UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the QUARTER ENDED SEPTEMBER 30, 1998 Commission file number: 0-11090 NAPA NATIONAL BANCORP (Exact name of Small Business Issuer as specified in its charter) CALIFORNIA 94-2780134 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 901 MAIN STREET, NAPA, CALIFORNIA 94559 (Address of principal executive offices) (Zip Code) (707) 257-2440 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the registrant's Common Stock, no par value, outstanding as of September 30, 1998, was 791,000. Transitional Small Business Disclosure Format: Yes No X --- --- NAPA NATIONAL BANCORP TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Balance Sheets: September 30, 1998 December 31, 1997 Consolidated Statements of Income: Three Months ended September 30, 1998 Three Months ended September 30, 1997 Nine Months ended September 30, 1998 Nine Months ended September 30, 1997 Consolidated Statements of Cash Flows: Nine Months ended September 30, 1998 Nine Months ended September 30, 1997 Notes to Consolidated Financial Statements ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5 - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES INDEX TO EXHIBITS 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS The following interim consolidated financial statements of Napa National Bancorp and its subsidiary Napa National Bank are unaudited and prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. However, they reflect all adjustments (which included only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods presented and are normal and recurring. Results for the period as presented are not necessarily indicative of results to be expected of the year as a whole. 3 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in 000's) September 30, December 31, 1998 1997 ------------- ------------ ASSETS Cash and due from banks $ 7,647 $ 9,926 Federal funds sold 7,275 16,221 Time deposits with other financial institutions - 1,782 Investment securities: Held to Maturity 1,798 1,823 Investment securities: Available for Sale 32,939 17,250 Federal Reserve and Federal Home Loan Bank Stock 547 582 Loans, less allowance for loan losses of $1,658 and $1,566 at September 30, 1998 and December 31, 1997 80,105 78,057 Premises, furniture, fixtures and equipment, net 2,583 2,612 Accrued interest receivable 1,281 934 Other real estate owned 262 607 Other assets 1,273 1,025 ------------ ---------- TOTAL ASSETS $ 135,710 $ 130,819 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing demand $ 29,485 $ 33,386 Interest-bearing: Savings 20,206 12,982 Transaction 32,815 34,557 Time certificates 42,896 40,536 ------------ ---------- TOTAL DEPOSITS 125,402 121,461 Accrued interest payable and other liabilities 764 771 ------------ ---------- TOTAL LIABILITIES 126,166 122,232 ------------ ---------- 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; 791,000 and 783,500 shares issued and outstanding at September 30, 1998 and December 31, 1997, respectively 7,207 7,147 Retained earnings 2,218 1,417 Net unrealized gain on available for sale securities, net of taxes 119 23 ------------ ---------- TOTAL SHAREHOLDERS' EQUITY 9,544 8,587 ------------ ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 135,710 $ 130,819 ============ ========== (See notes to consolidated financial statements) 4 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in 000's, except earnings per share) Three Months Ended September 30, -------------------------------- 1998 1997 --------- ---------- INTEREST INCOME: Interest and fees on loans $ 2,010 $ 2,223 Interest on federal funds sold 98 256 Interest on time deposits with other financial institutions 2 55 Interest and dividends on investment securities 533 34 --------- ---------- TOTAL INTEREST INCOME 2,643 2,568 INTEREST EXPENSE ON DEPOSITS 879 773 --------- ---------- NET INTEREST INCOME 1,764 1,795 Provision for loan losses 75 102 --------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,689 1,693 --------- ---------- NON-INTEREST INCOME: Service charges on deposit accounts 151 117 Mortgage loan service fees 12 18 Other 146 127 --------- ---------- TOTAL NON-INTEREST INCOME 309 262 --------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits 1,075 811 Occupancy 127 120 Furniture, fixtures and equipment 75 121 Other 403 448 --------- ---------- TOTAL NON-INTEREST EXPENSE 1,680 1,500 --------- ---------- INCOME BEFORE INCOME TAXES 318 455 INCOME TAXES 112 184 --------- ---------- NET INCOME $ 206 $ 271 ========= ========== EARNINGS PER COMMON SHARE $ 0.26 $ 0.35 ========= ========== EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 0.25 $ 0.33 ========= ========== Weighted average common shares outstanding used to compute net earnings per common share 787,000 772,666 ========= ========== Weighted average common shares outstanding used to compute net earnings per common share - Assuming Dilution 830,392 826,373 ========= ========== (See notes to consolidated financial statements) 5 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in 000's, except earnings per share) Nine Months Ended September 30, -------------------------------- 1998 1997 --------- --------- INTEREST INCOME: Interest and fees on loans $ 6,043 $ 6,253 Interest on federal funds sold 509 694 Interest on time deposits with other financial institutions 18 172 Interest and dividends on investment securities 1,330 96 --------- --------- TOTAL INTEREST INCOME 7,900 7,215 INTEREST EXPENSE ON DEPOSITS 2,627 2,287 --------- --------- NET INTEREST INCOME 5,273 4,928 Provision for loan losses 265 306 --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,008 4,622 --------- --------- NON-INTEREST INCOME: Service charges on deposit accounts 396 310 Mortgage loan service fees 38 47 Other 427 371 --------- --------- TOTAL NON-INTEREST INCOME 861 728 --------- --------- NON-INTEREST EXPENSE: Salaries and employee benefits 2,687 2,495 Occupancy 366 345 Furniture, fixtures and equipment 282 363 Other 1,180 1,271 --------- --------- TOTAL NON-INTEREST EXPENSE 4,515 4,474 --------- --------- INCOME BEFORE INCOME TAXES 1,354 876 INCOME TAXES 518 356 --------- --------- NET INCOME $ 836 $ 520 ========= ========= EARNINGS PER COMMON SHARE $ 1.07 $ 0.68 ========= ========= EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 1.01 $ 0.64 ========= ========= Weighted average common shares outstanding used to compute net earnings per common share 784,333 765,611 ========= ========= Weighted average common shares outstanding used to compute net earnings per common share - Assuming Dilution 827,203 818,474 ========= ========= (See notes to consolidated financial statements 6 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in 000's) Nine Months Ended September 30, ------------------------------- 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 836 $ 520 Reconciliation of net income to net cash provided by operating activities: Depreciation on premises and equipment 303 358 Extension of non-statutory stock options 153 - Loss on sale of other real estate owned 6 - Amortization of deferred loan fees and discounts/premiums on securities 230 21 Provision for loan losses 265 306 Increase in accrued interest receivable (347) (21) Increase in other real estate owned - (153) Increase in other assets, net (209) (32) (Decrease)Increase in accrued interest payable and other liabilities (7) 271 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,230 1,270 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Loan originations, net of repayments (2,216) (5,899) Proceeds from maturities of time deposits with other financial institutions 1,782 891 Activity in securities held to maturity: Purchases (1,923) (1,798) Maturities 1,948 1,697 Activity in securities available for sale: Purchases (21,248) - Principal Paydowns 4,603 - Funds from Call on Available for sale 792 Sale (Purchases) of Federal Reserve and Federal Home Loan Bank stock 35 (28) Purchases of furniture and equipment (274) (463) Proceeds on sale of other real estate owned 340 130 --------- --------- NET CASH USED BY INVESTING ACTIVITIES (16,161) (5,470) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 3,940 5,436 Cash dividends (294) (286) Compensation expense related to the exercise of incentive stock options 60 171 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 3,706 5,321 --------- --------- (CONTINUED) (See notes to consolidated financial statements) 7 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in 000's) Nine Months Ended September 30, ------------------------------- 1998 1997 --------- --------- (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS $(11,225) $ 1,121 Cash and cash equivalents at beginning of period 26,147 24,479 -------- -------- Cash and cash equivalents at end of period $ 14,922 $25,600 ======== ======== CASH AND CASH EQUIVALENTS AT SEPTEMBER 30: Cash and due from banks $ 7,647 $ 8,005 Federal funds sold 7,275 17,595 -------- -------- $ 14,922 $25,600 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 2,672 $ 2,413 ======== ======== Cash paid for income taxes $ 623 $ 65 ======== ======== (See notes to consolidated financial statements) 8 NAPA NATIONAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Napa National Bancorp and Subsidiaries' annual report on Form 10-KSB for the year ended December 31, 1997. Note 2 - Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income or loss and its components; however, the adoption of the Statement had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income or loss. The following is a summary of the components of total comprehensive income, net of related income taxes: 1998 1997 ------------------------------------- --------------------------------------------- Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------------------------------------- --------------------------------------------- Net income $ 206 $ 338 $ 292 $ 226 $ 271 $ 218 $ 32 Net unrealized gain(loss) on available-for-sale securities 175 (6) (73) 39 - - - ------------------------------------- --------------------------------------------- Total Comprehensive income $ 381 $ 332 $ 219 $ 265 $ 271 $ 218 $ 32 ===================================== ============================================= Note 3 - Extension of Non-Statutory Stock Options On August 18, 1998, the Board of Directors approved the extension of 32,500 non-statutory options that expired on September 16, 1998. The new expiration date is of September 16, 2000. Based on a current market value of the Company's Common Stock of $16.00, the extension of the exercise periods for these non-statutory options resulted in the Company taking a charge against third quarter earnings of $153,400, net of taxes. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Napa National Bancorp (the "Company") was incorporated in 1981 in the State of California and is headquartered in Napa, California. The Company is a bank holding company. Its principal subsidiary, Napa National Bank (the "Bank"), was organized as a national banking association in 1982. The following discussion and analysis by the Company's management compares the results of the Company's operations for the nine months ended September 30, 1998 and 1997 and the financial condition and liquidity of the Company as of September 30, 1998 and December 31, 1997. Certain matters discussed in this report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the competitive environment and its impact on the Company's net interest margin, changes in interest rates, asset quality risks, concentrations of credit and the economic health of Napa County (particularly the health of the wine industry), volatility of rate sensitive deposits, asset/liability matching risks, the dilutive impact which might occur upon the issuance of new shares of common stock, and liquidity risks. Therefore, the matters set forth below should be carefully considered when evaluating the Company's business and prospects. For additional information concerning these risks and uncertainties, please refer to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. FINANCIAL CONDITION The Company's assets increased approximately $4.9 million during the first nine months of 1998 as compared to the period ended December 31, 1997. The substantial portion of that increase was utilized in the investment portfolio. Total assets were $135.7 million at September 30, 1998 compared with $130.8 million at December 31, 1997. Total deposits increased to $125.4 million at September 30, 1998 compared with $121.4 million at December 31, 1997. The loan portfolio of $81.9 million at September 30, 1998 increased slightly compared to the December 31, 1997 total of $79.6 million. The allowance for loan losses on September 30, 1998 was $1,658,000 or 2.02% of total gross loans outstanding. Net loan charge-offs for the first nine months of 1998 were $173,000. In the opinion of management, the allowance for loan losses was considered adequate at September 30, 1998 based on management's analysis of the risks inherent in the loan portfolio. The Company's "held to maturity securities" consist of Treasury bonds, municipals and stock in the Federal Reserve and Federal Home Loan Bank and are classified as such in accordance with SFAS No. 115. At September 30, 1998, the "held to maturity" investment portfolio's amortized cost and fair market value was $2,345,000. 10 In fourth quarter 1997, the Company began to diversify its investment portfolio to include collateralized mortgage obligations and municipal bonds. The intention of management is to increase earnings and improve asset liability management through this strategy. The Company's general policy is to acquire "A" rated or better, insured tax-free municipal bonds. Collateralized mortgage obligations have an average life of five years or less at purchase date. New purchases of collateralized mortgage obligations and municipal bonds are classified as available-for-sale securities. At September 30, 1998, collateralized mortgage obligations and municipal securities had an amortized cost of $27,152,000 and $5,686,000, respectively, and a fair value of $27,142,000 and $5,797,000, respectively. RESULTS OF OPERATIONS The Company's after-tax earnings were $836,000 during the first nine months of 1998 compared with $520,000 during the same period in 1997. Net interest income, the principal source of the Company's earnings, represents the difference between interest and fees earned from lending and investment activities and the interest paid on deposits used to fund those activities. Variations in the volume and mix of loans, investments, and deposits and their relative sensitivity to movements in interest rates impact net interest income. During the first nine months of 1998, net interest income at $5,273,000 was $345,000 ahead of the same period in 1997. The primary cause of the increase was the investment income which resulted from utilizing the increase in deposits. That increase was mitigated by the decrease in interest on time deposits with other financial institutions during the first nine months of 1998 of $154,000 as compared to the same period in 1997. Non-interest income increased by $133,000 in the first nine months of 1998 as compared to the same period in 1997. This increase resulted mainly from the increase in service charges on deposit accounts and fees from brokered mortgage loans. Non-interest expenses consist of salaries and benefits provided to employees of the Bank, expenses related to premises and equipment, and operating expenses associated with the business affairs of the Company. Total non-interest expenses increased $41,000 or .9% during the first nine months of 1998 when compared with the first nine months of 1997. Salaries and benefits increased $192,000 due mainly to additional compensation expense for the extension of the non-statutory stock options. Otherwise, salaries and benefits would have indicated a decrease of $68,000 as compared to 1997. Other non-interest expense decreased $91,000 for the first nine months of 1998 compared to the same period in 1997, primarily, as a result of a more effective expense control system. 11 CAPITAL RESOURCES AND ADEQUACY Shareholders equity was $9.5 million or 7.0% of total assets at September 30, 1998 compared with $8.6 million or 6.6% of total assets at December 31, 1997. The ratio of capital to risk-weighted assets at September 30, 1998 was 11.80% for the Company and 11.57% for the Bank. Both ratios exceeded the regulatory requirements for a "well-capitalized" institution. Management anticipates that both the Company and the Bank will continue to exceed the regulatory minimums for "well-capitalized"institutions in the foreseeable future. Therefore, in management's opinion, the Company and the Bank have adequate capital in order to support future growth. INFLATIONARY FACTORS Since the assets and liabilities of the Bank are primarily monetary in nature, the performance of the Bank is affected more by changes in interest rates than by inflation. YEAR 2000 The Bank is performing a comprehensive analysis of its internal and external systems and applications, and an assessment of its customers and vendors to determine compliance with Year 2000. To review internal and external systems, the Bank has developed comprehensive plans and methodologies to test each mission-critical system for compliance with Year 2000 issues. The written test plans define each mission-critical system as well as the test environment, methodology and schedule that will be utilized to verify compliance. Completion for the testing of mission-critical systems is scheduled for December 1, 1998. At this time, there have no significant difficulties in assuring Year 2000 compliance. The Bank has incorporated a Remediation Contingency Plan into the written test plan. If after the mission-critical systems have been reviewed there are discrepancies, the plan provides for resolution through working closely with software and hardware vendors. The Bank relies on third party vendors for its electronic data processing and does not own any proprietary software. Presently, there are no indications that significant non-compliance with Year 2000 issues have occurred. The Bank has developed a Customer Risk Assessment program for identifying, evaluating and mitigating potential risk to the Bank from customers' operational difficulties with Year 2000 compliance. This entails communicating directly with customers that may represent a material risk to Bank operations through non-compliance with Year 2000. For vendors of the Bank, written notification is obtained assuring the Bank of the compliance requirements that is maintained to adhere to Year 2000 compliance. All procedures to test for Year 2000 are performed in compliance with the Bank's regulatory agency, the Office of the Comptroller of the Currency. 12 Costs incurred year to date associated with Year 2000 issues have been approximately $107,000. These costs included the current phases of testing and assessment of mission-critical systems, enhancements to current systems to ensure compliance, and personnel costs to implement proactive procedures. It is estimated that costs for completing Year 2000 compliance will range from $100,000 to $300,000. It is not expected that Year 2000 expenditures will have a material effect on the Company's result of operations, liquidity or capital position. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS As of September 30, 1998, the Company was not party to any significant legal proceeding. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS There were no changes in the Company's securities during the quarter. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES No securities of this nature. ITEM 4 - OTHER INFORMATION None. ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Index to Exhibits to this Form 10-QSB, for a list of the exhibits filed as a part of this report and incorporated herein by reference. (b) Reports on Form 8-K: The Company did not file a report on Form 8-K during the third quarter of 1998. 13 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAPA NATIONAL BANCORP (Registrant) Date: November 13, 1998 /s/ Brian J. Kelly ------------------------------ Brian J. Kelly President / COO Date: November 13, 1998 /s/ Michael D. Irwin ------------------------------ Michael D. Irwin Chief Financial Officer 14 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 3(i)* Articles of Incorporation of the Registrant, as amended. 3(ii)* Restated Bylaws of the Registrant. 4.1* A specimen copy of the certificates evidencing Common Stock. 10.1* Napa National Bancorp 1992 Stock Option Plan. 10.2* Form of Incentive Stock Option Agreement. 10.3* Form of Nonstatutory Stock Option Agreement. 27 Financial Data Schedule. *Previously filed. 15