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 September 30, 1996 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to 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 November 1, 1996, the number of shares outstanding of the registrant's Common Stock, without par value, was 754,500. Fully dilutive shares outstanding were 903,300. 1 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 and nine month period as presented are not necessarily indicative of results to be expected of the year as a whole. 2 NAPA NATIONAL BANCORP AND SUBSIDIARIES (Unaudited) CONSOLIDATED BALANCE SHEETS (IN 000S) September 30, December 31, 1996 1995 ASSETS Cash and due from banks $ 6,881 $ 7,106 Federal funds sold 10,630 14,780 Time deposits with other financial institutions 4,158 4,356 Investment securities: Held to Maturity 1,723 1,235 Federal Reserve and FHLB Stock 549 197 Loans, less allowance for loan losses of $1,526 and $1,325 at September 30, 1996 And December 31, 1995 78,070 73,374 Premises, furniture, fixtures and equipment, net 2,513 2,489 Accrued interest receivable 708 666 Other assets 994 648 TOTAL ASSETS $106,226 $104,851 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing demand $ 21,203 $ 19,068 Interest-bearing: Savings 11,760 12,305 Transaction 27,176 28,060 Time certificates 37,652 37,319 Total deposits 97,791 96,752 Accrued interest payable and other liabilities 447 652 TOTAL LIABILITIES 98,238 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 September 30,1996 and December 31, 1995 6,915 6,915 Retained Earnings 1,073 532 TOTAL SHAREHOLDERS' EQUITY 7,988 7,447 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $106,226 $104,851 3 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In 000s, except earnings per share data) Nine Months Ended September 30, 1996 1995 Interest income: Interest and fees on loans $ 6,297 $ 5,463 Interest on federal funds sold 360 405 Interest on time deposits with other financial institutions 173 187 Interest on investment securities 81 62 Total interest income 6,911 6,117 Interest expense: Interest on deposits 2,087 1,895 Total interest expense 2,087 1,895 Net interest income 4,824 4,222 Provision for loan losses 308 174 Net interest income after provision For loan losses 4,516 4,048 Non-interest income: Service charges on deposit accounts 386 342 Other customer fees and charges 221 197 Mortgage loan origination and Service fees 5 1 Other income 0 12 Total non-interest income 612 552 Non-interest expense: Salaries and employee benefits, net 2,043 1,675 Occupancy 345 289 Furniture, fixtures and equipment 324 294 Marketing and business development 122 82 Other 909 860 Total non-interest expense 3,743 3,200 Income before income taxes 1,385 1,400 Income taxes 561 567 Net income $ 824 $ 833 Net income per share $ 0.91 $ 0.95 Weighted average common shares outstanding used to compute net income per share 903,300 874,300 4 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In 000s, except earnings per share data) Quarter Ended September 30, 1996 1995 Interest income: Interest and fees on loans $ 2,112 $ 1,925 Interest on federal funds sold 136 138 Interest on time deposits with other financial institutions 58 64 Interest on investment securities 27 22 Total interest income $ 2,333 $ 2,149 Interest expense: Interest on deposits 703 712 Total interest expense 703 712 Net interest income 1,630 1,437 Provision for loan losses 129 50 Net interest income after provision For loan losses 1,501 1,387 Non-interest income: Service charges on deposit accounts 124 117 Other customer fees and charges 74 68 Mortgage loan origination and Service fees 3 0 Other Income 0 12 Total non-interest income 201 197 Non-interest expense: Salaries and employee benefits, net 712 591 Occupancy 120 109 Furniture, fixtures and equipment 110 99 Marketing and business development 53 30 Other 297 263 Total non-interest expense 1,292 1,092 Income before income taxes 410 492 Income taxes 166 182 Net income $ 244 $ 310 Net income per share $ 0.27 $ 0.35 Weighted average common shares outstanding used to compute net income per share 903,300 874,300 5 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (In 000s) Number of Shares Common Retained Outstanding Stock Earnings Total Balance, December 31, 1995 754,500 $6,915 $ 532 $7,447 Stock Dividends (283) (283) Net Income, September 30, 1996 824 824 Balance, September 30, 1996 754,500 $6,915 $1,073 $7,988 6 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In 000s) Nine Months Ended September 30, 1996 1995 Cash flows from operating activities: Net income $ 824 $ 833 Reconciliation of net income to net cash provided by operating activities: Depreciation on premises and equipment 325 234 Amortization of deferred loan fees and discounts/premiums on securities (396) (256) Provision for loan losses 308 174 (Increase) in accrued interest receivable (42) (269) (Increase) in other assets, net (346) (233) (Decrease) in accrued interest payable and other liabilities (205) (355) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 468 128 Cash flows from investing activities: Loan originations, net of collections (4,608) (7,440) Increase in other real estate owned 0 (678) Net decrease in time deposits with other financial institutions 198 1 Activity in securities held to maturity Purchases (2,725) (487) Maturities 2,237 475 Purchases of FRB and FHLB stock (352) (32) Capital expenditures (349) (1,209) NET CASH USED BY INVESTING ACTIVITIES (5,599) (9,370) Cash flows from financing activities: Net increases in deposits 1,039 8,239 Cash dividends paid to shareholders (283) 0 NET CASH PROVIDED BY FINANCING ACTIVITIES 756 8,239 DECREASE IN CASH/CASH EQUIVALENTS (4,375) (1,003) Cash and cash equivalents at beginning of period 21,886 16,219 Cash and cash equivalents at end of period $17,511 $15,216 (Continued on following page) 7 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (In 000s) Nine Months Ended September 30, 1996 1995 CASH AND CASH EQUIVALENTS AT September 30 CONSIST OF: Cash and due from banks $ 6,881 $ 5,426 Federal funds sold 10,630 9,790 $17,511 $15,216 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 2,306 $ 1,643 Cash paid for income taxes $ 815 $ 1,248 8 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 $244, or $0.27 per share for the third quarter of 1996 as compared to net income of $310, or $0.35 per share for the same period in 1995. For the first nine months of 1996, the Company had net income of $824, or $0.91 per share, as compared to $833, or $0.95 per share for the first nine months of 1995. The Company's year to date 1996 net income was $9 below the results of the same period of 1995 for the following reasons. Net interest income for the nine months ending September 30, 1996, was $602, or 14%, higher than the results for the same period of 1995. This increase was partially offset by an increase in the provision for loan losses for the first three quarters of 1996 of $134, or 77%, over the same period of 1995. Additionally, the increase in non-interest income of $60, or 11%, over the nine months of 1995, was offset by a $543, or 17%, increase in non-interest expenses in 1996 over the same time frame of 1995. Tax expenses decreased by $6, or 1%, in 1996 over 1995 totals due to the slightly lower year to date earnings. 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 both the third quarter and first nine months of 1996, net interest income was $193 and $602, respectively, higher than the same periods of 1995. These increases were due to growth in earning assets during the prior twelve months and increases in rates paid on loans and investments during the latter half of 1995. These increases were partially offset by growth in interest bearing deposits. For the first nine months of 1996, total average earning assets were approximately $94,074, an increase of approximately $11,874, or 14%, over total average earning assets ($82,200) during the same period in 1995. This increase in average assets in 1996 as compared to 1995, contributed 9 significantly to the increase of $184, and $794, in total interest income for the third quarter and year to date respectively. During the third quarter of 1996, total interest expense decreased over the same period of 1995 by $9. In March 1995, the Bank offered a limited time, one year, 7% certificate of deposit product. This product caused the Bank's cost of funds to increase dramatically during the next twelve months. In March 1996, these higher paying certificate of deposits matured and were replaced with deposits paying 100 to 200 basis points lower (See "Deposits" herein), thus immediately bringing down the Bank's overall cost of funds. This lower cost of funds was directly responsible for the decrease in total interest expense during the third quarter of 1996 over the same period of 1995. Net interest expense for the first nine months of 1996 was $192 higher than the same period of 1995. This increase represents a combination of the higher cost of funds from the first quarter, coupled with the lower interest rates paid during the second and third quarters of 1996. Additionally, total interest bearing deposits increased during the prior twelve months bringing with it a natural growth in interest expense. Average interest bearing deposits for the first nine months of 1996 were $75,954, an increase of $8,322, or 12%, over 1995's average of $67,632. 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 the "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. During the third quarter of 1996, the provision was $129 as compared to a provision of $50 for the same period in 1995. For the first nine months of 1996, the provision was $308 as compared to a provision of $174 for the same period of 1995. Gross loans totaled $79,596, as of September 30, 1996, an increase of $8,772 or 12%, over the September 30, 1995, balance of $70,824. The increase in the provision during the third quarter and first nine months of 1996 over 1995, was due primarily to an increase in outstanding loan balances 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 and fees charged for other banking services. Non-interest income for the third quarter of 1996 was $201, $4 or 2%, greater than the third quarter of 1995. Non-interest income for the first three quarters of 1996 was $612, $60 or 11%, higher than the same period of 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 10 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 three quarters of 1996. Non-Interest Expense For the third quarter of 1996, non-interest expenses increased by $200, or 18%, over the same period of 1995. Total non-interest expenses for nine months ending September 30, 1996 were $3,743, representing an increase of $543, or 17%, over 1995's total of $3,200. Salaries and employee benefit and marketing and business development expenses showed the largest dollar increases during the first nine months of 1996 over the same period in 1995 however, occupancy and furniture, fixtures and equipment expenses also showed a percentage gain of approximately 15%. Salaries and employee benefits increased by $121, or 20%, in the third quarter of 1996 as compared to the same period of 1995. 1996 year to date salary related expenses increase by $369, or 22%, over the first nine months of 1995. This increase can be primarily attributed to an addition of approximately nine 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 were necessary to maintain an adequate service level given the overall growth within the Company. Additionally, annual Company wide salary increases for 1996, which began in March, were approximately 4%. Occupancy and furniture, fixtures and equipment expenses increased a combined total of $22 during the third quarter of 1996 over the same period of 1995. Expenses for the first nine months of 1996 were $86 higher than 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 increased its marketing and business development costs by $30 during the third quarter of 1996 over the same period of 1995. For the first nine months of 1996, marketing and business development costs increased by $40 over the nine months of 1995. This increase in the two time periods under review is due primarily to a focused and high profile marketing campaign started late in the first quarter of 1996. Other non-interest expense increased by $34 for the third quarter of 1996 over the similar period of 1995. For the three quarters of 1996 non-interest expenses increased by $49 over 1995 totals. The growth in both the third quarter and year to date is due primarily to the overall growth in the Company of approximately 12% over the last twelve months. 11 Income Taxes Income tax expense was 41% of pre-tax income for the nine months ending September 30, 1996 and 1995. Loans and Nonaccrual Loans Gross loans totaled $79,596 at September 30, 1996, an increase of $4,897 (7%), and $8,772 (12%) over December 31, 1995 and September 30, 1995, respectively. The increase in the Company's loan portfolio over the last twelve months 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 September 30, 1996, nonperforming loans were $2,531, as compared to $1,447, at December 31, 1995. Accruing loans past due 90 days or more were $296 at September 30, 1996 and $0 at December 31, 1995, respectively. 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. 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 September 30, 1996, the Company had approximately $2,827 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 $515. The average recorded investment in the impaired loans during the nine months ended September 30, 1996, was $1,628: the related amount of interest income recognized during the period that such loans were impaired was $31, 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 $24. 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 12 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 $1,526 allowance, approximately 1.92% of total loans outstanding at September 30, 1996, is adequate. At September 30, 1995, the $1,204 amounted to approximately 1.70% of total loans. There can be no assurance that in any given period the Bank may not 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 losses and reduced by net charge-offs. The activity in the allowance for loan losses was as follows: 1996 1995 Balance at January 1 $1,325 $1,050 Provision for loan losses 308 174 Recoveries 71 3 Charge-offs (178) (23) Balance at September 30 $1,526 $1,204 Investments The Bank's classification of its investment in debt and equity securities according to the provisions of SFAS 115 are as follows: September 30, 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 (HTM) $1,723 $0 $10 $1,733 Federal Reserve Stock $ 232 $0 $ 0 $ 232 Federal Home Loan Bank $ 317 $0 $ 0 $ 317 Deposits Deposits totaled $97,791, at September 30, 1996, an increase of $1,039, or 1%, from December 31, 1995's balance of $96,752. Since December 31, 1995, slight increases have been seen in non-interest bearing deposits and time certificates only. During the last twelve months, deposits have grown by $10,174, or 12%, over September 30, 1995 total of $87,617. Management attributes this growth to changes in the Company's current service market, enhancements to the sales staff and a marketing and advertisement plan focused on deposit growth. 13 Late in March 1996, a special 7%, one year certificate of deposit product 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 by the slight growth of $333 in certificate of deposits from $37,319 at December 31, 1995 to $37,652 at September 30, 1996. Non-interest bearing demand deposits were 22% of total deposits at September 30, 1996, as compared to 19% at September 30, 1995. Time certificates of deposit were 39% of total deposits for the nine months ended September 30, 1996, and 40% for the same period of 1995. New Accounting Pronouncements The Company was required to adopt SFAS No. 123, Accounting for Stock-Based Compensation, on January 1, 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. 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 has not been 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 nine months ended September 30, 1996 and 1995, the Company's usual and primary source of funds has been customer deposits and loan principal repayments. 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. 14 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 decrease more quickly than the Company's cost of funds. This causes a narrowing of the net interest spread and a possible decrease to the overall earnings of the Company. As rates increase, the opposite effect occurs. The Company's management monitors the asset-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 customer. The 1996 Statement shows that operations and financing activities were sources of net cash inflows ($468 and $756, respectively) for the first nine months of the year. Investing activities used a net $5,599 in cash, which was comprised primarily in increases in net loan originations which totaled $4,608. With these transactions, cash and cash equivalents for the first nine months of 1995 decreased by $4,375. If the Bank's loan portfolio grows substantially, it might be necessary to raise deposits to support this growth. The Bank monitors its loan-to-deposit ratio (81% at September 30, 1996 as compared to 77% at December 31, 1995) on a daily basis. If the loan-to-deposit ratio indicated that a liquidity squeeze is possible, the Bank has a number of options available to raise the necessary liquidity. The Bank can raise rates on deposits to attract more funds, as well as having $6,500, 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 with other financial institutions, federal funds sold, and unpledged investment securities compared to total deposits. At September 30, 1996, this ratio was 21% as compared to 26% at December 31, 1995, and 22% at September 30, 1995. The Company's primary source of income is interest income earned on its liquid investments. The amounts invested by the Company in the Bank as of September 30, 1996 were approximately $88. The Company's yearly operating expenses are expected to exceed investment income by approximately $20 during 1996. During the first quarter of 1996, the Company declared and paid a cash dividend of twelve and a half cents ($.125) per share on outstanding stock. The first quarter dividend was based on 1995 earnings and amounted 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. This second cash dividend was based on the first quarter earnings of 1996 and was also $94. During the third quarter of 1996, the Bank paid a $100 cash dividend to the Company. This dividend allowed the Company to declare and pay another cash dividend of twelve and a half cents ($.125) per share for a total of $94. If the Company continues with this cash pay out, it is expected that Bank management will pay additional dividends to the Company during the fourth quarter of 1996. 15 Capital Adequacy The Federal Reserve Bank 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 September 30, 1996 11.59% 7.55% 9.73% Bank Ratio at September 30, 1996 10.87% 7.45% 9.61% The capital levels of both the Bank and the Company currently exceed the regulatory requirements for a "well capitalized" institution. 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. 16 INDEX TO EXHIBITS Exhibit No. Description 27 Financial Data Schedule 17 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. Form 8-K - Tender Offer on Company Stock for its ESOP Form 8-K - Change in Accountants 18 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: November 14, 1996 By: Brian J. Kelly President/COO By: Joan E. Heinitz Treasurer 19