SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the year ended: December 31, 1996
Commission File: 0-11090
NAPA NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
California 94-2780134
(State of incorporation) (I.R.S. Identification No.)
901 Main Street, Napa, California, 94559
(Address of principal executive offices)
Registrant's telephone number: (707) 257-2440
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: Common Stock, Without
Par Value (Title of Class)
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:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Aggregate market value of voting stock held by nonaffiliates of the registrant
as of February 28, 1997: $2,564,000
Number of shares of Common Stock outstanding of the registrant's Common Stock,
without par value, as of February 28, 1997 was 754,500. Fully diluted shares
outstanding at this date was 906,050.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement for Registrant's 1997 Annual
Meeting of Shareholders is included in Part III, Items 10, 11, 12, and 13, are
incorporated herein by reference. Registrant's Current Report on Form 8-K filed
with the Commission on September 26, 1996 and amended October 23, 1996 is
incorporated herein by reference in Part II, Item 9 herein.
1
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
SIGNATURES
2
PART I
ITEM 1. BUSINESS.
(A) GENERAL.
Certain statements in this Annual Report on Form 10-K include forward-
looking information within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Napa
County and the wine industry; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud; asset/liability
matching risks and liquidity risks; and changes in the securities markets. See
also "Certain Additional Business Risks" included herein in Item 1 and other
risk factors discussed elsewhere in this Report.
Napa National Bancorp (the "Company") was incorporated in 1981 in the State
of California and is headquartered in Napa, California. The Company is a bank
holding company. Its subsidiary, Napa National Bank (the "Bank"), was organized
as a national banking association in 1982. At December 31, 1996, the Company
had consolidated assets of $113,827,000 and shareholders' equity of $7,971,000.
The Bank is a full service commercial bank with three offices serving the Napa
Valley area in Northern California. The Company itself does not engage in any
business activities other than the ownership of the Bank and the ownership of
Napa National Leasing Corporation, an inactive subsidiary authorized to engage
in the leasing of equipment and other personal property (the "Leasing Company").
W. Clarke Swanson, Jr., Chairman of the Board and CEO, beneficially owns
approximately 70% of the outstanding shares of Common Stock of the Company. The
Company is registered under the Bank Holding Company Act of 1956, as amended.
The Bank provides a wide range of commercial banking services to
individuals, professionals and small- and medium-sized businesses in the Napa
Valley area. The services provided include those typically offered by
commercial banks, such as: checking, interest checking, savings, and time
deposit accounts, commercial, construction, personal, home improvement,
mortgage, automobile and other installment and term loans, travelers' checks,
night depository facilities, wire transfers, merchant card services, courier
service and automated teller machines.
The Bank does not provide international banking or trust services but has
arranged for its correspondent banks to offer these and other services to its
customers on an as needed basis.
3
Individuals, small businesses and professionals, manufacturers,
distributors, retailers, wineries, vineyard owners, real estate developers and
the Bank's shareholders currently form the core of the Bank's customer and
deposit base. In order to attract these customers, the Bank offers extensive
personalized contact, specialized services and banking convenience, including
Saturday banking hours.
EXISTING LOCATIONS
In addition to the Bank's head offices at 901 Main Street in Downtown Napa,
the Bank has two branch offices, one in St. Helena and one in North Napa. All
three facilities offer full service to the Bank's customers. See "Item 2. -
Properties" herein.
DEPOSITS
Most of the Bank's deposits are obtained from individuals, professional
firms and small- to medium-sized businesses from the Bank's service area. As of
December 31, 1996, the Bank had a total of 9,580 accounts representing 6,292
demand accounts with an average balance of approximately $8,664 each, 2,106
savings accounts with an average balance of approximately $5,708 each, and 1,182
other time accounts with an average balance of approximately $30,489 each.
OTHER BORROWINGS
At December 31, 1996 and 1995, the Bank had no borrowed funds.
LENDING ACTIVITIES
The Bank concentrates its lending activities in four areas: commercial
loans, short-term real estate and construction loans, mortgage loans, and loans
to individuals or households, automobile and other personal expenditures. At
December 31, 1996, these four loan categories accounted for approximately 66%,
11%, 6% and 17%, respectively, of the Bank's loan portfolio. Within these
categories, $10,933,000, or 14%, of the loan portfolio, relates to the winery
and vineyard segment of the agricultural industry with commitments to lend an
additional $4,670,000.
Under federal regulations applicable to national banks, at December 31,
1996, in general, the Bank cannot make loans to one borrower in excess of
$1,390,000. For borrowers desiring loans in excess of the Bank's lending limit,
the Bank may make such loans on a participation basis with other banks, without
recourse to the Bank. In other cases, the Bank may refer such borrowers to
larger banks or lending institutions. The interest rates charged for the
various loans made by the Bank vary with the degree of risk, size and maturity
of the loans involved and are generally affected by competition, governmental
regulation and current money market rates.
The Bank's construction and mortgage loans are not concentrated in any one
category and include loans to individuals, partnerships and corporations. As of
December 31, 1996, the Bank had gross loans outstanding of $79,695,000 and
undisbursed loan commitments of $21,351,000.
4
COMMITMENTS AND LINES OF CREDIT
The Bank makes contractual commitments to extend credit. Such commitments
are usually made in the form of revolving lines of credit or term loans with one
or more takedowns. Such commitments typically mature within one to three years.
The Bank also extends standby letters of credit which support the obligations of
Bank customers to third parties. At December 31, 1996, the Bank had $20,467,000
in commitments to extend credit and $865,000 in standby letters of credit.
CORRESPONDENT BANKS
At December 31, 1996, the Bank had correspondent relationships with Wells
Fargo Bank, Bank of America National Trust and Savings Association, and Union
Bank of California. These relationships are a result of the Bank's efforts to
obtain a wide range of services for the Bank and its customers and, as a net
seller of federal funds (overnight interbank loans), to minimize the risk of
undue concentration of its resources with a few entities. The Bank does not
currently serve, nor does it have plans to serve, as a correspondent to other
banks.
EMPLOYEES
At December 31, 1996, the Bank employed 75 employees, including 26 officers
and 12 part-time employees. At December 31, 1996, the Company employed one
employee.
(B) NAPA NATIONAL LEASING CORPORATION - COMPANY SUBSIDIARY
This subsidiary was inactive during 1996.
(C) SELECTED STATISTICAL INFORMATION
The following tables present certain consolidated statistical information
concerning the business of the Company and its subsidiaries. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", included herein at Item 7, and
the Company's consolidated financial statements and the notes thereto included
herein at Item 14.
During 1996 and prior years, the Company did not own any tax-exempt
securities.
5
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table sets forth the distribution of consolidated average
assets, liabilities and shareholders' equity for the years ended December 31,
1996 and 1995. Average balances have been computed using daily adjusted
balances.
YEAR ENDED DECEMBER 31,
1996 1995
AVERAGE AVERAGE
BALANCE PERCENT BALANCE PERCENT
(000'S) OF TOTAL (000'S) OF TOTAL
ASSETS
Cash and Due from Banks $ 6,100 5.9% $ 5,546 6.0%
Interest-Bearing Deposits
With Other Banks 4,210 4.0 4,356 4.7
Taxable Investment Securities 2,087 2.0 1,387 1.5
Federal Funds Sold 10,844 10.4 10,285 11.1
Loans, Net (1) 77,064 74.0 67,092 72.7
Premises and Equipment, Net 2,484 2.4 2,080 2.3
Other Assets and Accrued
Interest Receivable 1,391 1.3 1,595 1.7
Total Assets $104,180 100.0% $92,341 100.0%
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 19,284 18.5% $15,752 17.1%
Interest-Bearing
Transaction Accounts 27,970 26.8 24,682 26.7
Savings 12,071 11.6 12,151 13.2
Time 36,600 35.1 32,503 35.2
Total Deposits 95,925 92.0 85,088 92.2
Other Liabilities and
Accrued Interest 487 0.5 540 0.5
Shareholders' Equity 7,768 7.5 6,713 7.3
Total Liabilities and
Shareholders's Equity $104,180 100.0% $92,341 100.0%
- --------------------
1) Average loans include net deferred loan fees and non-accrual loans and are
net of the allowance for loan losses.
6
INTEREST RATES AND DIFFERENTIALS
The following table sets forth information concerning interest-earning
assets and interest-bearing liabilities, respective average yields or rates, the
amount of interest income or expense, and the net interest margin and the net
interest spread. Loan fees of $409,000 in 1996 and $294,000 in 1995 are
included, while non-accrual interest is excluded from computations of interest
income and expense.
YEAR ENDED DECEMBER 31, 1996
INTEREST
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/
(000'S) (000'S) RATE
INTEREST-EARNING ASSETS
Loans, Net (1,2) $77,064 $8,277 10.74%
Interest-Bearing Deposits
With Other Banks 4,210 230 5.46
Taxable Investment Securities 2,087 119 5.70
Federal Funds Sold 10,844 547 5.04
Total Average Interest-Earning
Assets $94,205 $9,173 9.74%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction
Accounts $27,970 $ 563 2.01%
Savings 12,071 275 2.28
Time 36,600 1,976 5.40
Total Average Interest-Bearing
Liabilities $76,641 $2,814 3.67%
Net Interest Income and
Net Interest Margin (3) $6,359 6.75%
Net Interest Spread (4) 6.07%
1) Average loans include net deferred loan fees and non-accrual
loans and are net of allowance for loan losses.
2) Loan interest income includes loan fees of $409,000.
3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
4) Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing liabilities.
7
YEAR ENDED DECEMBER 31, 1995
INTEREST
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/
(000'S) (000'S) RATE
INTEREST-EARNING ASSETS
Loans, Net (1,2) $67,092 $7,515 11.20%
Interest-Bearing Deposits
With Other Banks 4,356 251 5.76
Taxable Investment Securities 1,387 83 5.98
Federal Funds Sold 10,285 583 5.67
Total Average Interest-Earning
Assets $83,120 $8,432 10.14%
INTEREST-BEARING LIABILITIES
Deposits:
Interest-Bearing Transaction
Accounts $24,682 $ 517 2.09%
Savings 12,151 292 2.40
Time 32,503 1,825 5.61
Total Average Interest-Bearing
Liabilities $69,336 $2,634 3.80%
Net Interest Income and
Net Interest Margin (3) $5,798 6.98%
Net Interest Spread (4) 6.34%
1) Average loans include net deferred loan fees and non-accrual loans and
are net of allowance for loan losses.
2) Loan interest income includes loan fees of $294,000.
3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
4) Net interest spread represents the average yield earned on interest-
earning assets less the average rate paid on interest-bearing liabilities.
8
RATE AND VOLUME ANALYSIS
The following tables set forth, for the periods indicated, a summary of the
changes in average interest bearing asset and liability balances (volume) and
changes in average interest rates (rate). Where significant, the change in
interest due to both volume and rate has been allocated to the change due to
volume and rate in proportion to the relationship of absolute dollar amounts in
each. Insignificant changes have been allocated solely to the change due to
volume.
YEAR ENDED DECEMBER 31, 1996
COMPARED TO
YEAR ENDED DECEMBER 31, 1995
(IN 000'S)
AVERAGE AVERAGE NET
VOLUME RATE CHANGE
INCREASE (DECREASE) IN INTEREST INCOME:
Loans, Net $1,116 $(354) $762
Interest-Bearing Deposits
With Other Banks (9) (12) (21)
Taxable Investment Securities 42 (6) 36
Federal Funds Sold 32 (68) (36)
Total Increase (Decrease) 1,181 (440) 741
INTEREST (DECREASE) IN INTEREST EXPENSE:
Deposits:
Interest-Bearing Transaction
Accounts 68 (22) 46
Savings (2) (15) (17)
Time 228 (77) 151
Total Increase (Decrease) 294 (114) 180
Change in Net Interest Income $ 887 $(326) $561
9
YEAR ENDED DECEMBER 31, 1995
COMPARED TO
YEAR ENDED DECEMBER 31, 1994
(IN 000'S)
AVERAGE AVERAGE NET
VOLUME RATE CHANGE
INCREASE (DECREASE) IN
INTEREST INCOME:
Loans, Net $896 $1,000 $1,896
Interest-Bearing Deposits
With Other Banks 38 65 103
Taxable Investment Securities 19 17 36
Federal Funds Sold (18) 189 171
Total Increase 935 1,271 2,206
INTEREST (DECREASE) IN INTEREST EXPENSE:
Deposits:
Interest-Bearing Transaction
Accounts (1) 48 47
Savings (37) 6 (31)
Time 377 583 960
Total Increase 339 637 976
Change in Net Interest Income $596 $634 $1,230
10
INVESTMENT SECURITIES AND FEDERAL RESERVE STOCK
The Bank's classification of its investment in debt and equity securities
according to the provisions of SFAS 115 are as follows:
DECEMBER 31, 1996 - INVESTMENT SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Held-to-Maturity Securities
U.S. Treasury (HTM) $1,723,000 $27,000 $0 $1,750,000
DECEMBER 31, 1995 - INVESTMENT SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Held-to-Maturity Securities
U.S. Treasury (HTM) $1,235,000 $15,000 $0 $1,250,000
The Company had Federal Reserve and Federal Home Loan Bank Stock totalling
$554,000 and $197,000, at December 31, 1996 and 1995, respectively.
Yields on securities have been calculated by dividing interest income,
adjusted for amortization of any premium and accretion of any discount, by the
book value of the related securities. The Company's Federal Reserve and Federal
Home Loan Bank Stocks have no maturity and a weighted average yield of 6.0%.
All of the Company's U.S. Treasury securities have a maturity of less than
twelve months and a weighted average yield of 5.4%.
LOAN PORTFOLIO
The Company's primary service area is Napa County and the Carneros growing
region of Sonoma County. The Company's portfolio of loans consists of real
estate mortgage and construction loans, commercial and consumer loans.
At December 31, 1996, the Company's real estate construction portfolio
totaled $8,706,000. Real estate loans consisted of single family residences to
developers and owner-builders with a history of successfully developing projects
in the Company's market area. The loan-to-value ratio on each real estate
construction loan required by the Company depends upon the amount of the loan,
the nature of the property, whether the property is residential or commercial
and whether or not it is owner occupied. For construction loans, the Company's
policy is to require that the loan-to-value ratio generally be no more than 70%
when the loan is initially made and that the borrower generally has no less than
a 50% equity interest in the land. Substantially all of the real estate
construction portfolio is secured by real estate located within the Company's
service area.
11
Conventional real estate loans totaled $4,918,000 at December 31, 1996. The
loan-to-value ratio required by the Company on conventional real estate loans
depends upon the nature of the property and whether or not it is owner-occupied.
For owner-occupied conventional real estate loans, the Company usually requires
that the loan-to-value ratio be no more than 80% except when private mortgage
insurance is required, whereupon the Company may allow the loan-to-value ratio
to rise generally to no more than 85% when the loan is initially made.
Generally, non-owner-occupied conventional real estate loans must have loan-to-
value ratios not exceeding 70% when the loan is made. The entire real estate
mortgage portfolio is generally secured by first or second deeds of trust.
Substantially all of the secured property is located within the Company's
service area.
At December 31, 1996, commercial loans totaled $52,789,000. Commercial
lending is primarily to professionals and companies with sales up to $10
million. The Company's lending relationships generally involve companies with
sales of no more than $30 million. Substantially all of the commercial loan
portfolio is secured, some of which may include real estate collateral. Such
loans are not intended as permanent financing of real estate but are made for
commercial purposes and are secured by commercial real estate. The Company
evaluates such loans based upon the borrower's ability to service the debt
through its business operations and does not rely primarily on the value of the
real estate collateral for repayment. The remaining portfolio is secured by
accounts receivables, inventory, equipment, stock and deposits held by the
Company.
Total consumer loans, including personal lines of credit, were $13,282,000
at December 31, 1996. Included in consumer loans to individuals are home equity
lines of credit, totaling $9,066,000, which are secured primarily by second
trust deeds on single family residences. The Company requires a debt-to-value
ratio of not higher than 75% for most home equity loans when the loan is
initially made. The remaining portfolio is collateralized by automobiles,
computers and other equipment, and deposits held by the Company. Over 70% of
the Company's consumer portfolio is secured.
The Company had standby letters of credit outstanding of $865,000 and
$646,000 at December 31, 1996 and December 31, 1995, respectively. In addition,
the Company had commitments to fund real estate construction loans, commercial
loans and consumer loans of $2,684,000, $17,670,000 and $997,000, respectively,
at December 31, 1996.
The Company did not have any loans related to lease financing activities in
the loan portfolio at December 31, 1996.
12
The following table shows the composition of the Bank's loan portfolio by
type of loan or borrower as of December 31, 1996 and 1995:
DECEMBER 31,
1996 1995
(IN 000'S)
Commercial $52,789 $48,407
Real Estate--Construction 8,706 7,850
Real Estate--Mortgage 4,918 4,729
Installment Loans and Leases 4,216 3,376
Personal Lines of Credit
and Other 9,066 10,337
Total Loans 79,695 74,699
Less Allowance for
Loan Losses (1,405) (1,325)
Total Loans, Net $78,290 $73,374
In recent years, California commercial real estate markets in general have
experienced some difficulties. While these developments have not, in the
judgment of management, had a material adverse impact on the Bank's business,
there can be no assurance that further softening of the California real estate
market will not occur, nor can any assurance be given as to the effect of any
such developments on the Bank's business. Further increases in interest rates
could adversely impact real estate values or the ability of borrower to satisfy
the material terms of such loans.
During the beginning of 1997, the Napa Valley was subjected to severe
weather conditions that resulted in some areas of the Valley flooding from high
rain fall levels. Most of the flooding resulted in areas near the Napa River on
dormant fields. Management believes that this flooding did not have a direct or
material impact on the collateral underlying portions of the existing loan
portfolio.
LOAN CONCENTRATIONS
At December 31, 1996, approximately $55,680,000, or 70% of the loan
portfolio was secured by commercial or residential real estate. Concentrations
of the Bank's lending activity in the real estate sector could have the effect
of intensifying the impact on the Bank if there are any adverse changes in the
real estate market in the Bank's lending area.
The Bank is located in the Napa Valley and a significant amount of its loans
are related to winery and vineyard operations. Loans related to winery and
vineyard operations constituted approximately $10,933,000, or 14% of total loans
at December 31, 1996, as compared to $6,913,000, or 9% of total loans, at
December 31, 1995. A downturn in the wine industry in the Napa Valley or a
disruption in wine production, which may result from extreme weather conditions,
plant diseases or other natural causes, competition, changes in governmental
regulatory or tax policies, or changes in consumer preferences, could have a
significant adverse impact on the Company's results of operations and financial
condition.
13
NONPERFORMING ASSETS
The following table shows the Company's nonperforming assets by category as
of December 31, 1996 and 1995:
DECEMBER 31,
1996 1995
(In 000'S)
Nonperforming assets:
Nonaccrual Loans including loans
past due 90 days $3,152 $1,447
Other Real Estate Owned 328 0
Total Nonperforming Assets $3,480 $1,447
Management analyzes each loan on a case by case basis to determine when, in
management's opinion, interest should no longer be accrued. This occurs when
management determines the ultimate collectibility of principal or interest to be
unlikely or when loans become 90 days or more past due, unless they are well
secured and in the process of collection or unless other circumstances exist
which justify the treatment of the loan as fully collectible. When a loan is
placed on nonaccrual status, unpaid interest is reversed and charged against
current income.
Interest income on nonaccrual loans at December 31, 1996 which would have
been recognized during the year if the loans had been current in accordance with
their original terms totaled $188,000 versus $291,000 for the same period in
1995.
As of December 31, 1996 and 1995, other real estate owned totaled $328,000
and $0, respectively. It is the Company's policy to write foreclosed property
down to the lower of fair market value less estimated selling costs or cost at
the time it is reclassified into other real estate owned. Miscellaneous
expenses relating to the property are charged to other noninterest expenses as
incurred.
As of the date of this filing, there were no other loans, other than those
included in the table above, where known information concerning possible credit
problems of borrowers caused management to have serious doubts as to the ability
of the borrower to comply with the present loan repayment terms such that they
may become nonperforming loans. See "Nonperforming Assets" herein.
At December 31, 1996, pursuant to SFAS 114, the Company's total recorded
investment in nonaccrual loans was $3,152,000, of which there was a related
allowance for credit losses of $204,000.
The average recorded investment in nonaccrual loans during 1996 was
$2,123,000. Related interest income recognized on impaired loans during the
year ended December 31, 1996, under the cash-basis method of accounting was
approximately $44,000.
14
SUMMARY OF LOAN LOSS EXPERIENCE
Inherent in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan being made
and the credit-worthiness of the borrower over the term of the loan. The Company
has an allowance for loan losses which is maintained at a level estimated to be
adequate to provide for losses that can be reasonably anticipated based upon
specific loan conditions as determined by management, historical loan loss
experience, the amount of past due and nonperforming loans, comments of third-
party loan review consultants, prevailing economic conditions and other factors.
While these factors are essentially judgmental and may not be reduced to a
mathematical formula, it is management's view that the $1,405,000 allowance,
which constitutes 1.76% of total loans at December 31, 1996, was adequate as an
allowance against foreseeable losses from the loan portfolio. The allowance was
$1,325,000, or 1.77%, of the total loan portfolio at December 31, 1995. The
allowance is increased by charges to the provision for loan losses and reduced
by net charge-offs. The continuing evaluation of the loan portfolio and
assessment of current economic conditions will dictate future allowance levels.
An analysis of the allowance for loan losses for the years ending December
31, 1996 and 1995 follows:
DECEMBER 31,
1996 1995
(IN 000'S)
ALLOWANCE FOR LOAN LOSSES:
Balance, Beginning of Year $ 1,325 $ 1,050
Provision Charged to Expense 550 323
Loans Charged Off:
Commercial (297) (20)
Personal Lines of Credit and Other (177) (31)
Real Estate Construction (70) 0
Total Loans Charged Off (544) (51)
Recoveries:
Commercial 71 0
Personal Lines of Credit and Other 3 3
Total Recoveries 74 3
Net Loans (Charged Off) Recovered (470) (48)
Balance, End of year $ 1,405 $ 1,325
Average Gross Loans Outstanding
During Period $78,861 $68,499
Total Gross Loans at End of Year $79,695 $74,699
RATIOS:
Net Loans Charged Off
to Average Loans Outstanding 0.60% 0.07%
Net Loans Charged Off to Total
Loans at End of Year 0.59% 0.06%
Allowance for Loan Losses to
Average Loans 1.78% 1.93%
Allowance for Loan Losses to
Total Loans at End of Year 1.76% 1.77%
Net Loans Charged Off
to Allowance for Loan
Losses at End of Year 33.45% 3.62%
Net Loans Charged Off
to Provision for
Loan Losses 85.45% 14.86%
15
The table set forth below shows a breakdown of the portfolio of loans at the
dates indicated and the amount of the allowance that has been allocated as of
those dates to each of the loan categories. Management believes that any
breakdown or allocation of the allowance for possible loan losses into loan
categories lends an appearance of exactness which does not exist, in that the
reserve is ultimately utilized as a single unallocated allowance available for
all loans.
DECEMBER 31, 1996 DECEMBER, 31, 1995
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
AMOUNT OF TO TOTAL AMOUNT OF TO TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS
(000'S) (000'S)
Commercial $ 920 74% $ 731 62%
Real Estate-Construction 119 10 123 11
Real Estate-Mortgage 162 13 119 10
Installment Loans
and Leases 3 0 77 7
Personal Lines of
Credit and Other 44 3 120 10
Unallocated 157 155
Total $1,405 100% $1,325 100%
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturity distribution of the portfolio of
loans and leases in thousands as of December 31, 1996 and sets forth the
sensitivity to changes in interest rates by comparing total loans with fixed
interest rates and total loans with floating or adjustable rates.
AFTER ONE
THROUGH AFTER
ONE YEAR FIVE FIVE
OR LESS YEARS YEARS TOTAL
(In 000's)
Commercial $50,363 $2,402 $ 24 $52,789
Real Estate-Construction 8,674 32 0 8,706
Real Estate-Mortgage 3,648 974 296 4,918
Installment Loans & Leases 2,090 2,126 0 4,216
Personal Lines of Credit &
Other 9,011 55 0 9,066
Total $73,786 $5,589 $320 $79,695
Loans With Fixed Interest
Rates $ 1,238 $3,890 $320 $ 5,448
Loans With Floating
Interest Rates 72,548 1,699 0 74,247
Total $73,786 $5,589 $320 $79,695
16
DEPOSITS
The following table reflects average balances and the average rates paid for
the major categories of deposits for the years ended December 31, 1996 and 1995:
YEAR ENDED DECEMBER 31,
1996 1995
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
(000'S) (000'S)
Noninterest-Bearing Demand $19,284 0.00% $15,752 0.00%
Interest-Bearing
Transaction Accounts 27,970 2.01 24,682 2.09
Savings Deposits 12,071 2.28 12,151 2.40
Time Deposits over 100,000 9,987 5.20 7,551 5.19
Other Time Deposits 26,613 5.47 24,952 5.74
Total Deposits $95,925 3.67% $85,088 3.80%
The following table sets forth, by time remaining to maturity, the domestic
time deposits in amounts of $100,000 or more at December 31, 1996:
Amount
Maturing In: (000's)
Three Months or Less $ 5,287
Over Three Through Twelve Months 4,224
Over Twelve Months 1,317
Total $10,828
SELECTED FINANCIAL RATIOS
The following table sets forth certain financial ratios for the periods
indicated (averages are computed using daily figures):
YEAR ENDED DECEMBER 31,
1996 1995
Net income to:
Average earning assets 0.94% 1.30%
Average total assets 0.87 1.19
Average shareholders' equity 11.61 16.40
Average shareholders' equity to:
Average total assets 7.46% 7.27%
Average net loans 10.08 10.01
Average total deposits 8.10 7.92
Average earning assets to:
Average total assets 92.15% 91.52%
Average total deposits 100.08 99.67
Percent of average total deposits:
Average net loans 80.33% 79.12%
Average noninterest-bearing
deposits 20.10 18.56
Average savings and other
time deposits 50.74 52.38
Total interest expense to:
Total gross interest income 30.68% 31.24%
Dividend Pay-out Ratio 41.82% 0.00%
17
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Bank are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of the Bank cannot be predicted.
Additionally, state and federal tax policies can impact banking organizations.
Effective January 1, 1997, applicable California bank and corporation tax rates
were reduced by 5% in order to keep California competitive with other western
states.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Company is particularly
susceptible to being affected by the enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other financial institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the Company.
In response to various business failures in the savings and loan industry and in
the banking industry, in December 1991, Congress enacted, and the President
signed into law, the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). FDICIA substantially revised the bank regulatory framework and
deposit insurance funding provisions of the Federal Deposit Insurance Act and
made revisions to several other federal banking statutes.
Implementation of the various provisions of FDICIA is subject to the
adoption of regulations by the various regulatory agencies, the manner in which
the regulatory agencies implement those regulations and certain phase-in
periods.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the Bank Holding Company
Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and
may be examined by, the FRB. The FRB also has the authority to examine the
Company's subsidiaries. The costs of any examination by the FRB are payable by
the Company.
The FRB has significant supervisory and regulatory authority over the
Company and its affiliates. The FRB requires the Company to maintain certain
levels of capital. See "Capital Standards." The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations or conditions imposed
in writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
18
Under the BHCA, a company generally must obtain the prior approval of the
FRB before it exercises a controlling influence over a bank, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, the Company is
required to obtain the prior approval of the FRB before it acquires, merges or
consolidates with any bank or bank holding company; any company seeking to
acquire, merge or consolidate with the Company also would be required to obtain
the approval of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership
or control of more than 5% of the voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. A bank holding company, with the approval of
the FRB, may engage, or acquire the voting shares of companies engaged, in
activities that the FRB has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. A bank
holding company must demonstrate that the benefits to the public of the proposed
activity will outweigh the possible adverse effects associated with such
activity.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking and Branching Act"), a bank holding company
became able to acquire banks in states other than its home state beginning
September 29, 1995 without regard to the permissibility of such acquisitions
under state law, but subject to any state requirement that the bank has been
organized and operating for a minimum period of time, not to exceed five years,
and the requirement that the bank holding company, prior to or following the
proposed acquisition, controls no more than 10% of the total amount of deposits
of insured depository institutions in the United States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across states lines, therefore creating interstate branches, beginning June 1,
1997. Under such legislation, each state has the opportunity to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate branching within that
state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now
able to open new branches in a state in which it does not already have banking
operations, if the laws of such state permit such de novo branching. California
enacted legislation to "opt in" to the Interstate Banking and Branching Act
provisions regarding interstate branching, allowing a state bank chartered in a
state other than California to acquire by merger or purchase, at any time after
effectiveness of the Caldera, Weggeland, and Killea California Interstate
Banking and Branching Act of 1995 ("IBBA"), a California bank or industrial loan
company which is at least five (5) years old and thereby establish one or more
California branch offices. However, the IBBA prohibits a state bank chartered
in a state other than California from entering California by purchasing a
California branch office of a California bank or industrial loan company without
purchasing the entire entity or by establishing a de novo California branch
office. See the section entitled "Recently Enacted Legislation" for additional
information.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies.
19
The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
Transactions between the Company and the Bank are subject to a number of
other restrictions. FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Subject to certain limitations, depository institution
subsidiaries of bank holding companies may extend credit to, invest in the
securities of, purchase assets from, or issue a guarantee, acceptance, or letter
of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with affiliates may not exceed 10% of the capital stock and surplus
of the institution, and the aggregate of such transactions with all affiliates
may not exceed 20% of the capital stock and surplus of such institution. The
Company may only borrow from depository institution subsidiaries if the loan is
secured by marketable obligations with a value of a designated amount in excess
of the loan. Further, the Company may not sell a low-quality asset to a
depository institution subsidiary.
Generally, a bank holding company and its subsidiaries are prohibited from
engaging in tie-in arrangements in connection with the extension of credit, sale
or lease of property or furnishing of services unless the FRB permits an
exception to the tying prohibitions pursuant to exemption authority available to
it under applicable law. The FRB, however, has adopted a rule, effective
September 2, 1994, amending the anti-tying provisions to permit a bank or bank
holding company to offer a lower price on a loan, deposit or trust service
(traditional bank product), or on securities brokerage services, on the
condition that the customer obtain a traditional bank product from an affiliate.
Additionally, as of January 23, 1995, a bank holding company, or a nonbank
subsidiary, may offer lower prices on any of its products or services on the
condition that the customer obtain another product or service from such company
or any of its nonbank affiliates, provided that all products offered in the
package arrangement are separately available for purchase.
The Company is a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Superintendent of Banks (the "Superintendent"). Regulations have not yet been
proposed or adopted, and no other steps have been taken, to implement the
Superintendent's power under this statute.
20
BANK REGULATION AND SUPERVISION
As a national bank, the Bank is regulated, supervised and regularly
examined by the Office of the Comptroller of the Currency ("OCC"). Deposit
accounts at the Bank are insured by Bank Insurance Fund ("BIF"), as administered
by the Federal Deposit Insurance Corporation ("FDIC"), to the maximum amount
permitted by law. The Bank is also subject to applicable provisions of
California law, insofar as such provisions are not in conflict with or preempted
by federal banking law. The Bank is a member of the Federal Reserve System, and
is also subject to certain regulations of the FRB dealing primarily with check
clearing activities, establishment of banking reserves, Truth-in-Lending
(Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B).
By comparison, California state-chartered banks are regulated by the
California Superintendent of Banks (the "Superintendent"). Pursuant to AB 3351,
which was adopted by the California legislature during 1996, all of the
California state regulatory authorities for state-chartered depository
institutions will be consolidated under a new state agency, the Department of
Financial Institutions ("DFI") effective July 1, 1997. The newly created DFI
combines the State Banking Department and the Department of Savings and Loan
while regulatory oversight over industrial loan companies and credit unions will
be shifted from the Department of Corporations to the DFI. During 1996 the
California Interstate Banking and Branching Cleanup Act was enacted, which
revised the Superintendent's assessment methodology for state-chartered banks in
order to provide a better basis of comparison to the method used by the OCC.
Under the new methodology, the average assessment for state banks will be
approximately 39% of the OCC's annual charges for national bank supervision.
During 1996, the OCC adopted a regulation to revise and streamline its
procedures with respect to corporate activities of national banks, to be
effective December 31, 1996. These revised standards allow the OCC to approve,
on a case-by-case basis, the entry of bank operating subsidiaries into a
business incidental to banking, including activities in which the parent bank is
not permitted to engage. Such a standard allows a national bank to conduct an
activity approved for a bank holding company through a bank operating subsidiary
such as acting as an investment or financial advisor, leasing personal property
and providing financial advice to customers. In general, these new standards
will be available to well-capitalized or adequately capitalized national banks.
CAPITAL STANDARDS
The OCC and other federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and
credit equivalent amounts of off balance sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
21
In determining the capital level the Bank is required to maintain, the OCC
does not, in all respects, follow generally accepted accounting principles
("GAAP") and has special rules which have the effect of reducing the amount of
capital it will recognize for purposes of determining the capital adequacy of
the Bank. These rules are called Regulatory Accounting Principles ("RAP"). In
December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
Future changes in OCC regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Company to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
common stock, retained earnings, noncumulative perpetual preferred stock, other
types of qualifying preferred stock and minority interests in certain
subsidiaries, less most other intangible assets and other adjustments. Net
unrealized losses on available-for-sale equity securities with readily
determinable fair value must be deducted in determining Tier 1 capital.
Additionally as of April 1, 1995, for Tier 1 capital purposes, deferred tax
assets that can only be realized if an institution earns sufficient taxable
income in the future will be limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1 capital, whichever
is less. Tier 2 capital may consist of a limited amount of the allowance for
possible loan and lease losses, term preferred stock and other types of
preferred stock not qualifying as Tier 1 capital, term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital are subject to certain other requirements and
limitations of the federal banking agencies. Since December 31, 1992, the
federal banking agencies have required a minimum ratio of qualifying total
capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum
ratio of Tier 1 capital to adjusted average risk-adjusted assets and off balance
sheet items of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
adjusted average total assets, referred to as the leverage capital ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. It is improbable, however, that an
institution with a 3% leverage ratio would receive the highest rating by the
regulators since a strong capital position is a significant part of the
regulators' rating. For all banking organizations not rated in the highest
category, the minimum leverage ratio must be at least 100 to 200 basis points
above the 3% minimum. Thus, the effective minimum leverage ratio, for all
practical purposes, must be at least 4% or 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the minimum
guidelines and ratios.
22
The following tables present the capital ratios for the Company and the
Bank, compared to the standards for well-capitalized depository institutions, as
of December 31, 1996 (amounts in thousands except percentage amounts).
THE COMPANY
WELL MINIMUM
ACTUAL CAPITALIZED CAPITAL
CAPITAL RATIO RATIO REQUIREMENT
Leverage........... $7,971 7.21% 5.0% 4.0%
Tier 1 Risk-Based.. 7,971 9.34 6.0 4.0
Total Risk-Based... 9,376 10.99 10.0 8.0
THE BANK
WELL MINIMUM
ACTUAL CAPITALIZED CAPITAL
CAPITAL RATIO RATIO REQUIREMENT
Leverage........... $7,862 7.11% 5.0% 4.0%
Tier 1 Risk-Based.. 7,862 9.22 6.0 4.0
Total Risk-Based... 8,932 10.47 10.0 8.0
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy. This final rule does not codify a measurement
framework for assessing the level of a bank's interest rate risk exposure. The
information and exposure estimates collected through a new proposed supervisory
measurement process, described in the banking agencies' joint policy statement
on interest rate risk, would be one quantitative factor used to determine the
adequacy of an individual bank's capital for interest rate risk. The focus of
that proposed process is on a bank's economic value exposure. Other quantitative
factors include the bank's historical financial performance and its earnings
exposure to interest rate movements. Examiners also will consider qualitative
factors, including the adequacy of the bank's internal interest rate risk
management. The banking agencies intend for this case-by-case approach for
assessing a bank's capital adequacy for interest rate risk to be a transitional
arrangement.
The second step will consist of a proposed rule that would establish an
explicit minimum capital charge for interest rate risk, based on the level of a
bank's measured interest rate risk exposure. The banking agencies intend to
implement this second step at some future date, after the banking agencies and
the banking industry have gained more experience with the proposed supervisory
measurement and assessment process.
23
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA. An
insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
------------------ ------------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
------------------ --------------------------------
Total risk-based capital less than Total risk-based capital less than 6%;
8%; Tier 1 risk-based capital less than
Tier 1 risk-based capital less than 3%; or
4%; or Leverage ratio less than 3%.
Leverage ratio less than 4%.
"CRITICALLY UNDERCAPITALIZED"
-----------------------------
Tangible equity to total assets
less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
24
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
In addition to the statutory limitations, FDICIA originally required the
federal banking agencies to prescribe, by regulation, standards for all insured
depository institutions for such things as classified loans and asset growth. In
1994 FDICIA was amended to (a) authorize the agencies to establish safety and
soundness standards by regulation or by guideline for all insured depository
institutions; (b) give the agencies greater flexibility in prescribing asset
quality and earnings standards and (c) eliminate the requirement that such
standards apply to depository institution holding companies.
On July 10, 1995 the federal banking agencies published Interagency
Guidelines Establishing Standards for Safety and Soundness. By adopting the
standards as guidelines, the agencies retained the authority to require an
institution to submit to an acceptable compliance plan as well as the
flexibility to pursue other more appropriate or effective courses of action
given the specific circumstances and severity of an institution's noncompliance
with one or more standards.
25
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound,
possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
The payment of dividends by a national bank is further restricted by
additional provisions of federal law, which prohibit a national bank from
declaring a dividend on its shares of common stock unless its surplus fund
exceeds the amount of its common capital (total outstanding common shares times
the par value per share). Additionally, if losses have at any time been
sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend shall be paid. Moreover, even if a bank's surplus exceeded its common
capital and its undivided profits exceed its losses, the approval of the OCC is
required for the payment of dividends if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by the Bank is
governed by the Bank's ability to maintain minimum required capital levels and
an adequate allowance for loan losses. Regulators also have authority to
prohibit a depository institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including payment of dividends or
other payments under certain circumstances even if such payment are not
expressly prohibited by statute.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC
also administers the Savings Association Insurance Fund ("SAIF"), which insures
deposits in thrift institutions. The FDIC is authorized to borrow up to $30
billion from the United States Treasury; up to 90% of the fair market value of
assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. FDICIA also provides authority for
special assessments against insured deposits. No assurance can be given at this
time as to what the future level of premiums will be.
26
As required by FDICIA, the FDIC adopted a transitional risk-based
assessment system for deposit insurance premiums which became effective January
1, 1993. On November 14, 1995 the Board of Directors of the FDIC adopted a
resolution to reduce to a range of 0 to 27 basis points the assessment rates
applicable to deposits assessable by the BIF for the semiannual assessment
period beginning January 1, 1996. The new assessment schedule would retain the
risk based characteristics of the current system. On November 26, 1996 the FDIC
decided to continue in effect the current BIF assessment rate schedule.
The FDIC may make limited adjustments to the above rate schedule not to
exceed an increase or decrease of 5 basis points without public notice and
comment rulemaking. The amount of an adjustment adopted by the Board is to be
determined by the following considerations: (a) the amount of assessment revenue
necessary to maintain the reserve ratio at the designated reserve ratio and (b)
the assessment schedule that would generate such amount of assessment revenue
considering the risk profile of BIF members. In determining the relevant amount
of assessment revenue, the Board is to consider BIF's expected operating
expenses, case resolution expenditures and income, the effect of assessments on
BIF members' earnings and capital, and any other factors the Board may deem
appropriate.
In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act") in
order to raise the level of SAIF reserves, and to reduce the possibility that
bonds issued by the Financing Corporation ("FICO") would go into default. The
FICO was a special purpose government corporation that issued $8.2 billion in
bonds to recapitalize the Federal Savings and Loan Insurance Corporation.
Interest on the FICO bonds was paid from the proceeds of assessment made on the
deposits of SAIF members. Because of the almost $800 million needed to pay for
the annual interest on the FICO bonds, the payments of SAIF members were not
increasing the SAIF reserve to a sufficient level to allow the FDIC to reduce
assessment rates (as had been done for BIF deposits), and SAIF members were
employing certain strategies to either exit the system or transfer deposits to
BIF coverage.
Pursuant to the Funds Act, the FDIC imposed a special one-time assessment
on all institutions that held SAIF assessable deposits as of March 31, 1995 of
an estimated 65.7 cents per $100 of SAIF assessable deposits. Certain discounts
and exemptions from the assessment were available. For example, BIF-member banks
that had acquired SAIF-insured deposits from thrifts were generally entitled to
a 20% discount on the special assessment if the bank satisfied certain statutory
thresholds (the bank's acquired SAIF deposits, as adjusted, must be less than
half of its total domestic deposits). Furthermore, beginning January 1, 1997,
all FDIC-insured institutions will be assessed to cover the interest payments
due on FICO bonds. For calendar years 1997 through 1999, BIF members will pay
one-fifth the rate SAIF members will pay, and beginning in 2000 both types of
institutions will pay the same rate. BIF members will be required to pay a FICO
assessment of approximately 1.3 basis points for the first semiannual FICO
assessment in 1997.
27
The Funds Act also authorized the FDIC to rebate assessments paid by BIF
members if the BIF has reserves exceeding its designated reserve ratio of 1.25
percent of total estimated insured deposits. The adjusted BIF balance was
$25.888 billion on June 30, 1996, a reserve ratio of 1.30 percent. The FDIC has
expressed its view that the long-term needs of the BIF are a factor in setting
the effective average BIF assessment rate, and that the FDIC is uncertain
whether the current favorable conditions represent a long-term trend.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
On March 8, 1994, the federal Interagency Task Force on Fair Lending issued
a policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment, and evidence of
disparate impact.
In 1996, new compliance and examination guidelines for the CRA were
promulgated by each of the federal banking regulatory agencies, fully replacing
the prior rules and regulatory expectations with new ones ostensibly more
performance based than before to be fully phased in as of July 1, 1997. The
guidelines provide for streamlined examinations of smaller institutions.
RECENTLY ENACTED LEGISLATION
On September 29, 1995 the IBBA became effective. The IBBA implemented the
federal Interstate Banking and Branching Act. The main features of this
legislation are (a) out-of-state banks that wish to establish a California
branch office to conduct core banking business must first acquire an existing 5
year old California bank or industrial loan company by merger or purchase; (b)
California state-chartered banks will be empowered to conduct various authorized
branch-like activities on an agency basis through affiliated and unaffiliated
insured depository institutions in California and other states and (c) the
Superintendent will be authorized to approve an interstate acquisition or merger
which would result in a deposit concentration exceeding 30% if the
Superintendent finds that the transaction is consistent with public convenience
and advantage. The legislation also contains extensive provisions governing
intrastate and interstate (a) intra-industry sales, mergers and conversions
between banks and between industrial loan companies and (b) inter-industry
transactions involving banks, savings associations and industrial loan
companies.
28
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conversation and Recovery
Act ("RCRA") to provide lenders and fiduciaries with greater protections from
environmental liability. The definition of "owner or operator" under CERCLA has
been amended to exclude a lender who: (i) holds indicia of ownership in a
property primarily to protect its security interest, but does not participate in
the property's management or (i) forecloses on a property, or, after
foreclosure, sells, re-leases (in the case of a lease finance transaction), or
liquidates the property, maintains business activities, winds up operations,
undertakes a response under CERCLA, or takes measures to preserve, protect or
prepare property prior to sale or disposition, so long as the lender did not
participate in the property's management prior to sale. In order to preserve
these protections, a lender who forecloses on property must seek to sell, re-
lease, or otherwise divest itself of the property at the earliest practicable,
commercially reasonable time, and on reasonable terms. "Participation in
management" is defined as actual participation in the management or operational
affairs of the facility, not merely having the capacity to influence or the
unexercised right to control operations. Similar changes have been made in RCRA.
The California legislature adopted a similar bill to provide that, subject
to numerous exceptions, a lender acting in the capacity of a lender shall not be
liable under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property. Under this bill a lender which had not
participated in the management of the property prior to foreclosure may take
actions similar to those set forth in the CERCLA and RCRA amendments without
losing its immunity from liability. To preserve that immunity, after
foreclosure, the lender must take commercially reasonable steps to divest itself
of the property in a reasonably expeditious manner.
PENDING LEGISLATION
There are a number of pending legislative proposals to reform the Glass-
Steagall Act to allow affiliations between banks and other firms engaged in
"financial activities," including insurance companies and securities firms.
Glass-Steagall reform will likely be affected by a bank insurance powers case
decided during 1996 by the U.S. Supreme Court, which gives national banks
greater opportunities to sell traditional insurance products, such as life,
automobile, and property and casualty policies. In a similar recent case, the
Court upheld an OCC determination that national banks may sell annuities.
Certain other pending legislative proposals include bills to free
withdrawals from individual retirement accounts from penalties for first-time
home purchases and other purposes and eliminate most Community Reinvestment Act
reporting requirements.
While the effect of such proposed legislation and regulatory reform on the
business of financial institutions cannot be accurately predicted at this time,
it seems likely that a significant amount of consolidating in the banking
industry will continue to occur throughout the remainder of the decade.
29
COMPETITION
In the past, an independent bank's principal competitors for deposits and
loans have been other banks (particularly major banks), savings and loan
associations and credit unions. To a lesser extent, competition was also
provided by thrift and loans, mortgage brokerage companies and insurance
companies. Other institutions, such as brokerage houses, mutual fund companies,
credit card companies, and even retail establishments have offered new
investment vehicles which also compete with banks for deposit business. The
direction of federal legislation in recent years seems to favor competition
between different types of financial institutions and to foster new entrants
into the financial services market, and it is anticipated that this trend will
continue.
The enactment of the Interstate Banking and Branching Act in 1994 as well
as the California Interstate Banking and Branching Act of 1995 will likely
increase competition within California. Regulatory reform, as well as other
changes in federal and California law will also affect competition. While the
impact of these changes, and of other proposed changes, cannot be predicted with
certainty, it is clear that the business of banking in California will remain
highly competitive.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.
Shares of Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, and 1,000,000 shares of
preferred stock of which approximately 754,500 shares of common stock and no
shares of preferred stock were outstanding at December 31, 1996. As of December
31, 1996, outstanding options to purchase Common Stock were 164,800, and Common
Stock available for grants under the Company's stock option plans was 85,200
shares.
The loan portfolio of the Company is dependent on real estate. At December
31, 1996, real estate served as the principal source of collateral with respect
to approximately 70% of the Company's loan portfolio. A worsening of current
economic conditions or rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing loans and the value of the
available-for-sale investment portfolio, as well as the Company's financial
condition and results of operations in general and the market value for Company
Common Stock. Acts of nature, including earthquakes and floods, which may cause
uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact the Company's financial condition.
30
The Company is subject to certain operations risk, including, but not
limited to, data processing system failures and errors and customer or employee
fraud. The Company maintains a system of internal controls to mitigate against
such occurrences and maintains insurance coverage for such risks, but should
such an event occur that is not prevented or detected by the Company's internal
controls, uninsured or in excess of applicable insurance limits, it could have a
significant adverse impact on the Company's business, financial condition or
results of operations.
ITEM 2. PROPERTIES.
The Bank maintains its main offices on leased premises at 901 Main Street in
the Downtown part of Napa, California. The Company opened this banking facility
in 1995. This property is a two story building with an adjacent paved ground
level parking lot. The parking lot is approximately 10,860 square feet. The
lease term runs from December 1, 1994 to November 30, 1999, with three five (5)
year renewal options. The lease provides for inflationary increases in the
monthly rental amount during the renewal periods and also contains options to
purchase the facility at an agreed upon market value during certain defined
periods. The base rent is $9,900.00 per month. The base rent is subject to an
annual adjustment based on the Consumer Price Index beginning on the first day
of January of every year of the first option renewal term beginning in the year
2001. The adjusted rental will not exceed an 8% increase over the adjusted
rental of the preceding year nor will the adjusted rental be less than the
original base rent. Rent paid for the Downtown Napa Office was approximately
$119,000 during 1996. In addition, the Bank pays utilities, insurance and
maintenance relating to the branch.
The Company purchased its Claremont branch building for $558,000 in cash,
including fees, on September 6, 1989. The building, comprised of approximately
5,000 square feet, was remodeled so that it could be put into service as a full
service banking branch. The cost of the remodeling, security systems and
necessary furniture and equipment was approximately $600,000. This Office was
remodeled again in 1995 in order to accommodate the Bank's Electronic Data
Processing and Customer Service Departments. The cost of this remodel was
approximately $50,000.
The Company leases the Bank's approximately 2,400 square foot branch office
located at 1015 Adams Street in downtown St. Helena, California. The lease term
ends in 1998, with two options to extend the term of the lease for five years
each. Rent paid for the St. Helena office was approximately $61,000 during
1996. In addition, the Bank pays utilities, insurance and maintenance relating
to the branch.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 1996, neither the Company, the Bank nor the Leasing
Company was a party to, nor was any of their property the subject of, any
material pending legal proceedings, nor are any such proceedings known to be
contemplated by governmental authorities. At the same date, the Bank was
involved as plaintiff in ordinary routine litigation incidental to its business.
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report through the solicitation of
proxies or otherwise.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is not listed on any exchange or the National
Association of Securities Dealers' Automated Quotation System; however, there
has been limited trading in the Company's Common Stock which the company does
not believe necessarily represents an established public trading market. To the
Company's knowledge, no broker-dealers handle transactions of the Company's
common stock. The following table sets forth, for the fiscal quarters
indicated, the range of high and low sales prices, not including broker's
commissions, based upon known information as reported by management. These
figures may not include private transactions. Other than to this extent, there
is no established public trading market in the Company's Common Stock.
SALES PRICES OF THE COMPANY'S
COMMON STOCK
TRADING
YEAR HIGH LOW VOLUME
1996
Fourth Quarter $14.50 $14.50 100
Third Quarter 14.50 14.50 19,755
Second Quarter 14.50 14.50 250
First Quarter 10.00 10.00 450
1995
Fourth Quarter $ 9.00 $ 8.00 1,600
Third Quarter 9.00 8.00 600
Second Quarter 9.00 8.00 16,845
First Quarter 9.00 8.00 6,450
Because the Company's Common Stock is not listed on any exchange, accurate
trading volumes are difficult to ascertain. All known trades for 1996 involved
purchases by the Company's Employee Stock Ownership Trust ("ESOT"). The ESOT
purchased 19,855 shares in 1996. The ESOT did not purchase any shares of common
stock in 1995.
As of February 28, 1997, the outstanding shares of the Company's Common
Stock were held of record by 353 shareholders. The last known trade of the
Company's Common Stock occurred on December 11, 1996, for 100 shares. Price per
share was $14.50.
33
During the third quarter of 1996, the Company's ESOT sent out a tender offer
to purchase up to 20,000 shares of the Company's Common Stock. The price of the
offer was set at $14.50 per share. From this offer, the ESOT purchased 19,354
shares of the Company's outstanding Common Stock.
During the first quarter of 1996, the Company declared and paid a cash
dividend of twelve and a half cents ($0.125) per share on outstanding stock. The
first quarter dividend was based on 1995 earnings and amounted to $94,000.
During the beginning of the second quarter of 1996, the Company declared a
second cash dividend of twelve and a half cents ($0.125) per share. This cash
dividend was based on the first quarter earnings of 1996 and was also $94,000.
During the third quarter of 1996, the Bank paid a $100,000 cash dividend to the
Company. This dividend allowed the Company to declare and pay another cash
dividend of twelve and a half cents ($0.125) per share for a total of $94,000.
In the fourth quarter of 1996, the Bank paid another $100,000 cash dividend to
the Company, allowing it to again declared and issue a twelve and a half cents
($0.125) per share dividend. This fourth quarter dividend was based on third
quarter earnings and was paid to shareholders on January 3, 1997. Total
dividends paid by the Bank to the Company and from the Company to its
shareholders for 1996 amounted to $200,000 and $378,000 respectively.
34
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial information for the Company presented
below for the five years ended December 31, 1996 is derived from and should be
read in conjunction with the consolidated financial statements of the Company
and the notes thereto which are included in Item 14 of this Annual Report on
Form 10-K.
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
(IN 000'S EXCEPT EARNINGS PER SHARE AND RATIOS)
STATEMENT OF OPERATIONS
Total interest income $9,173 $8,432 $6,226 $4,831 $4,734
Total interest expense 2,814 2,634 1,658 1,551 2,038
Provision for loan losses 550 323 149 198 207
Net interest income after
provision for loan losses 5,809 5,475 4,419 3,082 2,489
Other income 806 800 627 594 554
Other expense 5,099 4,409 3,716 3,425 3,007
Income before
income tax 1,516 1,866 1,330 251 36
Income tax provision (credit) 614 765 553 (249) 14
Extraordinary tax credit 0 0 0 0 (12)
Net income 902 1,101 777 500 34
Net income/share 1.00 1.25 1.03 0.66 0.05
Cash Dividends Paid/share $ 0.50 $ 0 $ 0 $ 0 $ 0
Weighted Average Shares 906 882 755 755 755
BALANCE SHEET INFORMATION (AT PERIOD END):
Total assets $113,827 $104,851 $86,477 $77,241 $63,454
Net loans 78,290 73,374 62,103 54,259 45,990
Total deposits 105,417 96,752 79,378 71,463 58,243
Shareholders' equity 7,971 7,447 6,346 5,569 5,069
Book value per common
share outstanding $ 8.67 $ 8.44 $ 8.41 $ 7.38 $ 6.71
SELECTED FINANCIAL RATIOS:
Net interest margin 6.75% 6.98% 6.25% 5.38% 4.76%
Allowance for loan losses
to average loans 1.78% 1.93% 1.78% 1.80% 1.50%
Nonperforming loans to
average loans 4.41% 2.11% 1.63% 0.72% 2.06%
Net charge-offs
to average loans 0.60% 0.07% 0.02% 0.06% 0.31%
Average earning assets to
total average assets 92.15% 91.52% 92.00% 91.66% 90.28%
Primary capital ratio (1) N/A N/A N/A N/A N/A
Total capital ratio (1) N/A N/A N/A N/A N/A
Return on average assets .94% 1.30% 1.05% 0.81% 0.06%
Return on average
shareholders' equity 11.61% 16.40% 14.02% 9.77% 0.70%
Average equity to average
assets ratio 7.46% 7.27% 6.87% 7.58% 7.77%
Leverage Ratio (2) 7.11% 7.16% 7.28% 7.04% 7.60%
Total Risk based
capital ratio 10.47% 10.40% 10.33% 9.84% 10.77%
(1) As defined by regulatory guidelines.
(2) Calculated based on the Bank's capital and average assets.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following analysis of the Company's financial condition for the years
ended December 31, 1996 and 1995 and results of operation for each of the three
years in the period ended December 31, 1996, should be read in conjunction with
the Consolidated Financial Statements, related Notes thereto and other
information presented elsewhere herein. Since the Company is a bank holding
company whose principal asset is, and is expected to be, the capital stock of
the Bank, the following relates principally to the financial condition and
results of operations of the Bank.
The consolidated financial statements of the Company are prepared in
conformity with 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.
Average balances, including such balances used in calculating certain financial
ratios, are comprised of average daily balances. All dollar amounts are
rounded, except earnings per share data.
Certain statements in this Annual Report on Form 10-K include forward-
looking information within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Napa
County and the wine industry; volatility of rate sensitive deposits; operational
risks including data processing system failures or fraud; asset/liability
matching risks and liquidity risks; and changes in the securities markets. See
also "Certain Additional Business Risks" included in Item 1 herein and other
risk factors discussed elsewhere in this Report.
SUMMARY OF FINANCIAL RESULTS
The Company recorded net income of $902,000, or $1.00 per share for the year
ended December 31, 1996 compared to $1,101,000 or $1.25 per share, and $777,000
or $1.03 per share, for the year ended December 31, 1995 and 1994, respectively.
36
Net income declined in 1996 over 1995 by $199,000, or 18%. The primary
reasons for this decline were due to an increase in the provision for loan
losses of $227,000, or 70%, and increases in noninterest expenses of $690,000,
or 16%. These increases were partially offset by an increase in net interest
income of $561,000, or 10%, and decreases in taxes of $151,000, or 20%.
The primary reasons for the improvement in operating results in 1995 as
compared to 1994 are as follows: Net interest income increased by $1,230,000 or
27%. This growth was partially offset by an increase in the provision for loan
losses of $174,000 or 116%. Total noninterest income increased by $173,000 or
28%. These improvements were also offset by an increase in total noninterest
expense of $693,000 or 19%.
Management is not aware of any trends, events or uncertainties that would
have a material impact on the Company's liquidity, capital resources, or results
of operations other than the early payoff of a purchased loan in January 1997
that resulted in a write off of $104,000 in unamortized premium. The loan was
for commercial property in the Bank's service area that totalled approximately
$1,752,000 at the time of payoff.
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 period ended December 31, 1996, net interest income increased by
$561,000, or 10%, over the same period of 1995. This number is a component of
total interest income and total interest expense. The $11,085,000 increase in
average earning assets in 1996 compared to 1995 contributed significantly to
this increase in net interest income. Even though average earning assets
increased significantly in 1996 over 1995, net interest income did not increase
as dramatically due to a decline in the Bank's net interest margin from 6.98%
for 1995 compared to 6.75% for 1996.
Net interest income increased in 1995 by $1,230,000, or 27%, over 1994.
Total interest income increased in 1995 by $2,206,000, or 35%, over 1994. This
increase was offset by an increase in total interest expense of $976,000, or
59%. These results can be attributed to a number of factors, such as an
increase in the net interest margin from 6.25% in 1994 to 6.98% in 1995 (based
on period end earning assets). This rise in net interest margin was aided by
increases in the prime interest rate during late 1994 and early 1995.
Additionally, average earning assets increased by $10,056,000 or 14%, in 1995
over 1994 totals.
As of December 31, 1996, total average earning assets were $94,205,000, an
increase of $11,085,000, or 13%, from the 1995 level of $83,120,000.
37
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
including loan portfolio growth.
The provision for loan losses was $550,000 at December 31, 1996 compared to
$323,000 for 1995. This represents an increase of $227,000, or 70%, over the
prior year. The increase in the provision was due to increases in both average
loans and outstanding loan balances in 1996 over 1995 totals, projected loan
growth, increases in non-performing loans, and management's ongoing assessment
of the adequacy of the allowance for loan losses (See "Loans and Nonaccrual
Loans" herein).
During 1995, the provision for loan losses was $323,000 as compared to
$149,000 for 1994. As of December 31, 1995, total net loans were $73,374,000
compared to $62,103,000 for the same period in 1994. This was an increase of
$11,271,000, or 18% over the prior year.
NONINTEREST INCOME
Noninterest income consists primarily of service charges on deposit
accounts, fees charged for other banking deposit and loan services, and merchant
card processing income. Noninterest income remained relatively flat between
1996 and 1995, showing only a $6,000, or 1%, growth over the prior year.
Service charges generated from deposit accounts continued to show growth due to
both increases in the number of outstanding accounts and a continued emphasis on
assessing service charges and other related fees. Additionally, the Bank's
merchant card processing program continued to show gains in 1996 over earnings
in 1995
Noninterest income increased in 1995 by $173,000, or 28%, over 1994 totals,
primarily due to growth in deposit accounts and the related increase in service
charge income, and a more aggressive policy of assessing service charges and
other related fees. Additionally, the Bank's merchant card processing program
was enhanced and expanded in early 1995 and showed a significant increase in
earnings during 1995 over 1994 totals.
NONINTEREST EXPENSE
Total noninterest expense was $5,099,000 in 1996, representing an increase
of $690,000, or 16%, over the 1995 total of $4,409,000. Total noninterest
expense in 1995 was $693,000, or 19%, above 1994's total of $3,716,000.
Net salaries and employee benefit expense was $2,722,000 in 1996, an
increase of $461,000, or 20%, over 1995's total of $2,261,000. During 1996, the
Bank grew by approximately five full time equivalent employees, two of which
were senior officers. Additionally, salaries increased due to average bank-wide
raises of approximately four percent which took place in March 1996. The
Company did not accrue for incentive payouts in 1996 nor does it have plans on
paying any bonuses for performance in said year.
38
Salaries and employee benefits were $2,261,000 in 1995, an increase of
$297,000, or 15%, over 1994. This increase can be primarily attributed to an
addition of approximately five full time equivalent employees during 1995.
These staff increases were necessary to maintain an adequate service level given
the overall growth within the company. Additionally, salaries also increased as
a result of average bank-wide raises of five percent which took place in March
1995.
Occupancy and furniture, fixtures and equipment expenses increased in 1996
by $107,000, or 14% over 1995 totals. This increase was due primarily to the
Bank's branch/headquarters tenant improvements (see discussion below) and
upgrades in electronic media throughout the Company.
During April 1995, the Bank closed its original banking office located at
1500 Third Street, Napa, California and re-opened at 901 Main Street, Napa,
California. At the end of June, the Bank relocated it primary lending services
and headquarters into the completed facility. After relocation of the lending
and administration staff from its previous location at 3263 Claremont Way, Napa,
California, this facility began remodeling to accommodate the Bank's customer
service and EDP departments. The remodeling of the Claremont facility was
completed in July and these two departments were immediately relocated. With
the completion of this move, the Bank was able to vacate the leased space which
previously housed the Customer Service Center. At the end of the third quarter
of 1995, the Bank had consolidated back into three locations, all offering full
banking services. Occupancy and furniture, fixtures and equipment expenses for
the twelve months ending December 31, 1995 increased by $164,000 or 27%, over
the same period of 1994. These increases in costs were attributed primarily to
the Bank's new branch/headquarters tenant improvements, and the costs of
supporting its other locations.
Professional fees increased in 1996 by $32,000, or 8%, over 1995 totals.
This increase was due primarily to the additional use of outside consultants for
both loan related legal reviews and audits and managerial issues.
In 1995, professional and director fees increased by $241,000, or 137%, over
1994. This additional expense is primarily due to increases in consulting, legal
and director fees. Beginning in January 1995, the Company approved a new
director compensation plan which resulted in an increase of $63,000 over the
prior year. Consulting fees increased in 1995 by $34,000, due to the outsourcing
of a number of loan related reviews, audits and other similar procedures. The
Company incurred additional legal expenses of $52,000 in 1995 over the same
period of 1994.
The competition for deposits and loans in the Company's service area
warranted increased marketing and business development expenditures during 1996.
Early in 1996, the Company hired an employee whose primary focus was marketing
and sales support. This was done as a strategic move to enhance the Company's
overall marketing materials and focus both within the branches and in the
Company's service area. This focus resulted in an increase of $46,000, or 37%,
in marketing expenses between 1996 and 1995.
39
The Company decreased its marketing and business development costs by
$11,000, or 8%, during 1995 over the same period of 1994. This decrease was
primarily due to the high profile marketing efforts incurred during the first
quarter of 1995. Given the growth in loans and deposits resulting from these
marketing efforts, management curtailed the Bank's marketing costs greatly
during the remaining three quarters of 1995.
Regulatory fees and related expenses decreased in 1996 by $70,000, or 34%,
over the same period of 1995. The decrease was primarily due to changes in the
annual Federal Deposit Insurance Corporation assessments that occurred in the
latter half of 1995. This same change also contributed to the drop in expense
in 1995 over 1994 totals.
Stationery and supply expense for 1996 was $21,000, or 22%, higher than
1995. This increase was due to general growth in the Company and the enhanced
marketing oriented materials used within the branches. In 1995, stationery and
supply expense was $95,000, or 42%, higher than 1994. The increase in 1995 was
due to significant one time expenses related to the numerous facility moves and
relocations which incurred during 1995.
Data processing expenses have shown a steady increase during the three years
presented and have been in keeping with the overall growth of the Company.
Additionally, the $16,000, or 15%, growth in 1996 over 1995 was also due to
enhancements and upgrades made to the Company's personal computers.
Other noninterest expense increased by $77,000, or 19%, in 1996 over 1995
totals. The increase was due primarily to increase in miscellaneous loan
expenses and staff training and development. The increase between 1995 and 1994
was in keeping with the general growth of the Company.
INCOME TAXES
Income tax expense was 41% and 42% of pre-tax income for the years ending
December 31, 1996 and 1995, respectively.
EARNING ASSETS
Total earning assets consist of investment securities, loans, federal funds
sold and interest bearing deposits held in other institutions. Total earning
assets increased from $95,267,000 at December 31, 1995 to $102,680,000 at
December 31, 1996, an increase of $7,413,000, or 8%.
LOANS AND NONACCRUAL LOANS
Total loans, excluding the allowance for loan losses (see Notes 1 and 4 to
the Consolidated Financial Statements included herein at Item 14, for further
discussion of the allowance for loan losses), increased from $74,699,000 at
December 31, 1995 to $79,695,000 at December 31, 1996. The increase of
$4,996,000 represents a 7% increase in outstanding loans during 1996. The Bank
experienced increases in all of its loan categories except for a slight decline
in personal line of credit loans during the year under review. Management
attributes these increases to more seasoned staff, both loan and deposit
officers, which assisted with new loan generation and changes taking place in
the Company's service area.
40
General economic and credit risks are inherent in the lending function and
within particular types of lending categories. The Bank primarily makes four
types of loans: Real estate construction, real estate mortgage, commercial and
consumer loans. As discussed in "Item 1. Business - Loan Portfolio" herein, the
Bank generally takes a collateralized position, with reasonable loan to value
ratios on its loans (over 90% of the Bank's loan portfolio is collateralized).
The primary source of collateral is real estate located within the Company's
service area. An inherent risk in taking real estate as collateral is the
possibility of declines in real estate market values.
The Company's service area is Napa Valley, which is located approximately
fifty miles northeast of the San Francisco Bay Area. Napa Valley is a very
unique, and rather isolated area that has been able to sustain higher than
average real estate market values. Approximately four years ago, given the
economic trends and possibility of declining market values, the Company took a
more conservative approach on its collateral base and began lowering its loan to
value ratios on new loans. Even though the Company's loan portfolio is heavily
secured by California real estate, management does not presently foresee any
material impact on the Company's operations, given the low loan to value ratios.
As of December 31, 1996, nonperforming loans were $3,152,000, an increase of
$1,705,000, or 118%, over the December 31, 1995 balance of $1,447,000.
Nonperforming loans at December 31, 1996 represent 4.0% of total average loans
compared to 2.1% of total average loans for year end 1995. The growth in
nonperforming loans between 1996 and 1995 is primarily due to a rise in
bankruptcies in 1996 compared to 1995, and to the general growth in outstanding
loan balances. The increase in nonperforming loans, in management's opinion,
does not represent a material trend.
As discussed in "Item 1 - Business, Loan Portfolio", in early 1997, the
Company's service area was subjected to severe weather conditions that resulted
in some flooding. Management believes that this flooding will not have a direct
or material impact on either its existing loan portfolio or future growth.
41
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 December 31, 1996, the Company's total recorded investment in impaired
loans was $3,152,000, of which there is a related allowance for credit losses of
$204,000.
The average recorded investment in the impaired loans during 1996 was
$2,123,000: the related amount of interest income recognized during the period
that such loans were impaired recognized under the cash basis method of
accounting was $44,000.
Loans currently classified as special mention, substandard, doubtful or loss
(See Item 1, "Business" herein) do not, in management's view, represent or
result from trends or uncertainties which may have a material adverse effect on
the entire loan portfolio, liquidity or capital resources.
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 including growth of the loan portfolio. While
these factors are essentially judgmental and may not be reduced to a
mathematical formula, it is management's view that the $1,405,000 allowance,
approximately 1.76% of total loans outstanding at December 31, 1996, was
adequate as an allowance against foreseeable losses in the portfolio at that
time. The allowance was 1.77% of the loan portfolio at
42
December 31, 1995. The allowance is increased by charges to the provision for
loan losses and reduced by net charge-offs.
OTHER REAL ESTATE OWNED
At December 31, 1996 and December 31, 1995, total other real estate owned
was $328,000 and $0, respectively, which at December 31, 1996 consisted of two
separate properties.
DEPOSITS
Deposits totaled $105,417,000 at December 31, 1996, an increase of
$8,665,000, or 9%, from the December 31, 1995 balance of $96,752,000. In 1996,
noninterest bearing transaction accounts grew by $6,660,000, or 35%, savings
accounts decreased by $340,000, or 3%, and interest bearing transaction accounts
grew $1,257,000, or 4%, over 1995 totals. Time certificates of deposit of
$100,000 or more increased by $1,293,000, or 14%, and other time deposits
decreased by $205,000, or 1%, during 1996. The overall growth in deposit
accounts in 1996 was primarily due to a comprehensive marketing effort on the
part of the Bank's staff and management, the introduction of new and enhanced
deposit products and increases in deposit officers.
Non-interest bearing demand deposits were 24% of total deposits at December
31, 1996, as compared to 20% at December 31, 1995. Time certificates of deposit
were 36% of total deposits at December 31, 1996, and 39% for the same period of
1995.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which establishes financial and reporting standards
for stock-based compensation plans. The Company elected to continue accounting
for stock-based employee compensation plans in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations, as
SFAS 123 permits, and to follow the pro forma net income, pro forma earnings per
share and stock-based compensation plan disclosure requirements set forth in
SFAS 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.
43
ASSET-LIABILITY MANAGEMENT
Asset-liability management is a process whereby the Bank, through its Asset
and Liability Committee, monitors the maturities and repricing opportunities of
the various components of the balance sheet and initiates strategies designed to
maximize the net interest margin, while minimizing vulnerability to large
fluctuations in interest rates. The Bank is currently moving towards a policy
of maintaining a relative balance of asset and liability maturities within
similar time frames, while permitting a moderate amount of short-term interest
rate risk based on current interest rate projections, customers' credit demands
and deposit preferences.
At December 31, 1996, the Company's assets repricing in one year exceeded
its liabilities repricing in one year by $21,612,000, or 19%, of total assets.
This compares to $15,348,000, or 15% of total assets in 1995. The excess of
assets repricing over liabilities repricing means that if interest rates
decline, the Company's return on assets would be expected to decline more
quickly than its cost of funds, thereby reducing the Company's net interest
margin. However, as interest rates increase, the Company's return on assets
would be expected to increase more quickly than its cost of funds.
The following table represents the interest rate sensitivity profile of the
Company's consolidated assets, liabilities and shareholders' equity as of
December 31, 1996. Assets, liabilities and shareholders' equity are classified
by the earliest possible repricing opportunity or maturity date, whichever first
occurs. Assumptions used in constructing the table include the following: The
loans that are in the "Interest Rate Sensitivity Over One Year But Within 5
Years" and "Nonrate Sensitive or Over 5 Years" columns are all fixed-rate loans
and therefore mature in those time frames. The Bank's certificates of deposits
are substantially all fixed-rate, therefore they are in the columns which
represent the time frames in which they mature. All other interest-bearing
accounts reprice overnight and are therefore in the "Interest Rate Sensitivity
0-90 Days" column. Included in noninterest bearing liabilities is $25,728,000
in demand deposit accounts.
44
INTEREST RATE SENSITIVITY NON-RATE
0-90 91-180 181-365 OVER 1 YEAR SENSITIVE
DAYS DAYS DAYS BUT WITHIN OR OVER
(0-3 MO) (3-6 MO) (6-12 MO) 5 YRS 5 YRS TOTAL
ASSETS
Time deposits-other financial institutions $ 594 $ 891 $ 2,673 $ $ $ 4,158
Federal funds sold 16,550 16,550
Investments 973 750 554 2,277
Loans 59,847 6,319 7,621 5,589 319 79,695
Noninterest-earning assets net of
loan loss reserve 11,147 11,147
TOTAL ASSETS $77,964 $ 7,210 $11,044 $ 5,589 $ 12,020 $113,827
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Time deposits over $100,000 $ 5,373 $ 3,138 $ 1,000 $ 1,231 $ $ 10,742
All other interest-bearing deposits 51,097 9,239 4,759 3,821 31 68,947
Total interest-bearing deposits 56,470 12,377 5,759 5,052 31 79,689
Noninterest-bearing liabilities 26,167 26,167
Shareholders' equity 7,971 7,971
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $56,470 $12,377 $ 5,759 $ 5,052 $ 34,169 $113,827
INTEREST RATE SENSITIVITY GAP (1) $21,494 $(5,167) $ 5,285 $ 537 $(22,149)
CUMULATIVE INTEREST RATE SENSITIVITY GAP $21,494 $16,327 $21,612 $22,149
- --------------------
1 Interest rate sensitivity gap is the difference between interest rate
sensitive assets and interest rate liabilities within the above time frames.
45
LIQUIDITY
Liquidity refers to the Company's ability to maintain cash flow adequate to
fund operations and meet obligations and other commitments on a timely basis.
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals. Liquidity requirements
are evaluated by taking into consideration factors such as deposit
concentrations, seasonality and maturities, loan demand, capital expenditures,
and prevailing and anticipated economic conditions. As shown in the Consolidated
Statements of Cash Flows ("Statement") for the years ended December 31, 1996,
1995 and 1994, the Company's usual and primary source of funds has been customer
deposits and cash flow generated from operating activities. While the usual and
primary sources are expected to continue to provide significant amounts of funds
in the future, their mix, as well as those from other sources, will depend on
future economic and other market conditions.
In 1996, the Statement shows that operations and financing activities were
sources of net cash inflows ($510,000 and $8,287,000, respectively) for the
year. These sources were significant enough to increase the overall ending cash
and cash equivalents from $21,886,000 at December 31, 1995 to $24,479,000 at
December 31, 1996, an increase of $2,593,000.
In 1995, the Statement shows that operations and financing activities were
also sources of net cash inflows ($1,000,000 and $17,374,000, respectively) for
the year. These sources increased ending cash and cash equivalents by
$5,667,000, taking the total from $16,219,000 at December 31, 1994 to
$21,886,000 at the end of 1995.
In 1994, the Statement shows that operations and financing activities were
sources of net cash inflow ($1,247,000 and $7,915,000 respectively) for the
year. These sources were the primary reason for the small decrease in ending
cash and cash equivalents from $17,284,000 at December 31, 1993 to $16,219,000
at the end of 1994.
Liquidity is measure by various ratios, the most common being the liquidity
ratio of cash less reserves, time deposits with other financial institutions,
federal funds sold, and unpledged investment securities compared to total
deposits. This ratio was 26% at both December 31, 1996 and December 31, 1995.
Parent Company liquidity is maintained by cash flows stemming primarily
from dividends from the bank. The amount of dividends from the Bank is subject
to certain regulatory restrictions as discussed in Note 12 of the Notes to
Consolidated Financial Statements. The Parent Company financial statements are
presented in Note 16 of the Notes to Consolidated Financial Statements.
CAPITAL ADEQUACY
The Federal Reserve Bank and the Comptroller of the Currency have specified
guidelines for the purpose of evaluating the capital adequacy of bank holding
companies and banks. The table below summarizes the current requirements for
1996 and the Company's and the Bank's compliance therewith.
46
MINIMUM TIER 1 RISK TOTAL RISK
LEVERAGE BASED CAPITAL BASED CAPITAL
RATIO RATIO RATIO
Regulatory Requirements
for 1996 4.00% 4.00% 8.00%
Consolidated Company Ratio
at December 31, 1996 7.21% 9.34% 10.99%
Bank Ratio at
December 31, 1996 7.11% 9.22% 10.47%
The capital levels of both the Bank and the Company at December 31, 1996
currently exceed the regulatory requirements for a "well capitalized"
institution. Management anticipates that both the Company and the Bank will
continue to exceed the regulatory minimums in the foreseeable future. Therefore,
the Company and the Bank have adequate capital in order to expand in the future,
either through loan generation or other means of expansion.
As of the date of this report, management is not aware of any trends, events
or uncertainties that will have, or are reasonable likely to have a material
effect on the Company's liquidity, capital resources, or results of operations.
Additionally, the Company is subject to no current recommendations by any
regulatory authorities which, if implemented, would have such an effect.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on an industrial concern, primarily because 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 for the last three
years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets as of December 31, 1996 and 1995, and
Consolidated Statements of Income, Statements of Shareholders' Equity and
Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 are incorporated herein by reference to Item 14.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In September 1996, the Company retained Ernst & Young LLP to be the
Company's auditors for the current year ending December 31, 1996. The Company's
prior auditing firm was Deloitte & Touche LLP. Deloitte & Touche LLP had
audited the Company's financial statements for the years ended December 31, 1988
through December 31, 1995. Deloitte & Touche LLP were dismissed in September
1996. The Company had no disagreements with Deloitte & Touche LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope of procedures. The accountant's reports on financial statements
for the past eight years did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. Registrant hereby incorporates by reference herein its
report on Form 8-K filed on September 26, 1996 and amended on October 23, 1996.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference from the section of the
Registrant's 1997 definitive proxy statement entitled "Election of Directors,"
which proxy statement will be filed no later than April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference from the section of the
Registrant's 1997 definitive proxy statement entitled "Remuneration and Other
Information With Respect to Officers and Directors," which proxy statement will
be filed no later than April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference from the section of the
Registrant's 1997 definitive proxy statement entitled "Security Ownership of
Certain Beneficial Owners and Management," which proxy statement will be filed
no later than April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As permitted by General Instruction G(3) to Form 10-K, the information
called for by this Item is incorporated by reference form the section of the
Registrant's 1997 definitive proxy statement entitled "Certain Relationships and
Related Transactions," which proxy statement will be filed no later than April
30, 1997.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
Reference
Selected Financial Data
Independent Auditors' Report
Consolidated Financial Statements of
Napa National Bancorp and Subsidiaries:
- Consolidated Balance Sheets as of
December 31, 1996 and 1995
- Consolidated Statements of Income
for the Years Ended December 31,
1996, 1995 and 1994
- Consolidated Statements of
Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
- Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1996, 1995 and 1994
- Notes to Consolidated Financial
Statements
2. Financial Statement Schedules. In accordance with the rules of
Regulation S-X, schedules are not submitted because (a) they are not
applicable to or required of the Company, or (b) the information
required to be set forth therein is included in the financial
statements or footnotes thereto.
3. Exhibits. See Index to Exhibits to this Form 10-K, for a list of the
exhibits filed as a part of this report and incorporated herein by
reference.
(b) Reports on Form 8-K. During the fourth quarter of 1996, the Company filed an
amended report on Form 8-K dated October 23, 1996, referred to in greater
detail in Item 9 of this report titled "Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure".
50
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
To the Shareholders and Board of Directors of
Napa National Bancorp
We have audited the accompanying consolidated balance sheet of Napa National
Bancorp and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the Napa
National Bancorp's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of Napa
National Bancorp for the years ended December 31, 1995 and 1994, were audited by
other auditors whose report dated March 22, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Napa National Bancorp and subsidiaries at December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 14, 1997
51
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Napa National Bancorp:
We have audited the accompanying consolidated balance sheet of Napa National
Bancorp and subsidiaries (the "Company") as of December 31, 1995, and the
related consolidated statements of income, shareholder's equity and cash flows
for each of the two 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 the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
March 22, 1996
52
Napa National Bancorp and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
1996 1995
----------------------
(Dollars In Thousands)
ASSETS
Cash and due from banks $ 7,929 $ 7,106
Federal funds sold 16,550 14,780
Interest-bearing time deposits - other
financial institutions 4,158 4,356
Securities held to maturity
(market value: 1996 - $2,304;
1995 - $1,447) 2,277 1,432
Loans:
Commercial 52,789 48,407
Real estate Construction 8,706 7,850
Real Estate Mortgage 4,918 4,729
Installment 4,216 3,376
Personal lines of credit and other 9,066 10,337
-------------------------
Total loans 79,695 74,699
Less allowance for loan losses (1,405) (1,325)
-------------------------
Loans - net 78,290 73,374
-------------------------
Premises and equipment, net 2,519 2,489
Accrued interest receivable 647 666
Other assets 1,457 648
-------------------------
Total assets $113,827 $104,851
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand $ 25,728 $ 19,068
Interest-bearing:
Savings 11,965 12,305
Transaction 29,317 28,060
Time, $100 and over 10,742 9,449
Other time 27,665 27,870
-------------------------
Total deposits 105,417 96,752
Accrued interest payable 378 528
Other liabilities 61 124
-------------------------
Total liabilities 105,856 97,404
-------------------------
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 1,056 532
-------------------------
Total shareholders' equity 7,971 7,447
-------------------------
Total liabilities and shareholders'
equity $113,827 $104,851
=========================
See accompanying notes
53
Napa National Bancorp and Subsidiaries
Consolidated Statements of Income
YEARS ENDED DECEMBER 31
1996 1995 1994
------------------------------------------------------------
(Dollars In Thousands, Except Share and Per Share Amounts)
Interest income:
Loans (including fees) $ 8,277 $ 7,515 $ 5,619
Federal funds sold 547 583 412
Time deposits with other 230 251 148
financial institutions
Investment securities and
Federal Reserve Bank stock 119 83 47
------------------------------------------------------------
Total interest income 9,173 8,432 6,226
------------------------------------------------------------
Interest expense:
Deposits:
Savings 275 292 323
Transaction 563 517 470
Time, $100 and over 519 392 237
Other time 1,457 1,433 628
------------------------------------------------------------
Total interest expense 2,814 2,634 1,658
------------------------------------------------------------
Net interest income 6,359 5,798 4,568
Provision for loan losses 550 323 149
------------------------------------------------------------
Net interest income after 5,809 5,475 4,419
provision for loan losses
------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 509 469 382
Other customer fees and charges 207 250 228
Other 90 81 17
------------------------------------------------------------
Total noninterest income 806 800 627
------------------------------------------------------------
Noninterest expense:
Salaries and employee benefit 2,722 2,261 1,964
Occupancy 453 402 277
Professional fees 449 417 176
Equipment 436 380 341
Marketing and business development 170 124 135
Regulatory fees and related expenses 138 208 277
Stationery and supplies 116 95 67
Data processing 124 108 99
Other 491 414 380
------------------------------------------------------------
Total noninterest expense 5,099 4,409 3,716
------------------------------------------------------------
Income before provision for income taxes 1,516 1,866 1,330
Income taxes 614 765 553
------------------------------------------------------------
Net income $ 902 $ 1,101 $ 777
============================================================
Net income per common share $1.00 $1.25 $1.03
============================================================
Weighted average number of shares
outstanding during the year 906,050 882,300 754,500
============================================================
See accompanying notes.
54
Napa National Bancorp and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
Retained
Number of Earnings
Shares Common (Accumulated
Outstanding Stock Deficit) Total
----------------------------------------------
(Dollars in Thousands)
Balance, January 1, 1994 754,500 $6,915 $(1,346) $5,569
Net income 777 777
----------------------------------------------
Balance, December 31, 1994 754,500 6,915 (569) 6,346
Net income - - 1,101 1,101
----------------------------------------------
Balance, December 31, 1995 754,500 6,915 532 7,447
Cash dividends paid
($.50 per share) - - (378) (378)
Net income - - 902 902
----------------------------------------------
Balance, December 31, 1996 754,500 $6,915 $ 1,056 $7,971
==============================================
See accompanying notes.
55
Napa National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31
1996 1995 1994
--------------------------------
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 902 $ 1,101 $ 777
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization on
premises and equipment 437 325 273
Amortization of deferred loan fees
and premiums on investment securities (376) (304) (241)
Provision for loan losses 550 323 149
Deferred income taxes (31) (160) (114)
Loss on sale of fixed assets - 2 -
(Increase) decrease in accrued interest 19 (234) (134)
receivable
(Increase) decrease in other assets (778) 48 (7)
(Decrease) increase in accrued interest
payable and other liabilities (213) (101) 544
--------------------------------
Net cash provided by operating activities 510 1,000 1,247
INVESTING ACTIVITIES
Loan originations, net of repayments (5,090) (11,298) (7,752)
Net decrease (increase) in time deposits
with other financial institutions 198 1 (2,278)
Activity in securities held to maturity:
Purchases (2,696) (487) (1,214)
Maturities 2,207 475 500
Purchase of FRB and FHLB stock (356) (32) (19)
Proceeds from sales of other real - - 612
estate owned
Purchase of premises and equipment (467) (1,366) (76)
--------------------------------
Net cash used by investing activities (6,204) (12,707) (10,227)
FINANCING ACTIVITIES
Net increase in deposits 8,665 17,374 7,915
Cash dividends paid to shareholders (378) - -
--------------------------------
Net cash provided by financing activities 8,287 17,374 7,915
Increase (decrease) in cash and cash 2,593 5,667 (1,065)
equivalents
Cash and cash equivalents, beginning of year 21,886 16,219 17,284
--------------------------------
Cash and cash equivalents, end of year $24,479 $ 21,886 $ 16,219
================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,965 $ 2,241 $ 1,630
================================
Income taxes paid (net of refunds received) $ 1,020 $ 1,472 $ 89
================================
See accompanying notes.
56
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(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. These estimates are based on information available as of the date of
the financial statements. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold. Generally, federal funds sold are sold for one business
day.
INVESTMENT SECURITIES
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. All of the Bank's investment
securities are classified as held-to-maturity.
57
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
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 Bank places an asset on nonaccrual status when any
installment of principal or interest is 90 days past due, unless well secured
and in the process of collection, or when management determines that ultimate
collection of principal or interest on a loan is unlikely. When a loan is
placed on nonaccrual, all previously accrued but uncollected interest is
reversed. Cash payments subsequently received on nonaccrual loans are
recognized as income only where the collection of principal is considered by
management as probable. Interest accruals are resumed on such loans only when
they are brought fully current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be fully collectible
as to both principal and interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through a provision for
loan losses which is charged to expense. Losses are charged against the
allowance when management believes that the collectibility of the principal is
unlikely. The allowance is maintained at an amount that management believes
will be adequate to absorb losses inherent in existing loans and commitments to
extend credit, based on evaluations of their collectibility and the Bank's prior
loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality,
loan concentrations, specific problem loans, and current economic conditions
that may affect the borrowers' ability to repay.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a
Loan," as amended. Under SFAS 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 114 excludes large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment. The Company has defined one to four family loans and consumer
loans as homogeneous loans. All homogeneous loans that are 90 days or more
delinquent or are in foreclosure are automatically placed on nonperforming
status. The adoption of SFAS 114 did not have a material effect on the Company's
financial condition or results of operations
58
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization expenses are computed using the
straight-line method over the shorter of estimated useful lives of the related
assets (which are generally three to twenty years) or the lease terms.
Maintenance and repair costs are expensed as incurred, whereas expenditures that
improve or extend the service lives of assets are capitalized.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO"), which is recorded in other assets, includes
properties acquired through foreclosure or in full or partial satisfaction of
the related loan. OREO also includes loans where the Bank has obtained physical
possession of the related collateral. OREO is carried at the lower of fair
value, net of estimated selling and disposal costs, or cost. Fair value
adjustments are made at the time that real estate is acquired through
foreclosure or when full or partial satisfaction of the related loan is
received. These fair value adjustments are treated as loan losses.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred taxes arise from the effect of temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements, and from the effect of operating loss carryforwards on taxes payable
in future years based on currently enacted tax 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.
59
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which
establishes financial accounting and reporting standards for stock-based
compensation plans. The Company elected to continue accounting for stock-based
employee compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued To Employees" and related
interpretations, as SFAS 123 permits, and to follow the pro forma net income,
pro forma earnings per share and stock-based compensation plan disclosure
requirements set forth in SFAS 123.
NET INCOME PER COMMON SHARE
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.
RECLASSIFICATION
Certain amounts in prior periods have been reclassified to conform to the 1996
presentation.
2. CASH AND DUE FROM BANKS
The Bank is required to maintain reserves with the Federal Reserve Bank. The
average reserves required for 1996 and 1995 were $952 and $703, respectively.
60
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
3. SECURITIES HELD TO MATURITY
The amortized cost and fair value of investment securities held to maturity as
of December 31, 1996 and 1995, are summarized as follows:
December 31, 1996
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
Securities of U.S.
Government agencies $1,723 $ 27 $ - $1,750
Federal Reserve Bank stock 232 - - 232
Federal Home Loan Bank stock 322 - - 322
---------------------------------------------
Total $2,277 $ 27 $ - $2,304
=============================================
December 31, 1995
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
Securities of U.S.
Government agencies $1,235 $ 15 $ - $1,250
Federal Reserve Bank stock 197 - - 197
--------------------------------------------
Total $1,432 $ 15 $ - $1,447
=============================================
Total securities pledged under state regulation to secure deposits amounted to
$1,723 and $1,235 at December 31, 1996 and 1995, respectively.
The maturities of securities of U.S. Government agencies at December 31, 1996
are due within one year.
There were no sales of investment securities in 1996, 1995 and 1994.
61
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are presented net of unearned income of $374 and $296 at December 31, 1996
and 1995, respectively. Nonaccrual loans past due 90 days or more as of December
31, 1996 and 1995, were approximately $3,152 and $1,447 respectively. The
effect on interest income, had these loans been performing in accordance with
contractual terms as of December 31, 1996 and 1995, would have been an increase
of approximately $188 and $291, respectively.
At December 31, 1996, the Company had approximately $3,152 of loans considered
to be impaired in accordance with SFAS 114. These loans were evaluated for
impairment primarily using the collateral method and required an allowance for
credit losses measured in accordance with SFAS 114 of $204 . Average impaired
loans during the year ended December 31, 1995 amounted to approximately $2,123.
Related interest income recognized on impaired loans during the year ended
December 31, 1996 was approximately $44.
The activity in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 is summarized as follows (in thousands):
1996 1995 1994
-----------------------------
Balance, beginning of year $1,325 $1,050 $ 912
Provision for loan losses 550 323 149
Loans charged off (544) (51) (12)
Recoveries 74 3 1
-----------------------------
Balance, end of year $1,405 $1,325 $1,050
=============================
At December 31, 1996 and 1995, the Bank was servicing loans for the Federal Home
Loan Mortgage Corporation with unpaid principal balances of $23,020 and $22,508,
respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and conducting foreclosures 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 $62, $51 and $60 for the years ended December 31, 1996, 1995 and
1994, respectively.
62
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
5. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1996 and 1995 consisted of the
following:
1996 1995
-------------------
Equipment $ 1,674 $ 1,485
Bank premises 941 941
Furniture and fixtures 576 530
Leasehold improvements 1,155 923
Automobiles 39 39
-------------------
Total 4,385 3,918
Less accumulated depreciation and (1,866) (1,429)
amortization
-------------------
Total $ 2,519 $ 2,489
===================
Depreciation and amortization of $437, $325 and $273 was charged to expense for
the years ended December 31, 1996, 1995 and 1994, respectively. The Company and
Bank relocated its head office in 1995, which resulted in the retirement of $341
in fully depreciated assets during that year.
6. DEPOSITS
The aggregate amount of time deposit accounts exceeding $100,000 was $10,742 and
$9,449 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities for all time deposits is as
follows:
1997 $33,323
1998 4,882
1999 100
2000 102
2001 -
Thereafter -
----------
$38,407
==========
63
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1995 and
1994 is summarized as follows:
1996 1995 1994
-----------------------
Current:
Federal $ 471 $ 667 $ 486
State 174 258 181
-----------------------
Total 645 925 667
-----------------------
Deferred:
Federal (26) (126) (75)
State (5) (34) (39)
-----------------------
Total deferred (31) (160) (114)
-----------------------
Provision for income taxes $ 614 $ 765 $ 553
=======================
The temporary differences and tax carryforwards which created deferred tax
assets and liabilities are detailed below:
DECEMBER 31
1996 1995 1994
-----------------------
Deferred tax assets:
Reserves not currently deductible $ 546 $ 545 $ 412
Losses not currently deductible 227 227 227
State taxes - 21 3
Deferred loan fees 36 18 33
Other 14 9 6
-----------------------
Gross deferred tax assets 823 820 681
Valuation allowance (170) (170) (170)
-----------------------
Deferred tax assets 653 650 511
-----------------------
Deferred tax liabilities:
Accrual to cash - - (15)
Tax over book depreciation (13) (43) (49)
State taxes (10) - -
-----------------------
Gross deferred tax liabilities (23) (43) (64)
-----------------------
Net deferred tax asset included
in other assets $ 630 $ 607 $ 447
=======================
64
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
7. INCOME TAXES (CONTINUED)
Deferred tax assets are recognized to the extent that their realization is more
likely than not. As of December 31, 1996, 1995 and 1994, the Bank was unable to
conclude that the realization of the Company's deferred tax asset was more
likely than not. Accordingly, a valuation allowance has been reflected at
December 31, 1996, 1995 and 1994 to reduce the Bank's deferred tax assets to 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:
1996 1995 1994
--------------------
Federal statutory income 34% 34% 35%
tax rate
State franchise tax, less
federal income tax effect 7 8 7
--------------------
Effective income tax rate 41% 42% 42%
====================
8. TRANSACTIONS WITH RELATED PARTIES
The Company has had, and expects to have in the future, banking transactions,
primarily loans, in the ordinary course of business with directors, executive
officers and their associates. In accordance with Company policy, loans to
related parties are granted on the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others, and do not involve more than the normal risk of collectibility.
Loans to related parties for the years ended December 31, 1996 and 1995, are as
follows:
1996 1995
-----------------
Balance at beginning of year $ 1,135 $ 1,295
Additions 2,858 1,493
Payments (1,746) (1,653)
Other (89) -
-----------------
Balance at end of year $ 2,158 $ 1,135
=================
65
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The Company also had commitments to extend credit to related parties of $337 at
December 31, 1996. 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,
1996 and 1995, an affiliated company of a member of the Board of Directors had
$779 and $445 (0.7% and 0.5% 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.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. The instruments involve, to varying degrees elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual amount of
these instruments.
At December 31, 1996, financial instruments whose contract amounts represent
credit risk were as follows:
1996 1995
--------------------
Commitments to extend credit $20,467 $18,168
Standby letters of credit 865 646
--------------------
$21,332 $18,814
====================
66
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the 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 customer. At December 31, 1996, all standby
letters of credit were secured by normal business assets in accordance with the
Company's standard lending practices.
10. CONCENTRATION OF CREDIT RISK
The Company grants residential, commercial, construction, agricultural and
consumer loans to customers principally located in Napa County, California.
Although the Company has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their contracts is dependent on the economic
conditions of the wine industry. At December 31, 1996, the Company's loans to
companies in the wine industry were $10,933 with commitments to lend an
additional $4,670. The Company requires that loan customers meet the collateral
requirements described in Note 9 for commitments to extend credit.
As of December 31, 1996 and 1995, 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.
67
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
11. COMMITMENTS AND CONTINGENCIES
The Company and the Bank lease a portion of their banking and office facilities
under noncancelable operating leases. Total minimum future rental payments
under these operating leases at December 31, 1996, are as follows:
1997 $180
1998 154
1999 109
----
Total $443
====
Rental expense was $194, $201 and $155 for the years ended December 31, 1996,
1995 and 1994, 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.
12. RESTRICTIONS ON RETAINED EARNINGS
Under the U.S. National Bank Act and other federal laws, the Bank is subject to
prohibitions on the payment of dividends in certain circumstances and to
restrictions on the amount that it can pay without prior approval of the Office
of the Comptroller of the Currency. Without the Comptroller's approval,
dividends for a given year cannot exceed the Bank's retained net income for that
year and retained net profits from the preceding two years. In addition,
dividends may not be paid in excess of the Bank's undivided profits, subject to
other applicable provisions of law. Based upon these restrictions, the Bank
could have declared dividends for 1996 of $2,609 without prior regulatory
approval.
68
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
13. REGULATORY MATTERS
Napa National Bancorp and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. 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 their financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Napa National Bancorp and the Bank must meet specific capital guidelines that
involve quantitative measures of the thier assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require that minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined) be
maintained. Management believes, as of December 31, 1996, that Napa National
Bancorp and the Bank meet all capital adequacy requirements.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized both Napa National Bancorp and the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table below must be
maintained. There are no conditions or events since that notification that
management believes have changed the institution's category.
69
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
13. REGULATORY MATTERS (CONTINUED)
Napa National Bancorp and the Bank's actual capital amounts and ratios are
presented in the following tables:
DECEMBER 31, 1996
MINIMUM
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
----------------------------------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
----------------------------------------------------
NAPA NATIONAL BANCORP:
Leverage $7,971 7.21% $4,423 4.00% $5,528 5.00%
Tier 1 risk-based 7,971 9.34 3,413 4.00 5,121 6.00
Total risk-based 9,376 10.99 6,825 8.00 8,531 10.00
NAPA NATIONAL BANK:
Leverage 7,862 7.11 4,423 4.00 5,529 5.00
Tier 1 risk-based 7,862 9.22 3,411 4.00 5,115 6.00
Total risk-based 8,932 10.47 6,822 8.00 8,531 10.00
DECEMBER 31, 1995
MINIMUM
MINIMUM WELL-CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
----------------------------------------------------
CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO
----------------------------------------------------
NAPA NATIONAL BANCORP:
Leverage $7,447 7.45% $3,998 4.00% $4,998 5.00%
Tier 1 risk-based 7,447 9.51 3,132 4.00 4,698 6.00
Total risk-based 8,772 11.20 6,266 8.00 7,832 10.00
NAPA NATIONAL BANK:
Leverage 7,156 7.16 4,000 4.00 4,997 5.00
Tier 1 risk-based 7,156 9.14 3,132 4.00 4,698 6.00
Total risk-based 8,139 10.40 6,263 8.00 7,826 10.00
70
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN
The Company has a stock option plan 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 2006 have
been granted at a price of $8.00 to $15.35. This price approximates 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 85,200 options available for grant at December 31, 1996.
Option information is summarized below:
PRICE NONSTATUTORY NUMBER OF OPTIONS
---------------------------------
PER SHARE 1996 1995 1994
-------------- ---------------------------------
Shares under option at
beginning of year $ 8.00 - $8.09 110,000 90,000 100,000
Options canceled $ 8.00 - - (20,000)
Options granted $8.00 - $15.35 10,000 20,000 10,000
---------------------------------
Shares under option at end
of year $8.00 - $15.35 120,000 110,000 90,000
=================================
Shares under option
exercisable at end of year $8.00 - $15.35 102,500 95,000 90,000
=================================
PRICE ISO NUMBER OF OPTIONS
---------------------------------
PER SHARE 1996 1995 1994
-------------------------------------------------
Shares under option at
beginning of year $ 8.00 34,800 31,300 28,800
Options granted $8.00 - $15.35 11,000 3,500 7,500
Options canceled $ 8.00 (1,000) - (5,000)
---------------------------------
Shares under option at end
of year $8.00 - $15.35 44,800 34,800 31,300
=================================
Shares under option
exercisable at end of year $8.00 - $15.35 32,400 32,800 29,800
=================================
71
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN (CONTINUED)
The table below reflects the Company's net income and net income per common
share (under the Treasury Stock method), if compensation cost for the Company's
stock plan had been determined based on the fair value at the grant date for
awards under their plan. Since pro forma compensation cost relates to all
periods over which the awards vest, the initial impact on pro forma net income
may not be representative of compensation cost in subsequent years.
1996 1995
-----------------
Net income applicable to common stock $ 866 $1,070
Net income per common share $0.97 $ 1.20
Fair values of the options were estimated at the date of grant using the Black-
Scholes option pricing model, which includes the following assumptions used for
the stock options awarded during 1996 and 1995, respectively: risk-free
weighted average interest rates of 6.52 percent and 5.77 percent; dividend yield
of .16 percent and 0 percent; expected volatility of 5.6 percent and 1.9
percent; and expected option life for both 1996 and 1995 grants of 8.5 years.
The weighted average grant date fair values of the options granted during 1996
and 1995 were $6.57 and $7.76 per share, respectively. The exercise price of
each option approximates the market price of the Company's common stock on the
date of grant. Expiration dates range from September 16, 1998 to December 16,
2006 for options outstanding at December 31, 1996.
The Company also has an Employee Stock Ownership Trust (the "ESOT"), in which
all employees of the Company are eligible to participate. The ESOT is a
defined-contribution plan which invests in the common stock of the Company. A
portion of these contributions is matched by the Company. The Company's
matching contributions to the ESOT were $74, $60 and $23 for the years ended
December 31, 1996, 1995 and 1994, respectively.
72
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments 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, 1996 are as follows:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------------------
ASSETS
Cash and cash equivalents $ 24,479 $ 24,479
(a)
Interest-bearing time 4,158 4,158
deposits - other financial
institutions (b)
Securities held to maturity 2,277 2,304
(c)
Loans - net (d) 78,290 78,253
LIABILITIES
Deposits (e) 105,417 112,560
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS (F)
Commitments to extend credit 20,467 20,467
Commercial letters of credit 865 865
73
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and the estimated fair values of the Company financial
instruments at December 31, 1995 are as follows:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------------------
ASSETS
Cash and cash equivalents (a) $21,886 $21,886
Interest-bearing time deposits
- other financial institution 4,356 4,356
Securities held to maturity (c) 1,432 1,447
Loans - net (d) 73,374 73,302
LIABILITIES
Deposits (e) 96,752 95,560
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (F)
Commitments to extend credit 18,168 18,168
Commercial letters of credit 646 646
(a) Cash and cash equivalents: The carrying amount is a reasonable estimate of
fair value.
(b) Interest-bearing time deposits - other financial institutions: The carrying
value is a reasonable estimate of fair value.
(c) Securities 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.
(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, since the
interest rate adjustment characteristics of the loan or lease effectively
adjust the interest rate to maintain a market rate of return.
74
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
(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.
16. NAPA NATIONAL BANCORP (PARENT COMPANY ONLY)
The condensed financial statements of Napa National Bancorp are as follows:
BALANCE SHEETS AS OF DECEMBER 31, 1996
AND 1995
1996 1995
------------------
ASSETS
Cash $ 93 $ 278
Investments in subsidiaries 7,975 7,269
Accrued interest receivable and other assets 145 16
------------------
Total assets $8,083 $7,563
==================
LIABILITIES
Accrued expenses and other liabilities $ 112 $ 116
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 6,915 6,915
outstanding
Retained earnings 1,056 532
-------------------
Total shareholders' equity 7,971 7,447
-------------------
Total liabilities and shareholders' $8,083 $7,563
equity
===================
75
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
16. NAPA NATIONAL BANCORP (PARENT COMPANY ONLY) (CONTINUED)
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------------------
Income:
Interest income $ 3 $ 6 $ 6
Dividend from subsidiaries 200 - -
Other income - 12 -
-------------------------
Total income 203 18 6
-------------------------
Expenses:
Salaries and employee benefits - 46 -
Other expense 7 1 3
-------------------------
Total expenses 7 47 3
-------------------------
Income (Loss) before applicable
taxes and equity in undistributed
net income of subsidiaries 196 (29)
Applicable Income Taxes - - -
-------------------------
Income (Loss) before equity in
undistributed net income of
subsidiaries 196 (29) 3
Equity in undistributed net
income of subsidiaries 706 1,130 774
-------------------------
Net income $ 902 $ 1,101 $ 777
=========================
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------------------
Operating activities:
Net income $ 902 $ 1,101 $ 777
Reconciliation of net income to
net cash provided (used) by
operating activities:
Equity in undistributed net
income of subsidiaries (706) (1,130) (774)
Decrease in accrued interest
receivable 1 - -
(Decrease) increase in accrued
expenses and other liabilities,
net (4) - -
-------------------------
Net cash (used) provided by operating
activities 193 (29) 3
Financing activities:
Cash dividends paid to shareholders (378) - -
-------------------------
Net cash (used) by financing
activities (378) - -
Net (decrease) increase in cash (185) (29) 3
Cash at beginning of year 278 308 305
-------------------------
Cash at end of year $ 93 $ 278 $ 308
=========================
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 26, 1997.
NAPA NATIONAL BANCORP
By /s/ Brian J. Kelly
President/COO
By /s/ Michael D. Irwin
Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Brian J. Kelly and Michael D. Irwin jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
March 26, 1997
/s/ William A. Bacigalupi
Director
March 26, 1997
/s/ Dennis D. Groth
Director
March 26, 1997
/s/ E. James Hedemark
Director
March 26, 1997
/s/ Michael D. Irwin
Director
Chief Financial Officer
(Principal Accounting Officer)
March 26, 1997
/s/ Brian J. Kelly
President and COO
Director
March 26, 1997
/s/ C. Richard Lemon
Secretary and Director
March 26, 1997
/s/ Joseph G. Peatman
Director
March 26, 1997
/s/ A. Jean Phillips
Director
March 26, 1997
/s/ George M. Schofield
Director
March 26, 1997
/s/ W. Clarke Swanson, Jr.
Chairman of the Board and CEO
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3(i) Articles of Incorporation of the Registrant, as
amended.
3(ii).1 Restated Bylaws of the Registrant.
4.1 A specimen copy of the certificates evidencing Common
Stock.
10.1 Napa National Bancorp 1992 Stock Option Plan.
10.2 Form of Incentive Stock Option Agreement
10.3 Form of Nonstatutory Stock Option Agreement
16.1* Letter re change in certifying accountants. (Exhibit
16.1 to Form 8-K/A filed on October 23, 1996.)
21.1* Subsidiaries of the Registrant.
24.1 Power of Attorney (located on signature page hereof)
27 Financial Data Schedule
99.1* Registrant's Form 8-K filed on September 26, 1996, and
amended on October 23, 1996.
*Previously filed.