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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.
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ ---------------------
(Unaudited)
<S> <C> <C>
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
================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
2
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SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
-------------- ---------------
<S> <C> <C>
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
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
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SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
-----------------------------------------------------
<S> <C> <C>
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
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
-----------------------------------------
<S> <C> <C>
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
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
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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
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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.
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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
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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.
<TABLE>
<CAPTION>
Capital Ratios
March 31, December 31, Well Capitalized Minimum Capital
Capital Ratios (1): 2000 1999 Ratios Ratios
--------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C>
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%
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
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%
</TABLE>
- ----------------------------------------
(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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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
---------- ---------- --------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 33,738
<INT-BEARING-DEPOSITS> 591
<FED-FUNDS-SOLD> 21,325
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 173,966
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 401,098
<ALLOWANCE> 6,225
<TOTAL-ASSETS> 643,322
<DEPOSITS> 591,859
<SHORT-TERM> 31
<LIABILITIES-OTHER> 3,918
<LONG-TERM> 770
0
0
<COMMON> 34,738
<OTHER-SE> 12,006
<TOTAL-LIABILITIES-AND-EQUITY> 643,322
<INTEREST-LOAN> 9,934
<INTEREST-INVEST> 2,598
<INTEREST-OTHER> 390
<INTEREST-TOTAL> 12,922
<INTEREST-DEPOSIT> 4,108
<INTEREST-EXPENSE> 4,127
<INTEREST-INCOME-NET> 8,795
<LOAN-LOSSES> 752
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,539
<INCOME-PRETAX> 3,034
<INCOME-PRE-EXTRAORDINARY> 1,847
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,847
<EPS-BASIC> .27
<EPS-DILUTED> .26
<YIELD-ACTUAL> 5.93
<LOANS-NON> 3,788
<LOANS-PAST> 1,296
<LOANS-TROUBLED> 51
<LOANS-PROBLEM> 498
<ALLOWANCE-OPEN> 5,412
<CHARGE-OFFS> 45
<RECOVERIES> 105
<ALLOWANCE-CLOSE> 6,225
<ALLOWANCE-DOMESTIC> 6,225
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
