-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GOqwFUcLwQZCSqbwQRZ44FPC9sE0aoM4A5ZcP3+LF6qsb9nwQBGhTM4mZzCYd5gx KvvP6UepIt13fcDyo1RG+w== 0000929624-97-000348.txt : 19970401 0000929624-97-000348.hdr.sgml : 19970401 ACCESSION NUMBER: 0000929624-97-000348 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAPA NATIONAL BANCORP CENTRAL INDEX KEY: 0000700699 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942780134 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11090 FILM NUMBER: 97569641 BUSINESS ADDRESS: STREET 1: 3263 CLAREMONT WAY CITY: NAPA STATE: CA ZIP: 94558 BUSINESS PHONE: 7072572440 MAIL ADDRESS: STREET 1: 3263 CLAREMONT WAY CITY: NAPA STATE: CA ZIP: 94558 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - K (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the year ended: December 31, 1996 Commission File: 0-11090 NAPA NATIONAL BANCORP (Exact name of registrant as specified in its charter) California 94-2780134 (State of incorporation) (I.R.S. Identification No.) 901 Main Street, Napa, California, 94559 (Address of principal executive offices) Registrant's telephone number: (707) 257-2440 Securities registered pursuant to Section 12(b) of Act: None Securities registered pursuant to Section 12(g) of Act: Common Stock, Without Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Aggregate market value of voting stock held by nonaffiliates of the registrant as of February 28, 1997: $2,564,000 Number of shares of Common Stock outstanding of the registrant's Common Stock, without par value, as of February 28, 1997 was 754,500. Fully diluted shares outstanding at this date was 906,050. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Definitive Proxy Statement for Registrant's 1997 Annual Meeting of Shareholders is included in Part III, Items 10, 11, 12, and 13, are incorporated herein by reference. Registrant's Current Report on Form 8-K filed with the Commission on September 26, 1996 and amended October 23, 1996 is incorporated herein by reference in Part II, Item 9 herein. 1 TABLE OF CONTENTS PART I
Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K SIGNATURES
2 PART I ITEM 1. BUSINESS. (A) GENERAL. Certain statements in this Annual Report on Form 10-K include forward- looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in Napa County and the wine industry; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. See also "Certain Additional Business Risks" included herein in Item 1 and other risk factors discussed elsewhere in this Report. Napa National Bancorp (the "Company") was incorporated in 1981 in the State of California and is headquartered in Napa, California. The Company is a bank holding company. Its subsidiary, Napa National Bank (the "Bank"), was organized as a national banking association in 1982. At December 31, 1996, the Company had consolidated assets of $113,827,000 and shareholders' equity of $7,971,000. The Bank is a full service commercial bank with three offices serving the Napa Valley area in Northern California. The Company itself does not engage in any business activities other than the ownership of the Bank and the ownership of Napa National Leasing Corporation, an inactive subsidiary authorized to engage in the leasing of equipment and other personal property (the "Leasing Company"). W. Clarke Swanson, Jr., Chairman of the Board and CEO, beneficially owns approximately 70% of the outstanding shares of Common Stock of the Company. The Company is registered under the Bank Holding Company Act of 1956, as amended. The Bank provides a wide range of commercial banking services to individuals, professionals and small- and medium-sized businesses in the Napa Valley area. The services provided include those typically offered by commercial banks, such as: checking, interest checking, savings, and time deposit accounts, commercial, construction, personal, home improvement, mortgage, automobile and other installment and term loans, travelers' checks, night depository facilities, wire transfers, merchant card services, courier service and automated teller machines. The Bank does not provide international banking or trust services but has arranged for its correspondent banks to offer these and other services to its customers on an as needed basis. 3 Individuals, small businesses and professionals, manufacturers, distributors, retailers, wineries, vineyard owners, real estate developers and the Bank's shareholders currently form the core of the Bank's customer and deposit base. In order to attract these customers, the Bank offers extensive personalized contact, specialized services and banking convenience, including Saturday banking hours. EXISTING LOCATIONS In addition to the Bank's head offices at 901 Main Street in Downtown Napa, the Bank has two branch offices, one in St. Helena and one in North Napa. All three facilities offer full service to the Bank's customers. See "Item 2. - Properties" herein. DEPOSITS Most of the Bank's deposits are obtained from individuals, professional firms and small- to medium-sized businesses from the Bank's service area. As of December 31, 1996, the Bank had a total of 9,580 accounts representing 6,292 demand accounts with an average balance of approximately $8,664 each, 2,106 savings accounts with an average balance of approximately $5,708 each, and 1,182 other time accounts with an average balance of approximately $30,489 each. OTHER BORROWINGS At December 31, 1996 and 1995, the Bank had no borrowed funds. LENDING ACTIVITIES The Bank concentrates its lending activities in four areas: commercial loans, short-term real estate and construction loans, mortgage loans, and loans to individuals or households, automobile and other personal expenditures. At December 31, 1996, these four loan categories accounted for approximately 66%, 11%, 6% and 17%, respectively, of the Bank's loan portfolio. Within these categories, $10,933,000, or 14%, of the loan portfolio, relates to the winery and vineyard segment of the agricultural industry with commitments to lend an additional $4,670,000. Under federal regulations applicable to national banks, at December 31, 1996, in general, the Bank cannot make loans to one borrower in excess of $1,390,000. For borrowers desiring loans in excess of the Bank's lending limit, the Bank may make such loans on a participation basis with other banks, without recourse to the Bank. In other cases, the Bank may refer such borrowers to larger banks or lending institutions. The interest rates charged for the various loans made by the Bank vary with the degree of risk, size and maturity of the loans involved and are generally affected by competition, governmental regulation and current money market rates. The Bank's construction and mortgage loans are not concentrated in any one category and include loans to individuals, partnerships and corporations. As of December 31, 1996, the Bank had gross loans outstanding of $79,695,000 and undisbursed loan commitments of $21,351,000. 4 COMMITMENTS AND LINES OF CREDIT The Bank makes contractual commitments to extend credit. Such commitments are usually made in the form of revolving lines of credit or term loans with one or more takedowns. Such commitments typically mature within one to three years. The Bank also extends standby letters of credit which support the obligations of Bank customers to third parties. At December 31, 1996, the Bank had $20,467,000 in commitments to extend credit and $865,000 in standby letters of credit. CORRESPONDENT BANKS At December 31, 1996, the Bank had correspondent relationships with Wells Fargo Bank, Bank of America National Trust and Savings Association, and Union Bank of California. These relationships are a result of the Bank's efforts to obtain a wide range of services for the Bank and its customers and, as a net seller of federal funds (overnight interbank loans), to minimize the risk of undue concentration of its resources with a few entities. The Bank does not currently serve, nor does it have plans to serve, as a correspondent to other banks. EMPLOYEES At December 31, 1996, the Bank employed 75 employees, including 26 officers and 12 part-time employees. At December 31, 1996, the Company employed one employee. (B) NAPA NATIONAL LEASING CORPORATION - COMPANY SUBSIDIARY This subsidiary was inactive during 1996. (C) SELECTED STATISTICAL INFORMATION The following tables present certain consolidated statistical information concerning the business of the Company and its subsidiaries. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", included herein at Item 7, and the Company's consolidated financial statements and the notes thereto included herein at Item 14. During 1996 and prior years, the Company did not own any tax-exempt securities. 5 DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY The following table sets forth the distribution of consolidated average assets, liabilities and shareholders' equity for the years ended December 31, 1996 and 1995. Average balances have been computed using daily adjusted balances.
YEAR ENDED DECEMBER 31, 1996 1995 AVERAGE AVERAGE BALANCE PERCENT BALANCE PERCENT (000'S) OF TOTAL (000'S) OF TOTAL ASSETS Cash and Due from Banks $ 6,100 5.9% $ 5,546 6.0% Interest-Bearing Deposits With Other Banks 4,210 4.0 4,356 4.7 Taxable Investment Securities 2,087 2.0 1,387 1.5 Federal Funds Sold 10,844 10.4 10,285 11.1 Loans, Net (1) 77,064 74.0 67,092 72.7 Premises and Equipment, Net 2,484 2.4 2,080 2.3 Other Assets and Accrued Interest Receivable 1,391 1.3 1,595 1.7 Total Assets $104,180 100.0% $92,341 100.0% LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 19,284 18.5% $15,752 17.1% Interest-Bearing Transaction Accounts 27,970 26.8 24,682 26.7 Savings 12,071 11.6 12,151 13.2 Time 36,600 35.1 32,503 35.2 Total Deposits 95,925 92.0 85,088 92.2 Other Liabilities and Accrued Interest 487 0.5 540 0.5 Shareholders' Equity 7,768 7.5 6,713 7.3 Total Liabilities and Shareholders's Equity $104,180 100.0% $92,341 100.0%
- -------------------- 1) Average loans include net deferred loan fees and non-accrual loans and are net of the allowance for loan losses. 6 INTEREST RATES AND DIFFERENTIALS The following table sets forth information concerning interest-earning assets and interest-bearing liabilities, respective average yields or rates, the amount of interest income or expense, and the net interest margin and the net interest spread. Loan fees of $409,000 in 1996 and $294,000 in 1995 are included, while non-accrual interest is excluded from computations of interest income and expense.
YEAR ENDED DECEMBER 31, 1996 INTEREST AVERAGE INCOME/ AVERAGE BALANCE EXPENSE YIELD/ (000'S) (000'S) RATE INTEREST-EARNING ASSETS Loans, Net (1,2) $77,064 $8,277 10.74% Interest-Bearing Deposits With Other Banks 4,210 230 5.46 Taxable Investment Securities 2,087 119 5.70 Federal Funds Sold 10,844 547 5.04 Total Average Interest-Earning Assets $94,205 $9,173 9.74% INTEREST-BEARING LIABILITIES Deposits: Interest-Bearing Transaction Accounts $27,970 $ 563 2.01% Savings 12,071 275 2.28 Time 36,600 1,976 5.40 Total Average Interest-Bearing Liabilities $76,641 $2,814 3.67% Net Interest Income and Net Interest Margin (3) $6,359 6.75% Net Interest Spread (4) 6.07%
1) Average loans include net deferred loan fees and non-accrual loans and are net of allowance for loan losses. 2) Loan interest income includes loan fees of $409,000. 3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 4) Net interest spread represents the average yield earned on interest- earning assets less the average rate paid on interest-bearing liabilities. 7
YEAR ENDED DECEMBER 31, 1995 INTEREST AVERAGE INCOME/ AVERAGE BALANCE EXPENSE YIELD/ (000'S) (000'S) RATE INTEREST-EARNING ASSETS Loans, Net (1,2) $67,092 $7,515 11.20% Interest-Bearing Deposits With Other Banks 4,356 251 5.76 Taxable Investment Securities 1,387 83 5.98 Federal Funds Sold 10,285 583 5.67 Total Average Interest-Earning Assets $83,120 $8,432 10.14% INTEREST-BEARING LIABILITIES Deposits: Interest-Bearing Transaction Accounts $24,682 $ 517 2.09% Savings 12,151 292 2.40 Time 32,503 1,825 5.61 Total Average Interest-Bearing Liabilities $69,336 $2,634 3.80% Net Interest Income and Net Interest Margin (3) $5,798 6.98% Net Interest Spread (4) 6.34%
1) Average loans include net deferred loan fees and non-accrual loans and are net of allowance for loan losses. 2) Loan interest income includes loan fees of $294,000. 3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. 4) Net interest spread represents the average yield earned on interest- earning assets less the average rate paid on interest-bearing liabilities. 8 RATE AND VOLUME ANALYSIS The following tables set forth, for the periods indicated, a summary of the changes in average interest bearing asset and liability balances (volume) and changes in average interest rates (rate). Where significant, the change in interest due to both volume and rate has been allocated to the change due to volume and rate in proportion to the relationship of absolute dollar amounts in each. Insignificant changes have been allocated solely to the change due to volume.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 (IN 000'S) AVERAGE AVERAGE NET VOLUME RATE CHANGE INCREASE (DECREASE) IN INTEREST INCOME: Loans, Net $1,116 $(354) $762 Interest-Bearing Deposits With Other Banks (9) (12) (21) Taxable Investment Securities 42 (6) 36 Federal Funds Sold 32 (68) (36) Total Increase (Decrease) 1,181 (440) 741 INTEREST (DECREASE) IN INTEREST EXPENSE: Deposits: Interest-Bearing Transaction Accounts 68 (22) 46 Savings (2) (15) (17) Time 228 (77) 151 Total Increase (Decrease) 294 (114) 180 Change in Net Interest Income $ 887 $(326) $561
9
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 (IN 000'S) AVERAGE AVERAGE NET VOLUME RATE CHANGE INCREASE (DECREASE) IN INTEREST INCOME: Loans, Net $896 $1,000 $1,896 Interest-Bearing Deposits With Other Banks 38 65 103 Taxable Investment Securities 19 17 36 Federal Funds Sold (18) 189 171 Total Increase 935 1,271 2,206 INTEREST (DECREASE) IN INTEREST EXPENSE: Deposits: Interest-Bearing Transaction Accounts (1) 48 47 Savings (37) 6 (31) Time 377 583 960 Total Increase 339 637 976 Change in Net Interest Income $596 $634 $1,230
10 INVESTMENT SECURITIES AND FEDERAL RESERVE STOCK The Bank's classification of its investment in debt and equity securities according to the provisions of SFAS 115 are as follows: DECEMBER 31, 1996 - INVESTMENT SECURITIES
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE Held-to-Maturity Securities U.S. Treasury (HTM) $1,723,000 $27,000 $0 $1,750,000
DECEMBER 31, 1995 - INVESTMENT SECURITIES
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE Held-to-Maturity Securities U.S. Treasury (HTM) $1,235,000 $15,000 $0 $1,250,000
The Company had Federal Reserve and Federal Home Loan Bank Stock totalling $554,000 and $197,000, at December 31, 1996 and 1995, respectively. Yields on securities have been calculated by dividing interest income, adjusted for amortization of any premium and accretion of any discount, by the book value of the related securities. The Company's Federal Reserve and Federal Home Loan Bank Stocks have no maturity and a weighted average yield of 6.0%. All of the Company's U.S. Treasury securities have a maturity of less than twelve months and a weighted average yield of 5.4%. LOAN PORTFOLIO The Company's primary service area is Napa County and the Carneros growing region of Sonoma County. The Company's portfolio of loans consists of real estate mortgage and construction loans, commercial and consumer loans. At December 31, 1996, the Company's real estate construction portfolio totaled $8,706,000. Real estate loans consisted of single family residences to developers and owner-builders with a history of successfully developing projects in the Company's market area. The loan-to-value ratio on each real estate construction loan required by the Company depends upon the amount of the loan, the nature of the property, whether the property is residential or commercial and whether or not it is owner occupied. For construction loans, the Company's policy is to require that the loan-to-value ratio generally be no more than 70% when the loan is initially made and that the borrower generally has no less than a 50% equity interest in the land. Substantially all of the real estate construction portfolio is secured by real estate located within the Company's service area. 11 Conventional real estate loans totaled $4,918,000 at December 31, 1996. The loan-to-value ratio required by the Company on conventional real estate loans depends upon the nature of the property and whether or not it is owner-occupied. For owner-occupied conventional real estate loans, the Company usually requires that the loan-to-value ratio be no more than 80% except when private mortgage insurance is required, whereupon the Company may allow the loan-to-value ratio to rise generally to no more than 85% when the loan is initially made. Generally, non-owner-occupied conventional real estate loans must have loan-to- value ratios not exceeding 70% when the loan is made. The entire real estate mortgage portfolio is generally secured by first or second deeds of trust. Substantially all of the secured property is located within the Company's service area. At December 31, 1996, commercial loans totaled $52,789,000. Commercial lending is primarily to professionals and companies with sales up to $10 million. The Company's lending relationships generally involve companies with sales of no more than $30 million. Substantially all of the commercial loan portfolio is secured, some of which may include real estate collateral. Such loans are not intended as permanent financing of real estate but are made for commercial purposes and are secured by commercial real estate. The Company evaluates such loans based upon the borrower's ability to service the debt through its business operations and does not rely primarily on the value of the real estate collateral for repayment. The remaining portfolio is secured by accounts receivables, inventory, equipment, stock and deposits held by the Company. Total consumer loans, including personal lines of credit, were $13,282,000 at December 31, 1996. Included in consumer loans to individuals are home equity lines of credit, totaling $9,066,000, which are secured primarily by second trust deeds on single family residences. The Company requires a debt-to-value ratio of not higher than 75% for most home equity loans when the loan is initially made. The remaining portfolio is collateralized by automobiles, computers and other equipment, and deposits held by the Company. Over 70% of the Company's consumer portfolio is secured. The Company had standby letters of credit outstanding of $865,000 and $646,000 at December 31, 1996 and December 31, 1995, respectively. In addition, the Company had commitments to fund real estate construction loans, commercial loans and consumer loans of $2,684,000, $17,670,000 and $997,000, respectively, at December 31, 1996. The Company did not have any loans related to lease financing activities in the loan portfolio at December 31, 1996. 12 The following table shows the composition of the Bank's loan portfolio by type of loan or borrower as of December 31, 1996 and 1995:
DECEMBER 31, 1996 1995 (IN 000'S) Commercial $52,789 $48,407 Real Estate--Construction 8,706 7,850 Real Estate--Mortgage 4,918 4,729 Installment Loans and Leases 4,216 3,376 Personal Lines of Credit and Other 9,066 10,337 Total Loans 79,695 74,699 Less Allowance for Loan Losses (1,405) (1,325) Total Loans, Net $78,290 $73,374
In recent years, California commercial real estate markets in general have experienced some difficulties. While these developments have not, in the judgment of management, had a material adverse impact on the Bank's business, there can be no assurance that further softening of the California real estate market will not occur, nor can any assurance be given as to the effect of any such developments on the Bank's business. Further increases in interest rates could adversely impact real estate values or the ability of borrower to satisfy the material terms of such loans. During the beginning of 1997, the Napa Valley was subjected to severe weather conditions that resulted in some areas of the Valley flooding from high rain fall levels. Most of the flooding resulted in areas near the Napa River on dormant fields. Management believes that this flooding did not have a direct or material impact on the collateral underlying portions of the existing loan portfolio. LOAN CONCENTRATIONS At December 31, 1996, approximately $55,680,000, or 70% of the loan portfolio was secured by commercial or residential real estate. Concentrations of the Bank's lending activity in the real estate sector could have the effect of intensifying the impact on the Bank if there are any adverse changes in the real estate market in the Bank's lending area. The Bank is located in the Napa Valley and a significant amount of its loans are related to winery and vineyard operations. Loans related to winery and vineyard operations constituted approximately $10,933,000, or 14% of total loans at December 31, 1996, as compared to $6,913,000, or 9% of total loans, at December 31, 1995. A downturn in the wine industry in the Napa Valley or a disruption in wine production, which may result from extreme weather conditions, plant diseases or other natural causes, competition, changes in governmental regulatory or tax policies, or changes in consumer preferences, could have a significant adverse impact on the Company's results of operations and financial condition. 13 NONPERFORMING ASSETS The following table shows the Company's nonperforming assets by category as of December 31, 1996 and 1995:
DECEMBER 31, 1996 1995 (In 000'S) Nonperforming assets: Nonaccrual Loans including loans past due 90 days $3,152 $1,447 Other Real Estate Owned 328 0 Total Nonperforming Assets $3,480 $1,447
Management analyzes each loan on a case by case basis to determine when, in management's opinion, interest should no longer be accrued. This occurs when management determines the ultimate collectibility of principal or interest to be unlikely or when loans become 90 days or more past due, unless they are well secured and in the process of collection or unless other circumstances exist which justify the treatment of the loan as fully collectible. When a loan is placed on nonaccrual status, unpaid interest is reversed and charged against current income. Interest income on nonaccrual loans at December 31, 1996 which would have been recognized during the year if the loans had been current in accordance with their original terms totaled $188,000 versus $291,000 for the same period in 1995. As of December 31, 1996 and 1995, other real estate owned totaled $328,000 and $0, respectively. It is the Company's policy to write foreclosed property down to the lower of fair market value less estimated selling costs or cost at the time it is reclassified into other real estate owned. Miscellaneous expenses relating to the property are charged to other noninterest expenses as incurred. As of the date of this filing, there were no other loans, other than those included in the table above, where known information concerning possible credit problems of borrowers caused management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms such that they may become nonperforming loans. See "Nonperforming Assets" herein. At December 31, 1996, pursuant to SFAS 114, the Company's total recorded investment in nonaccrual loans was $3,152,000, of which there was a related allowance for credit losses of $204,000. The average recorded investment in nonaccrual loans during 1996 was $2,123,000. Related interest income recognized on impaired loans during the year ended December 31, 1996, under the cash-basis method of accounting was approximately $44,000. 14 SUMMARY OF LOAN LOSS EXPERIENCE Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made and the credit-worthiness of the borrower over the term of the loan. The Company has an allowance for loan losses which is maintained at a level estimated to be adequate to provide for losses that can be reasonably anticipated based upon specific loan conditions as determined by management, historical loan loss experience, the amount of past due and nonperforming loans, comments of third- party loan review consultants, prevailing economic conditions and other factors. While these factors are essentially judgmental and may not be reduced to a mathematical formula, it is management's view that the $1,405,000 allowance, which constitutes 1.76% of total loans at December 31, 1996, was adequate as an allowance against foreseeable losses from the loan portfolio. The allowance was $1,325,000, or 1.77%, of the total loan portfolio at December 31, 1995. The allowance is increased by charges to the provision for loan losses and reduced by net charge-offs. The continuing evaluation of the loan portfolio and assessment of current economic conditions will dictate future allowance levels. An analysis of the allowance for loan losses for the years ending December 31, 1996 and 1995 follows:
DECEMBER 31, 1996 1995 (IN 000'S) ALLOWANCE FOR LOAN LOSSES: Balance, Beginning of Year $ 1,325 $ 1,050 Provision Charged to Expense 550 323 Loans Charged Off: Commercial (297) (20) Personal Lines of Credit and Other (177) (31) Real Estate Construction (70) 0 Total Loans Charged Off (544) (51) Recoveries: Commercial 71 0 Personal Lines of Credit and Other 3 3 Total Recoveries 74 3 Net Loans (Charged Off) Recovered (470) (48) Balance, End of year $ 1,405 $ 1,325 Average Gross Loans Outstanding During Period $78,861 $68,499 Total Gross Loans at End of Year $79,695 $74,699 RATIOS: Net Loans Charged Off to Average Loans Outstanding 0.60% 0.07% Net Loans Charged Off to Total Loans at End of Year 0.59% 0.06% Allowance for Loan Losses to Average Loans 1.78% 1.93% Allowance for Loan Losses to Total Loans at End of Year 1.76% 1.77% Net Loans Charged Off to Allowance for Loan Losses at End of Year 33.45% 3.62% Net Loans Charged Off to Provision for Loan Losses 85.45% 14.86%
15 The table set forth below shows a breakdown of the portfolio of loans at the dates indicated and the amount of the allowance that has been allocated as of those dates to each of the loan categories. Management believes that any breakdown or allocation of the allowance for possible loan losses into loan categories lends an appearance of exactness which does not exist, in that the reserve is ultimately utilized as a single unallocated allowance available for all loans.
DECEMBER 31, 1996 DECEMBER, 31, 1995 PERCENT PERCENT OF LOANS OF LOANS IN EACH IN EACH CATEGORY CATEGORY AMOUNT OF TO TOTAL AMOUNT OF TO TOTAL ALLOWANCE LOANS ALLOWANCE LOANS (000'S) (000'S) Commercial $ 920 74% $ 731 62% Real Estate-Construction 119 10 123 11 Real Estate-Mortgage 162 13 119 10 Installment Loans and Leases 3 0 77 7 Personal Lines of Credit and Other 44 3 120 10 Unallocated 157 155 Total $1,405 100% $1,325 100%
MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF LOANS The following table shows the maturity distribution of the portfolio of loans and leases in thousands as of December 31, 1996 and sets forth the sensitivity to changes in interest rates by comparing total loans with fixed interest rates and total loans with floating or adjustable rates.
AFTER ONE THROUGH AFTER ONE YEAR FIVE FIVE OR LESS YEARS YEARS TOTAL (In 000's) Commercial $50,363 $2,402 $ 24 $52,789 Real Estate-Construction 8,674 32 0 8,706 Real Estate-Mortgage 3,648 974 296 4,918 Installment Loans & Leases 2,090 2,126 0 4,216 Personal Lines of Credit & Other 9,011 55 0 9,066 Total $73,786 $5,589 $320 $79,695 Loans With Fixed Interest Rates $ 1,238 $3,890 $320 $ 5,448 Loans With Floating Interest Rates 72,548 1,699 0 74,247 Total $73,786 $5,589 $320 $79,695
16 DEPOSITS The following table reflects average balances and the average rates paid for the major categories of deposits for the years ended December 31, 1996 and 1995:
YEAR ENDED DECEMBER 31, 1996 1995 AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE (000'S) (000'S) Noninterest-Bearing Demand $19,284 0.00% $15,752 0.00% Interest-Bearing Transaction Accounts 27,970 2.01 24,682 2.09 Savings Deposits 12,071 2.28 12,151 2.40 Time Deposits over 100,000 9,987 5.20 7,551 5.19 Other Time Deposits 26,613 5.47 24,952 5.74 Total Deposits $95,925 3.67% $85,088 3.80%
The following table sets forth, by time remaining to maturity, the domestic time deposits in amounts of $100,000 or more at December 31, 1996: Amount Maturing In: (000's) Three Months or Less $ 5,287 Over Three Through Twelve Months 4,224 Over Twelve Months 1,317 Total $10,828 SELECTED FINANCIAL RATIOS The following table sets forth certain financial ratios for the periods indicated (averages are computed using daily figures):
YEAR ENDED DECEMBER 31, 1996 1995 Net income to: Average earning assets 0.94% 1.30% Average total assets 0.87 1.19 Average shareholders' equity 11.61 16.40 Average shareholders' equity to: Average total assets 7.46% 7.27% Average net loans 10.08 10.01 Average total deposits 8.10 7.92 Average earning assets to: Average total assets 92.15% 91.52% Average total deposits 100.08 99.67 Percent of average total deposits: Average net loans 80.33% 79.12% Average noninterest-bearing deposits 20.10 18.56 Average savings and other time deposits 50.74 52.38 Total interest expense to: Total gross interest income 30.68% 31.24% Dividend Pay-out Ratio 41.82% 0.00%
17 THE EFFECT OF GOVERNMENT POLICY ON BANKING The earnings and growth of the Bank are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System ("FRB") influences the supply of money through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Bank cannot be predicted. Additionally, state and federal tax policies can impact banking organizations. Effective January 1, 1997, applicable California bank and corporation tax rates were reduced by 5% in order to keep California competitive with other western states. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company. In response to various business failures in the savings and loan industry and in the banking industry, in December 1991, Congress enacted, and the President signed into law, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA substantially revised the bank regulatory framework and deposit insurance funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Implementation of the various provisions of FDICIA is subject to the adoption of regulations by the various regulatory agencies, the manner in which the regulatory agencies implement those regulations and certain phase-in periods. REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended ("BHCA"). The Company reports to, registers with, and may be examined by, the FRB. The FRB also has the authority to examine the Company's subsidiaries. The costs of any examination by the FRB are payable by the Company. The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See "Capital Standards." The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms." 18 Under the BHCA, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over a bank, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company; any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the approval of the FRB. The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. A bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995 without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and no more than 30% of such deposits in that state (or such lesser or greater amount set by state law). The Interstate Banking and Branching Act also authorizes banks to merge across states lines, therefore creating interstate branches, beginning June 1, 1997. Under such legislation, each state has the opportunity to "opt out" of this provision, thereby prohibiting interstate branching in such states, or to "opt in" at an earlier time, thereby allowing interstate branching within that state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching. California enacted legislation to "opt in" to the Interstate Banking and Branching Act provisions regarding interstate branching, allowing a state bank chartered in a state other than California to acquire by merger or purchase, at any time after effectiveness of the Caldera, Weggeland, and Killea California Interstate Banking and Branching Act of 1995 ("IBBA"), a California bank or industrial loan company which is at least five (5) years old and thereby establish one or more California branch offices. However, the IBBA prohibits a state bank chartered in a state other than California from entering California by purchasing a California branch office of a California bank or industrial loan company without purchasing the entire entity or by establishing a de novo California branch office. See the section entitled "Recently Enacted Legislation" for additional information. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. 19 The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. Transactions between the Company and the Bank are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in the securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of, an affiliate, provided that the aggregate of such transactions with affiliates may not exceed 10% of the capital stock and surplus of the institution, and the aggregate of such transactions with all affiliates may not exceed 20% of the capital stock and surplus of such institution. The Company may only borrow from depository institution subsidiaries if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, the Company may not sell a low-quality asset to a depository institution subsidiary. Generally, a bank holding company and its subsidiaries are prohibited from engaging in tie-in arrangements in connection with the extension of credit, sale or lease of property or furnishing of services unless the FRB permits an exception to the tying prohibitions pursuant to exemption authority available to it under applicable law. The FRB, however, has adopted a rule, effective September 2, 1994, amending the anti-tying provisions to permit a bank or bank holding company to offer a lower price on a loan, deposit or trust service (traditional bank product), or on securities brokerage services, on the condition that the customer obtain a traditional bank product from an affiliate. Additionally, as of January 23, 1995, a bank holding company, or a nonbank subsidiary, may offer lower prices on any of its products or services on the condition that the customer obtain another product or service from such company or any of its nonbank affiliates, provided that all products offered in the package arrangement are separately available for purchase. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such the Company and the Bank are subject to examination by, and may be required to file reports with, the California Superintendent of Banks (the "Superintendent"). Regulations have not yet been proposed or adopted, and no other steps have been taken, to implement the Superintendent's power under this statute. 20 BANK REGULATION AND SUPERVISION As a national bank, the Bank is regulated, supervised and regularly examined by the Office of the Comptroller of the Currency ("OCC"). Deposit accounts at the Bank are insured by Bank Insurance Fund ("BIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC"), to the maximum amount permitted by law. The Bank is also subject to applicable provisions of California law, insofar as such provisions are not in conflict with or preempted by federal banking law. The Bank is a member of the Federal Reserve System, and is also subject to certain regulations of the FRB dealing primarily with check clearing activities, establishment of banking reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B). By comparison, California state-chartered banks are regulated by the California Superintendent of Banks (the "Superintendent"). Pursuant to AB 3351, which was adopted by the California legislature during 1996, all of the California state regulatory authorities for state-chartered depository institutions will be consolidated under a new state agency, the Department of Financial Institutions ("DFI") effective July 1, 1997. The newly created DFI combines the State Banking Department and the Department of Savings and Loan while regulatory oversight over industrial loan companies and credit unions will be shifted from the Department of Corporations to the DFI. During 1996 the California Interstate Banking and Branching Cleanup Act was enacted, which revised the Superintendent's assessment methodology for state-chartered banks in order to provide a better basis of comparison to the method used by the OCC. Under the new methodology, the average assessment for state banks will be approximately 39% of the OCC's annual charges for national bank supervision. During 1996, the OCC adopted a regulation to revise and streamline its procedures with respect to corporate activities of national banks, to be effective December 31, 1996. These revised standards allow the OCC to approve, on a case-by-case basis, the entry of bank operating subsidiaries into a business incidental to banking, including activities in which the parent bank is not permitted to engage. Such a standard allows a national bank to conduct an activity approved for a bank holding company through a bank operating subsidiary such as acting as an investment or financial advisor, leasing personal property and providing financial advice to customers. In general, these new standards will be available to well-capitalized or adequately capitalized national banks. CAPITAL STANDARDS The OCC and other federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as business loans. 21 In determining the capital level the Bank is required to maintain, the OCC does not, in all respects, follow generally accepted accounting principles ("GAAP") and has special rules which have the effect of reducing the amount of capital it will recognize for purposes of determining the capital adequacy of the Bank. These rules are called Regulatory Accounting Principles ("RAP"). In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. Future changes in OCC regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Company to grow and could restrict the amount of profits, if any, available for the payment of dividends. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items. The regulators measure risk-adjusted assets and off balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock, other types of qualifying preferred stock and minority interests in certain subsidiaries, less most other intangible assets and other adjustments. Net unrealized losses on available-for-sale equity securities with readily determinable fair value must be deducted in determining Tier 1 capital. Additionally as of April 1, 1995, for Tier 1 capital purposes, deferred tax assets that can only be realized if an institution earns sufficient taxable income in the future will be limited to the amount that the institution is expected to realize within one year, or ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, term preferred stock and other types of preferred stock not qualifying as Tier 1 capital, term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off balance sheet items of 4%. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to adjusted average total assets, referred to as the leverage capital ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators' rating. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, must be at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. 22 The following tables present the capital ratios for the Company and the Bank, compared to the standards for well-capitalized depository institutions, as of December 31, 1996 (amounts in thousands except percentage amounts).
THE COMPANY WELL MINIMUM ACTUAL CAPITALIZED CAPITAL CAPITAL RATIO RATIO REQUIREMENT Leverage........... $7,971 7.21% 5.0% 4.0% Tier 1 Risk-Based.. 7,971 9.34 6.0 4.0 Total Risk-Based... 9,376 10.99 10.0 8.0 THE BANK WELL MINIMUM ACTUAL CAPITALIZED CAPITAL CAPITAL RATIO RATIO REQUIREMENT Leverage........... $7,862 7.11% 5.0% 4.0% Tier 1 Risk-Based.. 7,862 9.22 6.0 4.0 Total Risk-Based... 8,932 10.47 10.0 8.0
Banking agencies have recently adopted final regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the institution's regular safety and soundness examination. Banking agencies also have recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluation of a bank's capital adequacy. This final rule does not codify a measurement framework for assessing the level of a bank's interest rate risk exposure. The information and exposure estimates collected through a new proposed supervisory measurement process, described in the banking agencies' joint policy statement on interest rate risk, would be one quantitative factor used to determine the adequacy of an individual bank's capital for interest rate risk. The focus of that proposed process is on a bank's economic value exposure. Other quantitative factors include the bank's historical financial performance and its earnings exposure to interest rate movements. Examiners also will consider qualitative factors, including the adequacy of the bank's internal interest rate risk management. The banking agencies intend for this case-by-case approach for assessing a bank's capital adequacy for interest rate risk to be a transitional arrangement. The second step will consist of a proposed rule that would establish an explicit minimum capital charge for interest rate risk, based on the level of a bank's measured interest rate risk exposure. The banking agencies intend to implement this second step at some future date, after the banking agencies and the banking industry have gained more experience with the proposed supervisory measurement and assessment process. 23 PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS FDICIA requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of FDICIA. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "WELL CAPITALIZED" "ADEQUATELY CAPITALIZED" ------------------ ------------------------ Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4%. "UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED" ------------------ -------------------------------- Total risk-based capital less than Total risk-based capital less than 6%; 8%; Tier 1 risk-based capital less than Tier 1 risk-based capital less than 3%; or 4%; or Leverage ratio less than 3%. Leverage ratio less than 4%. "CRITICALLY UNDERCAPITALIZED" ----------------------------- Tangible equity to total assets less than 2%. An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency. Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee of performance issued by the holding company. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. The most important additional measure is that the appropriate federal banking agency is required to either appoint a receiver for the institution within 90 days, or obtain the concurrence of the FDIC in another form of action. 24 In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. SAFETY AND SOUNDNESS STANDARDS FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. In addition to the statutory limitations, FDICIA originally required the federal banking agencies to prescribe, by regulation, standards for all insured depository institutions for such things as classified loans and asset growth. In 1994 FDICIA was amended to (a) authorize the agencies to establish safety and soundness standards by regulation or by guideline for all insured depository institutions; (b) give the agencies greater flexibility in prescribing asset quality and earnings standards and (c) eliminate the requirement that such standards apply to depository institution holding companies. On July 10, 1995 the federal banking agencies published Interagency Guidelines Establishing Standards for Safety and Soundness. By adopting the standards as guidelines, the agencies retained the authority to require an institution to submit to an acceptable compliance plan as well as the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution's noncompliance with one or more standards. 25 RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. Regulators also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. The payment of dividends by a national bank is further restricted by additional provisions of federal law, which prohibit a national bank from declaring a dividend on its shares of common stock unless its surplus fund exceeds the amount of its common capital (total outstanding common shares times the par value per share). Additionally, if losses have at any time been sustained equal to or exceeding a bank's undivided profits then on hand, no dividend shall be paid. Moreover, even if a bank's surplus exceeded its common capital and its undivided profits exceed its losses, the approval of the OCC is required for the payment of dividends if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. A national bank must consider other business factors in determining the payment of dividends. The payment of dividends by the Bank is governed by the Bank's ability to maintain minimum required capital levels and an adequate allowance for loan losses. Regulators also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payment are not expressly prohibited by statute. PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS FDICIA established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC also administers the Savings Association Insurance Fund ("SAIF"), which insures deposits in thrift institutions. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of premiums will be. 26 As required by FDICIA, the FDIC adopted a transitional risk-based assessment system for deposit insurance premiums which became effective January 1, 1993. On November 14, 1995 the Board of Directors of the FDIC adopted a resolution to reduce to a range of 0 to 27 basis points the assessment rates applicable to deposits assessable by the BIF for the semiannual assessment period beginning January 1, 1996. The new assessment schedule would retain the risk based characteristics of the current system. On November 26, 1996 the FDIC decided to continue in effect the current BIF assessment rate schedule. The FDIC may make limited adjustments to the above rate schedule not to exceed an increase or decrease of 5 basis points without public notice and comment rulemaking. The amount of an adjustment adopted by the Board is to be determined by the following considerations: (a) the amount of assessment revenue necessary to maintain the reserve ratio at the designated reserve ratio and (b) the assessment schedule that would generate such amount of assessment revenue considering the risk profile of BIF members. In determining the relevant amount of assessment revenue, the Board is to consider BIF's expected operating expenses, case resolution expenditures and income, the effect of assessments on BIF members' earnings and capital, and any other factors the Board may deem appropriate. In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act") in order to raise the level of SAIF reserves, and to reduce the possibility that bonds issued by the Financing Corporation ("FICO") would go into default. The FICO was a special purpose government corporation that issued $8.2 billion in bonds to recapitalize the Federal Savings and Loan Insurance Corporation. Interest on the FICO bonds was paid from the proceeds of assessment made on the deposits of SAIF members. Because of the almost $800 million needed to pay for the annual interest on the FICO bonds, the payments of SAIF members were not increasing the SAIF reserve to a sufficient level to allow the FDIC to reduce assessment rates (as had been done for BIF deposits), and SAIF members were employing certain strategies to either exit the system or transfer deposits to BIF coverage. Pursuant to the Funds Act, the FDIC imposed a special one-time assessment on all institutions that held SAIF assessable deposits as of March 31, 1995 of an estimated 65.7 cents per $100 of SAIF assessable deposits. Certain discounts and exemptions from the assessment were available. For example, BIF-member banks that had acquired SAIF-insured deposits from thrifts were generally entitled to a 20% discount on the special assessment if the bank satisfied certain statutory thresholds (the bank's acquired SAIF deposits, as adjusted, must be less than half of its total domestic deposits). Furthermore, beginning January 1, 1997, all FDIC-insured institutions will be assessed to cover the interest payments due on FICO bonds. For calendar years 1997 through 1999, BIF members will pay one-fifth the rate SAIF members will pay, and beginning in 2000 both types of institutions will pay the same rate. BIF members will be required to pay a FICO assessment of approximately 1.3 basis points for the first semiannual FICO assessment in 1997. 27 The Funds Act also authorized the FDIC to rebate assessments paid by BIF members if the BIF has reserves exceeding its designated reserve ratio of 1.25 percent of total estimated insured deposits. The adjusted BIF balance was $25.888 billion on June 30, 1996, a reserve ratio of 1.30 percent. The FDIC has expressed its view that the long-term needs of the BIF are a factor in setting the effective average BIF assessment rate, and that the FDIC is uncertain whether the current favorable conditions represent a long-term trend. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. On March 8, 1994, the federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In 1996, new compliance and examination guidelines for the CRA were promulgated by each of the federal banking regulatory agencies, fully replacing the prior rules and regulatory expectations with new ones ostensibly more performance based than before to be fully phased in as of July 1, 1997. The guidelines provide for streamlined examinations of smaller institutions. RECENTLY ENACTED LEGISLATION On September 29, 1995 the IBBA became effective. The IBBA implemented the federal Interstate Banking and Branching Act. The main features of this legislation are (a) out-of-state banks that wish to establish a California branch office to conduct core banking business must first acquire an existing 5 year old California bank or industrial loan company by merger or purchase; (b) California state-chartered banks will be empowered to conduct various authorized branch-like activities on an agency basis through affiliated and unaffiliated insured depository institutions in California and other states and (c) the Superintendent will be authorized to approve an interstate acquisition or merger which would result in a deposit concentration exceeding 30% if the Superintendent finds that the transaction is consistent with public convenience and advantage. The legislation also contains extensive provisions governing intrastate and interstate (a) intra-industry sales, mergers and conversions between banks and between industrial loan companies and (b) inter-industry transactions involving banks, savings associations and industrial loan companies. 28 During 1996, new federal legislation amended the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and the underground storage tank provisions of the Resource Conversation and Recovery Act ("RCRA") to provide lenders and fiduciaries with greater protections from environmental liability. The definition of "owner or operator" under CERCLA has been amended to exclude a lender who: (i) holds indicia of ownership in a property primarily to protect its security interest, but does not participate in the property's management or (i) forecloses on a property, or, after foreclosure, sells, re-leases (in the case of a lease finance transaction), or liquidates the property, maintains business activities, winds up operations, undertakes a response under CERCLA, or takes measures to preserve, protect or prepare property prior to sale or disposition, so long as the lender did not participate in the property's management prior to sale. In order to preserve these protections, a lender who forecloses on property must seek to sell, re- lease, or otherwise divest itself of the property at the earliest practicable, commercially reasonable time, and on reasonable terms. "Participation in management" is defined as actual participation in the management or operational affairs of the facility, not merely having the capacity to influence or the unexercised right to control operations. Similar changes have been made in RCRA. The California legislature adopted a similar bill to provide that, subject to numerous exceptions, a lender acting in the capacity of a lender shall not be liable under any state or local statute, regulation or ordinance, other than the California Hazardous Waste Control Law, to undertake a cleanup, pay damages, penalties or fines, or forfeit property as a result of the release of hazardous materials at or from the property. Under this bill a lender which had not participated in the management of the property prior to foreclosure may take actions similar to those set forth in the CERCLA and RCRA amendments without losing its immunity from liability. To preserve that immunity, after foreclosure, the lender must take commercially reasonable steps to divest itself of the property in a reasonably expeditious manner. PENDING LEGISLATION There are a number of pending legislative proposals to reform the Glass- Steagall Act to allow affiliations between banks and other firms engaged in "financial activities," including insurance companies and securities firms. Glass-Steagall reform will likely be affected by a bank insurance powers case decided during 1996 by the U.S. Supreme Court, which gives national banks greater opportunities to sell traditional insurance products, such as life, automobile, and property and casualty policies. In a similar recent case, the Court upheld an OCC determination that national banks may sell annuities. Certain other pending legislative proposals include bills to free withdrawals from individual retirement accounts from penalties for first-time home purchases and other purposes and eliminate most Community Reinvestment Act reporting requirements. While the effect of such proposed legislation and regulatory reform on the business of financial institutions cannot be accurately predicted at this time, it seems likely that a significant amount of consolidating in the banking industry will continue to occur throughout the remainder of the decade. 29 COMPETITION In the past, an independent bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and even retail establishments have offered new investment vehicles which also compete with banks for deposit business. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services market, and it is anticipated that this trend will continue. The enactment of the Interstate Banking and Branching Act in 1994 as well as the California Interstate Banking and Branching Act of 1995 will likely increase competition within California. Regulatory reform, as well as other changes in federal and California law will also affect competition. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive. CERTAIN ADDITIONAL BUSINESS RISKS The Company's business, financial condition and operating results can be impacted by a number of factors, including but not limited to those set forth below, any one of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results. Shares of Company Common Stock eligible for future sale could have a dilutive effect on the market for Company Common Stock and could adversely affect the market price. The Articles of Incorporation of the Company authorize the issuance of 20,000,000 shares of common stock, and 1,000,000 shares of preferred stock of which approximately 754,500 shares of common stock and no shares of preferred stock were outstanding at December 31, 1996. As of December 31, 1996, outstanding options to purchase Common Stock were 164,800, and Common Stock available for grants under the Company's stock option plans was 85,200 shares. The loan portfolio of the Company is dependent on real estate. At December 31, 1996, real estate served as the principal source of collateral with respect to approximately 70% of the Company's loan portfolio. A worsening of current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available-for-sale investment portfolio, as well as the Company's financial condition and results of operations in general and the market value for Company Common Stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition. 30 The Company is subject to certain operations risk, including, but not limited to, data processing system failures and errors and customer or employee fraud. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Company's internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations. ITEM 2. PROPERTIES. The Bank maintains its main offices on leased premises at 901 Main Street in the Downtown part of Napa, California. The Company opened this banking facility in 1995. This property is a two story building with an adjacent paved ground level parking lot. The parking lot is approximately 10,860 square feet. The lease term runs from December 1, 1994 to November 30, 1999, with three five (5) year renewal options. The lease provides for inflationary increases in the monthly rental amount during the renewal periods and also contains options to purchase the facility at an agreed upon market value during certain defined periods. The base rent is $9,900.00 per month. The base rent is subject to an annual adjustment based on the Consumer Price Index beginning on the first day of January of every year of the first option renewal term beginning in the year 2001. The adjusted rental will not exceed an 8% increase over the adjusted rental of the preceding year nor will the adjusted rental be less than the original base rent. Rent paid for the Downtown Napa Office was approximately $119,000 during 1996. In addition, the Bank pays utilities, insurance and maintenance relating to the branch. The Company purchased its Claremont branch building for $558,000 in cash, including fees, on September 6, 1989. The building, comprised of approximately 5,000 square feet, was remodeled so that it could be put into service as a full service banking branch. The cost of the remodeling, security systems and necessary furniture and equipment was approximately $600,000. This Office was remodeled again in 1995 in order to accommodate the Bank's Electronic Data Processing and Customer Service Departments. The cost of this remodel was approximately $50,000. The Company leases the Bank's approximately 2,400 square foot branch office located at 1015 Adams Street in downtown St. Helena, California. The lease term ends in 1998, with two options to extend the term of the lease for five years each. Rent paid for the St. Helena office was approximately $61,000 during 1996. In addition, the Bank pays utilities, insurance and maintenance relating to the branch. ITEM 3. LEGAL PROCEEDINGS. As of December 31, 1996, neither the Company, the Bank nor the Leasing Company was a party to, nor was any of their property the subject of, any material pending legal proceedings, nor are any such proceedings known to be contemplated by governmental authorities. At the same date, the Bank was involved as plaintiff in ordinary routine litigation incidental to its business. 31 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise. 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is not listed on any exchange or the National Association of Securities Dealers' Automated Quotation System; however, there has been limited trading in the Company's Common Stock which the company does not believe necessarily represents an established public trading market. To the Company's knowledge, no broker-dealers handle transactions of the Company's common stock. The following table sets forth, for the fiscal quarters indicated, the range of high and low sales prices, not including broker's commissions, based upon known information as reported by management. These figures may not include private transactions. Other than to this extent, there is no established public trading market in the Company's Common Stock.
SALES PRICES OF THE COMPANY'S COMMON STOCK TRADING YEAR HIGH LOW VOLUME 1996 Fourth Quarter $14.50 $14.50 100 Third Quarter 14.50 14.50 19,755 Second Quarter 14.50 14.50 250 First Quarter 10.00 10.00 450 1995 Fourth Quarter $ 9.00 $ 8.00 1,600 Third Quarter 9.00 8.00 600 Second Quarter 9.00 8.00 16,845 First Quarter 9.00 8.00 6,450
Because the Company's Common Stock is not listed on any exchange, accurate trading volumes are difficult to ascertain. All known trades for 1996 involved purchases by the Company's Employee Stock Ownership Trust ("ESOT"). The ESOT purchased 19,855 shares in 1996. The ESOT did not purchase any shares of common stock in 1995. As of February 28, 1997, the outstanding shares of the Company's Common Stock were held of record by 353 shareholders. The last known trade of the Company's Common Stock occurred on December 11, 1996, for 100 shares. Price per share was $14.50. 33 During the third quarter of 1996, the Company's ESOT sent out a tender offer to purchase up to 20,000 shares of the Company's Common Stock. The price of the offer was set at $14.50 per share. From this offer, the ESOT purchased 19,354 shares of the Company's outstanding Common Stock. During the first quarter of 1996, the Company declared and paid a cash dividend of twelve and a half cents ($0.125) per share on outstanding stock. The first quarter dividend was based on 1995 earnings and amounted to $94,000. During the beginning of the second quarter of 1996, the Company declared a second cash dividend of twelve and a half cents ($0.125) per share. This cash dividend was based on the first quarter earnings of 1996 and was also $94,000. During the third quarter of 1996, the Bank paid a $100,000 cash dividend to the Company. This dividend allowed the Company to declare and pay another cash dividend of twelve and a half cents ($0.125) per share for a total of $94,000. In the fourth quarter of 1996, the Bank paid another $100,000 cash dividend to the Company, allowing it to again declared and issue a twelve and a half cents ($0.125) per share dividend. This fourth quarter dividend was based on third quarter earnings and was paid to shareholders on January 3, 1997. Total dividends paid by the Bank to the Company and from the Company to its shareholders for 1996 amounted to $200,000 and $378,000 respectively. 34 ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial information for the Company presented below for the five years ended December 31, 1996 is derived from and should be read in conjunction with the consolidated financial statements of the Company and the notes thereto which are included in Item 14 of this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 (IN 000'S EXCEPT EARNINGS PER SHARE AND RATIOS) STATEMENT OF OPERATIONS Total interest income $9,173 $8,432 $6,226 $4,831 $4,734 Total interest expense 2,814 2,634 1,658 1,551 2,038 Provision for loan losses 550 323 149 198 207 Net interest income after provision for loan losses 5,809 5,475 4,419 3,082 2,489 Other income 806 800 627 594 554 Other expense 5,099 4,409 3,716 3,425 3,007 Income before income tax 1,516 1,866 1,330 251 36 Income tax provision (credit) 614 765 553 (249) 14 Extraordinary tax credit 0 0 0 0 (12) Net income 902 1,101 777 500 34 Net income/share 1.00 1.25 1.03 0.66 0.05 Cash Dividends Paid/share $ 0.50 $ 0 $ 0 $ 0 $ 0 Weighted Average Shares 906 882 755 755 755
BALANCE SHEET INFORMATION (AT PERIOD END):
Total assets $113,827 $104,851 $86,477 $77,241 $63,454 Net loans 78,290 73,374 62,103 54,259 45,990 Total deposits 105,417 96,752 79,378 71,463 58,243 Shareholders' equity 7,971 7,447 6,346 5,569 5,069 Book value per common share outstanding $ 8.67 $ 8.44 $ 8.41 $ 7.38 $ 6.71 SELECTED FINANCIAL RATIOS: Net interest margin 6.75% 6.98% 6.25% 5.38% 4.76% Allowance for loan losses to average loans 1.78% 1.93% 1.78% 1.80% 1.50% Nonperforming loans to average loans 4.41% 2.11% 1.63% 0.72% 2.06% Net charge-offs to average loans 0.60% 0.07% 0.02% 0.06% 0.31% Average earning assets to total average assets 92.15% 91.52% 92.00% 91.66% 90.28% Primary capital ratio (1) N/A N/A N/A N/A N/A Total capital ratio (1) N/A N/A N/A N/A N/A Return on average assets .94% 1.30% 1.05% 0.81% 0.06% Return on average shareholders' equity 11.61% 16.40% 14.02% 9.77% 0.70% Average equity to average assets ratio 7.46% 7.27% 6.87% 7.58% 7.77% Leverage Ratio (2) 7.11% 7.16% 7.28% 7.04% 7.60% Total Risk based capital ratio 10.47% 10.40% 10.33% 9.84% 10.77%
(1) As defined by regulatory guidelines. (2) Calculated based on the Bank's capital and average assets. 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following analysis of the Company's financial condition for the years ended December 31, 1996 and 1995 and results of operation for each of the three years in the period ended December 31, 1996, should be read in conjunction with the Consolidated Financial Statements, related Notes thereto and other information presented elsewhere herein. Since the Company is a bank holding company whose principal asset is, and is expected to be, the capital stock of the Bank, the following relates principally to the financial condition and results of operations of the Bank. The consolidated financial statements of the Company are prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. All material intercompany transactions and accounts have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Average balances, including such balances used in calculating certain financial ratios, are comprised of average daily balances. All dollar amounts are rounded, except earnings per share data. Certain statements in this Annual Report on Form 10-K include forward- looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in Napa County and the wine industry; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability matching risks and liquidity risks; and changes in the securities markets. See also "Certain Additional Business Risks" included in Item 1 herein and other risk factors discussed elsewhere in this Report. SUMMARY OF FINANCIAL RESULTS The Company recorded net income of $902,000, or $1.00 per share for the year ended December 31, 1996 compared to $1,101,000 or $1.25 per share, and $777,000 or $1.03 per share, for the year ended December 31, 1995 and 1994, respectively. 36 Net income declined in 1996 over 1995 by $199,000, or 18%. The primary reasons for this decline were due to an increase in the provision for loan losses of $227,000, or 70%, and increases in noninterest expenses of $690,000, or 16%. These increases were partially offset by an increase in net interest income of $561,000, or 10%, and decreases in taxes of $151,000, or 20%. The primary reasons for the improvement in operating results in 1995 as compared to 1994 are as follows: Net interest income increased by $1,230,000 or 27%. This growth was partially offset by an increase in the provision for loan losses of $174,000 or 116%. Total noninterest income increased by $173,000 or 28%. These improvements were also offset by an increase in total noninterest expense of $693,000 or 19%. Management is not aware of any trends, events or uncertainties that would have a material impact on the Company's liquidity, capital resources, or results of operations other than the early payoff of a purchased loan in January 1997 that resulted in a write off of $104,000 in unamortized premium. The loan was for commercial property in the Bank's service area that totalled approximately $1,752,000 at the time of payoff. NET INTEREST INCOME The Company's primary source of income is the difference between interest income and fees derived from earning assets and interest paid on liabilities incurred for the funding of those assets. This difference is referred to as "net interest income." Net interest income expressed as a percentage of average total earning assets is referred to as the "net interest margin" or "margin." For the period ended December 31, 1996, net interest income increased by $561,000, or 10%, over the same period of 1995. This number is a component of total interest income and total interest expense. The $11,085,000 increase in average earning assets in 1996 compared to 1995 contributed significantly to this increase in net interest income. Even though average earning assets increased significantly in 1996 over 1995, net interest income did not increase as dramatically due to a decline in the Bank's net interest margin from 6.98% for 1995 compared to 6.75% for 1996. Net interest income increased in 1995 by $1,230,000, or 27%, over 1994. Total interest income increased in 1995 by $2,206,000, or 35%, over 1994. This increase was offset by an increase in total interest expense of $976,000, or 59%. These results can be attributed to a number of factors, such as an increase in the net interest margin from 6.25% in 1994 to 6.98% in 1995 (based on period end earning assets). This rise in net interest margin was aided by increases in the prime interest rate during late 1994 and early 1995. Additionally, average earning assets increased by $10,056,000 or 14%, in 1995 over 1994 totals. As of December 31, 1996, total average earning assets were $94,205,000, an increase of $11,085,000, or 13%, from the 1995 level of $83,120,000. 37 PROVISION FOR LOAN LOSSES The provision for loan losses is based upon management's assessment of the amount that is necessary to maintain the allowance for loan losses at an adequate level. As further described in the "Allowance for Loan Losses" herein, management takes many factors into consideration when determining the provision including loan portfolio growth. The provision for loan losses was $550,000 at December 31, 1996 compared to $323,000 for 1995. This represents an increase of $227,000, or 70%, over the prior year. The increase in the provision was due to increases in both average loans and outstanding loan balances in 1996 over 1995 totals, projected loan growth, increases in non-performing loans, and management's ongoing assessment of the adequacy of the allowance for loan losses (See "Loans and Nonaccrual Loans" herein). During 1995, the provision for loan losses was $323,000 as compared to $149,000 for 1994. As of December 31, 1995, total net loans were $73,374,000 compared to $62,103,000 for the same period in 1994. This was an increase of $11,271,000, or 18% over the prior year. NONINTEREST INCOME Noninterest income consists primarily of service charges on deposit accounts, fees charged for other banking deposit and loan services, and merchant card processing income. Noninterest income remained relatively flat between 1996 and 1995, showing only a $6,000, or 1%, growth over the prior year. Service charges generated from deposit accounts continued to show growth due to both increases in the number of outstanding accounts and a continued emphasis on assessing service charges and other related fees. Additionally, the Bank's merchant card processing program continued to show gains in 1996 over earnings in 1995 Noninterest income increased in 1995 by $173,000, or 28%, over 1994 totals, primarily due to growth in deposit accounts and the related increase in service charge income, and a more aggressive policy of assessing service charges and other related fees. Additionally, the Bank's merchant card processing program was enhanced and expanded in early 1995 and showed a significant increase in earnings during 1995 over 1994 totals. NONINTEREST EXPENSE Total noninterest expense was $5,099,000 in 1996, representing an increase of $690,000, or 16%, over the 1995 total of $4,409,000. Total noninterest expense in 1995 was $693,000, or 19%, above 1994's total of $3,716,000. Net salaries and employee benefit expense was $2,722,000 in 1996, an increase of $461,000, or 20%, over 1995's total of $2,261,000. During 1996, the Bank grew by approximately five full time equivalent employees, two of which were senior officers. Additionally, salaries increased due to average bank-wide raises of approximately four percent which took place in March 1996. The Company did not accrue for incentive payouts in 1996 nor does it have plans on paying any bonuses for performance in said year. 38 Salaries and employee benefits were $2,261,000 in 1995, an increase of $297,000, or 15%, over 1994. This increase can be primarily attributed to an addition of approximately five full time equivalent employees during 1995. These staff increases were necessary to maintain an adequate service level given the overall growth within the company. Additionally, salaries also increased as a result of average bank-wide raises of five percent which took place in March 1995. Occupancy and furniture, fixtures and equipment expenses increased in 1996 by $107,000, or 14% over 1995 totals. This increase was due primarily to the Bank's branch/headquarters tenant improvements (see discussion below) and upgrades in electronic media throughout the Company. During April 1995, the Bank closed its original banking office located at 1500 Third Street, Napa, California and re-opened at 901 Main Street, Napa, California. At the end of June, the Bank relocated it primary lending services and headquarters into the completed facility. After relocation of the lending and administration staff from its previous location at 3263 Claremont Way, Napa, California, this facility began remodeling to accommodate the Bank's customer service and EDP departments. The remodeling of the Claremont facility was completed in July and these two departments were immediately relocated. With the completion of this move, the Bank was able to vacate the leased space which previously housed the Customer Service Center. At the end of the third quarter of 1995, the Bank had consolidated back into three locations, all offering full banking services. Occupancy and furniture, fixtures and equipment expenses for the twelve months ending December 31, 1995 increased by $164,000 or 27%, over the same period of 1994. These increases in costs were attributed primarily to the Bank's new branch/headquarters tenant improvements, and the costs of supporting its other locations. Professional fees increased in 1996 by $32,000, or 8%, over 1995 totals. This increase was due primarily to the additional use of outside consultants for both loan related legal reviews and audits and managerial issues. In 1995, professional and director fees increased by $241,000, or 137%, over 1994. This additional expense is primarily due to increases in consulting, legal and director fees. Beginning in January 1995, the Company approved a new director compensation plan which resulted in an increase of $63,000 over the prior year. Consulting fees increased in 1995 by $34,000, due to the outsourcing of a number of loan related reviews, audits and other similar procedures. The Company incurred additional legal expenses of $52,000 in 1995 over the same period of 1994. The competition for deposits and loans in the Company's service area warranted increased marketing and business development expenditures during 1996. Early in 1996, the Company hired an employee whose primary focus was marketing and sales support. This was done as a strategic move to enhance the Company's overall marketing materials and focus both within the branches and in the Company's service area. This focus resulted in an increase of $46,000, or 37%, in marketing expenses between 1996 and 1995. 39 The Company decreased its marketing and business development costs by $11,000, or 8%, during 1995 over the same period of 1994. This decrease was primarily due to the high profile marketing efforts incurred during the first quarter of 1995. Given the growth in loans and deposits resulting from these marketing efforts, management curtailed the Bank's marketing costs greatly during the remaining three quarters of 1995. Regulatory fees and related expenses decreased in 1996 by $70,000, or 34%, over the same period of 1995. The decrease was primarily due to changes in the annual Federal Deposit Insurance Corporation assessments that occurred in the latter half of 1995. This same change also contributed to the drop in expense in 1995 over 1994 totals. Stationery and supply expense for 1996 was $21,000, or 22%, higher than 1995. This increase was due to general growth in the Company and the enhanced marketing oriented materials used within the branches. In 1995, stationery and supply expense was $95,000, or 42%, higher than 1994. The increase in 1995 was due to significant one time expenses related to the numerous facility moves and relocations which incurred during 1995. Data processing expenses have shown a steady increase during the three years presented and have been in keeping with the overall growth of the Company. Additionally, the $16,000, or 15%, growth in 1996 over 1995 was also due to enhancements and upgrades made to the Company's personal computers. Other noninterest expense increased by $77,000, or 19%, in 1996 over 1995 totals. The increase was due primarily to increase in miscellaneous loan expenses and staff training and development. The increase between 1995 and 1994 was in keeping with the general growth of the Company. INCOME TAXES Income tax expense was 41% and 42% of pre-tax income for the years ending December 31, 1996 and 1995, respectively. EARNING ASSETS Total earning assets consist of investment securities, loans, federal funds sold and interest bearing deposits held in other institutions. Total earning assets increased from $95,267,000 at December 31, 1995 to $102,680,000 at December 31, 1996, an increase of $7,413,000, or 8%. LOANS AND NONACCRUAL LOANS Total loans, excluding the allowance for loan losses (see Notes 1 and 4 to the Consolidated Financial Statements included herein at Item 14, for further discussion of the allowance for loan losses), increased from $74,699,000 at December 31, 1995 to $79,695,000 at December 31, 1996. The increase of $4,996,000 represents a 7% increase in outstanding loans during 1996. The Bank experienced increases in all of its loan categories except for a slight decline in personal line of credit loans during the year under review. Management attributes these increases to more seasoned staff, both loan and deposit officers, which assisted with new loan generation and changes taking place in the Company's service area. 40 General economic and credit risks are inherent in the lending function and within particular types of lending categories. The Bank primarily makes four types of loans: Real estate construction, real estate mortgage, commercial and consumer loans. As discussed in "Item 1. Business - Loan Portfolio" herein, the Bank generally takes a collateralized position, with reasonable loan to value ratios on its loans (over 90% of the Bank's loan portfolio is collateralized). The primary source of collateral is real estate located within the Company's service area. An inherent risk in taking real estate as collateral is the possibility of declines in real estate market values. The Company's service area is Napa Valley, which is located approximately fifty miles northeast of the San Francisco Bay Area. Napa Valley is a very unique, and rather isolated area that has been able to sustain higher than average real estate market values. Approximately four years ago, given the economic trends and possibility of declining market values, the Company took a more conservative approach on its collateral base and began lowering its loan to value ratios on new loans. Even though the Company's loan portfolio is heavily secured by California real estate, management does not presently foresee any material impact on the Company's operations, given the low loan to value ratios. As of December 31, 1996, nonperforming loans were $3,152,000, an increase of $1,705,000, or 118%, over the December 31, 1995 balance of $1,447,000. Nonperforming loans at December 31, 1996 represent 4.0% of total average loans compared to 2.1% of total average loans for year end 1995. The growth in nonperforming loans between 1996 and 1995 is primarily due to a rise in bankruptcies in 1996 compared to 1995, and to the general growth in outstanding loan balances. The increase in nonperforming loans, in management's opinion, does not represent a material trend. As discussed in "Item 1 - Business, Loan Portfolio", in early 1997, the Company's service area was subjected to severe weather conditions that resulted in some flooding. Management believes that this flooding will not have a direct or material impact on either its existing loan portfolio or future growth. 41 On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure". These statements address the accounting and reporting by creditors for impairment of certain loans. A loan is impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. These statements are applicable to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment such as credit cards, residential mortgage and consumer installment loans, loans that are measured at fair value or at the lower of cost or fair value and leases. Impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are measured for impairment as part of the Company's normal internal asset review process. Interest income is recognized on impaired loans in a manner similar to that of all loans. It is the Company's policy to place loans that are delinquent 90 days or more as to principal or interest on a nonaccrual of interest basis unless secured and in the process of collection, and to reverse from current income accrued but uncollected interest. Cash payments subsequently received on nonaccrual loans are recognized as income only where the future collection of principal is considered by management to be probable. At December 31, 1996, the Company's total recorded investment in impaired loans was $3,152,000, of which there is a related allowance for credit losses of $204,000. The average recorded investment in the impaired loans during 1996 was $2,123,000: the related amount of interest income recognized during the period that such loans were impaired recognized under the cash basis method of accounting was $44,000. Loans currently classified as special mention, substandard, doubtful or loss (See Item 1, "Business" herein) do not, in management's view, represent or result from trends or uncertainties which may have a material adverse effect on the entire loan portfolio, liquidity or capital resources. ALLOWANCE FOR LOAN LOSSES Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made and the credit - worthiness of the borrower over the term of the loan. The Company maintains an allowance for possible loan losses at a level estimated to be adequate to provide for losses that can be reasonably anticipated based upon specific loan conditions as determined by management, and based upon management's assessment of historical loan loss experience, prevailing economic conditions and other factors including growth of the loan portfolio. While these factors are essentially judgmental and may not be reduced to a mathematical formula, it is management's view that the $1,405,000 allowance, approximately 1.76% of total loans outstanding at December 31, 1996, was adequate as an allowance against foreseeable losses in the portfolio at that time. The allowance was 1.77% of the loan portfolio at 42 December 31, 1995. The allowance is increased by charges to the provision for loan losses and reduced by net charge-offs. OTHER REAL ESTATE OWNED At December 31, 1996 and December 31, 1995, total other real estate owned was $328,000 and $0, respectively, which at December 31, 1996 consisted of two separate properties. DEPOSITS Deposits totaled $105,417,000 at December 31, 1996, an increase of $8,665,000, or 9%, from the December 31, 1995 balance of $96,752,000. In 1996, noninterest bearing transaction accounts grew by $6,660,000, or 35%, savings accounts decreased by $340,000, or 3%, and interest bearing transaction accounts grew $1,257,000, or 4%, over 1995 totals. Time certificates of deposit of $100,000 or more increased by $1,293,000, or 14%, and other time deposits decreased by $205,000, or 1%, during 1996. The overall growth in deposit accounts in 1996 was primarily due to a comprehensive marketing effort on the part of the Bank's staff and management, the introduction of new and enhanced deposit products and increases in deposit officers. Non-interest bearing demand deposits were 24% of total deposits at December 31, 1996, as compared to 20% at December 31, 1995. Time certificates of deposit were 36% of total deposits at December 31, 1996, and 39% for the same period of 1995. NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which establishes financial and reporting standards for stock-based compensation plans. The Company elected to continue accounting for stock-based employee compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, as SFAS 123 permits, and to follow the pro forma net income, pro forma earnings per share and stock-based compensation plan disclosure requirements set forth in SFAS 123. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The financial statement impact of adopting SFAS No. 121 has not been material. 43 ASSET-LIABILITY MANAGEMENT Asset-liability management is a process whereby the Bank, through its Asset and Liability Committee, monitors the maturities and repricing opportunities of the various components of the balance sheet and initiates strategies designed to maximize the net interest margin, while minimizing vulnerability to large fluctuations in interest rates. The Bank is currently moving towards a policy of maintaining a relative balance of asset and liability maturities within similar time frames, while permitting a moderate amount of short-term interest rate risk based on current interest rate projections, customers' credit demands and deposit preferences. At December 31, 1996, the Company's assets repricing in one year exceeded its liabilities repricing in one year by $21,612,000, or 19%, of total assets. This compares to $15,348,000, or 15% of total assets in 1995. The excess of assets repricing over liabilities repricing means that if interest rates decline, the Company's return on assets would be expected to decline more quickly than its cost of funds, thereby reducing the Company's net interest margin. However, as interest rates increase, the Company's return on assets would be expected to increase more quickly than its cost of funds. The following table represents the interest rate sensitivity profile of the Company's consolidated assets, liabilities and shareholders' equity as of December 31, 1996. Assets, liabilities and shareholders' equity are classified by the earliest possible repricing opportunity or maturity date, whichever first occurs. Assumptions used in constructing the table include the following: The loans that are in the "Interest Rate Sensitivity Over One Year But Within 5 Years" and "Nonrate Sensitive or Over 5 Years" columns are all fixed-rate loans and therefore mature in those time frames. The Bank's certificates of deposits are substantially all fixed-rate, therefore they are in the columns which represent the time frames in which they mature. All other interest-bearing accounts reprice overnight and are therefore in the "Interest Rate Sensitivity 0-90 Days" column. Included in noninterest bearing liabilities is $25,728,000 in demand deposit accounts. 44
INTEREST RATE SENSITIVITY NON-RATE 0-90 91-180 181-365 OVER 1 YEAR SENSITIVE DAYS DAYS DAYS BUT WITHIN OR OVER (0-3 MO) (3-6 MO) (6-12 MO) 5 YRS 5 YRS TOTAL ASSETS Time deposits-other financial institutions $ 594 $ 891 $ 2,673 $ $ $ 4,158 Federal funds sold 16,550 16,550 Investments 973 750 554 2,277 Loans 59,847 6,319 7,621 5,589 319 79,695 Noninterest-earning assets net of loan loss reserve 11,147 11,147 TOTAL ASSETS $77,964 $ 7,210 $11,044 $ 5,589 $ 12,020 $113,827 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits: Time deposits over $100,000 $ 5,373 $ 3,138 $ 1,000 $ 1,231 $ $ 10,742 All other interest-bearing deposits 51,097 9,239 4,759 3,821 31 68,947 Total interest-bearing deposits 56,470 12,377 5,759 5,052 31 79,689 Noninterest-bearing liabilities 26,167 26,167 Shareholders' equity 7,971 7,971 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $56,470 $12,377 $ 5,759 $ 5,052 $ 34,169 $113,827 INTEREST RATE SENSITIVITY GAP (1) $21,494 $(5,167) $ 5,285 $ 537 $(22,149) CUMULATIVE INTEREST RATE SENSITIVITY GAP $21,494 $16,327 $21,612 $22,149
- -------------------- 1 Interest rate sensitivity gap is the difference between interest rate sensitive assets and interest rate liabilities within the above time frames. 45 LIQUIDITY Liquidity refers to the Company's ability to maintain cash flow adequate to fund operations and meet obligations and other commitments on a timely basis. Management strives to maintain a level of liquidity sufficient to meet customer requirements for loan funding and deposit withdrawals. Liquidity requirements are evaluated by taking into consideration factors such as deposit concentrations, seasonality and maturities, loan demand, capital expenditures, and prevailing and anticipated economic conditions. As shown in the Consolidated Statements of Cash Flows ("Statement") for the years ended December 31, 1996, 1995 and 1994, the Company's usual and primary source of funds has been customer deposits and cash flow generated from operating activities. While the usual and primary sources are expected to continue to provide significant amounts of funds in the future, their mix, as well as those from other sources, will depend on future economic and other market conditions. In 1996, the Statement shows that operations and financing activities were sources of net cash inflows ($510,000 and $8,287,000, respectively) for the year. These sources were significant enough to increase the overall ending cash and cash equivalents from $21,886,000 at December 31, 1995 to $24,479,000 at December 31, 1996, an increase of $2,593,000. In 1995, the Statement shows that operations and financing activities were also sources of net cash inflows ($1,000,000 and $17,374,000, respectively) for the year. These sources increased ending cash and cash equivalents by $5,667,000, taking the total from $16,219,000 at December 31, 1994 to $21,886,000 at the end of 1995. In 1994, the Statement shows that operations and financing activities were sources of net cash inflow ($1,247,000 and $7,915,000 respectively) for the year. These sources were the primary reason for the small decrease in ending cash and cash equivalents from $17,284,000 at December 31, 1993 to $16,219,000 at the end of 1994. Liquidity is measure by various ratios, the most common being the liquidity ratio of cash less reserves, time deposits with other financial institutions, federal funds sold, and unpledged investment securities compared to total deposits. This ratio was 26% at both December 31, 1996 and December 31, 1995. Parent Company liquidity is maintained by cash flows stemming primarily from dividends from the bank. The amount of dividends from the Bank is subject to certain regulatory restrictions as discussed in Note 12 of the Notes to Consolidated Financial Statements. The Parent Company financial statements are presented in Note 16 of the Notes to Consolidated Financial Statements. CAPITAL ADEQUACY The Federal Reserve Bank and the Comptroller of the Currency have specified guidelines for the purpose of evaluating the capital adequacy of bank holding companies and banks. The table below summarizes the current requirements for 1996 and the Company's and the Bank's compliance therewith. 46
MINIMUM TIER 1 RISK TOTAL RISK LEVERAGE BASED CAPITAL BASED CAPITAL RATIO RATIO RATIO Regulatory Requirements for 1996 4.00% 4.00% 8.00% Consolidated Company Ratio at December 31, 1996 7.21% 9.34% 10.99% Bank Ratio at December 31, 1996 7.11% 9.22% 10.47%
The capital levels of both the Bank and the Company at December 31, 1996 currently exceed the regulatory requirements for a "well capitalized" institution. Management anticipates that both the Company and the Bank will continue to exceed the regulatory minimums in the foreseeable future. Therefore, the Company and the Bank have adequate capital in order to expand in the future, either through loan generation or other means of expansion. As of the date of this report, management is not aware of any trends, events or uncertainties that will have, or are reasonable likely to have a material effect on the Company's liquidity, capital resources, or results of operations. Additionally, the Company is subject to no current recommendations by any regulatory authorities which, if implemented, would have such an effect. EFFECTS OF INFLATION The impact of inflation on a financial institution differs significantly from that exerted on an industrial concern, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation is higher interest rates. However, the Bank's earnings are affected by the spread between the yield on earning assets and rates paid on interest- bearing liabilities rather than the absolute level of interest rates. Additionally, there may be some upward pressure on the Company's operating expenses, such as adjustments in staff expense and occupancy expense, based upon consumer price indices. In the opinion of management, inflation has not had a material effect on the consolidated results of operations for the last three years. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated Balance Sheets as of December 31, 1996 and 1995, and Consolidated Statements of Income, Statements of Shareholders' Equity and Statements of Cash Flows for each of the three years in the period ended December 31, 1996 are incorporated herein by reference to Item 14. 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In September 1996, the Company retained Ernst & Young LLP to be the Company's auditors for the current year ending December 31, 1996. The Company's prior auditing firm was Deloitte & Touche LLP. Deloitte & Touche LLP had audited the Company's financial statements for the years ended December 31, 1988 through December 31, 1995. Deloitte & Touche LLP were dismissed in September 1996. The Company had no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedures. The accountant's reports on financial statements for the past eight years did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. Registrant hereby incorporates by reference herein its report on Form 8-K filed on September 26, 1996 and amended on October 23, 1996. 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. As permitted by General Instruction G(3) to Form 10-K, the information called for by this Item is incorporated by reference from the section of the Registrant's 1997 definitive proxy statement entitled "Election of Directors," which proxy statement will be filed no later than April 30, 1997. ITEM 11. EXECUTIVE COMPENSATION. As permitted by General Instruction G(3) to Form 10-K, the information called for by this Item is incorporated by reference from the section of the Registrant's 1997 definitive proxy statement entitled "Remuneration and Other Information With Respect to Officers and Directors," which proxy statement will be filed no later than April 30, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As permitted by General Instruction G(3) to Form 10-K, the information called for by this Item is incorporated by reference from the section of the Registrant's 1997 definitive proxy statement entitled "Security Ownership of Certain Beneficial Owners and Management," which proxy statement will be filed no later than April 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. As permitted by General Instruction G(3) to Form 10-K, the information called for by this Item is incorporated by reference form the section of the Registrant's 1997 definitive proxy statement entitled "Certain Relationships and Related Transactions," which proxy statement will be filed no later than April 30, 1997. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. Reference Selected Financial Data Independent Auditors' Report Consolidated Financial Statements of Napa National Bancorp and Subsidiaries: - Consolidated Balance Sheets as of December 31, 1996 and 1995 - Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 - Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 - Notes to Consolidated Financial Statements 2. Financial Statement Schedules. In accordance with the rules of Regulation S-X, schedules are not submitted because (a) they are not applicable to or required of the Company, or (b) the information required to be set forth therein is included in the financial statements or footnotes thereto. 3. Exhibits. See Index to Exhibits to this Form 10-K, for a list of the exhibits filed as a part of this report and incorporated herein by reference. (b) Reports on Form 8-K. During the fourth quarter of 1996, the Company filed an amended report on Form 8-K dated October 23, 1996, referred to in greater detail in Item 9 of this report titled "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure". 50 [LETTERHEAD OF ERNST & YOUNG LLP] Report of Independent Auditors To the Shareholders and Board of Directors of Napa National Bancorp We have audited the accompanying consolidated balance sheet of Napa National Bancorp and subsidiaries as of December 31, 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Napa National Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Napa National Bancorp for the years ended December 31, 1995 and 1994, were audited by other auditors whose report dated March 22, 1996, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1996 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Napa National Bancorp and subsidiaries at December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP February 14, 1997 51 [LETTERHEAD OF DELOITTE & TOUCHE LLP] INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Napa National Bancorp: We have audited the accompanying consolidated balance sheet of Napa National Bancorp and subsidiaries (the "Company") as of December 31, 1995, and the related consolidated statements of income, shareholder's equity and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Napa National Bancorp and subsidiaries at December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP March 22, 1996 52 Napa National Bancorp and Subsidiaries Consolidated Balance Sheets
DECEMBER 31 1996 1995 ---------------------- (Dollars In Thousands) ASSETS Cash and due from banks $ 7,929 $ 7,106 Federal funds sold 16,550 14,780 Interest-bearing time deposits - other financial institutions 4,158 4,356 Securities held to maturity (market value: 1996 - $2,304; 1995 - $1,447) 2,277 1,432 Loans: Commercial 52,789 48,407 Real estate Construction 8,706 7,850 Real Estate Mortgage 4,918 4,729 Installment 4,216 3,376 Personal lines of credit and other 9,066 10,337 ------------------------- Total loans 79,695 74,699 Less allowance for loan losses (1,405) (1,325) ------------------------- Loans - net 78,290 73,374 ------------------------- Premises and equipment, net 2,519 2,489 Accrued interest receivable 647 666 Other assets 1,457 648 ------------------------- Total assets $113,827 $104,851 ========================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing demand $ 25,728 $ 19,068 Interest-bearing: Savings 11,965 12,305 Transaction 29,317 28,060 Time, $100 and over 10,742 9,449 Other time 27,665 27,870 ------------------------- Total deposits 105,417 96,752 Accrued interest payable 378 528 Other liabilities 61 124 ------------------------- Total liabilities 105,856 97,404 ------------------------- Shareholders' equity: Preferred stock, no par value: authorized, 1,000,000 shares, no shares outstanding - - Common stock, no par value: authorized, 20,000,000 shares, 754,500 shares issued and outstanding 6,915 6,915 Retained earnings 1,056 532 ------------------------- Total shareholders' equity 7,971 7,447 ------------------------- Total liabilities and shareholders' equity $113,827 $104,851 =========================
See accompanying notes 53 Napa National Bancorp and Subsidiaries Consolidated Statements of Income
YEARS ENDED DECEMBER 31 1996 1995 1994 ------------------------------------------------------------ (Dollars In Thousands, Except Share and Per Share Amounts) Interest income: Loans (including fees) $ 8,277 $ 7,515 $ 5,619 Federal funds sold 547 583 412 Time deposits with other 230 251 148 financial institutions Investment securities and Federal Reserve Bank stock 119 83 47 ------------------------------------------------------------ Total interest income 9,173 8,432 6,226 ------------------------------------------------------------ Interest expense: Deposits: Savings 275 292 323 Transaction 563 517 470 Time, $100 and over 519 392 237 Other time 1,457 1,433 628 ------------------------------------------------------------ Total interest expense 2,814 2,634 1,658 ------------------------------------------------------------ Net interest income 6,359 5,798 4,568 Provision for loan losses 550 323 149 ------------------------------------------------------------ Net interest income after 5,809 5,475 4,419 provision for loan losses ------------------------------------------------------------ Noninterest income: Service charges on deposit accounts 509 469 382 Other customer fees and charges 207 250 228 Other 90 81 17 ------------------------------------------------------------ Total noninterest income 806 800 627 ------------------------------------------------------------ Noninterest expense: Salaries and employee benefit 2,722 2,261 1,964 Occupancy 453 402 277 Professional fees 449 417 176 Equipment 436 380 341 Marketing and business development 170 124 135 Regulatory fees and related expenses 138 208 277 Stationery and supplies 116 95 67 Data processing 124 108 99 Other 491 414 380 ------------------------------------------------------------ Total noninterest expense 5,099 4,409 3,716 ------------------------------------------------------------ Income before provision for income taxes 1,516 1,866 1,330 Income taxes 614 765 553 ------------------------------------------------------------ Net income $ 902 $ 1,101 $ 777 ============================================================ Net income per common share $1.00 $1.25 $1.03 ============================================================ Weighted average number of shares outstanding during the year 906,050 882,300 754,500 ============================================================
See accompanying notes. 54 Napa National Bancorp and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1996, 1995 and 1994
Retained Number of Earnings Shares Common (Accumulated Outstanding Stock Deficit) Total ---------------------------------------------- (Dollars in Thousands) Balance, January 1, 1994 754,500 $6,915 $(1,346) $5,569 Net income 777 777 ---------------------------------------------- Balance, December 31, 1994 754,500 6,915 (569) 6,346 Net income - - 1,101 1,101 ---------------------------------------------- Balance, December 31, 1995 754,500 6,915 532 7,447 Cash dividends paid ($.50 per share) - - (378) (378) Net income - - 902 902 ---------------------------------------------- Balance, December 31, 1996 754,500 $6,915 $ 1,056 $7,971 ==============================================
See accompanying notes. 55 Napa National Bancorp and Subsidiaries Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31 1996 1995 1994 -------------------------------- (Dollars in Thousands) OPERATING ACTIVITIES Net income $ 902 $ 1,101 $ 777 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization on premises and equipment 437 325 273 Amortization of deferred loan fees and premiums on investment securities (376) (304) (241) Provision for loan losses 550 323 149 Deferred income taxes (31) (160) (114) Loss on sale of fixed assets - 2 - (Increase) decrease in accrued interest 19 (234) (134) receivable (Increase) decrease in other assets (778) 48 (7) (Decrease) increase in accrued interest payable and other liabilities (213) (101) 544 -------------------------------- Net cash provided by operating activities 510 1,000 1,247 INVESTING ACTIVITIES Loan originations, net of repayments (5,090) (11,298) (7,752) Net decrease (increase) in time deposits with other financial institutions 198 1 (2,278) Activity in securities held to maturity: Purchases (2,696) (487) (1,214) Maturities 2,207 475 500 Purchase of FRB and FHLB stock (356) (32) (19) Proceeds from sales of other real - - 612 estate owned Purchase of premises and equipment (467) (1,366) (76) -------------------------------- Net cash used by investing activities (6,204) (12,707) (10,227) FINANCING ACTIVITIES Net increase in deposits 8,665 17,374 7,915 Cash dividends paid to shareholders (378) - - -------------------------------- Net cash provided by financing activities 8,287 17,374 7,915 Increase (decrease) in cash and cash 2,593 5,667 (1,065) equivalents Cash and cash equivalents, beginning of year 21,886 16,219 17,284 -------------------------------- Cash and cash equivalents, end of year $24,479 $ 21,886 $ 16,219 ================================ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 2,965 $ 2,241 $ 1,630 ================================ Income taxes paid (net of refunds received) $ 1,020 $ 1,472 $ 89 ================================
See accompanying notes. 56 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996 (Dollars in Thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Napa National Bancorp is a bank holding company whose primary investment is Napa National Bank (the "Bank"). Napa National Bancorp's only other investment is in a wholly owned inactive leasing subsidiary. The Bank is a full service community commercial bank with three offices in the Napa Valley area in Northern California. The Bank's primary source of revenue is from providing loans to customers, who are predominantly individuals, professionals and small to medium sized businesses. PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The consolidated financial statements of Napa National Bancorp and subsidiaries (the "Company") are prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. All material intercompany transactions and accounts have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds sold are sold for one business day. INVESTMENT SECURITIES Held-to-maturity securities are those securities which management has the ability and intent to hold to maturity. These securities are stated at cost, adjusted for amortization of premiums and accretions of discounts to maturity using methods approximating the interest method. All of the Bank's investment securities are classified as held-to-maturity. 57 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOANS Loans are stated at the principal amount outstanding and net of any deferred loan origination fees or costs. Interest income on loans is accrued daily on a simple interest basis. The Bank places an asset on nonaccrual status when any installment of principal or interest is 90 days past due, unless well secured and in the process of collection, or when management determines that ultimate collection of principal or interest on a loan is unlikely. When a loan is placed on nonaccrual, all previously accrued but uncollected interest is reversed. Cash payments subsequently received on nonaccrual loans are recognized as income only where the collection of principal is considered by management as probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is a reserve established through a provision for loan losses which is charged to expense. Losses are charged against the allowance when management believes that the collectibility of the principal is unlikely. The allowance is maintained at an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of their collectibility and the Bank's prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrowers' ability to repay. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan," as amended. Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS 114 excludes large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. The Company has defined one to four family loans and consumer loans as homogeneous loans. All homogeneous loans that are 90 days or more delinquent or are in foreclosure are automatically placed on nonperforming status. The adoption of SFAS 114 did not have a material effect on the Company's financial condition or results of operations 58 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are computed using the straight-line method over the shorter of estimated useful lives of the related assets (which are generally three to twenty years) or the lease terms. Maintenance and repair costs are expensed as incurred, whereas expenditures that improve or extend the service lives of assets are capitalized. OTHER REAL ESTATE OWNED Other real estate owned ("OREO"), which is recorded in other assets, includes properties acquired through foreclosure or in full or partial satisfaction of the related loan. OREO also includes loans where the Bank has obtained physical possession of the related collateral. OREO is carried at the lower of fair value, net of estimated selling and disposal costs, or cost. Fair value adjustments are made at the time that real estate is acquired through foreclosure or when full or partial satisfaction of the related loan is received. These fair value adjustments are treated as loan losses. INCOME TAXES The Company accounts for income taxes under the asset and liability method. Deferred taxes arise from the effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and from the effect of operating loss carryforwards on taxes payable in future years based on currently enacted tax law. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. 59 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based compensation plans. The Company elected to continue accounting for stock-based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued To Employees" and related interpretations, as SFAS 123 permits, and to follow the pro forma net income, pro forma earnings per share and stock-based compensation plan disclosure requirements set forth in SFAS 123. NET INCOME PER COMMON SHARE Net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive stock options outstanding during the year. RECLASSIFICATION Certain amounts in prior periods have been reclassified to conform to the 1996 presentation. 2. CASH AND DUE FROM BANKS The Bank is required to maintain reserves with the Federal Reserve Bank. The average reserves required for 1996 and 1995 were $952 and $703, respectively. 60 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 3. SECURITIES HELD TO MATURITY The amortized cost and fair value of investment securities held to maturity as of December 31, 1996 and 1995, are summarized as follows:
December 31, 1996 Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------- Securities of U.S. Government agencies $1,723 $ 27 $ - $1,750 Federal Reserve Bank stock 232 - - 232 Federal Home Loan Bank stock 322 - - 322 --------------------------------------------- Total $2,277 $ 27 $ - $2,304 ============================================= December 31, 1995 Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------- Securities of U.S. Government agencies $1,235 $ 15 $ - $1,250 Federal Reserve Bank stock 197 - - 197 -------------------------------------------- Total $1,432 $ 15 $ - $1,447 =============================================
Total securities pledged under state regulation to secure deposits amounted to $1,723 and $1,235 at December 31, 1996 and 1995, respectively. The maturities of securities of U.S. Government agencies at December 31, 1996 are due within one year. There were no sales of investment securities in 1996, 1995 and 1994. 61 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 4. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are presented net of unearned income of $374 and $296 at December 31, 1996 and 1995, respectively. Nonaccrual loans past due 90 days or more as of December 31, 1996 and 1995, were approximately $3,152 and $1,447 respectively. The effect on interest income, had these loans been performing in accordance with contractual terms as of December 31, 1996 and 1995, would have been an increase of approximately $188 and $291, respectively. At December 31, 1996, the Company had approximately $3,152 of loans considered to be impaired in accordance with SFAS 114. These loans were evaluated for impairment primarily using the collateral method and required an allowance for credit losses measured in accordance with SFAS 114 of $204 . Average impaired loans during the year ended December 31, 1995 amounted to approximately $2,123. Related interest income recognized on impaired loans during the year ended December 31, 1996 was approximately $44. The activity in the allowance for loan losses for the years ended December 31, 1996, 1995 and 1994 is summarized as follows (in thousands):
1996 1995 1994 ----------------------------- Balance, beginning of year $1,325 $1,050 $ 912 Provision for loan losses 550 323 149 Loans charged off (544) (51) (12) Recoveries 74 3 1 ----------------------------- Balance, end of year $1,405 $1,325 $1,050 =============================
At December 31, 1996 and 1995, the Bank was servicing loans for the Federal Home Loan Mortgage Corporation with unpaid principal balances of $23,020 and $22,508, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and conducting foreclosures proceedings. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. Income from loan servicing amounted to $62, $51 and $60 for the years ended December 31, 1996, 1995 and 1994, respectively. 62 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 5. PREMISES AND EQUIPMENT Premises and equipment as of December 31, 1996 and 1995 consisted of the following:
1996 1995 ------------------- Equipment $ 1,674 $ 1,485 Bank premises 941 941 Furniture and fixtures 576 530 Leasehold improvements 1,155 923 Automobiles 39 39 ------------------- Total 4,385 3,918 Less accumulated depreciation and (1,866) (1,429) amortization ------------------- Total $ 2,519 $ 2,489 ===================
Depreciation and amortization of $437, $325 and $273 was charged to expense for the years ended December 31, 1996, 1995 and 1994, respectively. The Company and Bank relocated its head office in 1995, which resulted in the retirement of $341 in fully depreciated assets during that year. 6. DEPOSITS The aggregate amount of time deposit accounts exceeding $100,000 was $10,742 and $9,449 at December 31, 1996 and 1995, respectively. At December 31, 1996, the scheduled maturities for all time deposits is as follows:
1997 $33,323 1998 4,882 1999 100 2000 102 2001 - Thereafter - ---------- $38,407 ==========
63 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 7. INCOME TAXES The provision for income taxes for the years ended December 31, 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994 ----------------------- Current: Federal $ 471 $ 667 $ 486 State 174 258 181 ----------------------- Total 645 925 667 ----------------------- Deferred: Federal (26) (126) (75) State (5) (34) (39) ----------------------- Total deferred (31) (160) (114) ----------------------- Provision for income taxes $ 614 $ 765 $ 553 =======================
The temporary differences and tax carryforwards which created deferred tax assets and liabilities are detailed below:
DECEMBER 31 1996 1995 1994 ----------------------- Deferred tax assets: Reserves not currently deductible $ 546 $ 545 $ 412 Losses not currently deductible 227 227 227 State taxes - 21 3 Deferred loan fees 36 18 33 Other 14 9 6 ----------------------- Gross deferred tax assets 823 820 681 Valuation allowance (170) (170) (170) ----------------------- Deferred tax assets 653 650 511 ----------------------- Deferred tax liabilities: Accrual to cash - - (15) Tax over book depreciation (13) (43) (49) State taxes (10) - - ----------------------- Gross deferred tax liabilities (23) (43) (64) ----------------------- Net deferred tax asset included in other assets $ 630 $ 607 $ 447 =======================
64 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 7. INCOME TAXES (CONTINUED) Deferred tax assets are recognized to the extent that their realization is more likely than not. As of December 31, 1996, 1995 and 1994, the Bank was unable to conclude that the realization of the Company's deferred tax asset was more likely than not. Accordingly, a valuation allowance has been reflected at December 31, 1996, 1995 and 1994 to reduce the Bank's deferred tax assets to the amount likely to be realized. The difference between the statutory federal income tax rate and the Company's effective tax rate, expressed as a percentage of income before income taxes, is as follows:
1996 1995 1994 -------------------- Federal statutory income 34% 34% 35% tax rate State franchise tax, less federal income tax effect 7 8 7 -------------------- Effective income tax rate 41% 42% 42% ====================
8. TRANSACTIONS WITH RELATED PARTIES The Company has had, and expects to have in the future, banking transactions, primarily loans, in the ordinary course of business with directors, executive officers and their associates. In accordance with Company policy, loans to related parties are granted on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with others, and do not involve more than the normal risk of collectibility. Loans to related parties for the years ended December 31, 1996 and 1995, are as follows:
1996 1995 ----------------- Balance at beginning of year $ 1,135 $ 1,295 Additions 2,858 1,493 Payments (1,746) (1,653) Other (89) - ----------------- Balance at end of year $ 2,158 $ 1,135 =================
65 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED) The Company also had commitments to extend credit to related parties of $337 at December 31, 1996. Other activity in the table above represents loans to directors or officers who left the Company during the year and are, therefore, not considered related parties for purposes of this disclosure. At December 31, 1996 and 1995, an affiliated company of a member of the Board of Directors had $779 and $445 (0.7% and 0.5% of total deposits), respectively, deposited with the Company. These deposits were on the same terms as those prevailing at the same time for comparable transactions with others. 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. At December 31, 1996, financial instruments whose contract amounts represent credit risk were as follows:
1996 1995 -------------------- Commitments to extend credit $20,467 $18,168 Standby letters of credit 865 646 -------------------- $21,332 $18,814 ====================
66 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral required varies but may include accounts receivable, inventory, property, plant and equipment, real estate and income producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customer. At December 31, 1996, all standby letters of credit were secured by normal business assets in accordance with the Company's standard lending practices. 10. CONCENTRATION OF CREDIT RISK The Company grants residential, commercial, construction, agricultural and consumer loans to customers principally located in Napa County, California. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions of the wine industry. At December 31, 1996, the Company's loans to companies in the wine industry were $10,933 with commitments to lend an additional $4,670. The Company requires that loan customers meet the collateral requirements described in Note 9 for commitments to extend credit. As of December 31, 1996 and 1995, the Company's real estate loans were collateralized primarily with real estate located in the Napa Valley area. As such, the ultimate collectibility of a substantial portion of the Company's loan portfolio is influenced by the overall condition of the Northern California real estate market. 67 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 11. COMMITMENTS AND CONTINGENCIES The Company and the Bank lease a portion of their banking and office facilities under noncancelable operating leases. Total minimum future rental payments under these operating leases at December 31, 1996, are as follows:
1997 $180 1998 154 1999 109 ---- Total $443 ====
Rental expense was $194, $201 and $155 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company is involved in various legal actions arising from normal business activities. Management believes that the ultimate resolution of these actions will not have a material effect on the consolidated financial statements. 12. RESTRICTIONS ON RETAINED EARNINGS Under the U.S. National Bank Act and other federal laws, the Bank is subject to prohibitions on the payment of dividends in certain circumstances and to restrictions on the amount that it can pay without prior approval of the Office of the Comptroller of the Currency. Without the Comptroller's approval, dividends for a given year cannot exceed the Bank's retained net income for that year and retained net profits from the preceding two years. In addition, dividends may not be paid in excess of the Bank's undivided profits, subject to other applicable provisions of law. Based upon these restrictions, the Bank could have declared dividends for 1996 of $2,609 without prior regulatory approval. 68 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 13. REGULATORY MATTERS Napa National Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the their financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Napa National Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of the thier assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require that minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined) be maintained. Management believes, as of December 31, 1996, that Napa National Bancorp and the Bank meet all capital adequacy requirements. As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency categorized both Napa National Bancorp and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized minimum total risk-based, Tier I risk- based, and Tier I leverage ratios as set forth in the table below must be maintained. There are no conditions or events since that notification that management believes have changed the institution's category. 69 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 13. REGULATORY MATTERS (CONTINUED) Napa National Bancorp and the Bank's actual capital amounts and ratios are presented in the following tables:
DECEMBER 31, 1996 MINIMUM MINIMUM WELL-CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT ---------------------------------------------------- CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO ---------------------------------------------------- NAPA NATIONAL BANCORP: Leverage $7,971 7.21% $4,423 4.00% $5,528 5.00% Tier 1 risk-based 7,971 9.34 3,413 4.00 5,121 6.00 Total risk-based 9,376 10.99 6,825 8.00 8,531 10.00 NAPA NATIONAL BANK: Leverage 7,862 7.11 4,423 4.00 5,529 5.00 Tier 1 risk-based 7,862 9.22 3,411 4.00 5,115 6.00 Total risk-based 8,932 10.47 6,822 8.00 8,531 10.00 DECEMBER 31, 1995 MINIMUM MINIMUM WELL-CAPITALIZED ACTUAL REQUIREMENT REQUIREMENT ---------------------------------------------------- CAPITAL RATIO CAPITAL RATIO CAPITAL RATIO ---------------------------------------------------- NAPA NATIONAL BANCORP: Leverage $7,447 7.45% $3,998 4.00% $4,998 5.00% Tier 1 risk-based 7,447 9.51 3,132 4.00 4,698 6.00 Total risk-based 8,772 11.20 6,266 8.00 7,832 10.00 NAPA NATIONAL BANK: Leverage 7,156 7.16 4,000 4.00 4,997 5.00 Tier 1 risk-based 7,156 9.14 3,132 4.00 4,698 6.00 Total risk-based 8,139 10.40 6,263 8.00 7,826 10.00
70 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN The Company has a stock option plan that provides for issuance of incentive stock options (ISO) to certain officers and nonstatutory stock options to certain members of the Company's Board of Directors to purchase up to 250,000 shares of common stock. Each option entitles the holder to purchase one share of common stock. Outstanding options that expire at various dates through 2006 have been granted at a price of $8.00 to $15.35. This price approximates the market value of the stock at the dates the options were granted. The right to exercise options vests either immediately or at various rates in each year of future service. There were 85,200 options available for grant at December 31, 1996. Option information is summarized below:
PRICE NONSTATUTORY NUMBER OF OPTIONS --------------------------------- PER SHARE 1996 1995 1994 -------------- --------------------------------- Shares under option at beginning of year $ 8.00 - $8.09 110,000 90,000 100,000 Options canceled $ 8.00 - - (20,000) Options granted $8.00 - $15.35 10,000 20,000 10,000 --------------------------------- Shares under option at end of year $8.00 - $15.35 120,000 110,000 90,000 ================================= Shares under option exercisable at end of year $8.00 - $15.35 102,500 95,000 90,000 ================================= PRICE ISO NUMBER OF OPTIONS --------------------------------- PER SHARE 1996 1995 1994 ------------------------------------------------- Shares under option at beginning of year $ 8.00 34,800 31,300 28,800 Options granted $8.00 - $15.35 11,000 3,500 7,500 Options canceled $ 8.00 (1,000) - (5,000) --------------------------------- Shares under option at end of year $8.00 - $15.35 44,800 34,800 31,300 ================================= Shares under option exercisable at end of year $8.00 - $15.35 32,400 32,800 29,800 =================================
71 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 14. STOCK OPTION PLAN AND STOCK OWNERSHIP PLAN (CONTINUED) The table below reflects the Company's net income and net income per common share (under the Treasury Stock method), if compensation cost for the Company's stock plan had been determined based on the fair value at the grant date for awards under their plan. Since pro forma compensation cost relates to all periods over which the awards vest, the initial impact on pro forma net income may not be representative of compensation cost in subsequent years.
1996 1995 ----------------- Net income applicable to common stock $ 866 $1,070 Net income per common share $0.97 $ 1.20
Fair values of the options were estimated at the date of grant using the Black- Scholes option pricing model, which includes the following assumptions used for the stock options awarded during 1996 and 1995, respectively: risk-free weighted average interest rates of 6.52 percent and 5.77 percent; dividend yield of .16 percent and 0 percent; expected volatility of 5.6 percent and 1.9 percent; and expected option life for both 1996 and 1995 grants of 8.5 years. The weighted average grant date fair values of the options granted during 1996 and 1995 were $6.57 and $7.76 per share, respectively. The exercise price of each option approximates the market price of the Company's common stock on the date of grant. Expiration dates range from September 16, 1998 to December 16, 2006 for options outstanding at December 31, 1996. The Company also has an Employee Stock Ownership Trust (the "ESOT"), in which all employees of the Company are eligible to participate. The ESOT is a defined-contribution plan which invests in the common stock of the Company. A portion of these contributions is matched by the Company. The Company's matching contributions to the ESOT were $74, $60 and $23 for the years ended December 31, 1996, 1995 and 1994, respectively. 72 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments amounts have been determined by using available market information and appropriate valuation methodologies. However, these estimated fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the market assumptions or estimation techniques could significantly affect the fair value estimates. Because of the limitations, the aggregate fair value amounts presented below are not necessarily indicative of the amounts that could be realized in a current market exchange. The carrying amounts and the estimated fair values of the Company financial instruments at December 31, 1996 are as follows:
CARRYING ESTIMATED AMOUNT FAIR VALUE ---------------------- ASSETS Cash and cash equivalents $ 24,479 $ 24,479 (a) Interest-bearing time 4,158 4,158 deposits - other financial institutions (b) Securities held to maturity 2,277 2,304 (c) Loans - net (d) 78,290 78,253 LIABILITIES Deposits (e) 105,417 112,560 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (F) Commitments to extend credit 20,467 20,467 Commercial letters of credit 865 865
73 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and the estimated fair values of the Company financial instruments at December 31, 1995 are as follows:
CARRYING ESTIMATED AMOUNT FAIR VALUE ---------------------- ASSETS Cash and cash equivalents (a) $21,886 $21,886 Interest-bearing time deposits - other financial institution 4,356 4,356 Securities held to maturity (c) 1,432 1,447 Loans - net (d) 73,374 73,302 LIABILITIES Deposits (e) 96,752 95,560 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (F) Commitments to extend credit 18,168 18,168 Commercial letters of credit 646 646
(a) Cash and cash equivalents: The carrying amount is a reasonable estimate of fair value. (b) Interest-bearing time deposits - other financial institutions: The carrying value is a reasonable estimate of fair value. (c) Securities held to maturity: Fair values of investment securities are based on quoted market prices or dealer quotes. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities. (d) Loans - net: Fair values for certain commercial construction, revolving consumer credit and other loans were estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and maturities. Certain adjustable rate loans and leases have been valued at their carrying values, since the interest rate adjustment characteristics of the loan or lease effectively adjust the interest rate to maintain a market rate of return. 74 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) (e) Deposits: The fair value of noninterest-bearing, adjustable rate deposits and deposits without fixed maturity dates is the amount payable upon demand at the reporting date. The fair value of fixed-rate interest-bearing deposits with fixed maturity dates was estimated by discounting the cash flows using rates currently offered for deposits of similar remaining maturities. (f) Off-balance-sheet instruments: The fair value of commitments to extend credit is estimated using fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of standby and commercial letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties, reduced by the remaining net deferred income associated with such obligations. 16. NAPA NATIONAL BANCORP (PARENT COMPANY ONLY) The condensed financial statements of Napa National Bancorp are as follows:
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 1996 1995 ------------------ ASSETS Cash $ 93 $ 278 Investments in subsidiaries 7,975 7,269 Accrued interest receivable and other assets 145 16 ------------------ Total assets $8,083 $7,563 ================== LIABILITIES Accrued expenses and other liabilities $ 112 $ 116 Shareholders' equity: Preferred stock, no par value: 1,000,000 shares authorized, no shares outstanding - - Common stock, no par value: 20,000,000 shares authorized, 754,500 shares issued and 6,915 6,915 outstanding Retained earnings 1,056 532 ------------------- Total shareholders' equity 7,971 7,447 ------------------- Total liabilities and shareholders' $8,083 $7,563 equity ===================
75 Napa National Bancorp and Subsidiaries Notes to Consolidated Financial Statements (continued) (Dollars in Thousands) 16. NAPA NATIONAL BANCORP (PARENT COMPANY ONLY) (CONTINUED)
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ------------------------- Income: Interest income $ 3 $ 6 $ 6 Dividend from subsidiaries 200 - - Other income - 12 - ------------------------- Total income 203 18 6 ------------------------- Expenses: Salaries and employee benefits - 46 - Other expense 7 1 3 ------------------------- Total expenses 7 47 3 ------------------------- Income (Loss) before applicable taxes and equity in undistributed net income of subsidiaries 196 (29) Applicable Income Taxes - - - ------------------------- Income (Loss) before equity in undistributed net income of subsidiaries 196 (29) 3 Equity in undistributed net income of subsidiaries 706 1,130 774 ------------------------- Net income $ 902 $ 1,101 $ 777 ========================= STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 ------------------------- Operating activities: Net income $ 902 $ 1,101 $ 777 Reconciliation of net income to net cash provided (used) by operating activities: Equity in undistributed net income of subsidiaries (706) (1,130) (774) Decrease in accrued interest receivable 1 - - (Decrease) increase in accrued expenses and other liabilities, net (4) - - ------------------------- Net cash (used) provided by operating activities 193 (29) 3 Financing activities: Cash dividends paid to shareholders (378) - - ------------------------- Net cash (used) by financing activities (378) - - Net (decrease) increase in cash (185) (29) 3 Cash at beginning of year 278 308 305 ------------------------- Cash at end of year $ 93 $ 278 $ 308 =========================
76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 26, 1997. NAPA NATIONAL BANCORP By /s/ Brian J. Kelly President/COO By /s/ Michael D. Irwin Chief Financial Officer (Principal Accounting Officer) POWER OF ATTORNEY KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian J. Kelly and Michael D. Irwin jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. March 26, 1997 /s/ William A. Bacigalupi Director March 26, 1997 /s/ Dennis D. Groth Director March 26, 1997 /s/ E. James Hedemark Director March 26, 1997 /s/ Michael D. Irwin Director Chief Financial Officer (Principal Accounting Officer) March 26, 1997 /s/ Brian J. Kelly President and COO Director March 26, 1997 /s/ C. Richard Lemon Secretary and Director March 26, 1997 /s/ Joseph G. Peatman Director March 26, 1997 /s/ A. Jean Phillips Director March 26, 1997 /s/ George M. Schofield Director March 26, 1997 /s/ W. Clarke Swanson, Jr. Chairman of the Board and CEO INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 3(i) Articles of Incorporation of the Registrant, as amended. 3(ii).1 Restated Bylaws of the Registrant. 4.1 A specimen copy of the certificates evidencing Common Stock. 10.1 Napa National Bancorp 1992 Stock Option Plan. 10.2 Form of Incentive Stock Option Agreement 10.3 Form of Nonstatutory Stock Option Agreement 16.1* Letter re change in certifying accountants. (Exhibit 16.1 to Form 8-K/A filed on October 23, 1996.) 21.1* Subsidiaries of the Registrant. 24.1 Power of Attorney (located on signature page hereof) 27 Financial Data Schedule 99.1* Registrant's Form 8-K filed on September 26, 1996, and amended on October 23, 1996. *Previously filed. EX-3.I 2 AMENDED ARTICLES OF INCORPORATION EXHIBIT 3.I ARTICLES OF INCORPORATION OF NAPA NATIONAL BANCORP FIRST ----- The name of this corporation is: Napa National Bancorp SECOND ------ The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THIRD ----- The name and address of this corporation's initial agent for service of process is: Alan G. Tait 1500 Third Street Suite "D" Napa, CA 94558 FOURTH ------ (a) This corporation is authorized to issue two classes of shares designated "Preferred Stock" and "Common Stock", respectively. The number of shares of Preferred Stock authorized to be issued is One Million (1,000,000) and the number of shares of Common Stock authorized to be issued is Twenty Million (20,000,000). (b) The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges and restrictions granted to and imposed upon the Preferred Stock or any series thereof with respect to any wholly unissued class or series of Preferred Stock, and to fix the number of shares of any series of Preferred Stock and the designation of any such series of Preferred Stock. The board of directors, within the limits and restrictions stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, may increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series. IN WITNESS WHEREOF, for the purpose of forming this corporation under the laws of the State of California I, the undersigned incorporator, have executed these Articles of Incorporation this 30th day of October, 1981. /s/ Ronald W. Bachli _________________________ RONALD W. BACHLI -2- DECLARATION ----------- I declare that I am the person who executed the foregoing Articles of Incorporation and that said instrument is my act and deed. Executed at San Francisco, California, this 30th day of October, 1981. /s/ Ronald W. Bachli _____________________________ RONALD W. BACHLI EX-3.II 3 BYLAWS, AMENDED & RESTATED, OF THE REGISTRANT EXHIBIT 3.II RESTATED -------- BY-LAWS ------- OF -- NAPA NATIONAL BANCORP --------------------- A CALIFORNIA CORPORATION ------------------------ ARTICLE 1 --------- Meetings of Shareholders ------------------------ Section 1.1 Place of Meetings. All meetings of ----------------- shareholders shall be held at the principal administrative office of the corporation or at any other place within the State of California which may be designated either by the board of directors or by the shareholders in accordance with these by-laws. Section 1.2 Annual Meetings. The Annual Meeting of --------------- Shareholders shall be held on the second Tuesday in May in each year or on such other date as the board of directors by resolution may designate, at which time the shareholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. Section 1.3 Special Meetings. Special meetings of the ---------------- shareholders, for the purpose of taking any action which is within the powers of the shareholders, may be called at any time by the chairperson of the board, the chief executive officer, the president, the board of directors or the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. Section 1.4 Notice of Meetings of Shareholders. ---------------------------------- (a) Written notice of each meeting of shareholders, whether annual or special, shall be given to each shareholder entitled to vote thereat, either personally or by mail or other means of written communication, charges prepaid, addressed to such shareholder at the address of such shareholder appearing on the books of the corporation or given by such shareholder to the corporation for the purpose of notice. If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal administrative office of the corporation for a period of one (1) year from the date of the giving of the notice to all other shareholders. If no address appears on the books of the corporation or is given by the shareholder to the corporation for the purpose of notice, notice shall be deemed to have been given to such shareholder if sent by mail or other means of written communication addressed to the place where the principal administrative office of the corporation is located, or if published at least once in a newspaper of general circulation in the county in which the principal administrative office is located. (b) All such notices shall be given not less than tell (10) days nor more than sixty (60) days before the meeting to each shareholder entitled to vote thereat. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or any transfer agent of the corporation, shall be prima facie evidence of the giving of the notice. -1- (c) All such notices shall state the place, date and hour of such meeting. In the case of a special meeting such notice shall also state the general nature of the business to be transacted at such meeting, and no other business may be transacted thereat. In the case of an annual meeting, such notice shall also state those matters which the board of directors at the time of the mailing of the notice intends to present for action by the shareholders. (d) The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. (e) Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairperson of the board, chief executive officer, president, vice president or secretary by any person (other than the board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Section 1.5 Quorum. The presence in person or by ------ proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 1.6 Adjourned Meetings and Notice Thereof. ------------------------------------- (a) Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by vote of a majority of the shares, the holders of which are either present in person or by proxy thereat, but in the absence of a quorum, no other business may be transacted at any such meeting, except as provided in Section 1.5 herein. (b) When a shareholders' meeting is adjourned to another time or place, except as provided in this subsection (b), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. Section 1.7 Nomination of Directors. Nominations for ----------------------- election of members of the board of directors may be made by the board of directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations (other than for persons named in the notice of the meeting at which such nomination is to be made) shall be made in writing and shall be delivered or mailed to the president of the corporation by the later of the close of business twenty- one (21) days prior to any meeting of shareholders called for the election of directors or ten (10) days after the date of mailing of notice of the meeting to shareholders. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the number of shares of capital stock of the corporation owned by each proposed nominee; (c) the name and residence address of the notifying shareholder; (d) the number of shares of capital stock of the corporation owned by the notifying shareholder; (e) with the written consent of the proposed nominee, a copy of which shall be furnished with the notification, whether the proposed nominee has ever -2- been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt. The notice shall be signed by the nominating shareholder and by the nominee. Nominations not made in accordance herewith shall be disregarded by the chairperson of the meeting, and upon his or her instructions, the inspectors of election shall disregard all votes cast for each such nominee. The restrictions set forth in this paragraph shall not apply to nomination of a person to replace a proposed nominee who has died or otherwise become incapacitated to serve as a director between the last day for giving notice hereunder and the date of election of directors if the procedure called for in this paragraph was followed with respect to the nomination of the proposed nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which directors are to be elected. Section 1.8 Voting and Record Dates. ----------------------- (a) Voting Rights of Shares and Shareholders. ---------------------------------------- (i) Except as provided in section 708 of the California General Corporation Law (election of directors) and except as may be otherwise provided in the articles of incorporation of this corporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. (ii) Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office; but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. (b) Record Date Requirements. ------------------------ (i) In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action. (ii) If no record date is fixed: (A) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (B) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given. (C) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. (iii) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the board fixes a new record date for the adjourned meeting, but the board shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. -3- (iv) Shareholders as of the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the articles of incorporation of this corporation or by agreement or in the California General Corporation Law. (c) Voting of Shares by Fiduciaries, Receivers, ------------------------------------------- Pledgeholders and Minors. ------------------------ (i) Subject to subsection 1.8(d)(iii), shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. (ii) Shares standing in the name of a receiver may be voted by such receiver; and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver 5 name if authority to do so is contained in the order of the court by which such receiver was appointed. (iii) Subject to the provisions of Section 1.11 herein and except where otherwise agreed in writing between the parties, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (iv) Shares standing in the name of a minor may be voted and the corporation may treat all rights incident thereto as exercisable by the minor, in person or by proxy, whether or not the corporation has notice, actual or constructive, of the nonage, unless a guardian of the minor's property has been appointed and written notice of such appointment given to the corporation. (d) Voting of Shares by Other Corporations. -------------------------------------- (i) Shares of this corporation standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the by-laws of such other corporation may prescribe or, in the absence of such provision, as the board of such other corporation may determine or, in the absence of such determination, by the chairperson of the board, president or any vice president of such other corporation, or by any other person authorized to do so by the chairperson of the board, president or any vice president of such other corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of a corporation (whether or not any title of the person signing is indicated) shall be presumed to be voted or the proxy executed in accordance with the provisions of this subdivision, unless the contrary is shown. (ii) Shares of this corporation owned by a subsidiary shall not be entitled to vote on any matter. (iii) Shares of this corporation held by this corporation in a fiduciary capacity, and any of its shares held in a fiduciary capacity by its subsidiary, shall not be entitled to vote on any matter, except to the extent that the settlor or beneficial owner possesses and exercises a right to vote or to give the corporation binding instructions as to how to vote such shares. (e) Voting of Shares Owned of Record by Two (2) or ---------------------------------------------- More Persons. ------------ (i) If shares stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled -4- to vote under a shareholder voting agreement or otherwise, or if two (2) or more persons (including proxyholders) have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (A) If only one (1) votes, such act binds all; (B) If more than one (1) votes, the act of the majority so voting binds all; (C) If more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this section shall be a majority or even split in interest. (f) Election of Directors; Cumulative Voting. ---------------------------------------- (i) Every shareholder complying with subsection 1.8(f)(ii) and entitled to vote at any election of directors may cumulate such shareholder's votes. In such event, each shareholder shall be entitled to a number of votes equal to the number of directors to be elected at the election multiplied by the number of votes to which the shareholder's shares are entitled. (ii) No shareholder shall be entitled to cumulate votes (i.e., cast for any one (1) or more candidates a number of votes greater than the number of the shareholder's shares) unless such candidate's or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one (1) shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. (iii) In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected, are elected. (iv) Elections for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins. Section 1.9 Waiver of Notice and Consent of Absentees. ----------------------------------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed and wherever held, are as valid as though transacted at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting, or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law or these by-laws to be included in the notice but which was not so included, if such objection is expressly made at the meeting; provided, however, that any person making such objection at the beginning of the meeting or to the consideration of matters required to be but not included in the notice may orally withdraw such objection at the meeting or thereafter waive such objection by signing a written waiver thereof or a consent to the holding of -5- the meeting or the consideration of the matter or an approval of the minutes of the meeting. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of shareholders needs to be specified in any written waiver of notice, except that the general nature of a proposal to amend the articles of incorporation of the corporation and the proposals specified in subparagraphs (A) through (E) of subsection 1.10(c)(i) shall be so stated. Section 1.10 Action Without A Meeting. ------------------------ (a) Directors may be elected without a meeting by a consent in writing, setting forth the action so taken) signed by all of the persons who would be entitled to vote for the election of directors; provided that a director may be elected at any time to fill a vacancy not filled by the directors by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. (b) Any other action which, under any provision of the California General Corporation Law may be taken at any annual or special meeting of the shareholders, may be taken without a meeting, and without prior notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting to which all shares entitled to vote thereon were present and voted. (c) Unless the consents of all shareholders entitled to vote have been solicited in writing: (i) Notice of any shareholder approval without a meeting, by less than unanimous written consent, of (A) a contract or other transaction between the corporation and one or more of its directors or any corporation, firm or association in which one or more of its directors has a material financial interest or is also a director, (B) indemnification of an agent of the corporation as authorized by the articles of incorporation of the corporation, (C) a reorganization of the corporation as defined in section 181 of the California General Corporation Law, (D) an election to wind up and dissolve the corporation, or (E) the distribution of shares, obligations or securities of any other corporation or assets other than money which is not in accordance with the liquidation rights of preferred shares if the corporation is in the process of winding up, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (ii) Prompt notice shall be given of the taking of any other corporate action, including the filling of a vacancy on the board of directors, approved by shareholders without a meeting, by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 1.4 herein. (d) Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the secretary of the corporation. Section 1.11 Proxies. ------- (a) Every person entitled to vote shares or execute consents may authorize another person or persons to act by proxy with respect to such vote or consent. Any proxy purporting to be executed in accordance with the provisions of this Section 1.11 shall be presumptively valid. -6- (b) No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in this Section 1.11. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at a meeting and voting in person by, the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. (c) A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. (d) Except when other provision shall have been made by written agreement between the parties, the recordholder of shares that such person holds as pledgee or otherwise as security or which belong to another shall issue to the pledgor or the owner of such shares, upon demand therefor and payment of necessary expenses thereof, a proxy to vote or take other action thereon. (e) A proxy which states that it is irrevocable is irrevocable for the period specified therein (notwithstanding Section 1.11(b)) when it is held by any of the following or a nominee of any of the following: (i) A pledgee; (ii) A person who has purchased or agreed to purchase or holds an option to purchase the shares of a person who has sold a portion of such person's shares in the corporation to the maker of the proxy; (iii) A creditor or creditors of the corporation or the shareholder who extended or continued credit to the corporation or the shareholder in consideration of the proxy if the proxy states that it was given in consideration of such extension or continuation of credit and the name of the person extending or continuing credit; (iv) A person who has contracted to perform services as an employee of the corporation, if a proxy is required by the contract of employment and if the proxy states that it was given in consideration of such contract of employment, the name of the employee and the period of employment contracted for; or (v) A person designated by or under an agreement under section 706 of the California General Corporation Law. Notwithstanding the period of irrevocability specified, the proxy becomes revocable when the pledge is redeemed, the option or agreement to purchase is terminated, the seller no longer owns any shares of the corporation or dies, the debt of the corporation or the shareholder is paid, the period of employment provided for in the contract of employment has terminated or the agreement under section 706 of the California General Corporation Law has terminated. In addition to the foregoing subdivisions (i) through (v), a proxy may be made irrevocable (notwithstanding Section 1.11(b) above) if it is given to secure the performance of a duty or to protect a title, either legal or equitable, until the happening of events which, by its terms, discharge the obligations secured by it. (f) A proxy may be revoked, notwithstanding a provision making it irrevocable, by a purchaser of shares without knowledge of the existence of the provision, unless the existence of the proxy and its irrevocability appears on the certificate representing such shares. -7- Section 1.12 Inspectors of Election. ---------------------- (a) In advance of any meeting of shareholders, the board of directors may appoint any persons as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, or if any person so appointed fails to appear or refuses to act, the chairperson of any such meeting may, and on the request of any shareholder or his or her proxy shall, make such appointment at the. meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one (1) or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. (b) The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes and consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. (c) The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. ARTICLE 2 --------- Directors --------- Section 2.1 Powers. Subject to the California General ------ Corporation Law and any limitations in the articles of incorporation of this corporation relating to action requiring shareholder authorization or approval, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Section 2.2 Number and Qualification of Directors. ------------------------------------- The number of directors of the corporation shall not be less than eight (8) nor more than fifteen (15) until changed by a by-law amending this Section 2.2 duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. The exact number of directors shall be fixed from time to time, within the limits specified in this Section 2.2, by a by-law or amendment thereof or by a resolution duly adopted by a vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, by the written consent of the holders of a majority of the outstanding shares entitled to vote, or by resolution of the board of directors. Section 2.3 Election and Term of Office. The --------------------------- directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held or the directors are not elected at any annual meeting, the directors may be elected at any special meeting of shareholders held for that purpose or by written consent in accordance with Section 1.10. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until his or her successor has been elected and qualified, subject to the California General Corporation Law and the provisions of these by-laws with respect to vacancies on the board. Section 2.4 Resignation and Removal of Directors. Any ------------------------------------ director may resign effective upon giving written notice to the chairperson of the board, the president, the secretary, or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a -8- future time, a successor may be elected to take office when the resignation becomes effective. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. Any or all of the directors may be removed without cause if such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote; provided that no director may be removed (unless the entire board is removed) when the votes cast against removal (or, if such action is taken by written consent, the shares held by persons not consenting in writing to such removal) would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his or her term of office. Section 2.5 Vacancies. A vacancy or vacancies on the --------- board of directors shall exist on the death, resignation or removal of any director, or if the board declares vacant the office of a director if he or she is declared of unsound mind by an order of court or is convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail to elect the full authorized number of directors to be voted for at any shareholders' meeting at which an election of directors is held. Vacancies on the board of directors (except vacancies created by the removal of a director) may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled by the directors or which occurs by reason of the removal of a director. Any such election by written consent of shareholders shall require the consent of a majority of the outstanding shares entitled to vote. If the resignation of a director states that it is to be effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 2.6 Place of Meetings. Regular and special ----------------- meetings of the board of directors may be he[d at any place within the State of California which has been designated in the notice of the meeting, or, if not stated in the notice or there is no notice, designated by resolution or by written consent of all of the members of the board 3f directors. If the place of a regular or special meeting is not designated in the notice or fixed by a resolution of the board or consented to in writing by all members of the board of directors, it shall be held at the corporation's principal administrative office. Section 2.7 Organizational and Regular Meetings. ----------------------------------- Immediately following each annual shareholders' meeting, the board of directors shall hold an organizational meeting to elect officers and transact other business. Such meeting shall be held at the same place as the annual meeting or such other place as shall be fixed by the board of directors. The regular meetings of the board of directors shall be held at such times and places as are fixed by the board. Call and notice of regular meetings of the board of directors shall not be required and is hereby dispensed with. Section 2.8 Special Meetings. Special meetings of the ---------------- board of directors for any purpose or purposes may be called at any time by the chairperson of the board, the chief executive officer, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally to each director or by telephone or telegraph or sent to the director by mail. In case notice is given by mail or telegram, it shall be sent, charges prepaid, addressed to the director at his or her address appearing on the corporate records or if it is not on these records or is not readily ascertainable, at the place where the meetings of the directors are regularly held. If notice is delivered personally or given by telephone or telegraph, it shall be given or delivered to the telegraph office at least twenty-four (24) hours before the meeting. If notice is mailed it shall be deposited in the United States mail at least four (4) days before the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as provided in this Section 2.9, shall be due, legal and personal notice to such director. A notice or waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. -9- Section 2.9 Quorum. A majority of the authorized ------ number of directors shall constitute a quorum of the board of directors for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the board of directors, subject to the provisions of section 310 and subdivision (e) of section 317 of the California General Corporation Law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 2.10 Waiver of Notice or Consent. The --------------------------- transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors not present or who though present has prior to the meeting or at its commencement protested the lack of proper notice to him or her, signs a written waiver of notice, or a consent to holding the meeting, or an approval of the minutes of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. A notice or waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior to or at its commencement, the lack of notice to such director. Section 2.11 Adjournment. A majority of the directors ----------- present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is not adjourned for more than 24 hours, notice of the adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 2.12 Meeting by Conference Telephone. Members ------------------------------- of the board of directors may participate in a meeting through use of conference telephone or similar communications equipment, as long as all members participating in such meeting can hear one another. Participation by directors in a meeting in the manner provided in this Section 2.13 constitutes presence in person at such meeting. Section 2.13 Action Without a Meeting. Any action ------------------------ required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board of directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board of directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 2.14 Fees and Compensation. Directors and --------------------- members of the committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the board of directors. Section 2.15 Committees. The board of directors may, ---------- by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the board of directors. The board of directors may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The board of directors may delegate to any such committee, to the extent provided in such resolution, any of the board of directors' powers and authority in the management of the corporation's business and affairs, except such powers and authority that conflict with the California General Corporation Law or the corporation's articles of incorporation. -10- The board of directors may prescribe appropriate rules, not inconsistent with these by-laws, by which proceedings of any such committee shall be conducted. The provisions of these by-laws relating to the calling of meetings of the board of directors, notice of meetings of the board of directors and waiver of such notice, adjournments of meetings of the board of directors, written consents to the board of directors meetings and approval of minutes, action by the board of directors by consent in writing without a meeting, the place of holding such meetings, meetings by conference telephone or similar communications equipment, the quorum for such meetings, the vote required at such meetings and the withdrawal of directors after commencement of a meeting shall apply to committees of the board of directors and action by such committees. In addition, any member of the committee designated by the board of directors as the chairperson or as secretary of the committee or any two members of a committee may call meetings of the committee. Regular meetings of any committee may be held without notice if the time and place of such meetings are fixed by the board of directors or the committee. Section 2.16 Indemnification of Agents. The board of directors ------------------------- may authorize the Corporation to indemnify an agent, as defined in section 317 of the California Corporations Code, to the fullest extent permitted by law, including, but not limited to, the California General Corporation Law. (a) Indemnification of Directors and Officers. Each person ----------------------------------------- who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, formal or informal, whether brought in the name of the corporation or otherwise and whether of a civil, criminal, administrative or investigative nature (hereinafter a 'proceeding'), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is an alleged action or inaction in an official capacity or in any other capacity while serving as a director or officer, shall, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permissible under California law and the corporation's Articles of Incorporation, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise tax or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that (a) the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the board of directors of the corporation, and (b) the corporation shall indemnify such person seeking indemnification in connection with a proceeding (or part thereof) other than a proceeding by or in the name of the corporation to procure a judgment in its favor only if any settlement of such a proceeding is approved in writing by the corporation, and (c) no such person shall be indemnified (i) except to the extent that the aggregate of losses to be indemnified exceeds the amount of such losses for which the director or officer is paid pursuant to any directors' and officers' liability insurance policy maintained by the corporation; (ii) on the account of any suit in which judgment is rendered against such person for an accounting of profits made from the purchase or sale by such person of securities of the corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iii) if a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful; (iv) for any acts or omissions or transactions from which a director may not be relieved of liability as set forth in the exception to paragraph 10 of Section 204(a) of the General Corporation Law of the State of California ('GCL'); and (v) as to circumstances in which indemnity is expressly prohibited by Section 317 of the GCL. The right to indemnification conferred in this Section 2.16 shall be a contract right and shall include the right to be paid by the corporation expenses incurred in defending any proceeding in advance of its final disposition; provided, however, that if -11- the GCL requires the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, such advances shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts to the corporation if it shall be ultimately determined that such person is not entitled to be indemnified. (b) Indemnification of Employees and Agents. A person --------------------------------------- who was or is a party or is threatened to be made a party to or is involved in any proceedings by reason of the fact that he or she is or was an employee or agent of the corporation or is or was serving at the request of the corporation as an employee or agent of another enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is an alleged action or inaction in an official capacity or in any other capacity while serving as an employee or agent, may, subject to the terms of any agreement between the corporation and such person, be indemnified and held harmless by the corporation to the fullest extent permitted by California law and the corporation's Articles of Incorporation, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement), reasonably incurred or suffered by such person in connection therewith. The immediately preceding sentence is not intended to be and shall not be considered to confer a contract right on any employee or agent (other than directors and officers) of the corporation. (c) Action to Enforce Rights Under this Section. If a ------------------------------------------- claim under this Section 2.16 is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including it board of directors, independent.. legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the claimant has not met the applicable standard of conduct. (d) Entitlement to Expenses. Notwithstanding any ----------------------- other provision of this Section 2.16, to the extent that a director, officer or agent has been successful on the merits or otherwise (including the dismissal of an action without prejudice or the settlement of a proceeding or action without admission of liability) in defense of any proceeding referred to in this Section 2.16 or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith. (e) Non-Exclusivity. The right to indemnification --------------- provided by this Section 2.16 shall not be exclusive of nor limit any other right which any person may have or hereafter acquire under any statute, bylaw, agreement, vote of shareholders or disinterested directors or otherwise. (f) Insurance. The corporation may maintain --------- insurance, to the extent reasonably available, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the law. The corporation may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. -12- (g) Expenses as a Witness. To the extent that any --------------------- director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he or she shall be indemnified against all costs and expenses actually and reasonably incurred by him or her on his or her behalf in connection therewith. (h) Indemnity Agreements. The corporation may, -------------------- without shareholder approval, enter into agreements with any director, officer, employee or agent of the corporation or any person who serves at the request of the corporation as a director, officer, trustee, partner, employee or agent of another corporation or a partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification to the fullest extent permissible under the law and the corporation's Articles of Incorporation. (i) Severability. Each and every paragraph, sentence, ------------ term and provision of this Section 2.16 is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or unenforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Section 2.16 may be modified by a court of competent jurisdiction to preserve its validity and to provide the claimant with, subject to the limitations set forth in this Section 2.16 and any agreement between the corporation and claimant, the broadest possible indemnification permitted under applicable law. (j) Entities Merged with this Corporation. No ------------------------------------- provision of this Section 2.16 shall be applicable and unless otherwise required by California law indemnification shall not be permitted in respect of any acts, omissions or transactions of any person while serving as a director, officer, employee or agent of any corporation which shall have been or shall hereafter be merged into or otherwise combined with this corporation, or of another enterprise in respect of which such person was serving as a director, officer, employee or agent at the request of any such other corporation, or of any enterprise controlling, controlled by or under common control with any such other corporation, unless specifically approved by a majority vote of the board of directors of this corporation. (k) Repeals. Any repeal or modification of this ------- Section 2.16 (however effected) shall not adversely affect any right of indemnification of a director, officer, employee or agent existing at the time of such repeal or modification with respect to any act, omission or transaction occurring prior to such repeal or modification. ARTICLE 3 --------- Officers -------- Section 3.1 Officers. The officers of the corporation -------- shall be a chairperson of the board or a president, or both, a chief executive officer, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice-secretaries, a cashier, one or more assistant cashiers and such other officers as may be appointed in accordance with the provisions of Section 3.3. Any two (2) or more offices may be held by the same person; provided that in the execution of written instruments and in the performance of any executive or administrative duties on behalf of the corporation, such officer may only act in one (1) capacity when joint execution or action by two (2) officers is required. Section 3.2 Elections. The officers of the --------- corporation, except such officers as may be appointed in accordance with the provisions of Section 3.3 or Section 3.5, shall be chosen by the board of directors, and each shall hold his or her office -13- until he or she shall resign or be removed or is otherwise disqualified to serve, or until his or her successor is chosen and qualified. Section 3.3 Other Officers. The board of directors -------------- may appoint, and may empower the chairperson of the board or the chief executive officer or both of them to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the by- laws or as the board of directors may from time to time determine. Section 3.4 Removal and Resignation. Any officer may ----------------------- be removed with or without cause either by the board of directors or, except for an officer chosen by the board, by any officer upon whom the power of removal may be conferred by the board (subject, in each case, to the rights, if any, of an officer under any contract of employment). Any officer may resign at any time upon written notice to the corporation (without prejudice, however, to the rights, if any, of the corporation under any contract to which the officer is a party). Any such resignation shall take effect upon receipt of such notice or at any later time specified therein. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Unless a resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. Section 3.5 Vacancies. A vacancy in any office --------- because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the by- laws for regular appointments to such office. Section 3.6 Chairperson of the Board. The board of ------------------------ directors may, in its discretion, elect a chairperson of the board who, unless otherwise determined by the board of directors, shall preside at all meetings of the board of directors at which he or she is present and shall exercise and perform any other powers and duties assigned to him or her by the board of directors or prescribed by the by-laws. The chairperson of the board shall preside as chairperson at all meetings of the shareholders unless otherwise determined by the board of directors. Section 3.7 Vice Chairperson of the Board. The board ----------------------------- of directors may, in its discretion, elect one vice chairperson of the board or more than one vice chairpersons of the board. Unless otherwise determined by the board of directors, the vice chairperson of the board shall preside as chairperson, or if there are vice chairpersons of the board, the vice chairpersons of the board shall jointly preside as co-chairpersons, at all meetings of the board of directors or meetings of the shareholders from which the chairperson of the board is absent. The vice chairperson or vice chairpersons of the board shall exercise and perform any other powers and duties assigned to the vice chairperson of the board by the board of directors or prescribed by the by-laws. If the office of chairperson of the board is vacant, the vice chairperson of the board shall exercise, or if there are vice chairpersons, the vice chairpersons of the board shall jointly exercise, the duties of the chairperson of the board, and when so acting, shall have all the powers of, and be subject to the restrictions on, the chairperson of the board. Section 3.8 Chief Executive Officer. Subject to any ----------------------- supervisory powers, if any, that the board of directors or the by-laws have given to the president, if there be such an officer, the chief executive officer shall be the corporation's general manager. Subject to the control of the board of directors, the chief executive officer shall direct the total operation of the corporation and shall have responsibility for the attainment of goals, plans and directives established by the board of directors. The chief executive officer shall be a member of the board of directors. Unless otherwise determined by the board of directors, and in the absence of the chairperson of the board and the vice chairperson, or -vice chairpersons, of the board, or if there be none, the chief executive officer shall preside as chairperson at all meetings of the board of directors and of the shareholders. The chief executive officer shall have the general powers and duties of management usually vested in the office of chief executive officer and shall have any other powers and duties prescribed by the board of directors or the by-laws. -14- Section 3.9 President. Subject to the supervisory --------- powers, if any, that the by-laws or the board of directors have given to the chief executive officer, the president shall be the corporation's chief operating officer and shall have general supervision, direction and control of the business, affairs and officers of the corporation. Unless otherwise determined by the board of directors, and in the absence of the chairperson of the board, the vice chairperson, or vice chairpersons, of the board and the chief executive officer, or if there be none, the president shall preside as chairperson at all meetings of the board of directors and of the shareholders. The president shall have the general powers and duties of management usually vested in the office of president; shall have any other powers and duties prescribed by the by-laws or the board of directors; and shall be primarily responsible for carrying out all orders and resolutions of the board of directors. Section 3.10 Vice Presidents. In the absence or --------------- disability of the chief executive officer and president, the vice presidents in order of their rank as fixed by the board of directors, or if not ranked, the vice president designated by the board of directors, or if there has been no such designation, the vice president designated by the chief executive officer, shall perform all duties of the president, and when so acting, shall have all the powers of, and be subject to all the restrictions on, the president. Each vice president shall have any of the powers and perform any other duties that from time to time the board of directors, the by- laws or the chief executive officer may prescribe for him or her. Section 3.11 Secretary. The secretary shall keep or --------- cause to be kept a book of minutes of all meetings and actions by written consent of all directors, shareholders and committees of the board of directors. The minutes of each meeting shall state the time and place that it was held and such other information as shall be necessary to determine whether the meeting was held in accordance with the law and these by-laws and the actions taken thereat. The secretary shall keep or cause to be kept at the corporation's principal executive office, or at the office of its transfer agent or registrar, a record of the shareholders of the corporation, giving the names and addresses of all shareholders and the number and class of shares held by each. The secretary shall give, or cause to be given, notice of all meetings of shareholders, directors and committees required to be given under these by-laws or by law, shall keep or cause the keeping of the corporate seal in safe custody and shall have any other powers and perform any other duties that are prescribed by the board of directors or the by-laws or the chief executive officer. If the secretary refuses or fails to give notice of any meeting lawfully called, any other officer of the corporation may give notice of such meeting. The assistant secretary, or if there be more than one, any assistant secretary, may perform any or all of the duties and exercise any or all of the powers of the secretary unless prohibited from doing so by the board of directors, the chief executive officer or the secretary, and shall have such other powers and perform any other duties as are prescribed for him or her by the board of directors or the chief executive officer. Section 3.12 Chief Financial Officer. The chief ----------------------- financial officer, who shall also be deemed to be the treasurer when a treasurer may be required, shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account. The chief financial officer shall cause all money and other valuables in the name and to the credit of the corporation to be deposited at the depositories designated by the board of directors or any person authorized by the board of directors to designate such depositories. He or she shall render to the chief executive officer and board of directors when requested by either of them, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have any other powers and perform any other duties prescribed by the board of directors, the bylaws or the chief executive officer. Section 3.13 Cashier. The cashier may also be the ------- chief financial officer and may also be an assistant secretary. In the absence or disability of the chief financial officer, the cashier shall perform all the duties of the chief financial officer, and when so acting, shall have all the powers of, and be subject to all the restrictions on, the chief -15- financial officer. He or she shall have the general powers and duties of management usually vested in the office of cashier, when there also is an office of chief financial officer, and shall have any other powers and duties prescribed by the by-laws or the board of directors. The assistant cashier, or if there be more than one, any assistant cashier, may perform any or all of the duties and exercise any or all of the powers of the cashier unless prohibited from doing so by the board of directors, the chief executive officer or the cashier, and shall have such other powers and perform any other duties as are prescribed for him or her by the board of directors, the chief executive officer or the cashier. ARTICLE 4 --------- Miscellaneous ------------- Section 4.1 Record Date. The board of directors may ----------- fix a time in the future as a record date for the determination of the shareholders entitled to notice of any meeting of shareholders or to vote or entitled to receive payment of any dividend or distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of such meeting, nor more than sixty (60) days prior to any other action for the purpose of which it is fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at any such meeting, to receive a dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the hooks of the corporation after the record date, except as otherwise provided in the articles of incorporation or by- laws of this corporation. Section 4.2 Inspection of Corporate Records. The ------------------------------- accounting books and records and record of shareholders, and minutes of proceedings of the shareholders and the board and committees of the board of directors of the corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors of the corporation shall have (in person, or by agent or attorney) the absolute right to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days' prior written demand upon the corporation or to obtain from the transfer agent for the corporation, upon written demand and upon the tender of its usual charges, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of this corporation and any subsidiary of this corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 4.3 Checks, Drafts, Etc. All checks, drafts ------------------- or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or -16- payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. The board of directors may authorize one or more officers of the corporation to designate the person or persons authorized to sign such documents and the manner in which such documents shall be signed. Section 4.4 Annual and Other Reports. ------------------------ (a) The Board shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year or at least 15 (or, if sent by third-class mail, 35) days prior to the annual meeting of shareholders to be held during the next fiscal year, whichever is first; however, this requirement shall not limit the requirement for holding an annual meeting. (b) If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request within thirty (30) days thereafter the financial statements required by subdivision (a) of section 1501 of the California General Corporation Law for such year. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request. to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the statements referred to in subdivision (a) of section 1501 of the California General Corporation Law for the last fiscal year. The statements shall be delivered or mailed to the person making the request within thirty (30) days thereafter. A copy of such statements shall be kept on file in the principal administrative office of the corporation for twelve (12) months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. (c) The corporation shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semiannual or quarterly income statement which it has prepared and a balance sheet as of the end of the period. (d) The quarterly income statements and balance sheets referred to in this Section 4.4 shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. (e) Unless otherwise determined by the board of directors, president or the chief executive officer, the chief financial officer and the cashier are each authorized officers of the corporation to execute the certificate that the annual report and quarterly income statements and balance sheets referred to in this section were prepared without audit from the books and records of the corporation. Any report sent to the shareholders shall be given personally or by mail or other means of written communication, charges prepaid, addressed to such shareholder at the address of such shareholder appearing on the books of the corporation or given by such shareholder to the corporation for the purpose of notice or set forth in the written request of the shareholder as provided in this section. If any report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the report to the shareholder at such address, all future reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal administrative office of the corporation for a period of one (1) year from the date of the giving of the report to all other shareholders. If no address -17- appears on the books of the corporation or is given by the shareholder to the corporation for the purpose of notice or is set forth in the written request of the shareholder as provided in this section, such report shall be deemed to have been given to such shareholder if sent by mail or other means or written communication addressed to the place where the principal administrative office of the corporation is located, or if published at least once in a newspaper of general circulation in the county in which the principal administrative office is located. Any such report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such report in accordance with the foregoing provisions, executed by the secretary, assistant secretary or any transfer agent of the corporation, shall be prima facie evidence of the giving of the report. Section 4.5 Contracts, Etc.: How Executed. The board of ----------------------------- directors, except as the by-laws or articles of incorporation otherwise provide, may authorize any officer or officers and/or agent or agents to enter into any contract or execute any instrument in the name of and/or on behalf of the corporation, and such authority may be general or confined to specific instances. Section 4.6 Certificate for Shares. ---------------------- (a) Every holder of shares in the corporation shall be entitled. to have a certificate signed in the name of the corporation by the chairperson or vice chairperson of the board or the president or a vice president and by the chief financial office or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. (b) Any such certificate shall also contain such legend or other statement as may be required by section 418 of the California General Corporation Law, the Corporate Securities Law of 1968, and any agreement between the corporation and the issuee thereof, and may contain such legend or other statement as may be required by any other applicable law or regulation or agreement. (c) No new certificate for shares shall be issued in place of any certificate theretofore issued unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate may be issued without the surrender and cancellation of the old certificate if the certificate theretofore issued is alleged to have been lost, stolen or destroyed. In case of any such allegedly lost, stolen or destroyed certificate, the corporation may require the owner thereof or the legal representative of such owner to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4.7 Representation of Shares of Other --------------------------------- Corporations. Unless the board of directors shall otherwise ------------ determine, the chairperson of the board, the chief executive officer, the president, any vice president, and the secretary of this corporation are each authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to such officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any person authorized so to do by proxy or power of attorney or other document duly executed by any such officer. -18- Section 4.8 Inspection of By-Laws. The corporation ----------------------- shall keep in its principal administrative office in California, or I its principal administrative office is not in California, at its principal business office in California, the original or a copy of the by-laws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the corporation has no office in California, it shall upon the written request of any shareholder furnish to him or her a copy of the bylaws as amended to date. Section 4.9 Seal. The corporation may have a common ---- seal. Section 4.10 Construction and Definitions. Unless the ---------------------------- context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law shall govern the construction of these by-laws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE 5 --------- Amendments ---------- Section 5.1 Power of Shareholders. New by-laws may be --------------------- adopted or these by-laws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote or by the written assent of shareholders entitled to vote such shares, except as otherwise provided by law or by the articles of incorporation of this corporation. Section 5.2 Power of Directors. Subject to the right ------------------ of shareholders as provided in Section 5.1 of this Article 5 to adopt, amend or repeal by-laws, by-laws other than a by-law or amendment thereof changing the range of the authorized number of directors may be adopted, amended or repealed by the board of directors, including an amendment to change the number of authorized directors within the range fixed by the shareholders. ARTICLE 6 --------- Offices ------- Section 6.1 Principal Administrative Office. The ------------------------------- principal administrative office of the corporation shall be located at such place in the State of California as the board of directors shall from time to time determine. Section 6.2 Other Offices. Other offices may at any ------------- time be established by the board of directors at any place or places where the corporation is qualified to do business, subject to all regulatory approvals. -19- CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION James L. Wright and C. Richard Lemon certify that: 1. They are the Executive Vice President and Secretary, respectively, of Napa National Bancorp, a California corporation. 2. The Articles of Incorporation of this corporation are amended by adding a new Article FIFTH to such Articles of Incorporation, to read as follows: FIFTH ----- (a) The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to the actions for breach of duty to the corporation and its shareholders. (c) Any repeal or modification of the foregoing provisions of Article FIFTH by the shareholders of the corporation shall not adversely affect any right or protection existing at the time of such repeal or modification. 3. The foregoing amendment of the Articles of Incorporation of this corporation has been duly approved by the board of directors of this corporation. 4. The foregoing amendment of the Articles of Incorporation of this corporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 500,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required for approval. The percentage vote required for approval was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct and to our own knowledge. Dated: August 16, 1988. /s/ James L. Wright __________________________ James L. Wright Executive Vice President /s/ C. Richard Lemon __________________________ C. Richard Lemon Secretary EX-4.1 4 SPECIMEN COPY OF CERTIFICATES OF COMMON STOCK EXHIBIT 4.1 See reverse for certain abbreviations and for information on how to obtain a copy of the rights, preferences, privileges and restric- tions of each class or series of shares NAPA NATIONAL BANCORP NUMBER SHARES SFU 5069 INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA THIS CERTIFIES THAT IS THE OWNER OF SHARES OF THE NO PAR VALUE COMMON STOCK OF ----------------- ----------------- ---------------------- NAPA NATIONAL BANCORP --------------------- ----------------- ----------------- hereinafter called "Corporation" transferable only on the books of the Corporation by the holder thereof in person or by duly authorized attorney, upon the surrender of this certificate properly endorsed. The amount of no par value common stock is set forth on the books of the Corporation. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/C. Richard Lemon [Corporate Seal of /s/ (illegible) Secretary NAPA NATIONAL BANCORP INCORPORATED NOVEMBER 2, 1981 CALIFORNIA] Countersigned and Registered: FIRST INTERSTATE BANK, LTD. (San Francisco) Transfer Agent and Registrar By Authorized Officer (C) Security-Columbian United States Banknote Corporation NAPA NATIONAL BANCORP Any shareholder may obtain, upon request and without charge, a statement of the rights, preferences, privileges and restrictions granted to or imposed upon each class or series of shares authorized to be issued and upon the holders thereof, from the offices of the Corporation at 1500 Third Street, Napa, Ca. 94559-0479. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ...........Custodian.......... (Cust) (Minor) under Uniform Gifts to Minors Act ................ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ___________HEREBY SELL, ASSIGN AND TRANSFER UNTO Please insert social security or other identifying number of assignee [_________________________________] - ------------------------------------------------------------------------------- (Please print or typewrite name and address, including zip code, of assignee) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -----------------------------------------------------------------------Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - -----------------------------------------------------------------------Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_________________________________ -------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlarge- ment or any change whatever. Signature(s) Guaranteed: - ------------------------------------------------------ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved Medallion signature guarantee program), pursuant to S.E.C. Rule 17Ad-15. EX-10.1 5 NAPA NATIONAL BANCORP 1992 STOCK OPTION PLAN EXHIBIT 10.1 NAPA NATIONAL BANCORP --------------------- 1992 STOCK OPTION PLAN ---------------------- ARTICLE 1. INTRODUCTION. ---------- ------------ The Plan was adopted by the Board on June 30, 1992, subject to approval by the Company's shareholders at the 1992 annual meeting of shareholders. The purpose of the Plan is to promote the long-term success of the Company and the creation of shareholder value by (a) encouraging Non-Employee Directors and Key Employees to focus on critical long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors and Key Employees with exceptional qualifications and (c) linking Non-Employee Directors and Key Employees directly to shareholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for awards in the form of Options, which may constitute incentive stock options or nonstatutory stock options. The Plan shall be governed by, and construed in accordance with, the laws of the State of California. ARTICLE 2. ADMINISTRATION. ---------- -------------- 2.1 The Committee. The Plan shall be administered by the Committee ------------- appointed by the Board. 2.2 Committee Responsibilities. The Committee shall select the Non- -------------------------- Employee Directors and Key Employees who are to receive Options under the Plan, determine the number, vesting requirements and other conditions of such Options, interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. LIMITATION ON AWARDS. ---------- -------------------- 3.1 Basic Limitation. The aggregate number of Common Shares subject to ---------------- Options awarded under the Plan shall be 67,550; increased by any shares attributable to options that are forfeited, lapse, or terminate for any reason before being exercised under the Napa National Bancorp 1982 Stock Option Plan. In no event will the number of Common Shares subject to Options awarded under the Plan that are attributable to options that were forfeited, lapsed or terminated for any other reason before being exercised under the Napa National Bancorp 1982 Stock Option Plan exceed 158,800. 3.2 Additional Shares. If any Options are forfeited, lapse, or terminate ----------------- for any other reason before being exercised, -1- then the Common Shares subject to such Options shall again become available for the purposes of the Plan. The limitation of this Article 3 shall be subject to adjustment pursuant to Article 7. ARTICLE 4. ELIGIBILITY. ---------- ----------- 4.1 General Rule. Only Non-Employee Directors and Key Employees shall be ------------ eligible for designation as Optionees by the Committee. In addition, only Key Employees shall be eligible for the grant of ISOs. 4.2 Non-Employee Directors. Any other provision of the Plan ---------------------- notwithstanding, the participation of Non-Employee Directors in the Plan shall be subject to the following restrictions: (a) Non-Employee Directors shall receive no grants other than the NSOs described in this Section 4.2. (b) Each Non-Employee Director who first joins the Board after July 14, 1992, shall receive an NSO covering 10,000 Common Shares on the first business day after his or her initial election or appointment to the Board. (The number of Common Shares included in an NSO granted under this Subsection (b) shall be subject to adjustment under Article 7.) (c) NSOs granted under Subsection (b) above shall become exercisable immediately. (d) The Exercise Price under all NSOs granted to a Non-Employee Director under this Section 4.2 shall be equal to 100 percent of the Fair Market Value of a Common Share on the date of grant, payable in cash or in one of the forms described in Sections 6.2 or 6.3. (e) All NSOs granted to a Non-Employee Director under this Section 4.2 shall terminate on the earliest of (i) the 10th anniversary of the date of grant, (ii) the date of the termination of such Non-Employee Director's service for any reason other than death or total and permanent disability or (iii) the date 30 days after the termination of such Non-Employee Director's service because of death or total and permanent disability. 4.3 Ten-Percent Shareholders. A Key Employee who owns more than 10 ------------------------ percent of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless (a) the Exercise Price under such ISO is at least 110 percent of the Fair Market Value of a Common Share on the date of grant and (b) such ISO by its terms is not exercisable after the expiration of five years from the date of grant. -2- 4.4 Attribution Rules. For purposes of Section 4.3, in determining stock ----------------- ownership, a Key Employee shall be deemed to own the stock owned (directly or indirectly) by or for his or her brothers, sisters, spouse, ancestors and lineal descendants. Stock owned (directly or indirectly) by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its shareholders, partners or beneficiaries. Stock with respect to which the Key Employee holds an option shall not be counted. 4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding stock" ----------------- shall include all stock actually issued and outstanding immediately after the grant of the ISO to the Key Employee. "Outstanding stock" shall not include shares authorized for issuance under outstanding options held by the Key Employee or by any other person. ARTICLE 5. TERMS OF OPTIONS. ---------- ---------------- 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall ---------------------- be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. If the Optionee is a Key Employee, the Committee may designate all or any part of the Option as an ISO. 5.2 Options Nontransferable. No Option or interest therein may be ----------------------- transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. 5.3 Number of Shares; Tax Status. Each Stock Option Agreement shall ---------------------------- specify the number of Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 7. The Stock Option Agreement shall also specify whether the Option is an ISO or an NSO. 5.4 Exercise Price. Each Stock Option Agreement shall specify the -------------- Exercise Price. The Exercise Price under an ISO shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant, except as otherwise provided in Section 4.3. The Exercise Price under an NSO shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant. Subject to the preceding two sentences, the Exercise Price under any Option shall be determined by the Committee. The Exercise Price shall be payable in accordance with Article 6. -3- 5.5 Exercisability and Term. Each Stock Option Agreement shall specify ----------------------- the date when all or any installment of the Option is to become exercisable and shall provide for immediate exercisability of the entire Option in the event of a Change in Control with respect to the Company. The Stock Option Agreement shall also specify the term of the Option. The term of an Option shall in no event exceed 10 years from the date of grant, and Section 4.3 may require a shorter term for an ISO. Subject to this Section 5.5, the Committee shall determine when all or any part of an Option is to become exercisable and when such Option is to expire. A Stock Option Agreement may provide for accelerated exercisability upon the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. 5.6 Modification, Extension and Assumption of Options. Within the ------------------------------------------------- limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. ARTICLE 6. PAYMENT FOR OPTION SHARES. ---------- ------------------------- 6.1 General Rule. The entire Exercise Price of Common Shares issued upon ------------ exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee may specify in the Stock Option Agreement that payment may be made pursuant to Section 6.2, 6.3 or 6.4. (b) In the case of an NSO, the Committee may at any time accept payment pursuant to Section 6.2, 6.3 or 6.4. 6.2 Surrender of Stock. To the extent that this Section 6.2 is ------------------ applicable, payment for all or any part of the Exercise Price may be made with Common Shares which have already been owned by the Optionee for more than six months and which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. 6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, ------------- payment may be made by the delivery (on a form -4- prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Common Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 6.4 Other Forms of Payment. To the extent that this Section 6.4 is ---------------------- applicable, payment may be made in any other form approved by the Committee, consistent with applicable laws, regulations and rules. ARTICLE 7. PROTECTION AGAINST DILUTION. ---------- --------------------------- 7.1 General. In the event of a subdivision of the outstanding Common ------- Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee may make appropriate adjustments in one or more of (a) the number of' Options available for future awards under Article 3, (b) the number of Options included in awards to Non-Employee Directors under Section 4.2, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. 7.2 Reorganizations. In the event that the Company is a party to a merger --------------- or other reorganization, outstanding Options shall be subject to the agreement of merger or reorganization. Such agreement shall provide for the assumption or substitution of outstanding Options by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for settlement in cash. 7.3 Reservation of Rights. Except as provided in this Article 7, an --------------------- Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. -5- ARTICLE 8. LIMITATION OF RIGHTS. ---------- -------------------- 8.1 Employment Rights. Neither the Plan nor any Option granted under the ----------------- Plan shall be deemed to give any individual a right to remain an employee or director of the Company or a Subsidiary. The Company and its Subsidiaries reserve the right to terminate the service of any employee or director at any time, with or without cause, subject only to a written employment agreement (if any) or applicable by-law provisions. 8.2 Shareholders' Rights. An Optionee shall have no dividend rights, -------------------- voting rights or other rights as a shareholder with respect to any Common Shares covered by his or her Option prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Article 7. 8.3 Government Regulations. Any other provision of the Plan ---------------------- notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies or stock exchanges as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Option until such time as any legal requirements or regulations have been met relating to the issuance of such Common Shares, to their registration or qualification (or exemption from registration or qualification) under the Securities Act of 1933, as amended, or any applicable state securities laws, or to their listing on any stock exchange. ARTICLE 9. WITHHOLDING TAXES. ---------- ----------------- 9.1 General. To the extent required by applicable federal, state, local ------- or foreign law, an Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of an Option. The Company shall not be required to issue any Common Shares under the Plan until such obligations are satisfied. 9.2 Share Withholding. The Committee may permit an Optionee to satisfy ----------------- all or part of his or her withholding tax obligations by having the Company withhold a portion of any Common Shares that otherwise would be issued to him or her or by surrendering a portion of any Common Shares that previously were issued to him or her. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by assigning Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose. -6- ARTICLE 10. FUTURE OF THE PLAN. ----------- ------------------ 10.1 Term of the Plan. The Plan, as set forth herein, shall become ---------------- effective on June 30, 1992, subject to the approval of the Company's shareholders. In the event that the shareholders fail to approve the Plan at the 1992 annual meeting, or any adjournment thereof, any Options granted prior to such meeting shall be null and void, and no additional Options shall be granted after such meeting. Any other provision of the Plan notwithstanding, no Option shall be exercisable prior to such meeting. The Plan shall remain in effect until it is terminated under Section 10.2, except that no new Options shall be granted after June 29, 2002. 10.2 Amendment or Termination. The Board may, at any time and for any ------------------------ reason, amend or terminate the Plan, except that the provisions of Section 4.2 relating to the amount, price and timing of Option grants to Non-Employee Directors shall not be amended more than once in any six-month period. An amendment of the Plan shall be subject to the approval of the Company's shareholders only to the extent required by applicable laws, regulations or rules. 10.3 Effect of Amendment or Termination. No Options shall be granted ---------------------------------- under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option previously granted under the Plan. ARTICLE 11. DEFINITIONS. ----------- ----------- 11.1 "Board" means the Company's Board of Directors, as constituted from ----- time to time. 11.2 "Change in Control" means the occurrence of either of the following ----------------- events: (a) A change in the composition of the Board, as a result of which fewer than one-half of the incumbent directors are directors who either: (i) Had been directors of the Company 24 months prior to such change; or (ii) Were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (b) Any "person" (as such term is used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of -7- securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote. at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in. any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. 11.3 "Code" means the Internal Revenue Code of 1986, as amended. 11.4 "Committee" means the committee designated by the --------- Board, which is authorized to administer the Plan under Article 2 hereof. The Committee shall have membership composition which enables the Plan to qualify under Rule 16b-3 with regard to Options awarded to persons who are subject to Section 16 of the Exchange Act. 11.5 "Common Share" means one share of the common stock of the ------------ Company. 11.6 "Company" means Napa National Bancorp, a California -------- corporation. 11.7 "Exercise Price" means the amount for which one Common -------------- Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. 11.8 "Fair Market Value" shall mean the fair market value of a ----------------- Common Share, as determined by the Committee in good faith. 11.9 "ISO" means an incentive stock option described in section --- 422(b) of the Code. 11.10 "Key Employee" means a key common-law employee of the ------------ Company or of a Subsidiary, as determined by the Committee. 11.11 "Non-Employee Director" means a member of the Board who is --------------------- not a common-law employee of the Company or of a Subsidiary. 11.12 "NSO" means an employee stock option not described in --- section 422 or 423 of the Code. 11.13 "Option" means an ISO or NSO granted under the Plan and ------ entitling the holder to purchase one Common Share. -8- 11.14 "Optionee" means an individual or estate who holds an -------- Option. 11.15 "Plan" means this Napa National Bancorp 1992 Stock Option ---- Plan, as it may be amended from time to time. 11.16 "Stock Option Agreement" means the agreement between the ---------------------- Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 11.17 "Subsidiary" means any corporation, if the Company and/or ---------- one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ARTICLE 12. EXECUTION. ----------- --------- To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name and seal hereto. NAPA NATIONAL BANCORP By ______________________________ As its __________________________ -9- EX-10.2 6 FORM OF INCENTIVE STOCK OPTION AGREEMENT EXHIBIT 10.2 INCENTIVE STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT (the "Agreement"), made and entered into as of this _____ day of __________, 19 __, by and between Napa National Bancorp, a California corporation (the "Company"), and _____________, an employee (the "Optionee") of Napa National Bank, a wholly-owned subsidiary of the Company (the "Bank"). WITNESSETH ---------- WHEREAS, the Company has adopted the Napa National Bancorp 1982 Stock Option Plan, as amended and restated, effective July 15, 1988 (the "Plan"), providing for the grant to the officers and key full-time salaried employees of the Bank of options to purchase shares of its common stock, without par value (the "Common Stock"); and WHEREAS, the Plan provides for the grant of certain stock options which are intended to be incentive stock options ("incentive stock options" or "options") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Optionee is an officer or key employee of the Bank who is in a position to make an important contribution to the future growth and success of the Company; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Company hereby grants to the Optionee an incentive stock option to purchase ___________ shares of the Common Stock at the price set forth in Section 2, on the terms and subject to the conditions hereinafter stated. In consideration of the grant of this option and the other rights which are being concurrently granted to him or her, the Optionee hereby agrees to continue his or her employment with the Bank for a period of at least one year from the date of grant of this option. 2. The purchase price per share is __________ dollars ($____________) (the "Option Price"), which is hereby agreed to be 100% [110% if the Optionee is a more-than-10% shareholder] or more of the Fair Market Value, as defined in Section 4 hereof, of such Common Stock at the date of grant. The Option Price be subject to adjustment as hereinafter provided. 3. Subject to the provisions of this Agreement, this option can be exercised at any time during a period of _______ (__) months from the date of grant, as follows: (a) This option may be exercised immediately to the extent of not more than ___________ percent (_______%) of the shares of Common Stock covered hereby. (b) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of not more than _____________________ percent (_______%) of the shares of Common Stock covered hereby. (c) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional ______________________ percent (______%) of the shares of Common Stock covered hereby. (d) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (%) of the shares of Common Stock covered hereby. (e) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional ____________________ percent (______%) of the shares of Common Stock covered hereby. (f) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_____%) of the shares of Common Stock covered hereby. (g) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (___) of the shares of Common Stock covered hereby. (h) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an 2 additional _____________________ percent (_______%) of the shares of Common Stock covered hereby. (i) After the expiration of _______ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_____%) of the shares of Common Stock covered hereby. (j) After the expiration of _______ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_____%) of the shares of Common Stock covered hereby. (k) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (______%) of the shares of Common Stock covered hereby. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years [five (5) years if the Optionee is a more-than-10% shareholder] from the date of grant. 4. For the purposes of this Agreement, "Fair Market Value," when used in reference to the date of grant of this option or the date of any surrender of Common Stock in payment for the purchase of shares pursuant to the exercise of this option or in satisfaction of any withholding tax requirements, as the case may be, shall be determined by the Stock Option Committee of the Board of Directors of the Company (the "Committee") in accordance with any reasonable valuation method, including the valuation methods set forth in Section 20.2031-2 of the regulations promulgated under the Code. 5. The number of shares of Common Stock covered hereby and the price per share thereof shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of consideration by the Company. If the shares of Common Stock are changed into or exchanged for a different number or kind of shares of stock or securities of the Company or another corporation (whether by reason of reorganization, merger, consolidation, capitalization, classification, split-up, combination of shares, or 3 otherwise), the Optionee shall receive in substitution for each share of Common Stock issuable upon the exercise of this option the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each share shall be exchanged, or to which each such share shall be entitled, as the case may be. In addition, the Committee shall make appropriate adjustments in the number and kind of shares as to which this option, or portion thereof then unexercised, shall be exercisable so that the Optionee' 5 proportionate interest in the securities of the Company by reason of the Optionee' 5 rights hereunder shall be maintained as before the occurrence of such event.? Such adjustment shall be made without change in the total price as to the unexercised portion of this -option and with a corresponding adjustment in the Option Price. In the event of a sale, dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving or resulting corporation (unless the Company's obligations hereunder are assumed by the surviving or resulting corporation), options granted hereunder may be terminated by the Committee; provided, however, that immediately prior to such sale, --------- ------- dissolution, or liquidation, or merger or consolidation in which the Company is not the surviving or resulting corporation, the Company shall notify the Optionee as soon as practicable and, thereafter, this option may be exercised in whole or in part to the extent of any unexercised portion of this option, regardless of the vesting provisions of Section 3 of this Agreement; and, provided, further, that such right of exercise shall be conditioned upon the - --------- ------- execution of a final plan of dissolution or liquidation or a definitive agreement of merger or consolidation. In the event of an offer by any person or entity to all shareholders of the Company to purchase any or all shares of Common Stock (or shares of stock or other securities which are substituted for such shares or to which such shares are adjusted as provided in this Section 5), the option granted hereunder may be exercised upon the commencement of such offer to the extent of any unexercised or unvested portion of such option. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares shall be issued or delivered. The grant of the option granted hereunder shall not affect in any way the right or power of the Company to make 4 adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 6. No partial exercise of this option will be permitted for fewer than __________ shares of Common Stock. 7. The Company shall have the right to cancel this option at any time before it otherwise would have expired by its terms and to grant to the Optionee in substitution therefor a new option stating an Option Price which is lower (but not higher) than the Option Price stated in Section 2 of this Agreement and which, in any case, shall be no less than the Fair Market Value of the shares subject hereto on the date the new option is granted. The substituted option shall not be exercisable after the expiration of ten (10) years [five (5) years if the Optionee is a more-than-1O% shareholder] from the date of grant of this option. 8. If the Optionee's status as an officer or employee of the Bank is terminated due to total or partial disability within the meaning of Section 22(e)(3) of the Code (as determined by the Committee), this option may be exercised for a period of twelve (12) months after the date of such disability, provided the actual date of exercise is in no event after the expiration of the term of this option. If the Optionee' 5 status as an officer or employee of the Bank is terminated by death, the executors or administrators of the Optionee' 5 estate, or any person or persons who have acquired this option directly from the Optionee by the Optionee' 5 will or the applicable laws of descent and distribution, shall have the right to exercise this option, for a period of twelve (12) months, commencing with the death of the Optionee, provided the actual date of exercise is in no event after the expiration of the term of this option. If the Optionee's status as an officer or employee of the Bank is terminated for any of the reasons set forth in the paragraph captioned "CAUSE" under subsection 5(c)(3) of the Plan, this option shall expire at the time notice or advice of such termination is dispatched by the Company pursuant to the Plan and, notwithstanding anything else herein to the contrary, neither the Optionee nor the Optionee' 5 estate shall be entitled to exercise this option with respect to any shares whatsoever after such termination. If the Optionee's status as an officer or employee of the Bank is terminated for any reason other than those 5 specified in this Section 8, this option may be exercised within three (3) months following such termination to the extent this option was exercisable on the date of such termination, provided the date of exercise is in no event after the expiration of the term of this option. 9. This option shall be exercisable during the Optionee's lifetime only by the Optionee and shall be transferable by the Optionee only by will or the laws of descent and distribution. 10. Except as otherwise provided herein, the option herein granted and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution attachment or similar process upon the rights and privileges conferred hereby. Upon any attempt to transfer, assign, pledge or otherwise dispose of said option, or of any right or privilege conferred hereby, contrary to the provisions hereof 1 or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, said option and the rights and privileges conferred hereby shall immediately become null and void. 11. This option may be exercised by delivering to the Secretary of the Company payment in full at the Option Price for the number of shares of Common Stock being purchased. The Option Price may be paid by delivering, at the discretion of the Committee, (a) cash, a certified check, an official bank check or the equivalent thereof acceptable to the Company; (b) shares of Common Stock with a Fair Market Value as of the date of exercise equal to the Option Price, or (c) shares of Common Stock, with a Fair Market Value as of the date of exercise less than the full amount of the Option Price plus cash, a certified check, an official bank check or the equivalent thereof acceptable to the Company equal to the remaining amount of the Option Price, in each case together with a written notice identifying this option or the part thereof being. exercised and specifying the number of shares of Common Stock for which payment is being tendered. The Company shall deliver to the Optionee, which delivery shall be not less than fifteen (15) days and not more than thirty (30) days after the giving of such notice, without transfer or issue tax to the Optionee (or other person entitled to exercise this option), at the principal office of the Company, or such other place as shall be mutually acceptable, a certificate or certificates for such shares of Common Stock dated the date that this option was validly exercised; provided, however, that the time of such delivery --------- ------- may be postponed by the Company for such period as may be required for it with reasonable 6 diligence to comply with any requirements of law. If the Option Price is satisfied in whole or in part by delivery of shares of Common Stock, separate stock certificates shall be issued, one or more for the number of shares of stock received equal to the number of shares of Common Stock delivered and one or more for the remainder of the shares received upon the exercise. 12. Neither the Optionee nor any person claiming under or through him shall be or have any of the rights of a shareholder of the Company in respect of any of the shares issuable upon the exercise of this option until the date of issuance of a stock certificate for such shares by the Company. The Optionee shall not be entitled to the privileges of stock ownership as to any shares not actually issued and delivered to the Optionee. 13. Any notice to be given to the Company under the terms of this Agreement shall be addressed to Napa National Bankcorp, in care of its Secretary, at 1500 Third Street, P.O. Box 479, Napa, California 94559-0479, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Optionee shall be addressed to the Optionee at the address set forth beneath his or her signature hereto, or at any such other address as the Optionee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered and deposited, postage and registry fee prepaid, in a post office or branch post office regularly maintained by the United States government. 14. Subject to the limitations on transferability contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legal representatives, successors and assigns of the parties hereto. 15. The option granted hereby is subject to the requirement that if at any time the Board of Directors or the Committee shall determine in its discretion that the listing or qualification of the shares of Common Stock subject to such option on any securities exchange or under any applicable law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance of shares under this option, such option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board of Directors or the Committee. 7 16. Unless the Optionee is required to give the notice required by Section 17 hereof, the Optionee shall give the Company notice of any sale or other disposition of any shares issued pursuant to the exercise of this option not more than five (5) days after such sale or other disposition. The exercise of this option shall be conditioned upon the registration of the Plan with the Securities and Exchange Commission and qualification of the Plan with the Commissioner of Corporations of the State of California unless in the opinion of counsel to the Company such registration and qualification is not necessary. Further, unless the shares of Common Stock to be issued upon exercise of this option have been effectively registered under the Securities Act of 1933 and qualified under the California Corporate Securities Law of 1968, as each is now in force or hereafter amended, the Company shall be under no obligation to issue any shares of Common Stock covered by this option unless the person who' exercises such option, in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and scope to counsel to the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring the shares of Common Stock issued to him or her pursuant to such exercise of this option for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such shares of Common Stock, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act of 1933, the California Corporate Securities Law of 1968, or any other applicable law, and that if shares of Common Stock are issued without such registration or qualification, a legend to this effect shall be endorsed upon the securities so issued. 17. Section 16 hereof notwithstanding, in the event the Optionee sells or otherwise disposes of any of the shares that may be acquired hereunder within two (2) years of the date hereof or within one (1) year of the date such shares are acquired hereunder, the Optionee agrees to notify the Company in writing within ten (10) days of the date of such sale or other disposition of the number of shares sold or disposed of, the nature of the transaction, and the amount received (if any) upon such sale or other disposition. The Optionee understands that such a sale or other disposition may result in imposition of withholding taxes, and agrees to remit to the Company on request any amounts requested to satisfy any withholding tax liability. 18. The Optionee agrees to notify in writing the Corporate Secretary of the Company of his or her intention, if 8 any, to terminate his or her employment within ten (10) days after said intention is formed. 19. Subject to any employment contract with the Optionee, the terms of employment of the Optionee shall be determined from time to time by the Bank and the Bank shall have the right, which is hereby expressly reserved, to terminate the employee or change the terms of the employment at any time for any reason whatsoever, with or without good cause. 20. Whenever shares of Common Stock are to be issued to the Optionee in satisfaction of the rights conferred hereby, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever the Optionee is required to pay to the Company an amount required to be withheld under applicable federal and state income tax laws in connection with receipt of shares of Common Stock upon exercise of this option, the Committee may, in its absolute discretion, permit the Optionee to satisfy such obligation, in whole or in part, by electing to have the Company withhold shares of Common Stock having a value equal to the amount required to be withheld or by delivering to the Company already-owned shares to satisfy the withholding requirement. The amount of the withholding requirement shall include any amount agreed to be withheld at the time the election is made, not in excess of the maximum federal and state income tax rates applicable to the Optionee on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). The value of the shares to be withheld or delivered will be based on their Fair Market Value on the Tax Date. Such elections will be subject to the following restrictions: (1) the election must be made on or before the Tax Date; (2) the election will be irrevocable; and (3) the election will be subject to the disapproval of the Committee. Each election by an optionee whose transactions in shares of Common Stock are subject to Section 16(b) of the Securities Exchange Act of 1934 will be subject to the following additional restrictions: (1) the election may not be made within six (6) months of the grant of this option (except that this limitation will not apply in the event death or disability of the optionee occurs prior to the expiration of the six-month period), and (2) the election must be made either at least six (6) months before the Tax Date or within a ten (10) day period beginning on the third day following the release of the Company' 5 quarterly or annual summary statement of earnings. 9 21. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the committee in good faith shall be final and binding upon Optionee, the Company and all other interested persons. No member of the Board of Directors or of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 22. In the event that any provisiuon of this Agreemetn shall be invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this agreement. IN WITNESS HEREOF, the parties hereto have executed this Agreement, in duplicate, the day and year first above written. NAPA NATIONAL BANCORP By _________________________ Its______________________ ACCEPTED: ___________________________ Optionee ___________________________ ___________________________ (Address) 10 EX-10.3 7 FORM OF NONSTATUTORY STOCK OPTION AGREEMENT EXHIBIT 10.3 NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION AGREEMENT (the "Agreement"), made. and entered into as of this _____ day of __________ 19____ by and between Napa National Bancorp, a California corporation (the "Company"), and _____________ [an employee (the "Optionee") of Napa National Bank, a wholly-owned subsidiary of the Company (the "Bank")] [a nonemployee director of the Company]. WITNESSETH ---------- WHEREAS, the Company has adopted the Napa National Bancorp 1982 Stock Option Plan, as amended and restated, effective July 15, 1988 (the "Plan/"/), providing for the grant to its nonemployee directors and the officers and key full-time salaried employees of the [Napa National] Bank [, a wholly-owned subsidiary of the Company (the "Bank"),] of options to purchase shares of its common stock, without par value (the "Common Stock"); and WHEREAS, the Plan provides for the grant of certain stock options which are not intended to be incentive stock options ("nonstatutory stock options/" /or "options") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, the Optionee is a nonemployee director of the Company or an officer or key employee of the Bank who is in a position to make an important contribution to the future growth and success of the Company; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Company hereby grants to the Optionee a nonstatutory stock option to purchase ___________ shares of the Common Stock at the price set forth in Section 2, on the terms and subject to the conditions hereinafter stated. If the Optionee is an employee of the Bank, in consideration of the grant of this option and the other rights which are being concurrently granted to him or her, the Optionee hereby agrees to continue his or her employment with the Bank for a period of at least one year from the date of grant of this option. If the Optionee is a nonemployee director of the Company, in consideration of the grant of this option and the other rights which are being concurrently granted to him or her, the Optionee hereby agrees to continue his or her directorship with the Company during the term for which he or she was elected. 2. The purchase price per share is _________ dollars ($_________.__) (the "Option Price"), which is hereby agreed to be 100% or more of the Fair Market Value, as defined in Paragraph 4 hereof, of such Common Stock at the date of grant. The Option Price shall be subject to adjustment as hereinafter provided. 3. Subject to the provisions of this Agreement, this option can be exercised at any time during a period of _______ (___) months from the date of grant, as follows: (a) This option may be exercised immediately to the extent of not more than ___________ percent (_______%) of the shares of Common Stock covered hereby. (b) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of not more than _____________________ percent (_______%) of the shares of Common Stock covered hereby. (c) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional ______________________ percent (______%) of the shares of Common Stock covered hereby. (d) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (%) of the shares of Common Stock covered hereby. (e) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional ____________________ percent (______%) of the shares of Common Stock covered hereby. (f) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_____%) of the shares of Common Stock covered hereby. 2 (g) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (___) of the shares of Common Stock covered hereby. (h) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_______%) of the shares of Common Stock covered hereby. (i) After the expiration of _______ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_____%) of the shares of Common Stock covered hereby. (j) After the expiration of _______ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (_____%) of the shares of Common Stock covered hereby. (k) After the expiration of ________ (___) months from the date of grant, this option may be exercised to the extent of an additional _____________________ percent (______%) of the shares of Common Stock covered hereby. Notwithstanding any other provision of this Agreement, this option is not exercisable after the expiration of ten (10) years and one (1) month from the date of grant. 4. For the purposes of this Agreement, "Fair Market Value," when used in reference to the date of grant of this option or the date of any surrender of Common Stock in payment for the purchase of shares pursuant to the exercise of this option or in satisfaction of any withholding tax requirements, as the case may be, shall be determined by the Stock Option Committee of the Board of Directors of the Company (the "Committee") in accordance with any reasonable valuation method, including the valuation methods set forth in Section 20.2031-2 of the regulations promulgated under the Code. 5. The number of shares of Common Stock covered hereby and the price per share thereof shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares or the 3 payment of a stock dividend, or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of consideration by the Company. If the shares of Common Stock are changed into or exchanged for a different number or kind of shares of stock or securities of the Company or another corporation (whether by reason of reorganization, merger, consolidation, recapitalization, reclassification, split-up, combination of shares, or otherwise), the Optionee shall receive in substitution for each share of Common Stock issuable upon the exercise of this option the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each share shall be exchanged, or to which each such share shall be entitled, as the case may be. In addition, the Committee shall make appropriate adjustments in the number and kind of shares as to which this option, or portion thereof then unexercised, shall be exercisable so that the Optionee's proportionate interest in the securities of the Company by reason of the Optionee' 5 rights hereunder shall be maintained as before the occurrence of such event. Such adjustment shall be made without change in the total price as to the unexercised portion of this option and with a corresponding adjustment in the Option Price. In the event of a sale, dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving or resulting corporation (unless the Company's obligations hereunder are assumed by the surviving or resulting corporation), options granted hereunder may be terminated by the Committee; provided, however, that immediately prior to such --------- ------- sale,-dissolution, or liquidation, or merger or consolidation in which the Company is not the surviving or resulting corporation, the Company shall notify the Optionee as soon as practicable and, thereafter, this option may be exercised in whole or in part to the extent of any unexercised portion of this option, regardless of the vesting provisions of Section 3 of this Agreement; and, provided, further, that such right of exercise shall be conditioned -------- ------- upon the execution of a final plan of dissolution or liquidation or a definitive agreement of merger or consolidation. In the event of an offer by any person or entity to all shareholders of the Company to purchase any or all shares of Common Stock (or shares of stock or other securities which are substituted for such shares or to which such shares are adjusted as provided in this Section 5), the option granted hereunder may be exercised upon the commencement of such offer to the extent of any unexercised or unvested portion of such option. 4 To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares shall be issued or delivered. The grant of the option granted hereunder shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 6. No partial exercise of this option will be permitted for fewer than ___________ shares of Common Stock. 7. Unless the Optionee is a nonemployee director of the Company, the Company shall have the right to cancel this option at any time before it otherwise would have expired by its terms and to grant to the Optionee in substitution therefor a new option stating an Option Price which is lower (but not higher) than the Option Price stated in Section 2 of this Agreement and which, in any case, shall be no less than the Fair Market Value of the shares subject hereto on the date the new option is granted. The substituted option shall not be exercisable after the expiration of ten (10) years and one (1) month from the date of grant of this option. 8. If the Optionee's status as a nonemployee director of the Company or an officer or employee of the Bank is terminated due to total or partial disability within the meaning of Section 22(e)(3) of the Code (as determined by the Committee), this option may be exercised for a period of twelve (12) months after the date of such disability, provided the actual date of exercise is in no event after the expiration of the term of this option. If the Optionee's status as a nonemployee director of the Company or an officer or employee of the Bank is terminated by death, the executors or administrators of the Optionee's estate, or any person or persons who have acquired this option directly from the Optionee by the Optionee's will or the applicable laws of descent and distribution, shall have the right to exercise this option, for a period of twelve (12) months, commencing with the death of the Optionee, provided the actual date of exercise is in no event after the expiration of the term of this option. If the Optionee's status as a nonemployee director of the Company or an officer or employee of the Bank is terminated for any of the reasons set forth in the paragraph 5 captioned "CAUSE" under subsection 5(c)(3) of the Plan, this option shall expire at the time notice or advice of such termination is dispatched by the Company pursuant to the Plan and, notwithstanding anything else herein to the contrary, neither the Optionee nor the Optionee' 5 estate shall be entitled to exercise this option with respect to any shares whatsoever after such termination. If the Optionee's status as a nonemployee director of the Company or an officer or employee of the Bank is terminated for any reason other than those specified in this Section 8, this option may be exercised within three (3) months following such termination to the extent this option was exercisable on the date of such termination, provided the date of exercise is in no event after the expiration of the term of this option. Notwithstanding the foregoing provisions of this Section 8, if the status of the Optionee as a nonemployee director is terminated because it is determined that the Optionee is, or in the view of a Federal bank regulatory agency would be, precluded from continuing service as a member of the Board of Directors of the Company by virtue of a concurrent relationship of the Optionee with an organization primarily engaged in the issue, underwriting or distribution of securities and if that Optionee shall, as an independent advisor or consultant, provide without other remuneration advice, services or other assistance to the Company or the Bank of at least the same quality or quantity as the Optionee rendered as a director, then this option shall remain in full force until the earlier of (i) expiration according to the terms of this option, (ii) termination because of death, disability or cause as described above and in accordance with those paragraphs applicable to such reasons for termination, or (iii) a determination made by the Board of Directors of the Company in its sole discretion that the Optionee's assistance to the Company or Bank has ceased to be of at least the same quality or quantity as the Optionee rendered while a director. In the event that this option is terminated pursuant to such a Board of Directors' determination, the Optionee may within three (3) months of that determination exercise this option to the extent this option was exercisable by the Optionee on the date of such determination. 9. This option shall be exercisable during the Optionee's lifetime only by the Optionee and shall be transferable by the Optionee only by will or the laws of descent and distribution. 10. Except as otherwise provided herein, the option herein granted and the rights and privileges conferred hereby 6 shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution attachment or similar process upon the rights and privileges conferred hereby. Upon any attempt to transfer, assign, pledge or otherwise dispose of said option, or of any right or privilege conferred hereby, contrary to the provisions hereof, or upon any attempted sale under any execution, attachment or similar process upon the rights and privileges conferred hereby, said option and the rights and privileges conferred hereby shall immediately become null and void. 11. This option may be exercised by delivering to the Secretary of the Company payment in full at the Option Price for the number of shares of Common Stock being purchased. The Option Price may be paid by delivering, at the discretion of the Committee, (a) cash, a certified check, an official bank check or the equivalent thereof acceptable to the Company; (b) shares of Common Stock with a Fair Market Value as of the date of exercise equal to the Option Price, or (c) shares of Common Stock, with a Fair Market Value as of the date of exercise less than the full amount of the Option Price plus cash, a certified check, an official bank check or the equivalent thereof acceptable to the Company equal to the remaining amount of the Option Price, in each case together with a written notice identifying this option or the part thereof being exercised and specifying the number of shares of Common Stock for which payment is being tendered. The Company shall deliver to the Optionee, which delivery shall be not less than fifteen (15) days and not more than thirty (30) days after the giving of such notice, without transfer or issue tax to the Optionee (or other person entitled to exercise this option), at the principal office of the Company, or such other place as shall be mutually acceptable, a certificate or certificates for such shares of Common Stock dated the date that this option was validly exercised; provided, however, that the time of such delivery --------- ------- may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any requirements of law. If the Option Price is satisfied in whole or in part by delivery of shares of Common Stock, separate stock certificates shall be issued, one or more for the number of shares of stock received equal to the number of shares of Common Stock delivered and one or more for the remainder of the shares received upon the exercise. 12. Neither the Optionee nor any person claiming under or through him shall be or have any of the rights of a shareholder of the Company in respect of any of the shares issuable upon the exercise of this option until the date of issuance of a stock certificate for such shares by the 7 Company. The Optionee shall not be entitled to the privileges of stock ownership as to any shares not actually issued and delivered to the Optionee. 13. Any notice to be given to the Company under the terms of this Agreement shall be addressed to Napa National Bankcorp, in care of its Secretary, at 1500 Third Street, P.O. Box 479, Napa, California 94559-0479, or at such other address as the Company may hereafter designate in writing. Any notice to be given to the Optionee Shall be addressed to the Optionee at the address set forth beneath his or her signature hereto, or at any such other address as the Optionee may hereafter designate in writing. Any such notice shall be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, registered and deposited, postage and registry fee prepaid, in a post office or branch post office regularly maintained by the United States government. 14. Subject to the limitations on transferability contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legal representatives, successors and assigns of the parties hereto. 15. The option granted hereby is subject to the requirement that if at any time the Board of Directors or the Committee shall determine in its discretion that the listing or qualification of the shares of Common Stock subject to such option on any securities exchange or under any applicable law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance of shares under this option, such option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board of Directors or the Committee. 16. Unless the Optionee is required to give the notice required by Section 17 hereof, the Optionee shall give the Company notice of any sale or other disposition of any shares issued pursuant to the exercise of this option not more than five (5) days after such sale or other disposition. The exercise of this option shall be conditioned upon the registration of the Plan with the Securities and Exchange Commission and qualification of the Plan with the Commissioner of Corporations of the State of California unless in the opinion of counsel to the Company such registration and qualification is not necessary. Further, unless the shares of Common Stock to be issued upon exercise of this option have been effectively registered under the Securities Act of 1933 8 and qualified under the California Corporate Securities Law of 1968, as each is now in force or hereafter amended, the Company shall be under no obligation to issue any shares of Common Stock covered by this option unless the person who exercises such option, in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and scope to counsel to the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring the shares of Common Stock issued to him or her pursuant to such exercise of this option for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such shares of Common Stock, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act of 1933, the California Corporate Securities Law of 1968, or any other applicable law, and that if shares of Common Stock are issued without such registration or qualification, a legend to this effect shall be endorsed upon the securities so issued. 17. Section 16 hereof notwithstanding, in the event the Optionee sells or otherwise disposes of any of the shares that may be acquired hereunder within two (2) years of the date hereof or within one (1) year of the date such shares are acquired hereunder, the Optionee agrees to notify the Company in writing within ten (10) days of the date of such sale or other disposition of the number of shares sold or disposed of, the nature of the transaction, and the amount received (if any) upon such sale or other disposition. The Optionee understands that such a sale or other disposition may result in imposition of withholding taxes, and agrees to remit to the Company on request any amounts requested to satisfy any withholding tax liability. 18. The Optionee agrees to notify in writing the Corporate Secretary of the Company of his or her intention, if any, to terminate his or her employment within ten (10) days after said intention is formed. 19. Subject to any employment contract with the Optionee, the terms of employment of the Optionee shall be determined from time to time by the Bank and the Bank shall have the right, which is hereby expressly reserved, to terminate the employee or change the terms of the employment at any time for any reason whatsoever, with or without good cause. 20. Whenever shares of Common Stock are to be issued to the Optionee in satisfaction of the rights conferred hereby, the Company shall have the right to require the 9 Optionee to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Whenever the Optionee is required to pay to the Company an amount required to be withheld under applicable federal and state income tax laws in connection with receipt of shares of Common Stock upon exercise of this option, the Committee may, in its absolute discretion, permit the Optionee to satisfy such obligation, in whole or in part, by electing to have the Company withhold shares of Common Stock having a value equal to the amount required to be withheld or by delivering to the Company already-owned shares to satisfy the withholding requirement. The amount of the withholding requirement shall include any amount agreed to be withheld at the time the election is made, not in excess of the maximum federal and state income tax. rates applicable to the Optionee on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). The value of the shares to be withheld or delivered will be based on their Fair Market Value on the Tax Date. Such elections will be subject to the following restrictions: (1) the election must be made on or before the Tax Date; (2) the election will be irrevocable; and (3) the election will be subject to the disapproval of the Committee. Each election by an optionee whose transactions in shares of Common Stock are subject to Section 16(b) of the Securities Exchange Act of 1934 will be subject to the following additional restrictions: (1) the election may not be made within six (6) months of the grant of this option (except that this limitation will not apply in the event death or disability of the optionee occurs prior to the expiration of the six-month period), and (2) the election must be made either at least six (6) months before the Tax Date or within a ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of earnings. 21. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon Optionee, the Company and all other interested persons. No member of the Board of Directors or of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 22. In the event that any provision of this Agreement shall be invalid or unenforceable, such provision shall be severable from, and such invalidity or 10 unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. IN WITNESS HEREOF, the parties hereto have executed this Agreement, in duplicate, the day and year first above written. NAPA NATIONAL BANCORP By_______________________________ Its______________________________ ACCEPTED: ______________________________ Optionee ______________________________ ______________________________ (Address) 11 EX-27 8 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 7,929 4,158 16,550 0 0 0 2,277 79,695 (1,405) 113,827 105,417 0 61 0 0 0 6,915 0 113,827 8,277 896 0 9,173 230 2,814 5,809 550 0 5,099 1,516 1,516 0 0 902 1.196 0.982 9.740 3,480 0 0 0 1,325 544 74 1,405 1,405 0 0
-----END PRIVACY-ENHANCED MESSAGE-----