<PAGE> 1        
                              FORM 10-K
                   SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549
                            (Mark One)
           X  ANNUAL REPORT PURSUANT TO SECTION 13 OR
          15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
          For the fiscal year ended December 31, 1998 
                               or 
          
               TRANSITION REPORT PURSUANT TO SECTION 13
          OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
               
          For the transition period from          to            
                              
          Commission file number            2-77519-LA            
                               
                            SARATOGA BANCORP                
          (Exact name of registrant as specified in its charter)
          
          California                                94-2817587
(State or other jurisdiction of                  (I.R.S. employer   
incorporation or organization)                   Identification No.)
                            
12000 Saratoga-Sunnyvale Road                            
    Saratoga, California                              95070         
(Address of principal executive offices)           (Zip Code)   
          
          Registrant's telephone number, including area code   (408)973-1111
          
          Securities registered pursuant to Section 12 (b) of the Act:
                                                     Name of each exchange
          Title of each class                         on which registered
               NONE                                             NONE   
                           
Securities registered pursuant to Section 12 (g) of the Act:
                                 NONE               
                            (Title of class)
          
Saratoga Bancorp (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements
          for the past 90 days.  Yes  X  No     . 
          
Indicate by checkmark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of  this Form
          10-K or any amendment to this Form 10-K.  [X]                     
          
The aggregate market value of the voting stock held by non-affiliates of 
Saratoga Bancorp on March 1,  1999 was $22,982,496
          
As of March 1,  1999, Saratoga Bancorp had 1,605,656 shares of common stock 
outstanding.
          
                 DOCUMENTS INCORPORATED BY REFERENCE
          
The Company's Proxy Statement is incorporated herein by reference in
                   Part III, Items 10 through 13.
          
               The Index to Exhibits appears on page 65
                           
                           
                       Page 1 of 67 pages
<PAGE> 2
                            
                    PART 1
          Item 1. BUSINESS
          
          GENERAL 
          
               Certain matters discussed or incorporated by reference
          in this Annual Report on Form 10-K including, but not limited
          to, matters described in Item 7 - "Managements Discussion
          and Analysis of Financial Condition and Results of
          Operations," are forward-looking statements that are subject
          to risks and uncertainties that could cause actual results to
          differ materially from those projected.  Changes to such risks
          and uncertainties, which could impact future financial
          performance, include, among others, (1)competitive pressures
          in the banking industry; (2)changes in interest rate
          environment; (3)general economic conditions, nationally,
          regionally and in operating market areas; (4)changes in the
          regulatory environment; (5)changes in business conditions and
          inflation;  (6)changes in securities markets; and (7) Year 2000
          compliance problems.  Therefore, the information set forth
          herein should be carefully considered when evaluating the
          business prospects of the Company and the Bank.
          
               Saratoga Bancorp (the "Company") is a registered bank
          holding company whose principal asset (and only subsidiary)
          is the common stock of Saratoga National Bank (the "Bank"). 
          The Company itself does not engage in any business activities
          other than the ownership of the Bank and investment of its
          available funds.   As used herein, the term "Saratoga Bancorp"
          or the "Company" includes the subsidiary of the Company
          unless the context requires otherwise.  The Company was
          incorporated in California on December 8, 1981. The Bank
          commenced operations on November 8, 1982.  The Bank
          provides a variety of banking services to businesses,
          governmental units and individuals.  The Bank conducts a
          commercial and retail banking business, which includes
          accepting demand, savings and time deposits and making
          commercial, real estate and consumer loans.  It also offers
          installment note collections, issues cashier's checks, sells
          traveler's checks and provides other customary banking
          services.  The Bank's deposits are insured by the Federal
          Deposit Insurance Corporation (the "FDIC") up to the legal
          limits thereupon.  The Bank does not offer trust services nor
          international banking services and does not plan to do so in
          the near future.  At December 31, 1998, the Company had
          total assets of approximately $145 million and total deposits of
          approximately $103 million.  At December 31, 1998, the
          Company had 24 full-time equivalent employees.
          
               Most of the Bank's deposits are obtained from the
          Bank's primary service area.  No material portion of the Bank's
          deposits have  been obtained from a single person or group of
          related persons, the loss of any one or more of which would
          have a materially adverse effect on the business of the Bank,
          nor is a material portion of the Bank's loans concentrated
          within a single industry or group of related industries.  
          Although real estate construction loans represent
          approximately 26% and other real estate loans represent
          approximately 45% of total loans, no material portion is located
          in a single geographic
<PAGE> 3
          area.  Furthermore, the extent to which the business of the Bank 
          is seasonal is insignificant.  The importance of, and risks attendant
          to, foreign sources and application of the Bank's funds is 
          negligible.
          
               For additional information concerning the Company and
          the Bank, see Selected Financial Data under Item 6 on page
          17.
          
          SUPERVISION AND REGULATION
          
               The stock of the Company is subject to the registration
          requirements of the Securities Act of 1933, as amended, and
          the qualification requirements of the California Corporate
          Securities Law of 1968, as amended.  The Company is also
          subject to the periodic reporting requirements of Section 15(d)
          of the Securities Exchange Act of 1934, as amended, which
          include, but are not limited to, filing annual, quarterly and other
          current reports with the Securities and Exchange Commission.
          
               The Bank is chartered under the national banking laws
          of the United States of America, and its deposits are insured
          by the FDIC. The Bank has no subsidiaries.  Consequently,
          the Bank is regularly examined by the Office of the Comptroller
          of the Currency (the "OCC"), its primary regulator, and is
          subject to the supervision of the FDIC and the OCC.  Such
          supervision and regulation include comprehensive reviews of
          all major aspects of the Bank's business and condition,
          including its capital ratios, allowance for possible loan losses
          and other factors.  However, no inference should be drawn
          that such authorities have approved any such factors.  The
          Company and the Bank are required to file reports with the
          OCC, the FDIC and the Board of Governors of the Federal
          Reserve System (the "Board of Governors") and provide such
          additional information as the Board of Governors, FDIC and -
          OCC may require.
          
               The Company is a bank holding company within the
          meaning of the Bank Holding Company Act of 1956, as
          amended (the "Bank Holding Company Act"), and is registered
          as such with, and subject to the supervision of, the Board of
          Governors.  The Company is required to obtain the approval
          of the Board of Governors before it may acquire all or
          substantially all of the assets of any bank, or ownership or
          control of the voting shares of any bank if, after giving effect to
          such acquisition of shares, the Company would own or control
          more than 5% of the voting shares of such bank.  The Bank
          Holding Company Act prohibits the Company from acquiring
          any voting shares of, or interest in, all or substantially all of the
          assets of, a bank located outside the State of California unless
          such an acquisition is specifically authorized by the laws of the
          state in which such bank is located.  Any such interstate
          acquisition is also subject to the provisions of the Riegle-Neal
          Interstate Banking and Branching Efficiency Act of 1994
          discussed below.  The OCC regulates the number and
          locations of the branch offices of a national bank and may only
          permit a national bank to maintain branches in locations and
          under conditions imposed by state law upon state banks.
<PAGE> 4          
               The Company, and any subsidiaries which it may
          acquire or organize, are deemed to be "affiliates" of the Bank
          within the meaning of that term as defined in the Federal
          Reserve Act.  This means, for example, that there are
          limitations (a) on loans by the Bank to affiliates, and (b) on
          investments by the Bank in affiliates' stock as collateral for
          loans to any borrower.  The Company and the Bank are also
          subject to certain restrictions with respect to engaging in the
          underwriting, public sale and distribution of securities.
          
               In addition, regulations of the Board of Governors
          promulgated under the Federal Reserve Act require that
          reserves be maintained by the Bank in conjunction with any
          liability of the Company under any obligation (promissory note,
          acknowledgement of advance, banker's acceptance or similar
          obligation) with a weighted average maturity of less than
          seven (7) years to the extent that the proceeds of such
          obligations are used for the purpose of supplying funds to the
          Bank for use in its banking business, or to maintain the
          availability of such funds.
          
               The Board of Governors, FDIC and OCC have adopted
          risk-based capital guidelines for evaluating the capital
          adequacy of bank holding companies and banks.  The
          guidelines are designed to make capital requirements
          sensitive to differences in risk profiles among banking
          organizations, to take into account off-balance sheet
          exposures and to aid in making the definition of bank capital
          uniform nationally.  Under the guidelines, the Company and
          the Bank are required to maintain capital equal to at least
          8.0% of its assets and commitments to extend credit, weighted
          by risk, of which at least 4.0% must consist primarily of
          common equity (including retained earnings) and the
          remainder may consist of subordinated debt, cumulative
          preferred stock, or a limited amount of loan loss reserve.
          
               Assets, commitments to extend credit, and off-balance
          sheet items are categorized according to risk and certain
          assets considered to present less risk than others permit
          maintenance of capital at less than the 8% ratio.  For example,
          most home mortgage loans are placed in a 50% risk category
          and therefore require maintenance of capital equal to 4% of
          such loans, while commercial loans are placed in a 100% risk
          category and therefore require maintenance of capital equal to
          8% of such loans.
          
               The guidelines establish two categories of qualifying
          capital: Tier 1 capital comprising core capital elements, and
          Tier 2 comprising supplementary capital requirements.  At
          least one-half of the required capital must be maintained in the
          form of Tier 1 capital.  Tier 1 capital includes common
          shareholders' equity and qualifying perpetual preferred stock
          less intangible assets and certain other adjustments. 
          However, no more than 25% of the Company's total Tier 1
          capital may consist of perpetual preferred stock.  The
          definition of Tier 1 capital for the Bank is the same, except that
          perpetual preferred stock may be included only if it is
          noncumulative.  Tier 2 capital includes, among other items,
          limited life (and in the case of banks, cumulative) preferred
          stock, mandatory convertible securities, subordinated debt and
          a limited amount of reserve for credit losses.
          
<PAGE> 5          
            Effective October 1, 1998 the Board of Governors and other
          federal bank regulatory agencies approved including in Tier 2
          capital up to 45% of the pretax net unrealized gains on certain
          available-for-sale equity securities having  readily
          determinable fair values (i.e. the excess, if any, of fair market
          value over the book value or historical cost of the investment
          security).  The federal regulatory agencies reserve the right to
          exclude all or a portion of the unrealized gains upon the
          determination that the equity securities are not prudently
          valued.  Unrealized gains and losses on other types of assets,
          such as bank premises and available-for-sale debt securities,
          are not included in Tier 2 capital, but may be taken into
          account in the evaluation of overall capital adequacy and net
          unrealized losses on available-for-sale equity securities will
          continue to be deducted for Tier 1 capital as a cushion against
          risk.  
          
          The Board of Governors and other federal banking agencies
          have adopted a revised minimum leverage ratio for banking
          organizations as a supplement to the risk-weighted capital
          guidelines.  The old rule established a 3% minimum leverage
          standard for well-run banking organizations (bank holding
          companies and banks) with diversified risk profiles.  Banking
          organizations which did not exhibit such characteristics or had
          greater risk due to significant growth, among other factors,
          were required to maintain a minimum leverage ratio 1% to 2%
          higher.  The old rule did not take into account the
          implementation of the market risk capital measure set forth in
          the federal regulatory agency capital adequacy guidelines. 
          The revised leverage ratio establishes a minimum Tier 1 ratio
          of 3% (Tier 1 capital to total assets) for the highest rated bank
          holding companies and banks.  .  All other bank holding
          companies must maintain a minimum Tier 1 leverage ratio of
          4% with higher leverage capital ratios required for banking
          organizations that have significant financial and/or operational
          weaknesses, a high risk profile, or are undergoing or
          anticipating rapid growth. 
        
          On December 19, 1991, President Bush signed the
          Federal Deposit Insurance Corporation Improvement Act of
          1991 (the "FDICIA").  The Board of Governors, FDIC and OCC
          adopted regulations effective December 19, 1992,
          implementing a system of prompt corrective action pursuant to
          Section 38 of the Federal Deposit Insurance Act and Section
          131 of the FDICIA.  The regulations establish five capital
          categories with the following characteristics: (1) "Well
          capitalized" - consisting of institutions with a total risk-based
          capital ratio of 10% or greater, a Tier 1 risk-based capital ratio
          of 6% or greater and a leverage ratio of 5% or greater, and the
          institution is not subject to an order, written agreement, capital
          directive or prompt corrective action directive; (2) "Adequately
          capitalized" - consisting of institutions with a total risk-based
          capital ratio of 8% or greater, a Tier 1 risk-based capital ratio
          of 4% or greater and a leverage ratio of 4% or greater, and the
          institution does not meet the definition of a "well capitalized"
          institution; (3) "Undercapitalized" - consisting of institutions
          with a total risk-based capital ratio less than 8%, a Tier 1 risk-
          based capital ratio of less than 4%, or a leverage ratio of less
          than 4%; (4) "Significantly undercapitalized" - consisting of
          institutions with a total risk-based capital ratio of less than 6%,
          a Tier 1 risk-based capital ratio of less than 3%, or a leverage
          ratio
<PAGE> 6
          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
<PAGE> 7
          is also determined that some other course of action would better
          serve the purposes of the regulations.  Critically
          undercapitalized institutions are also prohibited from making
          (but not accruing) any payment of principal or interest on
          subordinated debt without the prior approval of the FDIC and
          the FDIC must prohibit a critically undercapitalized institution
          from taking certain other actions without its prior approval,
          including (1) entering into any material transaction other than
          in the usual course of business, including investment
          expansion, acquisition, sale of assets or other similar actions;
          (2) extending credit for any highly leveraged transaction; (3)
          amending articles or bylaws unless required to do so to comply
          with any law, regulation or order; (4) making any material
          change in accounting methods; (5) engaging in certain affiliate
          transactions; (6) paying excessive compensation or bonuses;
          and (7) paying interest on new or renewed liabilities at rates
          which would increase the weighted average costs of funds
          beyond prevailing rates in the institution's normal market
          areas.
          
               The capital ratio requirements for the "adequately
          capitalized" category generally are the same as the existing
          minimum risk-based capital ratios applicable to the Company
          and the Bank.
          
               Under the FDICIA, the federal financial institution
          agencies have adopted regulations which require institutions
          to establish and maintain comprehensive written real estate
          policies which address certain lending considerations,
          including loan-to-value limits, loan administrative policies,
          portfolio diversification standards, and documentation,
          approval and reporting requirements.  The FDICIA further
          generally prohibits an insured state bank from engaging as a
          principal in any activity that is impermissible for a national
          bank, absent FDIC determination that the activity would not
          pose a significant risk to the Bank Insurance Fund, and that
          the bank is, and will continue to be, within applicable capital
          standards.  Similar restrictions apply to subsidiaries of insured
          state banks.  The Company does not currently intend to
          engage in any activities which would be restricted or prohibited
          under the FDICIA.
          
               The federal financial institution agencies have
          established safety and soundness standards for insured
          financial institutions covering (1) internal controls, information
          systems and internal audit systems; (2) loan documentation;
          (3) credit underwriting; (4) interest rate exposure; (5) asset
          growth; (6) compensation, fees and benefits; (7) excessive
          compensation for executive officers, directors or principal
          shareholders which could lead to material financial loss.   If an
          agency determines that an institution fails to meet any
          standard the agency may require the financial institution to
          submit to the agency an acceptable plan to achieve
          compliance with the standard.  If the agency requires
          submission of a compliance plan and the institution fails to
          timely submit an acceptable plan or to implement an accepted
          plan, the agency must require the institution to correct the
          deficiency.  Under the final rule, an institution must file a
          compliance plan within 30 days of a request to do so from the
          institution's primary federal regulatory agency.  The agencies
          may elect to initiate enforcement action in certain cases rather
          than rely on an 
<PAGE> 8
          existing plan particularly where failure to meet
          one or more of the standards could threaten the safe and
          sound operation of the institution.
          
               The Board of Governors issued final amendments to its
          risk-based capital guidelines to be effective December 31,
          1994, requiring that net unrealized holding gains and losses
          on securities available for sale determined in accordance with
          Statement of Financial Accounting Standards (the "SFAS") No.
          115, "Accounting for Certain Investments in Debt and Equity
          Securities," are not to be included in the Tier 1 capital
          component consisting of common stockholders' equity.  Net
          unrealized losses on marketable equity securities (equity
          securities with a readily determinable fair value), however, will
          continue to be deducted from Tier 1 capital.  This rule has the
          general effect of valuing available for sale securities at
          amortized cost (based on historical cost) rather than at fair
          value (generally at market value) for purposes of calculating
          the risk-based and leverage capital ratios.
          
               On December 13, 1994, the Board of Governors issued
          amendments to its risk-based capital guidelines regarding
          concentration of credit risk and risks of non-traditional
          activities, which were effective January 17, 1995.  As
          amended, the risk-based capital guidelines identify
          concentrations of credit risk and evaluate an institution's ability
          to manage such risks and the risk posed by non-traditional
          activities as important factors in assessing an institution's
          overall capital adequacy.
          
               The federal banking agencies during 1996 issued a joint
          agency policy statement regarding the management of
          interest-rate risk exposure (interest rate risk is the risk that
          changes in market interest rates might adversely affect a
          bank's financial condition) with the goal of ensuring that
          institutions with high levels of interest-rate risk have sufficient
          capital to cover their exposures.  This policy statement
          reflected the agencies' decision at that time not to promulgate
          a standardized measure and explicit capital charge for interest
          rate risk, in the expectation that industry techniques for
          measurement of such risk will evolve.  
               
               However, the Federal Financial Institution Examination
          Counsel (the "FFIEC") on December 13, 1996, approved an
          updated Uniform Financial Institutions Rating System (the
          "UFIRS").  In addition to the five components traditionally
          included in the so-called "CAMEL" rating system which has
          been used by bank examiners for a number of years to classify
          and evaluate the soundness of financial institutions (including
          capital adequacy, asset quality, management, earnings and
          liquidity), UFIRS includes for all bank regulatory examinations
          conducted on or after January 1, 1997, a new rating for a sixth
          category identified as sensitivity to market risk.  Ratings in this
          category are intended to reflect the degree to which changes
          in interest rates, foreign exchange rates, commodity prices or
          equity prices may adversely affect an institution's earnings and
          capital.  The rating system henceforth will be identified as the
          "CAMELS" system.
<PAGE> 9          
               At December 31, 1998, the Bank and the Company are
          in compliance with the risk-based capital and leverage ratios
          described above.  See Item 7 below for a listing of the
          Company's risk-based capital ratios at December 31, 1998 and
          1997.
          
                 Community Reinvestment Act (the "CRA") regulations
          effective as of July 1, 1995 evaluate banks' lending to low and
          moderate income individuals and businesses across a four-point scale
          of "outstanding", "satisfactory", "needs to improve"
          and "substantial noncompliance," and are a factor in regulatory
          review of applications to merge, establish new branches or
          form bank holding companies.  In addition, any bank rated in
          "substantial noncompliance" with the CRA regulations may be
          subject to enforcement proceedings.
               
               The Bank has a current rating of "satisfactory" CRA
          compliance, and is scheduled for further examination for CRA
          compliance during 1999.
          
               During 1998, the Company's primary source of income
          was interest income.  In the future, the Company also expects
          to receive dividends and management fees from the Bank. 
          The Bank's ability to make such payments is subject to
          restrictions established by federal banking law, and subject to
          approval by the OCC.  Such approval is required if the total of
          all dividends declared by the Bank's Board of Directors in any
          calendar year will exceed the Bank's net profits for that year
          combined with its retained net profits for the preceding two
          years, less any required transfers to surplus or to a fund for
          the retirement of preferred stock. The OCC generally prohibits
          national banks from, among other matters, adding the
          allowance for loan and lease losses to undivided profits then
          on hand when calculating the amount of dividends which may
          be paid.  Additionally, while the Board of Governors has no
          general restriction with respect to the payment of cash
          dividends by an adequately capitalized bank to its parent
          holding company, the Board of Governors, FDIC and/or OCC,
          might, under certain circumstances, place restrictions on the
          ability of a bank to pay dividends based upon peer group
          averages and the performance and maturity of that bank, or
          object to management fees on the basis that such fees cannot
          be supported by the value of the services rendered or are not
          the result of an arms length transaction.  The FDIC may also
          restrict the payment of dividends if such payment would be
          deemed unsafe or unsound or if after the payment of such
          dividends, the Bank would be included in one of the
          "undercapitalized" categories for  capital adequacy purposes
          pursuant to the Federal Deposit Insurance Corporation
          Improvement Act of 1991.  See the discussion of dividends in
          Item 5 below for additional information regarding dividends.  
          Under the formulas discussed in Item 5, at December 31,
          1998, approximately $3,974,000 of the Bank's net profits were
          available for distribution as dividends without the necessity of
          any prior governmental approvals.  These net profits constitute
          part of the capital of the Bank and sound banking practices
          require the maintenance of adequate levels of capital.
           
         <PAGE> 10 
          
          COMPETITION
          
               The banking business in Santa Clara County, as it is
          elsewhere in California, is highly competitive, and each of the
          major branch banking institutions has one or more offices in
          the Bank's service area.  The Bank competes in the
          marketplace for deposits and loans, principally against these
          banks, independent community banks, savings and loan
          associations, thrift and loan companies, credit unions,
          mortgage banking companies, and other miscellaneous
          institutions that claim a portion of the market.
          
               Larger banks may have a competitive advantage
          because of higher lending limits and major advertising and
          marketing campaigns.  They also perform services, such as
          trust services, international banking, discount brokerage and
          insurance services which the Bank is not authorized or
          prepared to offer currently. The Bank has made arrangements
          with its correspondent banks and with others to provide such
          services for its customers.  For borrowers requiring loans in
          excess of the Bank's legal lending limit, the Bank has offered,
          and intends to offer in the future, such loans on a participating
          basis with its correspondent banks and with other independent
          banks, retaining the portion of such loans which is within its
          lending limit.  As of December 31, 1998, the Bank's legal
          lending limit to a single borrower and such borrower's related
          parties was $2,300,000 based on regulatory capital of
          $15,553,000.
          
               The Bank's business is concentrated in its service area,
          which primarily encompasses Santa Clara County, and also
          includes, to a lesser extent, the contiguous areas of Alameda,
          San Mateo and Santa Cruz counties.
          
               In order to compete with major financial institutions in its
          primary service area, the Bank uses to the fullest extent
          possible the flexibility which is accorded by its independent
          status.  This includes an emphasis on specialized services,
          local promotional activity, and personal contacts by the Bank's
          officers, directors and employees.  The Bank also seeks to
          provide special services and programs for individuals in its
          primary service area who are employed in the agricultural,
          professional and business fields, such as loans for equipment,
          furniture, tools of the trade or expansion of practices or
          businesses.  In the event there are customers whose loan
          demands exceed the Bank's lending limit, the Bank seeks to
          arrange for such loans on a participation basis with other
          financial institutions.  The Bank also assists those customers
          requiring services not offered by the Bank to obtain such
          services from correspondent banks.
          
               Banking is a business which depends on interest rate
          differentials.  In general, the difference between the interest
          rate paid by the Bank to obtain its deposits and its other
          borrowings and the interest rate received by the Bank on loans
          extended to its customers and on securities held in the Bank's
          portfolio comprise the major portion of the Bank's earnings.
          
               Commercial banks compete with savings and loan
          associations, credit unions, other financial institutions and
          other entities for funds.  For instance, yields on corporate and
<PAGE> 11          
          government debt securities and other commercial paper affect
          the ability of commercial banks to attract and hold deposits. 
          Commercial banks also compete for loans with savings and
          loan associations, credit unions, consumer finance companies,
          mortgage companies and other lending institutions.
          
               The interest rate differentials of the Bank, and therefore
          its earnings, are affected not only by general economic
          conditions, both domestic and foreign, but also by the
          monetary and fiscal policies of the United States as set by
          statutes and as implemented by federal agencies, particularly
          the Federal Reserve Board.  This agency can and does
          implement national monetary policy, such as seeking to curb
          inflation and combat recession, by its open market operations
          in United States government securities, adjustments in the
          amount of interest free reserves that banks and other financial
          institutions are required to maintain, and adjustments to the
          discount rates applicable to borrowing by banks from the
          Federal Reserve Board.  These activities influence the growth
          of bank loans, investments and deposits and also affect
          interest rates charged on loans and paid on deposits.  The
          nature and timing of any future changes in monetary policies
          and their impact on the Bank cannot be predicted.
          
                 In 1995 the FDIC, pursuant to Congressional mandate,
          reduced bank deposit insurance assessment rates to a range
          from $0 to $0.27 per $100 of deposits, dependent upon a
          bank's risk.  The FDIC has continued these assessment rates
          through the first semiannual assessment period of 1998. 
          Based upon the above risk-based assessment rate schedule,
          the Bank's current capital ratios, the Bank's current level of
          deposits, and assuming no further change in the assessment
          rate applicable to the Bank during 1998, the Bank estimates
          that its annual noninterest expense attributed to assessments
          will remain unchanged during 1999.
          
               Since 1986, California has permitted California banks
          and bank holding companies to be acquired by banking
          organizations based in other states on a "reciprocal" basis
          (i.e., provided the other state's laws permit California banking
          organizations to acquire banking organizations in that state on
          substantially the same terms and conditions applicable to local
          banking organizations).  Some increase in merger and
          acquisition activity among California and out-of-state banking
          organizations has occurred as a result of this law, as well as
          increased competition for loans and deposits.
          
               Since October 2, 1995, California law implementing
          certain provisions of prior federal law has (1) permitted
          interstate merger transactions; (2) prohibited interstate
          branching through the acquisition of a branch business unit
          located in California without acquisition of the whole business
          unit of the California bank; and (3) prohibited interstate
          branching through de novo establishment of California branch
          offices.  Initial entry into California by an out-of-state institution
          must be accomplished by acquisition of or merger with an
          existing whole bank which has been in existence for at least
          five years.

<PAGE> 12          
         
               Recently, the Federal banking agencies, especially the
          Board of Governors and the OCC, have taken steps to
          increase the types of activities in which national banks and
          bank holding companies can engage, and to make it easier to
          engage in such activities.  On November 20, 1996, the OCC
          issued final regulations permitting national banks to engage in
          a wider range of activities through subsidiaries.  "Eligible
          institutions" (those national banks that are well capitalized,
          have a high overall rating and a satisfactory CRA rating, and
          are subject to an enforcement order) may engage in activities
          related to banking through operating subsidiaries after going
          through a new expedited application process.  In addition, the
          new regulations include a provision whereby a national bank
          may apply to the OCC to engage in an activity through a
          subsidiary in which the bank itself may not engage.  Although
          the Bank is not currently intending to enter into any new type
          of business, this OCC regulation could be advantageous to the
          Bank if the Bank determines to expand its operations in the
          future, depending on the extent to which the OCC permits
          national banks to engage in new lines of business and whether
          the Bank qualifies as an "eligible institution" at the time of
          making application.  
          
               Certain legislative and regulatory proposals that could
          effect the Bank and the banking business in general are
          pending or may be introduced before the United States
          Congress, the California State Legislature and Federal and
          state government agencies.  The United States Congress is
          considering numerous bills that could reform banking laws
          substantially.  For example, proposed bank modernization
          legislation under consideration would, among other matters,
          include a repeal of the Glass-Steagall Act restrictions on
          banks that now prohibit the combination of commercial and
          investment banks.
          
               It is not known to what extent, if any, the legislation
          proposals will be enacted and what effect such legislation
          would have on the structure, regulation and competitive
          relationships of financial institutions.  It is likely, however, that
          many of these proposals would subject the Bank to increased
          regulation, disclosure and reporting requirements and would
          increase competition to the Bank and its cost of doing
          business.
          
               In addition to pending legislative changes, the various
          banking regulatory agencies frequently propose rules and
          regulations to implement and enforce already existing
          legislation.  It cannot be predicted whether or in what form any
          such rules or regulations will be enacted or the effect that such
          rules and regulations may have on the Bank's business.
          
          ACCOUNTING PRONOUNCEMENTS
          
               In October, 1995, the Financial Accounting Standards
          Board (the "FASB")issued SFAS No. 123, "Accounting for
          Stock-Based Compensation."  SFAS No. 123 establishes
          accounting and disclosure requirements using a fair value
          method of accounting for stock based 
<PAGE> 13
          employee compensation
          plans.  Under SFAS No. 123, the Company may either adopt
          the new fair value based accounting method or continue the
          intrinsic value based method and provide proforma disclosures
          of net income and earnings per share as if the accounting
          provisions of SFAS No. 123 had been adopted.  The
          provisions of SFAS No. 123 became effective January 1, 1996. 
          The Company adopted only the disclosure requirements of
          SFAS No. 123 and such adoption had no effect on the
          Company's consolidated net earnings or cash flows.
          
               In June, 1996, the FASB issued SFAS No. 125,
          "Accounting for Transfers and Servicing of Financial Assets
          and Extinguishment of Liabilities."  SFAS No. 125 establishes
          accounting and reporting standards for transfers and servicing
          of financial assets and extinguishment of liabilities based on
          a financial-component approach that focuses on control. 
          Under that approach, after a transfer of financial assets, an
          entity recognizes the financial and servicing assets it controls
          and the liabilities it has incurred, derecognizes financial assets 
          when control has been surrendered, and derecognizes
          liabilities when extinguished.  In December 1996, the FASB
          reconsidered certain provisions of SFAS No. 125 and issued
          SFAS 127, "Deferral of the Effective Date of Certain Provisions
          of FASB Statement No. 125" to defer for one year the effective
          date of implementation for transactions related to repurchase
          agreements, dollar-roll repurchase agreements, securities
          lending and similar transactions.  Earlier adoption or
          retroactive application of this statement with respect to any of
          its provisions was not premitted.  The Company adopted SFAS
          125 effective January 1, 1997.  The adoption of SFAS 125 had
          no effect on the Company's financial condition or results of
          operations.
          
               In February 1997, the FASB issued SFAS No. 128,
          "Earnings Per Share."  SFAS No. 128 requires restatement of
          all prior year earnings per share (EPS) and presentation of
          basic and diluted EPS.  Basic EPS is computed by dividing net
          income by the weighted average common shares outstanding
          during the period.  Diluted EPS reflects the potential dilution if
          securities or other contracts to issue common stock are
          exercised or converted to common shares.  The Company
          adopted SFAS 128 during 1997 and all EPS amounts have
          been retroactively adjusted to comply with SFAS 128.
          
               In June 1997, the FASB issued SFAS No. 130,
          "Reporting Comprehensive Income," which requires that an
          enterprise report, by major components and as a single total,
          the change in net assets during the period from nonowner
          sources; and SFAS No. 131 "Disclosures about Segments of
          an Enterprise and Related Information," which establishes
          annual and interim reporting standards for an enterprise's
          business segments and related disclosures about its products,
          services, geographic areas and major customers.  The
          Company adopted both SFAS 130 and SFAS 131 in 1998 and
          such adoption had no effect on the Company's financial
          position or results of operations.
          
               In June 1998, the FASB issued SFAS No. 133,
          "Acounting for Derivative Instruments and Hedging Activities"
          which establishes accounting and reporting standards for
          derivative instruments and hedging activities.  The Company
          adopted SFAS 133 effective July 1, 1998.  In connection with
          the adoption of SFAS 133 the Company 

<PAGE> 14
          reclassified certain investment securities from held-to-maturity 
          to available-for-sale.  Adoption of this statement did not have 
          any other impact on the Company's financial position and had no 
          impact on the Company's results of operations or cash flows.
          
          Item 2.  Properties
          
               As of December 31, 1998, the Bank had three banking
          offices located in Santa Clara County.  The first banking office,
          which is owned by the Bank, is also the principal executive
          office of the Company, and is located at 12000 Saratoga-Sunnyvale 
          Road, Saratoga, California, comprising of
          approximately 5,500 square feet.  The office was purchased by
          the Company in 1988 for $1,800,000.  The foregoing
          description of the office and purchase of the office is qualified
          by reference to the Agreement of Purchase and Sale dated
          July 27, 1988 attached as Exhibit 10.1 to the Company's
          Annual Report on Form 10-K for the year ended December 31,
          1988, filed with the Securities and Exchange Commission on
          March 27, 1989.
          
               The second banking facility, which is located at 15405
          Los Gatos Blvd., Suite 103, Los Gatos, California, was opened
          March 9, 1988.  The 3,082 square foot facility is leased under
          a noncancellable operating lease which expires in 2003.
          Current lease payments are $6,387 per month for the building
          and ground lease.  Effective March, 1998, the lease payments
          were tied to the Consumer Price Index.  The foregoing
          description of the lease is qualified by reference to the lease
          agreement dated October 19, 1987 attached as Exhibit 10.1 to
          the Company's Annual Report on Form 10-K for the year
          ended December 31, 1987, filed with the Securities and
          Exchange Commission on March 31, 1988.
          
               The third banking facility located at 160 West Santa
          Clara Street, in San Jose, California, was opened on October
          3, 1989.   The lease agreement for the 7,250 square foot
          location in the downtown area of San Jose is under a
          noncancellable operating lease which expires in 1999. 
          Current lease payments are $11,495 per month for the ground
          floor and $4,274 for the second floor.  The lease payments for
          the second floor are tied to the Consumer Price Index with the
          increase not to exceed 4% per year.  It is anticipated that the
          lease will be renewed during 1999 without substantial changes
          to the terms or conditions.  The foregoing description of the
          lease is qualified by reference to the lease agreement dated
          January 17, 1989 attached as Exhibit 10.4 to the Company's
          Annual Report on Form 10-K for the year ended December 31,
          1989, filed with the Securities and Exchange Commission on
          March 27, 1990.
          
          Item 3.  LEGAL PROCEEDINGS
          
               Neither the Company nor the Bank is a party to, nor is
          any of their property the subject of, any material pending legal
          proceedings other than ordinary routine litigation incidental to
          their respective businesses, nor are any such proceedings
          known to be contemplated by governmental authorities.
          
<PAGE> 15
          Item 4.  Submission of Matters to a Vote of Security Holders.
          
               Not Applicable.
                       PART II
                           
          Item 5.  Market for the Registrant's Common Equity and Related 
                   Shareholder Matters.
          
               There is limited trading in and no established public trading
          market for the Company's Common Stock.  The Company's
          Common Stock is not listed on any exchange.  Hoefer and
          Arnett, Incorporated, Burford Capital and Sutro and Company
          facilitate trades in the Company's Common Stock.
          
               The following table summarizes those trades of which
          the Company has knowledge based on information provided
          by Hoefer and Arnett, Incorporated, Burford Capital and Sutro
          and Company, setting forth the approximate high and low bid
          prices for the periods indicated, restated to reflect 3-for-2 stock
          split declared by the Board of Directors on March 27, 1998. 
          The prices indicated below may not necessarily represent
          actual transactions. 
<TABLE>
<CAPTION>                                                             
                                      Bid Price of 
                                     Common Stock  (1) 
<S>                              <C>          <C>
  Quarter ended                      Low        High  
  March 31, 1997................  $  8.00      $10.00
  June 30, 1997..................    9.67       11.00
  September 30, 1997........        10.50       12.67
  December 31, 1997.........        10.83       12.17 
  
  March 31, 1998................    12.75       15.33
  June 30, 1998..................   14.33       17.33
  September 30, 1998........        13.88       17.25
  December 31, 1998.........        13.00       14.50 
</TABLE>
  
  (1)  As estimated by the Company based upon trades of which
       it was aware, and not including purchases of stock pursuant to
       the exercise of employee stock options.  
         
         The Company had 255 shareholders of record as of March 1,
         1999.  The Company's shareholders are entitled to receive
         dividends when and as declared by its Board of Directors, out
         of funds legally available therefore, subject to the restrictions
         set forth in the California General Corporation Law (the "Cor-
         poration Law").  The Corporation Law provides that a
         corporation may make a distribution to its shareholders if the
         corporation's retained earnings equal at least the amount of the
         proposed distribution.  The Corporation Law further provides
         that, in the event that sufficient retained earnings are not
         available for the proposed distribution, a corporation may
         nevertheless make a distribution to its shareholders if it meets
         two conditions, which generally stated are as 
<PAGE> 16
         follows:  (i) the corporation's assets equal at least 1-1/4 times its
         liabilities; and (ii) the corporation's current assets equal at least 
         its current liabilities or, if the average of the corporation's 
         earnings before taxes on income and before interest expenses for the 
         two preceding fiscal years was less than the average of the
         corporation's interest expenses for such fiscal years, then the
         corporation's current assets must equal at least 1-1/4 times its
         current liabilities.  Funds for payment of any cash dividends by
         the Company would be obtained from its investments as well as
         dividends and/or management fees from the Bank.  The
         payment of cash dividends by the Bank may be subject to the
         approval of the OCC, as well as restrictions established by
         federal banking law, the Board of Governors and the FDIC.
         
             Approval of the OCC is required if the total of all dividends
         declared by the Bank's Board of Directors in any calendar year
         will exceed the Bank's net profits for that year combined with its
         retained net profits for the preceding two years, less any
         required transfers to surplus or to a fund for the retirement of
         preferred stock.
         
            Additionally, the Board of Governors,FDIC and/or OCC,
         might, under certain circumstances, place restrictions on the
         ability of a bank to pay dividends based upon peer group
         averages and the performance and maturity of that bank, or
         object to management fees on the basis that such fees cannot
         be supported by the value of the services rendered or are not
         the result of an arms length transaction.
         
            The Company has paid cash dividends on the outstanding
         shares of common stock totaling  $0.175 per share in 1997 and
         $0.20 per share in 1998.  
         
            It is the intention of the Company to pay cash and stock
         dividends, subject to the restrictions on the payment of cash
         dividends as described above, depending upon the level of
         earnings, management's assessment of future capital needs
         and other factors considered by the Board of Directors.   

<PAGE> 17
                  Item 6.  Selected Financial Data
         
         The following table presents certain consolidated financial
         information concerning the business of the Company and the
         Bank.  This information should be read in conjunction with the
         Consolidated Financial Statements and the notes thereto, and
         Management's Discussion  and Analysis of Financial Condition
         and Results of Operations contained elsewhere herein.
<TABLE>
<CAPTION>
         
         Operations               Year ended December 31,
                         (in thousands, except per share data)
                                1998     1997      1996      1995      1994
        <S>                  <C>       <C>       <C>       <C>       <C>
         Interest income      $9,749    $9,346    $7,585    $6,572    $5,446 
         Interest expense     (4,400)   (4,273)   (3,558)   (2,861)   (1,929)
         
         Net interest income   5,349     5,073     4,027     3,711     3,517 
         Provision (credit)
          for credit losses      136      -         (150)     -         (636)
         
         Net interest income
           after (credit) 
           provision
           for credit losses   5,213     5,073     4,177     3,711     4,153 
         Other income            765       477       353       577       405
         Other expenses       (2,965)   (2,978)   (2,870)   (2,868)   (3,523)
         Income before income
           taxes               3,013     2,572     1,660     1,420     1,035  
         Provision for income
           taxes              (1,065)     (976)     (559)     (539)     (377)
                                  
         Net income           $1,948    $1,596    $1,101    $  881   $   658
                              ======    ======    ======    ======    ======
         Earnings per share:
          Basic              $  1.19    $ 1.01    $ 0.71    $ 0.57   $  0.43   
          Diluted            $  1.07    $ 0.92    $ 0.64    $ 0.55   $  0.39
                              ======    ======    ======    ======    ======
         Cash dividends
          declared per
          common share       $ 0.167    $0.133    $0.117    $0.067   $   -
                              ======    ======    ======    ======    ======
</TABLE>
<TABLE>
<CAPTION>
         
         Balances at year end                    December 31,
                                    (in thousands,except per share data)
                              1998       1997      1996     1995       1994  
        <S>               <C>        <C>       <C>      <C>         <C>
         Total assets      $144,802   $131,044  $121,784 $100,497    $87,536 
         Net loans           73,847     63,187    52,033   36,759     32,803
         Total deposits     103,415     91,046    89,444   74,949     73,872
         Shareholders' 
          equity             15,257     13,605    11,952   11,057      9,627
         Book value per 
          share                9.36       8.31      7.69     7.15       6.23    
</TABLE>
         
<PAGE> 18         
         DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND
         SHAREHOLDERS' EQUITY, INTEREST RATES, AND
         INTEREST DIFFERENTIAL.  The following are the Company's
         daily average balance sheets for the years ended December 31,
         1998 and 1997.
<TABLE>
<CAPTION>
                                                         1998
                                               (dollars in thousands)
                                                        YIELDS       INTEREST
                                           AVERAGE        OR          INCOME/
                                           BALANCE       RATES        EXPENSE
        <S>                               <C>            <C>          <C>
         ASSETS
         Interest earning assets:
           Loans (1)                       $64,939        9.8%         $6,394 
           Investment securities (2)        41,400        5.9           2,460
           Federal funds sold               13,608        5.3             726
          Other                              2,929        5.8             169
         Total interest earning assets     122,876        7.9           9,749
                                                                    
         Noninterest-earning assets:
           Cash and due from banks           5,273
           Premises and equipment            2,155
           Other assets (3)                  1,828 
               TOTAL                      $132,132
                                           =======
         LIABILITIES AND SHAREHOLDERS' EQUITY
         Interest bearing liabilities:
           Deposits:
            Demand                         $24,182        3.4             833
            Savings                         14,918        2.8             422 
            Time                            30,888        5.7           1,746
         Total interest bearing deposits    69,988        4.3           3,001 
         Federal Home Loan Bank 
           borrowings                       22,837        6.1           1,398
         Other interest bearing liabilities     19        5.3               1 
         Total interest bearing liabilities 92,844        4.7           4,400
         Noninterest-bearing liabilities:
            Demand deposits                 23,397
        Accrued expenses and other  
              liabilities                    1,477
         Shareholders' equity               14,414
             TOTAL                        $132,132
                                           =======
         Net interest income                                           $5,349
                                                                        =====
         Net yield on interest earning assets            4.4% 
                                                         ====
</TABLE>
         (1) Including average non-accrual loans of Nil and loan fees of
         $458,000.
         (2) Interest income is reflected on an actual basis, not a fully
         taxable equivalent basis.  Yields are based on historical cost for
         held to maturity securities and fair market value for available for
         sale securities.                
         (3) Net of average deferred loan fees of $318,000 and average
         allowance for credit losses of $685,000.
<PAGE> 19         
<TABLE>
<CAPTION> 
                                                          1997
                                                 (dollars in thousands)
                                                         YIELDS      INTEREST
                                           AVERAGE        OR          INCOME/
                                           BALANCE       RATES        EXPENSE
        <S>                              <C>            <C>           <C>
         ASSETS
         Interest earning assets:
            Loans (1)                     $ 54,537       10.2%         $5,571 
            Investment securities (2)       49,579        6.3           3,138
            Federal funds sold              11,204        5.4             607
           Other                               485        6.2              30
         Total interest earning assets     115,805        8.1           9,346
                                                                    
         Noninterest-earning assets:
           Cash and due from banks           4,621
         Premises and equipment              2,071
           Other assets (3)                  2,230  
               TOTAL                      $124,727
                                           =======
         LIABILITIES AND SHAREHOLDERS' EQUITY
         Interest bearing liabilities:
           Deposits:
            Demand                         $23,674        3.6             853
            Savings                         17,547        3.0             530 
            Time                            26,742        5.8           1,539
         Total interest bearing deposits    67,963        4.3           2,922 
         Federal Home Loan Bank 
           borrowings                       21,759        6.2           1,350
         Other interest bearing liabilities     10       10.0               1
         Total interest bearing liabilities 89,732        4.8           4,273 
         Noninterest-bearing liabilities:
            Demand deposits                 21,301
            Accrued expenses and other  
              liabilities                    1,124
         Shareholders' equity               12,570
             TOTAL                        $124,727
                                           =======
         Net interest income                                           $5,073
                                                                        =====
         Net yield on interest earning assets            4.4% 
                                                         ====
</TABLE>
         (1) Including average non-accrual loans of $60,000 and loan
         fees of $357,000.
         (2) Interest income is reflected on an actual basis, not a fully
         taxable equivalent basis.  Yields are based on historical cost for
         held to maturity securities and fair market value for available for
         sale securities.                
         (3) Net of average deferred loan fees of $374,000 and average
         allowance for credit losses of $605,000.
<PAGE> 20
         Interest Differential - Rate/Volume Changes
         
         Interest differential is affected by changes in volume, changes
         in rates and a combination of changes in volume and rates. 
         Volume changes are caused by changes in the levels of
         average earning assets and average interest bearing deposits
         and borrowings.  Rate changes result from changes in yields
         earned on assets and rates paid on liabilities.  Changes not
         solely attributable to volume or rates have been allocated to the
         rate component.  The following table shows the effect on the
         interest differential of volume and rate changes for the years
         ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>         
                          1998 over 1997           1997 over 1996
                     Increase (Decrease) Due   Increase (Decrease) Due
                          to Changes in:           to Changes in:
                                    (in thousands)
                                        Net                          Net     
                    Volume     Rate   Change   Volume     Rate     Change 
<S>               <C>      <C>       <C>      <C>       <C>       <C>
Interest earning 
  assets:
Loans(1)           $ 1,053  $  (230)  $  823   $1,402    $(226)    $1,176
Securities (2)        (530)    (148)    (678)     550      169        719
Federal funds sold     128       (9)     119      (25)    (129)      (154) 
Interest bearing                                             
  deposits in                                           
  other banks          152      (13)     139       15        5         20
Total                  803     (400)     403    1,942     (181)     1,761

Interest bearing
 liabilities:                      
  Demand deposits       18      (38)     (20)     208        1        209
  Savings deposits     (82)     (26)    (108)      88       39        127
  Time deposits        253      (46)     207     (114)     (12)      (126)
  Borrowings            66      (18)      48      536      (27)       509
  Other liabilities      2       (2)       -       (4)       -         (4) 
  Total                257     (130)     127      714        1        715 

Interest differential $546    $(270)    $276  $ 1,228    $(182)    $1,046
</TABLE>
 
 (1)Including non accrual loans.  
(2)Interest income is reflected on an actual basis, not a fully taxable 
   equivalent basis.

<PAGE> 21
          INVESTMENT PORTFOLIO
          
            The amortized cost and fair values of securities at December
          31 are as follows:
<TABLE>
<CAPTION>                                                         
                                                  December 31,   
                 
                                            1998                 1997         
                                                  (in thousands)
Securities Available for Sale
<S>                                <C>         <C>       <C>         <C>
                                    Amortized     Fair    Amortized    Fair
                                      Cost        Value      Cost      Value 
U.S. Treasury and agency securities  $14,890    $14,972    $11,228    $11,152
Mortgage-backed securities            10,665     10,657       -          -
Governmental mutual fund               3,128      3,025      3,128      3,018
Federal Home Loan Bank stock           2,007      2,007      1,864      1,864
Bankers Bank stock                       150        150        150        150
Total                                $30,840    $30,811    $16,370    $16,184
                                      ======     ======     ======     ======
Securities Held to Maturity
                                    Amortized     Fair    Amortized    Fair
                                      Cost        Value      Cost      Value 
          
U.S. Treasury and agency securities $   -       $  -       $10,879    $10,845
Mortgage-backed securities              -          -        15,024     15,124
Obligations of states and political
  subdivisions                         9,214      9,384      5,159      5,234
Federal Reserve Bank stock                90         90         90         90
Total                               $  9,304   $  9,474    $31,152    $31,293
                                      ======     ===== =    ======     ======
</TABLE>
          
As investment securities mature, to the extent that the proceeds are
reinvested in investment securities, management expects that the categories
of taxable investment securities purchased will be in approximately the same
proportion as existed at December 31, 1998.  The maturities and yields of the
investment portfolio at December 31, 1998 are shown below.

<PAGE> 22
<TABLE>
<CAPTION>
MATURITY AND YIELDS OF INVESTMENT SECURITIES
          At December 31, 1998
          (Dollars in thousands)
          Securities Available for Sale
         Estimated                After 1 Year & After 5 years &
           Market Within 1 Year   Within 5 Years Within 10 Years After 10 years
           Value Amount Yield(1) Amount Yield(1) Amount Yield(1)Amount Yield(1)
<S>        <C>     <C>          <C>     <C>      <C>    <C>     <C>    <C>
U.S. Treas-
 ury and 
 agency
 securities $14,972 $   18 5.51%  $8,913  5.95%   $1,000  6.10%  $5,041  5.98%
Governmental
 mutual fund  3,025  3,025 6.12     -      -        -      -       -      -
Federal Home 
 Loan Bank 
 stock        2,007    -    -       -     -       -     -         2,007  5.12 
Bankers Bank
 stock          150    -    -       -     -       -     -           150   -  
             20,154 $3,043 6.11%  $8,913  5.95%   $1,000  6.10%  $7,198  5.62%
                    ======         =====           =====          =====
Mortgage-
 backed
 securities  10,657
Total       $30,811
             ======
</TABLE>
<TABLE>
<CAPTION>
          
Securities Held to Maturity
           Total                 After 1 Year & After 5 Years &  
         Carrying Within 1 Year  Within 5 Years Within 10 Years After 10 Years
           Value Amount Yield(1) Amount Yield(1)Amount Yield(1) Amount Yield(1)
<S>          <C>    <C>   <C>  <C>     <C>    <C>     <C>     <C>      <C>     
Oblig-
 ations of
 states and
 political
 subdiv-
 isions       9,214   450  5.31% 1,902   4.55%  1,418   4.73%   5,444    4.93%
          
Federal 
 Reserve
 Bank stock      90                                                90    6.00
Total        $9,304 $ 450  5.31%$1,902   4.55% $1,418   4.73%  $5,534    4.95%
             ====== =====        =====         ======           =====
</TABLE>
          
(1)  Yields are actual, not fully taxable equivalent.
          
Mortgage-backed securities generally have stated maturities of 4 to 15 years 
but are subject to likely and substantial prepayments which effectively 
accelerate actual maturities.

<PAGE> 23
LOAN PORTFOLIO

The composition of the loan portfolio at December 31, 1998 and 1997 is
summarized in the following table.
<TABLE>
<CAPTION>
                                               December 31, 
                                           1998         1997   
                                               (in thousands)
      <S>                          <C>            <C>
       Real estate:
        Construction                $19,623        $ 8,945
        Other                        33,452         29,100
        Commercial                   18,738         21,282
       Installment                    1,192          1,548
       Lease financing                1,850          3,215
                                    $74,855        $64,090
                                    =======        ======= 
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998, loans were due as follows:
                      Real       Real
                     Estate     Estate                        Lease
                     Const.     Other    Com'l.   Install.  Financing   Total
                    ======     ======   ======     ======   ========   ======
                                      (in thousands)
<S>               <C>       <C>       <C>       <C>       <C>        <C>
Due in one year
  or less          $19,414    $ 5,360   $11,334   $  -      $   183   $36,291
Due after one year     209     28,092     7,404     1,192     1,667    38,564
TOTAL              $19,623    $33,452   $18,738   $ 1,192   $ 1,850   $74,855
                    ======     ======    ======    ======    ======    ======
</TABLE>
Of the loans due after one year, $34,685,000 have fixed rates and $3,879,000 
have variable interest rates.

RISK ELEMENTS

There were no nonaccrual loans at December 31, 1998.  Nonaccrual loans
were $360,000 at December 31, 1997. 

At December 31, 1998 and 1997, there were no loans past due 90 days or
more as to principal or interest and still accruing interest.  There were no
loans at December 31, 1998 or 1997 which were troubled debt restructurings.

<PAGE> 24

      There were four potential problem loans at December 31, 1998 having a 
combined principal balance of $2,033,000 ($305,000 at December 31,
1997).  Potential problem loans are loans which are generally current as to
principal and interest but have been identified by the Company as potential
problem loans due either to a decrease in the underlying value of the
property securing the credit or some other deterioration in the
creditworthiness of the borrower.  All of the four loans identified as potential
problem loans are  secured by real estate and personal property.  

       The Company does not believe there to be any concentration of loans in
excess of 10% of total loans which is not disclosed above which would cause
them to be similarly impacted by economic or other conditions.  See
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Provision for Credit Losses, regarding discussion of California
economic conditions.

SUMMARY OF CREDIT EXPERIENCE
<TABLE>
<CAPTION>
Analysis of the Allowance for Credit Losses

                                       Year Ended December 31,
                                        1998            1997 
<S>                                  <C>            <C> 
Beginning balance                      $578,000      $628,000 
Provision charged to 
  operations                            136,000          -
Charge-offs - Commercial                (65,000)     (115,000)
Recoveries - Commercial                  67,000        65,000     

Ending balance                        $ 716,000     $ 578,000
                                       ========      ========
Ratio of net charge-offs
 (recoveries) during the period
 to average loans outstanding
 during the year.                       (.003)%         .092%
                                       ========      ========

Ratio of allowance for credit 
losses to loans outstanding 
at end of year                            0.96%         0.90%
                                       ========      ========
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
 
Allocation of the Allowance for Credit Losses 
                        December 31, 1998        December 31, 1997     
                                    Percent                        Percent 
                                 of loans in                    of loans in
                                each category              each category
                      Amount   to total loans     Amount   to total loans
<S>                 <C>            <C>          <C>            <C>   
Real estate-
  other              $169,000        45%         $254,000       46%
Commercial            224,000        25           254,000       33 
Real estate- 
 construction         279,000        26            61,000       14
Installment            44,000         2             9,000        2
Lease financing          -            2              -           5 
                     $716,000       100%         $578,000      100%
                     ========       ===           =======       ===
</TABLE>

DEPOSITS

The average balance sheets for 1998 and 1997 set forth the average
amount and average interest rate paid for deposits.
<TABLE>
<CAPTION>
At December 31, 1998, time deposits of $100,000 or more have remaining
maturities as follows (in thousands):
<S>                                      <C>
3 months or less                          $ 6,640
Over 3 months to 6 months                   8,959
Over 6 months to 12 months                  4,583
Over 1 year to 5 years                      2,497
Over 5 years                                  100
  TOTAL                                   $22,779  
                                           ======
</TABLE>
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS

Ratios of profitability, liquidity and capital for the years ended December 31,
are as follows:
<S>                                          <C>              <C>  
                                               1998            1997 
Return on average assets                        1.5%            1.3% 
Return on average equity                       13.5%           12.7%
Cash dividends declared per share
  to diluted earnings per share                15.6%           14.4% 
Average equity to average assets               10.9%           10.1%
</TABLE>

<PAGE> 26
Item  7.   Management's Discussion and Analysis of Financial Condition and
Results of Operations.

      Certain matters discussed or incorporated by reference in this Annual
Report on Form 10-K are forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected.  Changes to such risks and uncertainties, which could
impact future financial performance, include, among others, (1) competitive
pressures in the banking industry; (2)changes in interest rate environment;
(3)general economic conditions, nationally, regionally and in operating
market areas; (4) changes in the regulatory environment; (5) changes in
business conditions and inflation; (6) changes in securities markets; and (7)
Year 2000 compliance problems.  Therefore, the information set forth therein
should be carefully considered when evaluating business prospects of the
Company and the Bank.

Overview

      Net income in 1998 was $1,948,000 ($1.19 basic earnings per share,
$1.07 diluted earnings per share) compared to $1,596,000 ($1.01 basic
earnings per share, $0.92 diluted earnings per share) in 1997 and
$1,101,000 ($.71 basic earnings per share, $0.64 diluted earnings per
share) in 1996.  The increase in net income in 1998 resulted primarily from
an increase in the volume of earning assets, offset, in part, by a decrease in
the yield on earning assets and an increase in the volume of  interest-bearing 
liabilities. The increase in net income in 1997 resulted primarily from
an increase in the volume and yield of earning assets, offset, in part by an
increase in interest expense due to the increased volume of interest-bearing
liabilities.   The table below highlights the changes in the nature and sources
of income and expense from 1997 to 1998 and from 1996 to 1997.
<TABLE>
<CAPTION>
                                         Increase              Increase
                       1998     1997    (Decrease)     1996   (Decrease)        
                                      (in thousands)
<S>                  <C>      <C>        <C>         <C>      <C> 
Net interest income   $5,349   $5,073      $276       $4,027   1,046    
Provision (credit)
  for credit losses      136      -         136         (150)    150    
Noninterest income       765      477       288          353     124
Noninterest expenses  (2,965)  (2,978)      (13)      (2,870)    108
Income before
  income taxe          3,013    2,572       441        1,660     912
Provision for
  income taxe         (1,065)    (976)      (89)        (559)   (417)
Net income            $1,948   $1,596      $352       $1,101  $  495
                      =====     =====      ====       ======  ======
</TABLE>

<PAGE> 27
Net Interest Income                                              

Net interest income is affected by changes in the nature and volume of
earning assets held during the year, the rates earned on such assets and
the rates paid on interest-bearing liabilities. The table below details the
average balances, interest income and expense and the effective
yields/rates for earning assets and interest bearing liabilities.
<TABLE>
<CAPTION>
                    1998                   1997                   1996    
          Average        Yield/ Average           Yield/ Average         Yield/
         Balance Interest Rate  Balance  Interest  Rate  Balance Interest Rate
                          (in thousands, except percentages)
<S>     <C>      <C>     <C>   <C>        <C>     <C>    <C>     <C>      <C>
Earning 
 assets:
  Loans  $64,939  $6,394  9.8%  $  54,537  $5,571  10.2%  $41,313  $4,395  10.6%
  Other   57,937   3,355  5.8      61,268   3,775   6.2    55,170   3,190   5.8 
Total 
 earning 
 assets $122,876                 $115,805                 $96,483              
        =======                   =======                 =======

Interest
 bearing
 liab-
 ilities:
 Depo-
 sits   $ 69,988  3,001  4.3    $ 67,963    2,922   4.3    60,995   2,712   4.4
Other 
 interest
 bearing  
 funds    22,856  1,399  6.1      21,769    1,351   6.2    13,335     846   6.3

Total  
 interest
 bearing 
 liabil-
 ities  $ 92,844                $ 89,732                  $74,330             
         =======                 =======                   ======
Net interest
  income and
  margin         $5,349  4.4%              $5,073  4.4%           $4,027    4.2%
                  =====  ====               =====  ====            =====    ====
</TABLE>

Average earning assets increased $7.1 million or 6%, to $122.9 million
during 1998 compared to $115.8 million in 1997.  In 1997, Average earning
assets increased $19.3 million or 20% from $96.5 million in 1996 to $115.8
million in 1997.  The increase in 1998 was primarily in construction loans
and the longer term real estate loan portfolio.  These longer term loans are
generally made for a term of between five and fifteen years and are matched
against specific blocks of deposits or borrowings in order to alleviate interest
rate risk.  The increase in 1997 was primarily in Small Business
Administration  and U.S. Department of Agriculture  loans which were
purchased as a means to diversify the loan portfolio.  Average interest-
bearing liabilities increased $3.1 million, or 3%, during 1998 to $92.8  million
from $89.7 million in 1997 primarily due to an increase in Federal Home Loan 
Bank borrowings which were matched against specific longer term real estate 

<PAGE> 28

loans and an increase in interest bearing checking deposits.  Average
interest-bearing liabilities increased $15.4 million, or 21%, to $89.7 million,
in 1997 from $74.3 million in 1996.  This increase was primarily due to an
increase in Federal Home Loan Bank borrowings which were matched
against specific longer term real estate loans and an increase in interest
bearing checking deposits.


EARNING ASSETS-LOANS  

The average loan portfolio increased $10.4 million, or 19%, from $54.5
million in 1997 to $64.9 million in 1998.  The increase was primarily in the
longer term real estate loan portfolio as a result of marketing efforts in that
area.  Average loans increased $13.2 million from $41.3 million in 1996 to
$54.5 million in 1997. The increase was primarily in SBA and USDA loans
which were purchased in order to diversify the loan portfolio.    The average
loan to average deposit ratio for 1998 was 70% compared to 61% in 1997
and 68% in 1996.  The average yield on loans decreased from 10.6% in
1996 to 10.2% in 1997 and 9.8% in 1998.  The decrease in yield in 1998
primarily reflects a decrease in interest rates on loans originated as a result
of the decrease in prime rate during the year as compared to 1997. The
decrease in yield in 1997 is primarily attributable to the purchase of SBA and
USDA loans which generally had lower average yields as compared to the
rest of the loan portfolio. 

OTHER EARNING ASSETS

Average other earning assets, consisting of Investment securities, Federal
funds sold and interest bearing deposits in other banks, decreased $3.3
million or 5% during 1998 from $61.3 million to $57.9 million.  During 1997,
average other earning assets increased $6.1 million from $55.2 million in
1996.  The decrease in 1998 was primarily due to the increased level of
loans.  The increase in the securities portfolio in 1997 was primarily due to
the increased level of deposits.  The yield earned on average other earning
assets increased from 5.8% in 1996 to 6.2% in 1997 and then decreased to
5.8% in 1998.  In 1998, the change in the volume and yields resulted in a
decrease in  interest income of $420,000 on other earning assets. In 1997,
the change in the volume and yields of other earning assets resulted in an
increase in  interest income of $585,000 on other earning assets.

INTEREST BEARING LIABILITIES

Average interest bearing liabilities increased $3.1 million, or 3%,  from $89.7
million in 1997 to $92.8 million in 1998 and increased $15.4 million, or 21%, 
from $74.3 million in 1996 to $89.7 million in 1997.  The increase in 1998
was primarily a result 

<PAGE> 29

of increased interest-bearing checking accounts and Federal Home Loan Bank 
borrowings.  The increase in 1997 was primarily a result of increased Federal 
Home Loan Bank borrowings which were matched against certain longer term real 
estate loans to alleviate the impact of interest rate risk.  Average non-
interest bearing deposits increased $2.1 million, or 10%,  in 1998 to $23.4 
million and increased $3.2 million, or 18%, to $21.3 million in 1997 from an 
average of $18.1 million in 1996.  Overall rates on interest bearing deposits 
decreased from 4.4% in 1996 to 4.3% in 1997 and 1998.  The net result of the 
changes in average balances and rates was an increase in total interest 
expense of $127,000 in 1998 from 1997 and an increase of $715,000 in 1997 
from 1996.  

NET INTEREST MARGIN

The net interest margin increased from 4.2% in 1996 to 4.4% in 1997 and
1998.  The changes in the net interest margin are primarily attributable to
fluctuations in the loan, deposit and borrowing mix and the relationship
between rates charged and rates paid.

PROVISION FOR CREDIT LOSSES

The Bank maintains an allowance for credit losses which is based, in part,
on the Bank's historical loss experience, the impact of forecasted economic
conditions within the Bank's market area, and, as applicable, the State of
California, the value of underlying collateral, loan performance and inherent
risks in the loan portfolio.  The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating expense and
recoveries of previously charged-off loans.  During 1998, the Bank provided
$136,000 to the allowance for credit losses.  During 1997, the Bank did not
provide any additional provision for credit losses.  In 1996, $150,000 was
reversed from the allowance for credit losses.  The allowance for credit
losses was $716,000 in 1998, compared to $578,000 for 1997 and $628,000
for 1996.  At December 31, 1998, the allowance was approximately 0.96%
of total loans, compared to approximately 0.90% at December 31, 1997. 
There were no nonaccrual loans at December 31, 1998 or 1996. Nonaccrual
loans were $360,000 at December 31, 1997.  Interest income foregone on
nonaccrual loans during 1997 was $13,000.   The nonaccrual loans
consisted of one loan secured by real estate which was paid off on January
22, 1998.

At December 31, 1998 and 1997, there were no loans past due 90 days or
more as to principal or interest and still accruing interest. 

There was no Other Real Estate Owned ("OREO") at December 31, 1998 or
1997. 

<PAGE> 30
<TABLE>
<CAPTION>
Nonperforming loans and other real estate owned are summarized below:

                                     December 31, 1998     December 31, 1997
<S>                                <C>                    <C>
Nonperforming loans:
  Past due 90 days or more        
    and still accruing interest     $        -             $       -    
  Nonaccrual                                 -                  360,000
    
    Total                                    -                  360,000   

Other real estate owned                      -                     -      

Total nonperforming loans and
  other real estate owned           $        -              $   360,000   
                                     ===========             ==========  
</TABLE>
Management is of the opinion that the allowance for credit losses is
maintained at a level adequate for known and currently anticipated future
risks inherent in the loan portfolio.  However, the Bank's loan portfolio, 
which includes approximately $53,000,000 in real estate loans, representing
approximately 71% of the portfolio, could be adversely affected if California
economic conditions and the real estate market in the Bank's market area
were to weaken.  The effect of such events, although uncertain at this time,
could result in an increase in the level of nonperforming loans and OREO
and the level of the allowance for loan losses, which could adversely affect
the Company's and the Bank's future growth and profitability.

NONINTEREST INCOME

Noninterest income increased $288,000, or 60%, to $765,000 during 1998
compared to $477,000 during 1997. During 1997, noninterest income
increased $124,000, or 35%, from $353,000 in 1996.  The increase in 1998
is primarily attributable to an increase in net gain on sale of securities of
$120,000,  an increase of $85,000 in rental income on leased assets and
income from an increase in the cash surrender value of life insurance
policies. The increase in 1997 was primarily attributable to a net gain on sale
of securities of $34,000 and an increase of $74,000 in charges assessed on
deposit accounts. 

NONINTEREST EXPENSES

Noninterest expenses were approximately $3.0 million in 1998 and 1997,
compared to approximately $2.9 million in 1996. 

<PAGE> 31

Generally, expenses have grown at a slower rate than the growth in assets
and increases in the volume of transactions.  As a percentage of average
earning assets, noninterest expense decreased to 2.4% in 1998 from 2.6%
in 1997 and 3.0 in 1996. As pressure continues on net interest margins and
net asset growth, management of operating expenses will continue to be a
priority. 

INCOME TAXES

The Company's effective tax rate was 35.4% for 1998, 38.0% for 1997 and
33.7% for 1996.  See Note 9 to the consolidated financial statements for
additional information on income taxes.

LIQUIDITY/INTEREST RATE SENSITIVITY

The Bank manages its liquidity to provide adequate funds at an acceptable
cost to support borrowing requirements and deposit flows of its customers.
At December 31, 1998 and 1997, liquid assets as a percentage of deposits
were 52% and 36%, respectively.  In addition to cash and due from banks,
liquid assets include interest bearing deposits with other banks, Federal
funds sold and securities which are available for sale.  The Bank has $10.0
million in Federal funds lines of credit available with correspondent banks 
to meet liquidity needs.

Management regularly reviews general economic and financial conditions,
both external and internal, and determines whether the positions taken with
respect to liquidity and interest rate sensitivity continue to be appropriate. 
The Bank also utilizes a monthly "Gap" report which identifies rate sensitivity
over the short- and long-term.        

The following table sets forth the distribution of repricing opportunities,
based on contractual terms, of the Company's earning assets and interest-
bearing liabilities at December 31, 1998, the interest rate sensitivity gap 
(i.e. interest rate sensitive assets less interest rate sensitive liabilities),
the cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio (i.e. interest rate sensitive assets divided by interest rate sensitive
liabilities) and the cumulative interest rate sensitivity gap ratio.

Based on the contractual terms of its assets and liabilities, the Bank is
currently liability sensitive in terms of its short-term exposure to interest
rates.  In other words, the Bank's liabilities reprice faster than its assets.

<PAGE> 32

DISTRIBUTION OF REPRICING OPPORTUNITIES
At December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
                           After Three After Six  After One
                   Within  Months But  Months But Year But     After 
                   Three   Within Six  Within One  Within       Five 
                   Months    Months     Year     Five Years    Years    Total 
<S>               <C>      <C>       <C>       <C>        <C>        <C>
Federal funds sold $14,450  $   -     $   -     $    -     $    -     $ 14,450
Interest bearing 
  deposits in 
  other banks          100      -       1,689        -          -        1,789 
Municipal
 securities           -         200       250      1,902      6,862      9,214 
Treasury and                                                                   
 agency securities  3,043       -       1,010     10,381     14,220     28,654
FRB/FHLB/Bankers
 bank stock           -         -         -          -        2,247      2,247
Loans              29,612     5,576     4,448     13,521     21,698     74,855  
Total earning 
 assets           $47,205    $5,776    $7,397    $25,804    $45,027   $131,209  

Interest bearing
 demand accounts  $24,366    $  -      $  -      $   -      $   -     $ 24,366
Savings accounts   13,689       -         -          -          -       13,689  
Time certificates 
 of deposit of 
 $100,000 or more   6,641     8,959     4,583      2,497        100      22,780
Other time 
 deposits           3,731     3,667     4,695      3,027         -       15,120 
Federal funds
  purchased         2,000       -         -          -           -        2,000 
Other borrowings       25       -         -       14,522       8,150     22,697 
 Total interest-
  bearing
  liabilities     $50,452   $12,626    $9,278     $20,046    $ 8,250    100,652
Interest rate
 sensitivity gap $ (3,247)  $(6,850)  $(1,881)    $ 5,758    $36,777   $ 30,557
                   ======    ======    ======      ======     ======    ======= 
Cumulative interest
  rate sensitivity
  gap            $ (3,247) $(10,097) $(11,978)    $(6,220)   $30,557         
                  =======    ======   =======      ======     ======
Interest rate
  sensitivity gap
  ratio              0.94      0.46      0.80        1.29       5.46
                     ====      ====      ====        ====       ==== 
Cumulative interest
  rate sensitivity
  gap ratio          0.94      0.84      0.83        0.93       1.30
                     ====      ====      ====        ====       ==== 
</TABLE>

<PAGE> 33

INFLATION

The impact of inflation on a financial institution differs significantly from 
that exerted on manufacturing, or other commercial concerns, primarily because 
its assets and liabilities are largely monetary.  In general, inflation 
primarily affects the Company indirectly through its effect on the ability of 
its customers to repay loans, or its impact on market rates of interest, and 
thus the ability of the Bank to attract loan customers.  Inflation affects 
the growth of total assets by increasing the level of loan demand, and 
potentially adversely affects the Company's capital adequacy because
loan growth in inflationary periods may increase more rapidly than capital.    
Interest rates in particular are significantly affected by inflation, but 
neither the timing nor the magnitude of the changes coincides with changes in 
the Consumer Price Index, which is one of the indicators used to measure the 
rate of inflation.  Adjustments in interest rates may be delayed because of the
possible imposition of regulatory constraints.  In addition to its effects on 
interest rates, inflation directly affects the Company by increasing the 
Company's operating expenses.  The effect of inflation during the three-year 
period ended December 31, 1998 has not been significant to the Company's 
financial position or results of operations. 

CAPITAL RESOURCES   

The Company's capital resources consist of shareholders' equity and (for 
regulatory purposes) the allowance for credit losses. During the year ended 
December 31, 1998, the Company's regulatory capital increased $1,790,000. Tier 
1 capital increased $1,652,000 due primarily to the retention of earnings and 
sale of stock. Tier 2 capital increased $138,000 due primarily to the increase 
in the allowance for credit losses.  

The Company and the Bank are subject to capital adequacy guidelines issued by
the Board of Governors and the OCC. The Company and the Bank are required to
maintain total capital equal to at least 8% of assets and commitments to extend
credit, weighted by risk, of which at least 4% must consist primarily of common
equity including retained earnings (Tier 1 capital) and the remainder may 
consist of subordinated debt, cumulative preferred stock or a limited amount of 
loan loss reserves.  Certain assets and commitments to extend credit present 
less risk than others and will be assigned to lower risk-weighted categories 
requiring less capital allocation than the 8% total ratio.  For example, cash 
and government securities are assigned to a 0% risk-weighted category, most 
home mortgage loans are assigned to a 50% risk-weighted category requiring a 4%
capital allocation and commercial loans are assigned to a 100% risk-weighted 
category requiring an 8% capital allocation.  As of December 31, 1998, the 
Company's total risk-based capital ratio was approximately 16.8% (approximately
16.4% for the Bank) compared to approximately 18.1% (approximately 17.0% for 
the Bank) at December 31, 1997.

The Board of Governors and other federal banking agencies have adopted a
revised minimum leverage ratio for banking organizations as a supplement to the
risk-weighted 

<PAGE 34>
capital guidelines.  The old rule established a 3% minimum leverage standard 
for well-run banking organizations (bank holding companies and banks) with 
diversified risk profiles.  Banking organizations which did not exhibit such
characteristics or had greater risk due to significant growth, among other 
factors, were required to maintain a minimum leverage ratio 1% to 2% higher.  
The old rule did not take into account the implementation of the market risk 
capital measure set forth in the federal regulatory agency capital adequacy 
guidelines.  The revised leverage ratio establishes a minimum Tier 1 ratio of 
3% (Tier 1 capital to total assets) for the highest rated bank holding companies
and banks.   All other bank holding companies must maintain a minimum Tier 1 
leverage ratio of 4% with higher leverage capital ratios required for banking 
organizations that have significant financial and/or operational weaknesses, a 
high risk profile, or are undergoing or anticipating rapid growth.

The following table reflects the Company's Leverage, Tier 1 and total risk-based
capital ratios for the three year period ended December 31, 1998.
<TABLE>
<S>                                    <C>      <C>      <C>
                                        1998     1997      1996
Leverage ratio                          11.0%    10.9%    10.5%
Tier 1 capital ratio                    16.0%    17.4%    18.1% 
Total risk-based capital ratio          16.8%    18.1%    18.1%
</TABLE>
On December 19, 1991, President Bush signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDICIA").  The FDICIA, among other
matters, substantially revised banking regulations and established a framework 
for determination of capital adequacy of financial institutions.  Under the 
FDICIA, financial institutions are placed into one of five capital adequacy 
catagories as follows: (1) "Well capitalized" - consisting of institutions with
a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive or 
prompt corrective action directive; (2) "Adequately capitalized" - consisting of
institutions with a total risk-based capital ratio of 8% or greater, a Tier 1 
risk-based capital ratio of 4% or greater and a leverage ratio of 4% or greater,
and the institution does not meet the definition of a "well capitalized" 
institution; (3) "Undercapitalized" - consisting of institutions with a total
risk-based capital ratio less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly 
undercapitalized" - consisting of institutions with a total risk-based capital 
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a 
leverage ratio of less than 3%; (5) "Critically undercapitalized" - consisting 
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.

Financial institutions classified as undercapitalized or below are subject to 
various limitations including, among other matters, certain supervisory actions
by bank regulatory authorities and restrictions related to (i) growth of assets,
(ii) payment of interest on subordinated indebtedness, (iii) payment of 
dividends or other capital distributions, and (iv) payment of management fees 
to a parent holding company. The FDICIA requires the 

<PAGE> 35

bank regulatory authorities to initiate corrective action regarding financial 
institutions which fail to meet minimum capital requirements.  Such action 
may result in orders to, among other matters, augment capital and reduce 
total assets.  Critically undercapitalized financial institutions may also be
subject to appointment of a receiver or implementation of a capitalization plan.

OTHER MATTERS

   From time to time, the Company's Board of Directors reviews and consults with
advisors, including investment banking, accounting and legal advisors, regarding
banking industry trends and developments, as well as internal and external
opportunities to maximize shareholder value.  Such reviews and consultations
include evaluating and comparing internal results of operations projections and
external opportunities for mergers, acquisitions, reorganizations, or other
transactions with third parties which may be in the interests of the Company's
shareholders.  The Company's Board of Directors considers such periodic review
and consultation to be important as part of their analysis of the Company's 
value and prospects in the changing banking environment and in view of the 
current consolidation activity within the banking industry.

YEAR 2000

As the year 2000 approaches, a critical issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value.  In brief, many existing application software products were designed to 
only accommodate a two digit date position which represents the year (e.g. "97" 
is stored on the system and represents the year 1997.)  As a result, the year 
1999 (i.e. "99") could be the maximum date value these systems will be able to 
accurately process. This is not just a banking problem, as corporations around 
the world and in all industries are similarly impacted.

During 1997, the Company began a plan that includes the five phases of Year 2000
compliance as defined by the FFIEC, awareness, assessment, renovation,
validation, and implementation.  The Company's Year 2000 Plan (the "Plan")
addresses the proper function of the Company's in-house computer hardware and
software, along with other products and services which the Company utilizes and
which have potential for Year 2000 difficulties.

Awareness and Assessment Phases   The Company completed the Awareness and
Assessment Phases, as defined by the FFIEC, during early 1998 and continues to
update its assessment as needed.  Management of the Company reports at least
monthly to the Board of Directors on its Year 2000 efforts.


Renovation Phase   The FFIEC guideline date for institutions to substantially
complete program changes and system upgrades for mission critical systems was
December 31,

<PAGE> 36
1998.  By that date, the Company had completed replacements of all hardware 
and software components with the exception of the item processing subsystem
of the mainframe.  The replacement of this system was completed in March 1999.

Validation and Implementation Phases   To reduce the possibility of unexpected
failure of the Company's systems during and after the century date change, which
could have an impact on the Company and its customers, the company continues
to test its systems in accordance with a testing strategy and plan developed in
1998.  The FFIEC guideline date for institutions to begin testing their mission
critical applications and systems was September 1, 1998.  During April 1998, 
the Company began testing various mission critical and non-mission critical 
systems.  By December 31, 1998, the Company had substantially completed this 
testing, with the exception of leap year testing for the Company's mainframe
computer and the item processing subsystem that was installed in the first 
quarter of 1999.  This testing should be completed by the end of the second 
quarter of 1999.

Business Relationships   As a part of the Company's Plan, all third party 
suppliers and service providers have been contacted and assessed as to their 
Year 2000 preparedness.  In addition, the Bank has communicated with its large 
borrowers and major depositors to determine the extent to which the Company 
might be vulnerable if those third parties fail to resolve their Year 2000 
issues.  Because the company recognizes that its business and operations could 
be adversely affected if key business fail to achieve timely Year 2000 
compliance, the Company is evaluating strategies to manage and mitigate the 
risk to the Company from their Year 2000 failures.  

Contingency Plans   FFIEC guidelines indicate that contingency plans covering
mission critical systems in the event of Year 2000 problems are a prudent 
business practice.  The Company has developed contingency plans for applications
and systems used by the Bank that are deemed mission critical as well as plans 
to cover many non-mission critical applications and systems.  The contingency 
plans are based on a review of various emergency scenarios ranging from the Year
2000 failure of a single software or hardware component to the total loss of 
systems and applications.  Because business resumption planning is a dynamic 
process, the Company may further refine and test these plans throughout 1999.

Costs to Address Year 2000 Issues   The majority of the costs associated with 
the Company's Year 2000 preparedness efforts would have been incurred in the 
normal course of business, as the Company regularly upgrades its various systems
in an effort to more efficiently and effectively serve its clientele and conduct
its operations.  The Company estimates the total cost of compliance will be
approximately $150,000, with the majority of this expense earmarked for the new
item processing subsystem.  The costs incurred in 1998 did not have a material
effect on the Company's net income for 1998, and the Company does not expect
the costs that will be incurred in 1999 to have a material impact on the 
Company's net income for 1999.

<PAGE 37>

Even with all of the Company's preparation, there can be no assurance that
problems will not arise which could have an adverse impact due, among other
matters, to the complexities involved in computer programming related to 
resolution of Year 2000 problems and the fact that the systems of other 
companies on which the Company may rely must also be corrected on a timely 
basis.   Delays, mistakes or failures in correcting Year 2000 system problems 
by such other companies could have a significant adverse impact upon the 
Company and its ability to mitigate the risk of adverse impact of Year 2000 
problems for its customers.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures under this item are not applicable to the Company for the current 
fiscal year. 

<PAGE> 38

Item 8.  Financial Statements and Supplementary Data


         INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   Page
Independent Auditors' Report                                        39

Consolidated Balance Sheets, December 31, 1998 and 1997             40 

Consolidated Statements of Income and Comprehensive 
   Income for the years ended December 31, 1998, 1997, 
   and 1996                                                         41

Consolidated Statements of Shareholders' Equity for the  
   years ended December 31, 1998, 1997 and 1996                     42

Consolidated Statements of Cash Flows for the years 
   ended December 31, 1998, 1997 and 1996                           43


Notes to Consolidated Financial Statements                         44-60

All schedules have been omitted since the required information is not present 
or not present in amounts sufficient to require submission of the schedule or 
because the information required is included in the Consolidated Financial 
Statements or notes thereto.

<PAGE> 39
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of 
Saratoga Bancorp:

We have audited the accompanying consolidated balance sheets of Saratoga 
Bancorp and subsidiary as of December 31, 1998 and 1997, and the related 
consolidated statements of  income and comprehensive income, shareholders' 
equity and cash flows for each of the three years in the period ended December 
31, 1998.  These financial statements are the responsibility of the Company's 
management.  Our responsibility is to express an opinion on these financial 
statements based on our audits.  We conducted our audits in accordance with 
generally accepted auditing standards.  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on 
a test basis, evidence supporting the amounts and disclosures in the financial 
statements.  An audit also includes assessing the accounting principles used 
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits provide 
a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all 
material respects, the financial position of Saratoga Bancorp and subsidiary as
of December 31, 1998 and 1997, and the results of their operations and their 
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.



DELOITTE  &  TOUCHE LLP
San Jose, California
January 22, 1999

<PAGE> 40
<TABLE>
<CAPTION>

SARATOGA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS                              
DECEMBER 31, 1998 AND 1997                          
                                
ASSETS                                          1998                 1997
<S>                                     <C>                 <C>
CASH AND DUE FROM BANKS                  $     6,549,000     $     4,760,000
FEDERAL FUNDS SOLD                            14,450,000          10,500,000
          Total cash and  equivalents         20,999,000          15,260,000 
INTEREST-BEARING         
   DEPOSITS IN OTHER BANKS                     1,789,000           1,489,000
SECURITIES AVAILABLE FOR SALE                 30,811,000          16,184,000
SECURITIES HELD TO MATURITY                    9,304,000          31,152,000
LOANS                                         74,563,000          63,765,000
ALLOWANCE FOR CREDIT LOSSES                     (716,000)           (578,000)
          Loans, net                          73,847,000          63,187,000
PREMISES AND EQUIPMENT, Net                    2,268,000           1,992,000
ACCRUED INTEREST RECEIVABLE AND
    OTHER ASSETS                               5,784,000           1,780,000

TOTAL                                    $   144,802.000     $   131,044,000
                                        ================    ================
LIABILITIES AND  SHAREHOLDERS' EQUITY                         
  
DEPOSITS:                            
     Demand, noninterest-bearing         $    27,460,000     $    25,456,000   
     Demand, interest-bearing                 24,366,000          22,789,000
     Savings                                  13,689,000          14,092,000
     Time                                     37,900,000          28,709,000
          Total deposits                     103,415,000          91,046,000
FEDERAL FUNDS PURCHASED                        2,000,000           2,000,000
OTHER BORROWINGS                              22,697,000          22,984,000
ACCRUED INTEREST PAYABLE AND 
  OTHER LIABILITIES                            1,433,000           1,409,000 
          Total liabilities                  129,545,000         117,439,000
COMMITMENTS (Notes 5 and 10)                             
SHAREHOLDERS' EQUITY:                          
 Preferred stock, no par value; 
  authorized 1,000,000 shares; 
  no shares issued
 Common stock, no par value; 
  authorized 20,000,000 shares; 
  outstanding 1,629,357 in
  1998 and 1,637,857 shares in 1997.           4,684,000           4,705,000
     Retained earnings                        10,591,000           9,099,000
     Accumulated other comprehensive 
      income, net of taxes of $11,000 
      in 1998 and $122,000 in 1997               (18,000)           (199,000)
     Total shareholders' equity               15,257,000          13,605,000
 TOTAL                                  $    144,802,000    $    131,044,000
                                         ===============     ===============
</TABLE>
See notes to consolidated financial statements.

<PAGE> 41
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY                     
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME    
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                        1998           1997           1996 
<S>                             <C>            <C>            <C>
INTEREST INCOME: 
                         
     Loans, including fees       $    6,394,000 $    5,571,000 $    4,395,000
     Securities:                          
          Taxable                     2,118,000      2,894,000      2,244,000
          Non-taxable                   342,000        244,000        175,000  
     Federal funds sold                 726,000        607,000        761,000
     Other                              169,000         30,000         10,000  
                                      ---------      ---------      ---------
      Total interest income           9,749,000      9,346,000      7,585,000

INTEREST EXPENSE:                              
     Deposits                         3,001,000      2,922,000      2,712,000
     Borrowings                       1,398,000      1,350,000        841,000
     Other                                1,000          1,000          5,000
                                      ---------      ---------      ---------
      Total interest expense          4,400,000      4,273,000      3,558,000

NET INTEREST INCOME BEFORE
   PROVISION (CREDIT) FOR 
   CREDIT LOSSES                      5,349,000      5,073,000      4,027,000
PROVISION (CREDIT)  FOR 
  CREDIT LOSSES                         136,000           -          (150,000)
                                      ---------      ---------      ---------
NET INTEREST INCOME AFTER
 PROVISION (CREDIT)  FOR 
 CREDIT LOSSES                        5,213,000       5,073,000     4,177,000
OTHER INCOME:                             
     Service charges                    291,000         273,000       199,000
     Rental income 
      from leased assets                183,000          98,000        83,000
     Net gain on sale of 
      securities available
       for sale                         154,000          34,000          -   
     Increase in cash surrender 
      value of life 
      insurance policies                 61,000            -             -  
     Net gain on sale of leased 
      assets                             12,000            -             -  
     Other                               64,000          72,000        71,000
                                      ---------       ---------     --------- 
 Total other income                     765,000         477,000       353,000
OTHER EXPENSES:                           
     Salaries and employee 
      benefits                        1,261,000       1,338,000     1,342,000
     Occupancy                          398,000         372,000       348,000
     Professional fees                  205,000         154,000       158,000
     Depreciation on leased assets      145,000          79,000        65,000
     Furniture and equipment            137,000         141,000       138,000
     Data processing                     78,000          75,000        71,000
     Insurance                           61,000          40,000        88,000
     Net cost of other real estate 
      owned                               4,000          59,000         5,000
     Net loss on sale of securities 
      available for sale                   -               -            4,000
     Other                              676,000         720,000       651,000
                                     ----------      ----------    ---------- 
 Total other expenses                 2,965,000       2,978,000     2,870,000
INCOME BEFORE INCOME TAXES            3,013,000       2,572,000     1,660,000
PROVISION FOR INCOME TAXES            1,065,000         976,000       559,000
                                     ----------      ----------    ----------
NET INCOME                            1,948,000       1,596,000     1,101,000
OTHER COMPREHENSIVE 
  INCOME, NET OF TAX
Unrealized gains 
 (losses) on securities                 181,000          27,000       (59,000)
COMPREHENSIVE INCOME            $     2,129,000 $     1,623,000 $   1,042,000
                                 ============== =============== =============
EARNINGS PER SHARE:        
  BASIC                         $          1.19 $          1.01 $        0.71 
                                 ============== =============== ===============
 DILUTED                        $          1.07 $          0.92 $        0.64
                                 ============== =============== ===============
</TABLE>
See notes to consolidated financial statements.     

<PAGE> 42
<TABLE>
<CAPTION>
                           
SARATOGA BANCORP AND SUBSIDIARY                     
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                    
          YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                     
                                          Accumulated      
                                             Other             Total
                         Common Stock    Comprehensive   Retained Shareholders'
                      Shares     Amount      Income      Earnings    Equity
<S>               <C>         <C>         <C>         <C>          <C> 
BALANCES,                  
JANUARY 1, 1996     1,546,364  $4,427,000  $(167,000)  $ 6,797.000  $11,057,000 
Exercise of stock 
 options                8,130      34,000                                34,000
Cash dividend ($0.117 
  per share)             -           -          -         (181,000)    (181,000)
Change in net 
  unrealized loss on 
  securities, net 
  of taxes of $27,000    -           -      (59,000)          -         (59,000)
Net income               -           -         -         1,101,000    1,101,000
                   ----------  ---------- ---------    -----------  -----------
BALANCES,
DECEMBER 31, 1996   1,554,494   4,461,00   (226,000)     7,717,000   11,952,000
          
Exercise of stock 
 options               83,363    244,000                                244,000
Cash dividend ($.133 
 per share)              -          -          -          (214,000)    (214,000)
Change in net 
  unrealized loss on 
  securities, net of                     
  taxes of $16,000       -          -        27,000           -          27,000
Net income               -          -          -         1,596,000    1,596,000
                   ----------  ---------- ---------    -----------  -----------
BALANCES, 
DECEMBER 31, 1997  1,637,857    4,705,000  (199,000)     9,099,000   13,605,000
Exercise of stock 
 options               8,790       43,000      -              -          43,000
Cash dividend ($.167 
 per share)             -            -         -          (276,000)    (276,000)
Repurchase of shares (17,290)     (64,000)     -          (180,000)    (244,000)
Change in net 
 unrealized loss on 
 securities:
 Unrealized gains 
 arising during the 
 year, net of taxes 
 of $83,000                                 134,000                      134,000
Reclassification 
 adjustment for 
 losses included in 
 income, net of taxes 
 of $28,000                                  47,000                       47,000
Net income              -            -         -        1,948,000      1,948,000
                -------------  ----------   --------   -----------      --------
BALANCES, 
DECEMBER 31, 1998   1,629,357  $ 4,684,000 $ (18,000)  $10,591,000  $ 15,257,000
                  ===========  =========== =========   ===========  ============
</TABLE>
          
          
See notes to consolidated financial statements. 

<PAGE> 43
<TABLE>
<CAPTION>
SARATOGA BANCORP AND SUBSIDIARY                                    
          
CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996   
                                           1998          1997          1996 
<S>                                   <C>           <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:                      
Net income                             $ 1,948,000   $ 1,596,000   $ 1,101,000
Adjustments to reconcile net income to
 net cash provided by operating 
 activities:
    Provision (credit) for credit losses   136,000          -         (150,000) 
    Depreciation and amortization          244,000       179,000       170,000
    Gain on sale of other real estate 
      owned                                   -           (7,000)         -  
    Gain on sale of leased assets          (12,000)         -          (22,000) 
    Net (gain) loss  on sale of 
      investments                         (154,000)      (34,000)        4,000
    Deferred income taxes                   22,000      (158,000)      (86,000)
    Valuation allowance - other real 
      estate owned                            -             -          (50,000)
    Change in accrued interest  
      receivable and other assets          (49,000)     (198,000)     (233,000)
    Change in deferred loan fees           (33,000)        1,000        16,000 
    Change in accrued interest 
      payable and other liabilities       (120,000)      722,000      (216,000)
                                       -----------   -----------   -----------
    Net  cash provided by operating 
      activities                         1,982,000     2,101,000       534,000  
                                       -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:               
Purchases of securities 
  available for sale                   (21,063,000)  (20,205,000)  (14,065,000)
Purchases of securities 
  held to maturity                      (4,935,000)  (19,256,000)   (6,080,000) 
Proceeds from maturities of securities 
  available for sale                     7,856,000    18,933,000     6,993,000 
Proceeds from maturities of securities 
  held to maturity                       7,032,000    12,315,000     4,170,000 
Proceeds from sale of securities 
  available for sale                    18,642,000     2,923,000     2,496,000
Purchase of interest bearing deposits     (300,000)   (1,489,000)         -
Proceeds from maturity of interest-
  bearing deposits in other banks             -             -          200,000
Net increase in loans                  (10,763,000)  (11,105,000)  (15,142,000)
Purchases of premises and equipment       (520,000)      (36,000)     (450,000)
Proceeds from sale of premises and 
  equipment                                 12,000          -          134,000
Proceeds from sale of other real 
  estate owned                                -        1,321,000       652,000 
Purchase of life insurance policies     (3,953,000)         -             -   
                                      ------------  ------------  ------------
Net cash used in investing activities   (7,992,000)  (16,599,000)  (21,092,000)
                                      ------------  ------------  ------------ 
CASH FLOWS FROM FINANCING ACTIVITIES:               
Net increase in deposits                12,369,000     1,602,000    14,495,000
Net increase in federal funds 
  purchased                                   -          500,000          -
Net (decrease)increase in other 
  borrowings                              (287,000)    4,783,000     6,114,000 
Issuance of common stock                    43,000       244,000        34,000
Repurchase of common stock                (100,000)         -             -  
Payment of cash dividends                 (276,000)     (214,000)     (181,000)
                                      ------------  ------------  ------------
Net cash provided by financing 
  activities                            11,749,000     6,915,000    20,462,000
                                      ------------  ------------  ------------
NET INCREASE (DECREASE) IN CASH
  AND EQUIVALENTS                        5,739,000    (7,583,000)      (96,000)
          CASH AND EQUIVALENTS,       ------------  ------------  ------------  
             BEGINNING OF YEAR          15,260,000    22,843,000    22,939,000
          CASH AND EQUIVALENTS,       ------------  ------------  ------------
             END OF YEAR              $ 20,999,000   $15,260,000  $ 22,843,000 
                                      ============  ============  ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - 
  Cash paid during the year for: 
     Interest                         $  4,332,000   $ 4,212,000   $ 3,518,000
     Income taxes                     $  1,390,000   $   541,000   $   923,000
</TABLE>
          
See notes to consolidated financial statements.

<PAGE> 44
SARATOGA BANCORP AND SUBSIDIARY
          
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 
                                        
          
1.     SIGNIFICANT  ACCOUNTING  POLICIES
            
       The accounting and reporting policies of Saratoga Bancorp and subsidiary
       conform to generally accepted accounting principles and prevailing 
       practices within the banking industry.
          
       Business - Saratoga Bancorp ("the Company") is a registered bank holding
       company whose principal asset (and only subsidiary) is the common stock 
       of Saratoga National Bank (the "Bank").  It has been in business since
       1982 and has three branches.The Bank conducts commercial and retail 
       banking business, which includes accepting demand, savings and time 
       deposits and making commercial, real estate and consumer loans.  It also
       offers installment note collections, issues cashier's checks, sells 
       travelers checks and provides other customary banking services.
          
       Consolidation - The consolidated financial statements include Saratoga
       Bancorp and its wholly-owned subsidiary, Saratoga National Bank.  All 
       material intercompany accounts and transactions have been eliminated in
       consolidation.
          
       Use of Estimates - The preparation of financial statements in conformity
       with generally accepted accounting principles requires management to make
       estimates and assumptions that affect reported amounts of assets, 
       liabilities, revenues and expenses as of the dates and for the periods 
       presented.  A signifiant estimate included in the accompanying financial 
       statements is the allowance for loan losses.  Actual results could differ
       from those estimates.
          
       Cash Equivalents - The Bank considers all highly liquid debt instruments
       purchased with an original maturity of three months or less to be cash
       equivalents.     
          
       Securities - The Company  classifies its securities into two categories,
       securities available for sale and held to maturity, at the time of  
       purchase.  Securities available for sale are measured at market value 
       with a corresponding recognition of the net unrealized holding gain or 
       loss as a separate component of shareholders' equity, net of income 
       taxes, until realized. Securities held to maturity are measured at 
       amortized cost based on the Company's positive intent and ability to 
       hold the securities to maturity.  Premiums and discounts are recognized 
       in interest income using   the interest method over the period of
        maturity.
            
       Gains and losses on sales of securities are computed on a specific
       identification basis.
          
       Loans - Loans are stated at the principal amount outstanding less 
       allowance for credit losses and deferred loan  fees.  Interest on loans 
       is credited to income as earned.  The accrual of interest is discontinued
       and any accrued and unpaid interest is reversed when the payment of
       principal or interest is 90 days past due unless the amount is well
       secured and in the process of collection.  Income on nonaccrual loans is 
       recognized only to the extent that cash is received and where the future
       collection of principal is probable.
          
       Loan origination fees and costs are deferred and amortized to income by a
       method approximating the effective interest method over the lives of the
       underlying loans.
          
       Allowance for Credit Losses - The allowance for credit losses is 
       established through a provision charged to  expense.  Loans are charged 
       against the allowance when management believes that the collection of 
       principal is  unlikely.  The allowance is an amount that management 
       believes will be adequate to absorb losses inherent in existing loans
       and commitments to extend credit, based on evaluations of collectibility
       and prior loss experience.

<PAGE> 45
       The evaluations take into consideration such factors as changes in the 
       composition of the portfolio, overall portfolio quality, loan 
       concentrations,  specific problem loans, and current and anticipated 
       economic conditions  that may affect the borrowers' ability to repay.
       In evaluating the probability of collection, management is required to
       make estimates and assumptions.
          
       Accounting  for Impaired Loans -  A loan is considered impaired when it
       is probable that interest and   principal will not be collected according
       to the contractual terms of the loan agreement.  Impaired loans are 
       required to be measured based on the present value of expected future 
       cash flows discounted at the loan's effective interest rate or, as a
       practical expedient, at the loan's observable market price or the fair
       value of the collateral if the loan is collateral dependent.  Income 
       recognition on impaired loans is consistent with the policy for income
       recognition on nonaccrual loans described above.  The Bank had no
       impaired loans as of December 31, 1998 or 1997.
          
       Premises and Equipment - Premises and equipment are stated at cost less
       accumulated depreciation and amortization.  Depreciation and amortization
       are computed on a straight-line basis over the shorter of the lease term
       or the estimated useful lives of the assets, which are generally three
       to fifteen years for furniture,  equipment and leasehold improvements and
       35 years for a building.
          
       Leased Equipment - Leased equipment is stated at cost net of accumulated
       depreciation.  Depreciation is  computed on a straight-line basis over 
       the lease term to an estimated residual value.  Such leases are accounted
       for as operating leases.  Revenue is recognized when earned and 
       depreciation expense is recorded as other  expense.   
          
       Other Real Estate Owned - Other real estate owned is carried at the lower
       of cost or fair value less estimated costs to sell.  When the property is
       acquired through foreclosure, any excess of the related loan balance over
       its estimated fair value less estimated costs to sell is charged to the 
       allowance for credit losses.  Costs of maintaining other real  estate 
       owned and any subsequent declines in the estimated fair value are charged
       to other expenses.
          
       Income taxes - Income taxes are provided using the asset and liability
       method.  Under this method, deferred tax  assets and liabilities are 
       recognized for the future tax consequences of differences between the
       financial statement carrying amounts of existing assets and liabilities
       and their respective tax bases.  Deferred tax assets and liabilities
       are measured using enacted tax rates expected to apply to taxable income
       in the years in which those temporary differences are expected to be 
       recovered or settled.
          
       Earnings Per Share - Basic earnings per share is computed by dividing net
       income by the weighted average  common shares outstanding during the 
       period. Diluted earnings per share reflects the potential dilution if  
       securities or other contracts to issue common stock are exercised or 
       converted into common stock. Diluted earnings per share is computed by 
       dividing net income by the weighted average common shares outstanding for
       the period plus the dilutive effect of stock options.
                  
<PAGE> 46
       The weighted average shares used in computing earnings per share are as
       follows:
<TABLE>
<CAPTION>          
                                                Years ended December 31, 
                                              1998        1997         1996    
       Weighted average shares used in computing:
      <S>                                  <C>         <C>          <C>    
       Basic earnings per share             1,644,000   1,573,000    1,551,000
           
       Diluted potential common shares
        from exercise of stock options,
        using the treasury stock method       178,000     155,000      175,000
                                            ---------   ---------    ---------
       Diluted earnings per share           1,822,000   1,728,000    1,726,000
</TABLE>
          
          
       Stock split - On March 27, 1998 the Board of Directors declared a 3-for-2
       stock split, which was distributed on May 1, 1998 to shareholders of 
       record as of April 15, 1998.  All share and per share data have been 
       retroactively adjusted to reflect the stock split.
          
       Stock-based awards - The Company accounts for stock-based awards to
       employees using the intrinsic value method in accordance with Accounting
       Principles Board Opinion No. 25, "Accounting for Stock Issued to 
       Employees."
          
       Comprehensive income - In 1998 the Company adopted Statement of Financial
       Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" 
       which requires that an enterprise report, by major components and 
       as a single total, the change in net assets during the period from 
       nonowner sources.  The adoption of this Statement resulted in a change
       in financial statement presentation but did not have an impact on the
       Company's consolidated financial position, results of operations or 
       cash flows. 

       Segment Reporting - In 1998 the Company adopted SFAS No. 131,
       "Disclosures about Segments of an Enterprise and Related Information", 
       which establishes annual and interim reporting standards for an 
       enterprise's  operating segments and related disclosures about its 
       products, services, geographic areas and major customers.      
       Management has determined that since all of the commercial banking 
       products and services offered by the Bank are available in each branch 
       of the Bank, all branches are located within the same economic 
       environment and management does not allocate resources based on the 
       performance of different lending or transaction activities, it     
       is appropriate to aggregate the Bank's operations into a single operating
       segment.
          
       Derivative Instruments - Effective July 1, 1998 the Company adopted SFAS
       No. 133, " Accounting for Derivative Instruments and Hedging Activities",
       which establishes accounting and reporting standards for derivative
       instruments and hedging activities.  In connection with the adoption of 
       SFAS 133 the Company reclassified certain securities with an amortized 
       cost of  $19,751,000 and a fair value of $19,967,000 from held-to-
       maturity to  available-for-sale.  Adoption of this statement did not 
       have any other impact on the Company's consolidated financial position 
       and had no impact on the Company's results of operations or cash flows.
          
          
2.     CASH  AND  DUE  FROM  BANKS
          
       At December 31, 1998, aggregate reserves (in the form of deposits with 
       the Federal Reserve Bank) of $1,151,000 were maintained, which satisfied
       federal regulatory requirements to maintain certain average reserve 
       balances.
          
<PAGE> 47
          
          
          
          
          
          
3.     SECURITIES 
          
       The amortized cost and approximate fair values of securities at December
       31 are as follows:
<TABLE>
<CAPTION>
                                                1998      
                                                           
                                           Gross      Gross
                             Amortized  Unrealized  Unrealized       Fair
                               Cost        Gains      Losses         Value
      <S>                 <C>          <C>       <C>             <C>
       AVAILABLE FOR SALE  
       U. S. Treasury and 
         agency securities $14,890,000  $ 117,000 $   (35,000)    $14,972,000
       Mortgage-backed 
         securities         10,665,000     26,000     (34,000)     10,657,000
       Governmental mutual 
         fund                3,128,000       -       (103,000)      3,025,000
       Federal Home Loan 
         Bank Stock          2,007,000       -           -          2,007,000
       Bankers Bank Stock      150,000       -           -            150,000
                          ------------  --------- ------------    -----------
       Total               $30,840,000  $ 143,000 $  (172,000)    $30,811,000
                           ===========  ========= ===========     ===========
       HELD TO MATURITY
       Obligations of 
        states and 
        political
        subdivisions         9,214,000    175,000      (5,000)     $9,384,000  
      Federal Reserve 
        Bank Stock              90,000       -           -             90,000
                          ------------  --------- -----------      ----------
      Total                $ 9,304,000  $ 175,000 $    (5,000)     $9,474,000
                           ===========  =========  ==========      ==========
          
                                                 1997                     
                                            
                                            Gross      Gross
                            Amortized    Unrealized Unrealized       Fair 
                              Cost          Gains     Losses         Value
       AVAILABLE FOR SALE  
       U. S. Treasury and 
        agency securities  $11,228,000  $   27,000 $ (103,000)    $11,152,000
       Governmental mutual 
        fund                 3,128,000        -      (110,000)      3,018,000
       Federal Home Loan 
        Bank Stock           1,864,000        -          -          1,864,000
       Bankers Bank Stock      150,000        -          -            150,000
                           -----------  ---------- ----------     -----------
       Total               $16,370,000  $   27,000 $ (213,000)    $16,184,000
                           ===========  ========== ==========     ===========

       HELD TO MATURITY
       U. S. Treasury and 
        agency securities  $10,879,000  $   94,000 $ (128,000)    $10,845,000
       Mortgage-backed 
        securities          15,024,000     128,000    (28,000)     15,124,000
       Obligations of 
        states and 
        political
        subdivisions         5,159,000      75,000       -          5,234,000
       Federal Reserve 
        Bank Stock              90,000        -          -             90,000
                          ------------  ---------- -----------    -----------
       Total               $31,152,000  $  297,000 $ (156,000)    $31,293,000
                           ===========  ========== ==========     ===========
</TABLE>
            
            
          
          
          
          
          
          
          
<PAGE> 48          
          
         The scheduled maturities of securities (other than equity securities) 
         available for sale and held to maturity at December 31, 1998, were as 
         follows:
<TABLE>
<CAPTION>
                                Available for Sale        Held to Maturity
                               Amortized      Fair     Amortized      Fair    
                                 Cost         Value       Cost        Value
<S>                        <C>          <C>         <C>          <C>
Due in one year or less     $    18,000  $    18,000 $   450,000  $  455,000
Due after one year 
 through five years           8,866,000    8,913,000   1,902,000    1,952,000
Due after five years through 
  ten years                   1,000,000    1,000,000   1,418,000    1,467,000
Due after ten years           5,006,000    5,041,000   5,444,000    5,510,000
Mortgage-backed securities   10,665,000   10,657,000        -            -
Governmental mutual fund      3,128,000    3,025,000        -            -
                            -----------  -----------  -----------  ----------
Total                       $28,683,000  $28,654,000  $ 9,214,000  $ 9,384,000
                            ===========  ===========  ===========  ===========
</TABLE>
            
          Mortgage-backed securities generally have stated maturities of four 
          to fifteen years, but are subject to  substantial prepayments which
          effectively accelerate actual maturities. The Company's investment in
          governmental mutual funds has no fixed maturity.  At December 31, 1998
          investments with an amortized cost of $35,544,000 were pledged to 
          secure public and certain other deposits as required by law or 
          contract.
            
          Sales of securities resulted in gross realized gains of $154,000 for 
          1998, ($69,000 in 1997 and $1,000  in 1996) and gross realized losses
          of $35,000 in 1997 and  $5,000 in 1996.  There were no realized losses
          in 1998.
          
          In connection with the adoption of SFAS 133 in 1998, the Company 
          reclassified certain securities with an amortized cost of $19,751,000
          and a fair value of $19,967,000 from held-to-maturity to available-
          for-sale.  Included in such reclassification were certain securities 
          that were previously transferred from available-for-sale to held-
          to-maturity in 1994.  The net unrealized loss at the date of the 
          transfer in 1994 was being amortized over the remaining lives of the
          investments and totaled $135,000 at December 31, 1997.
          
            4.   LOANS  AND  ALLOWANCES  FOR  CREDIT  LOSSES
<TABLE>
<CAPTION>          
            Loans at December 31, are comprised of the following:            
                                                        1998           1997
           <S>                                     <C>            <C>
            Real estate:   
              Construction                          $19,623,000    $ 8,945,000
              Other                                  33,452,000     29,100,000 
            Commercial                               18,738,000     21,282,000
            Installment                               1,192,000      1,548,000  
            Lease financing                           2,119,000      3,656,000
            Unearned income on lease financing         (269,000)      (441,000)
                                                    -----------    -----------
            Total loans                              74,855,000     64,090,000
            Deferred loans fees                        (292,000)      (325,000)
                                                    -----------    -----------
            Loans, net of deferred loan fees        $74,563,000    $63,765,000
                                                    ===========    =========== 
</TABLE>
            
          
          
          
          
          
          
          
          
<PAGE> 49  
<TABLE>
<CAPTION>
          
            The activity in the allowance for credit losses is summarized as 
            follows:
          
                                                1998        1997        1996
           <C>                               <C>         <C>         <C>
            Balance, beginning of year        $578,000    $628,000    $776,000
            Provision charged (credited) 
              to expense                       136,000        -       (150,000)
            Write-offs                         (65,000)   (115,000)    (39,000)
            Recoveries                          67,000      65,000      41,000
                                              --------    --------    --------
            Balance, end of year              $716,000    $578,000    $628,000
                                              ========    ========    ========
</TABLE>
          
          There were no nonaccrual loans at December 31, 1998 or 1996 
          ($360,000 at December 31, 1997).  The reduction in interest income 
          associated with these loans in 1997 was $13,000.   Interest income 
          recognized on such loans in 1997 was $26,000.
          
          5.     PREMISES  AND  EQUIPMENT
<TABLE>
<CAPTION> 
          
            Premises and equipment at December 31, are comprised of the 
            following:
          
                                                1998           1997
           <S>                                   <C>            <C>
            Land                                  $     948,000  $     948,000
            Building and leasehold improvements       1,197,000      1,194,000 
            Furniture and equipment                   1,028,000        982,000 
            Leased equipment                            836,000        365,000 
                                                  -------------  -------------
            Total                                     4,009,000      3,489,000
            Accumulated depreciation and 
              amortization                           (1,741,000)    (1,497,000)
                                                  -------------  -------------
            Premises and equipment, net           $   2,268,000  $   1,992,000
                                                  =============  ============= 
</TABLE>
          
            The Company's San Jose and Los Gatos branches are leased under
            noncancellable operating leases which expire in 1999 and 2003, 
            respectively.  The Bank has renewal options with adjustments to 
            the lease payments based on changes in the consumer price index.  
            Future minimum annual lease payments are as follows:
            
            1999      $    253,000
            2000            77,000
            2001            77,000
            2002            77,000
            2003            13,000
                      ------------
            Total     $    497,000
                      ============
            
            Rental expense under operating leases was $239,000 in 1998, $227,000
            in 1997 and $236,000 in 1996.
          
          
          
          
          
          
<PAGE> 50          
          
          6.     OTHER  REAL  ESTATE  OWNED
<TABLE>
<CAPTION>
          
            There was no other real estate owned at December 31, 1998 or 1997. 
          The net cost of operation of other real estate owned is as follows:
                                                  1998        1997       1996
          <S>                                  <C>        <C>       <C>
            Decreases in valuation allowance 
              to reflect increases in estimated 
              fair value                        $  -       $   -      $ 50,000
            Net holding costs                    (4,000)    (59,000)   (55,000)
                                                -------    --------   --------
            Total                               $(4,000)   $(59,000)  $ (5,000)
                                                =======    ========   ========
</TABLE>
          7.     DEPOSITS
          
            The aggregate amount of short-term jumbo time deposits, each with a
            minimun denomination of $100,000, was approximately $22,780,000 and
            13,773,000 in 1998 and 1997, respectively.
          
            At December 31, 1998, the scheduled maturities of all time deposits
            are as follows:
          
                               Year ending
                              December 31,
          
                           1999             32,766,000
                           2000              2,870,000
                           2001              1,888,000
                           2002                197,000 
                           2003                 79,000
                           2004                100,000
                                           $37,900,000    
                                           ===========
          
          8.       OTHER BORROWINGS
            
            At December 31, 1998, the Company had borrowings from the Federal
            Home Loan Bank ($22,672,000) and the U.S. Treasury ($25,000) bearing
            interest at 5.59% to 6.74%.  The borrowings are secured by U.S.    
            Government and Agency securities and are due as follows:
                 
                           1999           $      25,000
                           2000               2,000,000
                           2001               9,115,000
                           2002                 746,000
                           2003               2,661,000
                           Thereafter         8,150,000
                                          $  22,697,000     
                                          =============
<PAGE> 51
         9.      INCOME TAXES
<TABLE>
<CAPTION>
            The provision for income taxes is comprised of the following:
          
                                            Years Ended December 31, 
               
                                          1998          1997        1996
           <S>                      <C>           <C>           <C>
            Current:
              Federal                $   745,000   $   896,000   $478,000
              State                      298,000       238,000    167,000
            Total current              1,043,000     1,134,000    645,000
          
            Deferred:
              Federal                     31,000      (168,000)   (75,000)
              State                       (9,000)       10,000    (11,000) 
            Total deferred                22,000      (158,000)   (86,000)
          
            Total                    $ 1,065,000   $   976,000   $559,000
                                     ===========   ============   ========
</TABLE>
          
            The effective tax rate differs from the federal statutory rate as 
            follows:
<TABLE>
<CAPTION>
            
                                             Years Ended December 31,
                                                    1998       1997      1996
           <S>                                      <C>       <C>       <C> 
            Federal statutory rate                   35.0%     35.0%     35.0%
            State income tax, net of federal effect   6.3       6.3       6.2 
            Tax exempt income                        (3.3)     (2.8)     (3.1)
            Officer's life insurance                 (0.7)       -         - 
            Other, net                               (1.9)     (0.5)     (4.4)
                                                     -----     -----     -----
            Total                                    35.4%     38.0%     33.7%
                                                     =====     =====     =====
</TABLE>
        
<PAGE> 52
<TABLE>
<CAPTION>
  
            The Company's net deferred tax asset at December 31 is as follows:
          
                                                          1998          1997  
           <S>                                       <C>           <C>
            Deferred tax assets:
              Provision for credit losses             $  190,000    $  132,000
              Deferred compensation                      175,000       133,000
              Unrealized loss on investments
                 available for sale                       11,000       122,000
              State income taxes                          80,000        72,000 
              Depreciation & amortization                   -           43,000
              Deferred gain on other real estate owned    28,000        29,000 
              Deferred rent                               11,000        24,000
                                                       ---------    ----------
              Total deferred assets                      495,000       555,000
                                                       ---------    ----------
            Deferred tax liabilities:
              Federal Home Loan Bank stock               (51,000)      (69,000)
            Depreciation & amortization                  (85,000)         -
            Other                                        (38,000)      (32,000)
                                                       ---------    ----------
            Total deferred liabilities                  (174,000)     (101,000)
                                                       ---------    ----------
            Net deferred tax asset                     $ 321,000    $  454,000
                                                       =========    ==========
</TABLE>
            
            There was no valuation allowance at December 31, 1998 and 1997.
          
          10.    STOCK  OPTION  PLANS
          
          The Company's stock option plans authorize the issuance to employees
          officers and directors of incentive and nonstatutory options to 
          purchase common stock.
          
          The Company's 1982 Amended Stock Option Plan (the "1982 Plan") expired
          on October 26, 1992, therefore, no options were granted by the Company
          during 1996, 1997 or 1998 under the 1982 Plan.  Prior to expiration of
          the 1982 Plan, options were granted to key officers and employees of 
          the Company and its subsidiary.  Options granted under the 1982 Plan
          were either incentive options or nonstatutory options and became 
          exercisable in accordance with a vesting schedule established at the
          time of grant.  Vesting may not extend beyond ten years from the date
          of grant.  Upon a change in control of the Company, all outstanding 
          options under the 1982 Plan will become fully vested and exercisable.
          Options granted under the 1982 Plan are adjusted to protect against 
          dilution in the event of certain changes in the Company's 
          capitalization, including stock splits and stock dividends.  
  
          The Company's 1994 Stock Option Plan (the "1994 Plan") is 
          substantially similar to the 1982 Plan regarding provisions related 
          to option grants, vesting and dilution.  Upon a change in control, 
          options do not become fully vested and exercisable, but may be assumed
          or equivalent options may be substituted by a successor corporation. 

<PAGE> 53
<TABLE>
<CAPTION>
          Option activity is summarized as follows:
                                                          
                                                         Outstanding Options 
                                                                      Weighted
                                                                      Average
                                                       Number of      Exercise
                                                        Shares          Price
        <S>                                            <C>             <C>  
         Balances, January 1, 1996                      439,087           4.09
          
          Granted (weighted average value of  $1.29)      6,750           6.78
          Exercised                                      (8,130)          4.21
          Canceled                                      (37,284)          4.73
                                                        -------          -----
         Balances,  December 31, 1996                   400,423           4.08
           (368,592 exercisable at weighted average 
            price of $3.93)
          
          Exercised                                     (92,781)          2.97
          Canceled                                       (3,075)          5.41
                                                        -------          -----
         Balances,  December 31, 1997                   304,567           4.41
           (294,199 exercisable at weighted average 
            price of $4.17)         
          
          Granted (weighted average value of $2.95)      82,500          15.80
          Exercised                                      (8,790)          4.89
                                                        -------          -----
        Balances,  December 31, 1998                    378,277          $6.91
          (294,787 exercisable at weighted average      =======          =====
           price of $4.44)      
</TABLE>
<TABLE>
<CAPTION>

          
        Additional information regarding options outstanding at December 31,
        1998 is as follows:
          
                          Options Outstanding              Options Exercisable 
                          -------------------              -------------------
       <S>              <C>         <C>      <C>       <C>          <C>
                                     Weighted
                                      Average
                                     Remaining                   
                                       Cont-   Weighted               Weighted
             Range of                 ractual   Average                Average
             Exercise        Number    Life    Exercise    Number      Exercise
              Prices      Outstanding (years)   Price    Exercisable     Price
        $  3.93  -  4.25    211,741     4.3     $4.17     211,741        4.17
           4.50  -  5.63     72,375     3.1      4.83      72,375        4.83
           6.11  -  8.17     11,661     3.5      6.64      10,671        6.50
          14.31  - 16.88     82,500     9.5     15.80        -            - 
        --------------------------------------------------------------------  
        $  3.93  - 16.88    378,277     5.2    $ 6.91     294,787        4.42
        =====================================================================
          
</TABLE>
          
          
          
         At December 31, 1998, 112,421 shares are available for future grant.
            
         The Company continues to account for its stock-based awards using the
         intrinsic value method in accordance with Accounting Principles Board
         Opinion No. 25, "Accounting for Stock Issued to Employees" and its 
         related interpertations.  Accordingly, no compensation expense has been
         recognized in the financial statements for employee stock arrangements.
          
         SFAS No. 123, "Accounting for Stock-Based Compensation" requires the
         disclosure of proforma net income and earnings per share had the 
         Company adopted the fair value method as of the beginning of fiscal 
         1995.  Under SFAS 123, the fair valur of stock-based awards to 
         employees is calculated through the use of option pricing models,

<PAGE> 54
         even though such models were developed to estimate the fair value of
         freely tradable, fully  transferrable options without vesting 
         restriction, which significantly differ from the Company's stock option
         awards.  These models also require subjective assumptions, including 
         future stock price volatility and expected time to exercice, which 
         greatly affect the calculated values.  The Company's calculations were
         made using the Black-Scholes option pricing model with the following
         weighted average assumptions: expected life, 114 months; stock 
         volatility, 19% in 1996 and 26.67% in 1998, risk free interest rates,
         5.547%, 5.451% and 4.718% in 1998 and 6.54% and 6.68% in 1996, and
         a dividend yield of 5.50% as they occur.  If the computed fair values 
         of the 1998 and 1996 awards had been amortized to expense over the 
         vesting period of the awards, pro forma net income would have been as 
         follows:
<TABLE>
          
                                                Years ended December 31,
                                           1998           1997          1996    
        <S>                           <C>            <C>            <C>   
         Pro forma net income          $1,759,000     $1,587,000     $1,090,000
          
         Pro forma earnings per share:
              Basic                    $1.07          $1.01          $0.70 
              Diluted                  $0.97          $0.92          $0.63
</TABLE>
          
        The impact of outstanding non-vested stock options granted prior to 1995
        has  been excluded from the pro forma calculations shown above. 
        Accordingly, the 1998, 1997 and 1996 pro forma adjustments are not
        indicative of future period pro forma adjustments, when the calculation
        will apply to all applicable stock options.
          
        11.     RETIREMENT PLAN
            
        During 1998 the Company established a defined contribution retirement 
        plan for the benefit of the directors  and certain executive officers 
        of the Company and, in connection with establishing the Plan, purchased
        single premium life insurance policies for each participant.  
        Contributions to the plan are based on the excess of increases in the 
        cash surrender values of the insurance policies over a specified rate, 
        and such contributions continue until the death of the participant.
        The Company accrued pension expense related to the Plan of approximately
        $70,000 in 1998.  The cash surrender value of the related life insurance
        policies totaled $3,953,000 at December 31, 1998 and is included in 
        other assets.
          
        12.    COMMITMENTS  AND  CONTINGENT  LIABILITIES
          
        The Bank is party to financial instruments with off-balance-sheet risk 
        in the normal course of business to meet the financing needs of its 
        customers.  These financial instruments include loan commitments of   
        $22,533,000 and standby letters of credit of $660,000 at December 31, 
        1998.  The Bank's exposure to credit loss is limited to amounts funded 
        or drawn; however, at December 31, 1998, no losses are anticipated as a
        result of these commitments.
          
        Loan commitments are typically contingent upon the borrower's meeting
        certain financial and other covenants and such commitments typically
        have fixed expiration dates and require payment of a fee.  As many of 
        these commitments are expected to expire without being drawn upon, the 
        total commitments do not necessarily represent future cash requirements.
        The Bank evaluates each potential borrower and the necessary collateral
        on an individual basis.  Collateral varies, and may include real 
        property, bank deposits, or business or personal assets.
          
        Standby letters of credit are conditional commitments written by the 
        Bank to guarantee the performance of a customer to a third party.  These
        guarantees are issued primarily relating to inventory purchases by the
        Bank's commercial customers and such guarantees are typically short-
        term.  Credit risk is similar to that involved in extending loan 
        commitments to customers and the Bank, accordingly, uses evaluation and
        collateral requirements similar to those for loan commitments.  
        Virtually all of such commitments are collateralized.

<PAGE> 55
          
        Officers of the Company have severance agreements which provide, in the
        event of a change in control  meeting certain criteria, severance 
        payments based on a multiple of their current compensation.  At December
        31, 1998, these payments would have aggregated up to $372,000.
          
        13.    LOAN  CONCENTRATIONS
          
        The Bank's customers are primarily located in Santa Clara County, which
        is located in the southern portion of the San Francisco Bay Area.  Many
        of the Bank's customers are employed by or are otherwise dependent on
        the high technology and real estate development industries and, 
        accordingly, the ability of the Bank's borrowers to repay loans may be
        affected by the performance of these sectors of the economy.  Virtually
        all loans are collateralized.  Generally, real estate loans are secured
        by real property and commercial and other loans are secured by business
        or personal assets.  Repayment is generally expected from refinancing
        or sale of the related property for real estate construction loans and
        from cash flows of the borrower for all other loans.  
          
        The composition of the loan portfolio at December 31, 1998 and 1997 is
        summarized in the following table.
                                
                                        1998       1997
        Real estate:               
         Construction:
          Single family construction     21%        11% 
          Land Development                5          3     
          Other                          45         46
        Commerical                       27         38
        Installment                       2          2  
                                        ----       ----
                                        100%       100%
                                        ====       ====
          
        14.    DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS 
          
        The following estimated fair value amounts have been determined by using
        available market information and appropriate valuation methodologies.  
        However, considerable judgment is required to interpret market data
        to develop the estimates of fair value.  Accordingly, the estimates 
        presented are not necessarily indicative of he amounts that could be 
        realized in a current market exchange.  The use of different market 
        assumptions and/or  estimation techniques may have a material effect
        on the estimated fair value amounts.     
            
        The following table presents the carrying amount and estimated fair 
        value of certain assets and liabilities of the Company at December 
        31, 1998 and 1997.  The carrying amounts reported in the consolidated
        balance sheets approximate fair value for the following financial 
        instruments: cash and due from banks, federal funds sold, interest 
        bearing deposits in other banks, demand and savings deposits, federal
        funds purchased and other borrowings (See Note 3 for information 
        regarding securities).
          
<TABLE>
                                                                              
        December 31, 1998                   
                                            Carrying          Estimated Fair
                                             Amount               Value       
       <S>                                <C>                 <C>
        Loans, net                         $74,847,000         $74,256,000
        Time deposits                      $37,900,000         $38,434,000
            
                                                        
        December 31, 1997                   
                                            Carrying          Estimated Fair
                                             Amount               Value       
        Loans, net                         $63,187,000         $62,284,000
        Time deposits                      $28,709,000         $28,644,000
</TABLE>

<PAGE> 56          
        Loans
          
        The fair value of loans with fixed rates is estimated by discounting the
        future cash flows using current rates at which similar loans would be 
        made to borrowers with similar credit ratings.  For loans with variable
        rates which adjust with changes in market rates of interest, the 
        carrying amount is a reasonable estimate of fair value.  
          
        Time deposits 
       
        The fair value of fixed maturity certificates of deposit is estimated 
        using rates currently offered for deposits of similar remaining 
        maturities.
            
        Commitments to extend credit and standby letters of credit
          
        Commitments to extend credit and standby letters of credit are issued in
        the normal course of business by the Bank.  Commitments to extend 
        credit are issued with variable interest rates tied to market interest 
        rates at the time the commitments are funded and the amount of the 
        commitments equal their fair value.  Standby letters of credit are 
        supported by commitments to extend credit with variable interest rates
        tied to market interest rates at the time the commitments are funded
        and the amount of standby letters of credit equals their fair value.
          
          
        15.    REGULATORY  MATTERS
          
        The Company and the Bank are subject to various regulatory capital
        requirements administered by federal banking agencies.  Failure to meet
        minimum capital requirements can initiate certain mandatory, and 
        possibly additional discretionary, actions by regulators that, if 
        undertaken, could have a direct material effect on the Company's 
        financial statements.  Under capital adequacy guidelines and the 
        regulatory framework for prompt corrective action, the Company and the
        Bank must meet specific capital guidelines that involve quantitative
        measures of the Company's and the Bank's assets, liabilities, and 
        certain off-balance-sheet items as calculated under regulatory 
        accounting practices.  The Company's and the Bank's capital amounts 
        and classification are also subject to qualitative judgments by the 
        regulators about components, risk weightings, and other factors.
          
        Quantitative measures established by regulation to ensure capital
        adequacy require the Company and the Bank to maintain minimum amounts 
        and ratios (set forth in the table below) of total and Tier 1  capital
        (as defined in the regulations) to risk-weighted assets (as defined), 
        and of Tier I capital (as defined) to average assets (as defined).  
        Management believes, as of December 31, 1998, that the Company and 
        the Bank meet all capital adequacy requirements to which they are 
        subject.
          
        As of December 31, 1998, the most recent notification from the Office of
        the Comptroller of the Currency categorized the Bank as well 
        capitalized under the regulatory framework for prompt corrective action.
        To be categorized as well capitalized the Company and the Bank must 
        maintain minimum total risk-based, Tier I risk-based, and Tier I 
        leverage ratios as set forth in the table.  There are no conditions or 
        events since that notification that management believes have changed
        the institution's category.
            
<PAGE> 57
<TABLE>
<CAPTION>
        The following table shows the Company's and the Bank's capital ratios at
        December 31, 1998 and 1997 as well as the minimum capital ratios 
        required to be deemed "well capitalized" under the regulatory framework.
                                                                 To Be Well
                                                             Capitalized Under
                   Bancorp     Bank Only      For Capital    Prompt Corrective
                   Actual       Actual     Adequacy Purposes: Action Provisions:
              Amount   Ratio Amount     Ratio Amount    Ratio Amount     Ratio  
<S>       <C>         <C>  <C>         <C>  <C>        <C>   <C>        <C>
As of December 
  31, 1998  
 Total Capital
   (to Risk 
   Weighted 
    Assets)$15,973,000 16.8%$15,553,000 16.4%>$7,575,000>8.00%>$9,469,000>10.0%
 Tier I Capital
  (to Risk 
  Weighted 
  Assets)  $15,257,000 16.0%$14,837,000 15.7%>$3,788,000>4.00%>$5,681,000> 6.0%
 Tier I Capital                     
  (to Average 
   Assets) $15,257,000 11.0%$14,837,000 10.7%>$5,536,000>4.00%>$6,920,000> 5.0% 
          
As of December 
  31, 1997  
 Total Capital
   (to Risk 
  Weighted 
  Assets)  $14,183,000 18.1%$13,266,000 17.0%>$6,232,000>8.00%>$7,790,000>10.0%
 Tier I Capital
  (to Risk 
  Weighted 
  Assets)  $13,605,000 17.4%$12,688,000 16.3%>$3,116,000>4.00%>$4,716,000> 6.0%
 Tier I Capital                     
  (to Average 
   Assets) $13,605,000 10.9%$12,688,000 10.2%>$4,989,000>4.00%>$6,236,000> 5.0% 
</TABLE>
          
        16.    CONDENSED FINANCIAL INFORMATION OF SARATOGA BANCORP (PARENT ONLY)
            
        The condensed financial statements of Saratoga Bancorp are as follows:
<TABLE>
<CAPTION>
          
        CONDENSED BALANCE SHEETS
                                                             
                                                            December 31,
                                                         1998          1997
         <S>                                      <C>           <C>
          ASSETS:             
           Cash-interest bearing account with Bank $      6,000  $     185,000
           Real estate loans                            536,000        660,000
           Investment in Bank                        14,837,000     12,688,000
           Other assets                                  24,000         79,000
                                                    -----------   ------------
           Total                                   $ 15,403,000  $  13,612,000
                                                   ============   ============
          
           LIABILITIES AND SHAREHOLDERS' EQUITY
            Other liabilities                      $    146,000  $       7,000 
            Common stock                              4,684,000      4,705,000
            Retained earnings                        10,591,000      9,099,000
            Accumulated other comphrehensive income     (18,000)      (199,000)
                                                   ------------  -------------
            Total                                  $ 15,403,000  $  13,612,000
</TABLE>
                                                   ============  =============
          
          
<PAGE> 58          
          
<TABLE>
<CAPTION>
          
            CONDENSED INCOME STATEMENTS
                                              Years Ended December 31,
                                      ------------------------------------------
                                           1998           1997         1996
           <S>                      <C>            <C>            <C>
            Interest income          $     71,000   $       73,000 $     26,000
            Dividend from subsidiary         -                -         861,000 
            Other expenses               (104,000)         (53,000)     (50,000)
                                     -------------  -------------- -------------
            Income (loss) before 
             income taxes and 
             equity in undistributed 
             net income of Bank           (33,000)          20,000      837,000
            Income tax (expense)
             benefit                       13,000           (7,000)       9,000 
                                     -------------  --------------- ------------
            Income(loss) before 
             equity in undistributed 
             net income of Bank           (20,000)           13,000     846,000
            Equity in undistributed 
             net income of Bank         1,968,000         1,583,000     255,000
                                    -------------  ---------------- ------------
            Net income                  1,948,000         1,596,000   1,101,000
            Other comprehensive income    181,000            27,000     (59,000)
                                     -------------  --------------- ------------
            Comprehensive income       $2,129,000        $1,623,000  $1,042,000
                                       ==========   ===============  ==========
</TABLE>
<TABLE>
<CAPTION>
          
            CONDENSED STATEMENTS OF CASH FLOWS
          
                                                 Years ended December 31,
                                           1998           1997         1996
         <S>                          <C>           <C>           <C>
          Cash flows from operating 
            activities:
              Net income               $ 1,948,000   $ 1,596,000   $ 1,101,000
              Adjustments to reconcile 
                net income to net cash 
                provided by (used in) 
                operating activities:     
                Equity in undistributed 
                 net income of Bank     (1,968,000)   (1,583,000)     (255,000)
                Change in other assets      55,000       (71,000)       19,000  
                Change in other 
                 liabilities               139,000         7,000        (1,000)
                                       -----------    ----------   -----------
            Net cash provided by 
             (used in) operating
             activities                    174,000       (51,000)      864,000 
            Cash flows from investing 
             activities - 
             Net change in loans           124,000       104,000      (764,000)
                                       -----------    ----------   -----------
            Cash flows from financing 
             activities:        
             Cash dividend                (276,000)     (214,000)     (181,000)
             Issuance of common stock       43,000       244,000        34,000
             Repurchase of common stock   (244,000)         -             -
                                       -----------   -----------   -----------
            Net cash provided by 
             (used in) financing 
             activities                   (477,000)       30,000      (147,000)
                                       -----------   -----------   -----------
            Net increase (decrease) 
             in cash                      (179,000)       83,000       (47,000)
          
            Cash, beginning of year        185,000       102,000       149,000
                                       -----------   -----------   -----------
            Cash, end of year          $     6,000   $   185,000   $   102,000 
                                       ===========   ===========   ===========
</TABLE>

<PAGE> 59
          
       The ability of the Company to pay future dividends will largely depend 
upon the dividends paid to it by the Bank.  Under federal law regulating 
national banks, dividends declared by the Bank in any calendar year may not 
exceed the lesser of its undistributed net income for the most recent three 
fiscal years or its retained earnings.  As of December 31, 1998, the amount 
available for distribution from the Bank to the Company was approximately 
$3,974,000, subject to approval by the Office of the Comptroller of the 
Currency.  The Bank is also restricted as to the amount and form of loans,  
advances or other transfers of funds or other assets to the Company.
                 

                           * * * * *

<PAGE> 60
     Item 9.  Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure.
                           Not applicable.
     
                       PART III
                            
     Item 10. Directors and Executive Officers of the Registrant.
     The information required hereunder is incorporated by reference from
     the Company's definitive proxy statement for the Company's 1999 Annual
     Meeting of Shareholders (to be filed pursuant to Regulation 14A).
     
     Item 11. Executive Compensation.
     The information required hereunder is incorporated by reference from the
     Company's definitive proxy statement for the Company's 1999 Annual
     Meeting of Shareholders (to be filed pursuant to Regulation 14A).
     
     Item 12. Security Ownership of Certain Beneficial Owners and Management.
     The information required hereunder is incorporated by reference from
     the Company's definitive proxy statement for the Company's 1999 Annual
     Meeting of Shareholders (to be filed pursuant to Regulation 14A).
     
     Item 13. Certain Relationships and Related Transactions.
     The information required hereunder is incorporated by reference from the
     Company's definitive proxy statement for the Company's 1999 Annual
     Meeting of Shareholders (to be filed pursuant to Regulation 14A).
     
                      PART IV
     
     Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
     
          (a)  (1)  Financial Statements. This information is listed and 
          included in Part II, Item 8.
     
          (a)  (2)  Financial Statement Schedules.  All schedules have been 
          omitted since the required information is not present or is not 
          present in amounts sufficient to require submission of the schedule or
          because the information required is included in Consolidated Financial
          Statements or notes thereto.

<PAGE> 61
  (a)  (3)  Exhibits.   The exhibits listed on the accompanying Exhibit Index
                        are filed as part of this report.
             
       (3.1)     Articles of Incorporation, as amended, are incorporated by
                 reference herein to Exhibit 3.1 of Registrant's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1988,
                 as filed with the Securities and Exchange Commission on March 
                 27, 1989.
     
       (3.2)     By-laws, as amended, are incorporated by reference herein
                 to Exhibit 3.2 of Registrant's Annual Report on Form 10-K for
                 the fiscal year ended December 31, 1993 as filed with the 
                 Securities and Exchange Commission on March 29, 1994.
     
      (4.1)      Specimen stock certificate is incorporated by reference to 
                 Exhibit 4.1 of Registrant's Annual Report on Form 10-K for 
                 the fiscal year ended December 31, 1994 as filed with the
                 Securities and Exchange Commission on March 30, 1995.   
                            
     (10.1)      Lease agreement dated 10/19/87 for 15405 Los Gatos Blvd., 
                 Suite 103, Los Gatos, CA is incorporated by reference herein
                 to Exhibit 10.1 of Registrant's Annual Report on Form 10-K for
                 the fiscal year ended December 31, 1987 as filed with the 
                 Securities and Exchange Commission on March 31, 1988.
     
     (10.2)      Agreement of Purchase and Sale dated July 27, 1988 for 
                 12000 Saratoga-Sunnyvale Road, Saratoga, CA is incorporated by
                 reference herein to Exhibit 10.1 of Registrant's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1988, as 
                 filed with the Securities and Exchange Commission on March 
                 27, 1989.
     
    *(10.3)     Indemnification Agreements with directors and Executive     
                Officers of the Registrant are incorporated by reference herein
                to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for
                the fiscal year ended December 31, 1988, as filed with the  
                Securities and Exchange Commission on March 27, 1989.
     
     (10.4)     Lease agreement dated 1/17/89 for 160 West Santa Clara Street,
                San Jose, California is incorporated by reference herein to 
                Exhibit 10.4 of Registrant's Annual Report on Form 10-K for the
                fiscal year ended December 31, 1989, as filed with the 
                Securities and Exchange Commission on March 27, 1990.
     
   * (10.5)     Bank of the West Master Profit Sharing and Savings Plan and 
                Amendment, amended as of March, 1990 are incorporated by 
                reference herein to Exhibit 10.5 of Registrant's Annual
                Report on Form 10-K for the fiscal year ended December 31, 1990,
                as filed with the Securities and Exchange Commission on March 
                20, 1991. 
     
     
<PAGE> 62
    *(10.6)    Employment Agreement and Management Continuity Agreement and 
               Chief Executive Officer Compensation Plan/Richard L. Mount is 
               incorporated by reference herein to Exhibit 10.6 of Registrant's 
               Annual Report on Form 10-K for the fiscal year ended December 
               31, 1990, as filed with the Securities and Exchange Commission on
               March 20, 1991.
     
    *(10.7)    Saratoga Bancorp 1982 Stock Option Plan is incorporated by 
               reference herein to the exhibits to Registration Statement No.
               33-34674 on Form S-8 as filed with the Securities and Exchange
               Commission on May 7, 1990.       
     
    *(10.8)    Saratoga National Bank Savings Plan dated June 19, 1995 is 
               incorporated by reference herein to Exhibit 10.8 of Registrant's
               Annual Report on Form 10-K for the fiscal year ended December
               31, 1995, as filed with the Securities and Exchange Commission
               on March 27, 1996.
     
    *(10.9)    Saratoga Bancorp 1994 Stock Option Plan dated March 18,1994 is
               incorporated by referencce herein to Appendix A of Proxy 
               Statement dated April 19, 1994 filed as with the Securities and
               Exchange Commission on April 27, 1994.      
     
   *(10.10)    Forms of Incentive Stock Option Agreement, Non-Statutory Stock
               Option Agreement and Non-Statutory Agreement for Outside 
               Directors,  as amended is incorporated by reference herein to 
               Exhibit 10.8 of Registrant's Quarterly Report on Form 10-Q for
               the Quarter ended June 30, 1994 as filed with the Securities and
               Exchange Commission on August 15, 1994.
                  
     (21)      Subsidiaries of the registrant:  Registrant's only subsidiary
               is Saratoga National Bank, a national banking association, which
               operates a commercial and retail banking operation in California.
     
     (23)      Independent Auditors' consent
     
     (27)      Financial Data Schedule
     
     * Denotes management contracts, compensatory plans or arrangements.
     
     
         (b)        Reports on Form 8-K
                    
              On October 2, 1998, Registrant filed a Current Report on Form 8- 
              K, dated September 18, 1998 reporting under Item 5 (Other Events)

<PAGE> 63
              a ten cent ($0.10) cash dividend on outstanding shares of common
              stock of Saratoga Bancorp, to be payable on November 6, 1998, to
              shareholders of record at the close of business on October 23, 
              1998. 
                 
     
              On December 10, 1998, Registrant filed a Current report on Form 
              8-K  under Item 5, Other Events, announcing the Company's intent 
              to repurchase an amount of its outstanding shares which aggregated
              with its prior repurchases during the preceding 12 months would
              not exceed 10% of its consolidated net worth.
     
     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS
     FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS
     WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION
     12 OF THE ACT.
     
     No annual report or proxy material has been sent to security holders.  The
     Company shall furnish copies of such material to the Commission when it is
     sent to security holders.
     

                                  SIGNATURES
     
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
     Exchange Act of 1934, the registrant has duly caused this report to be 
     signed on its behalf by the undersigned, thereunto duly authorized.
     
                               SARATOGA BANCORP
     
                        RICHARD L. MOUNT                                  
                     By_______________________________
                       Richard L. Mount, President 
                      (Principal Executive Officer)

                          March 26, 1999
                     Date_____________________________
     
                           
                                
                         MARY PAGE ROURKE     
                      By_______________________________  
                          Mary Page-Rourke, Treasurer
                          (Principal Financial and  
                           Accounting Officer)
     
                           March 26, 1999    
                      Date_____________________________
     
     
     
     
<PAGE> 64     
     
     
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the 
registrant and in the capacities and on the dates indicated.




Name                           Title                        Date

VICTOR ABOUKHATER                                       March 26, 1999
__________________            Director                  _______________
Victor Aboukhater

ROBERT G. EGAN                                          March 26, 1999
__________________           Director                   _______________
Robert G. Egan

WILLIAM D. KRON                                         March 26, 1999
__________________           Director                   _______________
William D. Kron

JOHN F. LYNCH III                                       March 26, 1999
__________________           Director                   _______________ 
John F. Lynch III

V. RONALD MANCUSO                                       March 26, 1999
__________________            Director                 _______________
V. Ronald Mancuso


RICHARD L. MOUNT      Chairman of the Board            March 26, 1999
__________________    President and Director           _______________
Richard L. Mount      (Principal Executive Officer)

MARY PAGE ROURKE                                       March 26, 1999
__________________            Treasurer                _______________
Mary Page-Rourke       (Principal Financial and
                        Accounting Officer)




<PAGE> 65

                   INDEX TO EXHIBITS
                                                                 Sequentially
                                                                   Numbered
Number                      Exhibits                                 Page    

27.1              Financial Data Schedule                              66
23.1              Independent Auditors' Consent                        67      





Exhibit 23.1








INDEPENDENT AUDITORS CONSENT

We consent to the incorporation by reference in Registration Statement No. 
33-34674 of Saratoga Bancorp on Form S-8 of our report dated January 22, 1999, 
appearing in the Annual Report on Form 10-K of Saratoga Bancorp for the year 
ended December 31, 1998.


DELOITTE & TOUCHE

San Jose, California
March 26, 1999