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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-77519-LA
SARATOGA BANCORP
(Exact name of registrant as specified in its charter)
California 94-2817587
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
12000 Saratoga-Sunnyvale Road
Saratoga, California 95070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408)973-1111
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
NONE NONE
Securities registered pursuant to Section 12 (g) of the Act:
NONE
(Title of class)
Saratoga Bancorp (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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by checkmark 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 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. [X]
The aggregate market value of the voting stock held by non-
affiliates of Saratoga Bancorp on March 1, 1997 was $12,769,635
As of March 1, 1997, Saratoga Bancorp had 1,036,392 shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement is incorporated herein by
reference in Part III, Items 10 through 13.
The Index to Exhibits appears on page 64
Page 1 of 66 pages
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PART 1
Item 1. Business
General
Certain matters discussed or incorporated by reference in
this Annual Report on Form 10-K including, but not limited to,
matters described in Item 7 - "Managements Discussion and
Analysis of Financial Condition and Results of Operations," are
forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ
materially from those projected. Changes to such risks and
uncertainties, which could impact future financial performance,
include, among others, (1)competitive pressures in the banking
industry; (2)changes in interest rate environment; (3)general
economic conditions, nationally, regionally and in operating
market areas; (4)changes in the regulatory environment;
(5)changes in business conditions and inflation; and (6)changes
in securities markets. Therefore, the information set forth
herein should be carefully considered when evaluating the
business prospects of the Company and the Bank.
Saratoga Bancorp (the "Company") is a registered bank hold-
ing company whose principal asset (and only subsidiary) is the
common stock of Saratoga National Bank (the "Bank"). The
Company itself does not engage in any business activities other
than the ownership of the Bank and investment of its available
funds. As used herein, the term "Saratoga Bancorp" or the
"Company" includes the subsidiary of the Company unless the
context requires otherwise. The Company was incorporated in
California on December 8, 1981. The Bank commenced operations on
November 8, 1982. The Bank provides a variety of banking
services to businesses, governmental units and individuals. The
Bank conducts a commercial and retail banking business, which
includes accepting demand, savings and time deposits and making
commercial, real estate and consumer loans. It also offers
installment note collections, issues cashier's checks, sells
traveler's checks and provides other customary banking services.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to the legal limits thereupon. The
Bank does not offer trust services nor international banking
services and does not plan to do so in the near future. At
December 31, 1996, the Company had total assets of approximately
$122 million and total deposits of approximately $89 million.
At December 31, 1996, the Company and the Bank had 29 full-time
equivalent employees.
Most of the Bank's deposits are obtained from the Bank's
primary service area. A material portion of the Bank's deposits
has not been obtained from a single person or group of related
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persons, the loss of any one or more of which would have a
materially adverse effect on the business of the Bank, nor is a
material portion of the Bank's loans concentrated within a
single industry or group of related industries, although real
estate construction loans represent approximately 17% of total
loans. Furthermore, the extent to which the business of the
Bank is seasonal is insignificant. The importance of, and risks
attendant to, foreign sources and application of the Bank's
funds is negligible.
For additional information concerning the Company and the
Bank, see Selected Financial Data in Item 6 at page 19.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the
registration requirements of the Securities Act of 1933, as
amended, and the qualification requirements of the California
Corporate Securities Law of 1968, as amended. The Bank's common
stock, however, is exempt from such requirements. The Company
is also subject to the periodic reporting requirements of
Section 15(d) of the Securities Exchange Act of 1934, as
amended, which include, but are not limited to, filing annual,
quarterly and other current reports with the Securities and
Exchange Commission.
The Bank is chartered under the national banking laws of
the United States of America, and its deposits are insured by
the FDIC. The Bank has no subsidiaries. Consequently, the Bank
is regularly examined by the Office of the Comptroller of the
Currency (the "OCC"), its primary regulator, and is subject to
the supervision of the OCC and the FDIC. Such supervision and
regulation include comprehensive reviews of all major aspects of
the Bank's business and condition, including its capital ratios,
allowance for possible loan losses and other factors. However,
no inference should be drawn that such authorities have approved
any such factors. The Company and the Bank are required to file
reports with the OCC, the FDIC and the Board of Governors of the
Federal Reserve System ("Board of Governors") and provide such
additional information as the OCC, FDIC and the Board of
Governors may require.
The Company is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"), and is registered as such with, and
subject to the supervision of, the Board of Governors. The
Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the
assets of any bank, or ownership or control of the voting shares
of any bank if, after giving effect to such acquisition of
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shares, the Company would own or control more than 5% of the
voting shares of such bank. The Bank Holding Company Act
prohibits the Company from acquiring any voting shares of, or
interest in, all or substantially all of the assets of, a bank
located outside the State of California unless such an
acquisition is specifically authorized by the laws of the state
in which such bank is located. Any such interstate acquisition
is also subject to the provisions of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 discussed below.
The OCC regulates the number and locations of the branch offices
of a national bank and may only permit a national bank to
maintain branches in locations and under conditions imposed by
state law upon state banks.
The Company, and any subsidiaries which it may acquire or
organize, are deemed to be "affiliates" of the Bank within the
meaning of that term as defined in the Federal Reserve Act.
This means, for example, that there are limitations (a) on loans
by the Bank to affiliates, and (b) on investments by the Bank in
affiliates' stock as collateral for loans to any borrower. The
Company and the Bank are also subject to certain restrictions
with respect to engaging in the underwriting, public sale and
distribution of securities.
In addition, regulations of the Board of Governors
promulgated under the Federal Reserve Act require that reserves
be maintained by the Bank in conjunction with any liability of
the Company under any obligation (promissory note,
acknowledgement of advance, banker's acceptance or similar
obligation) with a weighted average maturity of less than seven
(7) years to the extent that the proceeds of such obligations
are used for the purpose of supplying funds to the Bank for use
in its banking business, or to maintain the availability of such
funds.
The Board of Governors, OCC and the FDIC have adopted risk-
based capital guidelines for evaluating the capital adequacy of
bank holding companies and banks. The guidelines are designed
to make capital requirements sensitive to differences in risk
profiles among banking organizations, to take into account off-
balance sheet exposures and to aid in making the definition of
bank capital uniform internationally. Under the guidelines, the
Company and the Bank are required to maintain capital equal to
at least 8.0% of its assets and commitments to extend credit,
weighted by risk, of which at least 4.0% must consist primarily
of common equity (including retained earnings) and the remainder
may consist of subordinated debt, cumulative preferred stock, or
a limited amount of loan loss reserves.
Assets, commitments to extend credit, and off-balance sheet
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items are categorized according to risk and certain assets
considered to present less risk than others permit maintenance
of capital at less than the 8% ratio. For example, most home
mortgage loans are placed in a 50% risk category and therefore
require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and
therefore require maintenance of capital equal to 8% of such
loans.
The guidelines establish two categories of qualifying
capital: Tier 1 capital comprising core capital elements, and
Tier 2 comprising supplementary capital requirements. At least
one-half of the required capital must be maintained in the form
of Tier 1 capital. Tier 1 capital includes common shareholders'
equity and qualifying perpetual preferred stock. However, no
more than 25% of the Company's total Tier 1 capital may consist
of perpetual preferred stock. The definition of Tier 1 capital
for the Bank is the same, except that perpetual preferred stock
may be included only if it is noncumulative. Tier 2 capital
includes, among other items, limited life (and in the case of
banks, cumulative) preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of reserve
for credit losses.
The Board of Governors, OCC and the FDIC also adopted
minimum leverage ratios for banking organizations as a
supplement to the risk-weighted capital guidelines. The
leverage ratio is generally calculated using Tier 1 capital (as
defined under risk-based capital guidelines) divided by
quarterly average net total assets (excluding intangible assets
and certain other adjustments). The leverage ratio establishes
a limit on the ability of banking organizations, including the
Company and the Bank, to increase assets and liabilities without
increasing capital proportionately.
The Board of Governors and the OCC emphasized that the
leverage ratio constitutes a minimum requirement for well-run
banking organizations having diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and a composite rating of 1 under the
regulatory rating system for banks and 1 under the regulatory
rating system for bank holding companies. Banking organizations
experiencing or anticipating significant growth, as well as
those organizations which do not exhibit the characteristics of
a strong, well-run banking organization described above, will be
required to maintain minimum capital ranging generally from 100
to 200 basis points in excess of the leverage ratio. The FDIC
adopted a substantially similar leverage ratio for state non-
member banks which established (i) a 3 percent Tier 1 minimum
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capital leverage ratio for highly-rated banks (those with a
composite regulatory rating of 1 and not experiencing or
anticipating significant growth); and (ii) a 4 percent Tier 1
minimum capital leverage ratio for all other banks, as a
supplement to the risk-based capital guidelines.
The federal banking agencies during 1996 issued a joint
agency policy statement regarding the management of interest-
rate risk exposure (interest rate risk is the risk that changes
in market interest rates might adversely affect a bank's
financial condition) with the goal of ensuring that institutions
with high levels of interest-rate risk have sufficient capital
to cover their exposures. This policy statement reflected the
agencies' decision at that time not to promulgate a standardized
measure and explicit capital charge for interest rate risk, in
the expectation that industry techniques for measurement of such
risk will evolve.
However, the Federal Financial Institution Examination
Counsel ("FFIEC") on December 13, 1996, approved an updated
Uniform Financial Institutions Rating System ("UFIRS"). In
addition to the five components traditionally included in the
so-called "CAMEL" rating system which has been used by bank
examiners for a number of years to classify and evaluate the
soundness of financial institutions (including capital adequacy,
asset quality, management, earnings and liquidity), UFIRS
includes for all bank regulatory examinations conducted on or
after January 1, 1997, a new rating for a sixth category
identified as sensitivity to market risk. Ratings in this
category are intended to reflect the degree to which changes in
interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and
capital. The rating system henceforth will be identified as the
"CAMELS" system.
At December 31, 1996, the Bank and the Company are in
compliance with the risk-based capital and leverage ratios
described above. See Item 7 below for a listing of the
Company's risk-based capital ratios at December 31, 1996 and
1995.
During 1996, the Company's primary source of income was
dividends from the Bank. The Bank's ability to make such
payments is subject to restrictions established by federal
banking law, and subject to approval by the OCC. Such approval
is required if the total of all dividends declared by the Bank's
Board of Directors in any calendar year will exceed the Bank's
net profits for that year combined with its retained net profits
for the preceding two years, less any required transfers to
surplus or to a fund for the retirement of preferred stock. The
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OCC generally prohibits national banks from, among other
matters, adding the allowance for loan and lease losses to
undivided profits then on hand when calculating the amount of
dividends which may be paid. Additionally, while the Board of
Governors has no general restriction with respect to the payment
of cash dividends by an adequately capitalized bank to its
parent holding company, the Board of Governors, OCC and/or the
FDIC, might, under certain circumstances, place restrictions on
the ability of a particular bank to pay dividends based upon
peer group averages and the performance and maturity of the
particular bank, or object to management fees on the basis that
such fees cannot be supported by the value of the services
rendered or are not the result of an arms length transaction.
The FDIC may also restrict the payment of dividends if such
payment would be deemed unsafe or unsound or if after the
payment of such dividends, the Bank would be included in one of
the "undercapitalized" categories for capital adequacy purposes
pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991. See the discussion of dividends in
Item 5 below for additional information regarding dividends.
Under the formulas discussed in Item 5, at December 31, 1996,
approximately $2,356,000 of the Bank's net profits were
available for distribution as dividends without the necessity of
any prior governmental approvals. These net profits constitute
part of the capital of the Bank and sound banking practices
require the maintenance of adequate levels of capital.
COMPETITION
The banking business in Santa Clara County, as it is
elsewhere in California, is highly competitive, and each of the
major branch banking institutions has one or more offices in the
Bank's service area. The Bank competes in the marketplace for
deposits and loans, principally against these banks, independent
community banks, savings and loan associations, thrift and loan
companies, credit unions, mortgage banking companies, and other
miscellaneous institutions that claim a portion of the market.
Larger banks may have a competitive advantage because of
higher lending limits and major advertising and marketing
campaigns. They also perform services, such as trust services,
international banking, discount brokerage and insurance services
which the Bank is not authorized or prepared to offer currently.
The Bank has made arrangements with its correspondent banks and
with others to provide such services for its customers. For
borrowers requiring loans in excess of the Bank's legal lending
limits, the Bank has offered, and intends to offer in the
future, such loans on a participating basis with its
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correspondent banks and with other independent banks, retaining
the portion of such loans which is within its lending limits.
As of December 31, 1996, the Bank's legal lending limits to a
single borrower and such borrower's related parties were
$1,887,000 based on regulatory capital of $12,580,000.
The Bank's business is concentrated in its service area,
which primarily encompasses Santa Clara County, and also
includes, to a lesser extent, the contiguous areas of Alameda,
San Mateo and Santa Cruz Counties.
In order to compete with the major financial institutions
in its primary service area, the Bank uses to the fullest extent
possible the flexibility which is accorded by its independent
status. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by the Bank's
officers, directors and employees. The Bank also seeks to
provide special services and programs for individuals in its
primary service area who are employed in the agricultural,
professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or
businesses. In the event there are customers whose loan demands
exceed the Bank's lending limits, the Bank seeks to arrange for
such loans on a participation basis with other financial
institutions. The Bank also assists those customers requiring
services not offered by the Bank to obtain such services from
correspondent banks.
Banking is a business which depends on interest rate
differentials. In general, the difference between the interest
rate paid by the Bank to obtain its deposits and its other
borrowings and the interest rate received by the Bank on loans
extended to its customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan
associations, credit unions, other financial institutions and
other entities for funds. For instance, yields on corporate and
government debt securities and other commercial paper affect the
ability of commercial banks to attract and hold deposits.
Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies,
mortgage companies and other lending institutions.
The interest rate differentials of the Bank, and therefore
its earnings, are affected not only by general economic
conditions, both domestic and foreign, but also by the monetary
and fiscal policies of the United States as set by statutes and
as implemented by federal agencies, particularly the Federal
Reserve Board. This agency can and does implement national
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monetary policy, such as seeking to curb inflation and combat
recession, by its open market operations in United States
government securities, adjustments in the amount of interest
free reserves that banks and other financial institutions are
required to maintain, and adjustments to the discount rates
applicable to borrowing by banks from the Federal Reserve Board.
These activities influence the growth of bank loans, investments
and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and timing of any future changes
in monetary policies and their impact on the Bank can't be
predicted.
On December 19, 1991, President Bush signed the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The FDICIA substantially revised banking
regulations, certain aspects of the Federal Deposit Insurance
Act and established a framework for determination of capital
adequacy of financial institutions, among other matters. Under
the FDICIA, financial institutions are placed into five capital
adequacy categories as follows: (1) well capitalized, (2)
adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The
FDICIA authorized the Board of Governors, the OCC and FDIC to
establish limits below which financial institutions will be
deemed critically undercapitalized, provided that such limits
can not be less than two percent (2%) of the ratio of tangible
equity to total assets or sixty-five percent (65%) of the
minimum leverage ratio established by regulation. Financial
institutions classified as undercapitalized or below are subject
to limitations including restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness,
(iii) capital distributions, and (iv) payment of management fees
to a parent holding company.
The FDICIA requires the Board of Governors, OCC and FDIC to
initiate corrective action regarding financial institutions
which fail to meet minimum capital requirements. Such action
may result in orders to augment capital such as through sale of
voting stock, reduction in total assets, and restrictions
related to correspondent bank deposits. Critically
undercapitalized financial institutions may also be subject to
appointment of a receiver or conservator unless the financial
institution submits an adequate capitalization plan.
In 1995 the FDIC, pursuant to Congressional mandate,
reduced bank deposit insurance assessment rates to a range from
$0 to $0.27 per $100 of deposits, dependent upon a bank's risk.
The FDIC has continued these reduced assessment rates through
the first semiannual assessment period of 1997. Based upon the
above risk-based assessment rate schedule, the Bank's current
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capital ratios, the Bank's current level of deposits, and
assuming no further change in the assessment rate applicable to
the Bank during 1997, the Bank estimates that its annual
noninterest expense attributed to assessments will increase
during 1997 by approximately $9,000.
The Board of Governors, OCC and FDIC adopted regulations
effective December 19, 1992, implementing a system of prompt
corrective action pursuant to Section 38 of the Federal Deposit
Insurance Act and Section 131 of the FDICIA. The regulations
establish five capital categories with the following
characteristics: (1) "Well capitalized" - consisting of
institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and
a leverage ratio of 5% or greater, and the institution is not
subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) "Adequately capitalized"
- consisting of institutions with a total risk-based capital
ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4%
or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions
with a total risk-based capital ratio less than 8%, a Tier 1
risk-based capital ratio of less than 4%, or a leverage ratio of
less than 4%; (4) "Significantly undercapitalized" - consisting
of institutions with a total risk-based capital ratio of less
than 6%, a Tier 1 risk-based capital ratio of less than 3%, or
a leverage ratio of less than 3%; (5) "Critically
undercapitalized" - consisting of an institution with a ratio of
tangible equity to total assets that is equal to or less than
2%.
The regulations established procedures for classification
of financial institutions within the capital categories, filing
and reviewing capital restoration plans required under the
regulations and procedures for issuance of directives by the
appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain
from certain actions which would cause an institution to be
classified within any one of the three "undercapitalized"
categories, such as declaration of dividends or other capital
distributions or payment of management fees, if following the
distribution or payment the institution would be classified
within one of the "undercapitalized" categories. In addition,
institutions which are classified in one of the three
"undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory
actions include (1) increased monitoring and review by the
appropriate federal banking agency; (2) implementation of a
capital restoration plan; (3) total asset growth restrictions;
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and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate
federal banking agency. Discretionary supervisory actions may
include (1) requirements to augment capital; (2) restrictions
upon affiliate transactions; (3) restrictions upon deposit
gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon
activities of the institution and its affiliates; (6) requiring
divestiture or sale of the institution; and (7) any other
supervisory action that the appropriate federal banking agency
determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not
accept a capital restoration plan without determining, among
other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration
plan to be acceptable, the depository institution's parent
holding company must guarantee that the institution will comply
with such capital restoration plan. The aggregate liability of
the parent holding company under the guaranty is limited to the
lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became
undercapitalized, and (ii) the amount that is necessary (or
would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to
such institution as of the time it fails to comply with the
plan. If a depository institution fails to submit an acceptable
plan, it is treated as if it were "significantly
undercapitalized." The FDICIA also restricts the solicitation
and acceptance of and interest rates payable on brokered
deposits by insured depository institutions that are not "well
capitalized." An "undercapitalized" institution is not allowed
to solicit deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on
insured deposits in the particular institution's normal market
areas or in the market areas in which such deposits would
otherwise be accepted.
Any financial institution which is classified as
"critically undercapitalized" must be placed in conservatorship
or receivership within 90 days of such determination unless it
is also determined that some other course of action would better
serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making
(but not accruing) any payment of principal or interest on
subordinated debt without the prior approval of the FDIC and the
FDIC must prohibit a critically undercapitalized institution
from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than
in the usual course of business, including investment expansion,
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acquisition, sale of assets or other similar actions; (2)
extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material
change in accounting methods; (5) engaging in certain affiliate
transactions; (6) paying excessive compensation or bonuses; and
(7) paying interest on new or renewed liabilities at rates which
would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
The capital ratio requirements for the "adequately
capitalized" category generally are the same as the existing
minimum risk-based capital ratios applicable to the Company and
the Bank. It is not possible to predict what effect the prompt
corrective action regulation will have upon the Company and the
Bank or the banking industry taken as a whole in the foreseeable
future.
Under the FDICIA, the federal financial institution
agencies have adopted regulations which require institutions to
establish and maintain comprehensive written real estate
policies which address certain lending considerations, including
loan-to-value limits, loan administrative policies, portfolio
diversification standards, and documentation, approval and
reporting requirements. The FDICIA further generally prohibits
an insured state bank from engaging as a principal in any
activity that is impermissible for a national bank, absent FDIC
determination that the activity would not pose a significant
risk to the Bank Insurance Fund, and that the bank is, and will
continue to be, within applicable capital standards. Similar
restrictions apply to subsidiaries of insured state banks. The
Company does not currently intend to engage in any activities
which would be restricted or prohibited under the FDICIA.
The federal financial institution agencies have established
safety and soundness standards for insured financial
institutions covering (1) internal controls, information systems
and internal audit systems; (2) loan documentation; (3) credit
underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees and benefits; (7) excessive compensation for
executive officers, directors or principal shareholders which
could lead to material financial loss. If an agency determines
that an institution fails to meet any standard the agency may
require the financial institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If the
agency requires submission of a compliance plan and the
institution fails to timely submit an acceptable plan or to
implement an accepted plan, the agency must require the
institution to correct the deficiency. Under the final rule, an
institution must file a compliance plan within 30 days of a
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request to do so from the institution's primary federal
regulatory agency. The agencies may elect to initiate
enforcement action in certain cases rather than rely on an
existing plan particularly where failure to meet one or more of
the standards could threaten the safe and sound operation of the
institution.
The Board of Governors issued final amendments to its risk-
based capital guidelines to be effective December 31, 1994,
requiring that net unrealized holding gains and losses on
securities available for sale determined in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," are not to be included in the Tier 1 capital
component consisting of common stockholders' equity. Net
unrealized losses on marketable equity securities (equity
securities with a readily determinable fair value), however,
will continue to be deducted from Tier 1 capital. This rule has
the general effect of valuing available for sale securities at
amortized cost (based on historical cost) rather than at fair
value (generally at market value) for purposes of calculating
the risk-based and leverage capital ratios.
On December 13, 1994, the Board of Governors issued
amendments to its risk-based capital guidelines regarding
concentration of credit risk and risks of non-traditional
activities, which were effective January 17, 1995. As amended,
the risk-based capital guidelines identify concentrations of
credit risk and evaluate an institution's ability to manage such
risks and the risk posed by non-traditional activities as
important factors in assessing an institution's overall capital
adequacy.
Since 1986, California has permitted California banks and
bank holding companies to be acquired by banking organizations
based in other states on a "reciprocal" basis (i.e., provided
the other state's laws permit California banking organizations
to acquire banking organizations in that state on substantially
the same terms and conditions applicable to local banking
organizations). Some increase in merger and acquisition
activity among California and out-of-state banking organizations
has occurred as a result of this law, as well as increased
competition for loans and deposits.
Since 1986, California has permitted California banks and
bank holding companies to be acquired by banking organizations
based in other states on a "reciprocal" basis (i.e., provided
the other state's laws permit California banking organizations
to acquire banking organizations in that state on substantially
the same terms and conditions applicable to local banking
organizations). Since October 2, 1995, California law
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implementing certain provisions of prior federal law has
(1) permitted interstate merger transactions; (2) prohibited
interstate branching through the acquisition of a branch
business unit located in California without acquisition of the
whole business unit of the California bank; and (3) prohibited
interstate branching through de novo establishment of California
branch offices. Initial entry into California by an out-of-
state institution must be accomplished by acquisition of or
merger with an existing whole bank which has been in existence
for at least five years.
Community Reinvestment Act ("CRA") regulations effective
as of July 1, 1995 evaluate banks' lending to low and moderate
income individuals and businesses across a four-point scale from
"outstanding" to "substantial noncompliance," and are a factor
in regulatory review of applications to merge, establish new
branches or form bank holding companies. In addition, any bank
rated in "substantial noncompliance" with the CRA regulations
may be subject to enforcement proceedings.
The Bank has a current rating of "satisfactory" CRA
compliance, and is scheduled for further examination for CRA
compliance during 1997.
The Bank has a current rating of "satisfactory" CRA
compliance, and believes that it would not have received any
lower rating if the regulations had been in effect when the Bank
was last examined for CRA compliance on December 31, 1995.
The United States Congress has periodically considered
legislation which could result in further deregulation of banks
and other financial institutions. Such legislation could result
in further relaxation or elimination of geographic restrictions
on banks and bank holding companies and increase the level of
direct competition with other financial institutions, including
mutual funds, securities brokerage firms, investment banking
firms and other entities. The effect of such legislation on the
Company and the Bank cannot be determined at this time.
ACCOUNTING PRONOUNCEMENTS
In October, 1995, the Financial Accounting Standards Board
("FASB")issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 establishes accounting and disclosure requirements
using a fair value method of accounting for stock based employee
compensation plans. Under SFAS No. 123, the Company may either
adopt the new fair value based accounting method or continue the
intrinsic value based method and provide proforma disclosures of
net income and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The provisions of
<PAGE> 15
SFAS No. 123 became effective January 1, 1996. The Company
adopted only the disclosure requirements of SFAS No. 123 and
such adoption had no effect on the Company's consolidated net
earnings or cash flows.
In June, 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 establishes accounting and
reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities based on a financial-
component approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities
when extinguished. The Company believes that the effect of the
adoption of SFAS No. 125 will not be material.
Item 2. Properties
As of December 31, 1996, the Bank had three banking offices
located in Santa Clara County. The first banking office, which
is owned by the Bank, is also the principal executive office of
the Company, and is located at 12000 Saratoga-Sunnyvale Road,
Saratoga, California, comprising approximately 5,500 square
feet. The office was purchased by the Company in 1988 for
$1,800,000. The foregoing description of the office and
purchase of the office is qualified by reference to the
Agreement of Purchase and Sale dated July 27, 1988 attached as
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1988, filed with the Securities and
Exchange Commission on March 27, 1989.
The second banking facility, which is located at 15405 Los Gatos
Blvd., Suite 103, Los Gatos, California, was opened March 9,
1988. The 3,082 square foot facility is leased under a
noncancellable operating lease which expires in 1998. Current
lease payments are $6,168 per month for the building and ground
lease. Effective January, 1993, the lease was tied to the
Consumer Price Index with increases to range between 4 and 8
percent per year. The foregoing description of the lease is
qualified by reference to the lease agreement dated October 19,
1987 attached as Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1987, filed with the
Securities and Exchange Commission on March 31, 1988.
On October 3, 1989, the Company opened a third banking facility
located at 160 West Santa Clara Street, in San Jose, California.
The lease agreement for the 7,250 square foot location in the
downtown area of San Jose is under a noncancellable operating
lease which expires in 1999. Current lease payments are $10,989
<PAGE> 16
per month for the ground floor and $4,018 for the second floor.
The lease payments for the ground floor will increase over the
lease term to $10,989 per month in 1999. The lease payments for
the second floor are tied to the Consumer Price Index with the
increase not to exceed 4% per year. The foregoing description
of the lease is qualified by reference to the lease agreement
dated January 17, 1989 attached as Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989,
filed with the Securities and Exchange Commission on March 27,
1990.
Item 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of
their property the subject of, any material pending legal
proceedings other than ordinary routine litigation incidental to
their respective businesses nor are any such proceedings known
to be contemplated by governmental authorities.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
There is limited trading in and no established public
trading market for the Company's Common Stock. The Company's
Common Stock is not listed on any exchange, nor is it listed by
The NASDAQ Stock Market. Hoefer and Arnett, Incorporated,
Burford Capital and Sutro and Company facilitate trades in the
Company's Common Stock.
<PAGE> 17
The following table summarizes those trades of which the
Company has knowledge based on information provided by Hoefer
and Arnett, Incorporated, Burford Capital and Sutro and Company,
setting forth the approximate high and low bid prices for the
periods indicated. The prices indicated below may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Price of
Common Stock (1)
Quarter ended Low High
<S> <C> <C>
March 31, 1995................ $6.00 $7.00
June 30, 1995................. 6.125 6.50
September 30, 1995............ 6.75 7.50
December 31, 1995............. 7.125 7.375
March 31, 1996................ 7.25 8.50
June 30, 1996................. 8.25 9.75
September 30, 1996............ 9.06 13.50
December 31, 1996............. 12.00 12.88
</TABLE>
(1) As estimated by the Company based upon trades of which it was
aware, and not including purchases of stock pursuant to the
exercise of employee stock options.
The Company had 322 shareholders of record as of March 1, 1997.
The Company's shareholders are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally
available therefore, subject to the restrictions set forth in the
California General Corporation Law (the "Corporation Law"). The
Corporation Law provides that a corporation may make a distribution
to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. The Corporation Law
further provides that, in the event that sufficient retained
earnings are not available for the proposed distribution, a
corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally stated are
as follows: (i) the corporation's assets equal at least 1-1/4
times its liabilities; and (ii) the corporation's current assets
equal at least its current liabilities or, if the average of the
corporation's earnings before taxes on income and before interest
expenses for the two preceding fiscal years was less than the
average of the corporation's interest expenses for such fiscal
years, then the corporation's current assets must equal at least 1-
1/4 times its current liabilities. Funds for payment of any cash
dividends by the Company would be obtained from its investments as
well as dividends and/or management fees from the Bank. The
payment of cash dividends by the Bank may be subject to the
approval of the OCC, as well as restrictions established by federal
banking law, the Board of Governors and the FDIC.
<PAGE> 18
Approval of the OCC is required if the total of all dividends
declared by the Bank's Board of Directors in any calendar year will
exceed the Bank's net profits for that year combined with its
retained net profits for the preceding two years, less any required
transfers to surplus or to a fund for the retirement of preferred
stock.
Additionally, the Board of Governors, OCC and/or FDIC, might,
under certain circumstances, place restrictions on the ability of
a particular bank to pay dividends based upon peer group averages
and the performance and maturity of the particular bank, or object
to management fees on the basis that such fees cannot be supported
by the value of the services rendered or are not the result of an
arms length transaction.
It is the intention of the Company to pay cash and stock
dividends, subject to the restrictions on the payment of cash
dividends as described above, depending upon the level of earnings,
management's assessment of future capital needs and other factors
considered by the Board of Directors.
<PAGE> 19
Item 6. SELECTED FINANCIAL DATA
The following table presents certain consolidated financial
information concerning the business of the Company and the Bank.
This information should be read in conjunction with the
Consolidated Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere herein.
<TABLE>
<CAPTION>
Operations Year ended December 31,
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Interest income $7,585 $6,572 $5,446 $4,949 $6,236
Interest expense (3,558) (2,861) (1,929) (1,685) (2,055)
Net interest income 4,027 3,711 3,517 3,264 4,181
Provision(credit) for
credit losses (150) - (636) 560 731
Net interest income
after provision(credit)
for credit losses 4,177 3,711 4,153 2,704 3,450
Other income 353 577 405 581 644
Other expenses (2,870) (2,868) (3,523) (2,912) (3,234)
Income before income
taxes 1,660 1,420 1,035 373 860
Provision for income
taxes (559) (539) (377) (128) (326)
Net income $1,101 $ 881 $ 658 $ 245 $ 534
====== ====== ====== ====== ======
Net income per
common and
equivalent share $ .96 $ .82 $ .59 $ .21 $ .46
====== ====== ====== ====== ======
Cash dividends declared
per common share $ .175 $ .10 $ - $ - $ -
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Balances at year end December 31,
(in thousands,except per share data)
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Total assets $121,784 $100,497 $87,536 $79,209 $70,097
Net loans 52,033 36,759 32,803 33,685 38,888
Total deposits 89,444 74,949 73,872 65,714 59,085
Shareholders' equity 11,952 11,057 9,627 10,721 10,472
Book value per share 11.53 10.72 9.34 9.17 8.99
</TABLE>
<PAGE> 20
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS'
EQUITY, INTEREST RATES, AND INTEREST DIFFERENTIAL. The following
are the Company's daily average balance sheets for 1996 and 1995.
<TABLE>
<CAPTION>
1996
(dollars in thousands)
YIELDS INTEREST
AVERAGE OR INCOME/
BALANCE RATES EXPENSE
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold $ 14,555 5.2% $ 761
Investment securities (1) 40,422 6.0 2,419
Loans (2) 41,313 10.6 4,395
Other 193 5.2 10
Total interest earning assets 96,483 7.9 7,585
Noninterest-earning assets:
Cash and due from banks 4,190
Premises and equipment 2,186
Other assets (3) 1,802
TOTAL $104,661
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 17,984 3.6 644
Savings 14,238 2.8 403
Time 28,773 5.8 1,665
Total 60,995 4.4 2,712
Federal home loan bank borrowings 13,253 6.3 841
Other interest bearing liabilities 82 6.1 5
Total interest bearing liabilities 74,330 4.8 3,558
Noninterest-bearing liabilities:
Demand deposits 18,123
Accrued expenses and other
liabilities 877
Shareholders' equity 11,331
TOTAL $104,661
========
Net interest income $4,027
======
Net yield on interest earning assets 4.2%
=====
</TABLE>
(1) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis.
(2) Includes no average non-accrual loans for 1996.
(3) Net of average deferred loan fees of $318,000 and average
allowance for credit losses of $729,000.
<PAGE> 21
<TABLE>
<CAPTION>
1995
(dollars in thousands)
YIELDS INTEREST
AVERAGE OR INCOME/
BALANCE RATES EXPENSE
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold $ 7,429 5.7% $ 421
Investment securities (1) 37,229 6.3 2,363
Loans (2) 34,057 11.1 3,788
Total interest earning assets 78,715 8.3 6,572
Noninterest-earning assets:
Cash and due from banks 3,618
Premises and equipment 2,093
Other assets (3) 3,000
TOTAL $87,426
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $14,579 3.4 501
Savings 13,836 2.6 366
Time 27,054 5.9 1,603
Total 55,469 4.5 2,470
Federal home loan bank borrowings 5,213 7.2 377
Other interest bearing liabilities 233 6.0 14
Total interest bearing liabilities 60,915 4.7 2,861
Noninterest-bearing liabilities:
Demand deposits 15,280
Accrued expenses and other
liabilities 1,001
Shareholders' equity 10,230
TOTAL $87,426
=======
Net interest income $3,711
=====
Net yield on interest earning assets 4.7%
====
</TABLE>
(1) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis.
(2) Including average non-accrual loans of $59,000.
(3) Net of average deferred loan fees of $238,000 and average
allowance for credit losses of $769,000.
<PAGE> 22
INTEREST DIFFERENTIAL - RATE/VOLUME CHANGES
Interest differential is affected by changes in volume, changes
in rates and a combination of changes in volume and rates.
Volume changes are caused by changes in the levels of average
earning assets and average interest bearing deposits and
borrowings. Rate changes result from changes in yields earned on
assets and rates paid on liabilities. Changes not solely
attributable to volume or rates have been allocated to the rate
component. The following table shows the effect on the interest
differential of volume and rate changes for the years 1996 and
1995.
1996 over 1995 1995 over 1994
Increase (Decrease) Due Increase (Decrease) Due
to Changes in: to Changes in:
(in thousands)
Net Net
Volume Rate Change Volume Rate Change
Interest earning assets:
Federal funds sold $ 409 $ (69) $ 340 $ 63 $ 123 $ 186
Interest bearing
deposits in
other banks 10 - 10 (26) - (26)
Securities (1) 196 (140) 56 329 210 539
Loans 798 (191) 607 153 274 427
Total 1,413 (400) 1,013 519 607 1,126
Interest bearing
liabilities:
Demand deposits 110 33 143 36 70 106
Savings deposits 4 33 37 (40) (15) (55)
Time deposits 95 (33) 62 179 321 500
Borrowings 954 (490) 464 377 - 377
Other liabilities (9) - ( 9) 4 - 4
Total 1,154 (457) 697 556 376 932
Interest differential$ 259 $ 57 $ 316 $ (37) $ 231 $ 194
(1)Interest income is reflected on an actual basis, not a fully taxable
equivalent basis.
<PAGE> 23
INVESTMENT PORTFOLIO
The amortized cost and estimated market values of securities at December 31
are as follows:
December 31,
1996 1995
(in thousands)
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $11,704 $11,671 $10,290 $10,287
Governmental mutual fund 3,128 2,958 3,128 3,041
Federal Home Loan Bank stock 3,170 3,170 1,958 1,958
Bankers Bank stock 150 150 - -
Total $18,152 $17,949 $15,376 $15,286
======= ======= ======= =======
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities $ 5,489 $ 5,501 $ 5,564 $ 5,632
Mortgage-backed securities 13,204 13,070 11,145 11,152
Obligations of states and political
subdivisions 5,328 5,354 3,549 3,589
Federal Reserve Bank stock 90 90 90 90
$24,111 $24,015 $20,348 $20,463
======= ======= ======= =======
</TABLE>
As investment securities mature, to the extent that the proceeds are
reinvested in investment securities, management expects that the
categories of taxable investment securities purchased will be in
approximately the same proportion as existed at December 31, 1996. The
maturities and yields of the investment portfolio at December 31, 1996
are shown below.
<PAGE> 24
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1996
(Dollars in thousands)
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Total After 1 Year, After 5 years
Carrying Within 1 Year Within 5 Years Within 10 Years After 10 years
Value Amount Yield(1)Amount Yield(1)Amount Yield(1 )Amount Yield(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury
and agency
securities$ 6,069 $ 589 7.48% $1,980 6.16% $3,500 5.88% - -
Governmental
mutual
funds 2,958 2,958 5.88 - - - - - -
Federal Home
Loan Bank
stock 3,170 - - - - - - $3,170 6.20%
Bankers Bank
stock 150 - - - - - - 150 -
$12,347 $3,547 6.15% $1,980 6.16% $3,500 5.88% $3,320 6.20%
======= ====== ====== ====== ======
Mortgage-
backed
securities 5,602
Total $17,949
=======
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
Total After 1 Year, After 5 Years
Carrying Within 1 Year Within 5 Years Within 10 Years After 10 Years
Amount Amount Yield(1)Amount Yield(1)Amount Yield(1)Amount Yield(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and agency
securitie s $ 5,489 - - $ 1,996 4.55% $ 3,493 4.50% - -
Obligations of
states and
political
subdivisions 5,328 $635 3.80% 2,210 4.77 2,483 5.20% - -
Federal Reserve
Bank stock 90 90 6.00%
Total $10,907 $635 3.80% $9,154 5.83% $11,197 6.16% $2,126 6.00%
======= ====== ====== ======= ======
Mortgage-
backed
securities 13,204
Total $24,111
=======
</TABLE>
(1) Yields are actual, not fully taxable equivalent.
Mortgage-backed securities generally have stated maturities of over 5
years but are subject to likely and substantial prepayments which
effectively accelerate actual maturities.
<PAGE> 25
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1996 and
1995 is summarized in the following table.
December 31,
1996 1995
(in thousands)
Real estate:
Construction $ 9,249 $ 7,837
Other 21,473 17,507
Commercial 18,242 11,585
Installment 1,861 77
Lease financing 2,160 837
$52,985 $37,843
======= =======
At December 31, 1996, loans were due as follows:
<TABLE>
<CAPTION>
Lease
R/E Const R/E Other Com'l Install Financing Total
====== ========= ========= ======= ========= =======
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year
or less $9,249 $ 292 $ 9,217 $ - 216 $18,974
Due after one year - 21,181 9,025 1,861 $1,944 34,011
TOTAL $9,249 $21,473 $18,242 $1,861 $2,160 $52,985
====== ======= ======= ====== ====== =======
</TABLE>
Of the loans due after one year, $20,364,000 have fixed rates and
$13,647,000 have variable interest rates.
RISK ELEMENTS
There were no nonaccrual loans at December 31, 1996 or 1995.
At December 31, 1996 and 1995, there were no loans past due 90
days or more as to principal or interest and still accruing
interest. There was one loan at December 31, 1996 in the amount
of $187,000 which was a troubled debt restructuring as defined in
Statement of Financial Accounting Standards No. 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructuring."
There were five potential problem loans at December 31, 1996
having a combined principal balance of $1,140,000 ($1,161,000 at
December 31, 1995). Potential problem loans are loans which are
generally current as to principal and interest but have been
identified by the Company as potential problem loans due either
to a decrease in the underlying value of the property securing
the credit or some other deterioration in the creditworthiness of
the borrower. All of the five loans identified as potential
problem loans are secured by real estate and personal property.
<PAGE> 26
The Company does not believe there to be any concentration of
loans in excess of 10% of total loans which is not disclosed
above which would cause them to be similarly impacted by economic
or other conditions. See Management's Discussion and Analysis of
Financial Condition and Results of Operations-Provision for
Credit Losses, regarding discussion of California economic
conditions.
SUMMARY OF CREDIT EXPERIENCE
Analysis of the Allowance for Credit Losses
Year Ended December 31,
1996 1995
Beginning balance $776,000 $738,000
Reductions credited
to operations (150,000) -
Write-offs - Commercial (39,000) (45,000)
Recoveries - Commercial 41,000 83,000
Ending balanc $ 628,000 $ 776,000
========= ==========
Ratio of net recoveries
during the period to average
loans outstanding during the
year. (.005)% (.11)%
====== ======
Ratio of allowance for credit
losses to loans outstanding
at end of year 1.19% 2.05%
====== ======
Allocation of the Allowance for Credit Losses
December 31, 1996 December 31, 1995
Percent Percent
of loans in of loans in
each category each category
Amount to total loans Amount to total loans
Commercial $331,000 34% $228,000 31%
Real estate-
construction 70,000 18 124,000 21
Real estate-
other 215,000 41 424,000 46
Installment 12,000 3 - -
Lease financing - 4 - 2
$628,000 100% $776,000 100%
======== ==== ======== ====
<PAGE> 27
DEPOSITS
The average balance sheets for 1996 and 1995 set forth the average
amount and average interest rate paid for deposits.
At December 31, 1996, time deposits of $100,000 or more have a
remaining maturity as follows:
(in thousands)
3 months or less $ 5,585
Over 3 months to 6 months 2,128
Over 6 months to 12 months 2,622
Over 1 year to 5 years 2,929
TOTAL $13,264
=======
RETURN ON EQUITY AND ASSETS
The following table sets forth certain ratios of profita-
bility, liquidity and capital.
1996 1995
Return on average assets 1.1% 1.0%
Return on average equity 9.7% 8.6%
Cash dividends declared per share
to earnings per share 18.2% 12.2
Average equity to average assets 10.8% 11.7%
<PAGE> 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Certain matters discussed or incorporated by reference in
this Annual Report on Form 10-K are forward-looking statements that
are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, matters described in
Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Therefore, the information
set forth therein should be carefully considered when evaluating the
the business prospects of the Company and the Bank.
OVERVIEW
Net income in 1996 was $1,101,000 ($.96 per share) compared
to $881,000 ($.82 per share) in 1995 and $658,000 ($.59 per share)
in 1994. The increase in net income in 1996 resulted primarily
from an increase in the volume of earning assets, offset, in part
by a decrease in the yield on earning assets and an increase in
interest expense due to the increased volume of interest-bearing
liabilities. The increase in net income in 1995 resulted primarily
from an increase in the volume and yield on earning assets and a
decrease in expense related to Other Real Estate Owned (OREO),
offset, in part, by an increase in the volume and yield on
interest-bearing liabilities and a reduced benefit for credit
losses. The table below highlights the changes in the nature and
sources of income and expense from 1995 to 1996 and from 1994 to
1995.
<TABLE>
<CAPTION>
Net Net
Income Income
Increase Increase
1996 1995 (Decrease) 1994 (Decrease)
(in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $4,027 $3,711 $ 316 $3,517 $ 194
Provision (credit)
for credit losses (150) - 150 (636) 636
Noninterest income 353 577 (224) 405 172
Noninterest expense (2,870) (2,868) (2) (3,523) 655
Income before
income taxes 1,660 1,420 240 1,035 385
Provision for
income taxes (559) (539) (20) (377) (162)
Net income $1,101 $ 881 $ 220 $ 658 $ 223
====== ====== ===== ====== =====
</TABLE>
<PAGE> 29
NET INTEREST INCOME
Net interest income is affected by changes in the nature and volume of
earning assets held during the year, the rates earned on such assets
and the rates paid on interest-bearing liabilities. The table below
details the average balances, interest income and expense and the
effective yields/rates for earning assets and interest bearing
liabilities.
<TABLE>
<CAPTION>
1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning
assets:
Loans $41,313 $4,395 10.6% $34,057 $3,788 11.1%$32,572 $3,361 10.3%
Other 55,170 3,190 5.8 44,658 2,784 6.2 38,074 2,085 5.5
Total
earning
assets $96,483 $78,715 $70,646
======= ======= =======
Interest
bearing
liabilities:
Deposits $60,995 2,712 4.4 $55,649 2,470 4.5 $51,864 1,919 3.7
Other
interest
bearing
funds 13,335 846 6.3 5,446 391 7.2 380 10 2.6
Total
interest
bearing
liabili-
ties $74,330 $60,915 $52,244
======= ======= =======
Net interest
income and
margin $4,027 4.2% $3,711 4.7% $3,517 5.0%
====== ==== ====== ==== ====== ====
</TABLE>
Average earning assets increased $17.8 million or 23%, to $96.5
million during 1996 compared to $78.7 million in 1995. The
increase in loans was primarily in the longer term real estate
loan portfolio. These loans are generally made for a term of
between five and fifteen years and are matched against specific
blocks of deposits or borrowings in order to alleviate interest
rate risk. The increase in the investment portfolio is primarily
the result of increased average deposits and other borrowings.
During 1995, average earning assets increased $8.1 million,or 11%
to $78.7 million, compared to $70.6 million for 1994. This
<PAGE> 30
increase was primarily in the investment portfolio and was the
result of increased average balances and the reinvestment of
matured loan balances that were not being utilized to fund loans.
Average interest-bearing liabilities increased $13.4 million, or
22%, during 1996 to $74.3 million from $60.9 million in 1995
primarily due to an increase in Federal Home Loan Bank borrowings
which were matched against specific longer term real estate loans
and an increase in interest bearing checking deposits. Average
interest-bearing liabilities increased $8.7 million, or 17%, to
$60.9 million, in 1995 from $52.2 million in 1994. This increase
was primarily due to an increase in Federal Home Loan Bank
borrowings which were matched against specific longer term real
estate loans.
EARNING ASSETS-LOANS
The average loan portfolio increased $7.2 million, or 21%, from
$34.1 million in 1995 to $41.3 million in 1996. The increase was
primarily in the longer term real estate loan portfolio as a
result of marketing efforts in that area. Average loans
increased $1.5 million from $32.6 million in 1994 to $34.1
million in 1995. The average loan to average deposit ratio for
1996 was 68% compared to 49% and 47% in 1995 and 1994,
respectively. The average yield on loans increased from 10.3% in
1994 to 11.1% in 1995 and then decreased to 10.6% in 1996. The
decrease in yield in 1996 primarily reflects a decrease in
interest rates on loans originated during the year as compared to
1995. The increase in yield in 1995 reflects an increase in the
interest rates for the year as compared to 1994.
OTHER EARNING ASSETS
Average other earning assets, consisting of Federal funds sold,
interest bearing deposits in other banks and investment
securities, increased $10.5 million or 24% during 1996 from $44.7
million to $55.2 million. During 1995, average other earning
assets increased $6.6 million from $38.1 million in 1994. The
increase in the securities portfolio in 1996 was primarily due to
the increased level of deposits. The increase in 1995 was
primarily due to the reinvestment of matured loan balances into
the securities portfolio that were not currently being utilized
to fund loans. The yield earned on average other earning assets
increased from 5.5% in 1994 to 6.2% in 1995 and then decreased to
5.8% in 1996. In 1996, the change in the volume and yields of
other earning assets resulted in an increase in net interest
income of $406,000. In 1995, the increase in the volume and
yields resulted in an increase in net interest income of $699,000
on other earning assets.
<PAGE> 31
INTEREST BEARING LIABILITIES
Average interest bearing liabilities increased $13.4 million from
$60.9 million in 1995 to $74.3 million in 1996 and increased $8.7
million from $52.2 million in 1994 to $60.9 million in 1995. The
increases in 1996 and 1995 were primarily a result of increased
Federal Home Loan Bank borrowings which were matched against
certain longer term real estate loans to alleviate the impact of
interest rate risk. Average non-interest bearing deposits
increased $2.8 million in 1996 to $18.1 million and decreased
$1.2 million to $15.3 million in 1995 from an average of $16.5
million in 1994. Overall rates on interest bearing deposits
increased from 3.7% in 1994 to 4.5% in 1995 and then decreased to
4.4% in 1996. The net result of the changes in average balances
and rates was an increase in total interest expense of $697,000
in 1996 from 1995 and an increase of $932,000 in 1995 from 1994.
NET INTEREST MARGIN
The net interest margin decreased from 5.0% in 1994 to 4.7% in
1995 and 4.2% in 1996. The changes in the net interest margin
are primarily attributable to fluctuations in the loan, deposit
and borrowing mix and the relationship between rates charged and
rates paid.
PROVISION FOR CREDIT LOSSES
The Bank maintains an allowance for possible credit losses which
is based, in part, on the Bank's historical loss experience, the
impact of forecasted economic conditions within the Bank's market
area, and, as applicable, the State of California, the value of
underlying collateral, loan performance and inherent risks in the
loan portfolio. The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating
expense and recoveries of previously charged-off loans. During
1996 and 1995, the Bank did not provide any additional provision
for credit losses. In 1996, $150,000 was reversed from the
allowance for credit losses. The allowance for credit losses was
$628,000 in 1996, compared to $776,000 for 1995 and $738,000 for
1994. At December 31, 1996, the allowance was approximately 1.2%
of total loans, compared to approximately 2.1% at December 31,
1995. There were no nonaccrual loans at December 31, 1996 or
1995. There was no interest income foregone on nonaccrual loans
during 1996 or 1995. Interest income forgone on nonaccrual loans
in 1994 was $59,000.
At December 31, 1996 and 1995, there were no loans past due 90
days or more as to principal or interest and still accruing
interest.
<PAGE> 33
Other Real Estate Owned totalled $1,252,000 at December 31, 1996
($1,745,000 at December 31, 1995). Other real estate owned
consists of a 12 lot subdivision with an appraised value in
excess of the Bank's carrying value. The Company is actively
marketing the property.
Nonperforming loans and other real estate owned are summarized
below:
December 31, 1996 December 31, 1995
Nonperforming loans:
Past due 90 days or more
and still accruing interest $ - $ -
Nonaccrual - -
Total - -
Other real estate owned 1,252,000 1,745,000
Total nonperforming loans and
other real estate owned $1,252,000 $1,745,000
========== ==========
Management is of the opinion that the allowance for credit losses
is maintained at an adequate level for known and currently
anticipated future risks inherent in the loan portfolio.
However, the Bank's loan portfolio, which includes approximately
$31,000,000 in real estate loans, representing approximately 58%
of the portfolio, could be adversely affected if California
economic conditions and the real estate market in the Bank's
market area were to weaken. The effect of such events, although
uncertain at this time, could result in an increase in the level
of nonperforming loans and OREO and the level of the allowance
for loan losses, which could adversely affect the Company's and
the Bank's future growth and profitability.
NONINTEREST INCOME
Noninterest income decreased $224,000, or 39%, to $353,000 during
1996 compared to $577,000 during 1995. During 1995, noninterest
income increased $172,000, or 42%, from $405,000 in 1994. The
decrease in 1996 is primarily attributable to net gain on sale of
securities of $72,000 in 1995, a gain on sale of OREO of $55,000
realized in 1995 and a decrease of $102,000 in rental income from
OREO. The increase in 1995 is primarily attributable to rental
income from OREO of $102,000, net gain on sale of securities of
$72,000 and gain on sale of OREO of $55,000, offset by a decline
in rental income from leased assets of $60,000.
<PAGE> 33
NONINTEREST EXPENSE
Noninterest expense was $2.9 million in 1996 and 1995, compared
to $3.5 million in 1994. In 1996, increases in salary and
directors' expenses were offset by decreases in OREO and
assessment expenses. The decrease in 1995 is primarily
attributable to the loss on sale of securities of $196,000 which
was realized in 1994 and decreased OREO reserve expense.
Generally, expenses have grown commensurate with the growth in
assets and increases in the volume of transactions. As a
percentage of average earning assets, noninterest expense
decreased to 3.0% in 1996 from 3.6% in 1995. In 1995,
noninterest expense as a percentage of earning assets decreased
to 3.6% from 5.0% in 1994. As pressure continues on net interest
margins and net asset growth, management of operating expenses
will continue to be a priority.
INCOME TAXES
The Company's effective tax rate was 33.7% for 1996, 38.0% for
1995 and 36.4% for 1994. See Note 9 to the consolidated
financial statements for additional information on income taxes.
LIQUIDITY/INTEREST RATE SENSITIVITY
The Bank manages its liquidity to provide adequate funds at an
acceptable cost to support borrowing requirements and deposit
flows of its customers. At December 31, 1996 and 1995, liquid
assets as a percentage of deposits were 46% and 51%,
respectively. In addition to cash and due from banks, liquid
assets include interest bearing deposits with other banks,
Federal funds sold and investment securities. The Bank has $10.0
million in Federal funds lines of credit available with
correspondent banks to meet liquidity needs.
Management regularly reviews general economic and financial
conditions, both external and internal, and determines whether
the positions taken with respect to liquidity and interest rate
sensitivity continue to be appropriate. The Bank also utilizes a
monthly "Gap" report which identifies rate sensitivity over the
short- and long-term.
The following table sets forth the distribution of repricing
opportunities, based on contractual terms, of the Company's
earning assets and interest-bearing liabilities at December 31,
1996, the interest rate sensitivity gap (i.e. interest rate
sensitive assets less interest rate sensitive liabilities), the
cumulative interest rate sensitivity gap, the interest rate
sensitivity gap ratio (i.e. interest rate sensitive assets
<PAGE> 34
divided by interest rate sensitive liabilities) and the
cumulative interest rate sensitivity gap ratio.
Based on the contractual terms of its assets and liabilities, the
Bank is currently asset sensitive in terms of its short-term
exposure to interest rates. In other words, the Bank's assets
reprice faster than its liabilities.
DISTRIBUTION OF REPRICING OPPORTUNITIES
At December 31, 1996
(Dollars in thousands)
After Three After Six After One
Within Months But Months But Year But After
Three Within Six Within One Within Five
Months Months Year Five Years Years Total
Federal funds sold $18,300 - - - - $ 18,300
Municipal securities - $230 $405 $ 2,210 $ 2,483 5,328
U.S. Treasury and
agency securities 2,958 589 999 7,952 20,824 33,322
FRB/FHLB stock - - - - 3,410 3,410
Loans 29,335 1,367 1,919 7,825 12,539 52,985
------- ------ ------ ------- ------- --------
Total earning assets $50,593 $2,186 $3,323 $17,987 $39,256 $113,345
------- ------ ------ ------- ------- --------
Interest bearing
demand accounts $23,171 - - - - $23,171
Savings accounts 13,935 - - - - 13,935
Time certificates of
deposit of $100,000
or more 5,585 $2,128 $2,622 $2,929 - 13,264
Other time deposits 4,374 3,654 4,296 3,927 - 16,251
Federal funds
purchased 1,500 - - - - 1,500
Other borrowings - - - 6,358 $11,843 18,201
------- ------- ------ ------- ------- -------
Total interest-bearing
liabilities $48,565 $ 5,782 $6,918 $13,214 $11,843 $86,322
------- ------- ------ ------- ------- ------
Interest rate
sensitivity gap $ 2,028 $(3,596 $(3,595) $ 4,773 $27,413 $27,023
======= ======= ======= ======= ======= =======
Cumulative interest
rate sensitivity
gap $ 2,028 $(1,568) $(5,163) $ (390) $27,023
======= ======= ======= ======= =======
Interest rate
sensitivity gap
ratio 1.04% 0.38% 0.48% 1.36% N/A
Cumulative interest
rate sensitivity
gap ratio 1.04% 0.97% 0.92% 0.99% 1.31%
<PAGE> 35
INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other
commercial concerns, primarily because its assets and liabilities
are largely monetary. In general, inflation primarily affects
the Company indirectly through its effect on the ability of its
customers to repay loans, or its impact on market rates of
interest, and thus the ability of the Bank to attract loan
customers. Inflation affects the growth of total assets by
increasing the level of loan demand, and potentially adversely
affects the Company's capital adequacy because loan growth in
inflationary periods may increase more rapidly than capital.
Interest rates in particular are significantly affected by
inflation, but neither the timing nor the magnitude of the
changes coincides with changes in the Consumer Price Index, which
is one of the indicators used to measure the rate of inflation.
Adjustments in interest rates may be delayed because of the
possible imposition of regulatory constraints. In addition to
its effects on interest rates, inflation directly affects the
Company by increasing the Company's operating expenses. The
effect of inflation during the three-year period ended
December 31, 1996 has not been significant to the Company's
financial position or results of operations.
CAPITAL RESOURCES
The Company's capital resources consist of shareholders' equity
and (for regulatory purposes) the allowance for credit losses.
During the year ended December 31, 1996, the Company's regulatory
capital increased $850,000. Tier 1 capital increased $895,000 due
to the retention of earnings and sale of stock, offset, in part
by an increase in the unrealized loss on equity securities
available for sale of $59,000. Tier 2 capital decreased $45,000
due to the decrease in the allowance for credit losses.
The Company and the Bank are subject to capital adequacy
guidelines issued by the Board of Governors and the OCC. The
Company and the Bank are required to maintain total capital equal
to at least 8% of assets and commitments to extend credit,
weighted by risk, of which at least 4% must consist primarily of
common equity including retained earnings (Tier 1 capital) and
the remainder may consist of subordinated debt, cumulative
preferred stock or a limited amount of loan loss reserves.
Certain assets and commitments to extend credit present less risk
than others and will be assigned to lower risk-weighted
categories requiring less capital allocation than the 8% total
ratio. For example, cash and government securities are assigned
to a 0% risk-weighted category, most home mortgage loans are
assigned to a 50% risk-weighted category requiring a 4% capital
allocation and commercial loans are assigned to a 100% risk-
weighted category requiring an 8% capital allocation. As of
<PAGE> 36
December 31, 1996, the Company's total risk-based capital ratio
was approximately 18.0% (approximately 17.1% for the Bank)
compared to approximately 22.0% (approximately 21.7% for the
Bank) at December 31, 1995.
The Board of Governors and the OCC adopted a 3% minimum leverage
ratio for banking organizations as a supplement to the risk-
weighted capital guidelines. The minimum leverage ratio is
intended to limit the ability of banking organizations to
leverage their equity capital base by increasing assets and
liabilities without increasing capital proportionately. The 3%
minimum leverage ratio constitutes a minimum ratio for well-run
banking organizations. Organizations experiencing or
anticipating significant growth or failing to meet certain Board
of Governors standards will be required to maintain a minimum
leverage ratio ranging from 100 to 200 basis points in excess of
the 3% ratio.
The following table reflects the Company's Leverage, Tier 1 and
total risk-based capital ratios for the three year period ended
December 31, 1996.
1996 1995 1994
Leverage ratio 10.5% 11.7% 12.3%
Tier 1 capital ratio 17.1% 20.8% 20.9%
Total risk-based capital ratio 18.0% 22.0% 22.2%
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The
FDICIA, among other matters, substantially revised banking
regulations and established a framework for determination of
capital adequacy of financial institutions. Under the FDICIA,
financial institutions are placed into one of five capital
adequacy catagories as follows: (1) "Well capitalized" -
consisting of institutions with a total risk-based capital ratio
of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive; (2)
"Adequately capitalized" - consisting of institutions with a
total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater and a leverage ratio of 4%
or greater, and the institution does not meet the definition of a
"well capitalized" institution; (3) "Undercapitalized" -
consisting of institutions with a total risk-based capital ratio
less than 8%, a Tier 1 risk-based capital ratio of less than 4%,
or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" - consisting of institutions with a total risk-
based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%; (5)
"Critically undercapitalized" - consisting of an institution with
a ratio of tangible equity to total assets that is equal to or
less than 2%.
<PAGE> 37
Financial institutions classified as undercapitalized or below
are subject to various limitations including, among other
matters, certain supervisory actions by bank regulatory
authorities and restrictions related to (i) growth of assets,
(ii) payment of interest on subordinated indebtedness, (iii)
payment of dividends or other capital distributions, and (iv)
payment of management fees to a parent holding company. The
FDICIA requires the bank regulatory authorities to initiate
corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may result in
orders to, among other matters, augment capital and reduce total
assets. Critically undercapitalized financial institutions may
also be subject to appointment of a receiver or implementation of
a capitalization plan.
OTHER MATTERS
From time to time, the Company's Board of Directors reviews
and consults with advisors, including investment banking,
accounting and legal advisors, regarding banking industry trends
and developments, as well as internal and external opportunities
to maximize shareholder value. Such reviews and consultations
include evaluating and comparing internal results of operations
projections and external opportunities for mergers, acquisitions,
reorganizations, or other transactions with third parties which
may be in the interests of the Company's shareholders. The
Company's Board of Directors considers such periodic review and
consultation to be important as part of their analysis of the
Company's value and prospects in the changing banking environment
and in view of the current consolidation activity within the
banking industry.
<PAGE> 38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 40
Consolidated Balance Sheets, December 31, 1996 and 1995 41
Consolidated Income Statements for the years ended
December 31, 1996, 1995, and 1994 42
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 42
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 44
Notes to Consolidated Financial Statements 45-58
All schedules have been omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedule or because the information required is
included in the Consolidated Financial Statements or notes
thereto.
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Saratoga Bancorp:
We have audited the accompanying consolidated balance sheets of
Saratoga Bancorp and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 Saratoga Bancorp
and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 1997
<PAGE> 40
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
<S> <C> <C>
CASH AND DUE FROM BANKS $ 4,543,000 $ 5,239,000
FEDERAL FUNDS SOLD 18,300,000 17,700,000
Total cash and equivalents 22,843,000 22,939,000
INTEREST-BEARING
DEPOSITS IN OTHER BANK - 200,000
SECURITIES AVAILABLE FOR SALE 17,949,000 15,286,000
SECURITIES HELD TO MATURITY 24,111,000 20,348,000
(market value - 1996, $24,165,000,
1995, $20,643,000)
LOANS 52,661,000 37,535,000
ALLOWANCE FOR CREDIT LOSSES (628,000) (776,000)
Loans, net 52,033,000 36,759,000
PREMISES AND EQUIPMENT, Net 2,135,000 1,988,000
OTHER REAL ESTATE OWNED 1,252,000 1,745,000
ACCRUED INTEREST RECEIVABLE AND
OTHER ASSETS 1,461,000 1,232,000
TOTAL $ 121,784.000 $ 100,497,000
================ ===============
LIABILITIES AND
SHAREHOLDERS' EQUITY
DEPOSITS:
Demand, noninterest-bearing $ 22,823,000 $ 20,410,000
Demand, interest-bearing 23,171,000 14,218,000
Savings 13,935,000 13,113,000
Time 29,515,000 27,208,000
Total deposits 89,444,000 74,949,000
FEDERAL FUNDS PURCHASED 1,500,000 1,500,000
OTHER BORROWINGS 18,201,000 12,087,000
ACCRUED EXPENSES AND
OTHER LIABILITIES 687,000 904,000
Total liabilities 109,832,000 89,440,000
COMMITMENTS (Notes 5 and 10)
SHAREHOLDERS' EQUITY:
Preferred stock, no par
value; authorized
1,000,000 shares; no shares
issued
Common stock, no par
value; authorized 20,000,000
shares; outstanding 1,036,392
in 1996 and 1,030,972 shares
in 1995. 4,461,000 4,427,000
Retained earnings 7,717,000 6,797,000
Net unrealized loss on
securities available
for sale (226,000) (167,000)
Total shareholders' equity 11,952,000 11,057,000
TOTAL $ 121,784,000 $ 100,497,000
=============== ================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 41
SARATOGA BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 4,395,000 $ 3,788,000 $ 3,361,000
Federal funds sold 761,000 421,000 235,000
Securities:
Taxable 2,244,000 2,194,000 1,697,000
Non-taxable 175,000 169,000 127,000
Other 10,000 - 26,000
Total interest income 7,585,000 6,572,000 5,446,000
INTEREST EXPENSE:
Deposits 2,712,000 2,470,000 1,919,000
Borrowings 841,000 377,000 -
Other 5,000 14,000 10,000
Total interest expense 3,558,000 2,861,000 1,929,000
NET INTEREST INCOME BEFORE
CREDIT FOR CREDIT LOSSES 4,027,000 3,711,000 3,517,000
CREDIT FOR CREDIT LOSSES (150,000) - (636,000)
NET INTEREST INCOME AFTER
CREDIT FOR CREDIT LOSSES 4,177,000 3,711,000 4,153,000
OTHER INCOME:
Service charges 199,000 194,000 194,000
Rental income from
leased assets 83,000 119,000 179,000
Rental income from
other real estate owned - 102,000 -
Net gain on sale of
securities available
for sale - 72,000 -
Gain on sale of other
real estate owned - 55,000 -
Other 71,000 35,000 32,000
Total other income 353,000 577,000 405,000
OTHER EXPENSES:
Salaries and employee
benefits 1,342,000 1,188,000 1,106,000
Occupancy 348,000 376,000 388,000
Professional fees 158,000 156,000 186,000
Furniture and equipment 138,000 126,000 128,000
Insurance 88,000 161,000 176,000
Data processing 71,000 45,000 118,000
Depreciation on leased
assets 65,000 110,000 147,000
Net cost of other real
estate owned 5,000 115,000 514,000
Net loss on sale of
securities available
for sale 4,000 - 196,000
Other 651,000 591,000 564,000
Total other expenses 2,870,000 2,868,000 3,523,000
INCOME BEFORE INCOME TAXES 1,660,000 1,420,000 1,035,000
PROVISION FOR INCOME TAXES 559,000 539,000 377,000
NET INCOME $ 1,101,000 $ 881,000 $ 658,000
NET INCOME PER COMMON ============== ============ ===========
AND EQUIVALENT SHARE $ 0 .96 $ 0.82 $ 0.59
============== ============ ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 42
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Net
Unrealized
Loss
on Securities Total
Common Stock Retained Available Shareholders'
Shares Amount Earnings for Sale Equity
<S> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1994 $1,169,264 $5,021,000 $5,711,000 $ (11,000) $10,721,000
Shares repurchased (138,292) (594,000) (350,000) - (944,000)
Change in net
unrealized loss
on securities
available for sale - - - (808,000) (808,000)
Net income - - 658,000 - 658,000
---------- ---------- ---------- ---------- ----------
BALANCES,
DECEMBER 31, 1994 1,030,972 4,427,000 6,019,000 (819,000) 9,627,000
Cash dividend
($.10 per share) - - (103,000) - (103,000
Change in net
unrealized loss
on securities
available for sale - - - 652,000 652,000
Net income - - 881,000 - 881,000
---------- ---------- ---------- ---------- ----------
BALANCES,
DECEMBER 31, 1995 1,030,972 4,427,000 6,797,000 (167,000) 11,057,000
Exercise of stock
options 5,420 34,000 - - 34,000
Cash dividend
($.175 per share) - - (181,000) - (181,000)
Change in net
unrealized loss
on securities
available for sale - - - (59,000) (59,000)
Net income - - 1,101,000 - 1,101,000
---------- ---------- ---------- ---------- ----------
BALANCES,
DECEMBER 31, 1996 $1,036,392 $4,461,000 $7,717,000 $ (226,000)$11,952,000
========== ========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 43
SARATOGA BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<S> <C> <C> <C>
1996 1995 1994
CASH FLOWS FROM OPERATIONS:
Net income $ 1,101,000 $ 881,000 $ 658,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Credit for credit losses (150,000) - (636,000)
Depreciation and amortization 170,000 233,000 296,000
Deferred income taxes (86,000) 392,000 131,000
Valuation allowance - other
real estate owned (50,000) 35,000 481,000
Accrued interest receivable
and other assets (233,000) 514,000 (485,000)
Accrued expenses and other
liabilities (216,000) 367,000 (237,000)
Deferred loan fees 16,000 78,000 31,000
Net loss (gain) on sale of
investments 4,000 (72,000) 196,000
Gain on sale of leased assets (22,000) - -
Gain on sale of other real
estate owned - (55,000) -
----------- ----------- -----------
Net cash provided by operating activities 534,000 2,373,000 435,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available
for sale (14,065,000) (2,590,000) (3,018,000)
Purchase of securities held to
maturity (6,080,000) (4,885,000) (12,597,000)
Proceeds from maturities of
securities available for sale 6,993,000 - 100,000
Proceeds from maturities of
securities held to maturity 4,170,000 8,417,000 1,155,000
Proceeds from maturity of
interest-bearing deposits
in other banks 200,000 - -
Proceeds from sale of securities
available for sale 2,496,000 2,625,000 3,965,000
Net increase in loans (15,142,000) (4,797,000) (902,000)
Purchases of premises and equipment (450,000) (40,000) (34,000)
Proceeds from sale of premises
and equipment 134,000 14,000 -
Proceeds from sale of other
real estate owned 652,000 735,000 1,154,000
Other - (238,000) -
----------- ---------- -----------
Net cash used in investing activities (21,092,000) (759,000) (10,177,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 14,495,000 1,077,000 8,158,000
Net decrease in federal funds
purchased - - (500,000)
Net increase in other borrowings 6,114,000 10,087,000 2,000,000
Issuance of common stock 34,000 - -
Payment of cash dividends (181,000) (103,000) -
Repurchase of common stock - - (944,000)
---------- ---------- -----------
Net cash provided by financing activities 20,462,000 11,061,000 8,714,000
NET (DECREASE) INCREASE IN CASH
AND EQUIVALENTS (96,000) 12,675,000 (1,028,000)
CASH AND EQUIVALENTS,
BEGINNING OF YEAR 22,939,000 10,264,000 11,292,000
------------ ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 22,843,000 $22,939,000 $10,264,000
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year for:
Interest $ 3,518,000 $ 2,703,000 $ 1,940,000
Income taxes $ 923,000 $ 75,000 $ 861,000
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES -
Additions to other real estate owned $ - $ - $ 1,984,000
See notes to consolidated financial statements.
<PAGE> 44
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Saratoga Bancorp
and subsidiary conform to generally accepted accounting principles
and prevailing practices within the banking industry.
BUSINESS - Saratoga Bancorp ("the Company") is a registered bank
holding company whose principal asset (and only subsidiary) is
the common stock of Saratoga National Bank (the "Bank").
The Bank conducts commercial and retail banking business,
which includes accepting demand, savings and time deposits and
making commercial, real estate and consumer loans. It also offers
installment note collections, issues cashier's checks, sells travelers
checks and provides other customary banking services.
CONSOLIDATION - The consolidated financial statements include
Saratoga Bancorp (the Company) and its wholly-owned subsidiary,
Saratoga National Bank (the Bank). All material intercompany
accounts and transactions have been eliminated.
ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses as of the dates and
for the periods presented. Actual results could differ from
those estimates.
CASH AND EQUIVALENTS - The Bank considers all highly liquid debt
instruments purchased with an original maturity of three months
or less to be cash equivalents.
SECURITIES - The Company classifies its securities into two categories,
securities available for sale and held to maturity. Securities available
for sale are measured at market value with a corresponding recognition of
the net unrealized holding gain or loss as a separate component of
shareholders' equity, net of income taxes, until realized. Securities
held to maturity are measured at amortized cost based on the Company's
positive intent and ability to hold the securities to maturity.
Any gains and losses on sales of securities are computed on a specific
identification basis.
LOANS - Loans are stated at the principal amount outstanding. Interest
on loans is credited to income as earned. The accrual of interest is
discontinued and any accrued and unpaid interest is reversed when the
payment of principal or interest is 90 days past due unless the amount
is well secured and in the process of collection. Income on non accrual
loans is recognized only to the extent that cash is received and where
the future collection of principal is probable.
Loan origination fees and costs are deferred and amortized to income by
a method approximating the effective interest method over the lives of
the underlying loans.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is
established through a provision charged to expense. Loans are charged
against the allowance when management believes that the collection of
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans
and commitments to extend credit, based on evaluations of collectibility
and prior loss experience. The evaluations take into consideration
such factors as ch anges in the composition of the portfolio, overall
portfolio quality, loan concentrations, specific problem loans, and
current and anticipated economic conditions that may affect the borrowers'
ability to repay. In evaluating the probability of collection, management
is required to make estimates and assumptions.
ACCOUNTING FOR IMPAIRED LOANS - A loan is considered impaired when it is
probable that interest and principal will not be collected according to
the contractual terms of the loan agreement. Impaired loans are required
to be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
<PAGE> 45
collateral if the loan is collateral dependent. Income recognition on
impaired loans is consistent with the policy for income recognition on
nonaccrual loans described above. The Bank has determined that there
were no impaired loans as of December 31, 1996 or 1995.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the shorter of the lease term
or the estimated useful lives of the assets, which are generally three to
fifteen years for furniture, equipment and leasehold improvements and 35
years for a building.
LEASED EQUIPMENT - Leased equipment is stated at cost net of accumulated
depreciation. Depreciation is computed on a straight-line basis over the
lease term to an estimated residual value. Such leases are accounted for
as operating leases. Revenue is recognized when earned and depreciation
expense is recorded as other expense.
LONG-LIVED ASSETS - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", effective January 1,
1995. The adoption of this statement had no effect on the Company's
financial condition or results of operations.
OTHER REAL ESTATE OWNED - Other real estate owned is carried at the lower
of cost or fair value less estimated costs to sell. When the property is
acquired through foreclosure any excess of the related loan balance over
its estimated fair value less estimated costs to sell is charged to the
allowance for credit losses. Costs of maintaining other real estate owned
and any subsequent declines in the estimated fair value are charged to
other expenses.
ACCOUNTING FOR FINANCIAL ASSETS AND LIABILITIES - In June, 1996, the FASB
issued SFAS No.125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities". This statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company believes the
effect of adoption of this standard will not be material.
INCOME TAXES - Income taxes are provided at current rates. Deferred income
taxes are provided on income and expense items recognized in different
periods for financial statement and tax reporting purposes.
NET INCOME PER COMMON AND EQUIVALENT SHARE - Net income per common and
equivalent share is calculated using the weighted average shares
outstanding plus the dilutive effect of stock options. The number of
shares used to compute net income per common and equivalent share was
1,150,497 shares in 1996, 1,066,772 shares in 1995 and 1,117,076 shares
in 1994. The difference between primary and fully diluted net income
per share is not significant in any year.
STOCK-BASED AWARDS - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees."
RECLASSIFICATIONS - Certain amounts have been reclassified to conform to
the current year presentation. The reclassifications had no effect on
results of operations or shareholders' equity.
2. CASH AND DUE FROM BANKS
At December 31, 1996, average aggregate reserves (in the form of deposits
with the Federal Reserve Bank) of $1,362,000 were maintained, which
satisfied federal regulatory requirements to maintain certain average
reserve balances.
<PAGE> 46
3. INVESTMENTS
The amortized cost and estimated market values of securities at December 31
are as follows:
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U. S. Treasury and agency
securities $11,704,000 $ 12,000 $ (45,000) $11,671,000
Governmental mutual fund 3,128,000 - (170,000) 2,958,000
Federal Home Loan Bank Stock 3,170,000 - - 3,170,000
Bankers Bank Stock 150,000 - - 150,000
----------- -------- ---------- -----------
Total $18,152,000 $ 12,000 $ (215,000) $17,949,000
=========== ======== ========== ===========
SECURITIES HELD TO MATURITY
U. S. Treasury and agency
securities $ 5,489,000 $ 51,000 $ (39,000) $ 5,501,000
Mortgage-backed securities 13,204,000 14,000 (148,000) 13,070,000
Obligations of states and
political subdivisions 5,328,000 33,000 (7,000) 5,354,000
Federal Reserve Bank Stock 90,000 - - 90,000
------------ -------- ---------- -----------
Total $24,111,000 $ 98,000 $ (194,000) $24,015,000
=========== ======== ========== ===========
1995
SECURITIES AVAILABLE FOR SALE
U. S. Treasury and agency
securities $10,290,000 $ 29,000 $ (32,000) $10,287,000
Governmental mutual fund 3,128,000 - (87,000) 3,041,000
Federal Home Loan Bank Stock 1,958,000 - - 1,958,000
----------- -------- ---------- -----------
Total $15,376,000 $ 29,000 $ (119,000) $15,286,000
=========== ======== ========== ===========
SECURITIES HELD TO MATURITY
U. S. Treasury and agency
securities $ 5,564,000 $ 75,000 $ (7,000) $ 5,632,000
Mortgage-backed securities 11,145,000 79,000 (72,000) 11,152,000
Obligations of states and
political subdivisions 3,549,000 45,000 (5,000) 3,589,000
Federal Reserve Bank Stock 90,000 - - 90,000
----------- -------- --------- -----------
Total $20,348,000 $199,000 $ (84,000) $20,463,000
=========== ======== ========= ===========
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
The amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturity, are as follows:
Available for Sale Held to Maturity
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 585,000 $ 589,000 $ 1,634,000 $ 1,632,000
Due after one year
through five years 1,991,000 1,980,000 5,956,000 5,965,000
Due after five years
through ten years 3,496,000 3,500,000 7,234,000 7,261,000
Mortgage-backed
securities 5,632,000 5,602,000 9,197,000 9,067,000
Governmental
mutual fund 3,128,000 2,958,000 - -
----------- ----------- ----------- -----------
Total $14,832,000 $14,629,000 $24,021,000 $23,925,000
=========== =========== =========== ===========
</TABLE>
Sale of investments resulted in gross realized gains of $1,000 for 1996,
($148,000 in 1995 and none in 1994) and gross realized losses of $5,000
in 1996 ($76,000 in 1995 and $196,000 in 1994.) During 1994, the Company
transferred investments from available for sale to held to maturity. The
net unrealized loss at the date of transfer of $214,000 is being amortized
over the remaining maturities of the investments. The unamortized portion
of the loss is $161,000 at December 31, 1996.
Mortgage-backed securities generally have stated maturities of four to
fifteen years, but are subject to likely and substantial prepayments
which effectively accelerate actual maturities. The Company's investment
in governmental mutual funds has no fixed maturity. At December 31, 1996
investments with an amortized cost of $20,426,000 were pledged to secure
public and certain other deposits as required by law or contract.
Effective December 7, 1995, two securities totaling $ 3,000,000 in
amortized cost and $3,105,000 market value and Federal Home Loan Bank
stock totaling $1,958,000 were reclassified from held to maturity to
available for sale in connection with initial adoption of the Financial
Accounting Standards Board Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
4. LOANS AND ALLOWANCES FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Loans at December 31, are comprised of the following:
1996 1995
<S> <C> <C>
Real estate:
Construction $ 9,249,000 $ 7,837,000
Other 21,473,000 17,507,000
Commercial 18,242,000 11,585,000
Installment 1,861,000 77,000
Lease financing 2,535,000 920,000
Unearned income on lease financing (375,000) (83,000)
---------- ----------
Total loans 52,985,000 37,843,000
Deferred loans fees (324,000) (308,000)
----------- ----------
Loans, net of deferred loan fees $52,661,000 $37,535,000
=========== ===========
</TABLE>
<PAGE> 48
The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Balance, beginning of year $ 776,000 $ 738,000 $ 1,339,000
Provision credited to expense (150,000) - (636,000)
Write-offs (39,000) (45,000) (73,000)
Recoveries 41,000 83,000 108,000
------------ ------------ -----------
Balance, end of year $ 628,000 $ 776,000 $ 738,000
============ ============ ===========
</TABLE>
There were no nonaccrual loans at December 31, 1996 and 1995 and $707,000
at December 31, 1994. The reduction in interest income associated with
these loans in 1994 was $59,000. Interest income recognized on such
loans in 1994 was $28,000.
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, are comprised of the following:
1996 1995
Land $ 948,000 $ 948,000
Building and leasehold improvements 1,194,000 1,194,000
Furniture and equipment 945,000 860,000
Leased equipment 365,000 390,000
------------- -------------
Total 3,452,000 3,392,000
Accumulated depreciation and
amortization (1,317,000) (1,404,000)
------------- -------------
Premises and equipment, net $ 2,135,000 $ 1,988,000
============= =============
The Company's Los Gatos and San Jose branches are leased under noncancellable
operating leases which expire in 1998 and 1999, respectively. The Bank has
renewal options with adjustments to the lease payments based on changes in
the consumer price index. Future minimum annual lease payments are as
follows:
1997 $ 250,000
1998 188,000
1999 176,000
------------
Total $ 614,000
============
Rental expense under operating leases was $236,000 in 1996 and 1995 and
$226,000 in 1994.
6. OTHER REAL ESTATE OWNED
Other real estate owned was $1,252,000 and $1,745,000 at December 31, 1996
and 1995, respectively,
<PAGE> 49
(net of valuation allowance of $143,000 and $303,000, respectively). The
net cost of operation of other real estate owned is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Decreases (increases) in valuation
allowance to reflect increases and
decreases in estimated fair value $ 50,000 $ (35,000) $ (481,000)
Net holding costs (55,000) (80,000) (33,000)
------------ ----------- ----------
Total $ (5,000) $ (115,000) $ (514,000)
============ =========== ==========
</TABLE>
7. DEPOSITS
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $13,264,000 and 10,782,000
in 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of CDs over $100,000 are
as follows:
1997 $10,335,000
1998 2,060,000
1999 154,000
2000 715,000
-----------
$13,264,000
===========
8. OTHER BORROWINGS
Other borrowings consist of borrowings from the Federal Home Loan Bank
which are due as follows:
2000 $ 2,208,000
2001 4,150,000
2002 766,000
2003 2,700,000
2005 7,058,000
2010 353,000
2011 966,000
-----------
$18,201,000
===========
<PAGE> 50
9. INCOME TAXES
The provision for income taxes is comprised of the following:
Years Ended December 31,
1996 1995 1994
Current:
Federa $478,000 $ 68,000 $189,000
State 167,000 79,000 57,000
-------- -------- --------
Total current 645,000 147,000 246,000
-------- -------- --------
Deferred:
Federal (75,000) 345,000 94,000
State (11,000) 47,000 37,000
-------- -------- --------
Total deferred (86,000) 392,000 131,000
-------- -------- --------
Total $559,000 $539,000 $377,000
======== ======== ========
The effective tax rate differs from the federal statutory rate as follows:
Years Ended December 31,
1996 1995 1994
Federal statutory rate 35.0% 35.0% 35.0%
State income tax, net
of federal effect 6.2 6.0 5.9
Tax exempt income (3.1) (3.6) (4.2)
Officer's life insurance - 1.3 0.3
Other, net (4.4) (0.7) (0.6)
----- ----- -----
Total 33.7% 38.0% 36.4%
===== ===== =====
<PAGE> 51
The Company's net deferred tax asset at December 31 is as follows:
1996 1995
Deferred tax assets:
Provision for credit losses $ 197,000 $ 198,000
Unrealized loss on investments
available for sale 138,000 111,000
Deferred compensation 93,000 30,000
Provision for other real estate owned 59,000 126,000
Deferred rent 36,000 52,000
--------- ---------
Total deferred assets 523,000 517,000
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (183,000) (242,000)
Other (28,000) (76,000)
--------- ---------
Total deferred liabilities 211,000 (318,000)
--------- ---------
Net deferred tax asset $ 312,000 $ 199,000
========= =========
There was no valuation allowance at December 31, 1996 and 1995.
10. STOCK OPTION PLANS
The Company's stock option plans authorize the issuance to employees,
officers and directors of incentive and nonstatutory options to purchase
common stock.
The Company's 1982 Amended Stock Option Plan (the "1982 Plan") expired by
its terms on October 26, 1992. Therefore, no options were granted by the
Corporation during 1994, 1995 or 1996 under the 1982 Plan. Prior to
expiration of the 1982 Plan, options were granted to key officers and
employees of the Company and its subsidiary. Options granted under the
1982 Plan were either incentive options or nonstatutory options and
become exercisable in accordance with a vesting schedule established at
the time of grant. Vesting may not extend beyond ten years from the date
of grant. Upon a change in control of the Company, all outstanding options
under the 1982 Plan will become fully vested and exercisable. Options
granted under the 1982 Plan are adjusted to protect against dilution in the
event of certain changes in the Company's capitalization, including stock
splits and stock dividends.
The Company's 1994 Stock Option Plan ("the 1994 Plan") is substantially
similar to the 1982 Plan regarding provisions related to option grants,
vesting and dilution. Upon a change in control, options do not become
fully vested and exercisable, but may be assumed or equivalent options
may be substituted by a successor corporation. All options granted
in 1996 under the 1994 Plan were incentive stock options and have an
exercise price equal to the fair market value of the Company's common
stock on the date of grant.
<PAGE> 52
Option activity is summarized as follows:
Outstanding Options
Number of Weighted Average
Shares Exercise Price
Balances, January 1, 1994 176,377 $5.93
Granted 97,300 6.31
Canceled (7,000) 6.22
------- -----
Balances, December 31, 1994 266,677 6.06
At December 31, 1996, options for 36,494 shares are available for
future grant.
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpertations. Accordingly, no compensation expense has been recognized
in the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock- Based Compensation" requires the
disclosure of proforma net income and earnings per share had the Company
adopted the fairvalue method as of the beginning of fiscal 1995. Under
SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferrable options without vesting restriction, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and
expected time to exercice, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life, 114
months; stock volatility, 19.0%; risk free interest rates, 6.54% and
6.68% in 1996 and 5.85%, 6.15% and 7.66% in 1995; and a dividend yield of
5.50% as they occur. If the computed values of the 1996 and 1995 awards
had been amortized to expense over the vesting period of the awards, pro
forma net income would have been $1,090,000 ($0.95 per share) in 1996 and
$868,000 ($0.81 per share) in 1995. However, the impact of outstanding
non-vested stock options granted prior to 1995 have been excluded from the
pro forma calculation; accordingly the 1995 and 1996 pro forma adjustments
are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
11. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers.
These financial instruments include loan commitments of $20,826,000 and
standby letters of credit of $25,000 at December 31, 1996. The Bank's
exposure to
<PAGE> 53
credit loss is limited to amounts funded or drawn; however, at December 31,
1996, no losses are anticipated as a result of these commitments.
Loan commitments are typically contingent upon the borrower's meeting
certain financial and other covenants and such commitments typically have
fixed expiration dates and require payment of a fee. As many of these
commitments do not necessarily represent future cash requirements. The
Bank evaluates each potential borrower and the necessary collateral on an
individual basis. Collateral varies, and may include real property, bank
deposits, or business or personal assets.
Standby letters of credit are conditional commitments written by the Bank to
guarantee the performance of a customer to a third party. These guarantees
are issued primarily relating to inventory purchases by the Bank's
commercial customers and such guarantees are typically short-term. Credit
risk is similar to that involved in extending loan commitments to customers
and the Bank, accordingly, uses evaluation and collateral requirements
similar to those for loan commitments. Virtually all of such commitments
are collateralized.
Officers of the Company have severance agreements which provide, in the
event of a change in control meeting certain criteria, severance payments
based on a multiple of their current compensation. At December 31, 1996,
these payments would have aggregated up to $351,000.
12. LOAN CONCENTRATIONS
The Bank's customers are primarily located in Santa Clara County, which is
located in the southern portion of the San Francisco Bay Area. Many of
the Bank's customers are employed by or are otherwise dependent on the high
technology and real estate development industries and, accordingly, the
ability of the Bank's borrowers to repay loans may be affected by the
performance of these sectors of the economy. Virtually all loans are
collateralized. Generally, real estate loans are secured by real property
and commercial and other loans are secured by business or personal assets.
Repayment is generally expected from refinancing or sale of the related
property for real estate construction loans and from cash flows of the
borrower for all other loans.
The composition of the loan portfolio at December 31, 1996 and 1995 is
summarized in the following table.
1996 1995
Real estate:
Construction: 17 21
Other 41 46
Commerical 34 31
Installment 4 -
Lease financing 4 2
100% 100%
=== ===
13. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions and/or
estimation techniques may have a material effect on the estimated fair
value amounts.
<PAGE> 54
The following table presents the carrying mount and estimated fair value
of certain assets and liabilities of the Company at December 31, 1996.
The carrying amounts reported in the consolidated balance sheets
approximate fair value for the following financial instruments: cash and
due from banks, federal funds sold, interest bearing deposits in other
banks, demand and savings deposits, federal funds purchased and other
borrowings (See Note 3 for information regarding securities).
December 31, 1996
Carrying Estimated Fair
Amount Value
Loans, net $52,033,000 $52,202,000
Time deposits $29,515,000 $29,590,000
December 31, 1995
Carrying Estimated Fair
Amount Value
Loans, net $36,759,000 $36,752,000
Time deposits $27,208,000 $27,375,000
Loans
The fair value of loans with fixed rates is estimated by discounting
the future cash flows using current rates at which similar loans would
be made to borrowers with similar credit ratings. For loans with
variable rates which adjust with changes in market rates of interest,
the carrying amount is a reasonable estimate of fair value.
Time deposits
The fair value of fixed maturity certificates of deposit is estimated
using rates currently offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit are issued in
the normal course of business by the Bank. Commitments to extend credit
are issued with variable interest rates tied to market interest rates at
the time the commitment is funded and the amount of the commitment equals
their fair value. Standby letters of credit are supported by commitments
to extend credit with variable interest rates tied to market interest
rates at the time the commitments are funded and the amount of standby
letters of credit equals their fair value.
14. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Company's
and the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
<PAGE> 55
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1996, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 3 1, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Company and the Bank must
maintain minimum total risk-based , Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The following table shows the Company's and the Bank's capital ratios at
December 31, 1996 and 1995 as well as the minimum capital ratios required
to be deemed "well capitalized" under the regulatory framework.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Bancorp Bank Only For Capital Prompt Corrective
Actual Actual Adequacy PurposesAction Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Capital
(to Risk
Weighed
Assets) $12,580,000 18.0% $11,826,000 17.1% >$5,602,000 >8.00%>$7,003,000>10.0%
Tier I
Capital
to Risk
Weighed
Assets) $11,952,000 17.1% $11,198,000 16.2% >$2,802,000 >4.00%>$4,202,000> 6.0%
Tier I
Capital
(to
Average
Assets) $11,952,000 10.5% $11,198,000 9.8% >$4,614,000 >4.00%>$5,767,000> 5.0%
As of December 31, 1995
Total
Capital
(to Risk
Weighed
Assets) $11,833,000 22.0% $11,669,000 21.7% >$4,304,000 >8.00%>$5,380,000>10.0%
Tier I
Capital
(to Risk
Weighed
Assets) $11,057,000 20.8% $10,669,000 20.5% >$2,152,000 >4.00%>$3,228,000> 6.0%
Tier I
Capital
(to
Average
Assets) $11,057,000 11.7% $10,669,000 11.5% >$3,826,000 >4.00%>$4,782,000> 5.0%
</TABLE>
<PAGE> 56
15. CONDENSED FINANCIAL INFORMATION OF SARATOGA BANCORP (PARENT ONLY)
The condensed financial statements of Saratoga Bancorp are as follows:
CONDENSED BALANCE SHEETS
December 31,
1996 1995
ASSETS:
Cash-interest bearing account with Bank $ 102,000 $ 149,000
Real estate loans 764,000 -
Investment in Bank 11,078,000 10,882,000
Other assets 8,000 27,000
----------- -----------
Total $11,952,000 $11,058,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ - $ 1,000
Common stock 4,461,000 4,427,000
Retained earnings 7,717,000 6,797,000
Net unrealized loss on investments
available for sale (226,000) (167,000)
----------- -----------
Total $11,952,000 $11,058,000
=========== ===========
CONDENSED INCOME STATEMENTS
Years Ended December 31,
1996 1995 1994
Interest income $ 26,000 $ 8,000 $ 43,000
Credit for credit losses - - 10,000
Dividend from subsidiary 861,000 - -
Other expenses (50,000) (50,000) (57 000)
--------- ---------- ---------
Loss before income taxes
and equity in
undistributed net income
of Bank 837,000 (42,000) (4,000)
Income tax benefit 9,000 16,000 1,000
Equity in undistributed
net income of Bank 255,000 907,000 661,000
----------- ---------- -----------
Net income $ 1,101,000 $ 881,000 $ 658,000
=========== ========== ===========
<PAGE> 57
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1996 1995 1994
Cash flows from operations:
Net income $1,101,000 $ 881,000 $ 658,000
Adjustments to reconcile
net income to net
cash provided by (used in)
operating activities:
Equity in undistributed
net income of Bank (255,000) (907,000) (661,000)
Credit for credit losses - - (10,000)
Change in other assets 19,000 (16,000) -
Change in other liabilities (1,000) - 1,000
---------- ------------- -----------
Net cash provided by (used in)
operating activities 864,000 (42,000) (12,000)
Cash flows from investing
activities -
Net change in loans (764,000) 36,000 354,000
---------- ------------- -----------
Cash flows from financing
activities:
Cash dividend (181,000) (103,000) -
Issuance of common stock 34,000 - -
Repurchase of common stock - - (944,000)
---------- ------------- -----------
Net cash used in financing
activities (147,000) (103,000) (944,000)
---------- ------------- -----------
Net decrease in cash (47,000) (109,000) (602,000)
Cash, beginning of year 149,000 258,000 860,000
---------- ------------- -----------
Cash, end of year $ 102,000 $ 149,000 $ 258,000
========== ============= ===========
The ability of the Company to pay future dividends will largely depend
upon the dividends paid to it by the Bank. Under federal law regulating
national banks, dividends declared by the Bank in any calendar year may
not exceed the lesser of its undistributed net income for the most recent
three fiscal years or its retained earnings. As of December 31, 1996, the
amount available for distribution from the Bank to the Company was
approximately $2,356,000, subject to approval by the Office of the
Comptroller of the Currency. The Bank is also restricted as to the amount
and form of loans, advances or other transfers of funds or other assets
to the Company.
* * * * *
<PAGE> 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required hereunder is incorporated by reference from
the Company's definitive proxy statement for the Company's 1997 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
Item 11. Executive Compensation.
The information required hereunder is incorporated by reference from
the Company's definitive proxy statement for the Company's 1997 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required hereunder is incorporated by reference from
the Company's definitive proxy statement for the Company's 1997 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
Item 13. Certain Relationships and Related Transactions.
The information required hereunder is incorporated by reference from
the Company's definitive proxy statement for the Company's 1997 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements. This information is listed
and included in Part II, Item 8.
(a) (2) Financial Statement Schedules. All schedules have
been omitted since the required information is not
present or is not present in amounts sufficient to
require submission of the schedule or because the
information required is included in Consolidated
Financial Statements or notes thereto.
<PAGE> 59
(a) (3) Exhibits. The exhibits listed on the accompanying
Exhibit Index are filed as part of this report.
(3.1) Articles of Incorporation, as amended, are
incorporated by reference herein to Exhibit 3.1
of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988, as filed
with the Securities and Exchange Commission on
March 27, 1989.
(3.2) By-laws, as amended, are incorporated by reference
herein to Exhibit 3.2 of Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1993 as filed with the Securities
and Exchange Commission on March 29, 1994.
(4.1) Specimen stock certificate is incorporated by
reference to Exhibit 4.1 of Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994 as filed with the Securities and
Exchange Commission on March 30, 1995.
(10.1) Lease agreement dated 10/19/87 for 15405 Los Gatos
Blvd., Suite 103, Los Gatos, CA is incorporated
by reference herein to Exhibit 10.1 of
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987 as filed with
the Securities and Exchange Commission on March
31, 1988.
(10.2) Agreement of Purchase and Sale dated July 27, 1988
for 12000 Saratoga-Sunnyvale Road, Saratoga, CA is
incorporated by reference herein to Exhibit 10.1
of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, as filed with
the Securities and Exchange Commission on March
27, 1989.
*(10.3) Indemnification Agreements with directors and
Executive Officers of the Registrant are
incorporated by reference herein to Exhibit 10.2
of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, as filed with
the Securities and Exchange Commission on March
27, 1989.
(10.4) Lease agreement dated 1/17/89 for 160 West Santa
Clara Street, San Jose, California is incorporated
by reference herein to Exhibit 10.4 of
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, as filed with
the Securities and Exchange Commission on March
27, 1990.
<PAGE> 60
(10.5) Bank of the West Master Profit Sharing and Savings
Plan and Amendment, amended as of March, 1990 is
incorporated by reference herein to Exhibit 10.5
of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, as filed with
the Securities and Exchange Commission on March
20, 1991.
*(10.6) Employment Agreement and Management Continuity
Agreement and Chief Executive Officer
Compensation Plan/Richard L. Mount is incorporated
by reference herein to Exhibit 10.6 of
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990, as filed with
the Securities and Exchange Commission on March
20, 1991.
(10.7) Saratoga Bancorp 1982 Stock Option Plan is
incorporated by reference herein to the exhibits
to Registration Statement No. 33-34674 on Form S-8
as filed with the Securities and Exchange Commission
on May 7, 1990.
(10.8) Saratoga National Bank Savings Plan dated June 19,
1995 is incorporated by reference herein to
Exhibit 10.8 of Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995,
as filed with the Securities and Exchange
Commission on March 27, 1996.
(10.9) Saratoga Bancorp 1994 Stock Option Plan dated March
18, 1994 is incorporated by referencce herein to
Appendix A of Proxy Statement dated April 19, 1994
filed as with the Securities and Exchange Commission
on April 27, 1994.
(10.10) Forms of Incentive Stock Option Agreement, Non-
Statutory Stock Option Agreement and Non-Statutory
Agreement for Outside Diectors, as amended is
incorporated by reference herein to Exhibit 10.8 of
Registrant's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1994 as filed with the
Securities and Exchange Commission on August 15,
1994.
(21) Subsidiaries of the registrant: Registrant's only
subsidiary is Saratoga National Bank, a national
banking association, which operates a commercial
and retail banking operation in California.
<PAGE> 61
(23) Independent Auditors' consent
(27) Financial Data Schedule
* Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K for the
three month period ended December 31, 1996.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material has been sent to security
holders. The Company shall furnish copies of such material to the
Commission when it is sent to security holders.
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.
SARATOGA BANCORP
By_______________________________
Richard L. Mount, President
(Principal Executive Officer)
Date_____________________________
By_______________________________
Mary Page-Rourke, Treasurer
(Principal Financial and
Accounting Officer)
Date_____________________________
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 dates indicated.
<PAGE> 62
Name Title Date
__________________ Director _______________
Victor Aboukhater
__________________ Director and Secretary _______________
Neal A. Cabrinha
__________________ Director _______________
Robert G. Egan
__________________ Director _______________
William D. Kron
__________________ Director _______________
John F. Lynch III
__________________ Director _______________
V. Ronald Mancuso
Chairman of the Board
__________________ President and Director _______________
Richard L. Mount (Principal Executive
Officer)
__________________ Treasurer _______________
Mary Page-Rourke (Principal Financial and
Accounting Officer)
<PAGE> 63
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
23 Independent Auditors' Consent 65
27 Financial Data Schedule 66
<PAGE> 65
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-34674 of Saratoga Bancorp on Form S-8 of our report dated January 24,
1997, appearing in this Annual Report on Form 10-K of Saratoga Bancorp
for the year ended December 31, 1996.
//Deloitte & Touche LLP//
DELOITTE & TOUCHE LLP
San Jose, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4543
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17949
<INVESTMENTS-CARRYING> 24111
<INVESTMENTS-MARKET> 24015
<LOANS> 52661
<ALLOWANCE> 628
<TOTAL-ASSETS> 121784
<DEPOSITS> 89444
<SHORT-TERM> 1500
<LIABILITIES-OTHER> 687
<LONG-TERM> 18201
0
0
<COMMON> 4461
<OTHER-SE> 7491
<TOTAL-LIABILITIES-AND-EQUITY> 121784
<INTEREST-LOAN> 4395
<INTEREST-INVEST> 2419
<INTEREST-OTHER> 771
<INTEREST-TOTAL> 7585
<INTEREST-DEPOSIT> 2712
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<INTEREST-INCOME-NET> 4027
<LOAN-LOSSES> (150)
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 2866
<INCOME-PRETAX> 1660
<INCOME-PRE-EXTRAORDINARY> 1101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1101
<EPS-PRIMARY> .98
<EPS-DILUTED> .97
<YIELD-ACTUAL> 7.9
<LOANS-NON> 0
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<LOANS-TROUBLED> 187
<LOANS-PROBLEM> 1140
<ALLOWANCE-OPEN> 776
<CHARGE-OFFS> 39
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 628
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