<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 March 31, 1999 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 APRIL 16, 1999
Common Stock 1,586,588
The Index to Exhibits appears on Page 22
Page 1 of 23 pages
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Consolidated Condensed Financial Statements
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1999 1998*
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,461,000 $ 6,549,000
Federal funds sold 14,300,000 14,450,000
Total cash and equivalents 21,761,000 20,999,000
Interest bearing deposits in
other banks 2,339,000 1,789,000
Securities available for sale 33,518,000 30,811,000
Securities held to maturity 9,307,000 9,304,000
Loans, net 74,676,000 73,847,000
Premises and equipment 2,158,000 2,268,000
Other assets 6,700,000 5,784,000
TOTAL ASSETS $150,459,000 $144,802,000
=========== ===========
LIABILITIES
Deposits:
Non interest-bearing $ 32,942,000 $ 27,460,000
Interest-bearing 78,401,000 75,955,000
Total deposits 111,343,000 103,415,000
Federal funds purchased - 2,000,000
Other borrowings 22,655,000 22,697,000
Accrued expenses and
other liabilities 1,664,000 1,433,000
TOTAL LIABILITIES 135,662,000 129,545,000
SHAREHOLDERS' EQUITY
Common stock, no par value;
Authorized: 20,000,000 shares;
Issued and outstanding:
1,594,788 shares at March 31,
1999 and 1,629,357 shares at
December 31, 1998 4,533,000 4,684,000
Retained earnings 10,413,000 10,591,000
Net unrealized loss on securities
available for sale (149,000) (18,000)
TOTAL SHAREHOLDERS' EQUITY 14,797,000 15,257,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $150,459,000 $144,802,000
=========== ===========
</TABLE>
*Derived from the December 31, 1998 audited balance sheet included
in the Company's 1998 Annual Report on Form 10-K.
See notes to consolidated condensed financial statements.
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<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Loans $ 1,749,000 $ 1,558,000
Investment securities 618,000 748,000
Federal funds sold 127,000 104,000
----------- -----------
Total interest income 2,494,000 2,410,000
----------- -----------
INTEREST EXPENSE:
Deposits 776,000 717,000
Other 337,000 352,000
----------- -----------
Total interest expense 1,113,000 1,069,000
----------- -----------
NET INTEREST INCOME BEFORE
PROVISION FOR CREDIT LOSSES 1,381,000 1,341,000
Provision for credit losses 40,000 51,000
----------- -----------
Net interest income after
provision for credit losses 1,341,000 1,290,000
Other income 230,000 159,000
Other expenses 825,000 776,000
----------- -----------
INCOME BEFORE INCOME TAXES 746,000 673,000
Provision for income taxes 276,000 256,000
----------- -----------
NET INCOME $ 470,000 $ 417,000
----------- -----------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized gains (losses) on
securities ( 131,000) 24,000
----------- -----------
COMPREHENSIVE INCOME $ 339,000 $ 441,000
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.29 $ 0.25
=========== ===========
Diluted $ 0.26 $ 0.23
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
OPERATIONS:
Net income $ 470,000 $ 417,000
Adjustments to reconcile net
income to net cash provided
by (used in)operating activities:
Provision for credit losses 40,000 51,000
Depreciation and amortization 84,000 46,000
Gain on sale of leased assets 33,000 -
Other, net (685,000) (304,000)
Net cash (used in)provided by
operating activities (58,000) 210,000
INVESTING ACTIVITIES:
Proceeds from maturities or sale of
securities available for sale 2,335,000 10,077,000
Proceeds from maturities of
securities held to maturity - 2,199,000
Purchase of securities available
for sale (5,200,000) (7,057,000)
Purchase of securities held to
maturity - (3,085,000)
Net increase in interest bearing
deposits iin other banks (550,000) -
Net (increase) decrease in loans (869,000) 2,343,000
Proceeds from sale of premises and
equipment 350,000 -
Purchases of premises and equipment (333,000) -
Net cash (used in)provided by
investing activities (4,267,000) 4,477,000
FINANCING ACTIVITIES:
Net increase in deposits 7,928,000 2,879,000
Payment of cash dividends (160,000) (110,000)
Repurchase of common stock (674,000) -
Issuance of common stock 35,000 13,000
Net decrease in other
borrowings (42,000) (45,000)
Decrease in federal funds purchased (2,000,000) (2,000,000)
Net cash provided by financing
activities 5,087,000 737,000
NET INCREASE IN CASH AND EQUIVALENTS 762,000 5,424,000
Cash and equivalents,
Beginning of period 20,999,000 15,260,000
Cash and equivalents,end of period $21,761,000 $20,684,000
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
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SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1999 AND 1998
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. Basic Earnings Per Share is computed by dividing net
income by the weighted average common shares outstanding
during the period. Diluted Earnings Per Share reflects the
potential dilution if securities or other contracts to issue
common stock are exercised or converted into common stock.
Diluted earnings per share is computed by dividing net
income by the weighted average common shares outstanding for
the period plus the dilutive effect of stock options. The
weighted average shares used in computing earnings per share
are as follows:
Quarters ended March 31,
1999 1998
Weighted average shares used
in computing:
Basic earnings per share 1,609,000 1,639,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 176,000 180,000
Diluted earnings per share 1,792,000 1,819,000
3. In 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers.
Management has determined that since all of the commercial banking
products and services offered by the Bank are available in each
branch of the Bank, all branches are located within the same
economic environment and management does not allocate resources
based on the performance of different lending or transaction
activities, it is appropriate to aggregate the Bank's operations
into a single operating segment.
4. Effective July 1, 1998, the Company adopted SFAS No. 133,
<PAGE> 6
"Accounting for Derivative Instruments and Hedging Activities",
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.
5. There was no cash paid for income taxes during the three
months ended March 31, 1998. For the three months ended March
31, 1998, cash paid for income taxes was $566,000. During the
three months ended March 31, 1999 and 1998, cash paid for
interest was $1,126,000 and $1,050,000, respectively.
<PAGE> 7
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. 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; (6) changes in
securities markets; and (7) Year 2000 compliance problems.
Therefore, the information set forth therein should be
carefully considered when evaluating business prospects of the
Company and the Bank.
Summary of financial results
At March 31, 1999, total assets were $150,459,000, an increase
of $5,657,000 (3.9%) from $144,802,000 at December 31, 1998.
Net loans increased $829,000 (1.1%) from $73,847,000 at
December 31, 1998 to $74,676,000 at March 31, 1999. Total
deposits increased $7,928,000 (7.7%) from $103,415,000 at
year-end 1998 to $111,343,000 at March 31, 1999.
Net income for the first quarter of 1999 was $470,000 ($0.29
basic earnings per share, $0.26 diluted earnings per share)
compared to $417,000 ($0.25 basic earnings per share, $0.23
diluted earnings per share) for the comparable period in 1998.
The increase in income 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 and other borrowings.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1999 AND 1998
An analysis of the results of operations of the Company for
the first quarter of 1999 compared to the first quarter of
1998 is presented below:
<PAGE> 8
Net interest income
Net interest income, the difference between interest earned on
loans and investments and interest paid on deposits and other
borrowings, is the principal component of the Bank's earnings.
The components of net interest income are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
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) $ 75,735 $1,749 9.2% $63,520 $1,558 9.8%
Securities 43,803 618 5.6 48,065 748 6.2
Federal funds sold 10,833 127 4.7 7,651 104 5.4
Total interest
earning assets 130,371 2,494 7.7 119,236 2,410 8.1
Cash and due from
banks 6,075 4,862
Other assets (3) 7,219 2,804
$143,665 $126,902
======== =======
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 40,683 290 2.9 $33,911 282 3.3
Time deposits 37,706 486 5.2 32,831 435 5.3
Other borrowings 22,753 337 5.9 22,986 352 6.1
Total interest-
bearing
liabilities 101,142 1,113 4.4 89,728 1,069 4.8
Demand deposits 25,928 21,878
Other liabilities 1,484 1,508
Total liabilities 128,554 113,114
Shareholders' equity 15,111 13,788
$143,665 $126,902
======== =======
Net interest income and margin(4)$1,381 4.2% $1,341 4.5%
====== ======
</TABLE>
(1) Annualized.
(2) Loan interest income includes loan fee income of $82,000
for the quarters ended March 31, 1999 and 1998.
(3) Other assets include the average allowance for credit
losses of $731,000 and $606,000 and average deferred loan
fees of $296,000 and $319,000 for the quarters ended
March 31, 1999 and 1998, respectively.
(4) Net interest margin is computed by dividing net interest
income by total average earnings assets.
<PAGE> 9
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 first
quarter of 1999, the Bank provided $40,000 for the allowance
for credit losses as compared to $51,000 for the first quarter
of 1998. There were no loans charged-off in the first quarter
of 1999 and 1998. There were no recoveries in the first
quarter of 1999, compared to $12,000 in recoveries in the
first quarter of 1998.
At March 31, 1999, the allowance for credit losses was
$756,000 or 1.0% of total loans, compared to $716,000 or 0.96%
at December 31, 1998. There were no nonaccrual loans at March
31, 1998 or December 31, 1998.
At March 31, 1999 and December 31, 1998, there were no loans
past due 90 days or more as to principal or interest and still
accruing interest. There were no loans at March 31, 1999
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 March 31, 1999, there were three potential
problem loans having a combined principal balance of
$1,801,000 ($259,000 at December 31, 1998). 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.
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 March 31, 1999
or December 31, 1998.
<PAGE> 10
Nonperforming loans and OREO are summarized below:
<TABLE>
<S> <C> <C>
March 31, 1999 December 31, 1998
Nonperforming loans:
Past due 90 days or more $ - $ -
Nonaccrual - -
Total - -
Other real estate owned - -
Total nonperforming loans and
other real estate owned $ - $ -
========== ==========
</TABLE>
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 $54,000,000 in real estate loans representing
approximately 71% 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
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
$159,000 in the first quarter of 1998 to $230,000 in the first
quarter of 1999. This increase is primarily attributable to
an increase in rental income on leased assets of $37,000 and
income from an increase in the cash surrender value of life
insurance policies of $31,000.
NONINTEREST EXPENSE
Other expenses increased from $776,000 in the first quarter of
1998 to $825,000 in the first quarter of 1999. This increase
is primarily attributable to an increase in deferrd
compensation expense of $47,000.00. As a percentage of
average earning assets, other expenses for the first quarter,
on an annualized basis, were 2.5% and 2.8% in 1999 and 1998,
respectively.
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. Liquid assets as a percentage of
deposits were 52% at March 31, 1999 and December 31, 1998,
respectively. In addition to cash and due from banks, liquid
assets include Federal funds sold and securities available for
sale. 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-terms.
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 March 31,
1999, 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.
Based on the contractual terms of its assets and liabilities,
the Bank is currently liability sensitive in terms of its
exposure to interest rates through the next five years. In
other words, the Bank's liabilities reprice faster than its
assets during the next five years.
<PAGE> 12
<TABLE>
<CAPTION>
DISTRIBUTION OF REPRICING OPPORTUNITIES
At March 31, 1999
(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 $14,300 $ - $ - $ - $ - $14,300
Interest bearing
deposits in
other banks 550 1,789 - - - 2,339
Municipal
securities 200 250 - 1,902 6,865 9,217
U.S. Treasury
and agency
securities 2,986 - 1,367 10,276 16,505 31,134
FRB/FHLB stock - - - - 2,474 2,474
Loans 31,209 4,824 3,046 14,811 21,826 75,716
Total earning
assets $49,245 $ 6,863 $ 4,413 $26,989 $47,670 $135,180
Interest-bearing
demand deposits $37,245 $ - $ - $ - $ - 37,245
Savings deposits 4,277 - - - - 4,277
Time certificates
of deposit of
$100,000 or more 13,153 3,984 3,250 2,318 100 22,805
Other time
deposits 4,525 2,688 4,198 2,663 - 14,074
Other borrowings 25 - 2,000 12,510 8,121 22,656
Total interest-
bearing
liabilities $59,225 $6,672 $ 9,448 $17,491 $ 8,221 $101,057
Interest rate
sensitivity gap $(9,980) $ 191 $(5,035) $ 9,498 $39,449 $ 34,123
======= ======= ======= ======= ======= =======
Cumulative interest
rate sensitivity
gap $(9,980) $(9,789) $(14,824) $(5,326) $34,123
======= ======= ======== ======= =======
Interest rate
sensitivity gap
ratio 0.83% 1.03% 0.47% 1.54% 5.80%
Cumulative interest
rate sensitivity
gap ratio 0.83% 0.85% 0.80% 0.94% 1.34%
</TABLE>
<PAGE> 13
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 March 31, 1999, the Company's total risk-based
capital ratio was approximately 16.1% (approximately
15.3% for the Bank) compared to approximately 16.8%
(approximately 16.4% for the Bank) at December 31, 1998.
The Board of Governors and other federal banking agencies have
adopted a revised minimum leverage ratio for bank holding
companies and banks 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 federal regulatory agency capital
adequacy guidelines. The revised leverage ratio establishes
<PAGE> 14
a minimum Tier 1 ratio of 3% (Tier 1 capital to total assets)
for the highest rated bank holding companies and banks. .
All other bank holding companies must maintain a minimum Tier
1 leverage ratio of 4% with higher leverage capital ratios
required for banking organizations that have significant
financial and/or operational weaknesses, a high risk profile,
or are undergoing or anticipating rapid growth.
The following table reflects the Company's leverage, Tier 1
and total risk-based capital ratios as of March 31, 1999 and
December 31, 1998.
March 31, 1999 December 31, 1998
Leverage ratio 10.4% 11.0%
Tier 1 capital ratio 15.3% 16.0%
Total risk-based capital ratio 16.1% 16.8%
On December 19, 1991, the President signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "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
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
<PAGE> 15
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 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.
During 1997, the Company began a plan that includes the five
phases of Year 2000 compliance as defined by the FFIEC,
awareness, assessment, renovation, validation, and
implementation. The Company's Year 2000 Plan (the "Plan")
addresses the proper function of the Company's in-house
computer hardware and software, along with other products and
services which the Company utilizes and which have potential
for Year 2000 difficulties.
Awareness and Assessment Phases The Company completed the
Awareness and Assessment Phases, as defined by the FFIEC,
during early 1998 and continues to update its assessment as
needed. Management of the Company reports at least monthly to
<PAGE> 16
the Board of Directors on its Year 2000 efforts.
Renovation Phase The FFIEC guideline date for institutions
to substantially complete program changes and system upgrades
for mission critical systems was December 31, 1998. By that
date, the Company had completed replacements of all hardware
and software components with the exception of the item
processing subsystem of the mainframe. The replacement of
this system was completed in March 1999.
Validation and Implementation Phases To reduce the
possibility of unexpected failure of the Company's systems
during and after the century date change, which could have an
impact on the Company and its customers, the company continues
to test its systems in accordance with a test strategy and
plan developed in 1998. The FFIEC guideline date for
institutions to begin testing their mission critical
applications and systems was September 1, 1998. During April
1998, the Company began testing various mission critical and
non-mission critical systems. By December 31, 1998, the
Company had substantially completed this testing, with the
exception of leap year testing for the Company's mainframe
computer and the item processing subsystem that was installed
in the first quarter of 1999. This testing should be
completed by the end of the second quarter of 1999.
Business Relationships As a part of the Company's Plan, all
third party suppliers and service providers have been
contacted and assessed as to their Year 2000 preparedness. In
addition, the Bank has communicated with its large borrowers
and major depositors to determine the extent to which the
Company might be vulnerable if those third parties fail to
resolve their Year 2000 issues. Because the Company
recognizes that its business and operations could be adversely
affected if key business fail to achieve timely Year 2000
compliance, the Company is evaluating strategies to manage and
mitigate the risk to the Company from their Year 2000
failures.
Contingency Plans FFIEC guidelines indicate that contingency
plans covering mission critical systems in the event of Year
2000 problems are a prudent business practice. The Company
has developed contingency plans for applications and systems
used by the Bank that are deemed mission critical as well as
plans to cover many non-mission critical applications and
systems. The contingency plans are based on a review of
various emergency scenarios ranging from the Year 2000 failure
of a single software or hardware component to the total loss
of systems and applications. Because business resumption
planning is a dynamic process, the Company may further refine
and test these plans throughout 1999.
<PAGE> 17
Costs to Address Year 2000 Issues The majority of the costs
associated with the Company's Year 2000 preparedness efforts
would have been incurred in the normal course of business, as
the Company regularly upgrades its various systems in an
effort to more efficiently and effectively serve its clientele
and conduct its operations. The Company estimates the total
cost of compliance will be approximately $150,000, with the
majority of this expense earmarked for the new item processing
subsystem. The costs incurred in 1998 did not have a material
effect on the Company's net income for 1998, and the Company
does not expect the costs that will be incurred in 1999 to
have a material impact on the Company's net income for 1999.
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 applicable to the Company
for the current fiscal year.
<PAGE> 18
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
incorporated by reference herein to Exhibit
<PAGE> 19
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 incorporated
by reference herein to the exhibits to Registration
Statement No. 33-
<PAGE> 20
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 Commissionon August 15,
1994.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K
On February 26, 1999, Registrant filed a Current Report
on Form 8-K, dated February 26, 1999, reporting under
Item 5 (Other Events) a ten cent ($0.10) cash dividend on
the outstanding shares of Common Stock of Saratoga
Bancorp, to be payable on April 14, 1999 to shareholders
of record at the close of business on March 31, 1999.
<PAGE> 21
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: May 13, 1999 -------------------------
Richard L. Mount, President
(Principal Executive Officer)
<PAGE> 22
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
27.1 Financial Data Schedule 23
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7461
<INT-BEARING-DEPOSITS> 2339
<FED-FUNDS-SOLD> 14300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33518
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<LIABILITIES-OTHER> 1664
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0
0
<COMMON> 4533
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<TOTAL-LIABILITIES-AND-EQUITY> 150459
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<EXPENSE-OTHER> 825
<INCOME-PRETAX> 746
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<NET-INCOME> 470
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<YIELD-ACTUAL> 4.2
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1801
<ALLOWANCE-OPEN> 716
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 756
<ALLOWANCE-DOMESTIC> 576
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 180
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