-----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, THVGKTGQ9C61AJQJJl+YRI9L6jP6U3fugRUR54xvhU9K/CANOWjtw+liFnkh+IhA Z1SySW62PVtVgTU7G/z4vA== 0000929624-99-001949.txt : 19991117 0000929624-99-001949.hdr.sgml : 19991117 ACCESSION NUMBER: 0000929624-99-001949 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-11090 FILM NUMBER: 99751606 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 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the QUARTER ENDED SEPTEMBER 30, 1999 Commission file number: 0-11090 NAPA NATIONAL BANCORP (Exact name of Small Business Issuer as specified in its charter) CALIFORNIA 94-2780134 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 901 MAIN STREET, NAPA, CALIFORNIA 94559 (Address of principal executive offices) (Zip Code) (707) 257-2440 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the registrant's Common Stock, no par value, outstanding as of September 30, 1999, was 792,675. Transitional Small Business Disclosure Format: Yes No X ----- ----- NAPA NATIONAL BANCORP TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS Consolidated Balance Sheets: September 30, 1999 December 31, 1998 Consolidated Statements of Income: Three Months ended September 30, 1999 Three Months ended September 30, 1998 Nine Months ended September 30, 1999 Nine Months ended September 30, 1998 Consolidated Statements of Cash Flows: Nine Months ended September 30, 1999 Nine Months ended September 30, 1998 Notes to Consolidated Financial Statements ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ITEM 4 - OTHER INFORMATION ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES INDEX TO EXHIBITS 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS The following interim consolidated financial statements of Napa National Bancorp and its subsidiary Napa National Bank are unaudited and prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. However, they reflect all adjustments (which included only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods presented and are normal and recurring. Results for the period as presented are not necessarily indicative of results to be expected of the year as a whole. 3 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in 000's)
September 30, December 31, 1999 1998 ----------------------- ---------------------- ASSETS Cash and due from banks $ 8,578 $ 9,969 Federal funds sold 1,480 13,590 Investment securities: Available for Sale, at market value 36,878 33,844 Investment securities: Held to Maturity, at amortized cost 2,705 1,798 Federal Reserve and Federal Home Loan Bank Stock 592 553 Loans, less allowance for loan losses of $1,786 and $1,671 at September 30, 1999 and December 31, 1998 94,836 77,647 Premises, furniture, fixtures and equipment, net 4,144 3,908 Accrued interest receivable 1,286 1,211 Other real estate owned - 262 Other assets 1,766 1,307 -------- -------- TOTAL ASSETS $152,265 $144,089 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing demand $ 38,518 $ 36,557 Interest-bearing: Savings 26,395 20,534 Transaction 34,436 33,042 Time certificates 41,714 43,118 -------- -------- Total deposits 141,063 133,251 Accrued interest payable and other liabilities 977 1,025 -------- -------- TOTAL LIABILITIES 142,040 134,276 -------- -------- SHAREHOLDERS' EQUITY Common stock, no par value, 20,000,000 shares authorized; 792,675 and 791,000 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 7,223 7,207 Retained earnings 3,443 2,607 Net unrealized loss on available for sale securities, net of taxes (441) (1) -------- -------- TOTAL SHAREHOLDERS' EQUITY 10,225 9,813 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $152,265 $144,089 ======== ========
(See notes to the unaudited consolidated financial statements) 4 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in 000's, except earnings per share)
Three Months Ended September 30, ----------------------------------------------- 1999 1998 ---------------------- ----------------- Interest income: Interest and fees on loans $ 2,025 $ 2,010 Interest on federal funds sold 65 98 Interest on time deposits with other financial institutions - 2 Interest and dividends on investment securities 549 533 -------- -------- Total interest income 2,639 2,643 Interest expense: Interest expense on deposits 816 879 Interest expense on Fed Funds Purchased 2 - -------- -------- Total interest expense: 818 879 -------- -------- Net interest income 1,821 1,764 Provision for loan losses - 75 -------- -------- Net interest income after provision for loan losses 1,821 1,689 -------- -------- Non-interest income: Service charges on deposit accounts 156 151 Mortgage loan service fees 8 12 Other 136 146 -------- -------- Total non-interest income 300 309 -------- -------- Non-interest expense: Salaries and employee benefits 1,000 1,075 Occupancy 104 127 Furniture, fixtures and equipment 107 75 Other 401 403 -------- -------- Total non-interest expense 1,612 1,680 -------- -------- Income before income taxes 509 318 Income taxes 174 112 -------- -------- Net income $ 335 $ 206 ======== ======== Earnings per common share $ 0.42 $ 0.26 ======== ======== Earnings per common share - Assuming Dilution $ 0.40 $ 0.25 ======== ======== Weighted average common shares outstanding used to compute net earnings per common share 792,675 787,000 ======== ======== Weighted average common shares outstanding used to compute net earnings per common share - Assuming Dilution 841,672 830,392 ======== ========
(See notes to the unaudited consolidated financial statements) 5 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in 000's, except earnings per share)
Nine Months Ended September 30, ----------------------------------------------- 1999 1998 ---------------------- ----------------- Interest income: Interest and fees on loans $ 5,720 $ 6,043 Interest on federal funds sold 353 509 Interest on time deposits with other financial institutions - 18 Interest and dividends on investment securities 1,525 1,330 -------- -------- Total interest income 7,598 7,900 Interest Expense: Interest expense on deposits 2,403 2,627 Interest on Fed Funds Purchased 2 - -------- -------- Total Interest Expense 2,405 2,627 -------- -------- Net interest income 5,193 5,273 Provision for loan losses - 265 -------- -------- Net interest income after provision for loan losses 5,193 5,008 -------- -------- Non-interest income: Service charges on deposit accounts 456 396 Mortgage loan service fees 26 38 Other 422 427 -------- -------- Total non-interest income 904 861 -------- -------- Non-interest expense: Salaries and employee benefits 2,685 2,687 Occupancy 281 366 Furniture, fixtures and equipment 306 282 Other 1,227 1,180 -------- -------- Total non-interest expense 4,499 4,515 -------- -------- Income before income taxes 1,598 1,354 Income taxes 562 518 -------- -------- Net income $ 1,036 $ 836 ======== ======== Earnings per common share $ 1.31 $ 1.07 ======== ======== Earnings per common share - Assuming Dilution $ 1.23 $ 1.01 ======== ======== Weighted average common shares outstanding used to compute net earnings per common share 792,247 784,333 ======== ======== Weighted average common shares outstanding used to compute net earnings per common share - Assuming Dilution 840,741 827,203 ======== ========
(See notes to the unaudited consolidated financial statements) 6 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in 000's)
Nine Months Ended September 30, -------------------------------------------- 1999 1998 ------------------ ------------------ Cash flows from operating activities: Net income $ 1,036 $ 836 Reconciliation of net income to net cash provided by operating activities: Depreciation on premises and equipment 303 303 Extension of non-statutory stock options 60 153 (Gain)loss on sale of other real estate owned (9) 6 Amortization of deferred loan fees and discounts/premiums on securities 347 230 Provision for loan losses - 265 Decrease/(Increase) in accrued interest receivable (75) (347) Decrease/(Increase) in other assets, net (119) (209) Decrease in accrued interest payable and other liabilities (48) (7) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,495 1,230 ======== ======== Cash flows from investing activities: Loan originations, net of repayments (17,184) (2,216) Proceeds from maturities of time deposits with other financial institutions - 1,782 Activity in securities held to maturity: Purchases (2,611) (1,923) Maturities 1,698 1,948 Principal Paydowns 6 - Activity in securities available for sale: Purchases (12,027) (21,248) Principal Paydowns 7,157 4,603 Funds from Call on Available for sale 738 792 (Purchases)Sale of Federal Reserve and Federal Home Loan Bank stock (39) 35 Purchases of furniture and equipment (538) (274) Proceeds on sale of other real estate owned 275 340 -------- -------- NET CASH USED BY INVESTING ACTIVITIES (22,525) (16,161) ======== ======== Cash flows from financing activities: Net increase in deposits 7,810 3,940 Stock options exercised 16 - Cash dividends (297) (294) Compensation expense related to the exercise of incentive stock options - 60 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,529 3,706 ======== ======== (continued) (See notes to the unaudited consolidated financial statements)
7 NAPA NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in 000's)
Nine Months Ended September 30, -------------------------------------------- 1999 1998 ------------------ ------------------ DECREASE IN CASH AND CASH EQUIVALENTS (13,501) (11,225) Cash and cash equivalents at beginning of period 23,559 26,147 -------- -------- Cash and cash equivalents at end of period $ 10,058 $ 14,922 ======== ======== CASH AND CASH EQUIVALENTS AT SEPTEMER 30: Cash and due from banks $ 8,578 $ 7,647 Federal funds sold 1,480 7,275 -------- -------- $ 10,058 $ 14,922 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 2,473 $ 2,672 ======== ======== Cash paid for income taxes $ 675 $ 623 ======== ========
(See notes to the unaudited consolidated financial statements) 8 NAPA NATIONAL BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and display of comprehensive income or loss and its components; however, the adoption of the Statement had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income or loss. The following is a summary of the components of total comprehensive income, net of related income taxes:
1999 1998 ------------------------------ ----------------------------------------------- Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------------------------------ ----------------------------------------------- Net income $ 335 $ 383 $ 318 $ 487 $ 206 $ 338 $ 292 Net unrealized gain (loss) on available-for-sale securities (105) (278) (57) (120) 175 (6) (73) ------------------------------ ----------------------------------------------- Total Comprehensive income $ 230 $ 105 $ 261 $ 367 $ 381 $ 332 $ 219 ============================== ===============================================
Note 3 - Extension of Non-Statutory Stock Options On July 20, 1999, The Board of Directors approved the extension of 10,000 non- statutory options that expired on September 16, 1999. The new expiration date is September 16, 2000. Based on current market value of the Company's Common Stock of $17.85, the extension of the exercise periods for these non-statutory options resulted in the Company taking a charge against third quarter earnings of $60,512, net of taxes. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Napa National Bancorp (the "Company") was incorporated in 1981 in the State of California and is headquartered in Napa, California. The Company is a bank holding company. Its principal subsidiary, Napa National Bank (the "Bank"), was organized as a national banking association in 1982. The following discussion and analysis by the Company's management compares the results of the Company's operations for the nine months ended September 30, 1999 and 1998 and the financial condition and liquidity of the Company as of September 30, 1999 and December 31, 1998. Certain matters discussed in this report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the competitive environment and its impact on the Company's net interest margin, changes in interest rates, asset quality risks, concentrations of credit and the economic health of Napa County (particularly the health of the wine industry), volatility of rate sensitive deposits, asset/liability matching risks, the dilutive impact which might occur upon the issuance of new shares of common stock, and liquidity risks. Therefore, the matters set forth below should be carefully considered when evaluating the Company's business and prospects. For additional information concerning these risks and uncertainties, please refer to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. Financial Condition The Company's assets increased approximately $8.2 million during the first nine months of 1999 as compared to the period ended December 31, 1998. The substantial portion of that increase was due to the increase in non-interest bearing deposits of $2.0 million, savings deposits of $5.9 million, and interest bearing transaction deposits of $1.4 million. Time certificates of deposit comparatively declined $1.4 million. Total assets were $152.3 million at September 30, 1999 compared with $144.1 million at December 31, 1998. Total deposits increased to $141.1 million at September 30, 1999 compared with $133.3 million at December 31, 1998. The loan portfolio of $94.8 million at September 30, 1999 increased $17.2 million as compared to the December 31, 1998 total of $77.6 million. The allowance for loan losses on September 30, 1999 was $1,786,000 or 1.88% of total gross loans outstanding. Loan recoveries exceeded loan charge-offs for the first nine months of 1999 by $115,000. In the opinion of management, the allowance for loan losses was considered adequate at September 30, 1999 based on management's analysis of the risks inherent in the loan portfolio. The Company's "held to maturity securities" consist of Treasury bonds, municipals and stock in the Federal Reserve and Federal Home Loan Bank and are classified as such in accordance with SFAS No. 115. At September 30, 1999, the "held to maturity" investment portfolio's amortized cost and fair market value was $3,297,000. 10 The Company's available for sale portfolio include collateralized mortgage obligations and municipal bonds. The Company's general policy is to acquire "A" rated or better, insured tax-free municipal bonds. Collateralized mortgage obligations have an average life of five years or less at purchase date. At September 30, 1999, collateralized mortgage obligations and municipal securities had an amortized cost of $27,721,000 and $9,904,000, respectively, and a fair value of $27,359,000 and $9,522,000, respectively. Results of Operations The Company's after-tax earnings were $1,036,000 during the first nine months of 1999 compared with $836,000 during the same period in 1998. Net interest income, the principal source of the Company's earnings, represents the difference between interest and fees earned from lending and investment activities and the interest paid on deposits used to fund those activities. Variations in the volume and mix of loans, investments, and deposits and their relative sensitivity to movements in interest rates impact net interest income. During the first nine months of 1999, net interest income at $5,193,000 was $80,000 behind the same period in 1998. The primary cause of the decrease was the overall decline in interest rates and the impact it had on the loan portfolio. Yield on loans declined approximately 125 basis points for the nine months of 1999 as compared to the same period in 1998. That decrease was mitigated by the decrease in interest expense on interest bearing deposits. Yield on interest bearing deposits for the first nine months of 1999 was 43 basis points lower than the same time period of 1998. Yield on investments also showed a decline in yield of approximately 50 basis points. That was in part due to the decline in Federal Funds rate of 67 basis points. In addition, the decline in overall rates resulted in the prepayment factor on the collateralized mortgage obligations to increase. That caused the return of principal faster than originally predicted. That required premiums on the collateralized mortgage obligations to be amortized at a more expedited rate and returned principal to be reinvested at a lower rate. That also assisted in reducing net interest income as compared to prior year. Fortunately, the Bank has continued to grow and the increased volume of earning assets has provided the opportunity to increase net interest income. Non-interest income increased by $43,000 in the nine months of 1999 as compared to the same period in 1998. The increase in service charges on deposit accounts was $60,000. That was mainly a result of increased charges on NSF related items that increased $54,000 from 1998. Mortgage loan servicing fees have declined as the Bank has curtailed its interest in processing those types of transactions. 11 Non-interest expenses consist of salaries and benefits provided to employees of the Bank, expenses related to premises and equipment, and operating expenses associated with the business affairs of the Company. Total non-interest expenses decreased $16,000 during the first nine months of 1999 when compared with the first nine months of 1998. Salaries and benefits remained relatively flat when compared to the same period in 1998. Occupancy expense declined $85,000. At the end of 1998, the Bank purchased its Main Street building that it had previously been leasing. That purchase provided the savings experienced in the occupancy expense category. The remaining non-interest expense increased $71,000 or 4.9% for the first nine months of 1999 compared to the same period in 1998. This is primarily the result of normal increases in operating expenses. Capital Ratios and Adequacy Shareholders equity was $10.2 million or 6.7% of total assets at September 30, 1999 compared with $9.8 million or 6.8% of total assets at December 31, 1998. The ratio of capital to risk-weighted assets at September 30, 1999 was 11.11% for the Company and 10.98% for the Bank. Both ratios exceeded the regulatory requirements for a "well-capitalized" institution. Management anticipates that both the Company and the Bank will continue to exceed the regulatory minimums for "well-capitalized" institutions in the foreseeable future. Therefore, in management's opinion, the Company and the Bank have adequate capital in order to support future growth. Inflationary Factors Since the assets and liabilities of the Bank are primarily monetary in nature, the performance of the Bank is affected more by changes in interest rates than by inflation. Year 2000 The risks associated with the "Year 2000" problem involve both operational issues relating to the Bank's data processing systems and the impact of this problem on the operations of the Bank's customers. Both of these issues could have a significant negative impact on the Company's financial condition or results of operations including the level of the Bank's provision for possible loan and lease losses in future periods. See "Year 2000 Problem." Year 2000 Problem The "Year 2000" problem relates to the fact that many computer programs and other technology utilizing microprocessors only use two digits to represent a year, such as "98" to represent "1998." In the year 2000, such programs/ processors could incorrectly treat the year 2000 as the year 1900. The Company's business is dependent on technology and data processing. As a result, it has created a Year 2000 team whose members are familiar with the Company's business and operations. This issue has grown in importance as the use of computers and microprocessors has become more pervasive throughout the economy, and interdependencies between systems has 12 multiplied. The issue must be recognized as a business problem, rather than simply a computer problem, because of the way its effects could ripple through the economy. The Company could be affected either directly or indirectly by the Year 2000 issue. This could happen if any of its critical computer systems or equipment containing embedded logic fail, if the local infrastructure (electric power, communications, or water system) fails, if its significant vendors are adversely impacted, or if its borrowers or depositors are significantly impacted by their internal systems or those of their customers or suppliers. The Company utilizes ITI banking software which processes on Unisys equipment for its data processing and mission critical needs. The Company does not have access to the programming code of the software. The Company is dependent on this system, as well as personal computers connected on a local area network. The Company's business also involves non-IT products and services, some of which have embedded technology which might not be Year 2000 compliant. Some non-IT products and services involve various infrastructure issues such as power, communications and water, as well as elevators, ventilation and air conditioning equipment. The Company classifies power and communications as non- IT mission critical systems. The Company's application software, data processing vendors, computer operating systems, local area network and the power and communication infrastructure provide critical support to substantially all of its business and operations. Failure to successfully complete renovation, validation and implementation of its mission critical IT systems could have a material adverse effect on the operations and financial performance of the Company. Moreover, Year 2000 problems experienced by significant vendors or customers of the Company or power or communications systems could negatively impact the business and operations of the Company even if its own critical IT systems are capable of functioning satisfactorily. Due to the numerous issues and problems which might arise and lack of guarantees concerning Year 2000 readiness from non-IT service providers such as power and communication systems vendors, the Company cannot quantify the potential cost of problems if the Company's renovation and implementation efforts or the efforts of significant vendors or customers are not successful. State of Readiness The Company has conducted a comprehensive review of its IT systems to identify the systems that could be affected by the Year 2000 problem and has developed a plan designed to resolve the problem. The Company believes it has made continuous progress in addressing all material aspects of the Year 2000 problem. 13 The Company completed the Awareness and Assessment Phases, as defined by the Federal Financial Institutions Examination Council (FFIEC), for its IT systems and Company facilities in 1998 and continues to update its assessment as needed. The Company has identified mission-critical systems, assessed the state of Year 2000 compliance of those systems, and developed a plan to correct non- compliant systems. The Company reports on a regular basis to the Board of Directors on Year 2000 progress. The target date established by the FFIEC for substantial completion of testing for internal mission-critical IT systems was December 31, 1998. At December 31, 1998, the Company had substantially completed testing of non-Year 2000 compliant IT Systems that were identified as mission-critical. By March 31, 1999 FFIEC Guidelines require that testing by companies relying on service providers for mission-critical systems should be substantially complete. External testing with material other third parties (customers, other financial institutions, business partners, payment system providers, etc.) should have begun. By June 30, 1999 testing of mission-critical systems should be complete and implementation should be substantially complete. Based on information provided by outside service providers and its testing process the Company believes that its mission critical IT systems are substantially Year 2000 compliant. The Company intends to work with its vendors to resolve any other issues discovered during the testing process. The Company has completed secondary testing, where it was deemed appropriate, by June 30, 1999. The Company is also monitoring the Year 2000 readiness of outside product and service vendors. The Company cannot test for Year 2000 readiness of its power and telecommunications vendors, although the Company is monitoring their readiness. Additionally, at the date of this report, management of the Company had not identified any serious problems with its mission-critical systems. Costs The Company is expensing all period costs associated with the Year 2000 problem. Through December 31, 1998, the amount of such expense had been approximately $50,000. Management estimates that the Company will incur approximately an additional $200,000 in Year 2000 related expenses in fiscal 1999. There can be no assurance that these expenses will not increase as further testing and assessment of vendor and customer readiness and contingency planning for the Year 2000 continues. The above cost estimates include costs for consultants, running tests and technical assistance from vendors, as well as development of contingency plans and costs of communicating with customers concerning Year 2000 issues 14 Risks Because the Company recognizes that its business and operations could be adversely affected if key business partners fail to achieve timely Year 2000 compliance, the Company is evaluating strategies to manage and mitigate the risks to the Company of their Year 2000 failures. Management has identified a long-range, most reasonably likely, worst case scenario. This scenario suggests that the Year 2000 problem might negatively impact some significant customers and non-IT vendors/products through the failure of the customer and/or vendor to be prepared or the impact on them of the failure of their own vendors and customers. Management believes that this scenario could occur in conjunction with an economic recession arising from the Year 2000 problem. The Bank's asset quality and earnings could be adversely impacted in that event. It is not possible to predict the effect of this Year 2000 scenario on the economic viability of the Bank's customers and the related adverse impact it may have on Company's financial position and results of operations, including the level of the Bank's provision for possible loan losses in future periods. Further there can be no assurance that other possible adverse scenarios will not occur. The Company presently believes that, based upon its Year 2000 testing program and assuming representations of Year 2000 readiness from significant vendors and customers are accurate, the Year 2000 issue should not pose significant operational risks for the Company's IT systems. However, other significant risks relating to the Year 2000 problem are that of the unknown impact of this problem on the operations of the Bank's customers and vendors, the impact of infrastructure failures such as power, communications and water on the Company's IT systems, the economy and future actions which banking or securities regulators may take. The Company is making efforts to ensure that its customer base is aware of the Year 2000 problem. In addition to seminars for and mailings to its customer base, the Bank has amended its credit policy and credit authorization documentation to include consideration regarding the Year 2000 problem. Significant customer relationships have been identified, and such customers are being contacted by the Bank's account officers to determine whether they are aware of Year 2000 risks and whether they are taking preparatory actions. An initial assessment of these customers was substantially completed in late 1998. The Company is taking follow-up action in 1999 based on the results of this assessment. The Company has also attempted to contact major vendors and suppliers of non-software products and services (including those where products utilize embedded technology) to determine the Year 2000 readiness of such organizations and/or the products and services which the Company purchases from such organizations. The Company is monitoring reports provided by such vendors regarding their preparations for Year 2000. This is an ongoing process and the Company intends to continue to monitor information provided by such vendors through the century date change. 15 Federal banking regulators have responsibility for supervision and examination of banks to determine whether they have an effective plan for identifying, renovating, testing and implementing solutions for Year 2000 processing and coordinating Year 2000 processing capabilities with its customers, vendors and payment system partners. Examiners are also required to assess the soundness of an institution's internal controls and to identify whether further corrective action may be necessary to ensure an appropriate level of attention to Year 2000 processing capabilities. Management is currently in compliance with the federal bank regulatory guidelines and timetables. Contingency Plans The FFIEC guidelines indicate that remediation contingency plans may be necessary for mission-critical applications or systems that have not been certified as Year 2000 ready. In September 1998, the Company began to develop high-level remediation contingency plans for applications and systems used by the Company that are deemed mission-critical. Generally this has involved the identification of an alternate vendor or other expected actions the Company could take, as well as the establishment of a trigger date to implement the contingency plan. The Company is currently working to develop further contingency plans to address potential business disruptions which might result from Year 2000 issues. By June 1999, the Company has completed a Year 2000 business resumption plan based on a review of reasonable worst-case scenarios. This business resumption plan is intended to enable the Company to continue to conduct its core business despite unexpected Year 2000-related failures of systems or services. This involved, among other things procedures to be followed in the event of a power failure, communications failure, or system failure which occurs despite the testing which has been performed. The Company has tested this plan as of September 30, 1999. 16 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS As of September 30, 1999, the Company was not party to any significant legal proceeding. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS There were no changes in the Company's securities during the quarter. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES No securities of this nature. ITEM 4 - OTHER INFORMATION None. ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Index to Exhibits to this Form 10-QSB, for a list of the exhibits filed as a part of this report and incorporated herein by reference. (b) Reports on Form 8-K: The Company did not file a report on Form 8-K during the third quarter of 1999. 17 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAPA NATIONAL BANCORP --------------------- (Registrant) Date: November 9, 1999 /s/ Brian J. Kelly --------------------------- Brian J. Kelly President / COO Date: November 9, 1999 /s/ Michael D. Irwin --------------------------- Michael D. Irwin Chief Financial Officer 18 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 3(i)* Articles of Incorporation of the Registrant, as amended. 3(ii)* Restated Bylaws of the Registrant. 4.1* A specimen copy of the certificates evidencing Common Stock. 10.1* Napa National Bancorp 1992 Stock Option Plan. 10.2* Form of Incentive Stock Option Agreement. 10.3* Form of Nonstatutory Stock Option Agreement. 27 Financial Data Schedule. *Previously filed. 19 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 0 8,578 0 0 0 1,480 0 0 0 36,878 0 2,705 0 2,705 0 94,836 0 1,786 0 152,265 0 141,063 0 0 0 977 0 0 0 0 0 0 0 7,223 0 3,443 0 152,265 2,025 5,720 549 1,525 65 353 2,639 7,598 816 2,403 818 2,405 1,821 5,193 0 0 0 0 1,612 4,499 509 1,598 509 1,598 0 0 0 0 335 1,036 0.42 1.31 0.40 1.23 5.33 5.16 0 527 0 0 0 0 0 0 1,785 1,671 0 14 1 129 1,786 1,786 1,786 1,786 0 0 0 0
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