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.
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.

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.

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.
ITEM 4.

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.
PART II
ITEM 5.

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.
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.
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.
ITEM 6.

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.
BALANCE SHEET INFORMATION (AT PERIOD END):
(1) As defined by regulatory guidelines. (2) Calculated based on the Bank's capital and average assets.
ITEM 7.

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.
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.
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.
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.
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.
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.
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
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.
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.
- -------------------- 1 Interest rate sensitivity gap is the difference between interest rate sensitive assets and interest rate liabilities within the above time frames.
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.
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.

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.
ITEM 9.

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.
PART III
ITEM 10.

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.

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.

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.

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.
PART IV
ITEM 14.

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".
[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
[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
Napa National Bancorp and Subsidiaries
Consolidated Balance Sheets
See accompanying notes
Napa National Bancorp and Subsidiaries
Consolidated Statements of Income
See accompanying notes.
Napa National Bancorp and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
See accompanying notes.
Napa National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes.
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.
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
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.
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.
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:
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.
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):
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.
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:
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:
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:
The temporary differences and tax carryforwards which created deferred tax assets and liabilities are detailed below:
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:
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:
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:
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.
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:
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.
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.
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:
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:
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.
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.
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:
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:
(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.
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:
Napa National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in Thousands)
16. NAPA NATIONAL BANCORP (PARENT COMPANY ONLY) (CONTINUED)
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.