<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998 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
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable date.
CLASS SHARES OUTSTANDING AT JULY 27, 1998
Common Stock 1,644,567
Exhibit Index at Page 21
Page 1 of 22 pages
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997*
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,540,000 $ 4,760,000
Federal funds sold 14,200,000 10,500,000
Total cash and equivalents 20,740,000 15,260,000
------------ ------------
Interest bearing deposits in
other banks 1,589,000 1,489,000
Securities available for sale 11,944,000 16,184,000
Securities held to maturity 28,780,000 31,152,000
Loans, net 63,738,000 63,187,000
Premises and equipment 2,375,000 1,992,000
Other assets 1,904,000 1,780,000
------------ ------------
TOTAL ASSETS $131,070,000 $131,044,000
=========== ===========
LIABILITIES
Deposits:
Non interest-bearing $ 26,066,000 $ 25,456,000
Interest-bearing 66,353,000 65,590,000
Total deposits 92,419,000 91,046,000
Federal funds purchased - 2,000,000
Other borrowings 22,873,000 22,984,000
Accrued expenses and
other liabilities 1,376,000 1,409,000
------------ ------------
TOTAL LIABILITIES 116,668,000 117,439,000
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, no par value;
Authorized: 20,000,000 shares;
Issued and outstanding:
1,644,567 shares at June 30,
1998 and 1,637,950 shares at
December 31, 1997 4,725,000 4,705,000
Retained earnings 9,837,000 9,099,000
Net unrealized loss on
securities available for sale (160,000) (199,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,402,000 13,605,000
TOTAL LIABILITIES AND ------------ ------------
SHAREHOLDERS' EQUITY $131,070,000 $131,044,000
=========== ===========
</TABLE>
*Derived from the December 31, 1997 audited balance sheet included in
the Company's 1997 Annual Report on Form 10-K.
See notes to consolidated condensed financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED INCOME STATEMENTS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans $1,536,000 $1,331,000 $3,094,000 $2,634,000
Investment securities 698,000 853,000 1,446,000 1,445,000
Federal funds sold 189,000 107,000 293,000 331,000
---------- ---------- ---------- ----------
Total interest income 2,423,000 2,291,000 4,833,000 4,410,000
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 726,000 697,000 1,443,000 1,428,000
Other 353,000 358,000 705,000 638,000
---------- ---------- ---------- ----------
Total interest expense 1,079,000 1,055,000 2,148,000 2,066,000
---------- ---------- ---------- ----------
NET INTEREST INCOME
BEFORE PROVISION
FOR CREDIT LOSSES 1,344,000 1,236,000 2,685,000 2,344,000
Provision for credit
losses 51,000 - 102,000 -
---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses 1,293,000 1,236,000 2,583,000 2,344,000
Other income 133,000 111,000 292,000 233,000
Other expenses 729,000 824,000 1,505,000 1,604,000
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 697,000 523,000 1,370,000 973,000
Provision for income taxes 264,000 199,000 520,000 370,000
---------- ---------- ---------- ----------
NET INCOME $ 433,000 $ 324,000 $ 850,000 $ 603,000
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.26 $ 0.21 $ 0.52 $ 0.39
========== ========== ========== ==========
Diluted $ 0.24 $ 0.18 $ 0.47 $ 0.34
========== ========== ========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
OPERATIONS:
Net income $ 850,000 $ 603,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 102,000 -
Depreciation and amortization 90,000 89,000
Other, net 158,000 253,000
----------- -----------
Net cash provided by operating activities 1,200,000 945,000
----------- -----------
INVESTING ACTIVITIES:
Net increase in interest bearing
deposits in other banks (100,000)
Proceeds from maturities or sale of
investments available for sale 13,309,000 9,517,000
Proceeds from maturities of investments
held to maturity 3,012,000 1,571,000
Purchase of securities available for sale (7,000,000) (10,814,000)
Purchase of securities held to maturity (2,985,000) (13,450,000)
Net increase in loans (653,000) (620,000)
Purchases of premises and equipment (473,000) (24,000)
Proceeds from sale of OREO - 1,311,000
----------- ------------
Net cash provided by (used in) investing
activities 5,110,000 (12,509,000)
----------- ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 1,373,000 (3,063,000)
Issuance of common stock 20,000 48,000
Payment of cash dividends (112,000) (105,000)
Net (decrease) increase in other borrowings (111,000) 4,893,000
Decrease in federal funds purchased (2,000,000) (1,500,000)
----------- ------------
Net cash (used in) provided by financing
activities (830,000) 273,000
----------- ------------
NET INCREASE (DECREASE)IN CASH
AND EQUIVALENTS 5,480,000 (11,291,000)
Cash and equivalents, beginning of period 15,260,000 22,843,000
----------- ------------
Cash and equivalents, end of period $20,740,000 $11,552,000
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 5
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 1998 AND 1997
1. The unaudited consolidated condensed financial statements reflect all
adjustments (which include only normal recurring adjustments) which are, in
the opinion of management, necessary to state fairly the results for the
periods presented. The results for the periods are not necessarily
indicative of the results to be expected for the full fiscal year.
2. On March 27, 1998 the Board of Directors declared a 3-for-2 stock split,
which was distributed on May 1, 1998, to shareholders of record as of April
15, 1998. All share and per share data have been retroactively adjusted to
reflect the
stock split.
3. The Company adopted SFAS No. 128 "Earnings per Share"
during the fourth quarter of 1997. SFAS 128 requires
presentation of basic and diluted earnings per share (EPS) and
restatement of all prior period EPS presented. Basic EPS is
computed by dividing net income by the weighted average common
shares outstanding during the period. Diluted EPS reflects
the potential dilution if securities or other contracts to
issue common stock are exercised or converted into common
stock. The weighted average shares used in computing earnings
per share are as follows:
Quarters ended June 30,
1998 1997
Weighted average shares used
in computing:
Basic earnings per share 1,644,000 1,573,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 185,000 188,000
--------- ---------
Diluted earnings per share 1,829,000 1,761,000
--------- ---------
<PAGE> 6
Six Months ended June 30,
1998 1997
Weighted average shares used
in computing:
Basic earnings per share 1,642,000 1,564,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 178,000 198,000
--------- ---------
Diluted earnings per share 1,820,000 1,762,000
--------- ---------
4. Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." This Statement requires that all items
recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other
annual financial statements. This Statement also requires that
an entity classify items of other comprehensive earnings by
their nature in an annual financial statement. For example,
other comprehensive earnings may include foreign currency
translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable
securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as
required. The Company's total comprehensive earnings are as
follows:
Six months ended June 30,
1998 1997
Net income $850,000 $603,000
Other comprehensive earnings-
Net unrealized gains on
securities available for sale 39,000 73,000
-------- --------
Total comprehensive earnings $889,000 $676,000
-------- --------
<PAGE> 7
Quarters ended June 30,
1998 1997
Net income $433,000 $324,000
Other comprehensive earnings-
Net unrealized gains on
securities available for sale 15,000 97,000
-------- --------
Total comprehensive earnings $448,000 $421,000
5. In June, 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging
activities. This statement becomes effective in the third
quarter of 1999, with earlier application permitted. Adoption
of this statement will not impact the Company's consolidated
financial position, results of operations of cash flows.
6. During the six months ended June 30, 1998 and 1997, cash
paid for taxes was $627,000 and $155,000, respectively.
During the six months ended June 30, 1998 and 1997, cash paid
for interest was $2,083,000 and $2,056,000, respectively.
<PAGE> 8
SARATOGA BANCORP AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Certain matters discussed or incorporated by reference in
this Quarterly Report on Form 10-Q 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 2 - "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
business prospects of the Company and the Bank.
Summary of financial results
- ----------------------------
At June 30, 1998, total assets were $131,070,000, a slight
increase from $131,044,000 at December 31, 1997. Net loans
increased $551,000 (0.9%) from $63,187,000 at December 31,
1997 to $63,738,000 at June 30, 1998. Total deposits
increased $1,373,000 (1.5%) from $91,046,000 at December 31,
1997 to $92,419,000 at June 30, 1998.
Net income for the second quarter of 1998 was $433,000
($0.26 basic earnings per share, $0.24 diluted earnings per
share) compared to $324,000 ($0.21 basic earnings per share,
$0.18 diluted earnings per share) for the comparable period
in 1997. Net income for the first six months of 1998 was
$850,000 ($0.52 basic earnings per share, $0.47 diluted
earnings per share) compared to $603,000 ($0.39 basic
earnings per share, $0.34 diluted earnings per share) for
the comparable period in 1997.
The increase in income resulted primarily from an increase
in the volume of earning assets, offset in part by an
increase in interest expense due to the increased volume of
interest-bearing liabilities.
RESULTS OF OPERATIONS
- ---------------------
SECOND QUARTER OF 1998 AND 1997
- -------------------------------
An analysis of the results of operations of the Company for
the second quarter of 1998 compared to the second quarter of
1997 is presented below:
<PAGE> 9
Net interest income
Net interest income, the difference between interest earned
on loans and investments and interest paid on deposits, is
the principal component of the Bank's earnings. The
components of net interest income are as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1998 1997
------------------------- -------------------------
Average Average Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
------- -------- -------- ------- -------- --------
(In thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Earning assets:
Loans (2) $ 62,494 $1,536 9.8% $ 53,224 $1,331 10.0%
Investment
securities 45,837 698 6.1 54,419 853 6.3
Federal funds sold 13,805 189 5.5 7,340 107 5.8
Total interest -------- ------ -------- ------
earning assets 122,136 2,423 7.9 114,983 2,291 8.0
Cash and due from ------ ------
banks 5,053 4,697
Other assets (3) 2,754 3,993
-------- --------
$129,943 $123,673
======== ========
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 39,130 351 3.6 $ 37,173 315 3.4
Time deposits 28,025 375 5.4 28,981 382 5.3
Other borrowings 22,910 353 6.2 22,694 358 6.3
Total interest- -------- ------ -------- ------
bearing
liabilities 90,065 1,079 4.8 88,848 1,055 4.7
Demand deposits 24,632 ------ 21,448 ------
Other liabilities 1,240 1,054
-------- --------
Total liabilities 115,937 111,350
Shareholders' equity 14,006 12,323
-------- --------
$129,943 $123,673
======= =======
Net interest income and margin(4)$1,344 4.4% $1,236 4.3%
====== ======
</TABLE>
(1) Annualized.
(2) Loan interest income includes loan fee income of
$98,000 and $83,000 for the quarters ended June 30,
1998 and 1997,respectively.
(3) Net of the average allowance for loan losses of
$668,000 and $625,000 and deferred loan fees of
$317,000 and $330,000 for the quarters ended June 30,
1998 and 1997, respectively.
(4) Net interest margin is computed by dividing net
interest income by total average interest earning
assets.
<PAGE> 10
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 the 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 the
second quarter of 1998 the Bank provided $51,000 for the
allowance for credit losses. During the second quarter of
1997 the Bank did not record a provision for credit losses.
There were $14,000 in loans charged-off and $20,000 in
recoveries in the second quarter of 1998, as compared to
$5,000 in loans charged-off and $10,000 in recoveries in the
second quarter of 1997.
At June 30, 1998, the allowance for credit losses was
$698,000 or 1.1% of total loans, compared to $598,000 or
0.9% at December 31, 1997. There were no nonaccrual loans
at June 30, 1998 compared to $360,000 at December 31, 1997.
At June 30, 1998 and December 31, 1997, there were no loans
past due 90 days or more as to principal or interest and
still accruing interest. There were no loans at June 30,
1998 which were troubled debt restructurings as defined in
Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt
Restructuring." At June 30, 1998, there were five potential
problem loans having a combined principal balance of
$310,000 ($305,000 at December 31, 1997). 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.
There was no Other Real Estate owned ("OREO")at June 30,
1998 or December 31, 1997.
<PAGE> 11
Nonperforming loans and other real estate owned are
summarized below:
June 30, 1998 December 31, 1997
------------- -----------------
Nonperforming loans:
Past due 90 days or more $ - $ -
Nonaccrual - 360,000
------------- ---------------
Total - 360,000
Other real estate owned - -
------------- ---------------
Total nonperforming loans
and other real estate
owned $ - $ 360,000
============= ===============
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 $38,000,000 in real estate loans
representing approximately 59% of the portfolio, could be
adversely affected if California economic conditions and the
real estate market in the Bank's market area weaken. The
effect of such events 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
- ------------------
Other income consists of service charges on deposit
accounts, income from assets acquired for lease and fees for
other miscellaneous services. Total other income increased
from $111,000 in the second quarter of 1997 to $133,000 in
the second quarter of 1998. This increase is primarily
attributable to a gain on sale of leases of $12,000 and an
increase of $6,000 in service charges assessed on deposit
accounts.
Noninterest expenses
- --------------------
Other expenses decreased from $824,000 in the second quarter
of 1997 to $729,000 in the second quarter of 1998. The
decrease is primarily attributable to a loss on sale of
securities of $35,000 which was realized in the second
quarter of 1997 and a decrease in OREO expense of $33,000.
As a percentage of average earning assets, other expenses
for the second quarter, on an annualized basis, decreased
from 2.9% in 1997 to 2.4% in 1998.
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- ---------------------------------------
An analysis of the results of operations of the Company for
the six month period ended June 30, 1998 compared to the
comparable period in 1997 is as follows:
Net interest income
- -------------------
Net interest income, the difference between interest earned
on loans and investments and interest paid on deposits, is
the principal component of the Bank's earnings. The
components of net interest income are as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
Average Average Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
(In thousands, except percentages)
Assets: (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (2) $ 62,976 $3,094 9.8% $53,138 $2,634 9.9%
Investment
securities 46,945 1,446 6.2 48,024 1,445 6.0
Federal funds sold 10,745 293 5.5 12,529 331 5.3
Total interest -------- ------ -------- ------
earning assets 120,666 4,833 8.0 113,691 4,410 7.8
Cash and due from ------ -------- ------
banks 4,963 4,573
Other assets (3) 2,786 3,999
-------- --------
$128,415 $122,263
======== ========
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 38,577 633 3.3 $37,095 626 3.4
Time deposits 28,429 810 5.7 30,340 802 5.3
Other borrowings 22,948 705 6.1 20,459 638 6.2
Total interest- -------- ------ -------- ------
bearing
liabilities 89,954 2,148 4.8 87,894 2,066 4.7
Demand deposits 23,192 ------ 21,249 ------
Other liabilities 1,338 927
-------- --------
Total liabilities 114,484 110,070
Shareholders' equity 13,931 12,193
-------- --------
$128,415 $122,263
======== =======
Net interest income and margin(4)$2,685 4.5% $2,344 4.1%
====== ======
</TABLE>
(1) Annualized.
(2) Loan interest income includes loan fee income of
$180,000 and $166,000 for the six months ended June 30,
1998 and 1997, respectively.
(3) Net of the average allowance for loan losses of
$637,000 and $624,000, and deferred loan fees of
$318,000 and $325,000 for the six months ended June 30,
1998 and 1997, respectively.
(4) Net interest margin is computed by dividing net
interest income by total average interest earning
assets.
<PAGE> 13
Provision for credit losses
- ---------------------------
During the first six months of 1998, the Bank provided
$102,000 to the provision for credit losses. During the first
six months of 1997, the Bank did not provide any additional
funds to the provision for credit losses. There were $14,000
in loans charged off and $32,000 in recoveries for the six
months ended June 30, 1998, compared to $23,000 in loans
charged off and $20,000 in recoveries for the first six months
of 1997.
Noninterest income
- ------------------
Other income consists of service charges on deposit accounts,
income on assets acquired for lease and fees for other
miscellaneous services. Total other income increased from
$233,000 in 1997 to $292,000 in 1998. The increase is
primarily attributable to a gain on sale of securities of
$59,000 and a gain on sale of leases of $12,000.
Noninterest expenses
- --------------------
Other expenses have decreased from $1,604,000 in 1997 to
$1,505,000 in 1998 due primarily to a loss on sale of
securities of $35,000 which was realized in the first six
months of 1997 and a decrease in salary expense of $73,000.
As a percentage of average earning assets, other expenses, on
an annualized basis, decreased from 2.8% in 1997 to 2.5% in
1998.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank manages its liquidity to provide adequate funds at an
acceptable cost to support borrowing requirements and deposit
flows of its customers. At June 30, 1998 liquid assets as a
percentage of deposits were 35% (36% at December 31, 1997).
In addition to cash and due from banks, liquid assets include
short-term time deposits with other banks, Federal funds sold
and investment securities available for sale. The Bank has
$11.0 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 June 30,
1998, 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 divided by interest rate sensitive liabilities) and the
cumulative interest rate sensitivity gap ratio.
<PAGE> 15
<TABLE>
<CAPTION>
DISTRIBUTION OF REPRICING OPPORTUNITIES
At June 30, 1998
(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
<S> <C> <C> <C> <C> <C> <C>
Federal
funds sold $14,200 - - - - $14,200
Interest
bearing
deposits in
other banks - - 1,589 - - 1,589
Municipal
securities 660 - $ 200 $ 1,837 $ 5,227 7,924
U.S. Treasury
and agency
securities 3,451 - 420 12,289 14,451 30,611
FRB stock - - - - 2,189 2,189
Loans 31,947 2,667 3,637 13,788 12,719 64,758
------- ------- ------- ------- ------- -------
Total
earning
assets $50,258 $ 2,667 $ 5,846 $27,914 $34,586 $121,271
------- ------- -------- ------- ------- --------
Interest
bearing
demand
accounts $32,302 - - - - 32,302
Savings
accounts 5,821 - - - - 5,821
Time cert-
ificates of
deposit of
$100,000
or more 4,507 $ 3,224 $ 1,946 $ 3,046 100 12,823
Other time
deposits 4,042 4,071 3,816 3,478 - 15,407
Other
borrowings - - - 11,995 $10,878 22,873
------- ------- ------- ------- ------- -------
Total
interest-
bearing
liabilities $46,672 $ 7,295 $ 5,762 $18,519 $10,978 89,226
Interest
rate sens-
itivity gap $ 3,586 $(4,628) $ 84 $ 9,395 $23,608 $32,045
======= ======= ======== ======= ======= =======
Cumulative
interest
rate sens-
itivity gap $ 3,586 $ (1,042) $ (958) $ 8,437 $32,045
======= ======== ======= ======= =======
Interest rate
sensitivity
gap ratio 1.08% 0.37% 1.01% 1.51% 3.15%
Cumulative
interest
rate sens-
itivity
gap ratio 1.08% 0.98% 0.98% 1.11% 1.36%
</TABLE>
<PAGE> 16
The Company and the Bank are subject to capital adequacy
guidelines issued by the Board of Governors of the Federal
Reserve System (the "BGFRS") and the Office of the Comptroller of
the Currency ("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 June 30, 1998, the Company's total risk-based
capital ratio was approximately 18.7% (approximately 18.7% for
the Bank) compared to approximately 18.1% (approximately 17.0%
for the Bank) at December 31, 1997.
The BGFRS 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 BGFRS 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 as of June 30, 1998 and December
31, 1997.
June 30, 1998 December 31, 1997
------------- -----------------
Leverage ratio 11.2% 10.9%
Tier 1 capital ratio 17.9% 17.4%
Total risk-based capital ratio 18.7% 18.1%
On December 19, 1991, the President 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
<PAGE> 17
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%.
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 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 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> 18
Year 2000
- ---------
As the year 2000 approaches, a critical issue has emerged
regarding how existing application software programs and
operating systems can accommodate this date value. In brief,
many existing application software products were designed to only
accommodate a two digit date position which represents the year
(e.g. "97" is stored on the system and represents the year 1997).
As a result, the year 1999 (i.e. "99", could be the maximum date
value these systems will be able to accurately process. This is
not just a banking problem, as corporations around the world and
in all industries are similarly impacted. Management is in the
process of working with its software vendors to assure that the
Company is prepared for the year 2000. Also, the company has put
procedures in place to inquire whether the systems of key
borrowers are year 2000 compliant. However there can be no
assurance that problems will not arise which could have such an
adverse impact due, among other matters, to the
complexitiesinvolved in computer programming related to
resolution of Year 2000 problems and the fact that the systems of
other companies on which the Company may rely must also be
corrected on a timely basis. Delays, mistakes or failures in
correcting Year 2000 system problems by such other companies
could have a significant adverse impact upon the Company and its
ability to mitigate the risk of adverse impact of Year 2000
problems for its customers. At present, the Company does not
have an estimate of the total cost of evaluating and fixing any
potential year 2000 problems.
Quantitative and Qualitative Disclosures about Market Risk
- -----------------------------------------------------------
Disclosures under this item are not required for the current
fiscal year as the Company qualifies as a "Small Business" filer.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
<PAGE> 19
Item 4. Submission of Matters to a Vote of Security Holders
The shareholders of Saratoga Bancorp took the following
action at the Annual Meeting of Shareholders held on May
21, 1998 at the Company's main office located at
12000 Saratoga-Sunnyvale Road, Saratoga, California:
1. Approved the election of management's slate of nominees
for directors, each of whom were incumbent directors, as
follows:
Votes
-----
For Withheld
------- --------
Victor Aboukhater 857,563 6,977
Robert G. Egan 857,563 6,977
William D. Kron 857,563 6,977
John F. Lynch, III 857,563 6,977
V. Ronald Mancuso 857,563 6,977
Richard L. Mount 858,756 5,874
2. Approved amendments of the 1994 Stock Option Plan to
increase the maximum number of shares available for
options.
Votes in favor of this proposal 718,499
Votes against this proposal 33,609
Votes abstaining 5,675
3. Ratified appointment of Deloitte & Touche LLP as
independent auditors of the Company for the fiscal
year ending December 31, 1998.
VOTES
------
FOR 859,290
AGAINST 2,700
ABSTAIN 2,640
<PAGE> 20
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) (3) Exhibits
--------
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On June 10, 1998, Registrant filed a Current
Report on Form 8-K, dated June 10, 1998
reporting under Item 5 (Other Events)
detailing actions taken at the Annual Meeting
of Shareholders of Registrant held on May 21,
1998. See Item 4 herein for additional
information.
SIGNATURES
PURSUANT TO THE REQUIREMENTS 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
MARY PAGE ROURKE
Date: August 11, 1998 -------------------------
Mary Page Rourke, Treasurer
(Principal Accounting Officer)
<PAGE> 21
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
- ------ -------- ------------
27.1 Financial Data Schedule 22
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<FISCAL-YEAR-END> DEC-31-1998
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<CASH> 6540
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0
0
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<INCOME-PRE-EXTRAORDINARY> 850
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<CHANGES> 0
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<YIELD-ACTUAL> 4.5
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 310
<ALLOWANCE-OPEN> 578
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