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 June 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission file number 2-77519-LA
SARATOGA BANCORP
(Exact name of registrant as specified in its charter)
California 94-2817587
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 Saratoga-Sunnyvale Road
Saratoga, California 95070
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (408) 973-1111
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable date.
CLASS SHARES OUTSTANDING AT JULY 29, 1999
Common Stock 1,586,588
Exhibit Index at Page 26
Page 1 of 176 pages
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998*
(Unaudited)
ASSETS
Cash and due from banks $ 7,212,000 $ 6,549,000
Federal funds sold 16,900,000 14,450,000
Total cash and equivalents 24,112,000 20,999,000
Interest bearing deposits in
other banks 1,789,000 1,789,000
Securities available for sale 32,507,000 30,811,000
Securities held to maturity 10,791,000 9,304,000
Loans, net 68,261,000 73,847,000
Premises and equipment 3,742,000 2,268,000
Other assets 7,356,000 5,784,000
TOTAL ASSETS $148,558,000 $144,802,000
=========== ===========
LIABILITIES
Deposits:
Non interest-bearing $ 30,038,000 $ 27,460,000
Interest-bearing 79,606,000 75,955,000
Total deposits 109,644,000 103,415,000
Federal funds purchased - 2,000,000
Other borrowings 22,613,000 22,697,000
Accrued expenses and
other liabilities 1,447,000 1,433,000
TOTAL LIABILITIES 133,704,000 129,545,000
SHAREHOLDERS' EQUITY
Common stock, no par value;
Authorized: 20,000,000 shares;
Issued and outstanding:
1,586,588 shares at June 30,
1999 and 1,629,357 shares at
December 31, 1998 4,434,000 4,684,000
Retained earnings 10,857,000 10,591,000
Accumulated other comprehensive
income, net of taxes of $257,000
and $11,000, respectively (437,000) (18,000)
TOTAL SHAREHOLDERS' EQUITY 14,854,000 15,257,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $148,558,000 $144,802,000
=========== ===========
*Derived from the December 31, 1998 audited balance sheet included in
the Company's 1998 Annual Report on Form 10-K.
See notes to consolidated condensed financial statements.
3
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
INTEREST INCOME:
Loans $1,716,000 $1,536,000 $3,465,000 $3,094,000
Investment securities 636,000 698,000 1,254,000 1,446,000
Federal funds sold 194,000 189,000 321,000 293,000
Total interest income 2,546,000 2,423,000 5,040,000 4,833,000
INTEREST EXPENSE:
Deposits 799,000 726,000 1,575,000 1,443,000
Other 337,000 353,000 674,000 705,000
Total interest expense 1,136,000 1,079,000 2,249,000 2,148,000
NET INTEREST INCOME
BEFORE PROVISION
FOR CREDIT LOSSES 1,410,000 1,344,000 2,791,000 2,685,000
Provision for credit
losses 26,000 51,000 66,000 102,000
Net interest income
after provision for
credit losses 1,384,000 1,293,000 2,725,000 2,583,000
Other income 278,000 133,000 508,000 292,000
Other expenses 903,000 729,000 1,728,000 1,505,000
INCOME BEFORE INCOME TAXES 759,000 697,000 1,505,000 1,370,000
Provision for income taxes 281,000 264,000 557,000 520,000
NET INCOME 478,000 433,000 948,000 850,000
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized (losses)gains
on securities (288,000) 15,000 (419,000) 39,000
COMPREHENSIVE INCOME $ 190,000 $ 448,000 $ 529,000 $ 889,000
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.30 $ 0.26 $ 0.59 $ 0.52
========== ========== ========== ==========
Diluted $ 0.27 $ 0.24 $ 0.53 $ 0.47
========== ========== ========== ==========
See notes to consolidated condensed financial statements.
4
SARATOGA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
1999 1998
OPERATIONS:
Net income $ 948,000 $ 850,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 66,000 102,000
Depreciation and amortization 194,000 90,000
Gain on sale of premises and
equipment 33,000 -
Other, net (73,000) 158,000
Net cash provided by operating activities 1,168,000 1,200,000
INVESTING ACTIVITIES:
Net increase in interest bearing
deposits in other banks - (100,000)
Proceeds from maturities or sale of `
investments available for sale 3,283,000 13,309,000
Proceeds from maturities of investments
held to maturity 200,000 3,012,000
Purchase of securities available for sale (5,637,000) (7,000,000)
Purchase of securities held to maturity (1,695,000) (2,985,000)
Net decrease (increase) in loans 5,520,000 (653,000)
Purchase of life insurance policies (1,238,000)
Purchases of premises and equipment (2,182,000) (473,000)
Proceeds from sale of premises and
equipment 481,000 -
Net cash provided by (used in) investing
activities (1,268,000) 5,110,000
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 6,229,000 1,373,000
Issuance of common stock 35,000 20,000
Payment of cash dividends (160,000) (112,000)
Repurchase of common stock (807,000) -
Net (decrease) increase in other borrowings (84,000) (111,000)
Decrease in federal funds purchased (2,000,000) (2,000,000)
Net cash (used in) provided by financing
activities 3,213,000 (830,000)
NET INCREASE (DECREASE)IN CASH
AND EQUIVALENTS 3,113,000 5,480,000
Cash and equivalents, beginning of period 20,999,000 15,260,000
Cash and equivalents, end of period $24,112,000 $20,740,000
=========== ===========
See notes to consolidated condensed financial statements.
5
SARATOGA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
QUARTERS ENDED JUNE 30, 1999 AND 1998
1. The unaudited consolidated condensed financial statements
reflect all adjustments (which include only normal recurring
adjustments) which are, in the opinion of management,
necessary to state fairly the results for the periods
presented. The results for the periods are not necessarily
indicative of the results to be expected for the full fiscal
year.
2. Basic Earnings Per Share is computed by dividing net
income by the weighted average common shares outstanding
during the period. Diluted Earnings Per Share reflects the
potential dilution if securities or other contracts to issue
common stock are exercised or converted into common stock.
Diluted earnings per share is computed by dividing net income
by the average shares outstanding for the period plus the
dilutive effect of stock options. The weighted average shares
used in computing earnings per share are as follows:
Quarters ended June 30,
1999 1998
Weighted average shares used
in computing:
Basic earnings per share 1,588,000 1,644,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 182,000 185.000
Diluted earnings per share 1,770,000 1,829,000
Six Months ended June 30,
1999 1998
Weighted average shares used
in computing:
Basic earnings per share 1,598,000 1,642,000
Diluted potential common shares
from exercise of stock options,
using the treasury stock method 179,000 178.000
Diluted earnings per share 1,777,000 1,820,000
3. In 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information",which
6
establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers.
Management has determined that since all of the commercial
banking products and services offered by the Bank are
available in each branch of the Bank, all branches are located
within the same economic environment and management does not
allocate resources based on the performance of different
lending or transaction activities, it is appropriate to
aggregate the Bank's operations into a single operating
segment.
4. Effective July 1, 1998, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for
derivative instruments and hedging activities. In connection
with the adoption of SFAS 133 the Company reclassified certain
securities with an amortized cost of $19,751,000 and a fair
value of $19,967,000 from held-to-maturity to available-for-
sale. Adoption of this statement did not have any other
impact on the Company's consolidated financial position and
had no impact on the Company's results of operations or cash
flows.
5. During the six months ended June 30, 1999 and 1998, cash
paid for taxes was $220,000 and $627,000, respectively.
During the six months ended June 30, 1999 and 1998, cash paid
for interest was $2,232,000 and $2,083,000, respectively.
7
SARATOGA BANCORP AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Certain matters discussed or incorporated by reference
in this Quarterly Report on Form 10-Q are forward-looking
statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those
projected. Changes to such risks and uncertainties, which
could impact future financial performance, include, among
others, (1) competitive pressures in the banking industry;
(2)changes in interest rate environment; (3)general economic
conditions, nationally, regionally and in operating market
areas; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; (6) changes in
securities markets; and (7) Year 2000 compliance problems.
Therefore, the information set forth herein should be
carefully considered when evaluating business prospects of
the Company and the Bank.
SUMMARY OF FINANCIAL RESULTS
At June 30, 1999, total assets were $148,558,000, an
increase of $3,756,000 (2.6%) from $144,802,000 at December
31, 1998. Net loans decreased $5,586,000 (7.6%) from
$73,847,000 at December 31, 1998 to $68,261,000 at June 30,
1999. Total deposits increased $6,229,000 (6.0%) from
$103,415,000 at December 31, 1998 to $109,644,000 at June
30, 1999.
Net income for the second quarter of 1999 was $478,000
($0.30 basic earnings per share, $0.27 diluted earnings per
share) compared to $433,000 ($0.26 basic earnings per share,
$0.24 diluted earnings per share) for the comparable period
in 1998. Net income for the first six months of 1999 was
$948,000 ($0.59 basic earnings per share, $0.53 diluted
earnings per share) compared to $850,000 ($0.52 basic
earnings per share, $0.47 diluted earnings per share) for
the comparable period in 1998.
The increase in income resulted primarily from an increase
in the volume of earning assets, offset in part by a
decrease in the yield on earning assets and an increase in
interest expense due to the increased volume of interest-
bearing liabilities.
8
RESULTS OF OPERATIONS
SECOND QUARTER OF 1999 AND 1998
An analysis of the results of operations of the Company for
the second quarter of 1999 compared to the second quarter
of 1998 is presented below:
NET INTEREST INCOME
Net interest income, the difference between interest earned
on loans and investments and interest paid on deposits, is
the principal component of the Bank's earnings. The
components of net interest income are as follows:
Three months ended June 30,
1999 1998
Average Average Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
(In thousands, except percentages) (unaudited)
Assets:
Earning assets:
Loans (2) $ 72,971 $1,716 9.4% $ 62,494 $1,536 9.8%
Investment
securities 45,310 636 5.6 45,837 698 6.1
Federal funds sold 16,258 194 4.8 13,805 189 5.5
Total interest
earning assets 134,539 2,546 7.6 122,136 2,423 7.9
Cash and due from
banks 6,883 5,053
Other assets (3) 9,659 2,754
$151,081 $129,943
======== ========
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 42,388 339 3.2 $ 39,130 351 3.6
Time deposits 40,258 460 4.6 28,025 375 5.4
Other borrowings 22,641 337 6.0 22,910 353 6.2
Total interest-
bearing
liabilities 105,287 1,136 4.3 90,065 1,079 4.8
Demand deposits 28,756 24,632
Other liabilities 2,097 1,240
Total liabilities 136,140 115,937
Shareholders' equity 14,941 14,006
$151,081 $129,943
======= =======
Net interest income
and margin(4) $1,410 4.2% $1,344 4.4%
====== ======
(1) Annualized.
(2) Loan interest income includes loan fee income of
$105,000 and $98,000 for the quarters ended June 30,
1999 and 1998,respectively.
(3) Net of the average allowance for loan losses of
$772,000 and $668,000 and deferred loan fees of
$294,000 and $317,000 for the quarters ended June 30,
1999 and 1998, respectively.
(4) Net interest margin is computed by dividing net
interest income by total average interest earning
assets.
9
PROVISION FOR CREDIT LOSSES
The Bank maintains an allowance for possible credit losses
which is based, in part, on the Bank's historical loss
experience, the impact of forecasted economic conditions
within the Bank's market area, and, as applicable, the State
of California, the value of the underlying collateral, loan
performance and inherent risks in the loan portfolio. The
allowance is reduced by charge-offs and increased by
provisions for credit losses charged to operating expense
and recoveries of previously charged-off loans. During the
second quarter of 1999 the Bank provided $26,000 for the
allowance for credit losses as compared to $51,000 for the
second quarter of 1998. There were no loans charged-off and
$44,000 in recoveries in the second quarter of 1999, as
compared to $14,000 in loans charged-off and $20,000 in
recoveries in the second quarter of 1998.
At June 30, 1999, the allowance for credit losses was
$826,000 or 1.21% of total loans, compared to $716,000 or
0.96% at December 31, 1998. There were no nonaccrual loans
at June 30, 1999 or December 31, 1998.
At June 30, 1999 and December 31, 1998, there were no loans
past due 90 days or more as to principal or interest and
still accruing interest. There were no loans at June 30,
1999 which were troubled debt restructurings as defined in
Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt
Restructuring." At June 30, 1999, there were three
potential problem loans having a combined principal balance
of $1,719,000 ($259,000 at December 31, 1998). Potential
problem loans are loans which are generally current as to
principal and interest but have been identified by the
Company as potential problem loans due either to a decrease
in the underlying value of the property securing the credit
or some other deterioration in the creditworthiness of the
borrower. All of the three loans identified as potential
problem loans are secured by real estate and personal
property.
There was no Other Real Estate owned ("OREO")at June 30,
1999 or December 31, 1998.
10
Nonperforming loans and other real estate owned are
summarized below:
June 30, 1999 December 31, 1998
Nonperforming loans:
Past due 90 days or more $ - $ -
Nonaccrual - -
Total - -
Other real estate owned - -
Total nonperforming loans
and other real estate
owned $ - $ -
========== ==========
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 $49,000,000 in real estate loans
representing approximately 71% of the portfolio, could be
adversely affected if California economic conditions and the
real estate market in the Bank's market area weaken. The
effect of such events could result in an increase in the
level of nonperforming loans and OREO and the level of the
allowance for loan losses which could adversely affect the
Company's and the Bank's future growth and profitability.
NONINTEREST INCOME
Other income consists of service charges on deposit
accounts, income from assets acquired for lease and fees for
other miscellaneous services. Total other income increased
from $133,000 in the second quarter of 1998 to $278,000 in
the second quarter of 1999. This increase is primarily
attributable to an increase in rental income on leased
assets of $110,000 and an increase in the cash surrender
value of life insurance policies of $74,000, offset, in
part, by the decrease in gain on sale of securities of
$59,000.
NONINTEREST EXPENSE
Other expenses increased from $729,000 in the second quarter
of 1998 to $903,000 in the second quarter of 1999. The
increase is primarily attributable to an increase in
deferred compensation expense of $47,000 and an increase in
depreciation expense on leased assets of $88,000. As a
percentage of average earning assets, other expenses for the
second quarter, on an annualized basis, increased from 2.4%
in 1998 to 2.7% in 1999.
11
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
An analysis of the results of operations of the Company for
the six month period ended June 30, 1999 compared to the
comparable period in 1998 is as follows:
NET INTEREST INCOME
Net interest income, the difference between interest earned
on loans and investments and interest paid on deposits, is
the principal component of the Bank's earnings. The
components of net interest income are as follows:
Six months ended June 30,
1999 1998
Average Average Average Average
Balance Interest Yield(1) Balance Interest Yield(1)
(In thousands, except percentages) (unaudited)
Assets:
Earning assets:
Loans (2) $ 74,346 $3,465 9.3% $62,976 $3,094 9.8%
Investment
securities 44,561 1,254 5.6 46,945 1,446 6.2
Federal funds sold 13,561 321 4.7 10,745 293 5.5
Total interest
earning assets 132,468 5,040 7.6 120,666 4,833 8.0
Cash and due from
banks 6,481 4,963
Other assets (3) 8,452 2,786
$147,401 $128,415
======== =======
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand deposits $ 43,606 629 2.9 $38,577 633 3.3
Time deposits 36,923 946 5.1 28,429 810 5.7
Other borrowings 22,696 674 5.9 22,948 705 6.1
Total interest-
bearing
liabilities 103,225 2,249 4.4 89,954 2,148 4.8
Demand deposits 27,411 23,192
Other liabilities 1,795 1,338
Total liabilities 132,431 114,484
Shareholders' equity 14,970 13,931
$147,401 $128,415
======== =======
Net interest income
and margin(4) $2,791 4.2% $2,685 4.5%
====== ======
(1) Annualized.
(2) Loan interest income includes loan fee income of
$187,000 and $180,000 for the six months ended June
30, 1999 and 1998, respectively.
(3) Net of the average allowance for loan losses of
$752,000 and $637,000, and deferred loan fees of
$295,000 and $318,000 for the six months ended June 30,
1999 and 1998, respectively.
(4) Net interest margin is computed by dividing net
interest income by total average interest earning
assets.
11
PROVISION FOR CREDIT LOSSES
During the first six months of 1999, the Bank provided $66,000
to the provision for credit losses as compared to $102,000 for
the fist six months of 1998. There were no loans charged off
and $44,000 in recoveries for the six months ended June 30,
1999, compared to $14,000 in loans charged off and $32,000 in
recoveries for the first six months of 1998.
NONINTEREST INCOME
Other income consists of service charges on deposit accounts,
income on assets acquired for lease and fees for other
miscellaneous services. Total other income increased from
$292,000 in 1998 to $508,000 in 1999. The increase is
primarily attributable to an increase in rental income on
leased assets of $147,000 and an increase of $105,000 in the
cash surrender value value of life insurance policies.
NONINTEREST EXPENSE
Other expenses have increased from $1,505,000 in 1998 to
$1,728,000 in 1999 due primarily to an increase of $94,000 in
deferred compensation expense and an increase of $105,000 in
depreciation expense on leased assets. As a percentage of
average earning assets, other expenses, on an annualized
basis, increased from 2.5% in 1998 to 2.6% in 1999.
13
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 53% and 52% at June 30, 1999 and December 31,
1998, respectively. In addition to cash and due from banks,
liquid assets include short-term time deposits with other
banks, Federal funds sold and investment securities available
for sale. The Bank has $11.0 million in Federal funds lines
of credit available with correspondent banks to meet liquidity
needs.
Management regularly reviews general economic and financial
conditions, both external and internal, and determines whether
the positions taken with respect to liquidity and interest
rate sensitivity continue to be appropriate. The Bank also
utilizes a monthly "Gap" report which identifies rate
sensitivity over the short- and long-term.
The following table sets forth the distribution of repricing
opportunities, based on contractual terms, of the Company's
earning assets and interest-bearing liabilities at June 30,
1999, the interest rate sensitivity gap (i.e. interest rate
sensitive assets less interest rate sensitive liabilities),
the cumulative interest rate sensitivity gap, the interest
rate sensitivity gap ratio (i.e. interest rate sensitive
assets divided by interest rate sensitive liabilities) and the
cumulative interest rate sensitivity gap ratio.
14
DISTRIBUTION OF REPRICING OPPORTUNITIES
At June 30, 1999
(Dollars in thousands) (unaudited)
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 $16,900 - - - - $16,900
Interest bearing
deposits in
other banks 1,789 - - - - 1,789
Municipal
securities 250 - $ - $ 1,901 $ 8,550 10,701
U.S. Treasury
and agency
securities 2,915 1,003 291 10,717 14,734 29,660
FRB stock - - - - 2,937 2,937
Loans 30,068 2,172 2,397 12,656 22,117 69,410
Total
earning assets $51,922 $ 3,175 $ 2,688 $25,274 $48,338 131,397
Interest bearing
demand
accounts $38,442 - - - - 38,442
Savings
accounts 4,878 - - - - 4,878
Time
certificates
of deposit of
$100,000 or
more 9,355 $ 8,802 $ 3,027 $ 2,224 100 23,508
Other time
deposits 3,390 3,486 3,723 2,179 - 12,778
Other borrowings 25 - 2,000 12,497 $ 8,091 22,613
Total interest-
bearing
liabilities $56,090 $12,288 $ 8,750 $16,900 $ 8,191 102,219
Interest rate
sensitivity
gap $(4,168) $(9,113) $(6,062) $ 8,374 $40,147 $ 29,178
======= ======= ======= ======== ======= ========
Cumulative
interest rate
sensitivity
gap $(4,168) $(13,281) $(19,343) $(10,969) $29,178
======= ======== ======== ======== =======
Interest rate
sensitivity
gap ratio 0.93% 0.26% 0.31% 1.50% 5.90%
Cumulative
interest rate
sensitivity
gap ratio 0.93% 0.81% 0.75% 0.88% 1.29%
The Company and the Bank are subject to capital adequacy guidelines
issued by the Board of Governors of the Federal Reserve System (the
"BGFRS") and the Office of the Comptroller of the Currency ("OCC").
The Company and the Bank are required to maintain total capital
equal to at least 8% of assets and commitments to extend credit,
weighted by risk, of which at least 4% must consist primarily of
common equity including retained earnings (Tier 1 capital) and the
remainder may consist of limited life (and in the case of banks,
cumulative) preferred stock, mandatory convertible securities,
subordinated debt and a limited amount of loan loss reserves.
Effective October 1, 1998, the BGFRS and other federal agencies
approved including in Tier 2 capital up to 45% of the pretax net
unrealized gains on certain available-for-sale equity securities
having readily determinable fair values (i.e. the excess, if any,
of fair market value over the book value or historical cost of the
investment security). The federal regulatory agencies reserve the
right to exclude all or a portion of the unrealized gains upon a
determination that the equity securities are not prudently valued.
Unrealized gains and losses on other types of assets, such as bank
premises and available-for-sale debt securities, are not included
in Tier 2 capital, but may be taken into account in the evaluation
of overall capital adequacy and net unrealized losses on available-
for-sale equity securities will continue to be deducted from Tier
1 capital as a cushion against risk. Certain assets and commitments
to extend credit present less risk than others and will be assigned
to lower risk-weighted categories requiring less capital allocation
than the 8% total ratio. For example, cash and government
securities are assigned to a 0% risk-weighted category, most home
mortgage loans are assigned to a 50% risk-weighted category
requiring a 4% capital allocation and commercial loans are assigned
to a 100% risk-weighted category requiring an 8% capital
allocation. As of June 30, 1999, the Company's total risk-based
capital ratio was approximately 16.7% (approximately 16.2% for the
Bank) compared to approximately 16.8% (approximately 16.4% for the
Bank) at December 31, 1998.
The Board of Governors and other federal banking agencies have
adopted a revised minimum leverage ratio for bank holding companies
and banks as a supplement to the risk-weighted capital guidelines.
The old rule established a 3% minimum leverage standard for well-run
banking organizations (bank holding companies and banks) with
diversified risk profiles. Banking organizations which did not
exhibit such characteristics or had greater risk due to significant
growth, among other factors, were required to maintain a minimum
leverage ratio 1% to 2% higher. The old rule did not take into
account the implementation of the market risk capital measure set
forth in the federal regulatory agency capital adequacy guidelines.
The revised leverage ratio establishes a minimum Tier 1 ratio of 3%
(Tier 1 capital to total assets) for the highest rated bank holding
companies and banks. All other bank holding companies must maintain
a minimum Tier 1 leverage ratio of 4% with higher leverage capital
ratios required for banking organizations that have significant
16
financial and/or operational weaknesses, a high risk profile, or
are undergoing or anticipating rapid growth.
The following table reflects the Company's leverage, Tier 1 and
total risk-based capital ratios as of June 30, 1999 and December
31, 1998.
June 30, 1999 December 31, 1998
Leverage ratio 10.1% 11.0%
Tier 1 capital ratio 15.8% 16.0%
Total risk-based capital ratio 16.7% 16.8%
On December 19, 1991, the President signed the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"). The
FDICIA, among other matters, substantially revised banking
regulations and established a framework for determination of
capital adequacy of financial institutions. Under the FDICIA,
financial institutions are placed into one of five capital adequacy
catagories as follows: (1) "Well capitalized" - consisting of
institutions with a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a
leverage ratio of 5% or greater, and the institution is not subject
to an order, written agreement, capital directive or prompt
corrective action directive; (2) "Adequately capitalized" -
consisting of institutions with a total risk-based capital ratio of
8% or greater, a Tier 1 risk-based capital ratio of 4% or greater
and a leverage ratio of 4% or greater, and the institution does not
meet the definition of a "well capitalized" institution; (3)
"Undercapitalized" - consisting of institutions with a total risk-based
capital ratio less than 8%, a Tier 1 risk-based capital ratio
of less than 4%, or a leverage ratio of less than 4%; (4)
"Significantly undercapitalized" - consisting of institutions with
a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less
than 3%; (5) "Critically undercapitalized" - consisting of an
institution with a ratio of tangible equity to total assets that is
equal to or less than 2%.
Financial institutions classified as undercapitalized or below are
subject to various limitations including, among other matters,
certain supervisory actions by bank regulatory authorities and
restrictions related to (i) growth of assets, (ii) payment of
interest on subordinated indebtedness, (iii) payment of dividends
or other capital distributions, and (iv) payment of management fees
to a parent holding company. The 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.
17
OTHER MATTERS
From time to time, the Board of Directors and management of the
Company consult with its investment banking, accounting and legal
advisors, regarding banking industry trends and developments, as
well as internal and external opportunities, in order to maximize
shareholder value. Such external opportunities include potential
mergers, acquisitions, reorganizations, and other transactions with
third parties which may be in the interests of the Company's
shareholders. The Company has been engaged in discussions and
negotiations with another California-based financial institution
about a possible transaction which, if consummated, would result in
a merger of the Company with and into such other institution. The
proposed terms and conditions of such transaction remain under
negotiation and are subject to the approval of the Company's Board
of Directors. Thus, no assurance can be given as to whether the
proposed transaction will be consummated. Any definitive agreement,
if approved by the Company's Board of Directors, would be subject
to the satisfaction of certain other terms and conditions,
including shareholder and regulatory approvals.
YEAR 2000
As the year 2000 approaches, a critical issue has emerged regarding
how existing application software programs and operating systems
can accommodate this date value. In brief, many existing
application software products were designed to only accommodate a
two digit date position which represents the year (e.g. "97" is
stored on the system and represents the year 1997.) As a result,
the year 1999 (i.e. "99") could be the maximum date value these
systems will be able to accurately process. This is not just a
banking problem, as corporations around the world and in all
industries are similarly impacted.
During 1997, the Company began a plan that includes the five phases
of Year 2000 compliance as defined by the FFIEC, awareness,
assessment, renovation, validation, and implementation. The
Company's Year 2000 Plan (the "Plan") addresses the proper function
of the Company's in-house computer hardware and software, along
with other products and services which the Company utilizes and
which have potential for Year 2000 difficulties.
Awareness and Assessment Phases The Company completed the
Awareness and Assessment Phases, as defined by the FFIEC, during
early 1998 and continues to update its assessment as needed.
Management of the Company reports at least monthly to the Board of
Directors on its Year 2000 efforts.
Renovation Phase The FFIEC guideline date for institutions to
substantially complete program changes and system upgrades for
mission critical systems was December 31, 1998. By that date, the
Company had completed replacements of all hardware and software
18
components with the exception of the item processing subsystem of
the mainframe. The replacement of this system was completed in
March 1999.
Validation and Implementation Phases To reduce the possibility of
unexpected failure of the Company's systems during and after the
century date change, which could have an impact on the Company and
its customers, the company continues to test its systems in
accordance with a test strategy and plan developed in 1998. The
FFIEC guideline date for institutions to begin testing their
mission critical applications and systems was September 1, 1998.
During April 1998, the Company began testing various mission
critical and non-mission critical systems. The Company had
completed this testing by the end of the second quarter of 1999.
Business Relationships As a part of the Company's Plan, all third
party suppliers and service providers have been contacted and
assessed as to their Year 2000 preparedness. In addition, the Bank
has communicated with its large borrowers and major depositors to
determine the extent to which the Company might be vulnerable if
those third parties fail to resolve their Year 2000 issues.
Because the Company recognizes that its business and operations
could be adversely affected if key businesses fail to achieve
timely Year 2000 compliance, the Company is evaluating strategies
to manage and mitigate the risk to the Company from their Year 2000
failures.
Contingency Plans FFIEC guidelines indicate that contingency
plans covering mission critical systems in the event of Year 2000
problems are a prudent business practice. The Company has
developed contingency plans for applications and systems used by
the Bank that are deemed mission critical as well as plans to cover
many non-mission critical applications and systems. The
contingency plans are based on a review of various emergency
scenarios ranging from the Year 2000 failure of a single software
or hardware component to the total loss of systems and
applications. Because business resumption planning is a dynamic
process, the Company may further refine and test these plans
throughout 1999.
Costs to Address Year 2000 Issues The majority of the costs
associated with the Company's Year 2000 preparedness efforts would
have been incurred in the normal course of business, as the Company
regularly upgrades its various systems in an effort to more
efficiently and effectively serve its clientele and conduct its
operations. The Company estimates the total cost of compliance
will be approximately $150,000, with the majority of this expense
earmarked for the new item processing subsystem. The costs
incurred in 1998 did not have a material effect on the Company's
net income for 1998, and the Company does not expect the costs that
will be incurred in 1999 to have a material impact on the Company's
net income for 1999.
19
Even with all of the Company's preparation, there can be no
assurance that problems will not arise which could have an adverse
impact due, among other matters, to the complexities involved in
computer programming related to resolution of Year 2000 problems
and the fact that the systems of other companies on which the
Company may rely must also be corrected on a timely basis.
Delays, mistakes or failures in correcting Year 2000 system
problems by such other companies could have a significant adverse
impact upon the Company and its ability to mitigate the risk of
adverse impact of Year 2000 problems for its customers.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosures under this item are not required for the current
fiscal year as the Company qualifies as a "Small Business" filer.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The shareholders of Saratoga Bancorp took the following
action at the Annual Meeting of Shareholders held on May
19, 1999 at the Company's main office located at
12000 Saratoga-Sunnyvale Road, Saratoga, California:
1. Approved the election of management's slate of nominees
for directors, each of whom were incumbent directors, as
follows:
Votes
For Withheld
Victor Aboukhater 966,954 7,027
Robert G. Egan 966,954 7,027
William D. Kron 966,954 7,027
John F. Lynch, III 966,954 7,027
V. Ronald Mancuso 966,954 7,027
Richard L. Mount 971,916 2,065
2. Ratified appointment of Deloitte & Touche LLP as
independent auditors of the Company for the fiscal
year ending December 31, 1999.
VOTES
FOR 969,360
AGAINST -
ABSTAIN 4,621
Item 5. Other Information
Not applicable
21
Item 6. Exhibits and Reports on Form 8-K
(a) (3) Exhibits. The exhibits listed on the
accompanying Exhibit Index are filed
as part of this report.
(3.1) Articles of Incorporation, as amended, are
incorporated by reference herein to Exhibit
3.1 of Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1988,
as filed with the Securitiesand 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.
22
(10.4) Lease agreement dated 1/17/89 for 160 West Santa
Clara Street, San Jose, California is
incorporated by reference herein to Exhibit
10.4 of Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1989,
as filed with the Securities and Exchange Commission
on March 27, 1990.
(10.5) Bank of the West Master Profit Sharing and
Savings Plan and Amendment, amended as of
March, 1990 are incorporated by reference
herein to Exhibit 10.5 of Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1990, as filed with the
Securities and Exchange Commission on March
20, 1991.
*(10.6) Employment Agreement and Management
Continuity Agreement and Chief Executive
Officer Compensation Plan/Richard L. Mount is
incorporated by reference herein to Exhibit
10.6 of Registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
1990, as filed with the Securities and
Exchange Commission on March 20, 1991.
*(10.7) Saratoga Bancorp 1982 Stock Option Plan is
incorporated by reference herein to the
exhibits to Registration Statement No. 33-
34674 on Form S-8 as filed with the
Securities and Exchange Commission on May
7, 1990.
*(10.8) Saratoga National Bank Savings Plan dated
June 19, 1995 is incorporated by reference
herein to Exhibit 10.8 of Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1995, as filed with the
Securities and Exchange Commission on March
27, 1996.
*(10.9) Saratoga Bancorp 1994 Stock Option Plan dated
March 18, 1994 is incorporated by referencce
herein to Appendix A of Proxy Statement dated
April 19, 1994 as filed with the Securities
and Exchange Commission on April 27, 1994.
23
*(10.10) Forms of Incentive Stock Option Agreement,
Non-Statutory Stock Option Agreement and
Non-Statutory Agreement for Outside Directors,
as amended is incorporated by reference
herein to Exhibit 10.8 of Registrant's
Quarterly Report on Form 10-Q for the Quarter
ended June 30, 1994 as filed with the
Securities and Exchange Commission on August
15, 1994.
*(10.11) Form if Director Supplemental Compensation
Agreement dated September 24, 1998 between
Saratoga National Bank and Robert G. Egan,
John F. Lynch III and V. Ronald Mancuso,
respectively.
*(10.12) Form of Director Life Insurance Endorsement
method Split Dollar Plan Agreement dated
September 24, 1998 between Robert G. Egan,
John F. Lynch III and V. Ronald Mancuso,
respectively.
*(10.13) Form of Director Surrogate Supplemental
Compensation Agreement dated September
24, 1998 between Saratoga National Bank
and Victor E. Aboukhater and William D.
Kron, respectively.
*(10.14) Form of Director Surrogate Life Insurance
Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between
Saratoga National Bank and Victor Aboukhater
and William D. Kron, respectively.
*(10.15) Form of Officer Supplemental Compensation
Agreement dated September 24, 1998 between
Saratoga National Bank and Earl L. Lanna, Mary
Rourke, Sandra Swenson, Barbara Resop and
Cathe Franklin, respectively.
*(10.16) Form of Officer Life Insurance Endorsement
Method Split Dollar Plan Agreement dated
September 24, 1998 between Saratoga National
Bank and Earl L. Lanna, Mary Rourke, Sandra
Swenson, Barbara Resop and Cathe Franklin,
respectively.
*(10.17) Richard L. Mount Executive Benefits Agreement
dated June 18, 1999.
24
*(10.18) Richard L. Mount Life Insurance Endorsement
Method Split Dollar Plan Agreement dated
September 24, 1998.
*(10.19) Richard L. Mount Employment Agreement dated
May 20, 1999.
*(10.20) Richard L. Mount Executive Supplemental
Compensation Agreement dated September 24,
1998.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or
arrangements.
(b) Reports on Form 8-K
On May 4, 1999, registrant filed a current
report on Form 8-K, dated May 3, 1999 reporting
Under Item 5 (Other Events) the conclusion of
the stock repurchase program which commenced on
December 10, 1998.
On May 21, 1999, Registrant filed a Current
Report on Form 8-K, dated May 19, 1999 reporting
under Item 5 (Other Events) detailing actions
taken at the Annual Meeting of Shareholders of
Registrant held on May 19, 1999. See Item 4
herein for additional information.
25
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SARATOGA BANCORP
Date: August 13, 1999 -------------------------
Mary Page Rourke, Treasurer
(Principal Accounting Officer)
26
INDEX TO EXHIBITS
Sequentially
Numbered
Number Exhibits Page
10.11 Form of Director Supplemental
Compensation Agreement dated
September 24, 1998 27 - 47
10.12 Form of Director Life Insurance
Endorsement Method Split Dollar
Plan Agreement dated September
24, 1998 48 - 54
10.13 Form of Director Surrogate
Supplemental Compensation
Agreement dated September 24,
1998 55 - 77
10.14 Form of Director Surrogate
Life Insurance Method Split
Dollar Plan Agreement dated
September 24, 1998 78 - 85
10.15 Form of Officer Supplemental
Compensation Agreement dated
September 24, 1998 86 - 107
10.16 Form of Officer Life Insurance
Method Split Dollar Plan
Agreement dated September 24,
1998 108 - 114
10.17 Richard L. Mount Executive
Supplemental Compensation
Agreement dated September
24, 1998 115 - 136
10.18 Richard L. Mount Life Insurance
Endorsement Method Split Dollar
Plan Agreement dated September
24, 1998 137 - 142
10.19 Richard L. Mount Employment
Agreement dated May 20, 1999 143 - 155
10.20 Richard L. Mount Executive
Benefits Agreement dated
June 18, 1999 156 - 175
27.1 Financial Data Schedule 176