<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 September 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 OCTOBER 28, 1998
Common Stock 1,646,647
Exhibit Index at Page 24
Page 1 of 25 pages
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997*
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,369,000 $ 4,760,000
Federal funds sold 20,200,000 10,500,000
Total cash and equivalents 25,569,000 15,260,000
Interest bearing deposits in
other banks 6,789,000 1,489,000
Securities available for sale 25,947,000 16,184,000
Securities held to maturity 7,493,000 31,152,000
Loans, net 66,259,000 63,187,000
Premises and equipment 2,334,000 1,992,000
Other assets 5,473,000 1,780,000
TOTAL ASSETS $139,864,000 $131,044,000
=========== ===========
LIABILITIES
Deposits:
Non interest-bearing $ 24,437,000 $ 25,456,000
Interest-bearing 75,981,000 65,590,000
Total deposits 100,418,000 91,046,000
Federal funds purchased - 2,000,000
Other borrowings 22,739,000 22,984,000
Accrued expenses and
other liabilities 1,671,000 1,409,000
TOTAL LIABILITIES 124,828,000 117,439,000
SHAREHOLDERS' EQUITY
Common stock, no par value;
Authorized: 20,000,000 shares;
Issued and outstanding:
1,646,647 shares at September 30,
1998 and 1,637,950 shares at
December 31, 1997 4,737,000 4,705,000
Retained earnings 10,145,000 9,099,000
Net unrealized gain (loss) on
securities available for sale 154,000 (199,000)
TOTAL SHAREHOLDERS' EQUITY 15,036,000 13,605,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $139,864,000 $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
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED INCOME STATEMENTS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $1,665,000 $1,388,000 $4,759,000 $4,022,000
Investment securities 593,000 872,000 2,039,000 2,317,000
Federal funds sold 238,000 167,000 531,000 498,000
Total interest income 2,496,000 2,427,000 7,329,000 6,837,000
INTEREST EXPENSE:
Deposits 781,000 748,000 2,224,000 2,176,000
Other 353,000 356,000 1,058,000 994,000
Total interest expense 1,134,000 1,104,000 3,282,000 3,170,000
NET INTEREST INCOME
BEFORE PROVISION
FOR CREDIT LOSSES 1,362,000 1,323,000 4,047,000 3,667,000
Provision for credit
losses 34,000 - 136,000 -
Net interest income
after provision for
credit losses 1,328,000 1,323,000 3,911,000 3,667,000
Other income 201,000 175,000 493,000 408,000
Other expenses 767,000 745,000 2,272,000 2,349,000
INCOME BEFORE INCOME TAXES 762,000 753,000 2,132,000 1,726,000
Provision for income taxes 290,000 286,000 810,000 656,000
NET INCOME $ 472,000 $ 467,000 $1,322,000 $1,070,000
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.29 $ 0.29 $ 0.80 $ 0.68
========== ========== ========== ==========
Diluted $ 0.26 $ 0.26 $ 0.72 $ 0.61
========== ========== ========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 4
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
OPERATIONS:
<S> <C> <C>
Net income $1,322,000 $ 1,070,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 136,000 -
Depreciation and amortization 174,000 134,000
Other, net 441,000 648,000
Net cash provided by operating activities 2,073,000 1,852,000
INVESTING ACTIVITIES:
Net increase in interest bearing
deposits in other banks (5,300,000) (1,489,000)
Proceeds from maturities or sale of
investments available for sale 22,258,000 19,518,000
Proceeds from maturities of investments
held to maturity 3,012,000 7,072,000
Purchase of securities available for sale (8,000,000) (16,814,000)
Purchase of securities held to maturity (2,985,000) (17,886,000)
Purchase of life insurance policies (3,892,000) -
Net increase in loans (3,224,000) (3,082,000)
Purchases of premises and equipment (516,000) (24,000)
Proceeds from sale of OREO - 1,311,000
Net cash provided by (used in) investing
activities 1,353,000 (11,394,000)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 9,372,000 (1,370,000)
Issuance of common stock 32,000 70,000
Payment of cash dividends (276,000) (211,000)
Net (decrease) increase in other borrowings (245,000) 4,838,000
Decrease in federal funds purchased (2,000,000) (1,500,000)
Net cash provided by financing activities 6,883,000 1,827,000
NET INCREASE (DECREASE)IN CASH
AND EQUIVALENTS 10,309,000 (7,715,000)
Cash and equivalents, beginning of period 15,260,000 22,843,000
Cash and equivalents, end of period $25,569,000 $15,128,000
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 5
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED SEPTEMBER 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
September 30,
1998 1997
Weighted average shares used
in computing:
Basic earnings per share 1,646,000 1,591,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 183,000 193,000
Diluted earnings per share 1,829,000 1,784,000
<PAGE> 6
Nine Months ended
September 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 180,000 193,000
Diluted earnings per share 1,824,000 1,766,000
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
transaction 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:
Quarters ended
September 30,
1998 1997
Net income $472,000 $467,000
Other comprehensive earnings-
Net unrealized gains (losses) on
securities available for sale 314,000 (10,000)
Total comprehensive earnings $786,000 $457,000
<PAGE> 7
Nine months ended
September 30,
1998 1997
Net income $1,322,000 $1,070,000
Other comprehensive earnings-
Net unrealized gains on
securities available for sale 353,000 63,000
Total comprehensive earnings $1,675,000 $1,133,000
5. Effective July 1, 1998 the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activitied", which
establishes accounting and reporting standards for derivative
instruments and hedging activities. In connection with the
adoption of SFAS 133 the Company reclassified certain
securities with an amortized cost of $$19,751,000 and a fair
value of $19,967,000 from held-to-maturity to available-for-
sale. Adoption of this statement did not have any other
impact on the Company's consolidated financial position and
had no impact on the Company's results of operations or cash
flows.
6. During the nine months ended September 30, 1998 and 1997,
cash paid for taxes was $709,000 and $317,000, respectively.
During the nine months ended September 30, 1998 and 1997, cash
paid for interest was $3,119,000 and $3,108,000, respectively.
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, including, but not
limited to, matters described in Item 2 - "Management's
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 include, among others, (1)
competitive pressures in the banking industry; (2) changes
in the interest rate environment; (3) general economic
conditions, either nationally or regionally; (4) changes in
the regulatory environment; (5) changes in business
conditions and inflation; (6) changes in securities markets;
and (7) effects of Year 2000 problems discussed herein.
Therefore, the information set forth therein should be
carefully considered when evaluating the business prospects
of the Company and the Bank.
<PAGE> 8
Summary of financial results
At September 30, 1998, total assets were $139,864,000, an
increase of $8,820,000 (6.7%) from $131,044,000 at December
31, 1997. Net loans increased $3,072,000 (4.9%) from
$63,187,000 at December 31, 1997 to $66,259,000 at September
30, 1998. Total deposits increased $9,372,000 (10.3%) from
$91,046,000 at December 31, 1997 to $100,418,000 at
September 30, 1998.
Net income for the third quarter of 1998 was $472,000 ($0.29
basic earnings per share, $0.26 diluted earnings per share)
compared to $467,000 ($0.29 basic earnings per share, $0.26
diluted earnings per share) for the comparable period in
1997. Net income for the first nine months of 1998 was
$1,322,000 ($0.80 basic earnings per share, $0.72 diluted
earnings per share) compared to $1,070,000 ($0.68 basic
earnings per share, $0.61 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
THIRD QUARTER OF 1998 AND 1997
An analysis of the results of operations of the Company for
the third quarter of 1998 compared to the third quarter of
1997 is presented below:
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:
<PAGE> 9
Three months ended September 30,
1998 1997
<TABLE>
<CAPTION>
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) $ 66,033 $1,665 10.1% $ 54,842 $1,388 10.1%
Investment
securities 41,445 593 5.7 52,877 872 6.6
Federal funds sold 17,099 238 5.6 11,980 167 5.6
Total interest
earning assets 124,577 2,496 8.0 119,699 2,427 8.1
Cash and due from
banks 5,235 4,764
Other assets (3) 3,533 2,795
$133,345 $127,258
======== ========
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 39,813 331 3.3 $ 34,777 297 3.4
Time deposits 31,328 450 5.7 34,128 451 5.3
Other borrowings 22,872 353 6.2 23,075 356 6.2
Total interest-
bearing
liabilities 94,013 1,134 4.8 91,980 1,104 4.8
Demand deposits 22,924 21,131
Other liabilities 1,659 1,272
Total liabilities 118,596 114,383
Shareholders' equity 14,749 12,875
$133,345 $127,258
======= =======
Net interest income and margin(4)$1,362 4.4% $1,323 4.4%
====== ======
</TABLE>
(1) Annualized.
(2) Loan interest income includes loan fee income of
$131,000 and $85,000 for the quarters ended September
30, 1998 and 1997, respectively.
(3) Net of the average allowance for loan losses of
$722,000 and $601,000 and deferred loan fees of
$324,000 and $360,000 for the quarters ended September
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
third quarter of 1998, the Bank provided $34,000 for the
allowance for credit losses. During the third quarter of
1997, the Bank did not record a provision for credit losses.
There were no loans charged-off and $8,000 in recoveries in
the third quarter of 1998, as compared to $97,000 in loans
charged-off and $8,000 in recoveries in the third quarter of
1997.
At September 30, 1998, the allowance for credit losses was
$740,000 or 1.1% of total loans, compared to $578,000 or
0.9% at December 31, 1997. Nonaccrual loans were $47,000 at
September 30, 1998 compared to $360,000 at December 31,
1997.
At September 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
September 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 September 30, 1998, there were
three potential problem loans having a combined principal
balance of $252,000 ($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 three loans
identified as potential problem loans are secured by real
estate and personal property.
There was no Other Real Estate owned ("OREO")at September
30, 1998 or December 31, 1997.
<PAGE> 11
Nonperforming loans and other real estate owned are
summarized below:
September 30, 1998 December 31, 1997
Nonperforming loans:
Past due 90 days or more $ - $ -
Nonaccrual 47,000 360,000
Total 47,000 360,000
Other real estate owned - -
Total nonperforming loans
and other real estate
owned $ 47,000 $ 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 $41,000,000 in real estate loans
representing approximately 62% 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 $175,000 in the third quarter of 1997 to $201,000 in
the third quarter of 1998. This increase is primarily
attributable to a gain on sale of securities of $32,000 and
an increase in rental income on assets acquired for lease.
Noninterest expenses
Other expenses increased from $745,000 in the third quarter
of 1997 to $767,000 in the third quarter of 1998. The
increase is primarily attributable to an increase in
depreciation expense on assets acquired for lease. As a
percentage of average earning assets, other expense for the
third quarter, on an annualized basis, was 2.5% in 1997 and
1998.
<PAGE> 12
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
An analysis of the results of operations of the Company for
the nine month period ended September 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:
Nine months ended September 30,
<TABLE>
<CAPTION>
1998 1997
Average Average Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
(In thousands, except percentages)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (2) $ 63,999 $4,759 9.9% $53,677 $4,022 10.0%
Investment
securities 45,091 2,039 6.0 49,660 2,317 6.2
Federal funds sold 12,887 531 5.5 12,344 498 5.4
Total interest
earning assets 121,977 7,329 8.0 115,681 6,837 7.9
Cash and due from
banks 5,056 4,637
Other assets (3) 3,043 3,600
$130,076 $123,918
======== =======
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 38,951 964 3.3 $36,287 923 3.4
Time deposits 29,366 1,260 5.7 31,617 1,253 5.3
Other borrowings 22,892 1,058 6.2 21,340 994 6.2
Total interest-
bearing
liabilities 91,209 3,282 4.8 89,244 3,170 4.7
Demand deposits 23,286 21,283
Other liabilities 1,434 1,022
Total liabilities 115,929 111,549
Shareholders' equity 14,147 12,369
$130,076 $123,918
======== =======
Net interest income and margin(4)$4,047 4.4% $3,667 4.2%
====== ======
</TABLE>
(1) Annualized.
(2) Loan interest income includes loan fee income of
$338,000 and $252,000 for the nine months ended
September 30, 1998 and 1997, respectively.
(3) Net of the average allowance for loan losses of
$666,000 and $616,000, and deferred loan fees of
$320,000 and $337,000 for the nine months ended
September 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 nine months of 1998, the Bank recorded a
$136,000 provision for loan losses amd no provision was
recorded during that period in 1997. There were $14,000 in
loans charged-off and $40,000 in recoveries for the nine
months ended September 30, 1998, compared to $120,000 in loans
charged off and $28,000 in recoveries for the first nine
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
$408,000 in 1997 to $493,000 in 1998. The increase is
primarily attributable to an increase in rental income on
assets acquired for lease of $49,000, an increase in gain on
sale of securities of $22,000 and a gain on sale of leases of
$12,000.
Noninterest expenses
Other expenses have decreased from $2,349,000 in 1997 to
$2,272,000 in 1998 due primarily to a decrease in salary
expense of $54,000. As a percentage of average earning
assets, other expenses, on an annualized basis, decreased from
2.7% 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 September 30, 1998 liquid assets
as a percentage of deposits were 58% (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 September
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
DISTRIBUTION OF REPRICING OPPORTUNITIES
At September 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
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 $20,200 - - - - $20,200
Interest
bearing
deposits
in other
banks 5,000 199 1,590 - - 6,789
Municipal
securities - - $ 451 $ 1,752 $ 5,050 7,253
U.S. Treasury
and agency
securities 3,062 217 - 13,215 7,476 23,970
FRB stock - - - - 2,217 2,217
Loans 31,984 2,111 6,211 12,127 14,867 67,300
Total
earning
assets $60,246 $ 2,527 $ 8,252 $27,094 $29,610 127,729
Interest
bearing
demand
accounts $35,371 - - - - 35,371
Savings
accounts 5,163 - - - - 5,163
Time certif-
icates of
deposit of
$100,000
or more 6,414 $ 3,607 $ 7,570 $ 3,146 100 20,837
Other time
deposits 5,181 2,643 3,461 3,325 - 14,610
Other
borrowings 25 - - 11,869 $10,845 22,739
Total interest-
bearing
liabilities $52,154 $ 6,250 $11,031 $18,340 $10,945 98,720
Interest rate
sensitivity
gap $ 8,092 $(3,723) $(2,779) $ 8,754 $18,665 $29,009
======= ======= ======= ======= ======= =======
Cumulative
interest
rate sens-
itivity
gap $ 8,092 $ 4,369 $ 1,590 $10,344 $29,009
======= ======= ======= ======= =======
Interest rate
sensitivity
gap ratio 1.16% 0.40% 0.75% 1.48% 2.71%
Cumulative
interest
rate sens-
itivity
gap ratio 1.16% 1.07% 1.02% 1.12% 1.29%
</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 limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities,
subordinated debt and a limited amount of loan loss reserves.
Effective October 1, 1998, the BGFRS and other federal
agencies approved including in Tier 2 capital up to 45% of the
pretax net unrealized gains on certain available-for-sale
equity securities having readily determinable fair values
(i.e. the excess, if any, of fair market value over the book
value or historical cost of the investment security). The
federal regulatory agencies reserve the right to exclude all
or a portion of the unrealized gains upon a determination that
the equity securities are not prudently valued. Unrealized
gains and losses on other types of assets, such as bank
premises and available-for-sale debt securities, are not
included in Tier 2 capital, but may be taken into account in
the evaluation of overall capital adequacy and net unrealized
losses on available-for-sale equity securities will continue
to be deducted from Tier 1 capital as a cushion against risk.
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 September 30, 1998, the Company's total
risk-based capital ratio was approximately 18.0%
(approximately 17.4% for the Bank) compared to approximately
18.1% (approximately 17.0% for the Bank) at December 31, 1997.
The BGRS and other federal regulatory agencies have adopted a
revised minimum leverage ratio for bank holding companies as
a supplement to the risk-weighted capital guidelines. The old
rule established a 3% minimum leverage standard for well-run
banking organizations (bank holding companies and banks) with
diversified risk profiles. Banking organizations which did
not exhibit such characteristics or had greater risk due to
significant growth, among other factors, were required to
maintain a minimum leverage ratio 1% to 2% higher. The old
rule did not take into account the implementation of the
market risk capital measure set forth in the regulatory agency
capital adequacy guidelines. The revised leverage ratio
establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to
<PAGE> 17
total assets) for the highest rated bank holding companies or
those that have implemented the risk-based capital market risk
measure. All other bank holding companies must maintain a
minimum Tier 1 leverage ratio of 4% with higher leverage
capital ratios required for bank holding companies that have
significant financial and/or operational weaknesses, a high
risk profile, or are undergoing or anticipating rapid growth.
The old rule remains in effect for banks, however, the federal
regulatory agencies are currently continuing work on a revised
leverage rule for banks.
The following table reflects the Company's leverage, Tier 1
and total risk-based capital ratios as of September 30, 1998
and December 31, 1997.
September 30, 1998 December 31,
1997
Leverage ratio 11.1% 10.9%
Tier 1 capital ratio 17.2% 17.4%
Total risk-based capital ratio 18.0% 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 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
<PAGE> 18
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.
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.
Year 2000
As the year 2000 approaches, a critical issue has emerged
regarding how existing application software program 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.
The Company has a Year 2000 Compliance Program in place
to identify and resolve Y2K problems in the Company's
operations systems and its operating environment. This Plan
includes those systems under the direct control of Company
management and those mission critical systems provided by
outside servicers. This Plan, and the Company's Testing Plan,
are currently on schedule to comply with the requirements of
<PAGE> 19
the FFIEC, with the exception of leap year testing for the
Company's mainframe computer (other Y2K rollover testing was
completed successfully in the second quarter of 1998.), and
the item processing subsystem of the mainframe which is
scheduled to be replaced in the first quarter of 1999. The
Company has put a Year 2000 Loan Policy and a Customer
Awareness Program in place to inquire whether the systems of
key clients are year 2000 compliant and to keep our customers
apprised of the Company's Y2K status. A Year 2000 Contingency
Plan is also in place to assist the Company's employees with
problems which might occur due any Y2K difficulties.
The Bank will utilize both internal and external resources to
implement its Year 2000 Project. The Bank expects to complete
the majority of its efforts by the end of 1998, leaving
adequate time to assess and correct any significant issues
that may materialize. Purchases hardware and software will be
capitalized in accordance with normal policy. Personnel and
other costs related to the project are being expensed as
incurred. The Bank currently estimates the total cost of
compliance will be approximately $150,000. The majority of
these costed are expected to be incurred during 1998, and are
not expected to have a material impact on the Bank's cash
flows, results of operations, or financial condition.
Even with all of the Company's preparation, there can be
no assurance that problems will not arise which could have an
adverse impact due, among other matters, to the complexities
involved 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.
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.
<PAGE> 20
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
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(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
<PAGE> 21
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.
(10.5) Bank of the West Master Profit Sharing and
Savings Plan and Amendment, amended as of
March, 1990 are 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
<PAGE> 22
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 reference
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 Directors,
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.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K
On October 1, 1998, Registrant filed a Current
Report on Form 8-K, dated September 18, 1998
reporting under Item 5 (Other Events) a ten
cent ($0.10) cash dividend on outstanding
shares of common stock of Saratoga Bancorp, to
be payable on November 6, 1998, to shareholders
of record at the close of business on October
23, 1998.
<PAGE> 23
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
Date: November 13, 1998 -------------------------
Mary Page Rourke, Treasurer
(Principal Financial and
Accounting Officer)
<PAGE> 24
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
27.1 Financial Data Schedule 25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5369
<INT-BEARING-DEPOSITS> 6789
<FED-FUNDS-SOLD> 20200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25947
<INVESTMENTS-CARRYING> 7493
<INVESTMENTS-MARKET> 7531
<LOANS> 66259
<ALLOWANCE> 740
<TOTAL-ASSETS> 139864
<DEPOSITS> 100418
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1671
<LONG-TERM> 22739
0
0
<COMMON> 4737
<OTHER-SE> 10299
<TOTAL-LIABILITIES-AND-EQUITY> 139864
<INTEREST-LOAN> 4759
<INTEREST-INVEST> 2039
<INTEREST-OTHER> 531
<INTEREST-TOTAL> 7329
<INTEREST-DEPOSIT> 2224
<INTEREST-EXPENSE> 3282
<INTEREST-INCOME-NET> 4047
<LOAN-LOSSES> 136
<SECURITIES-GAINS> 91
<EXPENSE-OTHER> 2272
<INCOME-PRETAX> 2132
<INCOME-PRE-EXTRAORDINARY> 1322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1322
<EPS-PRIMARY> .80
<EPS-DILUTED> .72
<YIELD-ACTUAL> 4.53
<LOANS-NON> 47
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 252
<ALLOWANCE-OPEN> 578
<CHARGE-OFFS> 14
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 740
<ALLOWANCE-DOMESTIC> 252
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 488
</TABLE>
