,618 $104,851
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand $15,819 $ 19,068
Interest-bearing:
Savings 12,646 12,305
Transaction 25,697 28,060
Time certificates 35,511 37,319
Total deposits 89,673 96,752
Accrued interest payable and other liabilities 340 652
TOTAL LIABILITIES 90,013 97,404
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000
shares authorized; no shares outstanding 0 0
Common stock, no par value, 20,000,000
shares authorized; 754,500 shares issued
and outstanding at March 31, 1996 and
December 31, 1995 6,915 6,915
Retained Earnings 690 532
TOTAL SHAREHOLDERS' EQUITY 7,605 7,447
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $97,618 $104,851
3
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In 000s, except earnings per share data)
Quarter Ended March 31,
1996 1995
Interest income:
Interest and fees on loans $ 2,008 $ 1,696
Interest on federal funds sold 154 102
Interest on time deposits with
other financial institutions 61 59
Interest on investment securities 25 20
Total interest income 2,248 1,877
Interest expense:
Interest on deposits 735 498
Total interest expense 735 498
Net interest income 1,513 1,379
Provision for loan losses 72 49
Net interest income after provision
for loan losses 1,441 1,330
Non-interest income:
Service charges on deposit accounts 131 110
Other customer fees and charges 63 71
Mortgage loan origination 3 2
Total non-interest income 197 183
Non-interest expense:
Salaries and employee benefits, net 660 513
Occupancy 109 91
Furniture, fixtures and equipment 109 110
Marketing and business development 25 25
Other 308 273
Total non-interest expense 1,211 1,012
Income before income taxes 427 501
Income taxes 175 207
Net income $ 252 $ 294
Net income per share $ 0.29 $ 0.39
Dividends paid per share $ 0.125 $ 0.000
Weighted average common shares outstanding
used to compute net income per share 882,300 754,500
4
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In 000s)
Quarter Ended March 31,
1996 1995
Cash flows from operating activities:
Net income $ 252 $ 294
Reconciliation of net incomes to net cash
provided by operating activities:
Depreciation on premises and equipment 113 67
Amortization of deferred loan fees
and discounts/premiums on investment
securities (294) (272)
Provision for loan losses 72 49
(Increase) in accrued interest receivable (54) (74)
(Increase) in other assets, net (7) (141)
(Decrease) in accrued interest payable
and other liabilities (312) (373)
NET CASH (USED) BY OPERATING ACTIVITIES (230) (450)
Cash flows from investing activities:
Loan originations net of collections (43) (807)
Net decrease in time deposits with
other financial institutions 0 1
Activity in securities held to maturity
Purchases (1,724) 0
Maturities 1,237 0
Capital expenditures (114) (357)
Purchase of Federal Reserve Stock (18) (16)
NET CASH (USED) IN INVESTING ACTIVITIES (662) (1,179)
Cash flows from financing activities:
Net (decrease) increase in deposits (7,079) 5,342
Cash Dividend paid to shareholders (94) 0
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (7,173) 5,342
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (8,065) 3,713
Cash and cash equivalents at beginning
of period 21,886 16,219
Cash and cash equivalents at end of
period $13,821 $19,932
(Continued on following page)
5
NAPA NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In 000s)
Quarter Ended March 31,
1996 1995
CASH AND CASH EQUIVALENTS AT MARCH 31
CONSIST OF:
Cash and due from banks $ 5,781 $ 7,106
Federal funds sold 8,040 14,780
$13,821 $21,886
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 999 $ 442
Cash paid for income taxes $ 110 $ 735
(Concluded)
6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
The following should be read in conjunction with the unaudited consolidated
financial statements presented elsewhere in this Form 10-Q. Since Napa National
Bancorp (the Company) is a holding company whose principal asset is, and is
expected to be, the capital stock of Napa National Bank (the Bank), the
following relates principally to the financial condition and results of
operations of the Bank. All dollar amounts are rounded and expressed in
thousands except earnings per share data.
Summary of Financial Results
The Company recorded net income of $252, or $0.29 per share, for the first
quarter of 1996, compared to net income of $294, or $0.39 per share, during the
first quarter of 1995. The Company's year-to-date 1996 operating results were
$42 below the results for the same period in 1995 for the following reasons.
Net interest income for the first quarter of 1996 was $134 above the results for
the similar period in 1995. Provision for loan losses for the first three
months of 1996 was $23 above the same period in 1995. Non-interest income in
1996 was $14 above the results for 1995 due to increases in various service
charges and product enhancements. Non-interest expenses were $199 higher in the
first quarter of 1996 over the similar period of 1995.
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 first quarter of 1996, net interest income was $134, or 10%, higher
than the same quarter of 1995. Net interest income increased over 1995,
primarily due to an increase in earning assets (see below) and slight increases
on rates earned on loans and investments during the latter half of 1995. For
the first three months of 1996, the loan-to-deposit ratio averaged 81%, while in
the same period of 1995, the ratio averaged 84%.
For the first quarter of 1996, total average earning assets were
approximately $93,713, an increase of $15,998, or 21%, over total average
earning assets of $77,715 for the same period in 1995. This increase in average
assets in the first quarter of 1996 over that of 1995, contributed significantly
to the increase of $371, or 20%, in total interest income between the two
periods.
First quarter 1996 total interest expense increased substantially over the
same period of 1995 ($735 and $498, respectively). This increase
7
is primarily attributed to a limited time, one year 7% certificate of deposit
product offered by the Bank late in the first quarter of 1995 (See "Deposits"
herein).
Average interest bearing deposits for the first quarter of 1996 were
$76,651, an increase of $13,803, or 22%, over 1995's total of $62,848. This
growth in interest bearing deposits, coupled with general increases on rates
paid on deposits, and the 7% certificate of deposit product discussed above,
resulted in the growth in total interest expense of $237, or 48%, between the
two periods.
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. As further described in "Allowance for Loan Losses" herein,
management takes many factors into consideration when determining the provision.
In addition to the factors described in the "Allowance for Loan Losses" section,
management also considers loan portfolio growth in establishing the provision.
The provision for loan losses was $72, or $23 higher in the first quarter
of 1996 over the same period of 1995, an increase of 47%. Gross loans totaled
$74,982 as of March 31, 1996, an increase of $10,752, or 17%, over the March 31,
1995 total of $64,230. The provision for loan losses increased in the first
quarter of 1996 over the 1995 figure primarily due to an increase in outstanding
loan balances, projected loan growth in the second quarter and management's
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 and fees charged for other banking services. Non-interest income
increased in the first quarter of 1996 by $14, or 8%, compared to the same
period in 1995. The growth experienced in 1996 can be attributed to the
continued increase in number of deposit accounts subject to service charges
during the period under review. Additionally, the Bank's merchant card
processing program has shown strong gains throughout 1995 and into 1996,
contributing to the growth in non-interest income during the first quarter of
1996.
Non-Interest Expense
Total non-interest expenses for the first three months of 1996 were $1,211,
representing an increase of $199, or 20%, over 1995's total of $1,012.
Salaries and employee benefits increased by $147, or 29%, for the first three
months of 1996 over the same period in 1995. This increase is attributed to the
addition of approximately seven full time equivalent employees during the
previous twelve months. This staff increase was a strategic move by management
in order to take advantage of unique marketing opportunities taking place in the
Company's service area and the overall growth in the Bank in general.
8
Occupancy and furniture, fixtures and equipment expenses increased a
combined total of $17, or 8%, during the first quarter of 1996 over the same
period of 1995. During 1995, the Bank closed and relocated a branch, relocated
its head quarters, moved the bulk of its lending and loan administrative staff,
remodeled its North Napa office and relocated the EDP and Customer Service
Departments. The bulk of these moves and costs were incurred during the
second and third quarters of 1995. These moves increased the Company's total
occupied rental space by approximately 7,500 square feet. This increase in
square footage and associated costs, contributed materially to the increase in
1996 verse 1995 totals.
The Company's marketing and business development costs remained flat
between the first three months of 1996 over the same period of 1995. The Bank's
marketing efforts remained consistent during the first three months of both 1996
and 1995.
Other non-interest expenses increased by $35, or 13%, during 1996 over the
first quarter of 1995. A significant portion of this increase is attributable
to the fact that the Company has grown 6% in total assets during the previous
twelve months. Additionally, the Company enhanced its director compensation
plan effective January 1, 1996. Director and other professional fees attributed
significantly to the increase in expenses during the prior twelve months. In
addition to these costs, the Bank began an extensive training program for a
significant number of employees early in the first quarter of 1996.
Income Taxes
Income tax expense was approximately 41% of pre-tax income for the three
months ending March 31, 1996 and 1995.
9
Loans and Nonaccrual Loans
Loans totaled $74,982 at March 31, 1996, an increase of $283, or .4%, over
December 31, 1995's balance of $74,699, and an increase of $10,752, or 17%, over
March 31, 1995's balance of $64,230. The increase in the Company's loan
portfolio over the last twelve months, in management's opinion, resulted from
new loan generation by the Bank's loan officers, a concentrated marketing plan,
and current changes in the Company's service area.
As of March 31, 1996,nonperforming loans were $2,105, as compared to
$1,447, at December 31, 1995. Nonperforming loans at March 31, 1995 were
$1,005. Accruing loans past due 90 days or more were $0 at both March 31, 1996
and December 31, 1995.
10
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure." These statements
address the accounting and reporting by creditors for impairment of certain
loans. A loan is impaired when, based upon current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. These statements are applicable
to all loans, uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
such as credit cards, residential mortgage and consumer installment loans, loans
that are measured at fair value or at the lower of cost or fair value and
leases. Impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, except that as a
practical expedient, the Company measures impairment based on a loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Loans are measured for impairment as part of the
Company's normal internal asset review process.
Interest income is recognized on impaired loans in a manner similar to that
of all loans. It is the Company's policy to place loans that are delinquent 90
days or more as to principal or interest on a nonaccrual of interest basis
unless secured and in the process of collection, and to reverse from current
income accrued but uncollected interest. Cash payments subsequently received on
nonaccrual loans are recognized as income only where the future collection of
principal is considered by management to be probable.
At March 31, 1996, the Company had approximately $2,105 in loans considered
to be impaired. These loans were evaluated for impairment based on fair value of
the underlying collateral and required an allowance for credit losses measured
in accordance with SFAS No. 114 of $242.
The average recorded investment in the impaired loans during the three
months ended March 31, 1996, was $1,310: the related amount of interest income
recognized during the period that such loans were impaired was $7, and the
amount of interest income recognized under the cash-basis method of accounting
during the time within the period that the loans were impaired was $7.
Allowance for Loan Losses
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 maintains an allowance for possible loan losses 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, and based upon
management's assessment of historical loan loss experience, 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
the $1,343 allowance at March 31, 1996, approximately 1.79% of total loans, was
adequate as an allowance against probable losses in the portfolio. At March 31,
1995, the $1,099 allowance amounted to approximately 1.71% of total loans.
There can be no assurance that in any given period the Bank may not
11
sustain charge-offs which are substantial in relation to the size of the
allowance. The allowance is increased by charges to the provision for loan loss
and reduced by net charge-offs.
The activity in the allowance for loan losses was as follows:
1996 1995
(in 000's)
Balance at January 1 $1,050 $1,050
Provision for loan losses 72 49
Recoveries 0 0
Charge-offs 54 0
Balance at March 31 $1,343 $1,099
Investments
The Bank's classification of its investment in debt securities according to
the provisions of SFAS 115 are as follows:
March 31, 1996 - Investment Securities Classified
According to the Provisions of SFAS No. 115
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held-to-Maturity Securities
U.S. Treasury $1,724 $2 $0 $1,726
Federal Reserve Stock $ 215 $0 $0 $ 215
Deposits
Deposits totaled $89,673 at March 31, 1996, a decrease of $7,079, or 7%,
below December 31, 1995's balance of $96,752. During the last twelve months,
deposits have grown however, $4,953, or 6%, over March 31, 1995's total of
$84,720. The decrease in the first quarter of 1996 was primarily concentrated
in non-interest bearing demand and interest bearing transaction accounts.
Late in March 1996, the special 7% one year certificates of deposits
offered a year ago, matured. The Bank conducted a special marketing promotion
for these customers through an employee telephone campaign. These customers
were offered certificate of deposits with maturities ranging from 12 to 24
months. Interest rates offered on these certificate of deposits were tiered
dependent on the certificate of deposit's term and ranged 100 to 200 basis
points below the previous 7% rate. The rates offered were similar to rates
offered for similar products at other financial institutions in the Bank's
service area. The Bank's program was successful in maintaining the bulk of
these maturities at a substantially lower cost of funds, as evidenced in only a
$1,808, or 5%, drop in certificate of deposits from $37,319 at December 31, 1995
to $35,511 at March 31, 1996.
12
Management attributes the 6% growth over the last twelve months to changes
in the Company's current service market, and an advertisement plan focused on
deposit growth, primarily time certificates.
Non-interest-bearing demand deposits were 18% of total deposits at March
31, 1996 and March 31, 1995. Time certificates of deposit were 40% of total
deposits at quarter end, as compared to 38% at March 31, 1995.
New Accounting Pronouncements
The Company was required to adopt SFAS No. 123, Accounting for Stock-Based
Compensation, on January 31, 1996. SFAS No. 123 establishes accounting and
disclosure requirements using a fair value-based method of accounting for stock-
based employee compensation plans. Under SFAS No. 123, the Company may either
adopt the new fair value-based accounting method or continue the intrinsic
value-based method and provide pro forma disclosures of net income and earnings
per share as if the accounting provisions of SFAS No. 123 had been adopted. The
Company has adopted only the disclosure requirements of SFAS No. 123. There were
no stock options granted to employees or directors during the first quarter of
1996.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 is effective for fiscal years beginning after
December 15, 1995. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The financial statement
impact of adopting SFAS No. 121 is not expected to be material.
Liquidity and Capital Resources
Liquidity refers to the Company's ability to maintain a cash flow adequate
to fund operations and meet obligations and other commitments on a timely basis.
As shown in the Consolidated Statements of Cash Flows ("Statement") for the
three months ended March 31, 1996, cash and cash equivalents decreased $8,068.
This was primarily due to the large drop in deposits (See "Deposits" herein).
For the same period of 1995, the Company's primary sources of funds were
customer deposits and loan principal repayments. The significant drop in cash
and cash equivalents during the first quarter of 1996 is not indicative of a
trend and is not expected to continue. The usual sources of customer deposits is
expected to provide significant amounts of funds in the future. However, the mix
of deposits, as well as other sources of funds, will depend on future economic
and other market conditions.
The maturity and repricing profile of the Company's asset-liability mix is
currently in an asset sensitive position. This means that when there exists a
declining interest rate environment, the returns on the Company's earning assets
drops more quickly than the Company's cost of funds. This causes a narrowing of
the net interest spread and a possible reduction to the overall earnings of the
Company. As rates increase, the opposite effect occurs. The Company's
management monitors the asset-
13
liability position of the Company on a monthly basis and is continually
assessing both the asset-liability mix and the products being offered to its
customers.
If the Bank's loan portfolio grows substantially, it might be necessary to
raise deposits to support the growth. The Bank monitors its loan-to-deposit
ratio (84% at March 31, 1996 and 77% at December 31, 1995) on a daily basis. If
the loan-to-deposit ratio indicates that a liquidity squeeze is possible, the
Bank can raise rates on deposits to attract more funds. In addition, the Bank
has $5,500 in short-term lines of credit available to it from its correspondent
banks.
Liquidity is measured by various ratios, the most common being the
liquidity ratio of cash less reserve requirements, time deposits in other
financial institutions, federal funds sold, securities held for sale and
unpledged investment securities compared to total deposits. At March 31, 1996
and December 31, 1995, this ratio was 20% and 26%, respectively.
The Company's primary source of income is interest income earned on its
liquid investments. The amounts invested by the Company in the Bank at March
31, 1996 were approximately $184. The Company's yearly investment income is
expected to exceed operating expenses by approximately $10 during 1996.
During the first quarter of 1996, the Company declared and paid a cash
dividend of twelve and a half cents ($.125) per share of outstanding stock.
This dividend was based on 1995 earnings and amount to $94. During the
beginning of the second quarter of 1996, the Company declared another cash
dividend of twelve and a half cents ($.125) per share. The record date of this
dividend is May 10, 1996 and will be paid out to shareholders on June 1, 1996.
This second cash dividend was based on the first quarter earnings and will also
be $94. If the Company continues with this cash pay out, the Bank will need to
pay dividends to the Company by the end of the third quarter of 1996.
Capital Adequacy
The FRB and the Comptroller of the Currency have specified guidelines for
the purpose of evaluating the capital adequacy of holding companies and banks.
The table below summarizes the current requirements for 1996, and the Company's
and the Bank's compliance therewith. The requirements for the ratio of
regulatory capital to risk-weighted assets for an "adequately capitalized"
institution is 8.00%.
Capital as a Minimum Tier 1
% of Risk- Leverage Capital
Weighted Assets Ratio Ratio
Regulatory Requirements for 1996 8.00% 4.00% 4.00%
Consolidated Company Ratio at
March 31, 11.69% 7.50 9.93%
Bank Ratio at March 31, 10.93% 7.30% 9.68%
14
The capital levels of both the Bank and the Company currently exceed all
minimum regulatory requirements. Management anticipates that both companies
will continue to exceed the regulatory minimums in the foreseeable future.
Therefore, the Company and the Bank have adequate capital in order to expand in
the future, either through loan generation or other means of expansion.
Effects of Inflation
The impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because its assets and
liabilities consist largely of monetary items. The most direct effect of
inflation is higher interest rates. However, the Bank's earnings are affected
by the spread between the yield on earning assets and rates paid on interest-
bearing liabilities rather than the absolute level of interest rates.
Additionally, there may be some upward pressure on the Company's operating
expenses, such as adjustments in staff expense and occupancy expense, based upon
consumer price indices. In the opinion of management, inflation has not had a
material effect on the consolidated results of operations.
15
INDEX TO EXHIBITS
Exhibit No. Description
27 Financial Data Schedule
16
PART II
OTHER INFORMATION
Item 1. Not applicable
Item 2. Not applicable
Item 3. Not applicable
Item 4. Not applicable
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
No reports filed in 1996.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAPA NATIONAL BANCORP
Date May 13, 1996 By:_______________________
Brian J. Kelly
President & COO
By:_______________________
Joan E. Heinitz
Treasurer
18