1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission file number 2-77519-LA
SARATOGA BANCORP
(Exact name of registrant as specified in its charter)
California 94-2817587
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 Saratoga-Sunnyvale Road
Saratoga, California 95070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (408) 973-1111
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable date.
CLASS SHARES OUTSTANDING AT APRIL 25, 1997
Common Stock 1,050,173
The Index to Exhibits appears on Page 15
Page 1 of 16 pages
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1997 1996*
(Unaudited)
ASSETS
Cash and due from banks $ 4,912,000 $ 4,543,000
Federal funds sold 20,000,000 18,300,000
Total cash and equivalents 24,912,000 22,843,000
Securities available for sale 17,316,000 17,949,000
Securities held to maturity 23,526,000 24,111,000
Loans, net 52,269,000 52,033,000
Other real estate owned 1,252,000 1,252,000
Premises and equipment 2,106,000 2,135,000
Other assets 1,563,000 1,461,000
TOTAL ASSETS $122,944,000 $121,784,000
=========== ===========
LIABILITIES
Deposits:
Non interest-bearing $ 21,251,000 $ 22,823,000
Interest-bearing 70,352,000 66,621,000
Total deposits 91,603,000 89,444,000
Federal funds purchased - 1,500,000
Other borrowings 18,165,000 18,201,000
Accrued expenses and
other liabilities 969,000 687,000
TOTAL LIABILITIES 110,737,000 109,832,000
SHAREHOLDERS' EQUITY
Common stock, no par value;
Authorized: 20,000,000 shares;
Issued and outstanding:
1,036,392 shares 4,461,000 4,461,000
Net retained earnings 7,996,000 7,717,000
Unrealized loss on securities
available for sale (250,000) (226,000)
TOTAL SHAREHOLDERS' EQUITY 12,207,000 11,952,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $122,944,000 $121,784,000
=========== ===========
*Derived from the December 31, 1996 audited balance sheet included
in the Company's 1996 Annual Report on Form 10-K.
See notes to consolidated condensed financial statements.
3
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED INCOME STATEMENTS (Unaudited)
Three Months Ended
March 31,
1997 1996
------------ ------------
INTEREST INCOME:
Loans $1,303,000 $ 983,000
Investment securities 592,000 603,000
Federal funds sold 224,000 155,000
----------- -----------
Total interest income 2,119,000 1,741,000
----------- -----------
INTEREST EXPENSE:
Deposits 731,000 618,000
Other 280,000 196,000
----------- -----------
Total interest expense 1,011,000 814,000
----------- -----------
NET INTEREST INCOME BEFORE
CREDIT FOR CREDIT LOSSES 1,108,000 927,000
Credit for credit losses - (50,000)
----------- -----------
Net interest income after
credit for credit losses 1,108,000 977,000
Other income 122,000 70,000
Other expenses 780,000 722,000
----------- -----------
INCOME BEFORE INCOME TAXES 450,000 325,000
Provision for income taxes 171,000 123,000
----------- -----------
NET INCOME $ 279,000 $ 202,000
=========== ===========
NET INCOME PER COMMON AND
EQUIVALENT SHARE $0.24 $0.18
=========== ===========
See notes to consolidated condensed financial statements.
<PAGEl\> 4
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
1997 1996
OPERATIONS:
Net income $ 279,000 $ 202,000
Adjustments to reconcile net
income to net cash provided
by (used in)operating
activities:
Credit for credit losses - (50,000)
Depreciation and amortization 46,000 42,000
Other, net 187,000 (234,000)
Net cash provided by (used in)
operating activities 512,000 (40,000)
INVESTING ACTIVITIES:
Proceeds from maturities of
securities available for sale 690,000 -
Proceeds from maturities of
securities held to maturity 647,000 533,000
Purchase of securities available
for sale - (8,321,000)
Purchase of securities held to
maturity (150,000) (3,986,000)
Net (increase) decrease in loans (236,000) 1,340,000
Purchases of premises and equipment (17,000) (293,000)
Net cash provided by (used in)
investing activities 934,000 (10,727,000)
FINANCING ACTIVITIES:
Net increase in deposits 2,159,000 3,415,000
Payment of dividends - (77,000)
Net (decrease) increase in
other borrowings (36,000) 974,000
Decrease in federal funds purchased (1,500,000) (1,500,000)
Net cash provided by financing
activities 623,000 2,812,000
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 2,069,000 (7,951,000)
Cash and equivalents,
Beginning of period 22,843,000 22,939,000
Cash and equivalents,End of period $24,912,000 $14,988,000
=========== ===========
See notes to consolidated condensed financial statements.
5
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 1997 AND 1996
1. The unaudited consolidated condensed financial statements
reflect all adjustments (which include only normal recurring
adjustments) which are, in the opinion of management, necessary to
state fairly the results for the periods presented. The results
for the periods are not necessarily indicative of the results to be
expected for the full fiscal year.
2. Per share amounts are calculated using the weighted average
shares outstanding plus the dilutive effect of shares issuable
under stock options. The number of shares used to compute income
per share was 1,176,013 shares for the three month period ended
March 31, 1997 (1,089,378 shares for the comparable period in
1996). In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128). Earlier application is not
permitted.
SFAS 128 replaces current EPS reporting requirements and requires
a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $0.27 and $0.20 for the quarters
ended March 31, 1997 and 1996, respectively. Diluted EPS under
SFAS 128 would not have been significantly different than EPS
currently reported for the periods.
3. There was no cash paid for income taxes during the three months
ended March 31, 1997. For the three months ended March 31, 1996,
cash paid for income taxes was $209,000. During the three months
ended March 31, 1997 and 1996, cash paid for interest was $959,000
and $606,000, respectively.
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SARATOGA BANCORP AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Summary of financial results
At March 31, 1997, total assets were $122,944,000, an increase of
$1,160,000 (1.0%) from $121,784,000 at December 31, 1996. Net
loans increased $236,000 from $52,033,000 at December 31, 1996 to
$52,269,000 at March 31, 1997. Total deposits increased $2,159,000
(2.4%) from $89,444,000 at year-end 1996 to $91,603,000 at March
31, 1997.
Net income for the first quarter of 1997 was $279,000 or $.24 per
share compared to $202,000 ($.18 per share) for the comparable
period in 1996.
The increase in income resulted primarily from an increase in the
volume of earning assets, offset in part by a decrease in the yield
on earning assets and an increase in interest expense due to the
increased volume of interest-bearing liabilities.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1997 AND 1996
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-Q are forward-looking statements that
are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, matters described in
Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Therefore, the information
set forth therein should be carefully considered when evaluating
the the business prospects of the Company and the Bank.
An analysis of the results of operations of the Company for the
first quarter of 1997 compared to the first quarter of 1996 is
presented below:
7
Net interest income
Net interest income, the difference between interest earned on
loans and investments and interest paid on deposits, is the
principal component of the Bank's earnings. The components of net
interest income are as follows:
Three months ended March 31,
1997 1996
Average Average Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
(In thousands, except percentages)
Assets:
Earning assets:
Loans (2) $ 53,050 $1,303 9.8% $37,547 $ 983 10.5%
Securities 41,558 592 5.7 37,961 603 6.4
Federal funds sold 17,777 224 5.0 11,880 155 5.2
Total interest
earning assets 112,385 2,119 7.5 87,388 1,741 8.0
Cash and due from
banks 4,446 3,937
Other assets (3) 3,992 4,204
$120,823 $95,529
======== =======
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 37,006 311 3.4 $24,163 202 3.3
Time deposits 31,715 420 5.3 31,051 416 5.4
Other borrowings 18,183 280 6.2 12,095 196 6.5
Total interest-
bearing
liabilities 86,904 1,011 4.7 67,309 814 4.8
Demand deposits 21,033 16,237
Other liabilities 774 877
Total liabilities 108,711 84,423
Shareholders' equity 12,112 11,106
$120,823 $95,529
======== =======
Net interest income and margin $1,108 3.9% $927 4.2%
====== ======
(1) Annualized.
(2) Loan interest income includes loan fee income of $83,000 and
$77,000 for the quarters ended March 31, 1997 and 1996,
respectively.
(3) Other assets include the average allowance for credit losses
of $623,000 and $761,000 and deferred loan fees of $325,000
and $295,000 for the quarters ended March 31, 1997 and 1996,
respectively.
8
Provision for credit losses
The Bank maintains an allowance for possible credit losses which is
based, in part, on the Bank's historical loss experience, the
impact of forecasted economic conditions within the Bank's market
area, and, as applicable, the State of California, the value of the
underlying collateral, loan performance and inherent risks in the
loan portfolio. The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating
expense and recoveries of previously charged-off loans. During
the first quarter of 1997, the Bank did not record a provision for
credit losses. During the first quarter of 1996, the Bank reversed
$50,000 from the allowance for credit losses. There were $18,000
in loans charged-off and $10,000 in recoveries in the first quarter
of 1997, compared to $29,000 in loans charged-off and $11,000 in
recoveries in the first quarter of 1996.
At March 31, 1997, the allowance for credit losses was $620,000 or
1.2% of total loans, compared to $628,000 or 1.2% at December 31,
1996. There were no nonaccrual loans at March 31, 1997 or December
31, 1996.
At March 31, 1997 and December 31, 1996, there were no loans past
due 90 days or more as to principal or interest and still accruing
interest. There was one loan at March 31, 1997 in the amount of
$183,000 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." At March
31, 1997, there were five potential problem loans having a combined
principal balance of $788,000 ($1,140,000 at December 31, 1996).
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.
Other Real Estate Owned ("OREO") totalled $1,252,000 at March 31,
1997 and December 31, 1996. OREO consisted of a 12 lot subdivision
with an appraised value in excess of the Bank's carrying value.
The Company is actively marketing the property.
9
Nonperforming loans and OREO are summarized below:
March 31, 1997 December 31, 1996
Nonperforming loans:
Past due 90 days or more $ - $ -
Nonaccrual - -
Total - -
Other real estate owned 1,252,000 1,252,000
Total nonperforming loans and
other real estate owned $1,252,000 $1,252,000
========== ==========
Management is of the opinion that the allowance for credit losses
is maintained at an adequate level for known and currently
anticipated future risks inherent in the loan portfolio. However,
the Bank's loan portfolio, which includes approximately $31,000,000
in real estate loans representing approximately 60% of the
portfolio, could be adversely affected if California economic
conditions and the real estate market in the Bank's market area
were to weaken. The effect of such events, although uncertain at
this time, could result in an increase in the level of
nonperforming loans and OREO and the level of the allowance for
loan losses which could adversely affect the Company's and the
Bank's future growth and profitability.
NONINTEREST INCOME
Other income consists of service charges on deposit accounts,
income from assets acquired for lease and fees for other
miscellaneous services. Total other income increased from $70,000
in the first quarter of 1996 to $122,000 in the first quarter of
1997. This increase is primarily attributable to an increase in
service charges assessed on deposit accounts and gain on sale of
loans of $12,000.
NONINTEREST EXPENSE
Other expenses increased from $722,000 in the first quarter of 1996
to $780,000 in the first quarter of 1997. This increase is
primarily attributable to an increase in salary and legal expenses.
As a percentage of average earning assets, other expenses for the
first quarter, on an annualized basis, were 3.3% and 2.8% in 1996
and 1997, respectively.
10
LIQUIDITY AND CAPITAL RESOURCES
The Bank manages its liquidity to provide adequate funds at an
acceptable cost to support borrowing requirements and deposit flows
of its customers. Liquid assets as a percentage of deposits were
46% at March 31, 1997 and December 31, 1996. In addition to cash
and due from banks, liquid assets include Federal funds sold and
securities available for sale. The Bank has $11.0 million in
Federal funds lines of credit available with correspondent banks to
meet liquidity needs.
Management regularly reviews general economic and financial
conditions, both external and internal, and determines whether the
positions taken with respect to liquidity and interest rate
sensitivity continue to be appropriate. The Bank also utilizes a
monthly "Gap" report which identifies rate sensitivity over the
short- and long-terms.
The following table sets forth the distribution of repricing
opportunities, based on contractual terms, of the Company's earning
assets and interest-bearing liabilities at March 31, 1997, the
interest rate sensitivity gap (i.e. interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest
rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.
interest rate sensitive assets divided by interest rate sensitive
liabilities) and the cumulative interest rate sensitivity gap
ratio.
Based on the contractual terms of its assets and liabilities, the
Bank is currently liability sensitive in terms of its exposure to
interest rates through the next five years. In other words, the
Bank's liabilities reprice faster than its assets during the next
five years.
11
DISTRIBUTION OF REPRICING OPPORTUNITIES
At March 31, 1997
(Dollars in thousands)
After Three After Six After One
Within Months But Months But Year But After
Three Within Six Within One Within Five
Months Months Year Five Years Years Total
Federal funds sold $20,000 $ - $ - $ - $ - $20,000
Municipal securities 230 405 - 2,209 2,648 5,492
U.S. Treasury and
Agency securities 3,493 - 2,709 8,142 17,553 31,987
FRB/FHLB stock - - - - 3,453 3,453
Loans 27,608 2,389 2,536 7,022 13,659 53,214
Total earning assets $51,331 $ 2,794 $ 5,245 $17,373 $37,313 $114,056
Interest-bearing
demand deposits $40,055 $ - $ - $ - $ - $ 40,055
Savings deposits 3,958 - - - - 3,958
Time certificates of
deposit of $100,000
or more 4,977 $ 1,922 $ 1,787 $ 2,929 - 11,615
Other time deposits 4,866 1,776 4,380 3,703 - 14,725
Other borrowings - - - 7,103 $11,062 18,165
Total interest-bearing
liabilities $53,856 $3,698 $ 6,167 $13,735 $11,062 $ 88,518
Interest rate
sensitivity gap $(2,525) $ (904) $ (922) $ 3,638 $26,251 $ 25,538
======= ======= ======= ======= ======= ========
Cumulative interest
rate sensitivity
gap $(2,525) $(3,429) $(4,351) $ (713) $25,538
======= ======= ======= ======= =======
Interest rate
sensitivity gap
ratio 0.95% 0.76% 0.85% 1.26% 3.37%
Cumulative interest
rate sensitivity
gap ratio 0.95% 0.94% 0.93% 0.99% 1.29%
12
The Company and the Bank are subject to capital adequacy guidelines
issued by the Board of Governors of the Federal Reserve System (the
"Board of Governors") and the Office of the Comptroller of the Currency
("OCC"). The Company and the Bank are required to maintain total capital
equal to at least 8% of assets and commitments to extend credit,
weighted by risk, of which at least 4% must consist primarily of common
equity including retained earnings (Tier 1 capital) and the remainder
may consist of 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 March 31, 1997, the
Company's total risk-based capital ratio was approximately 18.4%
(approximately 17.3% for the Bank) compared to approximately 18.0%
(approximately 17.1% for the Bank) at December 31, 1996.
The Board of Governors and the OCC adopted a 3% minimum leverage ratio
for banking organizations as a supplement to the risk-weighted capital
guidelines. 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 BGFRS
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 as of March 31, 1997 and December 31, 1996.
March 31, 1997 December 31, 1996
Leverage ratio 9.8% 10.5%
Tier 1 capital ratio 17.5% 17.1%
Total risk-based capital ratio 18.4% 18.0%
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA, among
other matters, substantially revised banking regulations and established
a framework for determination of capital adequacy of financial
institutions. Under the FDICIA, financial institutions are placed into
one of five capital adequacy catagories as follows: (1) "Well
capitalized" - consisting of institutions with a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6%
or greater and a leverage ratio of 5% or greater, and the institution is
not subject to an order, written agreement, capital directive or prompt
corrective action directive; (2) "Adequately capitalized" - consisting
of institutions with a total risk-based capital ratio of 8% or greater,
a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio
13
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. FDICIA requires bank regulatory authorities to initiate
corrective action regarding financial institutions which fail to meet
minimum capital requirements. Such action may result in orders to,
among other matters, augment capital and reduce total assets.
Critically undercapitalized financial institutions may also be subject
to appointment of a receiver or implementation of a capitalization plan.
OTHER MATTERS
From time to time, the Company's Board of Directors reviews and consults
with advisors, including investment banking and legal advisors,
regarding banking industry trends and developments, as well as internal
and external opportunities to maximize shareholder value. Such reviews
and consultations include evaluating and comparing internal results of
operations projections and external opportunities for mergers,
acquisitions, reorganizations, or other transactions with third parties
which may be in the interests of the Company's shareholders. The
Company's Board of Directors considers such periodic review and
consultation to be important as part of their analysis of the Company's
value and prospects in the changing banking environment and in view of
the current consolidation activity within the banking industry.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) (3) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On April 1, 1997, Registrant filed a Current Report on
Form 8-K, dated March 31, 1997, reporting under Item
6 (Resignations of registrant's directors) the resignation
of Neal A. Cabrinha.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SARATOGA BANCORP
Richard L. Mount
Date: May 8, 1997 -------------------------
Richard L. Mount, President
(Principal Executive Officer)
15
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
27.1 Financial Data Schedule 16