-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GvZ57GRN8hdYV4iTVNWz6eflTXqjWpxAPnvChGui9rOoUoEO2W/1kgO6EnvYSqzQ 5zDBz9bzQxlJW0QCZQ2O1A== 0000912057-00-024063.txt : 20000516 0000912057-00-024063.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024063 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCRIPPS FINANCIAL CORP CENTRAL INDEX KEY: 0001086370 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26081 FILM NUMBER: 630540 BUSINESS ADDRESS: STREET 1: 7817 IVANHOE AVENUE CITY: LAJOLLA STATE: CA ZIP: 92037 BUSINESS PHONE: 6194562265 MAIL ADDRESS: STREET 1: C/O GRAY GARY STREET 2: 4365 EXECUTIVE DRIVE - SUITE 1600 CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 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: 0-26081 SCRIPPS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) California 33-0855985 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5787 Chesapeake Court, San Diego, CA 92123 ------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 858-456-2265 NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. As of March 31, 2000 there were 6,917,737 shares of Common Stock outstanding. PART 1 FINANCIAL INFORMATION Item 1. Financial Statements SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
March 31, December 31, 2000 1999 ------------------ --------------------- (Unaudited) ASSETS Cash and amounts due from banks $ 33,738,000 $ 25,046,000 Federal funds sold 21,325,000 29,670,000 ------------------ --------------------- Cash and cash equivalents 55,063,000 54,716,000 Interest bearing due from banks 591,000 789,000 Investment securities 172,148,000 163,283,000 Investment in Federal Home Loan Bank stock 1,818,000 1,793,000 Loans and leases, net 394,873,000 391,964,000 Premises and equipment, net 6,569,000 6,012,000 Other assets and accrued interest receivable 12,260,000 13,388,000 ------------------ --------------------- $ 643,322,000 $ 631,945,000 ================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand, non-interest bearing $ 192,689,000 $ 184,015,000 Money market, NOW and savings accounts 308,780,000 293,914,000 Time certificates: Under 100,000 33,953,000 34,705,000 $100,000 or greater 56,437,000 69,751,000 ------------------ --------------------- Total deposits 591,859,000 582,385,000 Guarantee of loan to ESOP Trust 31,000 44,000 Capitalized lease obligation 770,000 767,000 Other liabilities and accrued interest expense 3,918,000 3,452,000 ------------------ --------------------- Total liabilities 596,578,000 586,648,000 Stockholders' equity: Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 6,918,000 shares at March 31, 2000 and 6,909,000 shares at December 31, 1999 34,738,000 34,702,000 Retained earnings 14,344,000 12,497,000 Guarantee of loan to ESOP Trust (31,000) (44,000) Accumulated other comprehensive (loss) income, net (2,307,000) (1,858,000) ------------------ --------------------- Total stockholders' equity 46,744,000 45,297,000 ------------------ --------------------- $ 643,322,000 $ 631,945,000 ================== =====================
The accompanying notes are an integral part of these consolidated condensed financial statements. 2 SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended March 31, 2000 1999 -------------- --------------- Interest income: Loans and leases, including fees earned $ 9,934,000 $ 8,323,000 Investment securities: Taxable 2,318,000 1,995,000 Exempt from federal income tax 262,000 229,000 Dividends from Federal Home Loan Bank stock 18,000 15,000 Federal funds sold 380,000 361,000 Balances due from Banks 10,000 56,000 -------------- --------------- Total interest income 12,922,000 10,979,000 Interest expense on deposits (4,108,000) (3,313,000) Interest expense on other borrowed money (19,000) - -------------- --------------- Total interest expense (4,127,000) (3,313,000) Net interest income 8,795,000 7,666,000 Provision for loan losses (752,000) (885,000) -------------- --------------- Net interest income after provision for loan losses 8,043,000 6,781,000 Non-interest income 1,530,000 1,396,000 Non-interest expense (6,539,000) (5,644,000) -------------- --------------- Income before provision for income taxes 3,034,000 2,533,000 Provision for income taxes (1,187,000) (1,000,000) -------------- --------------- Net income $ 1,847,000 $ 1,533,000 ============== =============== Basic net income per share $ 0.27 $ 0.22 ============== =============== Diluted net income per share $ 0.26 $ 0.22 ============== ===============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED, DOLLARS IN THOUSANDS)
Three months ended March 31, 2000 1999 ----------------------------------------------------- Net Income $ 1,847,000 $ 1,533,000 Unrealized holding loss On available-for-sale securities (449,000) (314,000) -------------- --------------- Total comprehensive income $ 1,398,000 $ 1,219,000 ============== ===============
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED, DOLLARS IN THOUSANDS)
Three months ended March 31, 2000 1999 ----------------------------------------- Cash flows form operating activities: Net income $ 1,847,000 $ 1,533,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 423,000 415,000 Provision for loan losses 752,000 885,000 Amortization of discounts, premiums and loan fees (189,000) (479,000) Decrease in other assets and accrued interest receivable 1,426,000 95,000 Increase (decrease) in other liabilities and accrued interest expense 54,000 (4,898,000) --------------- -------------- Net cash provided (used) by operating activities 4,313,000 (2,449,000) --------------- -------------- Cash flows from investing activities: Proceeds from maturities and principal payments of investment 4,624,000 57,427,000 Securities Maturities of investment certificates of deposit 198,000 1,089,000 Purchases of investment securities (14,363,000) (59,611,000) Net funding of loans (3,370,000) (14,817,000) Purchases of premises and equipment, net (980,000) (191,000) --------------- -------------- Net cash used in investing activities (13,891,000) (16,103,000) --------------- -------------- Cash flows from financing activities: Net increase in demand deposits, NOW accounts and savings accounts 23,540,000 13,112,000 Net decrease in certificates of deposit (14,066,000) (1,624,000) Net proceeds from issuance of common stock 36,000 419,000 Dividends paid 415,000 408,000 --------------- -------------- Net cash provided by investing activities 9,925,000 12,315,000 --------------- -------------- Net increase (decrease) in cash and cash equivalents 347,000 (6,237,000) =============== ============== Cash and cash equivalents at beginning of year 54,716,000 67,120,000 =============== ============== Cash and cash equivalents at end of quarter $ 55,063,000 $ 60,883,000 =============== ==============
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 PART 1 FINANCIAL INFORMATION Item 1. Financial Statements (continued) SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying financial information has been prepared in accordance with the Securities and Exchange Commission rules and regulations for quarterly reporting and therefore does not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. This information should be read in conjunction with Scripps Financial Corporation's Form 10-K, including notes thereto, filed March 30, 2000. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial information for the three months ended March 31, 2000 and 1999, reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation thereof. NOTE 2. EARNINGS PER SHARE Earning per share is based upon the weighted average number of common stock and common stock equivalent shares outstanding adjusted retroactively for stock dividends. Basic earnings per share (EPS) represents net income divided by the weighted average common shares outstanding during the period. The weighted average number of shares outstanding for basic EPS was 6,914,672 and 6,846,631 for the three months ended March 31, 2000 and 1999, respectively. Diluted EPS gives effect to all potential issuance of common stock that would have caused basic EPS to be lower as if the issuance had already occurred. The calculation of diluted EPS for the three months ended March 31, 2000 and 1999, assumes the issuance of 66,742 and 104,821 shares of common stock, respectively, upon the conversion of stock options. As a result, the weighted average number of shares of common stock outstanding for diluted EPS was 6,981,414 and 6,951,452 for the three months ended March 31, 2000 and 1999, respectively. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Scripps Financial Corporation, a California corporation ("SFC"), which was formed on May 14, 1999 as a federally regulated bank holding company. Scripps Bank, a California banking corporation ("Scripps"), is a federally insured bank. Scripps merged with and into SFC on July 1, 1999. As a result of the merger, each shareholder of Scripps received a number of shares of SFC equal to that number of shares such sharehodler held in Scripps immediately prior to the merger. SFC currently holds all of the outstanding stock of Scripps. The following discussion is intended to provide information to facilitate the understanding and assessment of the primary asset of SFC, which is its ownership of Scripps. This discussion and analysis should be read in conjunction with SFC's audited financial statements provided in SFC's Form 10-K for December 31, 1999 filed with the Securities and Exchange Commission on March 30, 2000, including notes thereto. The Management's Discussion and Analysis of Financial Conditions and Results of Operations contain forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "seek", "believe", "anticipate", "expect", "may", "will", "estimate", "project" and "continue" or similar words. You should read statements that contain these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future results of operations or of our financial condition; or (3) state other "forward-looking" information. We believe it is important to communicate our expectations; however, there may be events in the future that we are not able to predict accurately or over which we have no control. Our actual results may differ materially from the expectations we describe in forward-looking statements. Factors that could cause actual results to differ materially from those we describe include, but are not limited to, local economic conditions in 6 San Diego county, business conditions and interest rate fluctuation, competition, new product development, the ability to manage growth of Scripps Financial Corporation ("SFC") and Scripps Bank ("Scripps"), a decline in real estate prices, and federal and state regulations. Forward-looking statements below should be read in light of these factors. Potential risks and uncertainties include, but are not limited to, those listed below under "Quantitative and Qualitative Disclosures about Market Risk" as well as other risks and uncertainties detailed in SFC's Annual Report on Form 10-K for the year ended December 31, 1999. FINANCIAL CONDITION Total assets of SFC increased $11.4 million or 1.8% to $643.3 million at March 31, 2000, from $631.9 million at December 31, 1999. Gross loans increased $3.7 million or .9% to $401.1 million from $397.4 million at December 31, 1999. Within the loan portfolio, real estate construction loans increased $3.8 million to $61.8 million, real estate mortgage loans increased $4.1 million to $124.3 million, while commercial loans decreased $5.6 million to $148.7 million at March 31, 2000. Total consumer loans increased by $773,000 to $58.8 million. There was little change in the loan portfolio mix of which real estate construction, real estate mortgage and commercial loans comprised 15%, 32% and 37%, respectively, at the end of March 2000, a change from 14%, 31% and 39%, respectively, at December 31, 1999. Consumer loans were unchanged at 15% at the end of both periods. Purchases of investment securities caused Federal funds sold to decline by $8.3 million to $21.3 million at the end of the first quarter. Nonperforming assets of $5.1 million or 0.8% of total assets at March 31, 2000 compare to $4.3 million or 0.7% of total assets for December 31, 1999. Total deposits at March 31, 2000 increased $9.5 million or 1.6% from December 31, 1999. This increase consisted of $8.7 million in noninterest-bearing accounts, $14.9 million in interest-bearing accounts and was partially offset by a decrease of $13.3 million in time deposits greater than $100,000. In the interest-bearing deposit categories, savings and money market accounts increased $19.6 million to $270.3 million, while NOW accounts decreased $4.8 million to $38.4 million, and net time deposits decreased $14.1 million to $90.4 million. Total stockholders' equity at March 31, 2000 was $46.7 million compared to $45.3 million at December 31, 1999, an increase of $1.4 million or 3.2% due to earnings. SFC's Tier I leverage capital ratios were 7.51% and 7.54%, at March 31, 2000 and December 31, 1999, respectively. (See CAPITAL RESOURCES.) RESULTS OF OPERATIONS SUMMARY Net earnings were $1.8 million ($.27 per share basic; $.26 per share diluted) for the three months ended March 31, 2000, compared with $1.5 million ($.22 per share basic; $.22 per share diluted) for the same period in 1999. This represents an increase of $314,000 or 20.5%. SFC's improved performance between 2000 and 1999 resulted primarily from an increase in average interest-earning assets, primarily in loans and investment securities. The provision for loan and lease losses decreased $133,000 or 15.0% to $752,000 for the three months ended March 31, 2000 from $885,000 for the three months ended March 31, 1999. Other income and other expense increased $134,000 and $896,000, respectively, for the three months ended March 31, 2000 over the same period in 1999. The provision for income taxes increased $187,000 to $1.2 million from $1.0 million due to an increase in pre-tax earnings of $501,000. Return on average assets and average stockholders' equity increased during the first three months of 2000 to 1.15% and 16.29%, respectively, from 1.08% and 13.83%, respectively for the same 1999 period. (See RESULTS OF OPERATIONS -- NET INTEREST INCOME, RESULTS OF OPERATIONS - -- NONINTEREST INCOME AND EXPENSE and RESULTS OF OPERATIONS - PROVISION FOR POSSIBLE LOAN LOSSES.) LIQUIDITY The objective of liquidity management is to maintain a balance between sources and uses of funds in such a way that the cash requirements of customers for loans and deposit withdrawals are met in the most economical manner. Management monitors its liquidity position continuously in relation to trends of loans and deposits for short term as well as long term requirements. Liquid resources are monitored on a daily basis to assure maximum availability. 7 Liquidity requirements are managed by maintaining an adequate level of readily marketable assets (primarily Federal funds and available for sale investment securities) and access to short term funding sources. Currently, Scripps has a line of credit of $22 million from non-affiliated financial institutions, which enables it to borrow Federal funds on an unsecured basis. Scripps also has a secured discount window borrowing facility with the Federal Reserve Bank of approximately $82 million and a secured borrowing facility with the Federal Home Loan Bank of approximately $22 million. At March 31, 2000, Scripps had no amounts outstanding in connection with any of its borrowing facilities. Management uses several tools and processes to monitor liquid resources: semi-monthly liquidity projection reports, liquidity and volatile deposit dependency ratios, deposit product trends, weekly deposit rate management, and daily large balance fluctuation reports, among others. Management uses a bank liquidity ratio, defined as the sum of unpledged marketable securities, Federal funds sold, and cash and balances due from banks divided by total deposits, as a measurement tool indicating the volume of liquid resources. This ratio will increase or decrease in response to general economic conditions, loan demand, the phases of the interest rate cycle, and deposit growth/contraction, among other things, and was approximately 38% at March 31, 2000, and 37% at December 31, 1999. Scripps' management believes this level of liquidity to be a cost-effective level that is well within Scripps' policy. There can be no assurance that Scripps liquidity will continue to be maintained at the levels presented. Additionally, Scripps closely monitors its loan-to-deposit ratio. This ratio (calculated as gross loans divided by total deposits) was 68% at March 31, 2000. This ratio was unchanged from December 31, 1999. Management anticipates this ratio will remain at this or a slightly higher lever for the remainder of 2000 due to the expanding local economy; however, there can be no assurances that the economy will continue to expand or that loans will outpace deposit growth. Scripps' ratio of core deposits (defined as customers' deposits less time certificates of deposit of $100,000 or more) to total deposits has increased to 90% at March 31, 2000, compared with 88% at December 31, 1999. While total time deposits as a percent of total deposits has been 15%, for March 31, 2000 and 18% for December 31, 1999, the percent of time deposits greater than $100,000 has decreased, thereby increasing the core deposit ratio. A significant portion of Scripps' core deposits is concentrated in the Scripps Money Fund, a higher interest-bearing demand deposit product that comprised $208.7 million or 35% of total deposits at March 31, 2000. The Money Fund balance represented an increase of $17.1 million or 8.9% from the balance of $191.6 million or 33% of deposits at December 31, 1999. Another significant portion of Scripps' core deposits is non-interest bearing demand deposits. These deposits increased to $192.7 million or 32.6% of total deposits at March 31, 2000 from $184.0 million or 31.6% at December 31, 1999. Management attempts to actively monitor its liquidity position and deposit composition; however, there can be no assurance that Scripps' overall liquidity position and deposit mix will continue to be satisfactory in the future. NET INTEREST INCOME Net interest income, which constitutes one of the principal sources of income for Scripps, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The net yield on total interest-earning assets, also referred to as interest rate margin or net interest margin, represents net interest income divided by average interest-earning assets. Scripps' principal interest-earning assets are loans, investment securities and Federal funds sold, while its principal interest-bearing liabilities are interest-bearing demand accounts, savings deposits and time deposits. Net interest income was $8.8 million for the three-months ended March 31, 2000, an increase of $1.1 million or 14.7% compared with net interest income of $7.7 million for March 31, 1999. Scripps' average interest-earning assets increased to $596.7 million for the three-months ended March 31, 2000 from $535.6 million for the same period in 1999, representing an increase of $61.1 million which resulted from increases in interest-earning asset categories, primarily in loans and investment securities. Average interest-bearing deposits increased to $412.8 million for the three-months ended March 31, 2000 from $372.5 million in the same period for 1999, representing an increase of $40.3 million, while average non-interest-bearing demand deposits increased $30.9 million or 20.1%. The net interest margin of 5.93% for March 31, 2000 reflects an increase of 13 basis points compared to the same period in 1999. This increase in net interest margin resulted primarily from the increase in the average prime rate from 7.75% to 8.71% for the three months ended March 31, 1999 and 2000, respectively, (since a majority of Scripps' loans are tied to the prime rate, an increase in the rate immediately affects net interest income) and the 8 increase in average interest-earning assets, which was partially off-set by the increase in average interest-bearing deposits. The cost of interest bearing funds increased from 3.61% to 4.01% from the first quarter 1999 to first quarter 2000. NONINTEREST INCOME Non-interest income was $1.5 million for the three-months ended March 31, 2000, an increase of $134,000 or 9.6% compared with non-interest income of $1.4 million for the same period in 1999. The primary reason for the increase in non-interest income over the period presented is new fees generated in relation to trust investment services, established in June 1999. However, there can be no assurances that trust investment services income will continue to increase. There continues to be high levels of competition in the trust services and deposit services areas. NONINTEREST EXPENSE Non-interest expense was $6.5 million for the three-months ended March 31, 2000, an increase of $896,000 or 15.9% compared with non-interest expense of $5.6 million for the same period in 1999. Personnel expense was $3.8 million for 2000, an increase of $500,000 or 15% compared with personnel expense of $3.3 million for 1999. Occupancy expense was $1.2 million for 2000, an increase of $200,000 or 20% compared with occupancy expense of $1 million for 1999. The increases over the three-month period principally reflect the additional costs associated with analyzing, starting and staffing new lines of business, including expenses associated with the parent company, as part of SFC's long-term growth strategy. PROVISION FOR LOAN LOSSES The provision for loan losses was $752,000 for the three-months ended March 31, 2000, compared to $885,000 for the same period in 1999, a decrease of $133,000 or 15.0%. The decrease in provision for loan losses is primarily due to lower net charge-offs for the three-months ended March 31, 2000. CAPITAL RESOURCES Management seeks to maintain capital adequate to support anticipated asset growth and credit risks and to ensure that SFC is within established regulatory guidelines and industry standards. The 1992 risk-based capital guidelines adopted by the FRB and FDIC require SFC to maintain certain minimum ratios of capital to risk-weighted assets. In addition, the FRB and FDIC have adopted a leverage ratio that requires a minimum ratio of Tier 1 capital to total assets. Higher minimum requirements for an institution may be established if, for example, a bank has previously received special attention or has a higher susceptibility to interest rate risk. These risk-based capital guidelines require state banks to have a ratio of Tier 1 capital to total risk-weighted assets of four percent and a ratio of total capital to total risk-weighted assets of eight percent. As depicted in the following table, the capital ratios of SFC have continuously exceeded the federal minimum regulatory requirements for a well-capitalized institution. The following table sets forth the actual capital ratios as of the dates indicated.
Capital Ratios March 31, December 31, Well Capitalized Minimum Capital Capital Ratios (1): 2000 1999 Ratios Ratios --------- ------------ ---------------- --------------- SFC Leverage (2) 7.5% 7.5% 5.0% 4.0% Tier 1 risk-based 10.3% 10.2% 6.0% 4.0% Total risk-based 11.6% 11.4% 10.0% 8.0%
9 SCRIPPS Leverage (2) 7.4% 7.4% 5.0% 4.0% Tier 1 risk-based 10.2% 10.1% 6.0% 4.0% Total risk-based 11.4% 11.2% 10.0% 8.0%
- ---------------------------------------- (1) Computed in accordance with 1992 Federal guidelines, which were initially effective January 1, 1990. (2) Leverage ratio is defined as the ratio of Tier 1 capital to the most recent quarterly average assets. IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The consolidated financial statements and related consolidated financial data concerning SFC presented in this filing have been prepared in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation in accordance with generally accepted accounting principles. The primary effect of inflation on the operations of SFC is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of SFC, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the FRB. The FRB implements national monetary policy such as seeking to curb inflation and combat recession by its open market operations in United States government securities, control of the discount rate applicable to borrowing by banks and the establishment of reserve requirements against bank deposits. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits, and affect the interest rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in federal monetary and fiscal policies on SFC and its results of operations are not predictable. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. For SFC, this new standard is effective in 2000 and is not to be applied retroactively to financial statements of prior periods. The impact of this Statement, if any, is yet to be determined. OUR PERFORMANCE DEPENDS ON THE SOUTHERN CALIFORNIA ECONOMY All of SFC's operations are in Southern California, principally San Diego County. As a result of this geographic concentration, our growth and operations are significantly influenced by local economic conditions. There can be no assurance that general economic conditions and the local business environment will continue to be favorable. During California's economic downturn of the early 1990's, many actual and prospective customers of SFC experienced reductions in their net worth, cash flow and the value of their real estate. FLUCTUATIONS IN INTEREST RATES AFFECT OUR FINANCIAL PERFORMANCE Changes in interest rates will affect the value of Scripps' investment securities portfolio, all of which is designated as available for sale, and which at March 31, 2000 represented 26.8% of total assets. Generally, an increase in interest rates would result in a decline in the value of fixed rate investment securities available for sale, which would result in 10 a corresponding adjustment, net of tax effects, in shareholders' equity. Therefore, Scripps' shareholders' equity and regulatory capital levels could be adversely affected by an increase in interest rates, due to a reduction in the value of investment securities available for sale. An increase in interest rates would also generally cause a decline in the market value of Scripps' fixed rate loan portfolio, which at March 31, 2000 represented approximately 21% of total assets. Approximately 41% of assets at March 31, 2000 were comprised of variable rate loans tied to Prime or similar indices. A decline in interest rate will generally have the immediate effect of reducing interest income associated with such loans. Declines in interest rates will also typically result in accelerated loan prepayments, which can impact our net income and profitability. FLUCTUATIONS IN INTEREST RATES CAN REDUCE DEMAND FOR OUR SERVICES AND LOANS The operations of SFC and Scripps are significantly influenced by general economic conditions and by the related monetary and fiscal policies of the Federal government. The nature, timing and impact of any future changes in federal monetary and fiscal policies on Scripps and its results of operations are not predictable. Deposit flows and the cost of funds are influenced by interest rates of competing investments and general market rates of interest. Lending activities are affected by the demand for loans which, in turn, is affected by the interest rates at which such financing may be offered and by other factors affecting the availability of funds. Increases in the level of interest rates may reduce the demand for loans and therefore the amount of loans originated by Scripps and, thus, the amount of loan and commitment fees. Moreover, decreases in interest rates relative to the rate of return on other investment vehicles may result in disintermediation, which is the flow of funds away from depository institutions into direct investments, such as corporate securities and other investment vehicles which, because of the absence of Federal deposit insurance, generally pay higher rates of return than deposits in depository institutions. COMPETITION MAY AFFECT OUR MARKET SHARE The banking business in California generally, and in Scripps' market area specifically, is highly competitive with respect to both loans and deposits. The trust and investment management services business in Scripps' market area is also highly competitive. Scripps competes for loans, deposits and trust services with other commercial banks, savings and loan associations, finance companies, money market funds, credit unions, brokerage firms and other financial institutions, including a number of institutions that have significantly greater financial resources than Scripps. Scripps also competes for business with institutions in unregulated industries. Deregulation has increased competition for deposit and loan business over the past several years. After interstate banking became lawful in the 1990's, bank holding companies headquartered outside of California entered the California market, providing further competition for Scripps. Many of the major commercial banks operating in Scripps' market area offer certain services which Scripps does not offer directly but can provide through a correspondent bank or through other financial services providers. Banks with larger capitalization also have larger lending limits and are thereby better able to serve the higher dollar needs of larger customers. There are no assurances that the strategies of Scripps for responding to this competition will succeed. AN ADVERSE REAL ESTATE MARKET COULD AFFECT OUR LOAN PORTFOLIO On March 31, 2000, Scripps had approximately $186.2 million in loans secured in whole or in part by real property, including interim construction loans, short, intermediate, and long term commercial and residential real estate loans, home improvement loans, and equity lines of credit. This reflects approximately 46% of Scripps' total loan portfolio at that date. A sharp and significant decline in real estate prices would potentially have a material adverse affect on Scripps' lending activities and on the quality of Scripps' real estate loan portfolio. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION 11 SFC and Scripps are subject to extensive state and federal supervision, regulation and legislation. We cannot predict the precise impact of recent legislation, nor the probable course or impact of future legislation or regulatory actions affecting the financial services industry. WE NEED TO IMPLEMENT GROWTH SUCCESSFULLY SFC and Scripps plan to expand its regional office network over time throughout San Diego County. The overall success of this strategy will largely depend on SFC's and Scripps' ability to manage its credit, interest rate and fiduciary risks, control costs, and attract and retain high quality personnel with business followings and skills sufficient for SFC and Scripps to operate profitably in new markets, while continuing to provide relationship-oriented banking services and competitive financial products. There are no assurances that existing and prospective customers will be responsive to, or have the need for, the services offered by SFC and Scripps in new markets. In addition, we may not receive the approvals required by the Federal Reserve Board ("FRB"), California Department of Financial Institutions ("DFI") and Federal Deposit Insurance Corporation ("FDIC") in order to grow into new markets. Expansion activity will likely require the expenditure of substantial sums to lease or purchase real property and equipment and to hire high quality, experienced and regionally-oriented new personnel. Our expansion may not generate the returns our management anticipates. Our ability to implement our growth strategy may depend on our retention of existing management. OUR STOCK MAY NOT BE LIQUID SFC Common Stock was listed on the American Stock Exchange in October 1999. Accordingly, there has been a very limited trading market for SFC Common Stock. Any swing in the price of our stock may be magnified into a material reduction in price because relatively few buyers may be available to purchase our stock. No assurance can be given that an active public market will exist in the future. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE The market price of SFC common stock has been volatile, reflecting loan write-offs, quarterly variations in our operating results, changes in market interest in local banks and financial stocks in general, and economic and financial conditions. WE MAY NOT PAY DIVIDENDS The California Financial Code restricts the payment of dividends by bank holding companies and banks. While SFC has paid cash and stock dividends in the past on its Common Stock, there can be no assurance that it will continue to do so or will be legally permitted to do so in the future. Any payment of dividends by SFC will depend on receipt of dividends from Scripps. Generally, California state banks such as Scripps may not declare or pay a dividend without the prior written approval of the California Commissioner, if the total of all dividends declared by such bank in any calendar year would exceed the total of its net profits, as defined, for that year combined with its retained net profits, as defined, for the preceding two years. The payment of dividends by Scripps is also affected by various regulatory requirements and policies, such as the requirement to maintain capital at or above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has issued policy statements which provide that insured banks should generally only pay dividends out of current operating earnings. If Scripps is unable to pay dividends or if the Scripps board of directors determines to reduce its payment of dividends to SFC, SFC in turn may be unable to make or may reduce dividend payments to its shareholders. 12 OUR CHARTER DOCUMENTS MAY DETER ACQUISITIONS The organizational documents of SFC contain certain provisions designed to encourage takeover bidders to engage in arm's-length negotiations with SFC before attempting a takeover. However, these provisions may make the SFC Common Stock less attractive to potential acquirers and may serve as a deterrent to acquisitions of SFC Common Stock, thus potentially preventing shareholders from realizing a return on their investment in an acquisition. The Board of Directors of SFC is authorized, without further shareholder approval, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted or imposed upon any unissued shares of preferred stock and to fix the number of shares constituting any series and the designations of such shares. The issuance of preferred stock may have the effect of delaying or preventing a change in control of SFC. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of SFC Common Stock or could adversely effect the rights and powers, including voting rights, of the holders of SFC Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. Item 3. Quantitative and Qualitative Disclosures about Market Risk QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SFC's balance sheet consists of interest-earning assets, primarily loans and investment securities, which are principally funded by interest-bearing liabilities, primarily deposits. These financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. In evaluating the exposure of SFC to market risk, management relies on gap analysis and rate shock analysis. Gap analysis provides information on the timing and repricing differences between rate sensitive assets and rate sensitive liabilities. Rate shock analysis provides management with estimates of the impact of immediate changes in interest rates both in terms of the change in net interest income and the change in fair market value of these instruments. There are certain shortcomings inherent in these methods and the following table that must be considered in evaluating market risk. Although certain assets may have similar maturities or periods to reprice, they may react in different degrees to changes in interest rates or they may precede or lag behind changes in market interest rates. In addition, certain interest rate sensitive assets may have contractual limitations to changes in interest rates. SFC considers these various factors and their anticipated effects in managing the bank's exposure to interest rate risk. Management seeks to maintain a reasonably balanced interest rate risk position over one year to protect its financial condition and net interest margin from market fluctuations in interest rates. Overall management strategies to reduce SFC's interest rate risk consist of: (i) maintaining a majority of its loan assets and deposit liabilities on an adjustable rate basis, (ii) limiting the volume of its loans with terms-to-maturity in excess of five years and (iii) maintaining a portion of its investment securities with varied terms to maturity. Additionally, SFC maintains a Management Asset/Liability Committee and a Directors Asset/Liability Committee, both of which review on a regular and periodic basis such matters as earnings, asset quality, asset and liability mix, liquidity and funding sources, investment resources, capital, interest rate risk, and economic events and trends, among other matters. Both Committees review bank compliance with a set of Board-approved directives with which SFC should comply to meet its asset and liability management objectives. The following table presents additional information about SFC's financial instruments that are sensitive to changes in interest rates. Cash flows in this presentation are grouped by maturity dates rather than repricing dates. Consideration is given to prepayment assumptions for mortgage-backed securities (MBS), including collateralized mortgage obligations (CMOs). The cash flows from mortgage-backed securities are influenced by prepayments, which are dependent on a number of factors, including the current interest rate and the interest rate on the security, the availability of refinancing of the underlying mortgages at attractive terms, as well as geographic specific factors which affect the sales and price levels of residential property. SFC's management uses average prepayment speeds provided by Wall Street dealers to calculate principal repayments and estimated maturity dates for these securities. The cash flows for other securities are based on the actual maturity dates of the instruments, except for equity securities. Equity securities, for which there is no contractual maturity, consist of a variable rate government fund, which is included in the second column (after one year but within two years). Fair values for investment securities are based on quoted market prices or dealer quotes. Loans are distinguished by variable or fixed rates. Because 13 variable rate loans are repricable immediately as market rates change, the fair value is assumed to be equal to the carrying value. The fair value of fixed rate loans is estimated using a discounted cash flow calculation. Non-maturing deposits consist of interest-bearing demand, savings, and money market accounts and have no maturity dates. Cash flow amortizations for these deposits are included in the first column (within one year). The fair value of non-maturing deposits is estimated to be the carrying value, which is the amount payable on demand. Time deposits are grouped according to contractual maturity dates. The fair value of time deposits is estimated using a discounted cash flow calculation. Average interest rates represent the weighted average yield in each category.
Interest-Sensitive Financial Instruments (Dollars in thousands) Expected Maturity Date as of March 31, 2000 ----------------------------------------------------------------------------------------------------------------------- AFTER 2 AFTER 3 AFTER 1 YEARS BUT YEARS BUT AFTER 4 YEAR BUT WITHIN WITHIN YEARS BUT WITHIN ONE WITHIN TWO THREE FOUR WITHIN THERE- YEAR YEARS YEARS YEARS FIVE YEARS AFTER Total Fair Value ---------- ---------- --------- --------- ---------- -------- --------- ---------- Financial Assets: Loans: Variable rate $156,293 $26,155 $10,637 $26,094 $12,451 $31,564 $263,194 $263,194 Average interest rate 10.13% 10.30% 10.17% 10.00% 10.25% 9.91% 10.11% Fixed rate 11,343 22,903 15,088 35,667 12,263 40,639 137,904 134,453 Average interest rate 8.49% 8.39% 9.28% 8.88% 8.77% 8.62% 8.72% Investment securities: CMOs 10,783 11,324 8,505 8,399 3,004 2,476 44,491 43,624 Average interest rate 6.01% 6.01% 6.02% 6.06% 5.99% 6.03% 6.02% MBS 2,822 2,842 2,862 5,783 5,561 14,722 34,592 33,441 Average interest rate 6.93% 6.93% 6.93% 6.93% 6.89% 7.06% 6.98% SBAs 142 6,022 6,164 6,098 Average interest rate 9.73% 6.17% 6.25% U.S. Treasury and Agency 18,606 21,588 26,611 2,568 69,373 67,865 Average interest rate 6.17% 6.03% 6.18% 5.47% 6.11% States and political Subdivisions 38 4,942 9,655 5,299 19,935 19,812 Average interest rate 8.10% 5.27% 5.30% 5.13% 5.25% Equity 1,461 1,461 1,308 Average interest rate 4.55% 4.55% Federal Home Loan Bank Stock 1,818 1,818 1,818 Average interest rate 5.48% 5.48% Interest bearing due from banks 591 591 591 Average interest rate 5.92% 5.92% Federal funds sold 21,325 21,325 21,325 Average interest rate 5.73% 5.73% Financial Liabilities: Interest bearing deposits: Non-maturing Deposits 308,780 308,780 308,780
14 Average interest rate 3.84% 3.84% Time deposits 87,637 2,654 99 90,390 90,304 Average interest rate 5.07% 5.05% 4.74% 5.07% Capitalized lease obligation 767 767 767 Average interest rate 9.87% 9.87% Guarantee of loan to ESOP Trust 31 31 31 Average interest rate 7.75% 7.75%
PART II OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: * 3.1 Articles of Incorporation of SFC * 3.2 Bylaws of SFC * 4.1 Specimen Common Stock Certificate 27.1 Financial Data Schedule - ------------------ * Incorporated by reference to the Registrant's Registration Statement on Form 10 (File No. 0-26081) (b) There were no reports on Form 8-K filed during the quarter ended March 31, 2000. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SCRIPPS FINANCIAL CORPORATION Date: May 12, 2000 By: /s/ Ronald J. Carlson ----------- --------------------- Ronald J. Carlson President 16 EX-27 2 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 33,738 591 21,325 0 173,966 0 0 401,098 6,225 643,322 591,859 31 3,918 770 0 0 34,738 12,006 643,322 9,934 2,598 390 12,922 4,108 4,127 8,795 752 0 6,539 3,034 1,847 0 0 1,847 .27 .26 5.93 3,788 1,296 51 498 5,412 45 105 6,225 6,225 0 0
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