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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
NONE NONE
Securities registered pursuant to Section 12 (g) of the Act:
NONE
(Title of class)
Saratoga Bancorp (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No .
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
Saratoga Bancorp on March 1, 1999 was $22,982,496
As of March 1, 1999, Saratoga Bancorp had 1,605,656 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement is incorporated herein by reference in
Part III, Items 10 through 13.
The Index to Exhibits appears on page 65
Page 1 of 67 pages
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PART 1
Item 1. BUSINESS
GENERAL
Certain matters discussed or incorporated by reference
in this Annual Report on Form 10-K including, but not limited
to, matters described in Item 7 - "Managements Discussion
and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that are subject
to risks and uncertainties that could cause actual results to
differ materially from those projected. Changes to such risks
and uncertainties, which could impact future financial
performance, include, among others, (1)competitive pressures
in the banking industry; (2)changes in interest rate
environment; (3)general economic conditions, nationally,
regionally and in operating market areas; (4)changes in the
regulatory environment; (5)changes in business conditions and
inflation; (6)changes in securities markets; and (7) Year 2000
compliance problems. Therefore, the information set forth
herein should be carefully considered when evaluating the
business prospects of the Company and the Bank.
Saratoga Bancorp (the "Company") is a registered bank
holding company whose principal asset (and only subsidiary)
is the common stock of Saratoga National Bank (the "Bank").
The Company itself does not engage in any business activities
other than the ownership of the Bank and investment of its
available funds. As used herein, the term "Saratoga Bancorp"
or the "Company" includes the subsidiary of the Company
unless the context requires otherwise. The Company was
incorporated in California on December 8, 1981. The Bank
commenced operations on November 8, 1982. The Bank
provides a variety of banking services to businesses,
governmental units and individuals. The Bank conducts a
commercial and retail banking business, which includes
accepting demand, savings and time deposits and making
commercial, real estate and consumer loans. It also offers
installment note collections, issues cashier's checks, sells
traveler's checks and provides other customary banking
services. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC") up to the legal
limits thereupon. The Bank does not offer trust services nor
international banking services and does not plan to do so in
the near future. At December 31, 1998, the Company had
total assets of approximately $145 million and total deposits of
approximately $103 million. At December 31, 1998, the
Company had 24 full-time equivalent employees.
Most of the Bank's deposits are obtained from the
Bank's primary service area. No material portion of the Bank's
deposits have been obtained from a single person or group of
related persons, the loss of any one or more of which would
have a materially adverse effect on the business of the Bank,
nor is a material portion of the Bank's loans concentrated
within a single industry or group of related industries.
Although real estate construction loans represent
approximately 26% and other real estate loans represent
approximately 45% of total loans, no material portion is located
in a single geographic
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area. Furthermore, the extent to which the business of the Bank
is seasonal is insignificant. The importance of, and risks attendant
to, foreign sources and application of the Bank's funds is
negligible.
For additional information concerning the Company and
the Bank, see Selected Financial Data under Item 6 on page
17.
SUPERVISION AND REGULATION
The stock of the Company is subject to the registration
requirements of the Securities Act of 1933, as amended, and
the qualification requirements of the California Corporate
Securities Law of 1968, as amended. The Company is also
subject to the periodic reporting requirements of Section 15(d)
of the Securities Exchange Act of 1934, as amended, which
include, but are not limited to, filing annual, quarterly and other
current reports with the Securities and Exchange Commission.
The Bank is chartered under the national banking laws
of the United States of America, and its deposits are insured
by the FDIC. The Bank has no subsidiaries. Consequently,
the Bank is regularly examined by the Office of the Comptroller
of the Currency (the "OCC"), its primary regulator, and is
subject to the supervision of the FDIC and the OCC. Such
supervision and regulation include comprehensive reviews of
all major aspects of the Bank's business and condition,
including its capital ratios, allowance for possible loan losses
and other factors. However, no inference should be drawn
that such authorities have approved any such factors. The
Company and the Bank are required to file reports with the
OCC, the FDIC and the Board of Governors of the Federal
Reserve System (the "Board of Governors") and provide such
additional information as the Board of Governors, FDIC and -
OCC may require.
The Company is a bank holding company within the
meaning of the Bank Holding Company Act of 1956, as
amended (the "Bank Holding Company Act"), and is registered
as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval
of the Board of Governors before it may acquire all or
substantially all of the assets of any bank, or ownership or
control of the voting shares of any bank if, after giving effect to
such acquisition of shares, the Company would own or control
more than 5% of the voting shares of such bank. The Bank
Holding Company Act prohibits the Company from acquiring
any voting shares of, or interest in, all or substantially all of the
assets of, a bank located outside the State of California unless
such an acquisition is specifically authorized by the laws of the
state in which such bank is located. Any such interstate
acquisition is also subject to the provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994
discussed below. The OCC regulates the number and
locations of the branch offices of a national bank and may only
permit a national bank to maintain branches in locations and
under conditions imposed by state law upon state banks.
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The Company, and any subsidiaries which it may
acquire or organize, are deemed to be "affiliates" of the Bank
within the meaning of that term as defined in the Federal
Reserve Act. This means, for example, that there are
limitations (a) on loans by the Bank to affiliates, and (b) on
investments by the Bank in affiliates' stock as collateral for
loans to any borrower. The Company and the Bank are also
subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
In addition, regulations of the Board of Governors
promulgated under the Federal Reserve Act require that
reserves be maintained by the Bank in conjunction with any
liability of the Company under any obligation (promissory note,
acknowledgement of advance, banker's acceptance or similar
obligation) with a weighted average maturity of less than
seven (7) years to the extent that the proceeds of such
obligations are used for the purpose of supplying funds to the
Bank for use in its banking business, or to maintain the
availability of such funds.
The Board of Governors, FDIC and OCC have adopted
risk-based capital guidelines for evaluating the capital
adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements
sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet
exposures and to aid in making the definition of bank capital
uniform nationally. Under the guidelines, the Company and
the Bank are required to maintain capital equal to at least
8.0% of its assets and commitments to extend credit, weighted
by risk, of which at least 4.0% must consist primarily of
common equity (including retained earnings) and the
remainder may consist of subordinated debt, cumulative
preferred stock, or a limited amount of loan loss reserve.
Assets, commitments to extend credit, and off-balance
sheet items are categorized according to risk and certain
assets considered to present less risk than others permit
maintenance of capital at less than the 8% ratio. For example,
most home mortgage loans are placed in a 50% risk category
and therefore require maintenance of capital equal to 4% of
such loans, while commercial loans are placed in a 100% risk
category and therefore require maintenance of capital equal to
8% of such loans.
The guidelines establish two categories of qualifying
capital: Tier 1 capital comprising core capital elements, and
Tier 2 comprising supplementary capital requirements. At
least one-half of the required capital must be maintained in the
form of Tier 1 capital. Tier 1 capital includes common
shareholders' equity and qualifying perpetual preferred stock
less intangible assets and certain other adjustments.
However, no more than 25% of the Company's total Tier 1
capital may consist of perpetual preferred stock. The
definition of Tier 1 capital for the Bank is the same, except that
perpetual preferred stock may be included only if it is
noncumulative. Tier 2 capital includes, among other items,
limited life (and in the case of banks, cumulative) preferred
stock, mandatory convertible securities, subordinated debt and
a limited amount of reserve for credit losses.
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Effective October 1, 1998 the Board of Governors and other
federal bank regulatory 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 the
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 for Tier 1 capital as a cushion against
risk.
The Board of Governors and other federal banking agencies
have adopted a revised minimum leverage ratio for banking
organizations 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 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.
On December 19, 1991, President Bush signed the
Federal Deposit Insurance Corporation Improvement Act of
1991 (the "FDICIA"). The Board of Governors, FDIC and OCC
adopted regulations effective December 19, 1992,
implementing a system of prompt corrective action pursuant to
Section 38 of the Federal Deposit Insurance Act and Section
131 of the FDICIA. The regulations establish five capital
categories with the following characteristics: (1) "Well
capitalized" - consisting of institutions with a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio
of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital
directive or prompt corrective action directive; (2) "Adequately
capitalized" - consisting of institutions with a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio
of 4% or greater and a leverage ratio of 4% or greater, and the
institution does not meet the definition of a "well capitalized"
institution; (3) "Undercapitalized" - consisting of institutions
with a total risk-based capital ratio less than 8%, a Tier 1 risk-
based capital ratio of less than 4%, or a leverage ratio of less
than 4%; (4) "Significantly undercapitalized" - consisting of
institutions with a total risk-based capital ratio of less than 6%,
a Tier 1 risk-based capital ratio of less than 3%, or a leverage
ratio
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of less than 3%; (5) "Critically undercapitalized" -
consisting of an institution with a ratio of tangible equity to total
assets that is equal to or less than 2%.
The regulations established procedures for
classification of financial institutions within the capital
categories, filing and reviewing capital restoration plans
required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other
matters. The regulations impose restrictions upon all
institutions to refrain from certain actions which would cause
an institution to be classified within any one of the three
"undercapitalized" categories, such as declaration of dividends
or other capital distributions or payment of management fees,
if following the distribution or payment the institution would be
classified within one of the "undercapitalized" categories. In
addition, institutions which are classified in one of the three
"undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory
actions include (1) increased monitoring and review by the
appropriate federal banking agency; (2) implementation of a
capital restoration plan; (3) total asset growth restrictions; and
(4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate
federal banking agency. Discretionary supervisory actions
may include (1) requirements to augment capital; (2)
restrictions upon affiliate transactions; (3) restrictions upon
deposit gathering activities and interest rates paid; (4)
replacement of senior executive officers and directors; (5)
restrictions upon activities of the institution and its affiliates;
(6) requiring divestiture or sale of the institution; and (7) any
other supervisory action that the appropriate federal banking
agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not
accept a capital restoration plan without determining, among
other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's
capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with
such capital restoration plan. The aggregate liability of the
parent holding company under the guaranty is limited to the
lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized,
and (ii) the amount that is necessary (or would have been
necessary) to bring the institution into compliance with all
capital standards applicable with respect to such institution as
of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if
it were "significantly undercapitalized." The FDICIA also
restricts the solicitation and acceptance of and interest rates
payable on brokered deposits by insured depository
institutions that are not "well capitalized." An
"undercapitalized" institution is not allowed to solicit deposits
by offering rates of interest that are significantly higher than
the prevailing rates of interest on insured deposits in the
particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or
receivership within 90 days of such determination unless it
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is also determined that some other course of action would better
serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making
(but not accruing) any payment of principal or interest on
subordinated debt without the prior approval of the FDIC and
the FDIC must prohibit a critically undercapitalized institution
from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than
in the usual course of business, including investment
expansion, acquisition, sale of assets or other similar actions;
(2) extending credit for any highly leveraged transaction; (3)
amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material
change in accounting methods; (5) engaging in certain affiliate
transactions; (6) paying excessive compensation or bonuses;
and (7) paying interest on new or renewed liabilities at rates
which would increase the weighted average costs of funds
beyond prevailing rates in the institution's normal market
areas.
The capital ratio requirements for the "adequately
capitalized" category generally are the same as the existing
minimum risk-based capital ratios applicable to the Company
and the Bank.
Under the FDICIA, the federal financial institution
agencies have adopted regulations which require institutions
to establish and maintain comprehensive written real estate
policies which address certain lending considerations,
including loan-to-value limits, loan administrative policies,
portfolio diversification standards, and documentation,
approval and reporting requirements. The FDICIA further
generally prohibits an insured state bank from engaging as a
principal in any activity that is impermissible for a national
bank, absent FDIC determination that the activity would not
pose a significant risk to the Bank Insurance Fund, and that
the bank is, and will continue to be, within applicable capital
standards. Similar restrictions apply to subsidiaries of insured
state banks. The Company does not currently intend to
engage in any activities which would be restricted or prohibited
under the FDICIA.
The federal financial institution agencies have
established safety and soundness standards for insured
financial institutions covering (1) internal controls, information
systems and internal audit systems; (2) loan documentation;
(3) credit underwriting; (4) interest rate exposure; (5) asset
growth; (6) compensation, fees and benefits; (7) excessive
compensation for executive officers, directors or principal
shareholders which could lead to material financial loss. If an
agency determines that an institution fails to meet any
standard the agency may require the financial institution to
submit to the agency an acceptable plan to achieve
compliance with the standard. If the agency requires
submission of a compliance plan and the institution fails to
timely submit an acceptable plan or to implement an accepted
plan, the agency must require the institution to correct the
deficiency. Under the final rule, an institution must file a
compliance plan within 30 days of a request to do so from the
institution's primary federal regulatory agency. The agencies
may elect to initiate enforcement action in certain cases rather
than rely on an
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existing plan particularly where failure to meet
one or more of the standards could threaten the safe and
sound operation of the institution.
The Board of Governors issued final amendments to its
risk-based capital guidelines to be effective December 31,
1994, requiring that net unrealized holding gains and losses
on securities available for sale determined in accordance with
Statement of Financial Accounting Standards (the "SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," are not to be included in the Tier 1 capital
component consisting of common stockholders' equity. Net
unrealized losses on marketable equity securities (equity
securities with a readily determinable fair value), however, will
continue to be deducted from Tier 1 capital. This rule has the
general effect of valuing available for sale securities at
amortized cost (based on historical cost) rather than at fair
value (generally at market value) for purposes of calculating
the risk-based and leverage capital ratios.
On December 13, 1994, the Board of Governors issued
amendments to its risk-based capital guidelines regarding
concentration of credit risk and risks of non-traditional
activities, which were effective January 17, 1995. As
amended, the risk-based capital guidelines identify
concentrations of credit risk and evaluate an institution's ability
to manage such risks and the risk posed by non-traditional
activities as important factors in assessing an institution's
overall capital adequacy.
The federal banking agencies during 1996 issued a joint
agency policy statement regarding the management of
interest-rate risk exposure (interest rate risk is the risk that
changes in market interest rates might adversely affect a
bank's financial condition) with the goal of ensuring that
institutions with high levels of interest-rate risk have sufficient
capital to cover their exposures. This policy statement
reflected the agencies' decision at that time not to promulgate
a standardized measure and explicit capital charge for interest
rate risk, in the expectation that industry techniques for
measurement of such risk will evolve.
However, the Federal Financial Institution Examination
Counsel (the "FFIEC") on December 13, 1996, approved an
updated Uniform Financial Institutions Rating System (the
"UFIRS"). In addition to the five components traditionally
included in the so-called "CAMEL" rating system which has
been used by bank examiners for a number of years to classify
and evaluate the soundness of financial institutions (including
capital adequacy, asset quality, management, earnings and
liquidity), UFIRS includes for all bank regulatory examinations
conducted on or after January 1, 1997, a new rating for a sixth
category identified as sensitivity to market risk. Ratings in this
category are intended to reflect the degree to which changes
in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and
capital. The rating system henceforth will be identified as the
"CAMELS" system.
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At December 31, 1998, the Bank and the Company are
in compliance with the risk-based capital and leverage ratios
described above. See Item 7 below for a listing of the
Company's risk-based capital ratios at December 31, 1998 and
1997.
Community Reinvestment Act (the "CRA") regulations
effective as of July 1, 1995 evaluate banks' lending to low and
moderate income individuals and businesses across a four-point scale
of "outstanding", "satisfactory", "needs to improve"
and "substantial noncompliance," and are a factor in regulatory
review of applications to merge, establish new branches or
form bank holding companies. In addition, any bank rated in
"substantial noncompliance" with the CRA regulations may be
subject to enforcement proceedings.
The Bank has a current rating of "satisfactory" CRA
compliance, and is scheduled for further examination for CRA
compliance during 1999.
During 1998, the Company's primary source of income
was interest income. In the future, the Company also expects
to receive dividends and management fees from the Bank.
The Bank's ability to make such payments is subject to
restrictions established by federal banking law, and subject to
approval by the OCC. Such approval is required if the total of
all dividends declared by the Bank's Board of Directors in any
calendar year will exceed the Bank's net profits for that year
combined with its retained net profits for the preceding two
years, less any required transfers to surplus or to a fund for
the retirement of preferred stock. The OCC generally prohibits
national banks from, among other matters, adding the
allowance for loan and lease losses to undivided profits then
on hand when calculating the amount of dividends which may
be paid. Additionally, while the Board of Governors has no
general restriction with respect to the payment of cash
dividends by an adequately capitalized bank to its parent
holding company, the Board of Governors, FDIC and/or OCC,
might, under certain circumstances, place restrictions on the
ability of a bank to pay dividends based upon peer group
averages and the performance and maturity of that bank, or
object to management fees on the basis that such fees cannot
be supported by the value of the services rendered or are not
the result of an arms length transaction. The FDIC may also
restrict the payment of dividends if such payment would be
deemed unsafe or unsound or if after the payment of such
dividends, the Bank would be included in one of the
"undercapitalized" categories for capital adequacy purposes
pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991. See the discussion of dividends in
Item 5 below for additional information regarding dividends.
Under the formulas discussed in Item 5, at December 31,
1998, approximately $3,974,000 of the Bank's net profits were
available for distribution as dividends without the necessity of
any prior governmental approvals. These net profits constitute
part of the capital of the Bank and sound banking practices
require the maintenance of adequate levels of capital.
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COMPETITION
The banking business in Santa Clara County, as it is
elsewhere in California, is highly competitive, and each of the
major branch banking institutions has one or more offices in
the Bank's service area. The Bank competes in the
marketplace for deposits and loans, principally against these
banks, independent community banks, savings and loan
associations, thrift and loan companies, credit unions,
mortgage banking companies, and other miscellaneous
institutions that claim a portion of the market.
Larger banks may have a competitive advantage
because of higher lending limits and major advertising and
marketing campaigns. They also perform services, such as
trust services, international banking, discount brokerage and
insurance services which the Bank is not authorized or
prepared to offer currently. The Bank has made arrangements
with its correspondent banks and with others to provide such
services for its customers. For borrowers requiring loans in
excess of the Bank's legal lending limit, the Bank has offered,
and intends to offer in the future, such loans on a participating
basis with its correspondent banks and with other independent
banks, retaining the portion of such loans which is within its
lending limit. As of December 31, 1998, the Bank's legal
lending limit to a single borrower and such borrower's related
parties was $2,300,000 based on regulatory capital of
$15,553,000.
The Bank's business is concentrated in its service area,
which primarily encompasses Santa Clara County, and also
includes, to a lesser extent, the contiguous areas of Alameda,
San Mateo and Santa Cruz counties.
In order to compete with major financial institutions in its
primary service area, the Bank uses to the fullest extent
possible the flexibility which is accorded by its independent
status. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by the Bank's
officers, directors and employees. The Bank also seeks to
provide special services and programs for individuals in its
primary service area who are employed in the agricultural,
professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or
businesses. In the event there are customers whose loan
demands exceed the Bank's lending limit, the Bank seeks to
arrange for such loans on a participation basis with other
financial institutions. The Bank also assists those customers
requiring services not offered by the Bank to obtain such
services from correspondent banks.
Banking is a business which depends on interest rate
differentials. In general, the difference between the interest
rate paid by the Bank to obtain its deposits and its other
borrowings and the interest rate received by the Bank on loans
extended to its customers and on securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan
associations, credit unions, other financial institutions and
other entities for funds. For instance, yields on corporate and
<PAGE> 11
government debt securities and other commercial paper affect
the ability of commercial banks to attract and hold deposits.
Commercial banks also compete for loans with savings and
loan associations, credit unions, consumer finance companies,
mortgage companies and other lending institutions.
The interest rate differentials of the Bank, and therefore
its earnings, are affected not only by general economic
conditions, both domestic and foreign, but also by the
monetary and fiscal policies of the United States as set by
statutes and as implemented by federal agencies, particularly
the Federal Reserve Board. This agency can and does
implement national monetary policy, such as seeking to curb
inflation and combat recession, by its open market operations
in United States government securities, adjustments in the
amount of interest free reserves that banks and other financial
institutions are required to maintain, and adjustments to the
discount rates applicable to borrowing by banks from the
Federal Reserve Board. These activities influence the growth
of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The
nature and timing of any future changes in monetary policies
and their impact on the Bank cannot be predicted.
In 1995 the FDIC, pursuant to Congressional mandate,
reduced bank deposit insurance assessment rates to a range
from $0 to $0.27 per $100 of deposits, dependent upon a
bank's risk. The FDIC has continued these assessment rates
through the first semiannual assessment period of 1998.
Based upon the above risk-based assessment rate schedule,
the Bank's current capital ratios, the Bank's current level of
deposits, and assuming no further change in the assessment
rate applicable to the Bank during 1998, the Bank estimates
that its annual noninterest expense attributed to assessments
will remain unchanged during 1999.
Since 1986, California has permitted California banks
and bank holding companies to be acquired by banking
organizations based in other states on a "reciprocal" basis
(i.e., provided the other state's laws permit California banking
organizations to acquire banking organizations in that state on
substantially the same terms and conditions applicable to local
banking organizations). Some increase in merger and
acquisition activity among California and out-of-state banking
organizations has occurred as a result of this law, as well as
increased competition for loans and deposits.
Since October 2, 1995, California law implementing
certain provisions of prior federal law has (1) permitted
interstate merger transactions; (2) prohibited interstate
branching through the acquisition of a branch business unit
located in California without acquisition of the whole business
unit of the California bank; and (3) prohibited interstate
branching through de novo establishment of California branch
offices. Initial entry into California by an out-of-state institution
must be accomplished by acquisition of or merger with an
existing whole bank which has been in existence for at least
five years.
<PAGE> 12
Recently, the Federal banking agencies, especially the
Board of Governors and the OCC, have taken steps to
increase the types of activities in which national banks and
bank holding companies can engage, and to make it easier to
engage in such activities. On November 20, 1996, the OCC
issued final regulations permitting national banks to engage in
a wider range of activities through subsidiaries. "Eligible
institutions" (those national banks that are well capitalized,
have a high overall rating and a satisfactory CRA rating, and
are subject to an enforcement order) may engage in activities
related to banking through operating subsidiaries after going
through a new expedited application process. In addition, the
new regulations include a provision whereby a national bank
may apply to the OCC to engage in an activity through a
subsidiary in which the bank itself may not engage. Although
the Bank is not currently intending to enter into any new type
of business, this OCC regulation could be advantageous to the
Bank if the Bank determines to expand its operations in the
future, depending on the extent to which the OCC permits
national banks to engage in new lines of business and whether
the Bank qualifies as an "eligible institution" at the time of
making application.
Certain legislative and regulatory proposals that could
effect the Bank and the banking business in general are
pending or may be introduced before the United States
Congress, the California State Legislature and Federal and
state government agencies. The United States Congress is
considering numerous bills that could reform banking laws
substantially. For example, proposed bank modernization
legislation under consideration would, among other matters,
include a repeal of the Glass-Steagall Act restrictions on
banks that now prohibit the combination of commercial and
investment banks.
It is not known to what extent, if any, the legislation
proposals will be enacted and what effect such legislation
would have on the structure, regulation and competitive
relationships of financial institutions. It is likely, however, that
many of these proposals would subject the Bank to increased
regulation, disclosure and reporting requirements and would
increase competition to the Bank and its cost of doing
business.
In addition to pending legislative changes, the various
banking regulatory agencies frequently propose rules and
regulations to implement and enforce already existing
legislation. It cannot be predicted whether or in what form any
such rules or regulations will be enacted or the effect that such
rules and regulations may have on the Bank's business.
ACCOUNTING PRONOUNCEMENTS
In October, 1995, the Financial Accounting Standards
Board (the "FASB")issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes
accounting and disclosure requirements using a fair value
method of accounting for stock based
<PAGE> 13
employee compensation
plans. Under SFAS No. 123, the Company may either adopt
the new fair value based accounting method or continue the
intrinsic value based method and provide proforma disclosures
of net income and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The
provisions of SFAS No. 123 became effective January 1, 1996.
The Company adopted only the disclosure requirements of
SFAS No. 123 and such adoption had no effect on the
Company's consolidated net earnings or cash flows.
In June, 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities." SFAS No. 125 establishes
accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities based on
a financial-component approach that focuses on control.
Under that approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes
liabilities when extinguished. In December 1996, the FASB
reconsidered certain provisions of SFAS No. 125 and issued
SFAS 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125" to defer for one year the effective
date of implementation for transactions related to repurchase
agreements, dollar-roll repurchase agreements, securities
lending and similar transactions. Earlier adoption or
retroactive application of this statement with respect to any of
its provisions was not premitted. The Company adopted SFAS
125 effective January 1, 1997. The adoption of SFAS 125 had
no effect on the Company's financial condition or results of
operations.
In February 1997, the FASB issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires restatement of
all prior year earnings per share (EPS) and presentation of
basic and diluted EPS. 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 to common shares. The Company
adopted SFAS 128 during 1997 and all EPS amounts have
been retroactively adjusted to comply with SFAS 128.
In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an
enterprise report, by major components and as a single total,
the change in net assets during the period from nonowner
sources; and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products,
services, geographic areas and major customers. The
Company adopted both SFAS 130 and SFAS 131 in 1998 and
such adoption had no effect on the Company's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133,
"Acounting for Derivative Instruments and Hedging Activities"
which establishes accounting and reporting standards for
derivative instruments and hedging activities. The Company
adopted SFAS 133 effective July 1, 1998. In connection with
the adoption of SFAS 133 the Company
<PAGE> 14
reclassified certain investment securities from held-to-maturity
to available-for-sale. Adoption of this statement did not have
any other impact on the Company's financial position and had no
impact on the Company's results of operations or cash flows.
Item 2. Properties
As of December 31, 1998, the Bank had three banking
offices located in Santa Clara County. The first banking office,
which is owned by the Bank, is also the principal executive
office of the Company, and is located at 12000 Saratoga-Sunnyvale
Road, Saratoga, California, comprising of
approximately 5,500 square feet. The office was purchased by
the Company in 1988 for $1,800,000. The foregoing
description of the office and purchase of the office is qualified
by reference to the Agreement of Purchase and Sale dated
July 27, 1988 attached as Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1988, filed with the Securities and Exchange Commission on
March 27, 1989.
The second banking facility, which is located at 15405
Los Gatos Blvd., Suite 103, Los Gatos, California, was opened
March 9, 1988. The 3,082 square foot facility is leased under
a noncancellable operating lease which expires in 2003.
Current lease payments are $6,387 per month for the building
and ground lease. Effective March, 1998, the lease payments
were tied to the Consumer Price Index. The foregoing
description of the lease is qualified by reference to the lease
agreement dated October 19, 1987 attached as Exhibit 10.1 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1987, filed with the Securities and
Exchange Commission on March 31, 1988.
The third banking facility located at 160 West Santa
Clara Street, in San Jose, California, was opened on October
3, 1989. The lease agreement for the 7,250 square foot
location in the downtown area of San Jose is under a
noncancellable operating lease which expires in 1999.
Current lease payments are $11,495 per month for the ground
floor and $4,274 for the second floor. The lease payments for
the second floor are tied to the Consumer Price Index with the
increase not to exceed 4% per year. It is anticipated that the
lease will be renewed during 1999 without substantial changes
to the terms or conditions. The foregoing description of the
lease is qualified by reference to the lease agreement dated
January 17, 1989 attached as Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1989, filed with the Securities and Exchange Commission on
March 27, 1990.
Item 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is
any of their property the subject of, any material pending legal
proceedings other than ordinary routine litigation incidental to
their respective businesses, nor are any such proceedings
known to be contemplated by governmental authorities.
<PAGE> 15
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters.
There is limited trading in and no established public trading
market for the Company's Common Stock. The Company's
Common Stock is not listed on any exchange. Hoefer and
Arnett, Incorporated, Burford Capital and Sutro and Company
facilitate trades in the Company's Common Stock.
The following table summarizes those trades of which
the Company has knowledge based on information provided
by Hoefer and Arnett, Incorporated, Burford Capital and Sutro
and Company, setting forth the approximate high and low bid
prices for the periods indicated, restated to reflect 3-for-2 stock
split declared by the Board of Directors on March 27, 1998.
The prices indicated below may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Bid Price of
Common Stock (1)
<S> <C> <C>
Quarter ended Low High
March 31, 1997................ $ 8.00 $10.00
June 30, 1997.................. 9.67 11.00
September 30, 1997........ 10.50 12.67
December 31, 1997......... 10.83 12.17
March 31, 1998................ 12.75 15.33
June 30, 1998.................. 14.33 17.33
September 30, 1998........ 13.88 17.25
December 31, 1998......... 13.00 14.50
</TABLE>
(1) As estimated by the Company based upon trades of which
it was aware, and not including purchases of stock pursuant to
the exercise of employee stock options.
The Company had 255 shareholders of record as of March 1,
1999. The Company's shareholders are entitled to receive
dividends when and as declared by its Board of Directors, out
of funds legally available therefore, subject to the restrictions
set forth in the California General Corporation Law (the "Cor-
poration Law"). The Corporation Law provides that a
corporation may make a distribution to its shareholders if the
corporation's retained earnings equal at least the amount of the
proposed distribution. The Corporation Law further provides
that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it meets
two conditions, which generally stated are as
<PAGE> 16
follows: (i) the corporation's assets equal at least 1-1/4 times its
liabilities; and (ii) the corporation's current assets equal at least
its current liabilities or, if the average of the corporation's
earnings before taxes on income and before interest expenses for the
two preceding fiscal years was less than the average of the
corporation's interest expenses for such fiscal years, then the
corporation's current assets must equal at least 1-1/4 times its
current liabilities. Funds for payment of any cash dividends by
the Company would be obtained from its investments as well as
dividends and/or management fees from the Bank. The
payment of cash dividends by the Bank may be subject to the
approval of the OCC, as well as restrictions established by
federal banking law, the Board of Governors and the FDIC.
Approval of the OCC is required if the total of all dividends
declared by the Bank's Board of Directors in any calendar year
will exceed the Bank's net profits for that year combined with its
retained net profits for the preceding two years, less any
required transfers to surplus or to a fund for the retirement of
preferred stock.
Additionally, the Board of Governors,FDIC and/or OCC,
might, under certain circumstances, place restrictions on the
ability of a bank to pay dividends based upon peer group
averages and the performance and maturity of that bank, or
object to management fees on the basis that such fees cannot
be supported by the value of the services rendered or are not
the result of an arms length transaction.
The Company has paid cash dividends on the outstanding
shares of common stock totaling $0.175 per share in 1997 and
$0.20 per share in 1998.
It is the intention of the Company to pay cash and stock
dividends, subject to the restrictions on the payment of cash
dividends as described above, depending upon the level of
earnings, management's assessment of future capital needs
and other factors considered by the Board of Directors.
<PAGE> 17
Item 6. Selected Financial Data
The following table presents certain consolidated financial
information concerning the business of the Company and the
Bank. This information should be read in conjunction with the
Consolidated Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition
and Results of Operations contained elsewhere herein.
<TABLE>
<CAPTION>
Operations Year ended December 31,
(in thousands, except per share data)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest income $9,749 $9,346 $7,585 $6,572 $5,446
Interest expense (4,400) (4,273) (3,558) (2,861) (1,929)
Net interest income 5,349 5,073 4,027 3,711 3,517
Provision (credit)
for credit losses 136 - (150) - (636)
Net interest income
after (credit)
provision
for credit losses 5,213 5,073 4,177 3,711 4,153
Other income 765 477 353 577 405
Other expenses (2,965) (2,978) (2,870) (2,868) (3,523)
Income before income
taxes 3,013 2,572 1,660 1,420 1,035
Provision for income
taxes (1,065) (976) (559) (539) (377)
Net income $1,948 $1,596 $1,101 $ 881 $ 658
====== ====== ====== ====== ======
Earnings per share:
Basic $ 1.19 $ 1.01 $ 0.71 $ 0.57 $ 0.43
Diluted $ 1.07 $ 0.92 $ 0.64 $ 0.55 $ 0.39
====== ====== ====== ====== ======
Cash dividends
declared per
common share $ 0.167 $0.133 $0.117 $0.067 $ -
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Balances at year end December 31,
(in thousands,except per share data)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total assets $144,802 $131,044 $121,784 $100,497 $87,536
Net loans 73,847 63,187 52,033 36,759 32,803
Total deposits 103,415 91,046 89,444 74,949 73,872
Shareholders'
equity 15,257 13,605 11,952 11,057 9,627
Book value per
share 9.36 8.31 7.69 7.15 6.23
</TABLE>
<PAGE> 18
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND
SHAREHOLDERS' EQUITY, INTEREST RATES, AND
INTEREST DIFFERENTIAL. The following are the Company's
daily average balance sheets for the years ended December 31,
1998 and 1997.
<TABLE>
<CAPTION>
1998
(dollars in thousands)
YIELDS INTEREST
AVERAGE OR INCOME/
BALANCE RATES EXPENSE
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) $64,939 9.8% $6,394
Investment securities (2) 41,400 5.9 2,460
Federal funds sold 13,608 5.3 726
Other 2,929 5.8 169
Total interest earning assets 122,876 7.9 9,749
Noninterest-earning assets:
Cash and due from banks 5,273
Premises and equipment 2,155
Other assets (3) 1,828
TOTAL $132,132
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $24,182 3.4 833
Savings 14,918 2.8 422
Time 30,888 5.7 1,746
Total interest bearing deposits 69,988 4.3 3,001
Federal Home Loan Bank
borrowings 22,837 6.1 1,398
Other interest bearing liabilities 19 5.3 1
Total interest bearing liabilities 92,844 4.7 4,400
Noninterest-bearing liabilities:
Demand deposits 23,397
Accrued expenses and other
liabilities 1,477
Shareholders' equity 14,414
TOTAL $132,132
=======
Net interest income $5,349
=====
Net yield on interest earning assets 4.4%
====
</TABLE>
(1) Including average non-accrual loans of Nil and loan fees of
$458,000.
(2) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis. Yields are based on historical cost for
held to maturity securities and fair market value for available for
sale securities.
(3) Net of average deferred loan fees of $318,000 and average
allowance for credit losses of $685,000.
<PAGE> 19
<TABLE>
<CAPTION>
1997
(dollars in thousands)
YIELDS INTEREST
AVERAGE OR INCOME/
BALANCE RATES EXPENSE
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1) $ 54,537 10.2% $5,571
Investment securities (2) 49,579 6.3 3,138
Federal funds sold 11,204 5.4 607
Other 485 6.2 30
Total interest earning assets 115,805 8.1 9,346
Noninterest-earning assets:
Cash and due from banks 4,621
Premises and equipment 2,071
Other assets (3) 2,230
TOTAL $124,727
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $23,674 3.6 853
Savings 17,547 3.0 530
Time 26,742 5.8 1,539
Total interest bearing deposits 67,963 4.3 2,922
Federal Home Loan Bank
borrowings 21,759 6.2 1,350
Other interest bearing liabilities 10 10.0 1
Total interest bearing liabilities 89,732 4.8 4,273
Noninterest-bearing liabilities:
Demand deposits 21,301
Accrued expenses and other
liabilities 1,124
Shareholders' equity 12,570
TOTAL $124,727
=======
Net interest income $5,073
=====
Net yield on interest earning assets 4.4%
====
</TABLE>
(1) Including average non-accrual loans of $60,000 and loan
fees of $357,000.
(2) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis. Yields are based on historical cost for
held to maturity securities and fair market value for available for
sale securities.
(3) Net of average deferred loan fees of $374,000 and average
allowance for credit losses of $605,000.
<PAGE> 20
Interest Differential - Rate/Volume Changes
Interest differential is affected by changes in volume, changes
in rates and a combination of changes in volume and rates.
Volume changes are caused by changes in the levels of
average earning assets and average interest bearing deposits
and borrowings. Rate changes result from changes in yields
earned on assets and rates paid on liabilities. Changes not
solely attributable to volume or rates have been allocated to the
rate component. The following table shows the effect on the
interest differential of volume and rate changes for the years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 over 1997 1997 over 1996
Increase (Decrease) Due Increase (Decrease) Due
to Changes in: to Changes in:
(in thousands)
Net Net
Volume Rate Change Volume Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest earning
assets:
Loans(1) $ 1,053 $ (230) $ 823 $1,402 $(226) $1,176
Securities (2) (530) (148) (678) 550 169 719
Federal funds sold 128 (9) 119 (25) (129) (154)
Interest bearing
deposits in
other banks 152 (13) 139 15 5 20
Total 803 (400) 403 1,942 (181) 1,761
Interest bearing
liabilities:
Demand deposits 18 (38) (20) 208 1 209
Savings deposits (82) (26) (108) 88 39 127
Time deposits 253 (46) 207 (114) (12) (126)
Borrowings 66 (18) 48 536 (27) 509
Other liabilities 2 (2) - (4) - (4)
Total 257 (130) 127 714 1 715
Interest differential $546 $(270) $276 $ 1,228 $(182) $1,046
</TABLE>
(1)Including non accrual loans.
(2)Interest income is reflected on an actual basis, not a fully taxable
equivalent basis.
<PAGE> 21
INVESTMENT PORTFOLIO
The amortized cost and fair values of securities at December
31 are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(in thousands)
Securities Available for Sale
<S> <C> <C> <C> <C>
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury and agency securities $14,890 $14,972 $11,228 $11,152
Mortgage-backed securities 10,665 10,657 - -
Governmental mutual fund 3,128 3,025 3,128 3,018
Federal Home Loan Bank stock 2,007 2,007 1,864 1,864
Bankers Bank stock 150 150 150 150
Total $30,840 $30,811 $16,370 $16,184
====== ====== ====== ======
Securities Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury and agency securities $ - $ - $10,879 $10,845
Mortgage-backed securities - - 15,024 15,124
Obligations of states and political
subdivisions 9,214 9,384 5,159 5,234
Federal Reserve Bank stock 90 90 90 90
Total $ 9,304 $ 9,474 $31,152 $31,293
====== ===== = ====== ======
</TABLE>
As investment securities mature, to the extent that the proceeds are
reinvested in investment securities, management expects that the categories
of taxable investment securities purchased will be in approximately the same
proportion as existed at December 31, 1998. The maturities and yields of the
investment portfolio at December 31, 1998 are shown below.
<PAGE> 22
<TABLE>
<CAPTION>
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1998
(Dollars in thousands)
Securities Available for Sale
Estimated After 1 Year & After 5 years &
Market Within 1 Year Within 5 Years Within 10 Years After 10 years
Value Amount Yield(1) Amount Yield(1) Amount Yield(1)Amount Yield(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treas-
ury and
agency
securities $14,972 $ 18 5.51% $8,913 5.95% $1,000 6.10% $5,041 5.98%
Governmental
mutual fund 3,025 3,025 6.12 - - - - - -
Federal Home
Loan Bank
stock 2,007 - - - - - - 2,007 5.12
Bankers Bank
stock 150 - - - - - - 150 -
20,154 $3,043 6.11% $8,913 5.95% $1,000 6.10% $7,198 5.62%
====== ===== ===== =====
Mortgage-
backed
securities 10,657
Total $30,811
======
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity
Total After 1 Year & After 5 Years &
Carrying Within 1 Year Within 5 Years Within 10 Years After 10 Years
Value Amount Yield(1) Amount Yield(1)Amount Yield(1) Amount Yield(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oblig-
ations of
states and
political
subdiv-
isions 9,214 450 5.31% 1,902 4.55% 1,418 4.73% 5,444 4.93%
Federal
Reserve
Bank stock 90 90 6.00
Total $9,304 $ 450 5.31%$1,902 4.55% $1,418 4.73% $5,534 4.95%
====== ===== ===== ====== =====
</TABLE>
(1) Yields are actual, not fully taxable equivalent.
Mortgage-backed securities generally have stated maturities of 4 to 15 years
but are subject to likely and substantial prepayments which effectively
accelerate actual maturities.
<PAGE> 23
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1998 and 1997 is
summarized in the following table.
<TABLE>
<CAPTION>
December 31,
1998 1997
(in thousands)
<S> <C> <C>
Real estate:
Construction $19,623 $ 8,945
Other 33,452 29,100
Commercial 18,738 21,282
Installment 1,192 1,548
Lease financing 1,850 3,215
$74,855 $64,090
======= =======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998, loans were due as follows:
Real Real
Estate Estate Lease
Const. Other Com'l. Install. Financing Total
====== ====== ====== ====== ======== ======
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year
or less $19,414 $ 5,360 $11,334 $ - $ 183 $36,291
Due after one year 209 28,092 7,404 1,192 1,667 38,564
TOTAL $19,623 $33,452 $18,738 $ 1,192 $ 1,850 $74,855
====== ====== ====== ====== ====== ======
</TABLE>
Of the loans due after one year, $34,685,000 have fixed rates and $3,879,000
have variable interest rates.
RISK ELEMENTS
There were no nonaccrual loans at December 31, 1998. Nonaccrual loans
were $360,000 at December 31, 1997.
At December 31, 1998 and 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 December 31, 1998 or 1997 which were troubled debt restructurings.
<PAGE> 24
There were four potential problem loans at December 31, 1998 having a
combined principal balance of $2,033,000 ($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 four loans identified as potential
problem loans are secured by real estate and personal property.
The Company does not believe there to be any concentration of loans in
excess of 10% of total loans which is not disclosed above which would cause
them to be similarly impacted by economic or other conditions. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Provision for Credit Losses, regarding discussion of California
economic conditions.
SUMMARY OF CREDIT EXPERIENCE
<TABLE>
<CAPTION>
Analysis of the Allowance for Credit Losses
Year Ended December 31,
1998 1997
<S> <C> <C>
Beginning balance $578,000 $628,000
Provision charged to
operations 136,000 -
Charge-offs - Commercial (65,000) (115,000)
Recoveries - Commercial 67,000 65,000
Ending balance $ 716,000 $ 578,000
======== ========
Ratio of net charge-offs
(recoveries) during the period
to average loans outstanding
during the year. (.003)% .092%
======== ========
Ratio of allowance for credit
losses to loans outstanding
at end of year 0.96% 0.90%
======== ========
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
Allocation of the Allowance for Credit Losses
December 31, 1998 December 31, 1997
Percent Percent
of loans in of loans in
each category each category
Amount to total loans Amount to total loans
<S> <C> <C> <C> <C>
Real estate-
other $169,000 45% $254,000 46%
Commercial 224,000 25 254,000 33
Real estate-
construction 279,000 26 61,000 14
Installment 44,000 2 9,000 2
Lease financing - 2 - 5
$716,000 100% $578,000 100%
======== === ======= ===
</TABLE>
DEPOSITS
The average balance sheets for 1998 and 1997 set forth the average
amount and average interest rate paid for deposits.
<TABLE>
<CAPTION>
At December 31, 1998, time deposits of $100,000 or more have remaining
maturities as follows (in thousands):
<S> <C>
3 months or less $ 6,640
Over 3 months to 6 months 8,959
Over 6 months to 12 months 4,583
Over 1 year to 5 years 2,497
Over 5 years 100
TOTAL $22,779
======
</TABLE>
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
Ratios of profitability, liquidity and capital for the years ended December 31,
are as follows:
<S> <C> <C>
1998 1997
Return on average assets 1.5% 1.3%
Return on average equity 13.5% 12.7%
Cash dividends declared per share
to diluted earnings per share 15.6% 14.4%
Average equity to average assets 10.9% 10.1%
</TABLE>
<PAGE> 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-K are forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected. 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.
Overview
Net income in 1998 was $1,948,000 ($1.19 basic earnings per share,
$1.07 diluted earnings per share) compared to $1,596,000 ($1.01 basic
earnings per share, $0.92 diluted earnings per share) in 1997 and
$1,101,000 ($.71 basic earnings per share, $0.64 diluted earnings per
share) in 1996. The increase in net income in 1998 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 the volume of interest-bearing
liabilities. The increase in net income in 1997 resulted primarily from
an increase in the volume and yield of earning assets, offset, in part by an
increase in interest expense due to the increased volume of interest-bearing
liabilities. The table below highlights the changes in the nature and sources
of income and expense from 1997 to 1998 and from 1996 to 1997.
<TABLE>
<CAPTION>
Increase Increase
1998 1997 (Decrease) 1996 (Decrease)
(in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $5,349 $5,073 $276 $4,027 1,046
Provision (credit)
for credit losses 136 - 136 (150) 150
Noninterest income 765 477 288 353 124
Noninterest expenses (2,965) (2,978) (13) (2,870) 108
Income before
income taxe 3,013 2,572 441 1,660 912
Provision for
income taxe (1,065) (976) (89) (559) (417)
Net income $1,948 $1,596 $352 $1,101 $ 495
===== ===== ==== ====== ======
</TABLE>
<PAGE> 27
Net Interest Income
Net interest income is affected by changes in the nature and volume of
earning assets held during the year, the rates earned on such assets and
the rates paid on interest-bearing liabilities. The table below details the
average balances, interest income and expense and the effective
yields/rates for earning assets and interest bearing liabilities.
<TABLE>
<CAPTION>
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning
assets:
Loans $64,939 $6,394 9.8% $ 54,537 $5,571 10.2% $41,313 $4,395 10.6%
Other 57,937 3,355 5.8 61,268 3,775 6.2 55,170 3,190 5.8
Total
earning
assets $122,876 $115,805 $96,483
======= ======= =======
Interest
bearing
liab-
ilities:
Depo-
sits $ 69,988 3,001 4.3 $ 67,963 2,922 4.3 60,995 2,712 4.4
Other
interest
bearing
funds 22,856 1,399 6.1 21,769 1,351 6.2 13,335 846 6.3
Total
interest
bearing
liabil-
ities $ 92,844 $ 89,732 $74,330
======= ======= ======
Net interest
income and
margin $5,349 4.4% $5,073 4.4% $4,027 4.2%
===== ==== ===== ==== ===== ====
</TABLE>
Average earning assets increased $7.1 million or 6%, to $122.9 million
during 1998 compared to $115.8 million in 1997. In 1997, Average earning
assets increased $19.3 million or 20% from $96.5 million in 1996 to $115.8
million in 1997. The increase in 1998 was primarily in construction loans
and the longer term real estate loan portfolio. These longer term loans are
generally made for a term of between five and fifteen years and are matched
against specific blocks of deposits or borrowings in order to alleviate interest
rate risk. The increase in 1997 was primarily in Small Business
Administration and U.S. Department of Agriculture loans which were
purchased as a means to diversify the loan portfolio. Average interest-
bearing liabilities increased $3.1 million, or 3%, during 1998 to $92.8 million
from $89.7 million in 1997 primarily due to an increase in Federal Home Loan
Bank borrowings which were matched against specific longer term real estate
<PAGE> 28
loans and an increase in interest bearing checking deposits. Average
interest-bearing liabilities increased $15.4 million, or 21%, to $89.7 million,
in 1997 from $74.3 million in 1996. This increase was primarily due to an
increase in Federal Home Loan Bank borrowings which were matched
against specific longer term real estate loans and an increase in interest
bearing checking deposits.
EARNING ASSETS-LOANS
The average loan portfolio increased $10.4 million, or 19%, from $54.5
million in 1997 to $64.9 million in 1998. The increase was primarily in the
longer term real estate loan portfolio as a result of marketing efforts in that
area. Average loans increased $13.2 million from $41.3 million in 1996 to
$54.5 million in 1997. The increase was primarily in SBA and USDA loans
which were purchased in order to diversify the loan portfolio. The average
loan to average deposit ratio for 1998 was 70% compared to 61% in 1997
and 68% in 1996. The average yield on loans decreased from 10.6% in
1996 to 10.2% in 1997 and 9.8% in 1998. The decrease in yield in 1998
primarily reflects a decrease in interest rates on loans originated as a result
of the decrease in prime rate during the year as compared to 1997. The
decrease in yield in 1997 is primarily attributable to the purchase of SBA and
USDA loans which generally had lower average yields as compared to the
rest of the loan portfolio.
OTHER EARNING ASSETS
Average other earning assets, consisting of Investment securities, Federal
funds sold and interest bearing deposits in other banks, decreased $3.3
million or 5% during 1998 from $61.3 million to $57.9 million. During 1997,
average other earning assets increased $6.1 million from $55.2 million in
1996. The decrease in 1998 was primarily due to the increased level of
loans. The increase in the securities portfolio in 1997 was primarily due to
the increased level of deposits. The yield earned on average other earning
assets increased from 5.8% in 1996 to 6.2% in 1997 and then decreased to
5.8% in 1998. In 1998, the change in the volume and yields resulted in a
decrease in interest income of $420,000 on other earning assets. In 1997,
the change in the volume and yields of other earning assets resulted in an
increase in interest income of $585,000 on other earning assets.
INTEREST BEARING LIABILITIES
Average interest bearing liabilities increased $3.1 million, or 3%, from $89.7
million in 1997 to $92.8 million in 1998 and increased $15.4 million, or 21%,
from $74.3 million in 1996 to $89.7 million in 1997. The increase in 1998
was primarily a result
<PAGE> 29
of increased interest-bearing checking accounts and Federal Home Loan Bank
borrowings. The increase in 1997 was primarily a result of increased Federal
Home Loan Bank borrowings which were matched against certain longer term real
estate loans to alleviate the impact of interest rate risk. Average non-
interest bearing deposits increased $2.1 million, or 10%, in 1998 to $23.4
million and increased $3.2 million, or 18%, to $21.3 million in 1997 from an
average of $18.1 million in 1996. Overall rates on interest bearing deposits
decreased from 4.4% in 1996 to 4.3% in 1997 and 1998. The net result of the
changes in average balances and rates was an increase in total interest
expense of $127,000 in 1998 from 1997 and an increase of $715,000 in 1997
from 1996.
NET INTEREST MARGIN
The net interest margin increased from 4.2% in 1996 to 4.4% in 1997 and
1998. The changes in the net interest margin are primarily attributable to
fluctuations in the loan, deposit and borrowing mix and the relationship
between rates charged and rates paid.
PROVISION FOR CREDIT LOSSES
The Bank maintains an allowance for credit losses which is based, in part,
on the Bank's historical loss experience, the impact of forecasted economic
conditions within the Bank's market area, and, as applicable, the State of
California, the value of underlying collateral, loan performance and inherent
risks in the loan portfolio. The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating expense and
recoveries of previously charged-off loans. During 1998, the Bank provided
$136,000 to the allowance for credit losses. During 1997, the Bank did not
provide any additional provision for credit losses. In 1996, $150,000 was
reversed from the allowance for credit losses. The allowance for credit
losses was $716,000 in 1998, compared to $578,000 for 1997 and $628,000
for 1996. At December 31, 1998, the allowance was approximately 0.96%
of total loans, compared to approximately 0.90% at December 31, 1997.
There were no nonaccrual loans at December 31, 1998 or 1996. Nonaccrual
loans were $360,000 at December 31, 1997. Interest income foregone on
nonaccrual loans during 1997 was $13,000. The nonaccrual loans
consisted of one loan secured by real estate which was paid off on January
22, 1998.
At December 31, 1998 and 1997, there were no loans past due 90 days or
more as to principal or interest and still accruing interest.
There was no Other Real Estate Owned ("OREO") at December 31, 1998 or
1997.
<PAGE> 30
<TABLE>
<CAPTION>
Nonperforming loans and other real estate owned are summarized below:
December 31, 1998 December 31, 1997
<S> <C> <C>
Nonperforming loans:
Past due 90 days or more
and still accruing interest $ - $ -
Nonaccrual - 360,000
Total - 360,000
Other real estate owned - -
Total nonperforming loans and
other real estate owned $ - $ 360,000
=========== ==========
</TABLE>
Management is of the opinion that the allowance for credit losses is
maintained at a level adequate for known and currently anticipated future
risks inherent in the loan portfolio. However, the Bank's loan portfolio,
which includes approximately $53,000,000 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
Noninterest income increased $288,000, or 60%, to $765,000 during 1998
compared to $477,000 during 1997. During 1997, noninterest income
increased $124,000, or 35%, from $353,000 in 1996. The increase in 1998
is primarily attributable to an increase in net gain on sale of securities of
$120,000, an increase of $85,000 in rental income on leased assets and
income from an increase in the cash surrender value of life insurance
policies. The increase in 1997 was primarily attributable to a net gain on sale
of securities of $34,000 and an increase of $74,000 in charges assessed on
deposit accounts.
NONINTEREST EXPENSES
Noninterest expenses were approximately $3.0 million in 1998 and 1997,
compared to approximately $2.9 million in 1996.
<PAGE> 31
Generally, expenses have grown at a slower rate than the growth in assets
and increases in the volume of transactions. As a percentage of average
earning assets, noninterest expense decreased to 2.4% in 1998 from 2.6%
in 1997 and 3.0 in 1996. As pressure continues on net interest margins and
net asset growth, management of operating expenses will continue to be a
priority.
INCOME TAXES
The Company's effective tax rate was 35.4% for 1998, 38.0% for 1997 and
33.7% for 1996. See Note 9 to the consolidated financial statements for
additional information on income taxes.
LIQUIDITY/INTEREST RATE SENSITIVITY
The Bank manages its liquidity to provide adequate funds at an acceptable
cost to support borrowing requirements and deposit flows of its customers.
At December 31, 1998 and 1997, liquid assets as a percentage of deposits
were 52% and 36%, respectively. In addition to cash and due from banks,
liquid assets include interest bearing deposits with other banks, Federal
funds sold and securities which are 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-term.
The following table sets forth the distribution of repricing opportunities,
based on contractual terms, of the Company's earning assets and interest-
bearing liabilities at December 31, 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.
Based on the contractual terms of its assets and liabilities, the Bank is
currently liability sensitive in terms of its short-term exposure to interest
rates. In other words, the Bank's liabilities reprice faster than its assets.
<PAGE> 32
DISTRIBUTION OF REPRICING OPPORTUNITIES
At December 31, 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 $14,450 $ - $ - $ - $ - $ 14,450
Interest bearing
deposits in
other banks 100 - 1,689 - - 1,789
Municipal
securities - 200 250 1,902 6,862 9,214
Treasury and
agency securities 3,043 - 1,010 10,381 14,220 28,654
FRB/FHLB/Bankers
bank stock - - - - 2,247 2,247
Loans 29,612 5,576 4,448 13,521 21,698 74,855
Total earning
assets $47,205 $5,776 $7,397 $25,804 $45,027 $131,209
Interest bearing
demand accounts $24,366 $ - $ - $ - $ - $ 24,366
Savings accounts 13,689 - - - - 13,689
Time certificates
of deposit of
$100,000 or more 6,641 8,959 4,583 2,497 100 22,780
Other time
deposits 3,731 3,667 4,695 3,027 - 15,120
Federal funds
purchased 2,000 - - - - 2,000
Other borrowings 25 - - 14,522 8,150 22,697
Total interest-
bearing
liabilities $50,452 $12,626 $9,278 $20,046 $ 8,250 100,652
Interest rate
sensitivity gap $ (3,247) $(6,850) $(1,881) $ 5,758 $36,777 $ 30,557
====== ====== ====== ====== ====== =======
Cumulative interest
rate sensitivity
gap $ (3,247) $(10,097) $(11,978) $(6,220) $30,557
======= ====== ======= ====== ======
Interest rate
sensitivity gap
ratio 0.94 0.46 0.80 1.29 5.46
==== ==== ==== ==== ====
Cumulative interest
rate sensitivity
gap ratio 0.94 0.84 0.83 0.93 1.30
==== ==== ==== ==== ====
</TABLE>
<PAGE> 33
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on manufacturing, or other commercial concerns, primarily because
its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company indirectly through its effect on the ability of
its customers to repay loans, or its impact on market rates of interest, and
thus the ability of the Bank to attract loan customers. Inflation affects
the growth of total assets by increasing the level of loan demand, and
potentially adversely affects the Company's capital adequacy because
loan growth in inflationary periods may increase more rapidly than capital.
Interest rates in particular are significantly affected by inflation, but
neither the timing nor the magnitude of the changes coincides with changes in
the Consumer Price Index, which is one of the indicators used to measure the
rate of inflation. Adjustments in interest rates may be delayed because of the
possible imposition of regulatory constraints. In addition to its effects on
interest rates, inflation directly affects the Company by increasing the
Company's operating expenses. The effect of inflation during the three-year
period ended December 31, 1998 has not been significant to the Company's
financial position or results of operations.
CAPITAL RESOURCES
The Company's capital resources consist of shareholders' equity and (for
regulatory purposes) the allowance for credit losses. During the year ended
December 31, 1998, the Company's regulatory capital increased $1,790,000. Tier
1 capital increased $1,652,000 due primarily to the retention of earnings and
sale of stock. Tier 2 capital increased $138,000 due primarily to the increase
in the allowance for credit losses.
The Company and the Bank are subject to capital adequacy guidelines issued by
the Board of Governors and the OCC. The Company and the Bank are required to
maintain total capital equal to at least 8% of assets and commitments to extend
credit, weighted by risk, of which at least 4% must consist primarily of common
equity including retained earnings (Tier 1 capital) and the remainder may
consist of subordinated debt, cumulative preferred stock or a limited amount of
loan loss reserves. Certain assets and commitments to extend credit present
less risk than others and will be assigned to lower risk-weighted categories
requiring less capital allocation than the 8% total ratio. For example, cash
and government securities are assigned to a 0% risk-weighted category, most
home mortgage loans are assigned to a 50% risk-weighted category requiring a 4%
capital allocation and commercial loans are assigned to a 100% risk-weighted
category requiring an 8% capital allocation. As of December 31, 1998, the
Company's total risk-based capital ratio was approximately 16.8% (approximately
16.4% for the Bank) compared to approximately 18.1% (approximately 17.0% for
the Bank) at December 31, 1997.
The Board of Governors and other federal banking agencies have adopted a
revised minimum leverage ratio for banking organizations as a supplement to the
risk-weighted
<PAGE 34>
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 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 for the three year period ended December 31, 1998.
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Leverage ratio 11.0% 10.9% 10.5%
Tier 1 capital ratio 16.0% 17.4% 18.1%
Total risk-based capital ratio 16.8% 18.1% 18.1%
</TABLE>
On December 19, 1991, President Bush 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 FDICIA requires the
<PAGE> 35
bank regulatory authorities to initiate corrective action regarding financial
institutions which fail to meet minimum capital requirements. Such action
may result in orders to, among other matters, augment capital and reduce
total assets. Critically undercapitalized financial institutions may also be
subject to appointment of a receiver or implementation of a capitalization plan.
OTHER MATTERS
From time to time, the Company's Board of Directors reviews and consults with
advisors, including investment banking, accounting and legal advisors, regarding
banking industry trends and developments, as well as internal and external
opportunities to maximize shareholder value. Such reviews and consultations
include evaluating and comparing internal results of operations projections and
external opportunities for mergers, acquisitions, reorganizations, or other
transactions with third parties which may be in the interests of the Company's
shareholders. The Company's Board of Directors considers such periodic review
and consultation to be important as part of their analysis of the Company's
value and prospects in the changing banking environment and in view of the
current consolidation activity within the banking industry.
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 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,
<PAGE> 36
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 testing 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.
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.
<PAGE 37>
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> 38
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 39
Consolidated Balance Sheets, December 31, 1998 and 1997 40
Consolidated Statements of Income and Comprehensive
Income for the years ended December 31, 1998, 1997,
and 1996 41
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 42
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 43
Notes to Consolidated Financial Statements 44-60
All schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Financial
Statements or notes thereto.
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Saratoga Bancorp:
We have audited the accompanying consolidated balance sheets of Saratoga
Bancorp and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Saratoga Bancorp and subsidiary as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 22, 1999
<PAGE> 40
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
<S> <C> <C>
CASH AND DUE FROM BANKS $ 6,549,000 $ 4,760,000
FEDERAL FUNDS SOLD 14,450,000 10,500,000
Total cash and equivalents 20,999,000 15,260,000
INTEREST-BEARING
DEPOSITS IN OTHER BANKS 1,789,000 1,489,000
SECURITIES AVAILABLE FOR SALE 30,811,000 16,184,000
SECURITIES HELD TO MATURITY 9,304,000 31,152,000
LOANS 74,563,000 63,765,000
ALLOWANCE FOR CREDIT LOSSES (716,000) (578,000)
Loans, net 73,847,000 63,187,000
PREMISES AND EQUIPMENT, Net 2,268,000 1,992,000
ACCRUED INTEREST RECEIVABLE AND
OTHER ASSETS 5,784,000 1,780,000
TOTAL $ 144,802.000 $ 131,044,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand, noninterest-bearing $ 27,460,000 $ 25,456,000
Demand, interest-bearing 24,366,000 22,789,000
Savings 13,689,000 14,092,000
Time 37,900,000 28,709,000
Total deposits 103,415,000 91,046,000
FEDERAL FUNDS PURCHASED 2,000,000 2,000,000
OTHER BORROWINGS 22,697,000 22,984,000
ACCRUED INTEREST PAYABLE AND
OTHER LIABILITIES 1,433,000 1,409,000
Total liabilities 129,545,000 117,439,000
COMMITMENTS (Notes 5 and 10)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value;
authorized 1,000,000 shares;
no shares issued
Common stock, no par value;
authorized 20,000,000 shares;
outstanding 1,629,357 in
1998 and 1,637,857 shares in 1997. 4,684,000 4,705,000
Retained earnings 10,591,000 9,099,000
Accumulated other comprehensive
income, net of taxes of $11,000
in 1998 and $122,000 in 1997 (18,000) (199,000)
Total shareholders' equity 15,257,000 13,605,000
TOTAL $ 144,802,000 $ 131,044,000
=============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 41
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 6,394,000 $ 5,571,000 $ 4,395,000
Securities:
Taxable 2,118,000 2,894,000 2,244,000
Non-taxable 342,000 244,000 175,000
Federal funds sold 726,000 607,000 761,000
Other 169,000 30,000 10,000
--------- --------- ---------
Total interest income 9,749,000 9,346,000 7,585,000
INTEREST EXPENSE:
Deposits 3,001,000 2,922,000 2,712,000
Borrowings 1,398,000 1,350,000 841,000
Other 1,000 1,000 5,000
--------- --------- ---------
Total interest expense 4,400,000 4,273,000 3,558,000
NET INTEREST INCOME BEFORE
PROVISION (CREDIT) FOR
CREDIT LOSSES 5,349,000 5,073,000 4,027,000
PROVISION (CREDIT) FOR
CREDIT LOSSES 136,000 - (150,000)
--------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION (CREDIT) FOR
CREDIT LOSSES 5,213,000 5,073,000 4,177,000
OTHER INCOME:
Service charges 291,000 273,000 199,000
Rental income
from leased assets 183,000 98,000 83,000
Net gain on sale of
securities available
for sale 154,000 34,000 -
Increase in cash surrender
value of life
insurance policies 61,000 - -
Net gain on sale of leased
assets 12,000 - -
Other 64,000 72,000 71,000
--------- --------- ---------
Total other income 765,000 477,000 353,000
OTHER EXPENSES:
Salaries and employee
benefits 1,261,000 1,338,000 1,342,000
Occupancy 398,000 372,000 348,000
Professional fees 205,000 154,000 158,000
Depreciation on leased assets 145,000 79,000 65,000
Furniture and equipment 137,000 141,000 138,000
Data processing 78,000 75,000 71,000
Insurance 61,000 40,000 88,000
Net cost of other real estate
owned 4,000 59,000 5,000
Net loss on sale of securities
available for sale - - 4,000
Other 676,000 720,000 651,000
---------- ---------- ----------
Total other expenses 2,965,000 2,978,000 2,870,000
INCOME BEFORE INCOME TAXES 3,013,000 2,572,000 1,660,000
PROVISION FOR INCOME TAXES 1,065,000 976,000 559,000
---------- ---------- ----------
NET INCOME 1,948,000 1,596,000 1,101,000
OTHER COMPREHENSIVE
INCOME, NET OF TAX
Unrealized gains
(losses) on securities 181,000 27,000 (59,000)
COMPREHENSIVE INCOME $ 2,129,000 $ 1,623,000 $ 1,042,000
============== =============== =============
EARNINGS PER SHARE:
BASIC $ 1.19 $ 1.01 $ 0.71
============== =============== ===============
DILUTED $ 1.07 $ 0.92 $ 0.64
============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 42
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Accumulated
Other Total
Common Stock Comprehensive Retained Shareholders'
Shares Amount Income Earnings Equity
<S> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 1,546,364 $4,427,000 $(167,000) $ 6,797.000 $11,057,000
Exercise of stock
options 8,130 34,000 34,000
Cash dividend ($0.117
per share) - - - (181,000) (181,000)
Change in net
unrealized loss on
securities, net
of taxes of $27,000 - - (59,000) - (59,000)
Net income - - - 1,101,000 1,101,000
---------- ---------- --------- ----------- -----------
BALANCES,
DECEMBER 31, 1996 1,554,494 4,461,00 (226,000) 7,717,000 11,952,000
Exercise of stock
options 83,363 244,000 244,000
Cash dividend ($.133
per share) - - - (214,000) (214,000)
Change in net
unrealized loss on
securities, net of
taxes of $16,000 - - 27,000 - 27,000
Net income - - - 1,596,000 1,596,000
---------- ---------- --------- ----------- -----------
BALANCES,
DECEMBER 31, 1997 1,637,857 4,705,000 (199,000) 9,099,000 13,605,000
Exercise of stock
options 8,790 43,000 - - 43,000
Cash dividend ($.167
per share) - - - (276,000) (276,000)
Repurchase of shares (17,290) (64,000) - (180,000) (244,000)
Change in net
unrealized loss on
securities:
Unrealized gains
arising during the
year, net of taxes
of $83,000 134,000 134,000
Reclassification
adjustment for
losses included in
income, net of taxes
of $28,000 47,000 47,000
Net income - - - 1,948,000 1,948,000
------------- ---------- -------- ----------- --------
BALANCES,
DECEMBER 31, 1998 1,629,357 $ 4,684,000 $ (18,000) $10,591,000 $ 15,257,000
=========== =========== ========= =========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 43
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,948,000 $ 1,596,000 $ 1,101,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision (credit) for credit losses 136,000 - (150,000)
Depreciation and amortization 244,000 179,000 170,000
Gain on sale of other real estate
owned - (7,000) -
Gain on sale of leased assets (12,000) - (22,000)
Net (gain) loss on sale of
investments (154,000) (34,000) 4,000
Deferred income taxes 22,000 (158,000) (86,000)
Valuation allowance - other real
estate owned - - (50,000)
Change in accrued interest
receivable and other assets (49,000) (198,000) (233,000)
Change in deferred loan fees (33,000) 1,000 16,000
Change in accrued interest
payable and other liabilities (120,000) 722,000 (216,000)
----------- ----------- -----------
Net cash provided by operating
activities 1,982,000 2,101,000 534,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities
available for sale (21,063,000) (20,205,000) (14,065,000)
Purchases of securities
held to maturity (4,935,000) (19,256,000) (6,080,000)
Proceeds from maturities of securities
available for sale 7,856,000 18,933,000 6,993,000
Proceeds from maturities of securities
held to maturity 7,032,000 12,315,000 4,170,000
Proceeds from sale of securities
available for sale 18,642,000 2,923,000 2,496,000
Purchase of interest bearing deposits (300,000) (1,489,000) -
Proceeds from maturity of interest-
bearing deposits in other banks - - 200,000
Net increase in loans (10,763,000) (11,105,000) (15,142,000)
Purchases of premises and equipment (520,000) (36,000) (450,000)
Proceeds from sale of premises and
equipment 12,000 - 134,000
Proceeds from sale of other real
estate owned - 1,321,000 652,000
Purchase of life insurance policies (3,953,000) - -
------------ ------------ ------------
Net cash used in investing activities (7,992,000) (16,599,000) (21,092,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 12,369,000 1,602,000 14,495,000
Net increase in federal funds
purchased - 500,000 -
Net (decrease)increase in other
borrowings (287,000) 4,783,000 6,114,000
Issuance of common stock 43,000 244,000 34,000
Repurchase of common stock (100,000) - -
Payment of cash dividends (276,000) (214,000) (181,000)
------------ ------------ ------------
Net cash provided by financing
activities 11,749,000 6,915,000 20,462,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 5,739,000 (7,583,000) (96,000)
CASH AND EQUIVALENTS, ------------ ------------ ------------
BEGINNING OF YEAR 15,260,000 22,843,000 22,939,000
CASH AND EQUIVALENTS, ------------ ------------ ------------
END OF YEAR $ 20,999,000 $15,260,000 $ 22,843,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid during the year for:
Interest $ 4,332,000 $ 4,212,000 $ 3,518,000
Income taxes $ 1,390,000 $ 541,000 $ 923,000
</TABLE>
See notes to consolidated financial statements.
<PAGE> 44
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Saratoga Bancorp and subsidiary
conform to generally accepted accounting principles and prevailing
practices within the banking industry.
Business - Saratoga Bancorp ("the Company") is a registered bank holding
company whose principal asset (and only subsidiary) is the common stock
of Saratoga National Bank (the "Bank"). It has been in business since
1982 and has three branches.The Bank conducts commercial and retail
banking business, which includes accepting demand, savings and time
deposits and making commercial, real estate and consumer loans. It also
offers installment note collections, issues cashier's checks, sells
travelers checks and provides other customary banking services.
Consolidation - The consolidated financial statements include Saratoga
Bancorp and its wholly-owned subsidiary, Saratoga National Bank. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets,
liabilities, revenues and expenses as of the dates and for the periods
presented. A signifiant estimate included in the accompanying financial
statements is the allowance for loan losses. Actual results could differ
from those estimates.
Cash Equivalents - The Bank considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Securities - The Company classifies its securities into two categories,
securities available for sale and held to maturity, at the time of
purchase. Securities available for sale are measured at market value
with a corresponding recognition of the net unrealized holding gain or
loss as a separate component of shareholders' equity, net of income
taxes, until realized. Securities held to maturity are measured at
amortized cost based on the Company's positive intent and ability to
hold the securities to maturity. Premiums and discounts are recognized
in interest income using the interest method over the period of
maturity.
Gains and losses on sales of securities are computed on a specific
identification basis.
Loans - Loans are stated at the principal amount outstanding less
allowance for credit losses and deferred loan fees. Interest on loans
is credited to income as earned. The accrual of interest is discontinued
and any accrued and unpaid interest is reversed when the payment of
principal or interest is 90 days past due unless the amount is well
secured and in the process of collection. Income on nonaccrual loans is
recognized only to the extent that cash is received and where the future
collection of principal is probable.
Loan origination fees and costs are deferred and amortized to income by a
method approximating the effective interest method over the lives of the
underlying loans.
Allowance for Credit Losses - The allowance for credit losses is
established through a provision charged to expense. Loans are charged
against the allowance when management believes that the collection of
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans
and commitments to extend credit, based on evaluations of collectibility
and prior loss experience.
<PAGE> 45
The evaluations take into consideration such factors as changes in the
composition of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current and anticipated
economic conditions that may affect the borrowers' ability to repay.
In evaluating the probability of collection, management is required to
make estimates and assumptions.
Accounting for Impaired Loans - A loan is considered impaired when it
is probable that interest and principal will not be collected according
to the contractual terms of the loan agreement. Impaired loans are
required to be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Income
recognition on impaired loans is consistent with the policy for income
recognition on nonaccrual loans described above. The Bank had no
impaired loans as of December 31, 1998 or 1997.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed on a straight-line basis over the shorter of the lease term
or the estimated useful lives of the assets, which are generally three
to fifteen years for furniture, equipment and leasehold improvements and
35 years for a building.
Leased Equipment - Leased equipment is stated at cost net of accumulated
depreciation. Depreciation is computed on a straight-line basis over
the lease term to an estimated residual value. Such leases are accounted
for as operating leases. Revenue is recognized when earned and
depreciation expense is recorded as other expense.
Other Real Estate Owned - Other real estate owned is carried at the lower
of cost or fair value less estimated costs to sell. When the property is
acquired through foreclosure, any excess of the related loan balance over
its estimated fair value less estimated costs to sell is charged to the
allowance for credit losses. Costs of maintaining other real estate
owned and any subsequent declines in the estimated fair value are charged
to other expenses.
Income taxes - Income taxes are provided using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences of differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled.
Earnings Per Share - 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.
<PAGE> 46
The weighted average shares used in computing earnings per share are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
Weighted average shares used in computing:
<S> <C> <C> <C>
Basic earnings per share 1,644,000 1,573,000 1,551,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 178,000 155,000 175,000
--------- --------- ---------
Diluted earnings per share 1,822,000 1,728,000 1,726,000
</TABLE>
Stock split - 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.
Stock-based awards - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
Comprehensive income - In 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income"
which requires that an enterprise report, by major components and
as a single total, the change in net assets during the period from
nonowner sources. The adoption of this Statement resulted in a change
in financial statement presentation but did not have an impact on the
Company's consolidated financial position, results of operations or
cash flows.
Segment Reporting - 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.
Derivative Instruments - Effective July 1, 1998 the Company adopted SFAS
No. 133, " 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.
2. CASH AND DUE FROM BANKS
At December 31, 1998, aggregate reserves (in the form of deposits with
the Federal Reserve Bank) of $1,151,000 were maintained, which satisfied
federal regulatory requirements to maintain certain average reserve
balances.
<PAGE> 47
3. SECURITIES
The amortized cost and approximate fair values of securities at December
31 are as follows:
<TABLE>
<CAPTION>
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U. S. Treasury and
agency securities $14,890,000 $ 117,000 $ (35,000) $14,972,000
Mortgage-backed
securities 10,665,000 26,000 (34,000) 10,657,000
Governmental mutual
fund 3,128,000 - (103,000) 3,025,000
Federal Home Loan
Bank Stock 2,007,000 - - 2,007,000
Bankers Bank Stock 150,000 - - 150,000
------------ --------- ------------ -----------
Total $30,840,000 $ 143,000 $ (172,000) $30,811,000
=========== ========= =========== ===========
HELD TO MATURITY
Obligations of
states and
political
subdivisions 9,214,000 175,000 (5,000) $9,384,000
Federal Reserve
Bank Stock 90,000 - - 90,000
------------ --------- ----------- ----------
Total $ 9,304,000 $ 175,000 $ (5,000) $9,474,000
=========== ========= ========== ==========
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
AVAILABLE FOR SALE
U. S. Treasury and
agency securities $11,228,000 $ 27,000 $ (103,000) $11,152,000
Governmental mutual
fund 3,128,000 - (110,000) 3,018,000
Federal Home Loan
Bank Stock 1,864,000 - - 1,864,000
Bankers Bank Stock 150,000 - - 150,000
----------- ---------- ---------- -----------
Total $16,370,000 $ 27,000 $ (213,000) $16,184,000
=========== ========== ========== ===========
HELD TO MATURITY
U. S. Treasury and
agency securities $10,879,000 $ 94,000 $ (128,000) $10,845,000
Mortgage-backed
securities 15,024,000 128,000 (28,000) 15,124,000
Obligations of
states and
political
subdivisions 5,159,000 75,000 - 5,234,000
Federal Reserve
Bank Stock 90,000 - - 90,000
------------ ---------- ----------- -----------
Total $31,152,000 $ 297,000 $ (156,000) $31,293,000
=========== ========== ========== ===========
</TABLE>
<PAGE> 48
The scheduled maturities of securities (other than equity securities)
available for sale and held to maturity at December 31, 1998, were as
follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 18,000 $ 18,000 $ 450,000 $ 455,000
Due after one year
through five years 8,866,000 8,913,000 1,902,000 1,952,000
Due after five years through
ten years 1,000,000 1,000,000 1,418,000 1,467,000
Due after ten years 5,006,000 5,041,000 5,444,000 5,510,000
Mortgage-backed securities 10,665,000 10,657,000 - -
Governmental mutual fund 3,128,000 3,025,000 - -
----------- ----------- ----------- ----------
Total $28,683,000 $28,654,000 $ 9,214,000 $ 9,384,000
=========== =========== =========== ===========
</TABLE>
Mortgage-backed securities generally have stated maturities of four
to fifteen years, but are subject to substantial prepayments which
effectively accelerate actual maturities. The Company's investment in
governmental mutual funds has no fixed maturity. At December 31, 1998
investments with an amortized cost of $35,544,000 were pledged to
secure public and certain other deposits as required by law or
contract.
Sales of securities resulted in gross realized gains of $154,000 for
1998, ($69,000 in 1997 and $1,000 in 1996) and gross realized losses
of $35,000 in 1997 and $5,000 in 1996. There were no realized losses
in 1998.
In connection with the adoption of SFAS 133 in 1998, 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. Included in such reclassification were certain securities
that were previously transferred from available-for-sale to held-
to-maturity in 1994. The net unrealized loss at the date of the
transfer in 1994 was being amortized over the remaining lives of the
investments and totaled $135,000 at December 31, 1997.
4. LOANS AND ALLOWANCES FOR CREDIT LOSSES
<TABLE>
<CAPTION>
Loans at December 31, are comprised of the following:
1998 1997
<S> <C> <C>
Real estate:
Construction $19,623,000 $ 8,945,000
Other 33,452,000 29,100,000
Commercial 18,738,000 21,282,000
Installment 1,192,000 1,548,000
Lease financing 2,119,000 3,656,000
Unearned income on lease financing (269,000) (441,000)
----------- -----------
Total loans 74,855,000 64,090,000
Deferred loans fees (292,000) (325,000)
----------- -----------
Loans, net of deferred loan fees $74,563,000 $63,765,000
=========== ===========
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
The activity in the allowance for credit losses is summarized as
follows:
1998 1997 1996
<C> <C> <C> <C>
Balance, beginning of year $578,000 $628,000 $776,000
Provision charged (credited)
to expense 136,000 - (150,000)
Write-offs (65,000) (115,000) (39,000)
Recoveries 67,000 65,000 41,000
-------- -------- --------
Balance, end of year $716,000 $578,000 $628,000
======== ======== ========
</TABLE>
There were no nonaccrual loans at December 31, 1998 or 1996
($360,000 at December 31, 1997). The reduction in interest income
associated with these loans in 1997 was $13,000. Interest income
recognized on such loans in 1997 was $26,000.
5. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment at December 31, are comprised of the
following:
1998 1997
<S> <C> <C>
Land $ 948,000 $ 948,000
Building and leasehold improvements 1,197,000 1,194,000
Furniture and equipment 1,028,000 982,000
Leased equipment 836,000 365,000
------------- -------------
Total 4,009,000 3,489,000
Accumulated depreciation and
amortization (1,741,000) (1,497,000)
------------- -------------
Premises and equipment, net $ 2,268,000 $ 1,992,000
============= =============
</TABLE>
The Company's San Jose and Los Gatos branches are leased under
noncancellable operating leases which expire in 1999 and 2003,
respectively. The Bank has renewal options with adjustments to
the lease payments based on changes in the consumer price index.
Future minimum annual lease payments are as follows:
1999 $ 253,000
2000 77,000
2001 77,000
2002 77,000
2003 13,000
------------
Total $ 497,000
============
Rental expense under operating leases was $239,000 in 1998, $227,000
in 1997 and $236,000 in 1996.
<PAGE> 50
6. OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
There was no other real estate owned at December 31, 1998 or 1997.
The net cost of operation of other real estate owned is as follows:
1998 1997 1996
<S> <C> <C> <C>
Decreases in valuation allowance
to reflect increases in estimated
fair value $ - $ - $ 50,000
Net holding costs (4,000) (59,000) (55,000)
------- -------- --------
Total $(4,000) $(59,000) $ (5,000)
======= ======== ========
</TABLE>
7. DEPOSITS
The aggregate amount of short-term jumbo time deposits, each with a
minimun denomination of $100,000, was approximately $22,780,000 and
13,773,000 in 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of all time deposits
are as follows:
Year ending
December 31,
1999 32,766,000
2000 2,870,000
2001 1,888,000
2002 197,000
2003 79,000
2004 100,000
$37,900,000
===========
8. OTHER BORROWINGS
At December 31, 1998, the Company had borrowings from the Federal
Home Loan Bank ($22,672,000) and the U.S. Treasury ($25,000) bearing
interest at 5.59% to 6.74%. The borrowings are secured by U.S.
Government and Agency securities and are due as follows:
1999 $ 25,000
2000 2,000,000
2001 9,115,000
2002 746,000
2003 2,661,000
Thereafter 8,150,000
$ 22,697,000
=============
<PAGE> 51
9. INCOME TAXES
<TABLE>
<CAPTION>
The provision for income taxes is comprised of the following:
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 745,000 $ 896,000 $478,000
State 298,000 238,000 167,000
Total current 1,043,000 1,134,000 645,000
Deferred:
Federal 31,000 (168,000) (75,000)
State (9,000) 10,000 (11,000)
Total deferred 22,000 (158,000) (86,000)
Total $ 1,065,000 $ 976,000 $559,000
=========== ============ ========
</TABLE>
The effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal effect 6.3 6.3 6.2
Tax exempt income (3.3) (2.8) (3.1)
Officer's life insurance (0.7) - -
Other, net (1.9) (0.5) (4.4)
----- ----- -----
Total 35.4% 38.0% 33.7%
===== ===== =====
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
The Company's net deferred tax asset at December 31 is as follows:
1998 1997
<S> <C> <C>
Deferred tax assets:
Provision for credit losses $ 190,000 $ 132,000
Deferred compensation 175,000 133,000
Unrealized loss on investments
available for sale 11,000 122,000
State income taxes 80,000 72,000
Depreciation & amortization - 43,000
Deferred gain on other real estate owned 28,000 29,000
Deferred rent 11,000 24,000
--------- ----------
Total deferred assets 495,000 555,000
--------- ----------
Deferred tax liabilities:
Federal Home Loan Bank stock (51,000) (69,000)
Depreciation & amortization (85,000) -
Other (38,000) (32,000)
--------- ----------
Total deferred liabilities (174,000) (101,000)
--------- ----------
Net deferred tax asset $ 321,000 $ 454,000
========= ==========
</TABLE>
There was no valuation allowance at December 31, 1998 and 1997.
10. STOCK OPTION PLANS
The Company's stock option plans authorize the issuance to employees
officers and directors of incentive and nonstatutory options to
purchase common stock.
The Company's 1982 Amended Stock Option Plan (the "1982 Plan") expired
on October 26, 1992, therefore, no options were granted by the Company
during 1996, 1997 or 1998 under the 1982 Plan. Prior to expiration of
the 1982 Plan, options were granted to key officers and employees of
the Company and its subsidiary. Options granted under the 1982 Plan
were either incentive options or nonstatutory options and became
exercisable in accordance with a vesting schedule established at the
time of grant. Vesting may not extend beyond ten years from the date
of grant. Upon a change in control of the Company, all outstanding
options under the 1982 Plan will become fully vested and exercisable.
Options granted under the 1982 Plan are adjusted to protect against
dilution in the event of certain changes in the Company's
capitalization, including stock splits and stock dividends.
The Company's 1994 Stock Option Plan (the "1994 Plan") is
substantially similar to the 1982 Plan regarding provisions related
to option grants, vesting and dilution. Upon a change in control,
options do not become fully vested and exercisable, but may be assumed
or equivalent options may be substituted by a successor corporation.
<PAGE> 53
<TABLE>
<CAPTION>
Option activity is summarized as follows:
Outstanding Options
Weighted
Average
Number of Exercise
Shares Price
<S> <C> <C>
Balances, January 1, 1996 439,087 4.09
Granted (weighted average value of $1.29) 6,750 6.78
Exercised (8,130) 4.21
Canceled (37,284) 4.73
------- -----
Balances, December 31, 1996 400,423 4.08
(368,592 exercisable at weighted average
price of $3.93)
Exercised (92,781) 2.97
Canceled (3,075) 5.41
------- -----
Balances, December 31, 1997 304,567 4.41
(294,199 exercisable at weighted average
price of $4.17)
Granted (weighted average value of $2.95) 82,500 15.80
Exercised (8,790) 4.89
------- -----
Balances, December 31, 1998 378,277 $6.91
(294,787 exercisable at weighted average ======= =====
price of $4.44)
</TABLE>
<TABLE>
<CAPTION>
Additional information regarding options outstanding at December 31,
1998 is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average
Remaining
Cont- Weighted Weighted
Range of ractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
$ 3.93 - 4.25 211,741 4.3 $4.17 211,741 4.17
4.50 - 5.63 72,375 3.1 4.83 72,375 4.83
6.11 - 8.17 11,661 3.5 6.64 10,671 6.50
14.31 - 16.88 82,500 9.5 15.80 - -
--------------------------------------------------------------------
$ 3.93 - 16.88 378,277 5.2 $ 6.91 294,787 4.42
=====================================================================
</TABLE>
At December 31, 1998, 112,421 shares are available for future grant.
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and its
related interpertations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires the
disclosure of proforma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal
1995. Under SFAS 123, the fair valur of stock-based awards to
employees is calculated through the use of option pricing models,
<PAGE> 54
even though such models were developed to estimate the fair value of
freely tradable, fully transferrable options without vesting
restriction, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercice, which
greatly affect the calculated values. The Company's calculations were
made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 114 months; stock
volatility, 19% in 1996 and 26.67% in 1998, risk free interest rates,
5.547%, 5.451% and 4.718% in 1998 and 6.54% and 6.68% in 1996, and
a dividend yield of 5.50% as they occur. If the computed fair values
of the 1998 and 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net income would have been as
follows:
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Pro forma net income $1,759,000 $1,587,000 $1,090,000
Pro forma earnings per share:
Basic $1.07 $1.01 $0.70
Diluted $0.97 $0.92 $0.63
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1995
has been excluded from the pro forma calculations shown above.
Accordingly, the 1998, 1997 and 1996 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable stock options.
11. RETIREMENT PLAN
During 1998 the Company established a defined contribution retirement
plan for the benefit of the directors and certain executive officers
of the Company and, in connection with establishing the Plan, purchased
single premium life insurance policies for each participant.
Contributions to the plan are based on the excess of increases in the
cash surrender values of the insurance policies over a specified rate,
and such contributions continue until the death of the participant.
The Company accrued pension expense related to the Plan of approximately
$70,000 in 1998. The cash surrender value of the related life insurance
policies totaled $3,953,000 at December 31, 1998 and is included in
other assets.
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include loan commitments of
$22,533,000 and standby letters of credit of $660,000 at December 31,
1998. The Bank's exposure to credit loss is limited to amounts funded
or drawn; however, at December 31, 1998, no losses are anticipated as a
result of these commitments.
Loan commitments are typically contingent upon the borrower's meeting
certain financial and other covenants and such commitments typically
have fixed expiration dates and require payment of a fee. As many of
these commitments are expected to expire without being drawn upon, the
total commitments do not necessarily represent future cash requirements.
The Bank evaluates each potential borrower and the necessary collateral
on an individual basis. Collateral varies, and may include real
property, bank deposits, or business or personal assets.
Standby letters of credit are conditional commitments written by the
Bank to guarantee the performance of a customer to a third party. These
guarantees are issued primarily relating to inventory purchases by the
Bank's commercial customers and such guarantees are typically short-
term. Credit risk is similar to that involved in extending loan
commitments to customers and the Bank, accordingly, uses evaluation and
collateral requirements similar to those for loan commitments.
Virtually all of such commitments are collateralized.
<PAGE> 55
Officers of the Company have severance agreements which provide, in the
event of a change in control meeting certain criteria, severance
payments based on a multiple of their current compensation. At December
31, 1998, these payments would have aggregated up to $372,000.
13. LOAN CONCENTRATIONS
The Bank's customers are primarily located in Santa Clara County, which
is located in the southern portion of the San Francisco Bay Area. Many
of the Bank's customers are employed by or are otherwise dependent on
the high technology and real estate development industries and,
accordingly, the ability of the Bank's borrowers to repay loans may be
affected by the performance of these sectors of the economy. Virtually
all loans are collateralized. Generally, real estate loans are secured
by real property and commercial and other loans are secured by business
or personal assets. Repayment is generally expected from refinancing
or sale of the related property for real estate construction loans and
from cash flows of the borrower for all other loans.
The composition of the loan portfolio at December 31, 1998 and 1997 is
summarized in the following table.
1998 1997
Real estate:
Construction:
Single family construction 21% 11%
Land Development 5 3
Other 45 46
Commerical 27 38
Installment 2 2
---- ----
100% 100%
==== ====
14. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of he amounts that could be
realized in a current market exchange. The use of different market
assumptions and/or estimation techniques may have a material effect
on the estimated fair value amounts.
The following table presents the carrying amount and estimated fair
value of certain assets and liabilities of the Company at December
31, 1998 and 1997. The carrying amounts reported in the consolidated
balance sheets approximate fair value for the following financial
instruments: cash and due from banks, federal funds sold, interest
bearing deposits in other banks, demand and savings deposits, federal
funds purchased and other borrowings (See Note 3 for information
regarding securities).
<TABLE>
December 31, 1998
Carrying Estimated Fair
Amount Value
<S> <C> <C>
Loans, net $74,847,000 $74,256,000
Time deposits $37,900,000 $38,434,000
December 31, 1997
Carrying Estimated Fair
Amount Value
Loans, net $63,187,000 $62,284,000
Time deposits $28,709,000 $28,644,000
</TABLE>
<PAGE> 56
Loans
The fair value of loans with fixed rates is estimated by discounting the
future cash flows using current rates at which similar loans would be
made to borrowers with similar credit ratings. For loans with variable
rates which adjust with changes in market rates of interest, the
carrying amount is a reasonable estimate of fair value.
Time deposits
The fair value of fixed maturity certificates of deposit is estimated
using rates currently offered for deposits of similar remaining
maturities.
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit are issued in
the normal course of business by the Bank. Commitments to extend
credit are issued with variable interest rates tied to market interest
rates at the time the commitments are funded and the amount of the
commitments equal their fair value. Standby letters of credit are
supported by commitments to extend credit with variable interest rates
tied to market interest rates at the time the commitments are funded
and the amount of standby letters of credit equals their fair value.
15. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative
measures of the Company's and the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Company and
the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Company and the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the institution's category.
<PAGE> 57
<TABLE>
<CAPTION>
The following table shows the Company's and the Bank's capital ratios at
December 31, 1998 and 1997 as well as the minimum capital ratios
required to be deemed "well capitalized" under the regulatory framework.
To Be Well
Capitalized Under
Bancorp Bank Only For Capital Prompt Corrective
Actual Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December
31, 1998
Total Capital
(to Risk
Weighted
Assets)$15,973,000 16.8%$15,553,000 16.4%>$7,575,000>8.00%>$9,469,000>10.0%
Tier I Capital
(to Risk
Weighted
Assets) $15,257,000 16.0%$14,837,000 15.7%>$3,788,000>4.00%>$5,681,000> 6.0%
Tier I Capital
(to Average
Assets) $15,257,000 11.0%$14,837,000 10.7%>$5,536,000>4.00%>$6,920,000> 5.0%
As of December
31, 1997
Total Capital
(to Risk
Weighted
Assets) $14,183,000 18.1%$13,266,000 17.0%>$6,232,000>8.00%>$7,790,000>10.0%
Tier I Capital
(to Risk
Weighted
Assets) $13,605,000 17.4%$12,688,000 16.3%>$3,116,000>4.00%>$4,716,000> 6.0%
Tier I Capital
(to Average
Assets) $13,605,000 10.9%$12,688,000 10.2%>$4,989,000>4.00%>$6,236,000> 5.0%
</TABLE>
16. CONDENSED FINANCIAL INFORMATION OF SARATOGA BANCORP (PARENT ONLY)
The condensed financial statements of Saratoga Bancorp are as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1998 1997
<S> <C> <C>
ASSETS:
Cash-interest bearing account with Bank $ 6,000 $ 185,000
Real estate loans 536,000 660,000
Investment in Bank 14,837,000 12,688,000
Other assets 24,000 79,000
----------- ------------
Total $ 15,403,000 $ 13,612,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 146,000 $ 7,000
Common stock 4,684,000 4,705,000
Retained earnings 10,591,000 9,099,000
Accumulated other comphrehensive income (18,000) (199,000)
------------ -------------
Total $ 15,403,000 $ 13,612,000
</TABLE>
============ =============
<PAGE> 58
<TABLE>
<CAPTION>
CONDENSED INCOME STATEMENTS
Years Ended December 31,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Interest income $ 71,000 $ 73,000 $ 26,000
Dividend from subsidiary - - 861,000
Other expenses (104,000) (53,000) (50,000)
------------- -------------- -------------
Income (loss) before
income taxes and
equity in undistributed
net income of Bank (33,000) 20,000 837,000
Income tax (expense)
benefit 13,000 (7,000) 9,000
------------- --------------- ------------
Income(loss) before
equity in undistributed
net income of Bank (20,000) 13,000 846,000
Equity in undistributed
net income of Bank 1,968,000 1,583,000 255,000
------------- ---------------- ------------
Net income 1,948,000 1,596,000 1,101,000
Other comprehensive income 181,000 27,000 (59,000)
------------- --------------- ------------
Comprehensive income $2,129,000 $1,623,000 $1,042,000
========== =============== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 1,948,000 $ 1,596,000 $ 1,101,000
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Equity in undistributed
net income of Bank (1,968,000) (1,583,000) (255,000)
Change in other assets 55,000 (71,000) 19,000
Change in other
liabilities 139,000 7,000 (1,000)
----------- ---------- -----------
Net cash provided by
(used in) operating
activities 174,000 (51,000) 864,000
Cash flows from investing
activities -
Net change in loans 124,000 104,000 (764,000)
----------- ---------- -----------
Cash flows from financing
activities:
Cash dividend (276,000) (214,000) (181,000)
Issuance of common stock 43,000 244,000 34,000
Repurchase of common stock (244,000) - -
----------- ----------- -----------
Net cash provided by
(used in) financing
activities (477,000) 30,000 (147,000)
----------- ----------- -----------
Net increase (decrease)
in cash (179,000) 83,000 (47,000)
Cash, beginning of year 185,000 102,000 149,000
----------- ----------- -----------
Cash, end of year $ 6,000 $ 185,000 $ 102,000
=========== =========== ===========
</TABLE>
<PAGE> 59
The ability of the Company to pay future dividends will largely depend
upon the dividends paid to it by the Bank. Under federal law regulating
national banks, dividends declared by the Bank in any calendar year may not
exceed the lesser of its undistributed net income for the most recent three
fiscal years or its retained earnings. As of December 31, 1998, the amount
available for distribution from the Bank to the Company was approximately
$3,974,000, subject to approval by the Office of the Comptroller of the
Currency. The Bank is also restricted as to the amount and form of loans,
advances or other transfers of funds or other assets to the Company.
* * * * *
<PAGE> 60
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required hereunder is incorporated by reference from
the Company's definitive proxy statement for the Company's 1999 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
Item 11. Executive Compensation.
The information required hereunder is incorporated by reference from the
Company's definitive proxy statement for the Company's 1999 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required hereunder is incorporated by reference from
the Company's definitive proxy statement for the Company's 1999 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
Item 13. Certain Relationships and Related Transactions.
The information required hereunder is incorporated by reference from the
Company's definitive proxy statement for the Company's 1999 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements. This information is listed and
included in Part II, Item 8.
(a) (2) Financial Statement Schedules. All schedules have been
omitted since the required information is not present or is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in Consolidated Financial
Statements or notes thereto.
<PAGE> 61
(a) (3) Exhibits. The exhibits listed on the accompanying Exhibit Index
are filed as part of this report.
(3.1) Articles of Incorporation, as amended, are incorporated by
reference herein to Exhibit 3.1 of Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988,
as filed with the Securities and Exchange Commission on March
27, 1989.
(3.2) By-laws, as amended, are incorporated by reference herein
to Exhibit 3.2 of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 as filed with the
Securities and Exchange Commission on March 29, 1994.
(4.1) Specimen stock certificate is incorporated by reference to
Exhibit 4.1 of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 as filed with the
Securities and Exchange Commission on March 30, 1995.
(10.1) Lease agreement dated 10/19/87 for 15405 Los Gatos Blvd.,
Suite 103, Los Gatos, CA is incorporated by reference herein
to Exhibit 10.1 of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987 as filed with the
Securities and Exchange Commission on March 31, 1988.
(10.2) Agreement of Purchase and Sale dated July 27, 1988 for
12000 Saratoga-Sunnyvale Road, Saratoga, CA is incorporated by
reference herein to Exhibit 10.1 of Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988, as
filed with the Securities and Exchange Commission on March
27, 1989.
*(10.3) Indemnification Agreements with directors and Executive
Officers of the Registrant are incorporated by reference herein
to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988, as filed with the
Securities and Exchange Commission on March 27, 1989.
(10.4) Lease agreement dated 1/17/89 for 160 West Santa Clara Street,
San Jose, California is incorporated by reference herein to
Exhibit 10.4 of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, as filed with the
Securities and Exchange Commission on March 27, 1990.
* (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.
<PAGE> 62
*(10.6) Employment Agreement and Management Continuity Agreement and
Chief Executive Officer Compensation Plan/Richard L. Mount is
incorporated by reference herein to Exhibit 10.6 of Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1990, as filed with the Securities and Exchange Commission on
March 20, 1991.
*(10.7) Saratoga Bancorp 1982 Stock Option Plan is incorporated by
reference herein to the exhibits to Registration Statement No.
33-34674 on Form S-8 as filed with the Securities and Exchange
Commission on May 7, 1990.
*(10.8) Saratoga National Bank Savings Plan dated June 19, 1995 is
incorporated by reference herein to Exhibit 10.8 of Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, as filed with the Securities and Exchange Commission
on March 27, 1996.
*(10.9) Saratoga Bancorp 1994 Stock Option Plan dated March 18,1994 is
incorporated by referencce herein to Appendix A of Proxy
Statement dated April 19, 1994 filed as with the Securities and
Exchange Commission on April 27, 1994.
*(10.10) Forms of Incentive Stock Option Agreement, Non-Statutory Stock
Option Agreement and Non-Statutory Agreement for Outside
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.
(21) Subsidiaries of the registrant: Registrant's only subsidiary
is Saratoga National Bank, a national banking association, which
operates a commercial and retail banking operation in California.
(23) Independent Auditors' consent
(27) Financial Data Schedule
* Denotes management contracts, compensatory plans or arrangements.
(b) Reports on Form 8-K
On October 2, 1998, Registrant filed a Current Report on Form 8-
K, dated September 18, 1998 reporting under Item 5 (Other Events)
<PAGE> 63
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.
On December 10, 1998, Registrant filed a Current report on Form
8-K under Item 5, Other Events, announcing the Company's intent
to repurchase an amount of its outstanding shares which aggregated
with its prior repurchases during the preceding 12 months would
not exceed 10% of its consolidated net worth.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS
FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION
12 OF THE ACT.
No annual report or proxy material has been sent to security holders. The
Company shall furnish copies of such material to the Commission when it is
sent to security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SARATOGA BANCORP
RICHARD L. MOUNT
By_______________________________
Richard L. Mount, President
(Principal Executive Officer)
March 26, 1999
Date_____________________________
MARY PAGE ROURKE
By_______________________________
Mary Page-Rourke, Treasurer
(Principal Financial and
Accounting Officer)
March 26, 1999
Date_____________________________
<PAGE> 64
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
VICTOR ABOUKHATER March 26, 1999
__________________ Director _______________
Victor Aboukhater
ROBERT G. EGAN March 26, 1999
__________________ Director _______________
Robert G. Egan
WILLIAM D. KRON March 26, 1999
__________________ Director _______________
William D. Kron
JOHN F. LYNCH III March 26, 1999
__________________ Director _______________
John F. Lynch III
V. RONALD MANCUSO March 26, 1999
__________________ Director _______________
V. Ronald Mancuso
RICHARD L. MOUNT Chairman of the Board March 26, 1999
__________________ President and Director _______________
Richard L. Mount (Principal Executive Officer)
MARY PAGE ROURKE March 26, 1999
__________________ Treasurer _______________
Mary Page-Rourke (Principal Financial and
Accounting Officer)
<PAGE> 65
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
27.1 Financial Data Schedule 66
23.1 Independent Auditors' Consent 67
Exhibit 23.1
INDEPENDENT AUDITORS CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-34674 of Saratoga Bancorp on Form S-8 of our report dated January 22, 1999,
appearing in the Annual Report on Form 10-K of Saratoga Bancorp for the year
ended December 31, 1998.
DELOITTE & TOUCHE
San Jose, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6549
<INT-BEARING-DEPOSITS> 1789
<FED-FUNDS-SOLD> 14450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30811
<INVESTMENTS-CARRYING> 9304
<INVESTMENTS-MARKET> 9474
<LOANS> 74563
<ALLOWANCE> 716
<TOTAL-ASSETS> 144802
<DEPOSITS> 103415
<SHORT-TERM> 2025
<LIABILITIES-OTHER> 1433
<LONG-TERM> 22672
0
0
<COMMON> 4684
<OTHER-SE> 10573
<TOTAL-LIABILITIES-AND-EQUITY> 144802
<INTEREST-LOAN> 6394
<INTEREST-INVEST> 3186
<INTEREST-OTHER> 169
<INTEREST-TOTAL> 9749
<INTEREST-DEPOSIT> 3001
<INTEREST-EXPENSE> 4400
<INTEREST-INCOME-NET> 5349
<LOAN-LOSSES> 136
<SECURITIES-GAINS> 154
<EXPENSE-OTHER> 2965
<INCOME-PRETAX> 3013
<INCOME-PRE-EXTRAORDINARY> 1948
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1948
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> .041
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2033
<ALLOWANCE-OPEN> 578
<CHARGE-OFFS> 65
<RECOVERIES> 67
<ALLOWANCE-CLOSE> 716
<ALLOWANCE-DOMESTIC> 341
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 375
</TABLE>
