-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J5zTcPM8qqOeRAma946+qKlsdDX3VLGeWeZvOb4GZ/xs0ul80kuep6pugvM9ru55 Y5s93Svzjhs/o9xn9pj3Qw== 0000702700-98-000016.txt : 19981118 0000702700-98-000016.hdr.sgml : 19981118 ACCESSION NUMBER: 0000702700-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SARATOGA BANCORP CENTRAL INDEX KEY: 0000702700 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 942817587 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-77519-LA FILM NUMBER: 98749812 BUSINESS ADDRESS: STREET 1: 12000 SARATOGA SUNNYVALE RD CITY: SARATOGA STATE: CA ZIP: 95070 BUSINESS PHONE: 4089731111 10-Q 1 10-Q FOR PERIOD ENDED 09/30/98 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to __________ Commission file number 2-77519-LA SARATOGA BANCORP (Exact name of registrant as specified in its charter) California 94-2817587 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12000 Saratoga-Sunnyvale Road Saratoga, California 95070 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (408) 973-1111 NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. CLASS SHARES OUTSTANDING AT OCTOBER 28, 1998 Common Stock 1,646,647 Exhibit Index at Page 24 Page 1 of 25 pages 2 PART I - FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements SARATOGA BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31, 1998 1997* (Unaudited) ASSETS Cash and due from banks $ 5,369,000 $ 4,760,000 Federal funds sold 20,200,000 10,500,000 Total cash and equivalents 25,569,000 15,260,000 Interest bearing deposits in other banks 6,789,000 1,489,000 Securities available for sale 25,947,000 16,184,000 Securities held to maturity 7,493,000 31,152,000 Loans, net 66,259,000 63,187,000 Premises and equipment 2,334,000 1,992,000 Other assets 5,473,000 1,780,000 TOTAL ASSETS $139,864,000 $131,044,000 =========== =========== LIABILITIES Deposits: Non interest-bearing $ 24,437,000 $ 25,456,000 Interest-bearing 75,981,000 65,590,000 Total deposits 100,418,000 91,046,000 Federal funds purchased - 2,000,000 Other borrowings 22,739,000 22,984,000 Accrued expenses and other liabilities 1,671,000 1,409,000 TOTAL LIABILITIES 124,828,000 117,439,000 SHAREHOLDERS' EQUITY Common stock, no par value; Authorized: 20,000,000 shares; Issued and outstanding: 1,646,647 shares at September 30, 1998 and 1,637,950 shares at December 31, 1997 4,737,000 4,705,000 Retained earnings 10,145,000 9,099,000 Net unrealized gain (loss) on securities available for sale 154,000 (199,000) TOTAL SHAREHOLDERS' EQUITY 15,036,000 13,605,000 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $139,864,000 $131,044,000 =========== ===========
*Derived from the December 31, 1997 audited balance sheet included in the Company's 1997 Annual Report on Form 10-K. See notes to consolidated condensed financial statements. 3 SARATOGA BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED INCOME STATEMENTS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 INTEREST INCOME: Loans $1,665,000 $1,388,000 $4,759,000 $4,022,000 Investment securities 593,000 872,000 2,039,000 2,317,000 Federal funds sold 238,000 167,000 531,000 498,000 Total interest income 2,496,000 2,427,000 7,329,000 6,837,000 INTEREST EXPENSE: Deposits 781,000 748,000 2,224,000 2,176,000 Other 353,000 356,000 1,058,000 994,000 Total interest expense 1,134,000 1,104,000 3,282,000 3,170,000 NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES 1,362,000 1,323,000 4,047,000 3,667,000 Provision for credit losses 34,000 - 136,000 - Net interest income after provision for credit losses 1,328,000 1,323,000 3,911,000 3,667,000 Other income 201,000 175,000 493,000 408,000 Other expenses 767,000 745,000 2,272,000 2,349,000 INCOME BEFORE INCOME TAXES 762,000 753,000 2,132,000 1,726,000 Provision for income taxes 290,000 286,000 810,000 656,000 NET INCOME $ 472,000 $ 467,000 $1,322,000 $1,070,000 ========== ========== ========== ========== EARNINGS PER SHARE: Basic $ 0.29 $ 0.29 $ 0.80 $ 0.68 ========== ========== ========== ========== Diluted $ 0.26 $ 0.26 $ 0.72 $ 0.61 ========== ========== ========== ==========
See notes to consolidated condensed financial statements. 4 SARATOGA BANCORP AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1998 1997 OPERATIONS: Net income $1,322,000 $ 1,070,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 136,000 - Depreciation and amortization 174,000 134,000 Other, net 441,000 648,000 Net cash provided by operating activities 2,073,000 1,852,000 INVESTING ACTIVITIES: Net increase in interest bearing deposits in other banks (5,300,000) (1,489,000) Proceeds from maturities or sale of investments available for sale 22,258,000 19,518,000 Proceeds from maturities of investments held to maturity 3,012,000 7,072,000 Purchase of securities available for sale (8,000,000) (16,814,000) Purchase of securities held to maturity (2,985,000) (17,886,000) Purchase of life insurance policies (3,892,000) - Net increase in loans (3,224,000) (3,082,000) Purchases of premises and equipment (516,000) (24,000) Proceeds from sale of OREO - 1,311,000 Net cash provided by (used in) investing activities 1,353,000 (11,394,000) FINANCING ACTIVITIES: Net increase (decrease) in deposits 9,372,000 (1,370,000) Issuance of common stock 32,000 70,000 Payment of cash dividends (276,000) (211,000) Net (decrease) increase in other borrowings (245,000) 4,838,000 Decrease in federal funds purchased (2,000,000) (1,500,000) Net cash provided by financing activities 6,883,000 1,827,000 NET INCREASE (DECREASE)IN CASH AND EQUIVALENTS 10,309,000 (7,715,000) Cash and equivalents, beginning of period 15,260,000 22,843,000 Cash and equivalents, end of period $25,569,000 $15,128,000 =========== ===========
See notes to consolidated condensed financial statements. 5 SARATOGA BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997 1. The unaudited consolidated condensed financial statements reflect all adjustments (which include only normal recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for the periods are not necessarily indicative of the results to be expected for the full fiscal year. 2. On March 27, 1998 the Board of Directors declared a 3-for- 2 stock split, which was distributed on May 1, 1998, to shareholders of record as of April 15, 1998. All share and per share data have been retroactively adjusted to reflect the stock split. 3. The Company adopted SFAS No. 128 "Earnings per Share" during the fourth quarter of 1997. SFAS 128 requires presentation of basic and diluted earnings per share (EPS) and restatement of all prior period EPS presented. Basic EPS is computed by dividing net income by the weighted average common shares outstanding during the period. Diluted EPS reflects the potential dilution if securities or other contracts to issue common stock are exercised or converted into common stock. The weighted average shares used in computing earnings per share are as follows: Quarters ended September 30, 1998 1997 Weighted average shares used in computing: Basic earnings per share 1,646,000 1,591,000 Diluted potential common shares from exercise of stock options, using the treasury stock method 183,000 193,000 Diluted earnings per share 1,829,000 1,784,000 6 Nine Months ended September 30, 1998 1997 Weighted average shares used in computing: Basic earnings per share 1,644,000 1,573,000 Diluted potential common shares from exercise of stock options, using the treasury stock method 180,000 193,000 Diluted earnings per share 1,824,000 1,766,000 4. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This Statement also requires that an entity classify items of other comprehensive earnings by their nature in an annual financial statement. For example, other comprehensive earnings may include foreign currency transaction adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. Annual financial statements for prior periods will be reclassified, as required. The Company's total comprehensive earnings are as follows: Quarters ended September 30, 1998 1997 Net income $472,000 $467,000 Other comprehensive earnings- Net unrealized gains (losses) on securities available for sale 314,000 (10,000) Total comprehensive earnings $786,000 $457,000 7 Nine months ended September 30, 1998 1997 Net income $1,322,000 $1,070,000 Other comprehensive earnings- Net unrealized gains on securities available for sale 353,000 63,000 Total comprehensive earnings $1,675,000 $1,133,000 5. Effective July 1, 1998 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activitied", which establishes accounting and reporting standards for derivative instruments and hedging activities. In connection with the adoption of SFAS 133 the Company reclassified certain securities with an amortized cost of $$19,751,000 and a fair value of $19,967,000 from held-to-maturity to available-for- sale. Adoption of this statement did not have any other impact on the Company's consolidated financial position and had no impact on the Company's results of operations or cash flows. 6. During the nine months ended September 30, 1998 and 1997, cash paid for taxes was $709,000 and $317,000, respectively. During the nine months ended September 30, 1998 and 1997, cash paid for interest was $3,119,000 and $3,108,000, respectively. SARATOGA BANCORP AND SUBSIDIARY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q, including, but not limited to, matters described in Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations", are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Changes to such risks and uncertainties include, among others, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, either nationally or regionally; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) effects of Year 2000 problems discussed herein. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company and the Bank. 8 Summary of financial results At September 30, 1998, total assets were $139,864,000, an increase of $8,820,000 (6.7%) from $131,044,000 at December 31, 1997. Net loans increased $3,072,000 (4.9%) from $63,187,000 at December 31, 1997 to $66,259,000 at September 30, 1998. Total deposits increased $9,372,000 (10.3%) from $91,046,000 at December 31, 1997 to $100,418,000 at September 30, 1998. Net income for the third quarter of 1998 was $472,000 ($0.29 basic earnings per share, $0.26 diluted earnings per share) compared to $467,000 ($0.29 basic earnings per share, $0.26 diluted earnings per share) for the comparable period in 1997. Net income for the first nine months of 1998 was $1,322,000 ($0.80 basic earnings per share, $0.72 diluted earnings per share) compared to $1,070,000 ($0.68 basic earnings per share, $0.61 diluted earnings per share) for the comparable period in 1997. The increase in income resulted primarily from an increase in the volume of earning assets, offset in part by an increase in interest expense due to the increased volume of interest-bearing liabilities. RESULTS OF OPERATIONS THIRD QUARTER OF 1998 AND 1997 An analysis of the results of operations of the Company for the third quarter of 1998 compared to the third quarter of 1997 is presented below: Net interest income Net interest income, the difference between interest earned on loans and investments and interest paid on deposits, is the principal component of the Bank's earnings. The components of net interest income are as follows: 9 Three months ended September 30, 1998 1997
Average Average Average Average Balance Interest Yield(1) Balance Interest Yield(1) (In thousands, except percentages) Assets: Earning assets: Loans (2) $ 66,033 $1,665 10.1% $ 54,842 $1,388 10.1% Investment securities 41,445 593 5.7 52,877 872 6.6 Federal funds sold 17,099 238 5.6 11,980 167 5.6 Total interest earning assets 124,577 2,496 8.0 119,699 2,427 8.1 Cash and due from banks 5,235 4,764 Other assets (3) 3,533 2,795 $133,345 $127,258 ======== ======== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Demand deposits $ 39,813 331 3.3 $ 34,777 297 3.4 Time deposits 31,328 450 5.7 34,128 451 5.3 Other borrowings 22,872 353 6.2 23,075 356 6.2 Total interest- bearing liabilities 94,013 1,134 4.8 91,980 1,104 4.8 Demand deposits 22,924 21,131 Other liabilities 1,659 1,272 Total liabilities 118,596 114,383 Shareholders' equity 14,749 12,875 $133,345 $127,258 ======= ======= Net interest income and margin(4)$1,362 4.4% $1,323 4.4% ====== ======
(1) Annualized. (2) Loan interest income includes loan fee income of $131,000 and $85,000 for the quarters ended September 30, 1998 and 1997, respectively. (3) Net of the average allowance for loan losses of $722,000 and $601,000 and deferred loan fees of $324,000 and $360,000 for the quarters ended September 30, 1998 and 1997, respectively. (4) Net interest margin is computed by dividing net interest income by total average interest earning assets. 10 Provision for credit losses The Bank maintains an allowance for possible credit losses which is based, in part, on the Bank's historical loss experience, the impact of forecasted economic conditions within the Bank's market area, and, as applicable, the State of California, the value of the underlying collateral, loan performance and inherent risks in the loan portfolio. The allowance is reduced by charge-offs and increased by provisions for credit losses charged to operating expense and recoveries of previously charged-off loans. During the third quarter of 1998, the Bank provided $34,000 for the allowance for credit losses. During the third quarter of 1997, the Bank did not record a provision for credit losses. There were no loans charged-off and $8,000 in recoveries in the third quarter of 1998, as compared to $97,000 in loans charged-off and $8,000 in recoveries in the third quarter of 1997. At September 30, 1998, the allowance for credit losses was $740,000 or 1.1% of total loans, compared to $578,000 or 0.9% at December 31, 1997. Nonaccrual loans were $47,000 at September 30, 1998 compared to $360,000 at December 31, 1997. At September 30, 1998 and December 31, 1997, there were no loans past due 90 days or more as to principal or interest and still accruing interest. There were no loans at September 30, 1998 which were troubled debt restructurings as defined in Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." At September 30, 1998, there were three potential problem loans having a combined principal balance of $252,000 ($305,000 at December 31, 1997). Potential problem loans are loans which are generally current as to principal and interest but have been identified by the Company as potential problem loans due either to a decrease in the underlying value of the property securing the credit or some other deterioration in the creditworthiness of the borrower. All of the three loans identified as potential problem loans are secured by real estate and personal property. There was no Other Real Estate owned ("OREO")at September 30, 1998 or December 31, 1997. 11 Nonperforming loans and other real estate owned are summarized below: September 30, 1998 December 31, 1997 Nonperforming loans: Past due 90 days or more $ - $ - Nonaccrual 47,000 360,000 Total 47,000 360,000 Other real estate owned - - Total nonperforming loans and other real estate owned $ 47,000 $ 360,000 ============ ========== Management is of the opinion that the allowance for credit losses is maintained at an adequate level for known and currently anticipated future risks inherent in the loan portfolio. However, the Bank's loan portfolio, which includes approximately $41,000,000 in real estate loans representing approximately 62% of the portfolio, could be adversely affected if California economic conditions and the real estate market in the Bank's market area weaken. The effect of such events could result in an increase in the level of nonperforming loans and OREO and the level of the allowance for loan losses which could adversely affect the Company's and the Bank's future growth and profitability. Noninterest income Other income consists of service charges on deposit accounts, income from assets acquired for lease and fees for other miscellaneous services. Total other income increased from $175,000 in the third quarter of 1997 to $201,000 in the third quarter of 1998. This increase is primarily attributable to a gain on sale of securities of $32,000 and an increase in rental income on assets acquired for lease. Noninterest expenses Other expenses increased from $745,000 in the third quarter of 1997 to $767,000 in the third quarter of 1998. The increase is primarily attributable to an increase in depreciation expense on assets acquired for lease. As a percentage of average earning assets, other expense for the third quarter, on an annualized basis, was 2.5% in 1997 and 1998. 12 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 An analysis of the results of operations of the Company for the nine month period ended September 30, 1998 compared to the comparable period in 1997 is as follows: Net interest income Net interest income, the difference between interest earned on loans and investments and interest paid on deposits, is the principal component of the Bank's earnings. The components of net interest income are as follows: Nine months ended September 30,
1998 1997 Average Average Average Average Balance Interest Yield(1) Balance Interest Yield(1) (In thousands, except percentages) Assets: Earning assets: Loans (2) $ 63,999 $4,759 9.9% $53,677 $4,022 10.0% Investment securities 45,091 2,039 6.0 49,660 2,317 6.2 Federal funds sold 12,887 531 5.5 12,344 498 5.4 Total interest earning assets 121,977 7,329 8.0 115,681 6,837 7.9 Cash and due from banks 5,056 4,637 Other assets (3) 3,043 3,600 $130,076 $123,918 ======== ======= Liabilities and Shareholders' Equity: Interest-bearing liabilities: Demand deposits $ 38,951 964 3.3 $36,287 923 3.4 Time deposits 29,366 1,260 5.7 31,617 1,253 5.3 Other borrowings 22,892 1,058 6.2 21,340 994 6.2 Total interest- bearing liabilities 91,209 3,282 4.8 89,244 3,170 4.7 Demand deposits 23,286 21,283 Other liabilities 1,434 1,022 Total liabilities 115,929 111,549 Shareholders' equity 14,147 12,369 $130,076 $123,918 ======== ======= Net interest income and margin(4)$4,047 4.4% $3,667 4.2% ====== ======
(1) Annualized. (2) Loan interest income includes loan fee income of $338,000 and $252,000 for the nine months ended September 30, 1998 and 1997, respectively. (3) Net of the average allowance for loan losses of $666,000 and $616,000, and deferred loan fees of $320,000 and $337,000 for the nine months ended September 30, 1998 and 1997, respectively. (4) Net interest margin is computed by dividing net interest income by total average interest earning assets. 13 Provision for credit losses During the first nine months of 1998, the Bank recorded a $136,000 provision for loan losses amd no provision was recorded during that period in 1997. There were $14,000 in loans charged-off and $40,000 in recoveries for the nine months ended September 30, 1998, compared to $120,000 in loans charged off and $28,000 in recoveries for the first nine months of 1997. Noninterest income Other income consists of service charges on deposit accounts, income on assets acquired for lease and fees for other miscellaneous services. Total other income increased from $408,000 in 1997 to $493,000 in 1998. The increase is primarily attributable to an increase in rental income on assets acquired for lease of $49,000, an increase in gain on sale of securities of $22,000 and a gain on sale of leases of $12,000. Noninterest expenses Other expenses have decreased from $2,349,000 in 1997 to $2,272,000 in 1998 due primarily to a decrease in salary expense of $54,000. As a percentage of average earning assets, other expenses, on an annualized basis, decreased from 2.7% in 1997 to 2.5% in 1998. 14 LIQUIDITY AND CAPITAL RESOURCES The Bank manages its liquidity to provide adequate funds at an acceptable cost to support borrowing requirements and deposit flows of its customers. At September 30, 1998 liquid assets as a percentage of deposits were 58% (36% at December 31, 1997). In addition to cash and due from banks, liquid assets include short-term time deposits with other banks, Federal funds sold and investment securities available for sale. The Bank has $11.0 million in Federal funds lines of credit available with correspondent banks to meet liquidity needs. Management regularly reviews general economic and financial conditions, both external and internal, and determines whether the positions taken with respect to liquidity and interest rate sensitivity continue to be appropriate. The Bank also utilizes a monthly "Gap" report which identifies rate sensitivity over the short- and long-term. The following table sets forth the distribution of repricing opportunities, based on contractual terms, of the Company's earning assets and interest-bearing liabilities at September 30, 1998, the interest rate sensitivity gap (i.e. interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e. interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative interest rate sensitivity gap ratio. 15 DISTRIBUTION OF REPRICING OPPORTUNITIES At September 30, 1998 (Dollars in thousands)
After Three After Six After One Within Months But Months But Year But After Three Within Six Within One Within Five Months Months Year Five Years Years Total Federal funds sold $20,200 - - - - $20,200 Interest bearing deposits in other banks 5,000 199 1,590 - - 6,789 Municipal securities - - $ 451 $ 1,752 $ 5,050 7,253 U.S. Treasury and agency securities 3,062 217 - 13,215 7,476 23,970 FRB stock - - - - 2,217 2,217 Loans 31,984 2,111 6,211 12,127 14,867 67,300 Total earning assets $60,246 $ 2,527 $ 8,252 $27,094 $29,610 127,729 Interest bearing demand accounts $35,371 - - - - 35,371 Savings accounts 5,163 - - - - 5,163 Time certif- icates of deposit of $100,000 or more 6,414 $ 3,607 $ 7,570 $ 3,146 100 20,837 Other time deposits 5,181 2,643 3,461 3,325 - 14,610 Other borrowings 25 - - 11,869 $10,845 22,739 Total interest- bearing liabilities $52,154 $ 6,250 $11,031 $18,340 $10,945 98,720 Interest rate sensitivity gap $ 8,092 $(3,723) $(2,779) $ 8,754 $18,665 $29,009 ======= ======= ======= ======= ======= ======= Cumulative interest rate sens- itivity gap $ 8,092 $ 4,369 $ 1,590 $10,344 $29,009 ======= ======= ======= ======= ======= Interest rate sensitivity gap ratio 1.16% 0.40% 0.75% 1.48% 2.71% Cumulative interest rate sens- itivity gap ratio 1.16% 1.07% 1.02% 1.12% 1.29%
16 The Company and the Bank are subject to capital adequacy guidelines issued by the Board of Governors of the Federal Reserve System (the "BGFRS") and the Office of the Comptroller of the Currency ("OCC"). The Company and the Bank are required to maintain total capital equal to at least 8% of assets and commitments to extend credit, weighted by risk, of which at least 4% must consist primarily of common equity including retained earnings (Tier 1 capital) and the remainder may consist of limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of loan loss reserves. Effective October 1, 1998, the BGFRS and other federal agencies approved including in Tier 2 capital up to 45% of the pretax net unrealized gains on certain available-for-sale equity securities having readily determinable fair values (i.e. the excess, if any, of fair market value over the book value or historical cost of the investment security). The federal regulatory agencies reserve the right to exclude all or a portion of the unrealized gains upon a determination that the equity securities are not prudently valued. Unrealized gains and losses on other types of assets, such as bank premises and available-for-sale debt securities, are not included in Tier 2 capital, but may be taken into account in the evaluation of overall capital adequacy and net unrealized losses on available-for-sale equity securities will continue to be deducted from Tier 1 capital as a cushion against risk. Certain assets and commitments to extend credit present less risk than others and will be assigned to lower risk-weighted categories requiring less capital allocation than the 8% total ratio. For example, cash and government securities are assigned to a 0% risk-weighted category, most home mortgage loans are assigned to a 50% risk-weighted category requiring a 4% capital allocation and commercial loans are assigned to a 100% risk-weighted category requiring an 8% capital allocation. As of September 30, 1998, the Company's total risk-based capital ratio was approximately 18.0% (approximately 17.4% for the Bank) compared to approximately 18.1% (approximately 17.0% for the Bank) at December 31, 1997. The BGRS and other federal regulatory agencies have adopted a revised minimum leverage ratio for bank holding companies as a supplement to the risk-weighted capital guidelines. The old rule established a 3% minimum leverage standard for well-run banking organizations (bank holding companies and banks) with diversified risk profiles. Banking organizations which did not exhibit such characteristics or had greater risk due to significant growth, among other factors, were required to maintain a minimum leverage ratio 1% to 2% higher. The old rule did not take into account the implementation of the market risk capital measure set forth in the regulatory agency capital adequacy guidelines. The revised leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1 capital to 17 total assets) for the highest rated bank holding companies or those that have implemented the risk-based capital market risk measure. All other bank holding companies must maintain a minimum Tier 1 leverage ratio of 4% with higher leverage capital ratios required for bank holding companies that have significant financial and/or operational weaknesses, a high risk profile, or are undergoing or anticipating rapid growth. The old rule remains in effect for banks, however, the federal regulatory agencies are currently continuing work on a revised leverage rule for banks. The following table reflects the Company's leverage, Tier 1 and total risk-based capital ratios as of September 30, 1998 and December 31, 1997. September 30, 1998 December 31, 1997 Leverage ratio 11.1% 10.9% Tier 1 capital ratio 17.2% 17.4% Total risk-based capital ratio 18.0% 18.1% On December 19, 1991, the President signed the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among other matters, substantially revised banking regulations and established a framework for determination of capital adequacy of financial institutions. Under the FDICIA, financial institutions are placed into one of five capital adequacy catagories as follows: (1) "Well capitalized" - consisting of institutions with a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 5% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately capitalized" - consisting of institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater, and the institution does not meet the definition of a "well capitalized" institution; (3) "Undercapitalized" - consisting of institutions with a total risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or a leverage ratio of less than 4%; (4) "Significantly undercapitalized" - consisting of institutions with a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting of an institution with a ratio of tangible equity to total assets that is equal to or less than 2%. Financial institutions classified as undercapitalized or below are subject to various limitations including, among other matters, certain supervisory actions by bank regulatory 18 authorities and restrictions related to (i) growth of assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of dividends or other capital distributions, and (iv) payment of management fees to a parent holding company. FDICIA requires bank regulatory authorities to initiate corrective action regarding financial institutions which fail to meet minimum capital requirements. Such action may result in orders to, among other matters, augment capital and reduce total assets. Critically undercapitalized financial institutions may also be subject to appointment of a receiver or implementation of a capitalization plan. OTHER MATTERS From time to time, the Company's Board of Directors reviews and consults with advisors, including investment banking and legal advisors, regarding banking industry trends and developments, as well as internal and external opportunities to maximize shareholder value. Such reviews and consultations include evaluating and comparing internal results of operations projections and external opportunities for mergers, acquisitions, reorganizations, or other transactions with third parties which may be in the interests of the Company's shareholders. The Company's Board of Directors considers such periodic review and consultation to be important as part of their analysis of the Company's value and prospects in the changing banking environment and in view of the current consolidation activity within the banking industry. Year 2000 As the year 2000 approaches, a critical issue has emerged regarding how existing application software program and operating systems can accommodate this date value. In brief, many existing application software products were designed to only accommodate a two digit date position which represents the year (e.g. "97" is stored on the system and represents the year 1997.) As a result, the year 1999 (i.e. "99"), could be the maximum date value these systems will be able to accurately process. This is not just a banking problem, as corporations around the world and in all industries are similarly impacted. The Company has a Year 2000 Compliance Program in place to identify and resolve Y2K problems in the Company's operations systems and its operating environment. This Plan includes those systems under the direct control of Company management and those mission critical systems provided by outside servicers. This Plan, and the Company's Testing Plan, are currently on schedule to comply with the requirements of 19 the FFIEC, with the exception of leap year testing for the Company's mainframe computer (other Y2K rollover testing was completed successfully in the second quarter of 1998.), and the item processing subsystem of the mainframe which is scheduled to be replaced in the first quarter of 1999. The Company has put a Year 2000 Loan Policy and a Customer Awareness Program in place to inquire whether the systems of key clients are year 2000 compliant and to keep our customers apprised of the Company's Y2K status. A Year 2000 Contingency Plan is also in place to assist the Company's employees with problems which might occur due any Y2K difficulties. The Bank will utilize both internal and external resources to implement its Year 2000 Project. The Bank expects to complete the majority of its efforts by the end of 1998, leaving adequate time to assess and correct any significant issues that may materialize. Purchases hardware and software will be capitalized in accordance with normal policy. Personnel and other costs related to the project are being expensed as incurred. The Bank currently estimates the total cost of compliance will be approximately $150,000. The majority of these costed are expected to be incurred during 1998, and are not expected to have a material impact on the Bank's cash flows, results of operations, or financial condition. Even with all of the Company's preparation, there can be no assurance that problems will not arise which could have an adverse impact due, among other matters, to the complexities involved in computer programming related to resolution of Year 2000 problems and the fact that the systems of other companies on which the Company may rely must also be corrected on a timely basis. Delays, mistakes or failures in correcting Year 2000 system problems by such other companies could have a significant adverse impact upon the Company and its ability to mitigate the risk of adverse impact of Year 2000 problems for its customers. Quantitative and Qualitative Disclosures about Market Risk Disclosures under this item are not required for the current fiscal year as the Company qualifies as a "Small Business" filer. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities Not applicable Item 3. Defaults upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) (3) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed as part of this report. (3.1) Articles of Incorporation, as amended, are incorporated by reference herein to Exhibit 3.1 of Registrant's Annual Report on Form 10- K for the fiscal year ended December 31, 1988, as filed with the Securities and Exchange Commission on March 27, 1989. (3.2) By-laws, as amended, are incorporated by reference herein to Exhibit 3.2 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 as filed with the Securities and Exchange Commission on March 29, 1994. (4.1) Specimen stock certificate is incorporated by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 as filed with the Securities and Exchange Commission on March 30, 1995. (10.1) Lease agreement dated 10/19/87 for 15405 Los Gatos Blvd., Suite 103, Los Gatos, CA is 21 incorporated by reference herein to Exhibit 10.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 as filed with the Securities and Exchange Commission on March 31, 1988. (10.2) Agreement of Purchase and Sale dated July 27, 1988 for 12000 Saratoga-Sunnyvale Road, Saratoga, CA is incorporated by reference herein to Exhibit 10.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, as filed with the Securities and Exchange Commission on March 27, 1989. *(10.3) Indemnification Agreements with directors and Executive Officers of the Registrant are incorporated by reference herein to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, as filed with the Securities and Exchange Commission on March 27, 1989. (10.4) Lease agreement dated 1/17/89 for 160 West Santa Clara Street, San Jose, California is incorporated by reference herein to Exhibit 10.4 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, as filed with the Securities and Exchange Commission on March 27, 1990. (10.5) Bank of the West Master Profit Sharing and Savings Plan and Amendment, amended as of March, 1990 are incorporated by reference herein to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, as filed with the Securities and Exchange Commission on March 20, 1991. *(10.6) Employment Agreement and Management Continuity Agreement and Chief Executive Officer Compensation Plan/Richard L. Mount is incorporated by reference herein to Exhibit 10.6 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, as filed with the Securities and Exchange Commission on March 20, 1991. *(10.7) Saratoga Bancorp 1982 Stock Option Plan is 22 incorporated by reference herein to the exhibits to Registration Statement No. 33- 34674 on Form S-8 as filed with the Securities and Exchange Commission on May 7, 1990. *(10.8) Saratoga National Bank Savings Plan dated June 19, 1995 is incorporated by reference herein to Exhibit 10.8 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as filed with the Securities and Exchange Commission on March 27, 1996. *(10.9) Saratoga Bancorp 1994 Stock Option Plan dated March 18, 1994 is incorporated by reference herein to Appendix A of Proxy Statement dated April 19, 1994 filed as with the Securities and Exchange Commission on April 27, 1994. *(10.10) Forms of Incentive Stock Option Agreement, Non-Statutory Stock Option Agreement and Non-Statutory Agreement for Outside Directors, as amended is incorporated by reference herein to Exhibit 10.8 of Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1994 as filed with the Securities and Exchange Commission on August 15, 1994. (27.1) Financial Data Schedule * Denotes management contracts, compensatory plans or arrangements. (b) Reports on Form 8-K On October 1, 1998, Registrant filed a Current Report on Form 8-K, dated September 18, 1998 reporting under Item 5 (Other Events) a ten cent ($0.10) cash dividend on outstanding shares of common stock of Saratoga Bancorp, to be payable on November 6, 1998, to shareholders of record at the close of business on October 23, 1998. 23 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. SARATOGA BANCORP Date: November 13, 1998 ------------------------- Mary Page Rourke, Treasurer (Principal Financial and Accounting Officer) 24 INDEX TO EXHIBITS Sequentially Numbered Number Exhibits Page 27.1 Financial Data Schedule 25 EX-27 2
9 1000 9-MOS DEC-31-1998 SEP-30-1998 5369 6789 20200 0 25947 7493 7531 66259 740 139864 100418 0 1671 22739 0 0 4737 10299 139864 4759 2039 531 7329 2224 3282 4047 136 91 2272 2132 1322 0 0 1322 .80 .72 4.53 47 0 0 252 578 14 40 740 252 0 488
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