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, 1995 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, 1996 was $6,661,376
As of March 1, 1996, Saratoga Bancorp had 1,030,972 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 73
Page 1 of 179 pages
PART 1
Item 1. Business
General
Saratoga Bancorp (the "Company") is a registered bank hold-
ing 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, 1995, the Company had total assets of approximately
$100 million and total deposits of approximately $75 million.
At December 31, 1995, the Company and the Bank had 24 full-time
equivalent employees.
Most of the Bank's deposits are obtained from the Bank's
primary service area. A material portion of the Bank's deposits
has not 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 21% of total
loans. 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 in Item 6 at page 28.
PAGE
Supervision and Regulation
The common 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 Bank's common
stock, however, is exempt from such requirements. 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 OCC and the FDIC. 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 ("Board of Governors") and provide such
additional information as the OCC, FDIC and the Board of
Governors 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.
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 Company and the Bank are prohibited from engaging in
certain tie-in arrangements in connection with an extension of
credit, sale or lease of property or furnishing of services.
Section 106(b) of the Bank Holding Company Act Amendments of
1970 generally prohibits a bank from tying a product or service
to another product or service offered by the bank, or by any of
its affiliates. A prohibited tie-in arrangement would exist
where a bank varies the consideration for a product or service
on the condition that the customer obtain some additional
product or service from the bank or from any of its affiliates,
or where as a condition for providing a customer a product or
service, the bank requires the customer to purchase another
product or service from the bank or from any of its affiliates.
These anti-tying restrictions also apply to bank holding
companies and their non-bank subsidiaries as if they were banks.
Section 106 contains a "traditional bank product" exception
permitting a bank to tie a product to a traditional bank product
offered by the bank itself, but not by any affiliated bank or
non-bank. For example, a bank may offer a discount on a loan on
the condition that a customer maintain a deposit account at that
bank, however, the bank may not offer a discount on a loan on
the condition that a customer maintain a deposit account at an
affiliated bank. Effective September 2, 1994, the Board of
Governors adopted a rule permitting a bank or a bank holding
company to offer a discount on a traditional bank product, or on
securities brokerage services to a customer on condition that
the customer obtain a traditional bank product from an
affiliate. Effective January 23, 1995, the Board of Governors
adopted a rule permitting a bank holding company or its non-bank
subsidiary to offer a discount on its product or service on
condition that a customer obtain any other product or service
from that holding company or from any of its non-bank
affiliates. The rule permits bank holding companies and their
non-bank subsidiaries to offer discounts on packaged products
when no affiliated bank is involved in the arrangement (both the
tying and tied products are offered by bank holding companies or
their non-bank subsidiaries only), and both the tying and tied
products are separately available for purchase at competitive
prices.
The Board of Governors, OCC and the FDIC 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 internationally. 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 reserves.
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. 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.
The Board of Governors, OCC and the FDIC also adopted
minimum leverage ratios for banking organizations as a
supplement to the risk-weighted capital guidelines. The
leverage ratio is generally calculated using Tier 1 capital (as
defined under risk-based capital guidelines) divided by
quarterly average net total assets (excluding intangible assets
and certain other adjustments). The leverage ratio establishes
a limit on the ability of banking organizations, including the
Company and the Bank, to increase assets and liabilities without
increasing capital proportionately.
The Board of Governors and the OCC emphasized that the
leverage ratio constitutes a minimum requirement for well-run
banking organizations having diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and a composite rating of 1 under the
regulatory rating system for banks and 1 under the regulatory
rating system for bank holding companies. Banking organizations
experiencing or anticipating significant growth, as well as
those organizations which do not exhibit the characteristics of
a strong, well-run banking organization described above, will be
required to maintain minimum capital ranging generally from 100
to 200 basis points in excess of the leverage ratio. The FDIC
adopted a substantially similar leverage ratio for state non-member banks
which established (i) a 3 percent Tier 1 minimum
capital leverage ratio for highly-rated banks (those with a
composite regulatory rating of 1 and not experiencing or
anticipating significant growth); and (ii) a 4 percent Tier 1
minimum capital leverage ratio for all other banks, as a
supplement to the risk-based capital guidelines.
At December 31, 1995, 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, 1995 and
1994.
During 1995, 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 estab-
lished 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, OCC
and/or the FDIC, might, under certain circumstances, place
restrictions on the ability of a particular bank to pay
dividends based upon peer group averages and the performance and
maturity of the particular 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, 1995, approximately $1,681,000 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.
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
limits, 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 limits.
As of December 31, 1995, the Bank's legal lending limits to a
single borrower and such borrower's related parties were
$1,749,000 based on regulatory capital of $11,658,000.
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 the 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 limits, 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
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 can't be
predicted.
California law and regulations of the California State
Superintendent of Banks ("the Superintendent") authorize
California licensed banks, subject to applicable limitations and
approvals of the Superintendent to (1) provide real estate
appraisal services, management consulting and advice services,
and electronic data processing services; (2) engage directly in
real property investment or acquire and hold voting stock of one
or more corporations, the primary activities of which are
engaging in real property investment; (3) organize, sponsor,
operate or render investment advice to an investment company or
to underwrite, distribute or sell securities in California; and
(4) invest in the capital stock, obligations or other securities
of corporations not acting as insurance companies, insurance
agents or insurance brokers. In November 1988, Proposition 103
was adopted by California voters. The Superintendent has
established certain procedures to be followed by banks desiring
to engage in insurance activities which include filing a report
describing (1) a proposed business plan and information
regarding the types of insurance products intended to be
offered; (2) insurance companies with which the banks intend to
conduct business; (3) organization plans; (4) locations at
which activities will be conducted; and (5) proposed operational
and compliance procedures and policies. The California
Department of Insurance regulates application processing,
licensing and supervision of insurance activities. National
banks (whether a holding company subsidiary or not) are limited
under applicable provisions of the National Bank Act to acting
as an agent for fire, life or other insurance only in locations
with a population of 5,000 or less. In recent years, banks and
bank holding companies have increasingly sought authorization to
expand their product base to include insurance activities. The
Federal Deposit Insurance Corporation Improvement Act of 1991
discussed below, generally restricts an insured state bank from
engaging as a principal in any activity that is impermissible
for a national bank. On January 18, 1995, the United States
Supreme Court unanimously upheld a ruling by the OCC that
permitted sale of fixed and variable annuities by a national
bank and confirmed the authority of the OCC to interpret the
powers of national banks under the National Bank Act. The OCC
determined that annuities are not insurance products, but rather
a type of investment instrument and that the sale of annuities
is incidental to the business of banking. It is not certain
what impact the decision will have upon the continuing effort of
banks and bank holding companies to engage in insurance related
activities.
The Caldera, Weggeland and Killea California Interstate
Banking and Branching Act of 1995, effective October 2, 1995,
amends the California Financial Code to, among other matters,
regulate the operations of state banks to eliminate conflicts
with and to implement the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 discussed below. The Caldera
Act includes (1) an election to permit early interstate merger
transactions; (2) a prohibition against 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) a prohibition against interstate
branching through de novo establishment of California branch
offices. The Caldera Act mandates that initial entry into
California by an out-of-state institution be accomplished by
acquisition of or merger with an existing whole bank which has
been in existence for at least five years.
The State Bank Parity Act, effective January 1, 1996,
eliminates certain existing disparities between California state
chartered banks and federally chartered national banks by
authorizing the Superintendent to address such disparities
through a streamlined rulemaking process. The Superintendent
has taken action pursuant to the Parity Act to, among other
matters, authorize previously impermissible share repurchases by
state banks, subject to the prior approval of the
Superintendent.
The Competitive Equality Banking Act of 1987 (the "1987
Banking Act") also has affected the balance of competition among
banks and other non-bank financial institutions. Among other
things, the 1987 Banking Act has restricted the growth and
formation of so-called "limited service" or "non-bank" banks
(institutions which accept deposits or make commercial loans,
but do not do both). Other key provisions of the 1987 Banking
Act included: (1) the expansion of the FDIC's authority in
arranging supervisory interstate acquisitions and acquisitions
of failing banks; (2) the renewal of emergency acquisition
authorities; (3) the exemption of assessment income of federal
banking agencies from budget restrictions imposed by the Office
of Management and Budget and from the budget balancing
requirements of the Gramm-Rudman-Hollings Act; (4) a moratorium
(which ended on March 1, 1988), prohibiting commercial banks
from engaging in insurance or securities activities not approved
prior to March 5, 1987; (5) the application of the Glass-
Steagall Act to state-chartered banks, prohibiting affiliations
with companies principally engaged in securities activities; and
(6) new check hold schedules which were implemented on September
1, 1990.
On August 9, 1989, President Bush signed into law the
Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"). The FIRREA contains provisions' which among
other things: (1) established two separate financial industry
insurance funds, both administered by the FDIC - the Bank
Insurance Fund and the Savings Association Insurance Fund; (2)
abolished the Federal Home Loan Bank Board and the Federal
Savings and Loan Insurance Corporation and established the
Office of Thrift Supervision as an office of the Treasury
Department, with responsibility for examination and supervision
of all savings and loan associations; (3) increased the premiums
paid by FDIC-insured institutions; (4) permitted bank holding
companies to acquire healthy savings and loan associations; (5)
enhanced federal banking agencies' enforcement authority over
the operations of all insured depository institutions and
increased the civil and criminal penalties that may be imposed
in connection with violations of laws and regulations; (6)
curtailed investments and certain other activities of state-chartered
savings and loan associations; and (7) increased the
capital requirements of savings and loan associations.
On December 19, 1991, President Bush signed the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The FDICIA substantially revises banking
regulations, certain aspects of the Federal Deposit Insurance
Act and establishes a framework for determination of capital
adequacy of financial institutions, among other matters. Under
the FDICIA, financial institutions are placed into five capital
adequacy categories as follows: (1) well capitalized, (2)
adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The
FDICIA authorized the Board of Governors, the OCC and FDIC to
establish limits below which financial institutions will be
deemed critically undercapitalized, provided that such limits
can not be less than two percent (2%) of the ratio of tangible
equity to total assets or sixty-five percent (65%) of the
minimum leverage ratio established by regulation. Financial
institutions classified as undercapitalized or below are subject
to limitations including restrictions related to (i) growth of
assets, (ii) payment of interest on subordinated indebtedness,
(iii) capital distributions, and (iv) payment of management fees
to a parent holding company.
The FDICIA requires the Board of Governors, OCC and FDIC to
initiate corrective action regarding financial institutions
which fail to meet minimum capital requirements. Such action
may result in orders to augment capital such as through sale of
voting stock, reduction in total assets, and restrictions
related to correspondent bank deposits. Critically
undercapitalized financial institutions may also be subject to
appointment of a receiver or conservator unless the financial
institution submits an adequate capitalization plan.
The FDIC adopted a regulation pursuant to Section 302(a) of
the FDICIA, effective on November 2, 1992, amending its
regulations on insurance assessments to, among other matters,
adopt a recapitalization schedule for the Bank Insurance Fund
and establish a transitional risk-based insurance assessment
system to replace the uniform assessment rate system previously
applicable to insured financial institution members of the Bank
Insurance Fund. The regulation required that each insured
institution be assigned to one of three capital groups and one
of three supervisory subgroups within each capital group, based
upon financial data reported by each institution in it's Report
of Income and Condition, as well as supervisory evaluations by
the institution's primary federal regulatory agency. The three
capital groups have the following characteristics: (1) "Well
capitalized" - consisting of institutions having a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater, and a Tier 1 leverage ratio of
5% or greater; (2) "Adequately capitalized" - consisting of
institutions that are not "well capitalized," but have a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based
capital ratio of 4% or greater, and a Tier 1 leverage ratio of
4% or greater; and (3) "Undercapitalized" - consisting of
institutions that do not qualify as either "well capitalized" or
"adequately capitalized". The three supervisory subgroups have
the following characteristics: (A) Subgroup "A" - consisting of
financially sound institutions with only a few minor weaknesses;
(B) Subgroup "B" - consisting of institutions that demonstrate
deterioration of the institution and increased risk of loss to
the Bank Insurance Fund; and (C) Subgroup "C" - consisting of
institutions that pose a substantial probability of loss to the
Bank Insurance Fund unless effective corrective action is taken.
The annual assessment rate for each insured institution
continued at the rate of $0.23 per $100 of deposits through
year-end December 31, 1992. Commencing January 1, 1993, the
assessment rate was based upon a risk assessment schedule with
rates ranging from $0.23 to $0.31 per $100 of deposits utilizing
the capital group and supervisory subgroup analysis. On June
25, 1993, the FDIC adopted a permanent risk-based insurance
assessment system which retained the transitional system without
substantial modification. In late 1994 and early 1995, the FDIC
proposed two significant changes to the deposit insurance
assessment system to (1) redefine the deposit assessment base
which has been defined to equal an institution's total domestic
deposits, plus or minus certain adjustments, but without
significantly impacting total industry-wide assessments
(although significant changes in assessments of individual
institutions may occur); and (2) establish a new assessment rate
schedule, using the present group and subgroup categories, but
with assessment rates varying from $0.04 to $0.31 per $100 of
deposits, resulting in a spread between the minimum and maximum
rates of $0.27 rather than $0.08. On August 8, 1995, the FDIC
voted to reduce the deposit insurance assessment rates to a
range from $0.04 to $0.31 per $100 of deposits and subsequently,
on November 14, 1995, the FDIC voted again to further reduce the
assessment rates to a range from $0 to $0.27 per $100 of
deposits, subject to a minimum $2,000 annual assessment for all
institutions regardless of classification within the capital
groups and supervisory subgroups as follows:
Supervisory Subgroup
A B C
Capital Group
1 $0.00 $0.03 $0.17
2 .03 .10 .24
3 .10 .24 .27
The above assessment rates are effective for the first
semiannual assessment period of 1996. Based upon the above
risk-based assessment rate schedule, the Company's and Bank's
current capital ratios, the Bank's current level of deposits,
and assuming no change in the assessment rate applicable to the
Bank during 1996, the Company estimates that its annual
noninterest expense attributed to assessments will decrease by
approximately $78,000 during 1996.
The Board of Governors, OCC and FDIC 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 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
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. It is not possible to predict what effect the prompt
corrective action regulation will have upon the Company and the
Bank or the banking industry taken as a whole in the foreseeable
future.
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.
As required by the FDICIA, the federal financial
institution agencies solicited comments in September 1993 on a
method of incorporating an interest rate risk component into the
current risk-based capital guidelines, with the goal of ensuring
that institutions with high levels of interest rate risk have
sufficient capital to cover their exposures. Interest rate risk
is the risk that changes in market interest rates might
adversely affect a bank's financial condition. Under the
proposal, interest rate risk exposures would be quantified by
weighing assets, liabilities and off-balance sheet items by risk
factors which approximate sensitivity to interest rate
fluctuations. As proposed, institutions identified as having an
interest rate risk exposure greater than a defined threshold
would be required to allocate additional capital to support this
higher risk. Higher individual capital allocations could be
required by the bank regulators based on supervisory concerns.
The agencies adopted a final rule effective September 1, 1995
which is substantially similar to the proposed rule, except that
the final rule does not establish (1) a measurement framework
for assessing the level of a bank's interest rate exposure; nor
(2) a minimum level of exposure above which a bank will be
required to hold additional capital for interest rate risk if it
has a significant exposure or a weak interest rate risk
management process. The agencies also solicited comments on and
are continuing their analysis of a proposed policy statement
which would establish a framework to measure and monitor
interest rate exposure.
The federal financial institution agencies published a
final rule on July 10, 1995 to be effective on August 9, 1995,
implementing safety and soundness standards. The FDICIA added
a new Section 39 to the Federal Deposit Insurance Act which
required the agencies to establish 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) asset quality, earnings and stock valuation;
and (8) excessive compensation for executive officers, directors
or principal shareholders which could lead to material financial
loss. The agencies issued the final rule in the form of
guidelines only for operational, managerial and compensation
standards and reissued for comment proposed standards related to
asset quality and earnings which are less restrictive than the
earlier proposal in November 1993. Unlike the earlier proposal,
the guidelines under the final rule do not apply to depository
institution holding companies and the stock valuation standard
was eliminated. If an agency determines that an institution
fails to meet any standard established by the guidelines, 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
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 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.
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.
President Clinton signed the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Interstate Banking
Act") on September 29, 1994. The Interstate Banking Act
authorizes the Board of Governors to approve interstate
acquisitions of banks or bank branch offices, generally without
regard to conflicting requirements of state law, by adequately
capitalized and managed bank holding companies, after September
29, 1995, and authorizes the other federal banking agencies to
approve similar acquisitions by banks after June 1, 1997, unless
prior to that date states enact laws prohibiting such
acquisitions. Such so-called "opt out" measures are pending or
have been passed in a number of states. States also may "opt
in" to this authority at an earlier date if they enact laws
specifically permitting such acquisitions. After March 29,
1996, the Interstate Banking Act authorizes the appropriate
federal agency to approve the consolidation of banks located in
different states but operated by the same bank holding company.
The Interstate Banking Act imposes several limitations on
the Board of Governors' general authority to approve such
acquisitions including (1) preservation of state laws requiring
acquisition target banks to have been chartered for minimum time
periods not in excess of five years; (2) precluding acquisitions
which would result in a concentration of deposits greater than
10% of total United States deposits, or 30% of total deposits in
the state in which the acquired bank or branch office is
located, subject to a state's right to either increase or
decrease the 30% threshold and, in the absence of legislation,
the right of a state banking regulatory agency to approve a
transaction under certain circumstances; (3) Board of Governors'
assessment of compliance with antitrust and community
reinvestment laws, including a separate community reinvestment
act analysis for each state in which a multi-state banking
operation approved under the Interstate Banking Act exists; and
(4) maintenance of state contingency laws requiring a bank
acquisition target to maintain assets available for call by
state-sponsored housing entities established under state law,
provided (i) the state law does not discriminate against out-of-state
banks, holding companies or their subsidiaries, (ii) the
state law was in effect at the enactment date of the Interstate
Banking Act, (iii) the FDIC has not determined that compliance
with the state law would result in an unacceptable risk to the
deposit insurance fund, and (iv) compliance with the state law
would not place the bank in an unsafe or unsound condition.
The federal banking agencies are required to adopt
regulations effective June 1, 1997 which prohibit any out-of-state bank
from using the interstate branching authority
primarily for the purpose of deposit production. Such
regulations will require the appropriate federal agency of an
out-of-state bank or bank holding company to review such bank's
operations in the host state in order to determine whether it is
meeting the credit needs of the host state communities in which
it operates, whenever it determines that such bank's ratio of
loans to deposits in the host state is less than one-half the
average of the total loans to total deposits for banks domiciled
in the host state. If the agency reaches a negative conclusion,
it is authorized to restrict the opening of new branch offices
and to order the closure of the host state branch offices of the
out-of-state bank. Before an agency may exercise authority to
close such a branch office or offices, the Interstate Banking
Act requires that it notify the bank and schedule a hearing.
Banks which determine to close branches located in low or
moderate income areas acquired under the Interstate Banking Act
must notify their customers how to contact the appropriate
federal agency to complain about the closing. If the agency
determines that any such complaint is not frivolous, it must
convene a meeting of concerned organizations and individuals to
explore the feasibility of adequate alternative sources of
banking services for the affected communities.
In October 1994, the federal financial institution
regulatory agencies jointly proposed a comprehensive revision of
their regulations implementing the Community Reinvestment Act
("CRA"), enacted in 1977 to promote lending by financial
institutions to individuals and businesses located in low and
moderate income areas. In May 1995, the proposed CRA
regulations were published in final form effective as of July 1,
1995. The revised regulations included transitional phase-in
provisions which generally reguire mandatory compliance not
later than July 1, 1997, although earlier voluntary compliance
is permissible.
Under the former CRA regulations, compliance was evaluated
by an assessment of the institution's methods for determining,
and efforts to meet, the credit needs of such borrowers. This
system was highly criticized by depository institutions and
their trade groups as subjective, inconsistent and burdensome,
and by consumer representatives for its alleged failure to
aggressively penalize poor CRA performance by financial
institutions. The revised CRA regulations emphasize an
assessment of actual performance rather than of the procedures
followed by a bank, to evaluate compliance with the CRA.
Overall CRA compliance continues to be rated across a four-point
scale from "outstanding" to "substantial noncompliance," and
continues to be a factor in review of applications to merge,
establish new branches or form bank holding companies. In
addition, any bank rated in "substantial noncompliance" with the
revised CRA regulations may be subject to enforcement
proceedings.
The regulations provide that "small banks," which are
defined to include any independent bank with total assets of
less than $250 million, are to be evaluated by means of a so-called
"streamlined assessment method" unless such a bank elects
to be evaluated by one of the other methods provided in the
regulations. The differences between the evaluation methods may
be summarized as follows:
(1) The "streamlined assessment method" presumptively
applicable to small banks requires that a bank's CRA compliance
be evaluated pursuant to five "assessment criteria," including
its (i) loan-to-deposit ratio (as adjusted for seasonal
variations and other lending-related activities, such as sales
to the secondary market or community development lending); (ii)
percentage of loans and other lending-related activities in the
bank's service area(s); (iii) distribution of loans and other
lending-related activities among borrowers of different income
levels, given the demographic characteristics of its service
area(s); (iv) geographic distribution of loans and other
lending-related activities within its service area(s); and (v)
record of response to written complaints, if any, about its CRA
performance.
(2) The "lending, investments and service tests
method" is applicable to all banks larger than $250 million
which are not wholesale or limited purpose banks and do not
elect to be evaluated by the "strategic plan assessment method."
Central to this method is the requirement that such banks
collect and report to their primary federal banking regulators
detailed information regarding home mortgage, small business and
farm and community development loans which is then used to
evaluate CRA compliance. At the bank's option, data regarding
consumer loans and any other loan distribution it may choose to
provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (I)
lending performance according to the geographic distribution of
its loans, the characteristics of its borrowers, the number and
complexity of its community development loans, the
innovativeness or flexibility of its lending practices to meet
low and moderate income credit needs and, at the bank's
election, lending by affiliates or through consortia or third-parties
in which the bank has an investment interest; (ii)
investment performance by measure of the bank's "qualified
investments," that is, the extent to which the bank's
investments, deposits, membership shares in a credit union, or
grants primarily benefit low or moderate income individuals and
small businesses and farms, address affordable housing or other
needs not met by the private market, or assist any minority or
women-owned depository institution by donating, selling on
favorable terms or providing on a rent-free basis any branch of
the bank located in a predominantly minority neighborhood; and
(iii) service performance by evaluating the demographic
distribution of the bank's branches and ATMs, its record of
opening and closing them, the availability of alternative retail
delivery systems (such as telephone banking, banking by mail or
at work, and mobile facilities) in low and moderate income
geographies and to low and moderate income individuals, and
(given the characteristics of the bank's service areas and its
capacity and constraints) the extent to which the bank provides
"community development services" (services which primarily
benefit low and moderate income individuals or small farms and
businesses or address affordable housing needs not met by the
private market) and their innovativeness and responsiveness.
(3) Wholesale or limited purpose banks which do not
make home mortgage, small farm or business or consumer loans to
retail customers may elect, subject to agency approval of their
status, to be evaluated by the "community development test
method," which assesses the number and amount of the bank's
community development loans, qualified investments and community
development services and their innovativeness and complexity.
(4) Any bank may request to be evaluated by the
"strategic plan assessment method" by submitting a strategic
plan for review and approval. Such a plan must involve public
participation in its preparation, and contain measurable goals
for meeting low and moderate income credit needs through
lending, investments and provision of services. Such plans
generally will be evaluated by measuring strategic plan goals
against standards similar to those which will be applied in
evaluating a bank according to the "lending, investments and
service tests method."
The federal financial institution regulatory agencies
jointly issued a final rule effective as of January 1, 1996 to
make certain technical corrections to the revised CRA
regulations. Among other matters, the rule clarifies the
transition from the former CRA regulations to the revised CRA
regulations by confirming that when an institution either
voluntarily or mandatorily becomes subject to the performance
tests and standards of the revised regulations, the institution
must comply with all of the requirements of the revised
regulations and is no longer subject to the provisions of the
former CRA regulations.
The Bank has a current rating of "satisfactory" CRA
compliance, and believes that it would not have received any
lower rating if the regulations had been in effect when the Bank
was last examined for CRA compliance on October 24, 1994.
The United States Congress has periodically considered
legislation which could result in further deregulation of banks
and other financial institutions. Such legislation could result
in further relaxation or elimination of geographic restrictions
on banks and bank holding companies and increase the level of
direct competition with other financial institutions, including
mutual funds, securities brokerage firms, investment banking
firms and other entities. The effect of such legislation on the
Company and the Bank cannot be determined at this time.
Accounting Pronouncements
In December, 1991, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments." SFAS No. 107 requires entities such as the
Company to disclose, either in the body of its financial
statements or in accompanying notes, the "fair value" of
financial instruments for which it is "practicable to estimate
that value." Most deposit and loan instruments issued by
financial institutions, however, are subject to SFAS No. 107,
and its effect on the Company is to require financial statement
disclosure, in addition to their carrying value, of the fair
value of most of the assets and liabilities of the Company.
These disclosures apply to off-balance sheet financial
instruments as well as those recorded on the balance sheet.
Excluded from the disclosure requirement, among other types of
instruments, are most employee benefit plan obligations,
insurance contracts, leases, warranties, minority and equity
interests in consolidated subsidiaries, and other investments
accounted for under the equity method. The provisions of SFAS
107 are effective for the Company as of December 31, 1992.
In November, 1992, the FASB issued SFAS No. 112,
"Accounting for Postemployment Benefits", which requires the
accrual of postemployment benefits, such as the continuation of
health care benefits and life insurance coverage. SFAS No. 112
is effective for fiscal years beginning after December 15, 1993.
Neither the Company nor the Bank currently offer postemployment
benefits to its employees and therefore the implementation of
SFAS No. 112 is not applicable to the Company and the Bank.
In May, 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." This standard was further
modified by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan----Income Recognition and Disclosures."
SFAS Nos. 114 and 118 are effective for the Company as of
January 1, 1995. They require the Company to measure impaired
loans based upon the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as
a practical expedient, a creditor may measure impairment based
on a loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is
impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
Application of the provisions of these statements did not have
a significant effect on the Company's financial position or
results of operations.
Also in May, 1993, the FASB issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires the Company to classify debt
and equity securities, which include substantially all of the
Company's investment portfolio, into one of three categories:
held-to-maturity, trading, or available-for-sale. Investments
in debt securities shall be classified as held-to-maturity and
measured at amortized cost only if the Company has the positive
intent and ability to hold such securities to maturity. This
methodology is consistent with the Company's current accounting
practices for its investment securities. All other investments
may be classified as either trading securities, which are bought
and held principally for the purpose of selling them in the near
term and are carried at market value with a corresponding
recognition of the unrealized holding gain or loss in results of
operations, or as available-for-sale securities, which are all
other securities and are carried at market value with a
corresponding recognition of the unrealized holding gain or loss
as a net amount in a separate component of stockholders' equity
until realized. The provisions of SFAS No. 115 are effective as
of January 1, 1994. At December 31, 1995, neither the Company
nor the Bank held investments that meet the definition of
trading securities under SFAS No. 115.
In October, 1994, the FASB issued SFAS No. 119, "Disclosure
about Derivative Financial Instruments and Fair Value of
Financial Instruments." The Company adopted SFAS No. 119 as of
December 31, 1994. SFAS No. 119 requires disclosures about
derivative financial instruments----futures, forward, swap, and
option contracts, and other financial instruments with similar
characteristics. It requires disclosures about amounts, nature,
and terms of derivative financial instruments that are not
subject to SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", because they do
not result in off-balance-sheet risk of accounting loss. This
statement requires disaggregation of information about financial
instruments with off-balance-sheet risk of accounting loss by
class, business activity, risk, or other category that is
consistent with the management of those instruments. It also
requires that fair value information be presented without
combining, aggregating, or netting the fair value of derivative
financial instruments with the fair value of nonderivative
financial instruments. As of December 31, 1995, the Company has
no derivative financial instruments that would be subject to
such disclosures.
In October, 1995, 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 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 will
have no effect on the Company's consolidated net earnings or
cash flows.
Item 2. Properties
As of December 31, 1995, 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 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 1998. Current
lease payments are $5,931 per month for the building and ground
lease. Effective January, 1993, the lease was tied to the
Consumer Price Index with increases to range between 4 and 8
percent per year. 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.
On October 3, 1989, the Company opened a third banking facility
located at 160 West Santa Clara Street, in San Jose, California.
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 $10,974
per month for the ground floor and $4,036 for the second floor.
The lease payments for the ground floor will increase over the
lease term to $10,989 per month in 1999. The lease payments for
the second floor are tied to the Consumer Price Index with the
increase not to exceed 4% per year. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
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, nor is it listed by
The NASDAQ Stock Market. 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. The prices indicated below may not
necessarily represent actual transactions.
Bid Price of
Common Stock (1)
Quarter ended Low High
March 31, 1994............. $6.00 $6.50
June 30, 1994................ 6.25 7.00
September 30, 1994....... 6.13 8.00
December 31, 1994........ 7.00 8.00
March 31, 1995............. 6.00 7.00
June 30, 1995................ 6.125 6.50
September 30, 1995....... 6.75 7.50
December 31, 1995........ 7.125 7.375
(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 345 shareholders of record as of March 1, 1996.
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 "Corporation 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 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, OCC and/or FDIC, might,
under certain circumstances, place restrictions on the ability of
a particular bank to pay dividends based upon peer group averages
and the performance and maturity of the particular 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.
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
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.
Operations Year ended December 31,
(in thousands, except per share data)
1995 1994 1993 1992 1991
Interest income $6,572 $5,446 $4,949 $6,236 $7,107
Interest expense (2,861) (1,929) (1,685) (2,055) (2,477)
Net interest income 3,711 3,517 3,264 4,181 4,630
(Provision)benefit for
credit losses - 636 (560) (731) (643)
Net interest income
after (provision)benefit
for credit losses 3,711 4,153 2,704 3,450 3,987
Other income 577 405 581 644 720
Other expenses (2,868) (3,523) (2,912) (3,234) (3,404)
Income before income
taxes 1,420 1,035 373 860 1,303
Provision for income
taxes (539) (377) (128) (326) (491)
Net income $ 881 $ 658 $ 245 $ 534 $ 812
====== ====== ====== ====== ======
Net income per
common and
equivalent share(1) $ .82 $ .59 $ .21 $ .46 $ .70
====== ====== ====== ====== ======
Cash dividends declared
per common share $ .10 $ - $ - $ - $ -
====== ====== ====== ====== =======
Balances at year end December 31,
(in thousands,except per share data)
1995 1994 1993 1992 1991
Total assets $100,497 $87,536 $79,209 $70,097 $70,208
Net loans 36,759 32,803 33,685 38,888 53,665
Total deposits 74,949 73,872 65,714 59,085 59,391
Shareholders'
equity 11,057 9,627 10,721 10,472 9,760
Book value
per share 10.72 9.34 9.17 8.99 8.76
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS'
EQUITY, INTEREST RATES, AND INTEREST DIFFERENTIAL. The following
are the Company's daily average balance sheets for 1995 and 1994.
1995
(in thousands except for percentages)
YIELDS INTEREST
AVERAGE OR INCOME/
BALANCE RATES EXPENSE
ASSETS
Interest earning assets:
Federal funds sold $ 7,429 5.7% $ 421
Investment securities (1) 37,229 6.3 2,363
Loans (2) 34,057 11.1 3,788
Total interest earning assets 78,715 8.3 6,572
Noninterest-earning assets:
Cash and due from banks 3,618
Premises and equipment 2,093
Other assets (3) 3,000
TOTAL $87,426
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $14,579 3.4 501
Savings 13,836 2.6 366
Time 27,054 5.9 1,603
Total 55,469 4.5 2,470
Federal home loan bank borrowings 5,213 7.2 377
Other interest bearing liabilities 233 6.0 14
Total interest bearing liabilities 60,915 4.7 2,861
Noninterest-bearing liabilities:
Demand deposits 15,280
Accrued expenses and other
liabilities 1,001
Shareholders' equity 10,230
TOTAL $87,426
=======
Net interest income $3,711
=====
Net yield on interest earning assets 4.7%
====
(1) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis.
(2) Including average non-accrual loans of $59,000.
(3) Net of average deferred loan fees of $238,000 and average
allowance for credit losses of $769,000.
1994
(in thousands except for percentages)
YIELDS INTEREST
AVERAGE OR INCOME/
BALANCE RATES EXPENSE
ASSETS
Interest earning assets:
Federal funds sold $ 5,845 4.0% $ 235
Short-term interest bearing
deposits in other banks 683 3.8 26
Investment securities (1) 31,546 5.8 1,824
Loans (2) 32,572 10.3 3,361
Total interest earning assets 70,646 7.7 5,446
Noninterest-earning assets:
Cash and due from banks 4,564
Premises and equipment 2,300
Other assets (3) 1,981
TOTAL $79,491
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $13,350 3.0 395
Savings 15,251 2.8 421
Time 23,263 4.7 1,103
Total 51,864 3.7 1,919
Other interest bearing liabilities 380 2.6 10
Total interest bearing liabilities 52,244 3.7 1,929
Noninterest-bearing liabilities:
Demand deposits 16,440
Accrued expenses and other
liabilities 735
Shareholders' equity 10,072
TOTAL $79,491
=======
Net interest income $3,517
======
Net yield on interest earning assets 5.0%
=====
(1) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis.
(2) Including average non-accrual loans of $854,000.
(3) Net of average deferred loan fees of $223,000 and average
allowance for credit losses of $1,014,000.
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 1995 and 1994.
1995 over 1994 1994 over 1993
Increase (Decrease) Due Increase (Decrease) Due
to Changes in: to Changes in:
(in thousands)
Net Net
Volume Rate Change Volume Rate Change
Interest earning
assets:
Federal funds sold $ 63 $ 123 $ 186 $ (117) $ 70 $ (47)
Interest bearing
deposits in other
banks (26) - (26) (48) (1) (49)
Securities* 329 210 539 827 50 877
Loans 153 274 427 (373) 89 (284)
Total 519 607 1,126 289 208 497
Interest bearing
liabilities:
Demand deposits 36 70 106 (12) 36 24
Savings deposits (40) (15) (55) 77 (6) 71
Time deposits 179 321 500 163 (19) 144
Borrowings 377 - 377 - - -
Other liabilities 4 - 4 24 (19) 5
Total 556 376 932 252 (8) 244
Interest
Differential $ (37) $ 231 $ 194 $ 37 $ 216 $ 253
===== ====== ====== ====== ====== ======
*Interest income is reflected on an actual basis, not a fully
taxable equivalent basis.
INVESTMENT PORTFOLIO
The amortized cost and estimated market values of investments at
December 31 are as follows:
December 31,
1995 1994
(in thousands)
Investments Available for Sale
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
U.S. Treasury and agency securities $10,290 $10,287 $10,278 $10,012
Governmental mutual fund 3,128 3,041 5,339 4,798
Federal Home Loan Bank stock 1,958 1,958 319 319
Total $15,376 $15,286 $15,936 $15,129
======= ======= ======= =======
Investments Held to Maturity
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
U.S. Treasury and agency securities $ 5,564 $ 5,632 $11,640 $11,298
Mortgage-backed securities 11,145 11,152 8,824 8,223
Obligations of states and political
subdivisions 3,549 3,589 3,090 3,000
Federal Reserve Bank stock 90 90 90 90
$20,348 $20,463 $23,644 $22,611
======= ======= ======= =======
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, 1995.
The maturities and yields of the investment portfolio at December
31, 1995 are shown below.
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1995
(Dollars in thousands)
Investments Available for Sale
Total After 1 Year,
Carrying Within 1 Year Within 5 Years After 5 Years
Value Amount Yield(1) Amount Yield(1) Amount Yield(1)
U.S. Treasury
and agency
securities $10,287 $7,681 4.94% $2,606 6.92% - -
Governmental
mutual funds 3,041 3,041 6.72% - - - -
Federal Home
Loan Bank
stock 1,958 - - - - $1,958 3.90%
$15,286 $10,722 5.58% $2,606 6.92% $1,958 3.90%
======= ======= ====== ======
Investments Held to Maturity
Total After 1 Year, After 5 Years After 10
Carrying Within 1 Year Within 5 Years Within 10 Years Years
Amount Amount Yield(1)Amount Yield(1)Amount Yield(1 )Amount Yield(1)
U.S. Treasury
and agency
securities $ 5,564 - - $ 1,993 5.76% $ 3,571 6.24% - -
Mortgage-
backed
securities 11,145 - - 4,894 6.14% 3,897 7.87% $2,354 6.17%
Obligations of
states and
political
subdivisions 3,549 $165 7.10% 2,613 4.62% 771 5.27% - -
Federal Reserve
Bank stock 90 90 6.00%
Total $20,348 $165 7.10% $9,500 5.64% $ 8,239 6.92% $2,444 6.16%
======= ==== ====== ======= ======
(1) Yields are actual, not fully taxable equivalent
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 1995 and 1994
is summarized in the following table.
December 31,
1995 1994
(in thousands)
Real estate:
Construction $ 7,837 $ 5,278
Other 17,507 14,654
Commercial 11,585 12,082
Installment 77 543
Lease financing 837 1,214
$37,843 $33,771
======= =======
At December 31, 1995, loans were due as follows:
Lease
Com'l R/E Const R/E Other Install Financing Total
====== ========= ========= ======= ========= =======
(in thousands)
Due in one year
or less $6,877 $ 7,837 $ 2,720 $ 2 273 $17,709
Due after one year 4,708 - 14,787 75 $ 564 20,134
TOTAL $11,585 $ 7,837 $17,507 $ 77 $ 837 $37,843
====== ======= ======= ====== ====== =======
Of the loans due after one year, $12,712,000 have fixed rates and
$7,422,000 have variable interest rates.
RISK ELEMENTS
There were no nonaccrual loans at December 31, 1995 ($707,000 at
December 31, 1994). The reduction in interest income associated
with these loans in 1994 was $59,000. Interest income recognized
on such loans in 1994 was $28,000.
At December 31, 1995 and 1994, there were no loans past due 90
days or more as to principal or interest and still accruing
interest. There was one loan at December 31, 1995 in the amount of
$196,000 which was a troubled debt restructuring as defined in
Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring."
There were five potential problem loans at December 31, 1995
having a combined principal balance of $1,161,000 ($1,030,000 in
1994). Potential problem loans are loans which are generally
current as to principal and interest but have been identified by
the Company as potential problem loans due either to a decrease in
the underlying value of the property securing the credit or some
other deterioration in the creditworthiness of the borrower. All
of the five loans identified as potential problem loans are
secured by real estate and personal property. 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
Analysis of the Allowance for Credit Losses
Year Ended December 31,
1995 1994
Beginning balance $738,000 $1,339,000
Charge-offs - Commercial (45,000) (73,000)
Recoveries - Commercial 83,000 108,000
Additions (reductions)
charged to operations - (636,000)
Ending balance $ 776,000 $ 738,000
========== ==========
Ratio of net charge-offs
during the period to average
loans outstanding during the
year. (.11)% (.11)%
====== ======
Ratio of allowance for credit
losses to loans outstanding
at end of year 2.05% 2.19%
====== ======
Allocation of the Allowance for Credit Losses
December 31, 1995 December 31, 1994
Percent Percent
of loans in of loans in
each category each category
Amount to total loans Amount to total loans
Commercial $228,000 31% $286,000 36%
Real estate-
construction 124,000 21 89,000 16
Real estate-
other 424,000 46 352,000 43
Installment - - 11,000 2
Lease financing - 2 - 3
$776,000 100% $738,000 100%
========== ==== ======== ====
DEPOSITS
The average balance sheets for 1995 and 1994 set forth the average
amount and average interest rate paid for deposits.
At December 31, 1995, time deposits of $100,000 or more have a
remaining maturity as follows:
(in thousands)
3 months or less $4,403
Over 3 months to 6 months 1,350
Over 6 months to 12 months 1,654
Over 1 year to 5 years 3,375
TOTAL $10,782
=======
RETURN ON EQUITY AND ASSETS
The following table sets forth certain ratios of profita-
bility, liquidity and capital.
1995 1994
Return on average assets 1.0% .8%
Return on average equity 8.6% 6.5%
Cash dividends declared per share
to earnings per share 12.2% -
Average equity to average assets 11.7% 12.7%
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
Net income in 1995 was $881,000 ($.82 per share) compared to
$658,000 ($.59 per share) in 1994 and $245,000 ($.21 per share) in
1993. The increase in net income in 1995 resulted primarily from
an increase in the volume and yield on earning assets and a
decrease in expense related to Other Real Estate Owned (OREO),
offset, in part, by an increase in the volume and yield on
interest-bearing liabilities and a reduced benefit for credit
losses. The increase in net income in 1994 resulted primarily from
an increase in the volume of earning assets and a credit provision
for loan losses, offset, in part by an increase in interest expense
due to the increased volume of interest-bearing liabilities and a
charge related to the write-down of Other Real Estate Owned (OREO)
included in Other Expenses. The table below highlights the changes
in the nature and sources of income and expense from 1994 to 1995
and from 1993 to 1994.
Net Net
Income Income
Increase Increase
1995 1994 (Decrease) 1993 (Decrease)
(in thousands)
Net interest income $3,711 $3,517 $ 194 $3,264 $ 253
Provision (benefit)
for credit losses - 636 (636) (560) 1,196
Noninterest income 577 405 172 581 (176)
Noninterest expense (2,868) (3,523) 655 (2,912) (611)
Income before
income taxes 1,420 1,035 385 373 662
Provision for
income taxes (539) (377) (162) (128) (249)
Net income $ 881 $ 658 $ 223 $ 245 $ 413
====== ====== ===== ====== =====
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.
1995 1994 1993
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(in thousands, except percentages)
Earning
assets:
Loans $34,057 $3,788 11.1% $32,572 $3,361 10.3% $36,265 $3,645 10.1%
Other 44,658 2,784 6.2% 38,074 2,085 5.5% 28,589 1,304 4.6%
Total
earning
assets $78,715 $70,646 $64,854
======= ======= =======
Interest
bearing
liabilities:
Deposits $55,649 2,470 4.5% $51,864 1,919 3.7% $45,552 1,680 3.7%
Other
interest
bearing
funds 5,446 391 7.2% 380 10 2.6% 67 5 7.5%
Total
interest
bearing
liabili-
ties $60,915 $52,244 $45,619
======= ======= =======
Net interest
income and
margin $3,711 4.7% $3,517 5.0% $3,264 5.0%
====== ==== ====== ==== ====== ====
Average earning assets increased $8.1 million or 11%, to $78.7
million during 1995 compared to $70.6 million in 1994. The
increase in loans was primarily in the longer term real estate
loan portfolio. These 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 the investment portfolio is primarily
the result of increased average deposits and the reinvestment of
matured loan balances that are not currently being utilized to
fund loans. During 1994, average earning assets increased $5.8
million,or 9% to $70.6 million, compared to $64.9 million for
1993. This increase reflects a decrease of $3.7 million or 10%,
in the loan portfolio and subsequent reinvestment of matured loan
balances in the investment portfolio which increased $9.5 million
during 1994. The decrease in loans was primarily a result of an
overall slowdown in the real estate construction industry and a
general reduction in loan demand precipitated by the continued
weakness in the California economy. Average interest-bearing
liabilities increased $8.7 million, or 17%, during 1995 to $60.9
million from $52.2 million in 1994 primarily due to an increase
in Federal Home Loan Bank borrowings which were matched against
specific longer term real estate loans. Average interest-bearing
liabilities increased $6.6 million, or 14%, to $52.2 million, in
1994 from $45.6 million in 1993. This increase was primarily due
to an increase in passbook savings and certificates of deposit.
Earning Assets-Loans
The loan portfolio increased $4.1 million, or 12%, from $33.7
million in 1994 to $37.8 million in 1995. The increase was
primarily in the longer term real estate loan portfolio as a
result of marketing efforts in that area. Average loans
increased $1.5 million from $32.6 million in 1994 to $34.1
million in 1995. During 1994, average loans decreased $3.7
million, or 10% as compared to 1993. The average loan to average
deposit ratio for 1995 was 49% compared to 47% and 59% in 1994
and 1993, respectively. The average yield on loans increased
from 10.1% in 1993 to 10.3% in 1994 and then increased to 11.1%
in 1995. The increase in yield in 1995 primarily reflects an
increase in interest rates on loans originated during the year as
compared to 1994. The increase in yield in 1994 reflects a
increase in the interest rates for the year as compared to 1993.
Other Earning Assets
Average other earning assets, consisting of Federal funds sold,
interest bearing deposits in other banks, investment securities
and other short-term investments, increased $6.6 million or 17%
during 1995 from $38.1 million to $44.7 million. During 1994,
average other earning assets increased $9.5 million from $28.6
million in 1993. The increases in the securities portfolio in
1995 and 1994 were primarily due to the reinvestment of matured
loan balances into the securities portfolio that were not
currently being utilized to fund loans. The yield earned on
average other earning assets increased from 4.6% in 1993 to 5.5%
in 1994 and then increased to 6.2% in 1995. In 1995, the
increase in the volume and yield on other earning assets resulted
in an increase in net interest income of $699,000. In 1994, the
increase in the volume and yields resulted an increase in net
interest income of $781,000 on these investments.
Interest Bearing Liabilities
Average interest bearing liabilities increased $8.7 million from
$52.2 million in 1994 to $60.9 million in 1995 and increased $6.6
million from $45.6 million in 1993 to $52.2 million in 1994. The
increase in 1995 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 decreased $1.2
million in 1995 to $15.2 million and increased $527,000 to $16.4
million in 1994 from an average of $15.9 million in 1993.
Overall rates on interest bearing deposits increased from 3.7% in
1993 and 1994 to 4.5% in 1995. The net result of the changes in
average balances and rates was an increase in interest expense of
$932,000 in 1995 from 1994 and an increase of $244,000 in 1994
from 1993.
Net Interest Margin
The net interest margin decreased from 5.0% in 1993 and 1994 to
4.7% in 1995. 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 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
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
1995, the Bank did not provide any additional provision for
credit losses. In 1994, $636,000 was reversed from the allowance
for credit losses compared to a provision of $560,000 in 1993.
The allowance for credit losses was $776,000 in 1995, compared to
$738,000 in 1994 and $1,339,000 in 1993. At December 31, 1995,
the allowance was approximately 2.1% of total loans, compared to
approximately 2.2% at December 31, 1994. There were no
nonaccrual loans at December 31, 1995 ($707,000 at December 31,
1994). There was no interest income foregone on nonaccrual loans
during 1995($59,000 in 1994 and $163,000 in 1993).
At December 31, 1995 and 1994, there were no loans past due 90
days or more as to principal or interest and still accruing
interest.
Other Real Estate Owned totalled $1,745,000 at December 31, 1995
($1,717,000 at December 31, 1994). Other real estate owned
consisted of a single family residence and a 12 lot subdivision
each with appraised values in excess of the Bank's book values.
The Company does not intend to hold the properties and is
actively marketing the properties.
Nonperforming loans and other real estate owned are summarized
below:
December 31, 1995 December 31, 1994
Nonperforming loans:
Past due 90 days or more
and still accruing $ - $ -
Nonaccrual - 707,000
Total - 707,000
Other real estate owned 1,745,000 1,717,000
Total nonperforming loans and
other real estate owned $1,745,000 $2,424,000
========== ==========
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 California economy has continued to demonstrate
signs of weakness since the third quarter of 1990, and through
the period covered by this report, and the Bank's loan portfolio,
which includes approximately $25,000,000 in real estate loans,
representing approximately 67% of the portfolio, has been and
could continue to be adversely affected if California economic
conditions and the real estate market in the Bank's market area
continue to weaken. The effect of such events, although
uncertain at this time, has resulted, and could continue to
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 $172,000, or 42%, to $577,000 during
1995 compared to $405,000 during 1994. During 1994, noninterest
income decreased $176,000, or 30%, from $581,000 in 1993. The
increase in 1995 is primarily attributable to rental income from
OREO of $119,000, net gain on sale of securities of $72,000 and
gain on sale of OREO of $55,000. The decrease in 1994 is
primarily attributable to a gain on sale of leases of $64,000 and
a gain on sale of OREO of $136,000 realized in 1993.
Noninterest Expense
Noninterest expense decreased $655,000 or 19% to $2.9 million in
1995, compared to $3.5 million in 1994 and increased $611,000 or
21% in 1994 compared to 1993. The decrease in 1995 is primarily
attributable to the loss on sale of securities of $196,000 which
was realized in 1994 and decreased OREO reserve expense. The
increase in 1994 is primarily attributable to a $196,000 loss on
sale of securities and OREO reserve expense of $481,000.
Generally, excluding the securities losses and OREO expense noted
above, expenses have grown commensurate with the growth in assets
and increases in the volume of transactions. As a percentage of
average earning assets, noninterest expense decreased to 3.6% in
1995 from 5.0% in 1994. In 1994, noninterest expense as a
percentage of earning assets increased to 5.0% from 4.5% in 1993.
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 38.0% for 1995, 36.4% for
1994 and 34.3% for 1993. See Note 8 to the consolidated
financial statements for additional information on income taxes.
Beginning in 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes,("SFAS
109"). There was no cumulative or current period effect of
adopting SFAS 109 on the Company's financial position or results
of operations.
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, 1995 and 1994, liquid
assets as a percentage of deposits were 48% and 34%,
respectively. In addition to cash and due from banks, liquid
assets include short-term time deposits with other banks, Federal
funds sold, investment securities and other short term
investments. The Bank has $8.0 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,
1995, 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 asets.
DISTRIBUTION OF REPRICING OPPORTUNITIES
At December 31, 1995
(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 $17,700 - - - - $17,700
Interest bearing
deposits in
other banks - - $ 200 - - 200
Municipal
securities - - 165 $ 2,613 $ 771 3,549
U.S. Treasury
and agency
securities 3,041 $4,699 2,982 9,493 9,822 30,037
FRB/FHLB stock 2,048 2,048
Loans 22,269 623 2,240 6,671 6,040 37,843
------- ------- ------- ------- ------- -------
Total earning
assets $43,010 $5,322 $5,587 $18,777 $18,681 91,377
------- ------- ------- ------- ------- -------
Interest bearing
demand accounts$14,218 - - - - $14,218
Savings accounts 13,113 - - - - 13,113
Time certificates
of deposit of
$100,000 or more 4,403 $1,350 $1,654 $3,375 - 10,782
Other time
deposits 2,030 2,014 5,943 6,439 - 16,426
Federal funds
purchased 1,500 - - - - 1,500
Other borrowings 2,000 1,570 - 262 $8,255 12,087
------- ------- ------- ------- ------- -------
Total interest-
bearing
liabilities $37,264 $4,934 $7,597 $10,076 $8,255 68,126
------- ------- ------- ------- ------- ------
Interest rate
sensitivity
gap $ 5,746 $ 388 $(2,010) $ 8,701 $10,426 $23,251
======= ======= ======= ======= ======= =======
Cumulative
interest rate
sensitivity
gap $ 5,746 $6,134 $4,124 $12,825 $23,251
======= ======= ======= ======= =======
Interest rate
sensitivity
gap ratio 1.15% 1.08% .74% 1.86% N/A
Cumulative interest
rate sensitivity
gap ratio 1.15% 1.15% 1.08% 1.21% 1.34%
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, 1995 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, 1995, the Company's regulatory
capital increased $1,468,000. Tier 1 capital increased $1,430,000
due to the retention of earnings and decrease in the unrealized
loss on equity securities available for sale of $652,000. Tier 2
capital increased $38,000 due to a net increase in the allowable
portion of 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, 1995, the Company's total risk-based capital ratio
was approximately 22.0% (approximately 21.7% for the Bank)
compared to approximately 22.2% (approximately 21.6% for the
Bank) at December 31, 1994.
The Board of Governors adopted a 3% minimum leverage ratio for
banking organizations as a supplement to the risk-weighted
capital guidelines, effective September 7, 1990. The OCC adopted
the minimum leverage ratio for national banks effective December
31, 1990. The minimum leverage ratio is intended to limit the
ability of banking organizations to leverage their equity
capital base by increasing assets and liabilities without
increasing capital proportionately. The 3% minimum leverage
ratio constitutes a minimum ratio for well-run banking
organizations. Organizations experiencing or anticipating
significant growth or failing to meet certain Board of Governors
standards will be required to maintain a minimum leverage ratio
ranging from 100 to 200 basis points in excess of the 3% ratio.
The following table reflects the Company's Leverage, Tier 1 and
total risk-based capital ratios for the three year period ended
December 31, 1995.
1995 1994 1993
Leverage ratio 11.7% 12.3% 13.5%
Tier 1 capital ratio 20.8% 20.9% 23.0%
Total risk-based capital ratio 22.0% 22.2% 24.2%
On December 19, 1991, President Bush signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The
FDICIA, among other matters, substantially revises 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 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.
PAGE
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 49
Consolidated Balance Sheets, December 31, 1995 and 1994 50
Consolidated Income Statements for the years ended
December 31, 1995, 1994, and 1993 51
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1994 and 1993 52
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 53
Notes to Consolidated Financial Statements 54-67
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.
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, 1995 and 1994,
and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994,
and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 2, 1996
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
CASH AND DUE FROM BANKS $ 5,239,000 $ 6,514,000
FEDERAL FUNDS SOLD 17,700,000 3,500,000
SHORT-TERM INTEREST-BEARING DEPOSITS
IN OTHER BANKS - 250,000
------------ -------------
Total cash and cash equivalents 22,939,000 10,264,000
INTEREST-BEARING DEPOSITS IN OTHER BANKS 200,000 -
SECURITIES AVAILABLE FOR SALE
(at market value, cost - 1995,
$15,376,000; 1994, $15,936,000) 15,286,000 15,129,000
SECURITIES HELD TO MATURITY (at cost,
market value - 1995 $20,463,000,
1994, $22,611,000) 20,348,000 23,644,000
LOANS 37,535,000 33,541,000
ALLOWANCE FOR CREDIT LOSSES (776,000) (738,000)
------------ -------------
Loans, net 36,759,000 32,803,000
------------ -------------
PREMISES AND EQUIPMENT, Net 1,988,000 2,195,000
OTHER REAL ESTATE OWNED 1,745,000 1,717,000
ACCRUED INTEREST RECEIVABLE AND
OTHER ASSETS 1,232,000 1,784,000
------------ -------------
TOTAL $ 100,497,000 $ 87,536,000
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand, noninterest-bearing $ 20,410,000 $ 19,555,000
Demand, interest-bearing 14,218,000 14,280,000
Savings 13,113,000 14,541,000
Time 27,208,000 25,496,000
--------------- -------------
Total deposits 74,949,000 73,872,000
FEDERAL FUNDS PURCHASED 1,500,000 1,500,000
OTHER BORROWINGS 12,087,000 2,000,000
ACCRUED EXPENSES AND OTHER LIABILITIES 904,000 537,000
--------------- -------------
Total liabilities 89,440,000 77,909,000
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 1,030,972 shares 4,427,000 4,427,000
Retained earnings 6,797,000 6,019,000
Net unrealized loss on
securities available for sale (167,000) (819,000)
--------------- --------------
Total shareholders' equity 11,057,000 9,627,000
TOTAL $ 100,497,000 $ 87,536,000
============== ==============
See notes to consolidated financial statements.
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
INTEREST INCOME:
Loans, including fees $ 3,788,000 $ 3,361,000 $ 3,645,000
Federal funds sold 421,000 235,000 282,000
Securities:
Taxable 2,194,000 1,697,000 815,000
Non-taxable 169,000 127,000 132,000
Other - 26,000 75,000
----------- ----------- -----------
Total interest income 6,572,000 5,446,000 4,949,000
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 2,470,000 1,919,000 1,680,000
Borrowings 377,000 - -
Other 14,000 10,000 5,000
----------- ----------- -----------
Total interest expense 2,861,000 1,929,000 1,685,000
----------- ----------- -----------
NET INTEREST INCOME 3,711,000 3,517,000 3,264,000
PROVISION (CREDIT) FOR
CREDIT LOSSES - (636,000) 560,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION (CREDIT)
FOR CREDIT LOSSES 3,711,000 4,153,000 2,704,000
----------- ----------- ------------
OTHER INCOME:
Service charges 194,000 194,000 191,000
Rental income from
leased assets 119,000 179,000 106,000
Rental income from
other real estate
owned 102,000 - -
Net gain on sale of
securities available
for sale 72,000 - 43,000
Gain on sale of
other real estate owned 55,000 - 136,000
Gain on sale leased assets - - 64,000
Other 35,000 32,000 41,000
----------- ------------ ------------
Total other income 577,000 405,000 581,000
OTHER EXPENSES:
Salaries and employee
benefits 1,188,000 1,106,000 958,000
Occupancy 376,000 388,000 354,000
Insurance 161,000 176,000 253,000
Professional fees 156,000 186,000 236,000
Furniture and equipment 126,000 128,000 139,000
Depreciation on leased
assets 110,000 147,000 73,000
Net cost of other
real estate owned 115,000 514,000 262,000
Data Processing 5,000 118,000 172,000
Loss on sale of
securities available
for sale - 196,000 -
Other 591,000 564,000 465,000
----------- ----------- -----------
Total other expenses 2,868,000 3,523,000 2,912,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,420,000 1,035,000 373,000
PROVISION FOR INCOME TAXES 539,000 377,000 128,000
----------- ----------- -----------
NET INCOME $ 881,000 $ 658,000 $ 245,000
=========== =========== ===========
NET INCOME PER COMMON
AND EQUIVALENT SHARE $ 0.82 $ 0.59 $ 0.21
=========== =========== ===========
See notes to consolidated financial statements.
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Net
Unrealized
Loss on
Investments Total
Common Stock Retained Available Shareholders'
Shares Amount Earnings for Sale Equity
BALANCES,
JANUARY 1, 1993 1,164,686 $5,006,000 $5,466,000 $ - $10,472,000
Exercise of stock
options, Net of
shares exchanged 4,578 9,000 - - 9,000
Tax benefit of
stock option
exercises - 6,000 - - 6,000
Net unrealized
loss on securities
available for sale - - - (11,000) (11,000)
Net income - - 245,000 - 245,000
------------ ---------- ---------- -------- -----------
BALANCES,
DECEMBER 31, 1993 1,169,264 5,021,000 5,711,000 (11,000) 10,721,000
Shares repurchased 138,292) (594,000) (350,000) - (944,000)
Net unrealized
loss on securities
available for sale - - - (808,000) (808,000)
Net income - - 658,000 - 658,000
---------- ---------- ---------- --------- -----------
BALANCES,
DECEMBER 31, 1994 1,030,972 4,427,000 6,019,000 (819,000) 9,627,000
Cash dividend
($.10 per share) - - (103,000) - (103,000)
Net unrealized
gain on securities
available for sale - - - 652,000 652,000
Net income - - 881,000 - 881,000
----------- ---------- ---------- ---------- ----------
BALANCES,
DECEMBER 31, 1995 1,030,972 $4,427,000 $6,797,000 $ (167,000) $11,057,000
[CAPTION]
See notes to consolidated financial statements.
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
CASH FLOWS FROM OPERATIONS:
Net income $ 881,000 $ 658,000 $ 245,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Provision (credit)
for credit losses - (636,000) 560,000
Depreciation and
amortization 233,000 296,000 279,000
Deferred income taxes 392,000 131,000 (427,000)
Valuation allowance -
other real estate owned 35,000 481,000 202,000
Accrued interest
receivable and other assets 514,000 (485,000) 157,000
Accrued expenses and
other liabilities 367,000 (237,000) 281,000
Deferred loan fees 78,000 31,000 (81,000)
(Gain) loss on sale of
investments (72,000) 196,000 (43,000)
Gain on sale of other
real estate owned (55,000) - (121,000)
(Gain) loss on sale of
leased assets - - (64,000)
----------- ----------- -----------
Net cash provided by
operating activitie 2,373,000 435,000 988,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of securities
available for sale (2,590,000) (3,018,000) (24,276,000)
Purchase of securities
held to maturity (4,885,000) (12,597,000) (7,039,000)
Proceeds from maturities of
securities available
for sale - 100,000 4,406,000
Proceeds from maturities of
securities held to maturit y 8,417,000 1,155,000 1,578,000
Proceeds from sale of
securities available
for sale 2,625,000 3,965,000 5,043,000
Net (increase) decrease
in loans (4,797,000) (902,000) 4,615,000
Purchases of premises and
equipment (40,000) (34,000) (89,000)
Proceeds from sale of
premises and equipment 14,000 - -
Proceeds from sale of
leased assets - - 300,000
Proceeds from sale of
other real estate owned 735,000 1,154,000 481,000
Other (238,000) - -
------------ ----------- ------------
Net cash used in
investing activities (759,000) (10,177,000) (14,981,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,077,000 8,158,000 6,629,000
Net increase (decrease) in
federal funds purchased - (500,000) 2,000,000
Net increase (decrease)
in other borrowings 10,087,000 2,000,000 (47,000)
Payment of cash dividend (103,000) - -
Sale of common stock - - 9,000
Repurchase of common stock - (944,000) -
----------- ----------- -------------
Net cash provided by
financing activitie 11,061,000 8,714,000 8,591,000
------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 12,675,000 (1,028,000) (5,402,000)
CASH AND EQUIVALENTS,
BEGINNING OF YEAR 10,264,000 11,292,000 16,694,000
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $22,939,000 $10,264,000 $11,292,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during
the year for:
Interest $ 2,703,000 $ 1,940,000 $ 1,701,000
Income taxes $ 75,000 $ 861,000 $ 163,000
NON-CASH INVESTING AND FINANCING
ACTIVITIES -
Additions to other real
estate owned $ 670,000 $ 1,984,000 $ 108,000
See notes to consolidated financial statements.
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Bank is a full service bank, and as such, its
principal activities include the receiving and lending of money.
Additionally, the Bank provides bank card services and safe deposit
facilities. The accounting and reporting policies of the Bank conform
with generally accepted accounting principles and the prevailing practices
within the banking industry.
Consolidation - The consolidated financial statements include Saratoga
Bancorp (the Company) and its wholly-owned subsidiary, Saratoga National
Bank (the Bank). All material intercompany accounts and transactions have
been eliminated.
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. Actual results could differ from those estimates.
Cash and 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 Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," on December 31, 1993. In accordance with SFAS No.115, the
Company has classified its securities into two categories, securities
available for sale and held to maturity. 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.
Any gains and losses on sales of securities are computed on a specific
identification basis.
Loans - Loans are stated at the principal amount outstanding. 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 non-accrual 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. 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 by Creditors for Impairment of a Loan - On January 1, 1995 the
Company adopted SFAS No. 114 "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures". 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. Under SFAS 114 and 118
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 dependant.
Income recognition on impaired loans is consistant with the policy for
income recognition on nonaccrual loans described above. The Bank has
determined that there were no impaired loans as of December 31, 1995.
Premises and Equipment - Premises and equip ment are stated at cost less
accumulated depreciation andamortization. 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 st ated at cost net of accumulated
depreciation. Depreciation is computed on a straight-line basis over the
ease 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. The Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" effective January 1, 1995. The
adoption of this statement had no effect on the Company's financial
condition or results of operations.
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 - Deferred income taxes are provided for temporary differences
between financial statement and income tax reporting.
Net Income per Common and Equivalent Share - Net income per common and
equivalent share is calculated using the weighted average shares
outstanding plus the dilutive effect of stock options. The number of
shares used to compute net income per common and equivalent share was
1,066,772 shares in 1995, 1,117,076 shares in 1994 and 1,183,860 shares
in 1993. The difference between primary and fully diluted net income per
share is not significant in any year.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123, "Accounting for Stock-Based Compensation" The new
standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. The new standard
permits companies to continue to account for equity transactions with
employees under existing accounting rules, but requires disclosure in a
note to the financial statement of the pro forma net income
Reclassifications - Certain 1994 and 1993 amounts have been reclassified
to conform to the 1995 presentation. The reclassifications had no effect
on results of operations or shareholders' equity.
2. CASH AND DUE FROM BANKS
At December 31, 1995, aggregate reserves (in the form of deposits with the
Federal Reserve Bank) of $424,000 were maintained, which satisfied federal
regulatory requirements to maintain certain average reserve balances.
3. SECURITIES
The amortized cost and estimated market values of securities at
December 31 are as follows:
Securities available for sale
1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U. S Treasury and
agency securities $10,290,000 $ 29,000 $ (32,000) $10,287,000
Governmental mutual
fund 3,128,000 - (87,000) 3,041,000
Federal home loan
bank stock 1,958,000 - - 1,958,000
----------- ----------- ----------- -----------
Total $15,376,000 $ 29,000 $ (119,000) $15,286,000
=========== =========== =========== ===========
Securities Held to Maturity
U. S Treasury and
agency securities $ 5,564,000 $ 75,000 $ (7,000) $ 5,632,000
Mortgage-backed
securities 11,145,000 79,000 (72,000) 11,152,000
Obligations of
states and political
subdivisions 3,549,000 45,000 (5,000) 3,589,000
Federal reserve
bank stock 90,000 - - 90,000
----------- ----------- ----------- -----------
Total $20,348,000 $ 199,000 $ (84,000) $20,643,000
=========== =========== =========== ===========
1994
Securities Available for Sale
U. S Treasury and
agency securities $10,278,000 $ 22,000 $ (288,000) $10,012,000
Governmental mutual
fund 5,339,000 - (541,000) 4,798,000
Federal home loan
bank stock 319,000 - - 319,000
----------- ----------- ---------- -----------
Total $15,936,000 $ 22,000 $ (829,000) $15,129,000
=========== =========== ========== ===========
Securities Held to Maturity
U. S Treasury and
agency securities $11,640,000 $ 35,000 $ (377,000) $11 298,000
Mortgage-backed
securities 8,824,000 - (601,000) 8,223,000
Obligations of states
and political
subdivisions 3,090,000 17,000 (107,000) 3,000,000
Federal reserve
bank stock 90,000 - - 90,000
----------- ----------- ---------- -----------
Total $23,644,000 $ 52,000 $(1,085,000) $22,611,000
=========== =========== =========== ===========
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual maturity, are as follows:
Available for Sale Held to Maturity
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Due in one year
or less $ 7,705,000 $ 7,681,000 $ 165,000 $ 168,000
Due after one year
through five years 2,585,000 2,606,000 4,605,000 4,568,000
Due after five years
through ten years - - 4,343,000 4,485,000
Mortgage-backed
securities - - 11,145,000 11,152,000
Governmental mutual
fund 3,128,000 3,041,000 - -
----------- ----------- ----------- -----------
Total $13,418,000 $13,328,000 $20,258,000 $20,373,000
=========== =========== =========== ===========
The Federal Home Loan Bank and Federal Reserve Bank stocks are not
included in the maturity table as there is no stated maturity. Sale of
securities resulted in gross realized gains of $148,000 for 1995, (none in
1994 and $143,000 in 1993) and gross realized losses of $71,000 in 1995
($196,000 in 1994 and none in 1993.) During 1994, the Company transferred
securities from available for sale to held to maturity. The net unrealized
loss at the date of transfer of $214,000 is being amortized over the
remaining maturities of the investments. The unamortized portion of the
loss is $188,000 at December 31, 1995.
Mortgage-backed securities generally have stated maturities of four to
fifteen years, but are subject to likely and substantial prepayments which
effectively accelerate actual maturities. The Company's investment in
governmental mutual funds has no fixed maturity. At December 31, 1995
investments with an amortized cost of $12,306,000 were pledged to secure
public and certain other deposits as required by law or contract.
Effective December 7, 1995, two securities totaling $ 3,000,000 in
amortized cost and $3,105,000 market value and Federal Home Loan Bank
stock totaling $1,958,000 were reclassified from held to maturity to
available for sale in connection with initial adoption of the Financial
Accounting Standards Board Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities."
4. LOANS AND ALLOWANCES FOR CREDIT LOSSES
Loans at December 31, are comprised of the following:
1995 1994
Real estate
Construction $ 7,837,000 $ 5,278,000
Other 17,507,000 14,654,000
Commercial 11,585,000 12,082,000
Installment 77,000 543,000
Lease financing 920,000 1,375,000
Unearned income on lease financing (83,000) (161,000)
------------ ------------
Total loans 37,843,000 33,771,000
Deferred loans fees (308,000) (230,000)
------------ ------------
Loans, net of deferred loan fees $ 37,535,000 $ 33,541,000
============ ============
The activity in the allowance for credit losses is summarized as follows:
1995 1994 1993
Balance, beginning of year $ 738,000 $1,339,000 $ 971,000
Provision (credited) charged
to expense - (636,000) 560,000
Write-offs (45,000) (73,000) (259,000)
Recoveries 83,000 108,000 67,000
------------ ---------- ----------
Balance, end of year $ 776,000 $ 738,000 $1,339,000
========== ========== ==========
There were no nonaccrual loans at December 31, 1995 (1994, $707,000 and
1993, $2,294,000). The reduction in interest income associated with these
loans in 1994 and 1993 was $59,000 and $163,000, respectively. Interest
income recognized on such loans in 1994 and 1993 was $28,000 and $16,000.
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are comprised of the following:
1995 1994
Land $ 948,000 $ 948,000
Building and leasehold improvements 1,194,000 1,181,000
Furniture and equipment 860,000 832,000
Leased equipment 390,000 405,000
------------ ------------
Total 3,392,000 3,366,000
Accumulated depreciation and
amortization (1,404,000) (1,171,000)
------------ ------------
Premises and equipment, net $ 1,988,000 $ 2,195,000
============ ============
The Company's Los Gatos and San Jose branches are leased under
noncancellable operating leases which expire in 1998 and 1999,
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:
Fiscal
1996 $ 241,000
1997 250,000
1998 188,000
1999 176,000
-------------
Total $ 855,000
Rental expense under operating leases was $236,000 in 1995, $226,000 in
1994 and $222,000 in 1993.
6. OTHER REAL ESTATE OWNED
Other real estate owned was $1,745,000 and $1,717,000 at December 31, 1995
and 1994, respectively, (net of valuation allowance of $303,000 and
$268,000, respectively). The net cost of operation of other real estate
owned is as follows:
1995 1994 1993
Increases in valuation
allowance to reflect
decreases in estimated
fair value $ (35,000) $ (481,000) $ (202,000)
Net holding costs (80,000) (33,000) (60,000)
---------- ----------- ----------
Total $ (115,000) $ (514,000) $ (262,000)
========== ========== ==========
7. OTHER BORROWINGS
Other borrowings consist of borrowings from an U. S. agency of which
$3,570,000 is due in 1996 and the remaining is due subsequent to
December 1999.
8. INCOME TAXES
The provision for income taxes is comprised of the following:
Current:
Federal $ 68,000 $189,000 $434,000
State 79,000 57,000 121,000
--------- -------- --------
Total Current 147,000 246,000 555,000
--------- -------- --------
Deferred:
Federal 345,000 94,000 (340,000)
State 47,000 37,000 (87,000)
--------- -------- --------
Total Deferred 392,000 131,000 (427,000)
--------- -------- --------
Total $ 539,000 $377,000 $128,000
========= ======== ========
The effective tax rate differs from the federal statutory rate as follows:
Federal statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal effect 6.0 5.9 5.8
Tax exempt income (3.6) (4.2) (11.7)
Officer's life insurance 1.3 0.3 1.2
Other, net (0.7) (0.6) 4.0
---- ---- ----
Total 38.0% 36.4% 34.3%
==== ==== ====
The Company's net deferred tax asset at December , 31 is as follows:
Deferred tax assets:
Provision for credit losses $ 198,000 $ 214,000 $ 512,000
Provision for other real estate owned 126,000 121,000 147,000
Unrealized lossed on investments
available for sale 111,000 202,000 -
Deferred rent 52,000 63,000 69,000
Deferred compensation 30,000 60,000 42,000
Depreciation and amortization - 9,000 -
Other - 13,000 -
--------- -------- --------
Total deferred assets 517,000 682,000 770,000
--------- -------- --------
Deferred tax liabilities
Depreciation and amortization (242,000) - (111,000)
Cash basis income tax reporting - - (42,000)
Other (76,000) - (6,000)
--------- -------- --------
Total deferred liabilities (318,000) - (159,000)
--------- -------- --------
Net deferred tax asset $ 199,000 $ 682,000 $ 611,000
========= ========= =========
There was no valuation allowance at December 31, 1995 and 1994.
9. STOCK OPTION PLAN
The Company's stock option plans authorize the issuance to employees,
officers and directors of incentive and nonstatutory options to purchase
common stock. Options generally are granted at fair market value, become
exercisable over terms of up to four years from date of grant and expire
no more than ten years from date of grant.
Option activity is summarized as follows:
Balances at January 1, 1993 191,747 $3.50 -$9.17
Exercised (7,717) 3.63 - 4.36
Cancelled (7,653) 5.90 - 9.17
--------- ------------
Balances at December 31, 1993 176,377 3.50 - 9.17
Granted 97,300 6.31
Cancelled (7,000) 6.17 - 6.31
--------- ------------
Balances at December 31, 1994 266,677 3.50 - 9.17
Granted 31,750 6.75
Cancelled (6,200) 6.17 - 6.75
--------- ------------
Balances at December 31, 1995 292,227 $3.50 -$9.17
====== ============
At December 31, 1995, options for 21,558 shares are available for future
grant and 247,798 are exercisable.
10. 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 $15,021,000 and
standby letters of credit of $35,000 at December 31, 1995. The Bank's
exposure to credit loss is limited to amounts funded or drawn; however,
at December 31, 1995, 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.
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, 1995,
these payments would have aggregated up to $291,000.
11. 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. Commercial
loans represent 31% of total loans, with no particular industry
representing a significant portion. Approximately 21% of the Bank's loans
are for real estate construction, of which 92% are for single family
residential properties and 8% are for land development. Other real estate
secured loans, primarily for commercial properties, represent another 46% of
loans. Installment and other loans, primarily automobile loans, represent
the remainder of loans. Many of the Bank's customers are employed by or
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.
12. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
statements is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Values of Financial Statements." The 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 the 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, 1995. 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).
December 31, 1995
Carrying Estimated fair
Amount Value
Loans, net $36,759,000 $31,047,000
Time deposits $27,208,000 $27,375,000
Loans
The fair value of loans with fixed rates is estimated 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.
Deposit liabilities
The fair value of demand deposits, savings accounts and certain money
market deposits, is the amount payable on demand at the reporting date
and is equal to the carrying value. 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 commitment is funded and the amount of the commitment
equals its 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 is funded and the amount of the
standby letter of credit equals its fair value.
13. REGULATORY MATTERS
The Company is subject to Federal Reserve Board ("FRB") guidelines and the
Bank is subject to Federal Deposit Insurance Corporation ("FDIC")
regulations governing capital adequacy. The FRB guidelines and the FDIC
regulations require that bank holding companies and banks meet both
risk-weighted capital and leverage capital ratio requirements.
The risk-weighted capital requirements involve assigning assets to four
broad risk categories and establishing minimum capital ratios based on the
require maintenance of an 8% ratio of capital to risk-weighted assets, with
Tier I capital comprising at least 4% thereof. Tier I capital consists of
common equity and retained earnings. At December 31, 1995, the ratio of
Tier I capital to risk-weighted assets was 20.8% and 20.5% for the Company
and the Bank, respectively. In addition, the FRB and the FDIC have adopted
leverage capital guidelines which call for a minimum ratio of 3% to 5% of
Tier I capital to total assets for bank holding companies and banks. The
leverage ratio of Tier I capital to total assets was 11.7% and 11.5% for
the Company and the Bank, respectively, at December 31, 1995.
14. CONDENSED FINANCIAL INFORMATION OF SARATOGA BANCORP (PARENT ONLY)
The condensed financial statements of Saratoga Bancorp are as follows:
CONDENSED BALANCE SHEETS
ASSETS:
Cash-interest bearing account
with Bank $ 149,000 $ 8,000
Short-term interest bearing
deposits - 250,000
Real estate loans - 36,000
Investment in Bank 10,882,000 9,322,000
Other assets 27,000 12,000
------------- ------------
Total $ 11,058,000 $ 9,628,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 1,000 $ 1,000
Common stock 4,427,000 4,427,000
Retained earnings 6,797,000 6,019,000
Unrealized loss on investments
available for sale (167,000) (819,000)
------------- -------------
Total $ 11,058,000 $ 9,628,000
============= =============
December 31,
CONDENSED INCOME STATEMENTS 1995 1994 1993
Interest income $ 8,000 $ 43,000 $ 49,000
Credit for credit losses - 10,000 1,000
Other expenses (50,000) (57,000) (61,000)
------------- ------------- ------------
Loss before income taxes and
equity in undistributed net
income of Bank (42,000) (4,000) (11,000)
Income taxes 16,000 1,000 4,000
Equity in undistributed net
income of Bank 907,000 661,000 252,000
------------ ------------- ------------
Net income $ 881,000 $ 658,000 $ 245,000
============ ============= ============
Cash flows from operations:
Net income $ 881,000 $ 658,000 $ 245,000
Adjustments to reconcile
net income to net
cash (used in) provided
by operating activities:
Equity in undistributed
net income of Bank (907,000) (661,000) (252,000)
Credit for credit losses - (10,000) (1,000)
Change in other assets (16,000) - 78,000
Change in other liabilities - 1,000 -
----------- ------------ -----------
Net cash (used in) provided
by operating activities (42,000) (12,000) 70,000
Cash flows from investing
activities - Net change
in loans 36,000 354,000 619,000
----------- ------------ -----------
Cash flows from financing
activities -
Cash dividend (103,000) - -
Repurchase of common stock - (944,000) -
Sale of common stock - - 9,000
----------- ------------ -----------
Net cash (used in) provided
by financing activities (103,000) (944,000) 9,000
----------- ------------ -----------
Net (decrease) increase in cash (109,000) (602,000) 698,000
Cash, beginning of year 258,000 860,000 162,000
----------- ------------ -----------
Cash, end of year $ 149,000 $ 258,000 $ 860,000
=========== ============ ===========
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, 1995, the
amount available for distribution from the Bank to the Company was
approximately $1,681,000, 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.
* * * * *
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 1996 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 1996 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 1996 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 1996 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
resent or is 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.
(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 is
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.
(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
Registrant filed no reports on Form 8-K for the
three month period ended December 31, 1995.
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
By_______________________________
Richard L. Mount, President
(Principal Executive Officer)
Date_____________________________
By_______________________________
Mary Page-Rourke, Treasurer
(Principal Financial and
Accounting Officer)
Date_____________________________
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
__________________ Director _______________
Victor Aboukhater
__________________ Director and Secretary _______________
Neal A. Cabrinha
Name Title Date
__________________ Director _______________
Robert G. Egan
__________________ Director _______________
William D. Kron
__________________ Director _______________
John F. Lynch III
__________________ Director _______________
V. Ronald Mancuso
Chairman of the Board
__________________ President and Director _______________
Richard L. Mount (Principal Executive
Officer)
__________________ Treasurer _______________
Mary Page-Rourke (Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
10.8 Saratoga Bank Savings Plan dated
June 19, 1995 74 - 177
23 Independent Auditors' Consent 178
27 Financial Data Schedule 179