SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
[ ] 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, CALIFORNIA 92123
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 456-2265
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To be so Registered Each Class is to be Registered
------------------- ------------------------------
NONE NOT APPLICABLE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the registrant (1) 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 report(s), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-X contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-K or any amendment to this Form 10-K. [ ]
As of March 23, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $ 48,250,000.
Shares of Common Stock held by each officer and director and each person
owning more than five percent of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of the affiliate status is not necessarily a conclusive
determination for other purposes
The number of shares of Common Stock of the registrant outstanding as of
February 29, 2000, was 6,913,139.
2
The following report contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "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 Southern California and particularly in San Diego, the ability to manage
growth of Scripps Financial Corporation ("SFC") and Scripps Bank ("Scripps"),
business conditions and interest rate fluctuation, competition, a decline in
real estate prices, new product development, federal and state regulation.
Forward-looking statements below should be read in light of these factors.
PART I
ITEM 1. BUSINESS
GENERAL
SCRIPPS FINANCIAL CORPORATION. SFC is a California corporation, which was
formed in the spring of 1999 as a federally regulated bank holding company.
SFC acquired the stock of Scripps on June 30, 1999 in a transaction in which
all of the shareholders of Scripps became shareholders of SFC. At this time
Scripps became a wholly owned subsidiary of SFC. The transaction was
accounted for by SFC at historical cost in a manner comparable to a
pooling-of-interests. As a result of this accounting treatment, periods
presented in the financial statements of SFC from before its incorporation
include data for Scripps. Prior to the merger SFC had no operations and held
no assets other than the stock in the subsidiary used to effect the merger.
In the merger each shareholder of Scripps received a number of shares of SFC
equal to the number of shares such shareholder held in Scripps immediately
prior to the merger. They therefore received the same percentage interest in
SFC as they held in Scripps immediately prior to the merger. Currently, SFC
holds all of the stock of Scripps. Information regarding Scripps is set forth
below to provide a better understanding of the primary asset of SFC, which is
its ownership of Scripps.
SCRIPPS BANK. Scripps, a California banking corporation, is a federally
insured bank with its headquarters in Kearny Mesa and main office in La Jolla
and additional full-service offices in downtown San Diego, El Cajon,
Escondido, Kearny Mesa, Encinitas, Point Loma and Chula Vista. Scripps
commenced operations on January 16, 1984. Scripps is licensed and regulated
by the California Department of Financial Institutions ("DFI"), and its
deposits are insured up to the maximum legal limits by the FDIC.
OPERATIONS OF SFC
Management of SFC includes two officers. SFC has six directors.
SFC is committed to enhancing shareholder value by building a solid future
for its customers, employees and the communities it serves. It was formed as
a holding company for Scripps to provide regulatory flexibility, because bank
holding companies have certain business opportunities not available to
state-regulated banks.
BANKING SERVICES
Scripps targets businesses, professionals and individuals interested in
personalized relationship-oriented financial services in its geographical
markets of San Diego County currently comprising La Jolla, downtown San
Diego, El Cajon, Escondido, Kearny Mesa, Encinitas, Point Loma and Chula
Vista. The bank offers a broad range of banking products and services
including but not limited to:
- Business loans and lines of credit - includes secured and
unsecured loans to finance working capital, inventory and
accounts receivable, and term loans for the purchase of equipment.
3
- Consumer loans and lines of credit - includes equity lines of credit,
home improvement loans, car loans and loans for investment purposes.
- Real estate construction loans - includes construction loans for
single family dwellings and small to medium size commercial and
multi-family buildings.
- Real estate mortgage loans - includes intermediate and long term
mortgage loans for commercial and residential property.
- Corporate lending - specializes in loans to larger companies and in
mortgage financing.
- SBA guaranteed lending - Scripps is designated as a Preferred lender
by the Small Business Administration (SBA) and offers commercial and
real estate SBA loans.
- Equipment leasing
- Residential lending brokerage services - specializes in brokerage
services for single family residences, condos and two to four unit
dwellings.
- International department services - provides collection services,
letters of credit and foreign exchange services.
- Cash management services for businesses - provides collection
services, letters of credit and foreign exchange services.
- Credit and debit cards through affiliated institutions
- Customized depository services, including demand, savings, money
market, money fund, certificates of deposit, US Savings Bonds and
individual retirement accounts
- On-line home banking with bill pay service - individuals have access
to their account information through their PC, along with the bill
payment option.
- Automated teller machines - Scripps has ATMs at each branch and
belongs to several networks that allow customers to obtain cash
throughout the world.
- 24 hour telephone banking - the "Any Time Line" provides access to
account balance and transaction information and allows funds transfer.
- Customer courier services - business customers have the option of
courier services to bring deposits to Scripps.
- Safe deposit boxes
- Property management banking is specifically designed to meet the
unique banking needs of property management companies and individual
Homeowners Association by offering a variety of services to include
Remittance Processing and specialized Depository and Loan services.
Scripps holds no patents, registered trademarks, licenses (other than
licenses obtained from regulatory agencies), franchises or concessions.
Scripps has not spent material amounts on research and development of new
products or services or improvements to existing products or services.
LENDING SERVICES
4
COMMERCIAL
Loans in this category include loans to small and middle market businesses,
individuals and professionals located primarily in Scripps' market areas.
Scripps provides secured and unsecured loans and lines of credit for the
operation and expansion needs of businesses, including working capital lines
of credit inventory and accounts receivable financing and equipment
financing. Scripps typically looks to the cash flow generated by a borrower
as the principal source of repayment. Scripps may also take personal property
and/or a first or second deed of trust on real estate as an additional form
of collateral. This category of loans represents our most risky loans. While
the majority of these loans are collateralized by business assets, in a
troubled debt situation, which can arise from a variety of factors, the risk
of significantly diminished collateral value is high. To mitigate such risks,
management has established a process to segment the portfolio by industry
type in order to evaluate concentration risk. Also, in 1999 Scripps started a
credit department to provide consistent credit analysis, central review of
loan covenants and collateral tracking.
REAL ESTATE
Scripps makes intermediate and long-term real estate loans to homeowners and
other borrowers who have a defined repayment source. These loans generally
carry terms of three to thirty years with amortization schedules of up to 30
years. This category also includes interim construction loans for single
family dwellings, and small or medium size commercial and multi-family
buildings and lots to be developed. Scripps also makes longer-term real
estate loans on commercial properties in conjunction with the SBA guaranteed
lending program. The SBA guarantees second trust deed secured debentures,
which are junior liens to Scripps' loans, to enable business owners to
acquire commercial facilities for their businesses.
CONSUMER
Consumer loans are primarily automobile secured loans, home improvement
loans, and equity lines of credit, generally secured by second trust deeds on
personal residences, loans secured by various personal property and unsecured
lines of credit. Fixed rate consumer loans, which comprise approximately 33%
of the consumer portfolio, are generally made as amortizing loans over terms
in excess of one year. The variable rate portion of consumer loans are
primarily equity lines of credit secured by lien positions on real property
or unsecured revolving credit facilities to qualified individuals. This
category is more risky than real estate loans, due in large part to
industry-wide excessive availability of credit, an overall increase in the
consumers' appetite for debt, and the relative ease by which consumers can
discharge their obligations through bankruptcy.
LEASES
A major portion of Scripps' lease assets is comprised of leases for
electronic equipment, such as computers and data processing equipment. The
remaining balance of the lease portfolio includes leases on a variety of
other equipment.
CREDIT REVIEW
All loans are rated by an objective risk rating system, which is applied on a
regular basis. Any exceptions to underwriting standards are tracked in order
to identify trends. The credit review process was outsourced in early 1999.
This provides management and the Board of Directors with reports from an
unbiased third party on the status of loans. The bank maintains a Special
Asset Department, which actively monitors classified loans - those loans that
have deteriorated to the degree that there is a potential for loss. The
objective of this department is to identify the classified loans as soon as
possible, to protect or enhance the Bank's position, and ultimately to return
the loan to non-classified status or recognize it as a loss.
TRUST SERVICES AND INVESTMENT MANAGEMENT SERVICES
The Scripps Trust Department is committed to providing San Diego County with
high quality personalized trust and investment management services. The Trust
Department offers a full range of personal trust services to individuals,
including the administration of:
5
- living trusts
- testamentary trusts
- custodial agencies
- investment agencies
- executorships
- conservatorships
All standard employee benefit trust services are available, including trust
administration and asset management. The Trust Department also assists
individuals who wish to establish an IRA rollover for qualified retirement
plan distributions.
The Trust Department strives to attain a personalized approach to trust
services by custom tailoring products and services to meet the customer's
needs. The Trust Department utilizes an independent registered investment
advisor to provide investment advice to the Trust Investment Committee in an
attempt to provide individualized asset management programs for each trust
account. The Trust Department also offers "no load" mutual funds for some
accounts to achieve proper diversification of assets.
Scripps has offered the ability to buy and sell stocks, bonds, and mutual
funds through the Scripps Trust Department since June 1999. These products
are not FDIC insured.
COMMITMENTS AND CONTINGENT LIABILITIES
In the course of normal business, SFC enters into various types of
transactions that include commitments to extend credit that are not reflected
on its statements of financial condition. SCF's exposure to loss under
commitments to extend credit is represented by the total amount of these
commitments. See "Notes to Consolidated financial statements."
COMPETITION
The banking business in California generally, and in the San Diego market
area specifically, is highly competitive with numerous competitors both
making loans and accepting deposits. The trust and investment management
services business in SFCs' market area is also highly competitive, with six
major banks and various credit unions and savings and loans serving the area.
SFC 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 SFC. SFC also competes for business with unregulated lenders. There has
been increased competition for deposit and loan business over the past
several years as a result of deregulation, and with the advent of interstate
banking, bank holding companies headquartered outside of California may also
enter the California market in greater numbers and provide further
competition for SFC. Many of the major commercial banks operating in SFC's
market area offer some services which SFC does not offer directly but can
provide through a correspondent bank or through a strategic alliance with a
financial service provider. Additionally, banks with larger capitalization
have larger lending limits and are thereby better able to serve the higher
dollar needs of larger customers. SFC intends to compete with such banks
through customer service orientation, active involvement of its board of
directors, management and employees in community affairs, and commitment to
the community. With nine branches, Scripps is the largest locally owned and
managed bank in San Diego County. Scripps holds 2.65% of the deposit market
share countywide.
6
The regulatory climate became more favorable to large competitors in the
1990s. On September 29, 1994, President Clinton signed into law the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The Interstate Banking Act has various provisions
designed to facilitate the acquisition of banks and branching across state
borders. It allows the FRB to approve a bank holding company's application to
acquire control or substantial assets of a bank located outside the bank
holding company's home state, regardless of whether the acquisition would be
prohibited by state law. In addition, the Interstate Banking Act now permits
a bank in one state to merge with another bank in a different state. On
October 2, 1995, the California legislature adopted the Caldera, Weggeland,
and Killea California Interstate Banking and Branching Act of 1995 (the
"California Act"). The California Act expressly permits an out-of-state bank
to acquire an entire California bank by acquiring an entity through a merger
or purchase. Merely adding a branch or directly acquiring a branch in
California continues to be prohibited to out-of-state banks. Out-of-state
banks are permitted to affiliate with California institutions and may
establish facilities in California (such as loan production offices) under
conditions set forth in the California Act.
APPLICABLE REGULATIONS
Bank holding companies and financial institutions are extensively regulated
under federal and state law. As a result, the growth and earnings of SFC can
be affected by the regulations and policies of governmental regulatory
authorities in addition to management decisions and general economic
conditions. Several of the more significant regulations which apply to SFC
and Scripps are discussed below. When information in this report describes
statutory or regulatory provisions, it is qualified in its entirety to the
statutes or regulations.
SFC is subject to the periodic reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). As a result, SFC files annual,
quarterly and other current reports with the SEC and is subject to securities
regulations including rules regarding proxies. Directors, executive officers
and principal shareholders of more than 10% of SFC's common stock are also
subject to periodic reporting requirements. Both SFC and Scripps are subject
to the Internal Revenue Service and state taxing authorities.
SFC is a bank holding company under the Bank Holding Company Act of 1956, as
amended, so is required to file reports with the Federal Reserve Board. Prior
to March 13, 2000, a bank holding company generally was prohibited from
acquiring the beneficial ownership or control of more than 5% of the voting
shares or substantially all of the assets of any company, including a bank,
without the FRB's prior approval. Also, prior to March 13, 2000, a bank
holding company generally was limited to engaging in banking and activities
that the FRB had determined to be closely related to banking. Under the
Gramm-Leach-Bliley Act of 1999, beginning March 13, 2000 eligible bank
holding companies may elect to become financial holding companies, and
thereafter affiliate with securities firms and insurance companies and engage
other activities that are financial in nature. A bank holding company is
eligible to become a financial holding company if each of its subsidiary
banks and savings associations is well capitalized, is well managed, and has
a Community Reinvestment Act rating of satisfactory or better. SFC has not
yet determined whether it will elect to become a financial holding company.
Even if SFC were to elect to become a financial holding company, it would
continue to be required to comply with other bank holding company regulations
promulgated by the FRB.
7
The FRB has by regulation determined certain activities in which holding
companies including SFC may or may not conduct business. As a holding company
SFC is currently prohibited from such activities as real estate brokerage and
syndication; real estate development; property management; underwriting of
life insurance not related to credit transactions; and, with certain
exceptions, securities underwriting and equity funding.
As a California state-chartered bank, Scripps is subject to primary
supervision, periodic examination and regulation by the California Department
of Financial Institutions and the FDIC. If, as a result of an examination of
a bank, the FDIC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other
aspects of the bank's operations are unsatisfactory or that the bank or its
management is violating or has violated any law or regulation, various
remedies are available to FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase
in capital, to restrict the growth of the bank, to assess civil monetary
penalties, to remove officers and directors and ultimately to terminate a
bank's deposit insurance, which for a California state-charted bank would
result in a revocation of the bank's charter. The DFI has many of the same
remedial powers.
Scripps is insured by the FDIC, which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, each
bank pays a semi-annual statutory premium and is subject to the rules and
regulations of the FDIC. Although Scripps is not a member of the Federal
Reserve System, it is subject to certain regulations of the FRB.
CAPITAL ADEQUACY GUIDELINES
The FRB and the FDIC have issued guidelines to implement risk-based capital
requirements. The guidelines are intended to establish a systematic
analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations and
takes off-balance sheet items into account in assessing capital adequacy and
minimizes disincentives to holding liquid, low-risk assets. Under these
guidelines, assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to
one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain United States government securities, to 100% for
relatively high-risk assets, such as loans and investments in fixed assets,
premises and other real estate owned. The aggregate dollar amount of each
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of eight percent, of which at least four percent must
consist of Tier 1 capital. Higher risk-based ratios are required for an
insured depository institution to be considered well capitalized under the
prompt corrective action provisions of the FDIC Improvement Act. See "Federal
Deposit Insurance Corporation Improvement Act of 1991."
8
A banking organization's qualifying total capital consists of two components:
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).
Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock (plus,
for bank holding companies, qualifying percentage of cumulative perpetual
preferred stock in an amount up to 25% of Tier 1 capital) and minority
interest in the equity accounts of consolidated subsidiaries. Intangibles,
such as goodwill, are generally deducted from Tier 1 capital; however,
purchased mortgage servicing rights and purchased credit card relationships
may be included, subject to certain limitations. At least 50% of banking
organization's total regulatory capital must consist of Tier 1 capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock (which for bank
holding companies must have an original maturity of 20 years or more) and
related surplus; (iii) hybrid capital instruments with characteristics of
both debt and equity), perpetual debt and mandatory convertible debt
securities; and (iv) eligible term subordinated debt and intermediate-term
preferred stock with an original maturity of five years or more, including
related surplus, in an amount up to 50% of Tier 1 capital. The inclusion of
the foregoing elements of Tier 2 capital are subject to certain requirements
and limitations of the Federal banking agencies.
The FRB and the FDIC also have adopted a minimum leverage ratio of Tier 1
capital to average total assets of three percent for institutions which have
been determined to be in the highest of five categories used by regulators to
rate financial institutions. This leverage ratio is only a minimum. All other
institutions are required to maintain leverage ratios of at least 100 to 200
basis points above the three percent minimum. Furthermore, higher leverage
ratios are required for an insured depository institution to be considered
well capitalized or adequately capitalized under the prompt corrective action
provisions of the FDIC Improvement Act. As of December 31, 1999, SFC's Tier 1
risk-based capital and total risk-based capital ratios were 10.18% and
11.35%, respectively.
The risk-based capital standards of the federal banking agencies take into
account concentrations of credit (relatively large proportions of loans
involving one borrower, industry, location, collateral or loan type) and the
risks of "non-traditional" activities (those that have not customarily been
part of the banking business). These regulations require institutions with
high or inordinate levels of risk to operate with higher minimum capital
standards, and authorize the regulators to review an institution's management
of such risks in assessing an institution's capital adequacy.
The federal banking agencies have also revised the risk-based capital
regulations to include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a bank's capital adequacy. Interest
rate risk is the exposure of a bank's current and future earnings and equity
capital arising from adverse movements in interest rates. While interest risk
is inherent to a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank.
The FRB also requires the maintenance of a leverage capital ratio designed to
supplement the risk-based capital guidelines. Banks and Bank Holding
Companies that have received the
9
highest regulatory ratings must maintain Tier 1 leverage capital ratio of at
least 3.0%. All other institutions are required to maintain a leverage ratio
of at least 100 to 200 basis points above the 3.0% minimum, for a minimum of
4.0% to 5.0%. Pursuant to federal regulations, banks must maintain capital
levels commensurate with the level of risk to which they are exposed,
including the volume and severity of problem loans, and federal regulators
may, however, set higher capital requirements when a bank's particular
circumstances warrant. As of December 31, 1999 SFC's and Scripps' Tier 1
leverage capital ratios were 7.5% and 7.4%, respectively, exceeding
regulatory minimums. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Capital Resources."
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, the FDIC Improvement Act was enacted into law. This
legislation substantially revises the bank regulatory and funding provisions
of the Federal Deposit Insurance Act and makes revisions to several other
federal banking statutes. Set forth below is a brief discussion of certain
portions of this law and implementing regulations that have been adopted by
the FRB, the Office of the Comptroller of the Currency, the Office of Thrift
Supervision and the FDIC (collectively, the "Federal banking agencies").
- - - IMPROVED EXAMINATIONS. All insured depository institutions must undergo a
full-scope, on-site examination by their primary Federal banking agency at
least once every 12 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate Federal
banking agency against each institution or affiliate as it deems necessary
or appropriate.
- - - STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDIC Improvement Act,
the Federal banking agencies have issued safety and soundness standards and
guidelines on matters such as loan underwriting and documentation, asset
quality and growth, earnings, internal controls, information and audit
systems, interest rate risk exposure and compensation and other employee
benefits. The Federal banking agencies have also issued final regulations
prescribing uniform guidelines for real estate lending, which require
insured depository institutions to adopt written policies establishing
standards, consistent with such guidelines, for extensions of credit
secured by real estate. The policies must address loan portfolio
management, underwriting standards and loan to value limits that do not
exceed the supervisory limits prescribed by the regulations.
- - - PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires each
Federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios. The purpose of this law is to resolve
the problems of insured depository institutions at the least possible
long-term cost to the appropriate deposit insurance fund.
The law requires each Federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized (significantly exceeding the required minimum capital
requirements), adequately capitalized (meeting the required capital
requirements), undercapitalized (failing to meet one or more of the capital
requirements), significantly
10
undercapitalized (significantly below one or more capital requirements) and
critically undercapitalized (failing to meet all capital requirements).
In September, 1992, the Federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of the FDIC
Improvement Act. Under the regulations, an insured depository institution
will be deemed to be:
- "Well capitalized" if it (i) has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of six percent or greater and
a leverage ratio of five percent or greater and (ii) is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure;
- "Adequately capitalized" if it has a total risk-based capital ratio
of eight percent or greater, a Tier 1 risk based capital ratio of four percent
or greater and a leverage ratio of four percent or greater (or a leverage ratio
of three percent or greater if the institution is rated composite 1 under the
applicable regulatory rating system in its most recent report of examination);
- "Undercapitalized" if it has a total risk-based capital ratio that is
less than eight percent, a Tier 1 risk-based capital ratio that is less than
four percent or a leverage ratio that is less than four percent; and
- "Significantly undercapitalized" if it has a total risk-based capital
ratio that is less than six percent, a Tier 1 risk-based capital ratio that is
less than three percent or a leverage ratio that is less than three percent; and
- "Critically capitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than two percent.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be reclassified
to the next lower capital category if the appropriate Federal banking agency,
after notice and opportunity for hearing, (i) determines that the institution
is in an unsafe or unsound condition or (ii) deems the institution to be
engaging in an unsafe or unsound practice and not to have corrected the
deficiency. At each successive lower capital category, an insured depository
institution is subject to more restrictions and federal banking agencies are
given less flexibility in deciding how to deal with such institution.
The law prohibits insured depository institutions from paying management fees
to any controlling persons or; with certain limited exceptions, making
capital distributions, including dividends, if after such transaction the
institution would be undercapitalized. If an insured depository institution
is undercapitalized, it will be closely monitored by the appropriate Federal
banking agency, subject to asset growth restrictions, and required to obtain
prior regulatory approval for acquisitions, branching and engaging in new
lines of business. Any undercapitalized depository institution must submit an
acceptable capital restoration plan to the appropriate Federal banking agency
45 days after becoming undercapitalized. The appropriate Federal banking
agency cannot accept a capital plan unless, among other things, it determines
that the plan (i) specifies the steps the institution will take to become
adequately capitalized, (ii) is based on realistic assumptions and (iii) is
likely to succeed in restoring the depository
11
institution's capital. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution
will comply with the capital plan until the depository institution has been
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the
lesser of (a) an amount equal to five percent of the depository institution's
total assets at the time the institution became undercapitalized and (b) the
amount which is necessary to bring the institution into compliance with all
capital standards applicable to such institutions as of the time the
institution fails to comply with its capital restoration plan. Finally, the
appropriate Federal banking agency may impose on any undercapitalized
depository institution any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the prompt corrective action
provisions.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized and requirements to reduce the
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
OTHER REQUIREMENTS OF THE FDIC IMPROVEMENT ACT
The FDIC Improvement Act also, among other things, (i) limits the percentage
of interest paid on brokered deposits and limits the unrestricted use of such
deposits to only those institutions that are well capitalized; (ii) requires
the FDIC to charge insurance premiums based on the risk profile of each
institution; (iii) eliminates "pass-through" deposit insurance for certain
employee benefit accounts unless the depository institution is well
capitalized or, under certain circumstances, adequately capitalized; (iv)
prohibits insured state-chartered banks from engaging as principal in any
type of activity that is not permissible for a national bank unless the FDIC
permits such activity and the bank meets all of its regulatory capital
requirements; (v) directs the appropriate Federal banking agency to determine
the amount of readily marketable purchased mortgage servicing rights that may
be included in calculating such institution's tangible, core and risk-based
capital; and (vi) provides that, subject to certain limitations, any Federal
savings association may acquire or be acquired by any insured depository
institution.
The FDIC has also issued final regulations which prohibit, subject to certain
specified exceptions, insured state-chartered banks from engaging as
principal in any activity not permitted of a national bank, without FDIC
approval. The regulations also provide that, subject to certain specified
exceptions, subsidiaries of insured state-charted banks may not engage as
principal in any activity that is not permitted of a subsidiary of a national
bank, without FDIC approval.
The impact of the FDIC Improvement Act on Scripps is uncertain. Certain
provisions may affect the way in which Scripps conducts its business, and
other provisions, such as those relating to the establishment of the
risk-based premium system and the limitations on pass-through insurance may
affect its results of operations. Furthermore, the actual and potential
restrictions and sanctions that apply to or may be imposed on
undercapitalized institutions under the prompt corrective action and other
provisions of the FDIC Improvement Act may significantly affect the
12
operations and liquidity of Scripps, the value of SFC Common Stock and its
ability to raise funds in the financial markets.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Community Reinvestment Act ("CRA") requires banks, as well as other
lenders, to identify the communities served by the bank's offices and to
identify the types of credit the bank is prepared to extend within such
communities. The CRA also requires the FDIC to assess the performance of a
bank in meeting the credit needs of its community and to take such assessment
into consideration in reviewing applications for mergers, acquisitions, and
other transactions. An unsatisfactory CRA rating may be the basis for denying
such an application.
Scripps is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and CRA activities. In
addition to substantive penalties and corrective measures that may be
required for a violation of certain fair lending laws, the Federal banking
agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In 1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the
three methods that Federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment, and evidence of
disparate impact.
In connection with its assessment of CRA performance, the FDIC assigns a
rating of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." The FDIC conducts examinations of a bank's CRA performance,
among other matters, approximately every two years. Based on a CRA and
consumer compliance examination conducted during November 1999, Scripps was
rated "satisfactory." There can be no assurance that Scripps will retain this
rating.
FEDERAL RESERVE SYSTEM
The FRB requires banks to maintain noninterest-earning reserves against
certain of their transactional accounts (primarily deposit accounts that may
be accessed by writing checks) and non-personal time deposits.
As a creditor and a financial institution, Scripps is subject to certain
regulations promulgated by the FRB, including, without limitation, Regulation
B (Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E
(Electronic Funds Transfers Act), Regulation F (inter bank liabilities),
Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act), and Regulation DD (Truth in Savings Act). As creditors on
loans secured by real property and as owners of real property, financial
institutions, including Scripps, may be subject to potential liability under
various statutes and regulations applicable to property owners, generally
including statutes and regulations relating to the environmental condition of
the property.
13
Other state and federal statutes and regulations apply to many aspects of the
operations of SFC and Scripps, including requirements to maintain reserves
against deposits and meet capital requirements, and regulation of interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends and locations of branch offices. From time to time,
legislation is enacted which has the effect of increasing the cost of doing
business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial intermediaries.
Proposals to change the laws and regulations governing the operations and
taxation of banks, bank holding companies and other financial intermediaries
are frequently made in Congress, in the California legislature and before
various bank regulatory and other professional agencies. The likelihood of
any major changes and the impact such changes might have on SFC and Scripps
are impossible to predict.
EMPLOYEES
14
As of December 31, 1999, Scripps had a full time equivalent staff of 275
persons on a full-time and part-time basis. SFC had no employees.
ITEM 2. PROPERTIES.
SFC and Scripps together have 14 locations, nine of which are branch offices
of Scripps. Another location, in Carmel Valley, will open in Fall 2000. In
February 2000 SFC relocated its SFC and Scripps corporate headquarters to
5787 Chesapeake Court, San Diego, California, 92123, from Ivanhoe Avenue in
La Jolla.
Scripps' main office branch is located at 7733 Girard, La Jolla, California,
92037. Scripps has sub-leased major portions of the former corporate
headquarters in La Jolla and offsets rent expense with the income from the
sub-leases. Scripps plans on sub-leasing the second floor of the Carmel
Valley property, while retaining the first floor for a branch.
The following table sets forth-certain information regarding SFC and Scripps
property, net of accumulated depreciation, at December 31, 1999:
15
SQUARE DATE NET BOOK VALUE OF
FEET LOCATION OPENED PREMISES & EQUIPMENT
------ -------- ------ --------------------
7,000 South Bay Regional Office 1984 $ 196,000
20,200 Corporate Headquarters (former), La Jolla 1984 357,000
-- Trust Department, La Jolla 1990 175,000
5,500 East County Regional Office, El Cajon 1992 195,000
5,400 San Diego Regional Office, Downtown San Diego 1993 184,000
5,600 North County Coastal Regional Office, Escondido 1994 142,000
9,300 Service Center 1995 1,638,000
6,700 Chula Vista Center City Office 1995 331,000
5,200 Kearny Mesa Regional and Corporate Lending 1997 448,000
4,800 Encinitas Regional Office 1997 572,000
4,100 Point Loma Regional Office 1997 227,000
6,900 Girard Office, La Jolla main office 1999 1,478,000
1,300 Rancho Bernardo Center 1999 69,000
23,000 Corporate Headquarters (current), San Diego 2000 0
29,000 Carmel Valley Office To Open 0
Fall 2000
TOTAL $6,012,000
The SFC and Scripps facilities are held under lease agreements that expire at
various times from 2001 through 2026. The lease agreements have option
periods to extend their terms at rates equivalent to the then market rates.
Annual minimum lease commitments for SFC and Scripps together approximate
$2.1 million on average through the year 2004.
ITEM 3. LEGAL PROCEEDINGS.
No litigation against SFC is known by its board of directors to be pending or
threatened. Scripps is at times subject to pending and threatened legal
actions that arise out of the normal course of business. Management, after
reviewing all actions and proceedings pending against SFC and Scripps,
considers that the ultimate disposition of pending or threatened litigation
will not have a material effect on the financial condition or results of
operations of SFC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
SFC COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
In October 1999 SFC listed its common stock on the American Stock Exchange
(AMEX). Between this listing and July 1, 1999, SFC Common Stock was traded on
the over-the-counter bulletin board. Before July 1, 1999, Scripps common
stock was listed on the over-the-counter bulletin board.
Scripps is the sole subsidiary of SFC. As a state-chartered bank, the ability
of Scripps to pay dividends or make distributions to SFC is subject to
restrictions set forth in the California Financial Code. The California
Financial Code provides that neither a bank nor any majority-owned subsidiary
of a bank may make a distribution to its shareholders in an amount which
exceeds the lesser of (i) the bank's retained earnings, or (ii) the bank's
net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of the
bank to the shareholders of the bank during such period. However, a bank or a
majority-owned subsidiary of a bank may, with the prior approval of the
Commissioner of the DFI, make a distribution to the shareholders of the bank
in an amount not exceeding the greatest of (i) the bank's retained earnings,
(ii) the bank's
16
net income for its last fiscal year, or (iii) the bank's net income for its
current fiscal year. In the event that the Commissioner of the DFI determines
that the stockholders' equity of a bank is inadequate or that the making of a
distribution by a bank would be unsafe or unsound, the Commissioner may order
the bank to refrain from making a proposed distribution. As of December 31,
1999 Scripps had approximately $11.6 million legally available for the
payment of dividends. SFC paid semi-annual cash dividends to its shareholders
for a total of $.12 per share and $.16 per share in 1999 and 1998,
respectively. In 1999 the first payment was declared by Scripps and the
second payment by SFC. SFC will depend on dividends from its subsidiaries for
operating funds and to provide dividends to its shareholders. Payment of
future dividends by SFC will be subject to the discretion of the SFC Board of
Directors and will depend upon available revenue, its financial condition,
its capital requirements, its need for funds, applicable governmental
policies and regulations and such other matters, as the Board deems
appropriate. At present, SFC desires to continue paying cash dividends on a
periodic basis comparable to the historical levels paid by Scripps, which has
been semi-annual payments ranging from 13% to 18% of net income. However, the
ability of SFC to make such payments and the rate at which such payments may
be made is not assured and will depend on the factors discussed above.
The price information contained in the following table sets forth the high
and low closing prices per share of SFC or Scripps Common Stock as reported
by the composite closing price table published by the Bloomberg Financial
Markets Service. The high and low bid prices of SFC and Scripps Common Stock
do not include retail markups, markdowns or commissions and may not represent
actual transactions.
HIGH LOW
------- -------
1998
First Quarter 21.38 17.38
Second Quarter 20.50 17.00
Third Quarter 20.38 16.63
Fourth Quarter 17.50 15.25
1999
First Quarter 17.25 14.75
Second Quarter 15.50 14.00
Third Quarter* 16.00 13.63
Fourth Quarter* 16.38 13.50
*SFC common stock
On March 22, 2000, the last sales price of the SFC Common Stock, according to
the composite closing price table published by the Bloomberg Financial
Markets Service was $12.125 per share. There were approximately 449 holders
of Common Stock of SFC as of March 22, 2000.
SALES OF UNREGISTERED SECURITIES.
No unregistered securities have been issued by SFC since its formation.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA OF SFC
(Dollar amounts in thousands, except per share data)
The selected consolidated financial data presented below as of and for the
years ended December 31, 1999, 1998, 1997, 1996 and 1995 have been derived
from the consolidated financial statements of SFC audited by
PricewaterhouseCoopers, LLP. In the opinion of SFC management, the unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments
necessary for a fair presentation of the financial position and the results
of operations for these periods, the most recent three years of which are
included in this filing. The data below should be read in conjunction with
the audited consolidated financial statements and notes there to, and with
management's discussion and analysis included in this report.
17
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Net interest income $ 32,839 $ 28,396 $ 23,218 $ 18,099 $ 15,958
Provision for loan losses (7,230) (1,805) (1,452) (922) (1,263)
Noninterest income 5,624 6,095 5,390 4,230 3,554
Noninterest expense (24,014) (22,823) (20,168) (15,746) (13,792)
Provision for income taxes (2,790) (3,995) (2,758) (2,259) (1,835)
---------- ---------- ---------- ---------- ----------
Net income $ 4,429 $ 5,868 $ 4,230 $ 3,402 $ 2,622
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER COMMON SHARE DATA: (1)
Net income (basic) $ 0.64 $ 0.87 $ 0.63 $ 0.56 $ 0.52
Net income (diluted) 0.63 0.84 0.61 0.55 0.52
Cash dividends declared 0.12 0.16 0.34 0.31 0.36
Period-end book value 6.56 6.44 5.66 5.12 4.11
SHARES OUTSTANDING:
Weighted average common
shares outstanding (basic) 6,879,000 6,754,000 6,726,000 6,026,000 5,064,000
Weighted average common
shares outstanding (diluted) 6,991,000 6,974,000 6,987,000 6,213,000 5,090,000
Common shares outstanding at period end 6,909,000 6,797,000 6,708,000 6,772,000 5,570,000
AVERAGE FINANCIAL CONDITION DATA: (2)(3)
Investment securities (4) $ 151,467 $ 127,003 $ 99,318 $ 86,899 $ 55,319
Loans 365,105 307,061 243,895 183,176 161,083
Assets 588,058 508,871 404,605 324,825 263,732
Deposits 537,820 463,829 364,927 293,795 240,661
Shareholders' equity 46,005 41,095 36,117 28,542 20,930
ASSET QUALITY RATIOS: (2)
Net charge-offs to average loans 1.80% 0.22% 0.27% 0.36% 0.56%
Nonperforming loans to total
Loans (5) (10) 1.09% 0.40% 0.35% 0.62% 2.09%
Nonperforming assets to total
Assets (10) 0.68% 0.23% 0.31% 0.50% 1.20%
Allowance for loan losses to total
Loans (10) 1.36% 1.40% 1.28% 1.32% 1.58%
Allowance for loan losses to
Nonperforming loans (10) 125.25% 352.07% 368.29% 213.31% 75.56%
PERFORMANCE RATIOS: (2)
Return on average assets 0.75% 1.15% 1.05% 1.05% 0.99%
Return on average equity 9.63% 14.28% 11.71% 11.92% 12.53%
Equity to assets 7.82% 8.08% 8.93% 8.79% 7.94%
Dividend payout 18.64% 18.57% 53.99% 54.65% 69.80%
Net interest margin (6) 6.03% 6.02% 6.31% 6.16% 6.67%
Efficiency ratio (7) 62.35% 66.12% 70.36% 70.32% 70.49%
REGULATORY CAPITAL RATIOS: (8) (10)
Leverage ratio (9) 7.54% 7.63% 8.30% 9.63% 7.83%
Tier 1 risk-based capital 10.18% 10.19% 11.10% 13.93% 16.21%
Total risk-based capital 11.35% 11.32% 12.20% 15.08% 17.24%
(1) Per share data have been retroactively adjusted to reflect a 10% stock
dividend in 1996, a 10% stock dividend in 1997 and a two for one split in
1997 for all periods presented.
(2) Amounts have not been derived from SFC's consolidated financial statements
but were compiled separately by management.
(3) Average balance sheet data has been derived from quarterly balances for
1995, otherwise from year-to-date daily balances.
(4) Amounts are derived from average balances based upon market value.
18
(5) Nonperforming loans represent nonaccrual loans and loans still accruing
interest and contractually past due 90 days or more.
(6) Net interest income divided by average interest-earning assets.
(7) Efficiency ratio is defined as the ratio of noninterest expenses, less cost
related to real estate owned, to the sum of net interest income and
noninterest income exclusive of securities gains/(losses).
(8) Computed in accordance with 1992 Federal guidelines, which were initially
effective January 1, 1990.
(9) Leverage ratio is defined as the ratio of Tier 1 capital to average assets
for the most recent quarter.
(10) Data is as of period end.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
SFC, with $632 million in total assets at December 31, 1999, derives
substantially all of its revenues and income by providing a full range of
commercial banking, consumer banking and trust services primarily to small
and middle market businesses and individuals in San Diego County, California.
The revenues of SFC are derived principally from interest earned on loans and
investment securities, from trust and residential lending service fees, and
from other loan and deposit account-related fees and service charges. The
operations of SFC are influenced significantly by general economic conditions
and by policies of its primary regulators, FRB, and for Scripps DFI and FDIC.
Return on average equity ("ROE") is determined by dividing annual net income
by average shareholders' equity and indicates the effectiveness of an
institution in generating net income from the capital invested by its
shareholders. For the year ended December 31, 1999, SFCs' ROE was 10%
compared to 14% for 1998 and 12% for 1997. Return on average assets ("ROA")
measures net income in relation to total average assets and generally
indicates an institution's ability to use its assets profitably. For the year
ended December 31, 1999, SFCs' ROA was 0.8% compared to 1.2% for 1998 and
1.1% for 1997. ROE for 1999 decreased by 0.4% from 1998 primarily as a result
of the need to replenish the reserve for loan losses due to net charge-offs
of $6.6 million. $6.4 million of the charge-offs were from two loans and are
considered by management to be non-recurring in nature. In 1998 PCB merged
with and into Scripps, resulting in two new offices for Scripps. Management
believes the continued growth of market share in existing and new markets,
enhanced internal efficiency, the continued resolution of its nonperforming
assets, and a general economic recovery of Southern California will have a
positive effect upon future operations, although there can be no assurance
these developments will occur. There are many factors that could adversely
affect the future operations of SFC, including any decline in the San Diego
County economy at a time when SFC is incurring costs of expansion.
INSTITUTIONAL GROWTH
Scripps began to experience significant growth in 1995 as the local economy
improved and following the failure or merger of several larger San Diego
headquartered financial institutions. The decision was made to increase the
bank's capital and to take advantage of the opportunity to increase market
share. Prior to 1996, the bank had established offices in La Jolla, El Cajon,
downtown San Diego and Escondido. In 1996, the bank obtained an additional
$9.5 million through the sale of Scripps Common Stock and received regulatory
approval to open three new offices in Kearny Mesa, Encinitas and Point Loma.
Those offices were opened during 1997, and all have experienced satisfactory
growth in loans and deposits. In 1998 Scripps expanded into Chula Vista and
the South Bay area of San Diego County, adding two offices, through its
merger with PCB.
SFC's long term plan includes establishing a total of eleven to thirteen
Scripps offices strategically located throughout San Diego County. Through
the merger of PCB and Scripps, the resulting institution has nine branches
serving much of San Diego County. Although there can be no assurances that it
will prove to be correct, SFC's management believes that significant growth
and market opportunity will occur in the near future in the South Bay area,
and that it is therefore very important for the bank to be represented in
that area. It is anticipated that in the future, one or two additional
offices may be opened in North County, and possibly one additional office in
East County.
Growth has and will enable SFC to expand its deposit gathering and loan
delivery systems geographically within San Diego County. Increases in average
interest-earning assets and average interest-bearing liabilities contributed
to increases in total interest income interest expense and net interest
income. Expansion has
19
also contributed to the gathering of additional noninterest-bearing deposits,
which effectively lowers SFC's internal cost of funds and increases net
interest income. Growth has also caused, and can be expected to continue to
cause, increases in noninterest expense.
SFC's growth during the period from 1994 through the end of 1999 facilitated
increases in earnings per share. In 1999 income per share decreased due to
loan charge-offs as noted above. As SFC's growth continues and as noninterest
expense continues to rise, income per share may decline. SFC believes that
even if additional investment in growth comes at the cost of lower income per
share for several quarters, SFC's profitability will be enhanced over the
long term, although there can be no assurance that this will in fact be the
case.
ANNUAL COMPARISON
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
results of operations and the financial condition of SFC. This discussion and
analysis should be read in conjunction with SFC's audited consolidated
financial statements, including notes thereto, located elsewhere in this
report.
NET EARNINGS
Net earnings were $4 million ($.64 per share basic; $.63 per share diluted)
for the year ended December 31, 1999, compared with $6 million ($.87 per
share basic; $.84 per share diluted) for 1998, a decrease of $2 million or
25%. Net earnings for 1998 reflect an increase of $2 million or 39% over net
earnings of $4 million ($.63 per share basic; $.61 per share diluted) for the
year ended December 31, 1997. SFC's decrease in earnings between 1999 and
1998 resulted primarily from the charge-offs noted above. The charge-offs
were partially offset by earnings from an increase in average
interest-earning assets, primarily in loans and investment securities. SFC's
improved performance between 1998 and 1997 was primarily due to an increase
in average interest-earning assets, primarily in loans and investment
securities. The higher levels of net interest income in 1998 and 1997 were
partially offset by the costs and additional salary expense associated with
the Scripps-PCB merger in 1998.
NET INTEREST INCOME
Net interest income, which constitutes one of the principal sources of income
for SFC, 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. SFC's 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 $33 million for fiscal 1999, an increase of $5
million or 16% compared with net interest income of $28 million for 1998,
which represented an increase of $5 million or 22% compared to net interest
income of $23 million for 1997. Comparing 1999 to 1998, SFC's average
interest-earning assets increased to $545 million in 1999 from $472 million
in 1998, representing an increase of 15% which resulted from increases in all
interest-earning asset categories but primarily in loans (19%) and
investments (19%). Average interest-bearing deposits increased to $372
million in 1999 from $328 million in 1998, representing an increase of 14%,
while average noninterest-bearing demand deposits also increased $30 million
or 22%. The net interest margin of 6.03% for 1999 reflects an increase of 1
basis point from that of 1998. This increase in net interest margin resulted
primarily from average interest-earning asset growth out pacing average
interest-bearing deposits, and the effective interest rate paid on deposits
was significantly lower than 1998. This increase was partially offset by both
the decrease in the prime rate from an average of 8.3% in 1998 to 8.0% in
1999 (since a majority of Scripps' loans are tied to the prime rate, a
decrease in the rate immediately affects net interest income) and continued
competitive pressure in pricing loans. Comparing 1998 to 1997, SFC's average
interest-earning assets increased to $472 million in 1998 from $368 million
in 1997, representing an increase of 29% which resulted from increases in all
interest-earning asset categories. Average interest-bearing deposits
increased to $328 million in 1998 from $258 million in 1997, representing an
increase of 27%, while average noninterest-bearing demand deposits also
increased $29 million or 27%. The net interest margin of 6.02% for 1998
reflects a decrease of 29 basis points from that of 1997.
20
This decrease in net interest margin resulted primarily from both the
decrease in the prime rate from an average of 8.4% in 1997 to 8.3% in 1998,
and competitive loan pricing.
SFC's net interest income is affected by changes in the amount and mix of
interest-earning assets and interest-bearing liabilities, referred to as a
"volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing liabilities,
referred to as a "rate change." The following table sets forth the categories
of interest-earning assets and interest-bearing liabilities, the average
amounts outstanding, the interest earned or paid on such amounts, and the
average rate earned or paid for the periods indicated. The table also sets
forth the average rate earned on all interest-earning assets, the average
rate paid on all interest-bearing liabilities, and the net yields earned by
SFC for the same periods.
21
AVERAGE BALANCES AND INTEREST RATES
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
----------------------------- ----------------------------- ----------------------------
1999 1998 1997
----------------------------- ----------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- ------- -------- -------
Interest-earning
assets:
Loans, net (1) $365,105 $36,230 9.92% $307,061 $32,151 10.47% $243,895 $26,214 10.75%
Investment securities 153,651 8,732 5.68% 132,740 7,830 5.90% 104,335 6,372 6.11%
Federal funds 25,945 1,309 5.05% 31,982 1,730 5.41% 19,851 1,085 5.47%
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 544,701 46,271 8.49% 471,783 41,711 8.84% 368,081 33,671 9.15%
Other assets 43,357 37,088 36,524
-------- -------- --------
Total assets $588,058 $508,871 $404,605
-------- -------- --------
-------- -------- --------
Interest-bearing
liabilities:
Deposits:
Interest-bearing
demand deposits $251,443 $ 8,434 3.35% $219,223 $ 8,387 3.83% $164,110 $ 6,155 3.75%
Savings deposits 26,525 622 2.34% 24,596 623 2.53% 22,768 594 2.61%
Time deposits 94,163 4,331 4.60% 84,056 4,305 5.12% 70,936 3,705 5.22%
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 372,131 13,387 3.60% 327,875 13,315 4.06% 257,814 10,454 4.05%
Other borrowed money 382 45 11.78% 0 0 0.00% 0 0 0.00%
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits 165,689 135,954 107,113
Other liabilities 3,840 3,947 3,449
Stockholders' equity 46,016 41,095 36,229
-------- -------- --------
Total liabilities and
Stockholders' equity $588,058 $508,871 $404,605
-------- -------- --------
-------- -------- --------
Net interest income $32,839 $28,396 $23,217
------- ------- -------
------- ------- -------
Net interest spread (2) 4.90% 4.78% 5.09%
Net interest margin (3) 6.03% 6.02% 6.31%
- - ---------------------
(1) Nonaccrual loans are included in the average balances used in this table.
(2) Net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
The following table illustrates the changes in Scripps' net interest income
due to changes in volume (change in volume multiplied by initial rate) and
changes in interest rate (change in rate multiplied by initial volume) for
the periods indicated. Changes attributable to the combined effect of volume
and interest rate have been allocated proportionately to the changes in
volume and the changes in interest rate.
22
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)
1999 1998
COMPARED WITH COMPARED WITH
1998 1997
-------------------------------------- -------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
VOLUME RATE CHANGES VOLUME RATE CHANGES
-------- -------- ------- -------- -------- -------
Interest income on:
Loans, net (1) $ 5,638 $ (1,559) $ 4,079 $ 6,595 $ (658) $ 5,937
Investment securities 1,175 (272) 903 1,667 (209) 1,458
Federal funds (310) (111) (421) 656 (11) 645
-------- -------- ------- -------- -------- -------
Total interest income 6,503 (1,942) 4,561 8,918 (878) 8,040
-------- -------- ------- -------- -------- -------
Interest paid on:
Interest-bearing demand
Deposits 291 (244) 47 2,106 126 2,232
Savings deposits (19) 18 (1) 46 (17) 29
Time deposits 171 (145) 26 670 (70) 600
-------- -------- ------- -------- -------- -------
Total deposit interest
expense 443 (371) 72 2,822 39 2,861
Other borrowed money 45 0 45 0 0 0
-------- -------- ------- -------- -------- -------
Total interest expense 488 (371) 117 2,822 39 2,861
-------- -------- ------- -------- -------- -------
Net interest income $ 6,015 $ (1,571) $ 4,444 $ 6,096 $ (917) $ 5,179
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
(1) Nonaccrual loans are included in the average balances used in calculating
this table.
PROVISION FOR LOAN LOSSES
Provisions for loan losses are charged to earnings to bring the total reserve
for loan losses to a level deemed appropriate by management based upon such
factors as historical loss experience, the volume and type of lending
conducted by Scripps, the amounts of classified and nonperforming assets,
regulatory policies and examination results, concentrations, general economic
and business conditions, credit quality trends, and other factors related to
the collectability of loans in Scripps' portfolio. The provision for loan
losses was $7.2 million for 1999, an increase of $5.4 million or 301%
compared to the provision for loan losses of $1.8 million for 1998, which in
turn represented an increase of $0.3 million or 24% compared to the provision
for loan losses of $1.5 million for 1997.
The increase in the provision for 1999 reflects the following: Scripps
charged-off two large loans in 1999 totalling $6.4 million, average loans
increased 19% over the prior year and non-accrual loans increased 128% for
the same period. Factors influencing the 1998 provision include the 26%
increase in average loans over the prior year and the increase of 39% in
non-accrual loans for the same period.
NONINTEREST INCOME
Noninterest income was $6 million for the year ended December 31, 1999,
unchanged compared with noninterest income of $6 million for 1998, which
represented an increase of $1 million or 13% compared with noninterest income
of $5 million for 1997. In 1999 trust income increased by 18%, but was offset
by a decrease in service charge and other income. The primary reasons for the
increase in noninterest income over the years presented are growth in trust
assets under administration of 20% to $804 million over the two year period
ended December 31,
23
1999 and growth in deposits of 38% to $582 million over the two year period
ended December 31, 1999. There continues to be high levels of competition in
the deposit services and trust services arena.
The following table sets forth the various categories of noninterest income.
NONINTEREST INCOME DATA
(Dollars in thousands)
YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1999 % CHANGE 1998 % CHANGE 1997
------ ---------- ------ -------- ------
Customer service charges $1,955 -14% $2,269 24% $1,833
Trust fees 2,528 18% 2,140 15% 1,862
Gain on sale of securities 0 0% 0 -100% 44
Other non-interest income 284 -27% 387 45% 222
Other fees 857 -34% 1,299 -9% 1,429
------ ---------- ------ -------- ------
Total $5,624 -8% $6,095 13% $5,390
------ ------ ------
------ ------ ------
NONINTEREST EXPENSE
Noninterest expense was $24 million for 1999, an increase of $1 million or 5%
compared with noninterest expense of $23 million for 1998, and an increase of
$3 million or 13% compared with noninterest expense of $20 million for 1997.
Personnel expense was $13.5 million for 1999, an increase of $1.5 million or
12% compared with personnel expense of $12 million for 1998, and an increase
of $1 million or 10% compared with personnel expense of $11 million for 1997.
Occupancy expense was $2.7 million for 1999, an increase of $0.2 million or
6% compared with occupancy expense of $2.5 million for 1998, and an increase
of $0.4 million or 15% compared with occupancy expense of $2.1 million for
1997. The aggregate increases over the three-year period principally reflect
the additional costs associated with opening new locations as part of SFC's
long-term growth strategy. In 1998, noninterest expense included expenses
associated with the Scripps-PCB merger.
Data processing expense was $0.2 million for 1999, a decrease of $0.6 million
or 72% compared with data processing expense of $0.8 million for 1998, an
increase of $0.2 million or 23% compared with data processing expense of $0.6
million for 1997. The decrease in data processing expense resulted
principally from the in house servicing of the acquired PCB offices along
with enhanced technical functionality from equipment acquired in 1998. The
increase over the prior two-year period resulted principally from the
increase in volumes processed due to loan and deposit growth, offset in part
by enhanced technical functionality from equipment acquired in 1996.
The following table sets forth the amount of each of the various categories
of noninterest expense for the periods indicated.
NONINTEREST EXPENSE DATA
(Dollars in thousands)
YEARS ENDED
DECEMBER 31,
-----------------------------------------------
1999 % CHANGE 1998 % CHANGE 1997
------- ---------- ------- -------- -------
Salaries and employee benefits $13,460 12% $12,023 10% $10,884
Occupancy and equipment 2,689 6% 2,528 15% 2,190
Data processing 210 -72% 756 23% 615
Depreciation and amortization 1,483 24% 1,200 4% 1,156
Other real estate owned 31 63% 19 -51% 39
Professional services 1,463 -29% 2,052 39% 1,472
Other general and administrative 4,678 10% 4,245 11% 3,812
------- ---------- ------- -------- -------
Total $24,014 5% $22,823 13% $20,168
------- ------- -------
------- ------- -------
24
INCOME TAXES
The provision for income taxes was $3 million, $4 million and $3 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Effective tax
rates, the percentage of earnings set aside for federal and state income
taxes were 39%, 41% and 39% for the years ended December 31, 1999, 1998 and
1997, respectively. The decrease in effective rate reflects higher levels of
tax exempt income in 1999, as compared to 1998, while 1998 experienced a rise
in the effective rate due to lower levels of tax-exempt income over 1997.
LOANS AND ASSET QUALITY
Net loans (gross loans less unearned income and reserve for loan losses) were
$392 million at December 31, 1999, an increase of $56 million or 17% from
loans of $336 million at December 31, 1998. This increase followed loan
growth of $56 million or 20% from loans of $280 million at December 31, 1997.
This increase was preceded by an increase of $68 million or 32% from loans of
$212 million at the end of 1996. The rate of loan growth for these periods
increased due to an overall improvement in the Southern California economy as
well as Scripps' positive reputation in the community to provide quality
service and products. Management expects loan growth to be moderate in 2000
assuming that the economy will remain strong, but that the overall
competition for loans will be a factor to contend with. If the economy
weakens or competition increases, loan growth may be less than expected.
Scripps' lending activities are guided by the basic lending policy
established by its Board of Directors. The Scripps Board of Directors has
established loan approval limits for the officers of Scripps. Under
regulations governing California state-chartered banks, Scripps may lend up
to 15% of its total capital on an unsecured basis and 25% of its total
capital on a secured basis to any one borrower, up to a limit of 25% of total
capital for all direct and indirect loans to any one borrower. Additionally,
loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities or resident in the same geographic region,
which would cause them to be similarly affected by economic or other
conditions. Scripps, on a regular and periodic basis, evaluates these
concentrations for the purposes of making corrections in its lending
practices in consideration of economic conditions, industry trends and a
variety of other factors. As a result of SFC's market focus, Scripps has a
concentration of its customers and assets in San Diego County.
The following table sets forth the composition of Scripps' loan portfolio by
type of loan on the dates indicated in terms of amount and as a percentage of
the total loan portfolio.
LOAN PORTFOLIO ANALYSIS
(Dollars in thousands)
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
Loans and leases:
Commercial and other $154,290 39% $156,236 46% $134,960 48% $105,229 49% $ 82,097 50%
Real estate construction(1) 57,975 14% 37,932 11% 29,510 11% 14,396 7% 5,335 3%
Real estate mortgage(1) 120,256 31% 93,681 28% 74,516 26% 57,049 26% 43,402 27%
Consumer (2) 58,076 15% 48,375 14% 42,390 15% 35,718 17% 28,177 18%
Lease financing 7,852 2% 6,199 2% 3,212 1% 3,608 2% 5,172 3%
Less: Unearned income
and fees 1,073 1% 1,648 1% 941 1% 901 1% 1,112 1%
-------- -------- -------- -------- -------- ---------
Total $397,376 100% $340,775 100% $283,647 100% $215,099 100% $163,071 100%
-------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- ---------
25
- - -----------------------------
(1) The calculation of real estate loans for financial statement purposes
differs from the calculation of loans secured by real estate as reported in
Scripps' regulatory call reports. At December 31, 1999, for instance, total
loans secured by real estate as reported in Scripps' call report were 225
million or 57%.
(2) Represents installment loans to individuals.
The following table sets forth the selected loan maturity data of Scripps'
loan portfolio. Maturities are presented on a contractual basis.
SELECTED LOAN PORTFOLIO MATURITY
(Dollars in thousands)
DECEMBER 31, 1999
Maturing
----------------------------------------------
After One
Within But Within More Than
One Year Five Years Five Years Total
-------- ---------- ---------- --------
Commercial and other loans $ 82,529 $ 58,727 $ 13,034 $154,290
Real estate construction loans 49,486 6,944 1,544 57,974
Real estate mortgage loans 23,565 55,979 40,713 120,257
-------- ---------- ---------- --------
Total $155,580 $121,650 $ 55,292 $332,522
-------- ---------- ---------- --------
-------- ---------- ---------- --------
Sensitivity of loans due after one year
to changes in interest rates:
Fixed rate loans $ 68,792 $ 35,966 $104,758
Variable rate loans 52,858 19,326 72,184
---------- ---------- --------
Total $121,650 $ 55,292 $176,942
---------- ---------- --------
---------- ---------- --------
LOAN CONCENTRATIONS
Scripps tracks loan concentrations by standard industry codes (SIC). The
table set forth below estimates concentrations of 10 percent or more of total
loans as of December 31, 1999. (Dollars in thousands)
SIC Percent Amount
- - --- ------- ------------
Manufacturing 13% $ 51,798
Finance, insurance, and real estate 20% 79,690
Services 19% 75,705
Managers and administrators 14% 55,783
--- --------
Total 66% $262,976
All real estate related loans 34% $135,473
Much of the San Diego economy is based on real estate development and
investment. As noted above, real estate related borrowers make up
approximately 34% of Scripps' loan portfolio, therefore the portfolio is
vulnerable to stress in this sector. The Bank has several tools in place to
mitigate exposure in the real estate sector, such as conservative
underwriting practices, monitoring of sales price trends, centralized
monitoring of loans based on accounts or contracts receivable or work in
process, and a concerted focus on the underlying strength of the borrower.
26
NONPERFORMING ASSETS
Generally, Scripps' policy is to discontinue accrual of interest on loans,
which are delinquent for 90 days, or more unless management determines that a
loan is adequately collateralized or other circumstances justify treating a
loan as fully collectable. When a loan is placed on nonaccrual status, income
is not recognized until payment has actually been received and future
payments of principal and interest appear certain. Interest income, which has
been accrued up to the point a loan is placed on nonaccrual status, is
reversed if management determines that the collectability of the accrued
interest is doubtful. Real estate acquired by Scripps as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate
owned. Such real estate is reclassified to real estate owned at the lower of
cost or fair value less estimated selling costs, and any estimated loss upon
reclassification is charged to allowance for losses at that time. Further
increases to the allowance for losses on real estate owned are recorded as
charges to noninterest expense at the time such costs are incurred or
management believes additional deterioration in value has occurred.
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that as of
December 31, 1999, all problem loans to date had been identified and included
in the nonaccrual or 90 days past due totals reflected below. Management, as
part of the responsibilities of Credit Administration and Regulatory Risk
Management, is particularly focused upon the objective of reducing its
nonperforming and classified assets. In fact, management noted an increase in
nonperforming loans in 1999 and is closely monitoring the adequacy of the
loan loss reserve in light of this increase. There can be no assurance that
management will achieve the objective of reducing nonperforming and
classified assets.
The following table sets forth certain information with respect to Scripps'
nonaccrual loans, accruing loans for which payments of principal and interest
are contractually past due 90 days or more, and real estate owned for the
periods indicated.
NONPERFORMING ASSETS
(Dollars in thousands)
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Nonaccrual loans $ 2,759 $ 1,211 $ 872 $ 661 $ 2,015
Accruing loans past due 90
days or more 1,562 143 112 669 1,393
-------- -------- -------- -------- --------
Total nonperforming loans 4,321 1,354 984 1,330 3,408
Real estate owned 0 0 428 488 48
-------- -------- -------- -------- --------
Total nonperforming assets $ 4,321 $ 1,354 $ 1,412 $ 1,818 $ 3,456
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total nonperforming assets
to total assets .68% .23% .31% .50% 1.20%
Reductions in real estate owned over the years presented have resulted
principally from Scripps' efforts to dispose of, and keep to a minimum,
holdings of such non-earning assets. The bank's level of restructured loans
was $1,351,000, $549,000, $643,000, $651,000 and $2,252,000 at December 31,
1999, 1998, 1997, 1996 and 1995 respectively, for which it had established
reserves for potential losses of $150,000, $97,000, $153,000, $164,000 and
$475,000.
Scripps has a Special Assets Department with the primary responsibilities of
regular internal loan quality reviews and the monitoring and disposition of
nonperforming and classified assets. However, there can be no assurance that
reductions in the balance and percent of nonperforming assets will occur in
the future.
27
RESERVE FOR LOAN LOSSES
In originating loans, Scripps recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things,
general economic conditions, the type of loan being made, the
creditworthiness of the borrower over the term of the loan and, in the case
of a collateralized loan, the quality of the collateral for such loan.
Management maintains a reserve for loan losses at a level considered adequate
to absorb known and inherent risks in the loan portfolio. Management's
evaluation of the adequacy of the reserve is ongoing and comprehensive.
The following table set forth the breakdown of the allocation of the reserve
for loan losses by category of loan on the dates indicated. The allocation of
the reserve to each category is not necessarily indicative of future losses
and does not restrict the use of the reserve to absorb losses in any other
category.
28
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
(Dollars in thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- ---------
Loans and leases:
Commercial and other $3,993,480 39% $3,798,916 46% $2,988,051 48% $1,773,785 49% $1,483,867 50%
Real Estate
construction 280,470 14% 0 11% 0 11% 0 7% 0 3%
Real Estate mortgage 612,866 31% 568,653 28% 397,337 26% 349,433 26% 396,376 27%
Consumer 485,338 15% 345,431 14% 156,222 15% 621,824 17% 694,757 18%
Lease financing 39,846 2% 54,000 2% 82,390 1% 91,958 2% 0 3%
---------- ---------- ---------- ---------- ----------
Total allowance
for Loan losses $5,412,000 100% $4,767,000 100% $3,624,000 100% $2,837,000 100% $2,575,000 100%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Management has and will continue to actively monitor Scripps' asset quality,
to charge off loans against the reserve for loan losses when appropriate and
to provide for specific losses when necessary. Although management believes
it uses the best information available to make determinations with respect to
the reserve for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. There can be no assurance that economic conditions that may
adversely affect SFC's market area or other circumstances will not result in
increased loan losses in Scripps' loan portfolio.
The following table sets forth an analysis of Scripps' reserve for loan
losses for the periods indicated.
29
RESERVE FOR LOAN LOSSES DATA
(Dollars in thousands)
DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Beginning balance of reserve for
loan losses $ 4,767 $ 3,624 $ 2,837 $ 2,575 $ 2,208
--------- --------- --------- --------- ---------
Loans charged off:
Real estate construction 0 0 0 0 45
Real estate mortgage 90 88 0 169 288
Commercial and other 6,605 394 664 619 515
Consumer 74 241 123 116 99
Lease financing 0 12 2 25 3
--------- --------- --------- --------- ---------
Total loans charged off 6,769 735 789 929 950
--------- --------- --------- --------- ---------
Recovery of loans previously
charged off:
Real estate mortgage 28 1 1 63 7
Commercial and other 132 30 114 190 8
Consumer 16 13 9 8 39
Lease financing 9 29 0 8 0
--------- --------- --------- --------- ---------
Total recoveries 185 73 124 269 54
--------- --------- --------- --------- ---------
Net loans charged off 6,585 662 665 660 896
Provision for loan losses 7,230 1,805 1,452 922 1,263
--------- --------- --------- --------- ---------
Ending balance of reserve for loan
losses $ 5,412 $ 4,767 $ 3,624 $ 2,837 $ 2,575
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average net loans outstanding
during the period $365,105 $307,061 $243,895 $183,176 $161,083
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Total net loans outstanding at
period-end $397,376 $340,775 $283,647 $215,099 $163,071
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loans charged off to average
net loans 1.80% .22% .27% .36% .56%
Reserve for loan losses as a
percentage of nonperforming
loans 125.25% 352.07% 368.29% 213.31% 75.56%
Reserve for loan losses as a
percentage of total net loans
outstanding at
period-end 1.36% 1.40% 1.28% 1.32% 1.58%
INVESTMENT ACTIVITIES
Scripps' investment portfolio is used primarily for liquidity purposes and
secondarily for investment income. Investment securities classified as available
for sale ("AFS") are stated at their current market value with stockholders'
equity being adjusted for the after-tax unrecognized gain (loss) on said
securities. Investment securities classified as held to maturity ("HTM") are
stated at cost, decreased by amortization of premium and increased by accretion
of discount, over the period to maturity of the related securities. During 1999
and 1998, Scripps classified its entire investment portfolio as available for
sale. Management attempts to maintain investment
30
securities in its portfolio that offer a stable total return profile over a
wide range of interest rate environments, as well as securities with varied
maturities (a "laddered" portfolio) so that, under normal conditions, there
should be no need to sell securities prior to maturity dates, thereby
minimizing the impact of interest rate fluctuations on net interest income.
However, there can be no assurance that Scripps' investment securities will
continue to reflect a stable total return profile over time or that SFC would
not sell any investment securities during a rising interest rate environment
and recognize a loss.
Scripps' current investment policy enables management to invest primarily in
United States Treasury and Government Agency obligations, United States
Government-sponsored agency securities, mortgage-backed securities,
collateralized mortgage obligations and obligations of states and political
subdivisions with a maximum aggregate portfolio duration not to exceed four
years. Scripps uses an investment advisor to provide added expertise with
respect to managing the portfolio. Scripps retains control of all investment
decisions. Equity Securities are comprised of mutual fund shares in a variable
rate government bond fund, which was acquired through the merger with PCB.
The following table sets forth an analysis of Scripps' investment portfolio as
of the dates indicated.
INVESTMENT PORTFOLIO COMPOSITION
(Dollars in thousands)
DECEMBER 31,
-----------------------------
1999 1998 1997
---------- ----------- -----------
AVAILABLE FOR SALE:
U.S. Treasury and U.S. Government
Corporation & Agency
Securities $70,074 $59,907 $36,517
Mortgage-backed securities:
U.S. Government Agency 32,406 38,260 13,530
U.S. Government-Sponsored
Agency Securities 3,157 4,970 4,684
Collateralized Mortgage
Obligations 36,686 38,507 39,792
States and political
subdivisions 19,652 18,128 17,903
Equity Securities 1,308 1,335 1,360
---------- ----------- -----------
Total available for sale 163,283 161,107 113,786
HELD TO MATURITY:
U.S. Treasury and U.S. Government
Corporation & Agency
Securities 0 0 3,798
Mortgage-backed securities:
U.S. Government Agency 0 0 102
U.S. Government-Sponsored
Agency Securities 0 0 45
Collateralized Mortgage
Obligations 0 0 970
Total held to maturity 0 0 4,915
---------- ----------- -----------
Total investment securities $163,283 $161,107 $118,701
---------- ----------- -----------
---------- ----------- -----------
31
The following table sets forth the maturity distribution and weighted average
yield of the investment portfolio as of December 31, 1999.
INVESTMENT PORTFOLIO MATURITY DISTRIBUTION AND YIELDS
(Dollars in thousands)
----------------------------------------------------------------------------------
DUE FROM ONE DUE FROM MORTGAGE-
YEAR FIVE YEARS BACKED AND
DUE IN ONE THROUGH FIVE THROUGH TEN DUE AFTER SBA LOAN
YEAR OR LESS YEARS YEARS TEN YEARS POOLS TOTAL
------------ ------------ ----------- --------- ---------- -----
Available for Sale:
U.S. Treasury and U.S.
Government Corporation &
Agency securities $4,995 $57,424 $1,460 $ 0 $6,195 $70,074
Weighted average Yield 6.03% 6.16% 6.91% 6.01% 6.15%
Mortgage-backed securities:
U.S. Government Agency 32,406 32,406
Weighted average yield 6.93% 6.93%
U.S. Government-sponsored
Agency Securities 3,157 3,157
Weighted average yield 7.83% 7.83%
Collateralized Mortgage
Obligations 36,686 36,686
Weighted average yield 6.00% 6.00%
States and political
subdivisions 372 10,399 8,881 19,652
Weighted average yield (1) 5.36% 5.05% 5.48% 5.25%
Equity Securities 1,308 1,308
Weighted average yield 4.46% 4.46%
------------ ------------ ----------- --------- ---------- -----
Percentage of total 3% 36% 7% 5% 49% 100%
- - -------------------------------
(1) The calculation of this yield is not on a tax equivalent basis.
DEPOSIT ACTIVITIES
Scripps attracts deposits through the offering of a broad variety of deposit
instruments for both the consumer and business customer including checking
accounts, money market accounts, negotiable orders of withdrawal ("NOW")
accounts, savings accounts, term certificates of deposit (including "jumbo"
certificates in denominations of $100,000 or more), and retirement savings
plans.
Scripps' average balance of total deposits was approximately $538 million for
the year ended December 31, 1999, an increase of $74 million or 16% compared
with the average balance of total deposits for 1998. Scripps' average balance of
total deposits was approximately $464 million for the year ended December 31,
1998, an increase of $99 million or 27% compared with the average balance of
total deposits of approximately $365 million for 1997.
The following table sets forth the average balances and weighted average rates
for Scripps' categories of deposits for the periods indicated.
32
AVERAGE DEPOSITS
(Dollars in thousands)
DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- ---------------------------------
AVERAGE % OF TOTAL AVERAGE % OF TOTAL AVERAGE % OF TOTAL
BALANCE DEPOSITS BALANCE DEPOSITS BALANCE DEPOSTIS
-------------- --------------- --------------- --------------- --------------- -----------------
Noninterest bearing
demand deposits $ 165,689 30% $ 135,954 29% $107,113 29%
Interest-bearing demand
deposits (Money Market
and NOW accounts) 251,443 47% 219,223 47% 164,110 45%
Weighted average rate 3.35% 3.83% 3.75%
Savings deposits 26,525 5% 24,596 5% 22,768 5%
Weighted average rate 2.34% 2.53% 2.61%
Time deposits 94,163 18% 84,056 18% 70,936 15%
Weighted average rate 4.60% 5.12% 5.22%
The following table sets forth the amount of Scripps' certificates of deposit of
$100,000 or more by time remaining until maturity.
TIME DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)
DECEMBER 31, 1999
------------------------------------
BALANCE % OF TOTAL
-------- ----------
Three months or less $ 44,941 64%
Over three months through six months 12,906 19%
Over six months through twelve months 10,949 16%
Over twelve months 955 1%
-------- ----------
Total $ 69,751 100%
--------
--------
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. Management also
manages its liquidity requirements by maintaining an adequate level of readily
marketable assets (primarily Federal funds and investment securities available
for sale) and access to short term funding sources. Currently, Scripps also has
a line of credit of $22 million from non-affiliated financial institutions that
enable it to borrow Federal funds on an unsecured basis. Scripps also has a
secured discount window borrowing facility with the Federal Reserve Bank of $82
million and a secured borrowing facility with the Federal Home Loan Bank of
approximately $23 million. At December 31, 1999, 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 37%, 42% and 39%
at December 31, 1999, 1998 and 1997, respectively. The decrease in the liquidity
ratio from 1998 to 1999 actually reflects a more cost-effective level of
liquidity that is well within Scripps' policy guidelines. There can be no
assurance that Scripps liquidity will continue to be maintained at a level
comparable to that in 1999. Additionally, Scripps closely monitors its
loan-to-deposit ratio. This ratio (calculated as gross loans divided by total
deposits) was 68%, 64% and 68% at December 31, 1999, 1998 and 1997,
respectively. Management anticipated the ratio increase in 1999 with the
expanding local economy. This ratio decreased between 1998 and 1997, primarily
as a result of deposit growth outpacing loan growth. There can be no assurances
that the economy will continue to expand or that loans will outpace deposit
growth.
33
Scripps' ratio of core deposits (defined as customers' deposits less time
certificates of deposit of $100,000 or more) to total deposits was 88% at
December 31, 1999, compared to 89% at December 31, 1998, compared with 87% at
December 31, 1997. While total time deposits as a percent of total deposits has
been 18%, 17% and 20% for December 31, 1999, 1998 and 1997, respectively, the
percent of time deposits greater than $100,000 has increased, thereby decreasing
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 $192 million or 33% of total deposits at December 31,
1999. The Money Fund balance at December 31, 1999 represented a decrease of $3
million or 2% from the balance of $195 million or 37% of deposits at December
31, 1998. Comparing 1998 and 1997, the Money Fund increased $78 million or 67%
from the balance of $117 million or 33% of deposits at year end 1997. Another
significant portion of Scripps' core deposits is non-interest-bearing demand
deposits. These deposits increased to $166 million or 31% of deposits at
December 31, 1999, from $136 million or 29% at December 31, 1998. Comparing 1998
and 1997, non-interest-bearing demand deposits increased $29 million or 29% from
the balance of $107 million or 32% of deposits at year end 1997. Management
attempts to actively monitor its liquidity position and deposit composition;
however, there can be no assurance that Scripps' overall liquidity position and
deposit base will continue to be satisfactory in the future.
CAPITAL RESOURCES
Total stockholders' equity was $45 million at December 31, 1999, an increase
of $1 million or 4% compared with stockholders' equity of $44 million as of
December 31, 1998. This increase is attributable primarily to earnings of $4
million for 1999 and new share issuances of $0.6 million, partially offset by
the increase in unrealized holding loss on available for sale securities and
dividends declared of $0.8 million. Total stockholders' equity of $44 million
at December 31, 1998, reflects an increase of $6 million or 15% compared with
stockholders' equity of $38 million as of December 31, 1997. This increase is
primarily the result of the earnings of $6 million for 1998, partially offset
by dividends declared of approximately $0.8 million.
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 of SFC as of the dates
indicated.
CAPITAL RATIOS
DECEMBER 31,
----------------------------
WELL MINIMUM
CAPITALIZED CAPITAL
CAPITAL RATIOS(1): 1999 1998 1997 RATIOS RATIOS
----------- --------- ---------- ------------ -----------
Leverage (2) 7.54% 7.63% 8.30% 5.0% 4.0%
Tier 1 risk-based 10.18% 10.19% 11.10% 6.0% 4.0%
Total risk-based 11.35% 11.32% 12.20% 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
34
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.
35
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 December 31, 1999 represented 25.8% 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 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 December 31, 1999 represented
approximately 22% % of total assets. Approximately 41% of assets at December
31, 1999 were comprised of variable rate loans tied to Prime or similar
indices. A decline in interest rates 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 interest 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,
36
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 December 31, 1999, Scripps had approximately $178.2 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 45% 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
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.
37
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.
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 7A. 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 company'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, Scripps 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
Scripps 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
38
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 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.
39
INTEREST-SENSITIVE FINANCIAL INSTRUMENTS
(Dollars in thousands)
EXPECTED MATURITY DATE AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------
AFTER 2
AFTER 1 YEARS BUT AFTER 3 AFTER 4
YEAR BUT WITHIN YEARS BUT YEARS BUT
WITHIN ONE WITHIN TWO THREE WITHIN FOUR WITHIN FIVE
YEAR YEARS YEARS YEARS YEARS THEREAFTER TOTAL FAIR VALUE
----------- ---------- --------- ----------- ---------- ------------ ------- ------------
Financial Assets:
Loans:
Variable rate $143,776 $24,608 $10,757 $28,332 $15,341 $32,934 $255,748 $255,748
Average interest rate 9.73% 9.88% 9.90% 9.48% 9.90% 10.35% 9.81%
Fixed rate 13,645 22,224 17,695 33,686 12,067 42,311 141,628 140,760
Average interest rate 8.54% 8.42% 9.05% 8.89% 8.68% 8.37% 8.63%
Investment securities:
CMOs 5,767 4,358 3,767 5,867 4,275 13,285 37,319 33,280
Average interest rate 6.04% 6.36% 6.04% 6.03% 6.03% 5.96% 6.01%
MBS 13,707 10,455 5,824 4,537 926 947 36,396 34,783
Average interest rate 7.03% 7.02% 6.96% 6.91% 6.88% 6.67% 6.99%
SBAs 153 2,737 3,334 6,224 6,299
Average interest rate 9.73% 6.13% 6.20% 6.26%
U.S. Treasury and
Agency 8,511 25,256 24,348 6,953 65,068 47,667
Average interest rate 6.18% 6.20% 6.27% 5.50% 6.15%
States and political
subdivisions 38 1,959 9,793 8,144 19,934 18,641
Average interest rate 8.10% 5.46% 5.30% 5.13% 5.25%
Equity 1,461 1,461 1,308
Average interest rate 4.46% 4.46%
Federal Home Loan
Bank Stock 1,793 1,793 1,793
Average interest rate 5.49% 5.49%
Interest bearing due
from banks 789 789 789
Average interest rate 5.90% 5.90%
Federal funds sold 29,670 29,670 29,670
Average interest rate 5.14% 5.14%
Financial Liabilities:
Interest bearing
deposits:
Non-maturing Deposits 293,914 293,914 293,914
Average interest rate 3.64% 3.64%
Time deposits 101,876 2,473 80 27 104,456 104,427
Average interest rate 4.79% 4.86% 4.57% 5.25% 4.79%
Capitalized lease
obligation 767 767 767
Average interest rate 9.87% 9.87%
Guarantee of loan to
ESOP Trust 38 6 44 44
Average interest rate 7.75% 7.75% 7.75%
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Scripps Financial Corporation
The information contained in the accompanying consolidated statements of
financial condition and the related consolidated statements of income, of
changes in stockholders' equity and of cash flows have been prepared by
management. Management has the primary responsibility for ascertaining that
these financial consolidated statements present fairly the financial position
and the results of operations and cash flows of Scripps Financial Corporation
as of and for the years ended December 31, 1999 and 1998.
These financial statements were prepared in accordance with generally
accepted accounting principles and necessarily include amounts that are based
on best estimates and judgments with appropriate consideration given to
materiality. Management has made these estimates and judgments based on
extensive experience and a substantive understanding of the underlying events
and transactions.
In fulfilling its responsibility for the reliability and integrity of
financial information, management has established and maintains accounting
procedures and related internal control systems. Management believes that
these systems and controls provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorizations and properly recorded to permit the preparation of reliable
financial statements in conformity with generally accepted accounting
principles, and that material errors or irregularities are either prevented
or detected within a timely period by employees in the normal course of
performing their assigned duties. Scripps Financial Corporation's independent
accountants review and test the established internal control systems to the
extent necessary to express an opinion on the accompanying consolidated
financial statements.
41
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF SCRIPPS FINANCIAL CORPORATION
- - --------------------------------------------------------------------------------
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, of changes in
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Scripps Financial Corporation and its
subsidiary at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management, our responsibility is to Express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Diego, California
February 4, 2000
42
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - ------------------------------------------------------------------
December 31,
--------------------------
1999 1998
--------------------------
ASSETS
Cash and amounts due from banks $25,046,000 $24,330,000
Federal funds sold 29,670,000 42,790,000
--------------------------
Cash and cash equivalents 54,716,000 67,120,000
Interest bearing due from banks 789,000 4,352,000
Investment securities 163,283,000 161,107,000
Investment in Federal Home Loan Bank stock 1,793,000 1,210,000
Loans and leases, net 391,964,000 336,008,000
Premises and equipment, net 6,012,000 4,441,000
Other assets and accrued interest receivable 13,388,000 8,392,000
--------------------------
$631,945,000 $582,630,000
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $184,015,000 $152,697,000
Money market, NOW and savings accounts 293,914,000 290,113,000
Time certificates:
Under $100,000 34,705,000 31,861,000
$100,000 or greater 69,751,000 56,303,000
--------------------------
Total deposits 582,385,000 530,974,000
Guarantee of loan to ESOP Trust 44,000 76,000
Capitalized lease obligation 767,000 0
Other liabilities and accrued interest expense 3,452,000 7,825,000
--------------------------
Total liabilities 586,648,000 538,875,000
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
6,909,000 shares (1998 6,797,000 shares) 34,702,000 34,092,000
Retained earnings 12,497,000 8,896,000
Guarantee of loan to ESOP Trust (44,000) (76,000)
Accumulated other comprehensive (loss) income, net (1,858,000) 843,000
--------------------------
Total stockholders' equity 45,297,000 43,755,000
--------------------------
$631,945,000 $582,630,000
==========================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
- - ------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
Interest income:
Loans and leases, including fees earned $36,230,000 $32,151,000 $26,215,000
Investment securities:
Taxable 7,566,000 6,500,000 5,401,000
Exempt from federal income tax 955,000 920,000 651,000
Dividends from Federal Home Loan Bank stock 84,000 66,000 16,000
Federal funds sold 1,309,000 1,730,000 1,085,000
Balances due from Banks 127,000 344,000 304,000
-------------------------------------
Total interest income 46,271,000 41,711,000 33,672,000
Interest expense on deposits (13,387,000) (13,315,000)(10,454,000)
Interest expense on other borrowed money (45,000) 0 0
-------------------------------------
Total interest expense (13,432,000) (13,315,000)(10,454,000)
Net interest income 32,839,000 28,396,000 23,218,000
Provision for loan losses (7,230,000) (1,805,000) (1,452,000)
-------------------------------------
Net interest income after provision for
loan losses 25,609,000 26,591,000 21,766,000
Non-interest income 5,624,000 6,095,000 5,390,000
Non-interest expense (24,014,000) (22,823,000)(20,168,000)
-------------------------------------
Income before provision for income taxes 7,219,000 9,863,000 6,988,000
Provision for income taxes (2,790,000) (3,995,000) (2,758,000)
-------------------------------------
Net income $4,429,000 $5,868,000 $4,230,000
=====================================
Basic net income per share $0.64 $0.87 $0.63
=====================================
Diluted net income per share $0.63 $0.84 $0.61
=====================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Guarantee Other Total
------------------------- Retained of Loan to Comprehensive Stockholders'
Shares Amount Earnings ESOP Trust (Loss) Income Equity
---------------------------------------------------------------------------------
Balance at December 31, 1996 4,031,000 $27,352,000 $7,415,000 $(143,000) $ 64,000 $34,688,000
Comprehensive income:
Net income 4,230,000 4,230,000
Unrealized holding gain
on available for sale
Securities, net of tax
of $463,000 694,000 694,000
---------------------------------------------------------------------------------
Total comprehensive income 4,924,000
---------------------------------------------------------------------------------
Net principal decrease
of loan to ESOP Trust 36,000 36,000
Stock options exercised 52,000 346,000 346,000
Cash dividends declared (917,000) (917,000)
Stock dividend declared (10%) 223,000 5,516,000 (5,516,000) 0
Stock dividend declared (2.3%) 85,000 668,000 (668,000) 0
Repurchase and retirement of common
stock (149,000) (380,000) (740,000) (1,120,000)
Stock split (2 for 1, in the form
of a 100% stock dividend) 2,466,000 0
---------------------------------------------------------------------------------
Balance at December 31, 1997 6,708,000 $33,502,000 $3,804,000 $(107,000) $ 758,000 $37,957,000
---------------------------------------------------------------------------------
Comprehensive income:
Net income 5,868,000 5,868,000
Unrealized holding gain
on available for sale
securities, net of tax
of $70,000 85,000 85,000
---------------------------------------------------------------------------------
Total comprehensive income 5,953,000
---------------------------------------------------------------------------------
Net principal decrease
of loan to ESOP Trust 31,000 31,000
Stock options exercised 74,000 280,000 280,000
Cash dividends declared (776,000) (776,000)
Stock issued for services 12,000 250,000 250,000
Stock issued for dividends
reinvested 3,000 60,000 60,000
---------------------------------------------------------------------------------
Balance at December 31, 1998 6,797,000 $34,092,000 $8,896,000 $ (76,000) $ 843,000 $43,755,000
---------------------------------------------------------------------------------
Comprehensive income:
Net income 4,429,000 4,429,000
Unrealized holding loss
on available for sale
securities (2,701,000) (2,701,000)
---------------------------------------------------------------------------------
Total comprehensive income 1,728,000
---------------------------------------------------------------------------------
Net principal decrease
of loan to ESOP Trust 32,000 32,000
Stock options exercised 110,000 574,000 574,000
Cash dividends declared (828,000) (828,000)
Stock issued for dividends
reinvested 2,000 36,000 36,000
---------------------------------------------------------------------------------
Balance at December 31, 1999 6,909,000 $34,702,000 $12,497,000 ($44,000) ($1,858,000) $45,297,000
=================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
SCRIPPS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
Cash flows from operating activities:
Net income $4,429,000 $5,868,000 $4,230,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,483,000 1,200,000 1,156,000
Provision for loan losses 7,230,000 1,805,000 1,411,000
Amortization of discounts, premiums and
loan fees (245,000) (808,000) (805,000)
Loss (gain) on sale of real estate owned 2,000 (10,000) (26,000)
Stock issued for services 0 250,000 0
Decrease (increase) in other assets and
accrued interest receivable (3,384,000) (837,000) (946,000)
Increase (decrease) in other liabilities and
accrued interest expense (3,612,000) 4,459,000 559,000
-------------------------------------
Net cash provided by operating activities 5,903,000 11,927,000 5,579,000
-------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal payments
received from investment securities 109,286,000 106,782,000 17,009,000
Proceeds from sale of investment securities 0 0 29,421,000
Proceeds from sale of furniture, fixtures & equipment 8,000 169,000 10,000
Proceeds from sale of real estate owned 250,000 438,000 487,000
Maturities/(purchases) of investment certificate of
deposit 3,563,000 1,385,000 (89,000)
Purchases of investment securities (117,235,000)(149,266,000)(72,159,000)
Net funding of loans (62,274,000) (56,957,000)(69,024,000)
Purchases of premises and equipment, net (3,104,000) (1,820,000) (2,765,000)
-------------------------------------
Net cash used in investing activities (69,506,000) (99,269,000)(97,110,000)
-------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts and savings accounts 35,119,000 104,824,000 72,609,000
Net increase (decrease) in certificates of deposit 16,292,000 5,473,000 20,980,000
Net proceeds from issuance of common stock 610,000 340,000 346,000
Repurchase and retirement of common stock 0 0 (1,120,000)
Dividends paid (822,000) (674,000) (833,000)
-------------------------------------
Net cash provided by financing activities 51,199,000 109,963,000 91,982,000
-------------------------------------
Net increase (decrease) in cash and cash equivalents (12,404,000) 22,621,000 451,000
Cash and cash equivalents at beginning of year 67,120,000 44,499,000 44,048,000
-------------------------------------
Cash and cash equivalents at end of year $54,716,000 $67,120,000 $44,499,000
=====================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
46
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Scripps Financial Corporation, a California corporation ("SFC"), was formed
on May 14, 1999 as a federally regulated bank holding company. Its
wholly-owned subsidiary Scripps Bank ("the Bank") is a California State
Banking Corporation organized in 1983, whose primary business is commercial
banking. At December 31, 1999, the Bank is the only business activity of SFC.
The accounting and reporting policies of SFC are in accordance with generally
accepted accounting principles and conform to practices within the banking
industry. The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. A summary of the significant accounting policies used in the
preparation of these consolidated financial statements follows.
BASIS OF PRESENTATION AND BUSINESS COMBINATION
The accompanying consolidated financial statements include the accounts of
both SFC and the Bank. All inter-company transactions and balances have been
eliminated.
The merger in August 1998 with Pacific Commerce Bank, as described in Note
13, was accounted for as a pooling-of-interests. Under this method of
accounting, the assets, liabilities and shareholders' equity of Pacific
Commerce Bank were carried forward at their historical amounts and its
results of operations were combined with the Bank's results of operations,
retroactively for all periods. No adjustments to conform accounting methods
of the merged company to the Bank were required. Certain amounts have been
reclassified with regard to presentation of the financial information of the
merged banks.
INVESTMENT SECURITIES
The Bank has classified its entire securities portfolio as available-for-sale
at December 31, 1999 and 1998. Available-for-sale securities are recorded at
estimated market value with the unrealized cumulative gain or loss being
reflected in accumulated other comprehensive income as a component of
stockholders' equity. The held-to-maturity securities acquired through the
merger with Pacific Commerce Bank were transferred to the available-for-sale
account at the merger date, resulting in a decrease in unrealized gain of
$19,000, net of tax of $13,000. The amortized cost of these securities at the
date of the merger was $3,860,000. Gains and losses realized upon sale of
securities are determined using the specific identification method.
LOANS AND LEASES
Loans are reported at their outstanding principal amount, net of unearned
discounts and fees. Unearned discounts and interest on loans and other
interest earning assets are accrued monthly as earned. The accrual of
interest on loans is discontinued when, in management's judgment, the
interest will not be paid in accordance with contractual terms of the loan
agreement. Loan origination fees, net of direct costs, are amortized to
interest income as an adjustment of yield over the term of the loan.
The Bank considers a loan to be impaired when, based on current information
and events, it is probable that the Bank may not collect amounts due
according to the original contractual terms of, and as scheduled in, the
original loan agreement. The Bank measures impaired loans by using one of the
following methods: (i) the present value of expected cash flows discounted at
the loan's effective interest rate; (ii) the observable value of the loan's
market price; or (iii) the fair value of the collateral if the loan is
collateral dependent. Cash receipts for impaired loans placed on non-accrual
status are first applied to reduce principal.
Direct financing lease agreements are recorded at the aggregate of lease
payments receivable and the estimated residual values, net of unearned
income. Lease income is recognized to yield a level rate of return on the net
investment in leases outstanding.
47
OTHER REAL ESTATE OWNED
Real estate acquired in satisfaction of loan obligations is recorded at the
lower of the loan balance at the date of acquisition, the present value of
expected cash flows or the fair value less expected selling costs. Subsequent
operating expenses or income, reductions in estimated value, and gains or
losses upon sale are charged to earnings as incurred.
RESERVE FOR LOAN LOSSES
The Bank maintains a reserve for estimated loan losses at a level considered
adequate by the Bank to provide for known and inherent risks in the loan and
lease portfolio. The reserve is increased by provisions charged to expense
and reduced by charge-offs, net of recoveries. Management's evaluation of the
adequacy of the reserve includes periodic review and assessment of the
overall risk in the loan and lease portfolio, prior loan and lease loss
experience, and prevailing and anticipated economic conditions.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (3 to 25 years). Leasehold improvements are
capitalized and amortized over the term of the lease or the estimated useful
life of the improvement, whichever is shorter. Maintenance and repair costs
are expensed as incurred, while renewals and betterments are capitalized.
Capital leases are included in premises and equipment at cost, less
accumulated depreciation.
INCOME TAXES
Income taxes are provided using the liability method of accounting. Under
this method, a deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial statement and tax
basis of assets and liabilities and for the expected future tax benefit to be
derived from tax loss and tax credit carry forwards. This method also
requires the establishment of a valuation allowance, if necessary, to reflect
the likelihood of realization of deferred tax assets. The effect of tax rate
changes are reflected in income in the period such changes are enacted.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The guaranteed borrowing by SFC's ESOP Trust is reflected in the accompanying
consolidated financial statements as both a liability and a reduction of
stockholders' equity. The debt service requirements of the plan are funded by
contributions from SFC. Such contributions are included in non-interest
expense for the period in which the contributions are made.
DIVIDEND REINVESTMENT PLAN
SFC has a Dividend Reinvestment Plan ("the Plan"), which allows shareholders
to automatically reinvest all or a portion of cash dividends paid on their
shares of Common Stock in newly issued shares without payment of any
brokerage commissions or service charges. The Plan is currently suspended
until such time as the necessary SEC registration filing is made.
EARNINGS PER SHARE ("EPS")
Basic EPS represents net income divided by the weighted average common shares
outstanding during the period excluding any potential dilutive effects. The
weighted average number of shares used for the computation of basic EPS was
6,879,000, 6,754,000 and 6,726,000 shares in 1999, 1998 and 1997,
respectively. Diluted EPS gives effect to all potential issuances of common
stock that would have caused basic EPS to be lower as if the issuance had
already occurred. Accordingly, diluted EPS reflects an increase in the
weighted average shares outstanding of 112,000, 220,000 and 261,000 for 1999,
1998 and 1997 respectively, due to the assumed exercise of stock options.
48
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and Federal funds sold.
Total interest paid on deposits in 1999, 1998 and 1997 aggregated approximately
$14,377,000, $13,991,000 and $10,778,000, respectively. Income taxes paid in
1999, 1998 and 1997 total approximately $4,250,000, $4,294,000 and $3,280,000,
respectively. Dividends declared, not yet paid in 1999, 1998 and 1997 were
$415,000, $408,000 and $300,000, respectively.
TRUST DEPARTMENT
In accordance with the usual practice of financial institutions, the assets and
liabilities of individual trusts, agencies, and fiduciary funds are not included
in the accompanying consolidated financial statements. Trust assets under
management total approximately $804,400,000 and $867,312,000 at December 31,
1999 and 1998, respectively.
NOTE 2 - INVESTMENT SECURITIES
The components of investment securities, which management has classified
entirely as available-for-sale are as follows:
DECEMBER 31, 1999
-------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------------------
US Treasury and US Government Corporation
& Agency securities $ 71,292,000 $ 16,000 $ (1,234,000) $ 70,074,000
Mortgage-backed securities:
US Government Agency 33,231,000 106,000 (931,000) 32,406,000
US Government-sponsored
Agency securities 3,165,000 8,000 (16,000) 3,157,000
Collateralized mortgage obligations 37,319,000 6,000 (639,000) 36,686,000
States and political subdivisions 19,934,000 51,000 (333,000) 19,652,000
Equity securities 1,461,000 0 (153,000) 1,308,000
---------------- ---------------- -------------- --------------
$ 166,402,000 $ 187,000 $ (3,306,000) $ 163,283,000
---------------- ---------------- -------------- --------------
---------------- ---------------- -------------- --------------
The collateralized mortgage obligations owned by the Bank at December 31, 1999
are issued or guaranteed by a US Government Agency ("GNMA") or US
Government-sponsored Agencies ("FNMA" and "FHLMC") or are collateralized by
mortgage-backed securities issued or guaranteed by the same agencies. These
securities have weighted average lives estimated at less than five years,
although actual terms to maturity may differ due to the variability of principal
repayments. Equity securities are comprised of mutual fund shares in a
variable-rate government bond fund.
DECEMBER 31, 1998
-------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------------------
US Treasury and US Government Corporation
& Agency securities $ 59,655,000 $ 323,000 $ (71,000) $ 59,907,000
Mortgage-backed securities:
US Government Agency 38,009,000 314,000 (63,000) 38,260,000
US Government-sponsored
49
Agency securities 4,922,000 64,000 (16,000) 4,970,000
Collateralized mortgage obligations 38,418,000 171,000 (82,000) 38,507,000
States and political subdivisions 17,236,000 892,000 18,128,000
Equity securities 1,461,000 (126,000) 1,335,000
---------------- ---------------- -------------- --------------
$ 159,701,000 $ 1,764,000 $ (358,000) $ 161,107,000
---------------- ---------------- -------------- --------------
---------------- ---------------- -------------- --------------
The maturity distribution of available-for-sale investment securities at
December 31, 1999 is as follows:
AMORTIZED ESTIMATED
COST MARKET VALUE
--------------------------------
Due in one year or less $ 5,000,000 $ 4,995,000
Due from one year through five years 58,951,000 57,796,000
Due from five years through ten years 12,004,000 11,860,000
Due after ten years 9,048,000 8,880,000
Mortgage-backed and guaranteed Small Business Administration
loan-backed securities 79,938,000 78,444,000
Equity securities 1,461,000 1,308,0000
-------------- --------------
$ 166,402,000 $ 163,283,000
-------------- --------------
-------------- --------------
The maturities of mortgage-backed securities, collateralized mortgage
obligations, and Small Business Administration (a US Government Agency)
loan-backed securities will differ from contractually-stated maturities because
the mortgages or loans underlying the securities amortize regularly and may also
prepay without penalty; in addition, equity securities have no stated maturity
date. Accordingly, these securities are listed separately in the above maturity
distribution.
Securities with a fair value of $114,676,000 and $14,867,000 at December 31,
1999 and 1998, respectively, were pledged to secure certain deposits and other
borrowings as required or permitted by law. Realized net gains from the sale of
securities during 1999, 1998 and 1997 were $0, $0 and $44,000, respectively. The
increase in pledged securities between 1998 and 1999 was the result of the
Bank's decision to establish Y2K liquidity lines, none of which were drawn on.
NOTE 3 - LOANS AND LEASES, AND RESERVE FOR LOAN LOSSES
Loans and leases comprise the following:
DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
LOANS AND LEASES:
Commercial $ 154,290,000 $ 156,236,000
Real estate construction 57,975,000 37,932,000
Real estate mortgage 120,256,000 93,681,000
Consumer 58,076,000 48,375,000
Lease financing 7,852,000 6,199,000
--------------- ---------------
398,449,000 342,423,000
LESS:
Unearned income and fees 1,073,000 1,648,000
Reserve for loan losses 5,412,000 4,767,000
--------------- ---------------
Total $ 391,964,000 $ 336,008,000
--------------- ---------------
--------------- ---------------
50
At December 31, 1999, minimum lease payments to be received on direct financing
leases for each of the succeeding years ending December 31 are estimated as
follows: $3,469,000 in 2000, $2,570,000 in 2001, $1,577,000 in 2002, $946,000 in
2003 and $375,000 in 2004.
The Bank has made loans to various directors and officers of the Bank or SFC.
The loans, which were made in accordance with the Bank's general lending
policies, totaled $119,000 and $1,363,000 at December 31, 1999 and 1998,
respectively. During 1999, new loans (including drawdowns on revolving lines of
credit and advances) aggregated $0 and repayments aggregated $1,244,000.
Loans placed on non-accrual status totaled $2,759,000 and $1,211,000 at December
31, 1999 and 1998, respectively. The Bank's investment in impaired loans was
$1,351,000 and $549,000 at December 31, 1999 and 1998, respectively, for which
it had established reserves for estimated losses of $150,000 and $97,000. The
average recorded investment in impaired loans during 1999 and 1998 was
$1,354,000 and $552,000, respectively. Interest income on impaired loans of
$116,000, $40,000 and $41,000 was recognized for cash payments received in 1999,
1998 and 1997, respectively.
Activity in the reserve for loan losses follows:
YEAR ENDED
DECEMBER 31
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
Balance at beginning of year $ 4,767,000 $ 3,624,000 $ 2,837,000
Provision charged to expense 7,230,000 1,805,000 1,452,000
Loans charged off (6,769,000) (735,000) (789,000)
Recoveries 184,000 73,000 124,000
---------------- --------------- ---------------
Balance at end of year $ 5,412,000 $ 4,767,000 $ 3,624,000
---------------- --------------- ---------------
---------------- --------------- ---------------
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment consist of:
DECEMBER 31,
----------------------------------
1999 1998
----------------------------------
Furniture, fixtures and equipment $ 8,634,000 $ 7,047,000
Leasehold improvements 3,505,000 3,083,000
Premises 777,000 89,000
--------------- ---------------
12,916,000 10,219,000
Less: Accumulated depreciation and amortization 6,976,000 5,778,000
--------------- ---------------
Premises and equipment, net $ 6,012,000 $ 4,441,000
--------------- ---------------
--------------- ---------------
Included in premises at December 31, 1999 is a branch office leased under a
capital lease in the amount of $760,000. Future minimum lease payments at
December 31, 1999 are as follows:
2000 $ 167,000
2001 171,000
2002 180,000
2003 180,000
51
2004 192,000
Thereafter 5,973,000
---------------
Total minimum capital lease payments $ 6,863,000
---------------
---------------
The Bank leases its facilities under non-cancelable operating leases that expire
at various times beginning in the years 2001 through 2026. The Bank leases one
of its offices from a partnership in which a director of the Bank is the general
partner under a lease expiring on September 24, 2006. In the opinion of
management, the terms of the lease are comparable to the terms of other leases
that could be obtained if the Bank leased similar space from an unrelated party.
The lease agreements have option periods to extend at rates equivalent to the
then market rates. The future minimum rental commitments at December 31, 1999
are as follows:
2000 $ 1,820,000
2001 2,442,000
2002 2,393,000
2003 2,292,000
2004 1,763,000
Thereafter 10,944,000
---------------
Total minimum lease payments $ 21,654,000
---------------
---------------
The total rental expense was $1,424,000, $1,350,000 and $1,102,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
NOTE 5 - NON-INTEREST INCOME AND EXPENSE
Non-interest income consists of:
YEAR ENDED
DECEMBER 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
Customer service charges $ 1,955,000 $ 2,269,000 $ 1,833,000
Trust income 2,528,000 2,140,000 1,862,000
Other fees 857,000 1,299,000 1,429,000
Other non-interest income 284,000 387,000 266,000
--------------- --------------- ---------------
$ 5,624,000 $ 6,095,000 $ 5,390,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Non-interest expense consists of:
Salaries and employee benefits $ 13,460,000 $ 12,023,000 $ 10,884,000
Occupancy & equipment 2,689,000 2,528,000 2,190,000
Depreciation and amortization 1,483,000 1,200,000 1,156,000
Data processing 210,000 756,000 615,000
Professional services 1,463,000 2,052,000 1,472,000
Other general and administrative 4,709,000 4,264,000 3,851,000
--------------- --------------- ----------------
$ 24,014,000 $ 22,823,000 $ 20,168,000
--------------- --------------- ----------------
--------------- --------------- ----------------
NOTE 6 - INCOME TAXES
The provision for income taxes includes the following components:
52
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
CURRENT:
Federal $ 2,225,000 $ 3,460,000 $ 2,210,000
State 764,000 1,157,000 892,000
--------------- --------------- ----------------
2,989,000 4,617,000 3,102,000
DEFERRED:
Federal (206,000) (574,000) (245,000)
State 7,000 (48,000) (99,000)
--------------- --------------- ----------------
(199,000) (622,000) (344,000)
--------------- --------------- ----------------
$ 2,790,000 $ 3,995,000 $ 2,758,000
--------------- --------------- ----------------
--------------- --------------- ----------------
Deferred tax assets and liabilities represent the expected future income tax
impact of the differences between tax basis and financial statement basis of
assets and liabilities.
The components of net deferred tax assets were as follows:
DECEMBER 31,
-----------------------------------
1999 1998
-----------------------------------
Loan loss provision $ 1,661,000 $ 1,273,000
Deferred loan fees 437,000 332,000
Leases (555,000) (236,000)
Deferred compensation 564,000 460,000
Fixed assets 549,000 335,000
Unrealized gain on AFS securities 1,259,000 (599,000)
Other (282,000) 217,000
--------------- ----------------
$ 3,633,000 $ 1,782,000
--------------- ----------------
--------------- ----------------
Based on SFC's earnings history and projections, management considers the net
deferred tax asset to be realizable. Accordingly, no valuation allowance has
been established.
The reconciliation between the statutory Federal income tax rate and the
effective rate follows:
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
Federal statutory rate 34% 34% 34%
Tax exempt income (5) (8) (4)
State tax, net of Federal tax effect 7 11 8
Other 2 4 1
--------------- -------------- ----------------
Effective tax rate 39% 41% 39%
--------------- -------------- ----------------
--------------- -------------- ----------------
53
NOTE 7 - EMPLOYEE BENEFIT PLANS
SFC has a 401(k) plan covering substantially all employees who meet certain age
and service requirements. The Board of Directors determines employer
contributions based on net income. During 1999, 1998 and 1997 SFC contributed to
the plan $306,000, $240,000 and $226,000, respectively. The Scripps Bank Board
of Directors changed the plan to a matching contribution, effective January
1999. In 1999, SFC contributed an amount equal to 50% of the employee's
contribution, up to 12% of the employee's salary. Beginning January 1, 2000 the
SFC contribution was reduced to 50% of the employee's contribution, up to 6% of
the employee's salary.
In 1996, the ESOP obtained a loan to purchase shares of common stock, which are
held by a third party lender as security for the loan. The loan is guaranteed by
the Bank as to payment of principal and interest. The outstanding loan balances
at December 31, 1999 and 1998 were $44,000 and $76,000, respectively. SFC's
contributions to the ESOP during 1999, 1998 and 1997 were approximately $40,000,
$80,000 and $75,000 respectively. At December 31, 1999, approximately 103,200
shares owned by the ESOP are allocated to the ESOP participants, and
approximately 6,400 shares currently owned by the ESOP are held as collateral
for the ESOP loan.
SFC has a stock purchase plan in which all employees and directors may
participate. SFC contributes an amount equal to 25% of the participants'
contributions; these contributions are then used to purchase common stock of
SFC. During 1999, 1998 and 1997, SFC contributed $59,000, $60,000 and $46,000,
respectively, to the plan. The plan held approximately 134,000 and 122,300
shares of common stock at December 31, 1999 and 1998, respectively.
The Bank has adopted supplemental retirement plans to provide additional
retirement benefits for its president. The present value of the estimated future
obligation is being accrued and funded over the vesting period.
NOTE 8 - STOCK OPTIONS
EMPLOYEE STOCK OPTION PLANS
SFC has granted incentive stock options and non-qualified stock options to
certain officers, employees and directors to purchase common stock. The purpose
of these Plans is to advance the interest of SFC and its shareholders by
providing officers, directors and key employees with an incentive to serve and
to continue service with SFC. SFC currently has options outstanding under three
option plans, the 1998 Outside Director Plan ("1998 Plan"), the 1995 Stock
Option Plan ("1995 Plan"), and the 1992 Stock Option Plan ("1992 Plan").
The stock options under these plans vest at various rates up to five years and
expire over a period of up to ten years. No compensation cost has been
recognized for its employee stock option grants, which are fixed in nature, as
the options have been granted at a price equal to the market value of SFC's
common stock at the date of grant. Had compensation cost for SFC's stock based
compensation plans been determined based on the estimated fair value at the
grant date rather than market value during the year ended December 31, 1999,
SFC's net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
NET INCOME:
As reported $ 4,429,000 $ 5,868,000 $ 4,230,000
Pro forma $ 4,265,000 $ 5,697,000 $ 4,143,000
BASIC EARNINGS PER SHARE:
As reported $.64 $.87 $.63
Pro forma $.62 $.84 $.62
DILUTED EARNINGS PER SHARE:
As reported $.63 $.84 $.61
Pro forma $.61 $.82 $.59
54
The fair value of each option grant has been estimated on the date of grant
using the following assumptions: for 1999: an expected option life of three and
eight years, a constant dividend yield of 1%, a risk-free interest rate of 6.62%
and 6.79%, and a volatility factor of 31%; for 1998: an expected option life of
three and eight years, a constant dividend yield of 1%, a risk-free interest
rate of 4.60% and 4.80%, and a volatility factor of 34%; for 1997: an expected
option life of eight years, a constant dividend yield of 1%, a risk-free
interest rate of 5.60%, and a volatility factor of 27%.
Employee transactions are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- -------- --------- -------- ---------
EMPLOYEE STOCK OPTIONS
Options outstanding at beginning of year 388,847 $9.51 417,095 $7.31 421,904 $4.67
Granted 44,500 14.75 55,000 18.34 92,194 16.51
Exercised 111,278 4.07 74,438 3.95 94,825 3.63
Forfeited 26,668 14.72 8,810 7.00 2,178 5.70
------- -------- --------
Options outstanding at end of year 295,401 11.88 388,847 9.51 417,095 7.31
------- -------- -------
------- -------- -------
Options exercisable at end of year 158,487 9.26 204,045 5.48 199,885 4.09
Weighted average fair value per share of
options granted during the year $5.97 $7.37 $6.88
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF REMAINING AVERAGE WEIGHTED-
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER OF AVERAGE
PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
---------------------------------------------------------- --------------------------------
$3 to $9 146,801 4.8 yrs. $ 5.97 114,047 $ 5.35
$10 to $20 148,600 7.5 yrs. $ 17.71 44,440 $ 19.29
Approximately 260,500 shares of common stock were available for future grant
under the Plan at December 31, 1999.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with disclosure requirements, management has estimated the fair
value of SFC's financial instruments. In cases where quoted market prices are
not available, fair value estimates are based on the present value of expected
future cash flows, or other valuation techniques, all of which are significantly
affected by the assumptions used therein. Accordingly, most fair value estimates
cannot be substantiated by comparison to independent market quotes and could not
be realized from offering for sale SFC's entire holdings of a particular
financial instrument at one time. Furthermore, management does not intend to
dispose of significant portions of all of its financial instruments and, thus,
any aggregate unrealized gain or loss should not be interpreted as a forecast of
future earnings and cash flows.
55
Certain financial instruments such as equity investments in consolidated
subsidiaries, obligations for pension and other postretirement benefits and
deferred compensation arrangements, among others, are generally excluded from
fair value disclosure requirements. In addition, the fair value estimates do not
attempt to include the value of anticipated future business, such as trust and
core deposit relationships, and the value of assets and liabilities that are not
considered financial instruments such as deferred tax assets, intangibles, and
premises and equipment.
The fair values of financial instruments are derived using numerous subjective
assumptions and may not be necessarily indicative of the net realizable or
liquidation value of these instruments. These fair value estimates involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. The fair values are also influenced by the estimation
methods, including discount rates and cash flow assumptions, chosen from
acceptable alternatives. Comparisons of fair value information among companies
are limited by variability in estimations and judgments.
The following methods and assumptions were used to estimate the fair value of
each material class of financial instruments at a specific point in time:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD
The carrying amount of these financial instruments reasonably approximates fair
value.
INVESTMENT SECURITIES
The fair value of investment securities is based upon independently quoted
market prices.
LOANS AND LEASES
The fair value of loans and leases is based upon the aggregate estimated fair
values of each product type, giving effect to credit quality and time to
maturity. The fair value of fixed rate loans and leases is estimated by
discounting expected future cash flows, based upon rates offered as of the
reporting date for similar loans and leases. The carrying amount of variable
rate loans reasonably approximates fair value.
DEPOSITS
The fair value of demand, money market, NOW and savings deposits is the amount
payable on demand at the reporting date. The carrying amount for variable rate
time deposit accounts reasonably approximates fair value. The fair value of
fixed rate time deposits is estimated using a discounted cash flow calculation.
The discount rate on such deposits is based upon rates offered as of the
reporting date for deposits with similar remaining maturities.
GUARANTEE OF LOAN TO ESOP TRUST
The carrying amount of this financial instrument reasonably approximates fair
value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit is
estimated to be the cost to terminate or otherwise settle such obligations with
counterparties. The fair value of such items at the reporting date is not
considered to be material in relation to the consolidated financial statements
taken as a whole (Note 11).
The carrying amount and fair value of SFC's financial instruments are as
follows:
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- ------------------------------
CARRY FAIR CARRY FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------ ------------ ------------
FINANCIAL ASSETS:
Cash and due from banks $ 25,046,000 $ 25,046,000 $ 24,330,000 $ 24,330,000
Federal funds sold 29,670,000 29,670,000 42,790,000 42,790,000
Investment securities, available-for-sale 165,076,000 165,076,000 162,317,000 162,317,000
Loans and leases, net 391,964,000 391,096,000 336,008,000 337,588,000
FINANCIAL LIABILITIES:
Deposits 582,385,000 582,356,000 530,974,000 531,120,000
Guarantee of loan to ESOP trust 44,000 44,000 76,000 76,000
56
NOTE 10 - FINANCIAL INSTITUTION RISK
In the normal course of its business, SFC encounters two significant types of
risk: economic and regulatory. Economic risk is comprised of three components -
interest rate risk, credit risk, and market risk. SFC is subject to interest
rate risk to the degree that its interest-bearing liabilities mature and reprice
at different speeds, or on a different basis, than its interest-bearing assets.
Credit risk is the risk of default on the Bank's loan portfolio that results
from the borrower's inability or unwillingness to make contractually required
payments. Market risk results from changes in the value of assets and
liabilities which may impact, favorably or unfavorably, the realizability of
those assets and liabilities. Additionally, SFC is subject to regulations of
various governmental agencies. These regulations can and do change significantly
from period to period. SFC also undergoes periodic examinations by the
regulatory agencies, which may subject it to further changes with respect to
asset valuations, amounts of required loss allowances and operating restrictions
resulting from the regulators' judgments based on information available to them
at the time of their examination.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include loan commitments and standby letters of credit.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated financial
statements. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those instruments.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. Since many of the loan commitments may expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit evaluation
of the counter party. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and other income-producing
commercial properties.
The Bank's lending activities are concentrated in San Diego County, California.
The Bank's commercial loan portfolio is diverse as to the industries
represented. The real estate portion of the loan portfolio includes credits to
many different borrowers for a variety of projects and for residential real
estate.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
Undisbursed loan commitments amount to approximately $193,604,000 and
$157,757,000 at December 31, 1999 and 1998, respectively. Standby letters of
credit total approximately $1,927,000 and $4,447,000 at December 31, 1999 and
1998, respectively. International letters of credit total approximately
$1,362,000 and $477,000 at December 31, 1999 and 1998, respectively.
SFC is at times subject to pending and threatened legal actions that arise out
of the normal course of business. Management has reviewed these matters with
legal counsel and, in the opinion of management, the ultimate disposition of all
pending or threatened litigation will not have a material effect on the
financial condition or results of operations of SFC.
The Bank has a line of credit available to purchase federal funds from a
non-affiliated financial institution at the prevailing market rate. The line is
subject to the availability of funds at the lending institution. The Bank also
has borrowing lines with Federal Reserve Bank "FRB" and Federal Home Loan Bank
"FHLB". Borrowing at FRB would be at the discount rate as set by FRB. Borrowing
at FHLB would be at the prevailing rate offered by FHLB. No amounts were
outstanding on any line at December 31, 1999 and 1998.
57
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
Risk-based capital guidelines issued by bank regulatory authorities incorporate
into the determination of capital adequacy an institution's asset risk profile
and off-balance sheet exposures, such as unused loan commitments and standby
letters of credit. The guidelines for an adequately capitalized institution
require a total capital to risk-weighted assets ratio of at least 8.0% and a
tier 1 capital to risk-weighted assets ratio of at least 4.0%. The risk-based
capital rules have been further supplemented by a leverage ratio, defined as
tier 1 capital divided by average total assets of the most recent quarter. A
minimum leverage ratio of 4.0% is required for most banking institutions. As of
December 31, 1999, the most recent notification from the appropriate regulatory
agency categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. Management is not aware of any conditions or
events subsequent to December 31, 1999, which would have caused a change in the
Bank's category. The following table summarizes SFC and the Bank's regulatory
capital ratios:
ACTUAL
DECEMBER 31, WELL
--------------------------------- CAPITALIZED REGULATORY
1999 1998 THRESHOLD MINIMUM
---------------------------------
SFC
Total risk-based capital ratio 11.4% 11.3% 10.0% 8.0%
Tier 1 risk-based capital ratio 10.2% 10.2% 6.0% 4.0%
Leverage ratio 7.5% 7.6% 5.0% 4.0%
BANK
Total risk-based capital ratio 11.2% 11.3% 10.0% 8.0%
Tier 1 risk-based capital ratio 10.1% 10.2% 6.0% 4.0%
Leverage ratio 7.4% 7.6% 5.0% 4.0%
NOTE 13 - MERGER
On August 31, 1998, Pacific Commerce Bank was merged with and into Scripps Bank.
Pursuant to the Agreement and Plan of Merger, dated April 22, 1998, each share
of Pacific Commerce Bank was exchanged for 2.1789 shares of Scripps Bank common
stock, resulting in approximately 1.8 million shares being issued. At the date
of merger, Pacific Commerce Bank had total assets of $72.3 million, including
$43.5 in loans and $22.3 million in investment securities, and $65.0 million in
liabilities, including $64.2 million in deposits. The merger was accounted for
as a pooling-of-interests and, accordingly, financial results for 1998 and prior
periods include the combined financial results of both entities.
Merger costs totaling $821,000 were recorded during 1998 in connection with the
Pacific Commerce Bank transaction. Such costs related primarily to professional,
legal and other support activities.
NOTE 14 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following tables present condensed financial information for 1999, the year
in which SFC was formed.
Condensed Parent Only Statement of Financial Condition
- - ------------------------------------------------------
58
December 31,
1999
------------
ASSETS
Cash and cash equivalents $120,000
Investment in subsidiary 44,794,000
Other assets and accrued interest receivable 812,000
------------
$45,726,000
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities and accrued interest expense $429,000
------------
Total liabilities 429,000
------------
Stockholders' equity:
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
6,909,000 shares 34,702,000
Retained earnings 12,497,000
Guarantee of loan to ESOP Trust (44,000)
Accumulated other comprehensive income, net (1,858,000)
------------
Total stockholders' equity 45,297,000
------------
$45,726,000
------------
------------
Condensed Parent Only Statement of Income
- - -----------------------------------------
Year Ended
December 31,
1999
------------
Non-interest income $0
Non-interest expense (223,000)
------------
Income before provision for income taxes (223,000)
Provision for income taxes 64,000
------------
59
Income before undistributed income of subsidiary (159,000)
Equity in undistributed income of subsidiary 4,588,000
------------
Net income $4,429,000
------------
------------
Basic net income per share $0.64
------------
------------
Diluted net income per share $0.63
------------
------------
Condensed Parent Only Statement of Cash Flows
- - ---------------------------------------------
Year Ended
December 31,
1999
------------
Cash flows from operating activities:
Net income $4,429,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income from subsidiary (4,588,000)
Increase in other assets and accrued interest receivable (812,000)
Increase in other liabilities and accrued interest expense 423,000
------------
Net cash used by operating activities (548,000)
------------
Cash flows from investing activities:
Net cash provided by subsidiary 880,000
------------
Net cash provided by investing activities 880,000
------------
60
Cash flows from financing activities:
Net proceeds from issuance of common stock 610,000
Dividends paid (822,000)
------------
Net cash used by financing activities (212,000)
------------
Net Increase in cash and cash equivalents 120,000
Cash and cash equivalents at beginning of year 0
------------
Cash and cash equivalents at end of year $120,000
------------
------------
NOTE 15 - SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
1999 Quarters Ended
----------------------------------------------------
December 31 September 30 June 30 March 31
----------------------------------------------------
Interest income $12,416,000 $11,757,000 $11,119,000 $10,979,000
Interest expense (3,812,000) (3,296,000) (3,011,000) (3,313,000)
----------------------------------------------------
Net interest income 8,604,000 8,461,000 8,108,000 7,666,000
Provision for loan losses (4,320,000) (750,000) (1,275,000) (885,000)
----------------------------------------------------
Net interest income after provision for
loan losses 4,284,000 7,711,000 6,833,000 6,781,000
Non-interest income 1,407,000 1,417,000 1,404,000 1,396,000
Non-interest expense (5,964,000) (6,552,000) (5,854,000) (5,644,000)
----------------------------------------------------
Income before provision for income taxes (273,000) 2,576,000 2,383,000 2,533,000
Provision for income taxes 192,000 (1,030,000) (952,000) (1,000,000)
----------------------------------------------------
Net income ($81,000) $1,546,000 $1,431,000 $1,533,000
----------------------------------------------------
----------------------------------------------------
61
Basic net income per share ($0.01) $0.22 $0.21 $0.22
----------------------------------------------------
----------------------------------------------------
Diluted net income per share ($0.02) $0.22 $0.21 $0.22
----------------------------------------------------
----------------------------------------------------
1998 Quarters Ended
----------------------------------------------------
December 31 September 30 June 30 March 31
----------------------------------------------------
Interest income $11,130,000 $10,897,000 $10,185,000 $9,499,000
Interest expense (3,548,000) (3,531,000) (3,190,000) (3,046,000)
----------------------------------------------------
Net interest income 7,582,000 7,366,000 6,995,000 6,453,000
Provision for loan losses (360,000) (520,000) (465,000) (460,000)
----------------------------------------------------
Net interest income after provision for
loan losses 7,222,000 6,846,000 6,530,000 5,993,000
Non-interest income 1,320,000 1,494,000 1,613,000 1,668,000
Non-interest expense (5,902,000) (5,861,000) (5,636,000) (5,424,000)
----------------------------------------------------
Income before provision for income taxes 2,640,000 2,479,000 2,507,000 2,237,000
Provision for income taxes (1,107,000) (1,006,000) (1,002,000) (880,000)
----------------------------------------------------
Net income $1,533,000 $1,473,000 $1,505,000 $1,357,000
----------------------------------------------------
----------------------------------------------------
Basic net income per share $0.23 $0.22 $0.22 $0.20
----------------------------------------------------
----------------------------------------------------
Diluted net income per share $0.21 $0.21 $0.22 $0.20
----------------------------------------------------
----------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
NAME AND ADDRESS OF
BENEFICIAL OWNERS AGE POSITION(S)
- - --------------------------------------- --- -----------
Ronald J. Carlson...................... 65 President, Chief Executive Officer and Director of SFC
M. Catherine Wright.................... 49 Secretary and Chief Financial Officer of SFC
Christopher C. Calkins................. 54 Director
Christopher S. McKellar................ 50 Director
William E. Nelson...................... 73 Chairman of the Board
Alfred B. Salganick, M.D............... 62 Director
William T. Stephens.................... 61 Director
62
CHRISTOPHER C. CALKINS is a director of SFC, Vice Chairman of the Board of
Scripps, President of Carltas Management, Manager of Carltas Company, a real
estate holding company, and general counsel of the Paul Ecke Ranch, a
floricultural production company. He has been a director of Scripps since 1984.
He is a Director of the Thomas C. Ackerman Foundation and President of the
Charles H. and Anna S. Stern Foundation. Mr. Calkins is a former partner of the
law firm of Gray Cary Ames & Frye (now Gray Cary Ware & Freidenrich).
RONALD J. CARLSON is President and a director of SFC. He assumed the position of
President and Chief Operating Officer of Scripps Bank (in organization) on July
1, 1983, and was named President and Chief Executive Officer of Scripps Bank on
December 20, 1984. Prior to joining Scripps, Mr. Carlson served as President and
Chief Executive Officer of the Bank of Rancho Bernardo from 1981 to 1983, and
President and Chief Operating Officer and Executive Vice President of La Jolla
Bank & Trust Company from 1973 to 1980. Prior to his employment with La Jolla
Bank & Trust Company, he was employed by California First Bank (now Union Bank
of California) for 10 years in various assignments including Manager of the Main
Office and Regional Vice President. Mr. Carlson has a B.S. degree from the
University of Colorado. He is a Regent of California Lutheran University,
Chairman of the Board of Directors of the Greater San Diego Division of the
American Heart Association, Advisory Director of the Salvation Army, and a
Trustee of the San Diego Maritime Museum.
CHRISTOPHER S. MCKELLAR was a director of Scripps from 1984 until the 1999
annual meeting of Scripps and is a director of SFC. He is Chief Executive
Officer of California Traditions, Inc. Mr. McKellar has been involved in more
than $1 billion of commercial, industrial and residential development in
Southern California and Utah. Mr. McKellar serves as Chairman of the Board of
the Medical Biology Institute. Formerly, he served on the boards of the Scripps
Memorial Hospital Foundation, Chancellor's Advisory Board of University of
California, San Diego, and the Mayor's Housing Committee.
WILLIAM E. NELSON has been Chairman of the Board of Scripps since 1984 and is
Chairman of the Board of SFC. He is an attorney and real estate developer. He
served as President and Chief Executive Officer of Scripps Institution of
Medicine and Science from 1993 to 1996. He has been the prime developer of
several commercial buildings in Southern California. He has also authored books
and articles on real estate finance and served as a Lecturer on finance at the
University of Southern California. He currently is a Regent's Lecturer on
Economics and Ethics of Health Care at University of California, San Diego. He
is currently President and a Director of the San Diego Blood Bank, a Director of
the San Diego Dialogue, which he also founded, and is involved with other
community activities such as the San Diego Opera.
ALFRED B. SALGANICK, M.D. is on the board of SFC. He retired from his practice
as a family practice physician in 1997. He received his pre-medical education in
New York and completed medical school in Chicago. Dr. Salganick served in the
U.S. Navy from 1965 through 1967 and then practiced medicine in Chula Vista,
California from 1967 through 1997. He was a founder and Chairman of the Board of
Pacific Commerce Bank ("PCB") in Chula Vista, which merged with Scripps in 1998.
Immediately after the PCB merger, Dr. Salganick joined the Scripps Board. Dr.
Salganick has been a member of the New York Stock Exchange since 1978.
WILLIAM T. STEPHENS is a director of SFC, director of Scripps since 1996 and
President of Kennebec Financial Corporation, a company providing trustee and
investment services to private trusts. Mr. Stephens has been in banking for over
35 years and served on the board of directors of San Diego Trust and Saving Bank
until its sale in 1994. He currently is a Director of the J.W. Sefton Foundation
and serves on the Board of Directors of the San Diego County Tax Payers
Association and is an active member of the San Diego Downtown Rotary Club. He
has served as an officer and director for many local philanthropic organizations
including having served as President and a Director of the local American Cancer
Society. Mr. Stephens is a Staff Commodore of the San Diego Yacht Club and a
member of the De Anza Country Club.
M. CATHERINE WRIGHT assumed the position of Senior Vice President/Chief
Financial Officer/Finance & Administration Division Manager of Scripps in
December 1997 and is Secretary and Chief Financial Officer of SFC. Ms. Wright
has over 25 years of banking experience which include serving as Senior Vice
President/Cashier at First National Bank, Vice President/Cashier at Bank of
Commerce and in various capacities in the areas of lending and operations at
Bank of America. She has a B.S. in Accountancy from National University, San
Diego and is a
63
graduate of Pacific Coast Banking School at the University of Washington and
the ABA National School of Bank Investments and Financial Management. Ms.
Wright is a member of Financial Women International.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
To the knowledge of SFC, no director, officer or beneficial owner of greater
than 10% of the common stock of SFC during fiscal 1999 failed to file on a
timely basis reports required by Section 16(a) of the Securities and Exchange
Act of 1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation paid to or earned by the
named executive officers--the SFC President and Chief Executive Officer, and
the Secretary and Chief Financial Officer--the only two officers of SFC
during the fiscal year ended December 31, 1999:
SUMMARY COMPENSATION TABLE
1999 ANNUAL
COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------------- ----------------------------------------------------
SECURITIES OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION (1)
- - --------------------------------------- ------------ -------------- -------------------- --------------------------------
Ronald J. Carlson, President and Chief $230,000 $22,304 - $219,489 (2)
Executive Officer
M. Catherine Wright, Secretary and 87,550 9,044 - 11,831
Chief Financial Officer
- - ----------------------------------
(1) Includes taxable auto allowance or lease value, club dues, term life
insurance in excess of $50,000, and the bank's contribution to the Stock
Purchase Plan, the Stock Ownership Plan and the 401(k) Plan.
(2) Includes accruals toward supplemental retirement plans.
There were no grants of options to purchase SFC Common Stock made during the
fiscal year ended December 31, 1999 to the named executive officers.
The following table provides the specified information concerning option
exercises during fiscal year 1999 and the exercisable and unexercisable options
held by the named executive officers.
OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 (3) DECEMBER 31, 1999 (2)
---------------------------------- --------------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - -------------------- ---------------- -------------- --------------- ------------------ ---------------- ---------------------
Ronald J. Carlson 6,050 $64,731 9,840 11,210 $36,348 $9,087
M. Catherine Wright 0 $0 1,200 4,800 $0 $0
- - ---------------------------
(1) Difference between fair market value of shares acquired and cost of shares
pursuant to exercise of option.
(2) Based on the closing sale price of SFC Common Stock as of December 31, 1999
as reported by Bloomberg Financial Markets Service ($13.50).
(3) The number of unexercised stock options has been restated to reflect the
effect of all prior stock dividends and a two for one stock split declared in
November 1997.
64
DIRECTORS' COMPENSATION
SFC and Scripps pay fees to all non-management directors for their attendance at
board meetings and committee meetings, including $750 for attendance at board
meetings and $200 for attendance at all committee meetings. Because of the
additional time commitment, the Chairman of SFC and Scripps receives $1,500 per
month for attendance at board meetings. No director has received reimbursement
for travel expenses incurred in traveling to meetings. In 1999, as a group, SFC
and Scripps non-management directors received compensation totaling $219,350 for
services in their capacity as directors. This amount does not include
approximately $34,100 contributed on their behalf by SFC and Scripps to the
Restated Stock Purchase Plan. Under the 1992 Stock Option Plan, there were
outstanding stock options for the purchase of 7,260 shares of common stock with
a weighted average exercise price of $4.96. There are no shares available for
grant in the 1992 Plan. In addition, under the 1998 Outside Directors Stock
Option Plan, each non-employee director was granted an option to purchase 1,000
shares of Common Stock of SFC after the last annual meeting and will receive an
option to purchase additional 1,000 shares upon re-election. As of December 31,
1999 there were outstanding stock options for the purchase of 30,000 shares of
Common Stock with a weighted average exercise price of $17.47. As of that date,
there were 70,000 shares available for grant.
SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
SUPPLEMENTAL RETIREMENT PLAN
Scripps has entered into a Supplemental Retirement Plan (the "Retirement Plan")
with Mr. Carlson. Under the Retirement Plan, if Mr. Carlson remains in the
employment of Scripps until he attains age 67, he will be entitled to a monthly
annuity payment in the base amount of $4,167. The amount of the monthly payment
will adjust annually by a three- percent increase as a cost-of-living
adjustment. If Mr. Carlson terminates employment with Scripps prior to age 67,
he may elect early commencement of a reduced monthly payment, as determined
actuarially. However, if Mr. Carlson terminates employment prior to age 67 due
to total disability, he will be entitled to the full amount of the monthly
annuity payment beginning on the first day of the month following such
termination of service. If Mr. Carlson dies and is survived by Barbara Ann
Carlson, then she will be entitled for life to monthly payments equivalent to
those Mr. Carlson would have received if he were alive. Scripps has established
a grantor trust to which it may make contributions to help satisfy its
obligations under the Retirement Plan. All assets held in the trust are subject
to the claims of general creditors of Scripps.
PRESIDENT'S UNFUNDED DEFERRED COMPENSATION AGREEMENTS
Scripps has entered into two Unfunded Deferred Compensation Agreements (the
"Deferred Compensation Agreements") with Mr. Carlson. Under one Deferred
Compensation Agreement, an annual benefit of $20,000 per year is to be paid to
Mr. Carlson following the latter of the dates at which he attains age 65 or the
date he separates from service with Scripps. Payments are to be made each year
beginning with the year in which Mr. Carlson attains age 66. The amount of this
payment is adjusted on each annual anniversary date to take into effect any cost
of living increases from the date in which he attains the age of 65. If Mr.
Carlson dies, is impaired by a disability, or otherwise separates from service
prior to attaining age 65, then he or Barbara Ann Carlson if he is deceased,
receives a reduced annual benefit.
Under the other Deferred Compensation Agreement, an annual benefit of $25,000
per year, increased by 3% as a cost of living adjustment, is to be paid to Mr.
Carlson commencing upon his retirement if he remains in the employment of
Scripps until the earlier of October 1, 2002 or total and permanent disability.
If Scripps terminates Mr. Carlson's employment prior to October 1, 2002 for
reasons other than cause, he is entitled to receive the retirement benefit. If
Mr. Carlson's employment is terminated by Scripps for cause at any time, no
payments will be made under this Deferred Compensation Agreement. This Deferred
Compensation Agreement includes death benefits payable to Deirdre Carlson.
The obligations of Scripps under the Deferred Compensation Agreements are
unfunded. Scripps accrues a liability for its obligations each year, but does
not set aside a separate fund to be held in trust for Mr. Carlson's benefit.
65
LONG TERM INCENTIVE COMPENSATION PLAN
The Bank has entered into a Long Term Incentive Compensation Plan with Mr.
Carlson. The Plan allows for awards based on the bank's attainment of certain
performance related goals. The goals will be measured as of December 31, 2001.
If the goals are met or exceeded, awards would be payable to Mr. Carlson as of
October 1, 2002. The maximum amount payable would be 140 percent of Mr.
Carlson's salary as of October 1, 2002. Mr. Carlson will have the option to
receive his award in the form of cash, SFC stock, or deferred payments up to
five years.
EMPLOYMENT AGREEMENTS
Scripps has entered into employment agreements ("Employment Agreements") with
Mr. Ronald Carlson and Ms. M. Catherine Wright, which provide for base annual
salaries that adjust annually. As of December 31, 1999, the base salaries of
such employees were $230,000 and $87,550, respectively. In addition, the
Employment Agreements provide for an automobile use allowance. The respective
terms of the Employment Agreements expire October 2002 and June 2001.
SCRIPPS FINANCIAL CORPORATION 1992 AND 1995 STOCK OPTION PLANS
The purpose of the SFC Stock Option Plans is to attract, retain and reward
persons providing services to SFC and certain affiliated entities and to
motivate such persons to contribute to the growth and profits of SFC. Options
may be granted to directors and full-time salaried employees, including officers
and directors who are also employees.
As of December 31, 1999, there were outstanding stock options for the purchase
of 221,249 shares of Common Stock under the Stock Option Plan originally adopted
in 1995 (the "1995 Plan") with a weighted average exercise price of $12.44 per
share. As of that date, there were 190,542 shares of Common Stock available for
grant under the 1995 Plan. As of December 31, 1999, there were outstanding stock
options for the purchase of 44,152 shares of SFC Common Stock under the Stock
Option Plan originally adopted in 1992 (the "1992 Plan"), with weighted average
exercise price of $5.32 per share. No shares of Common Stock remain available
for grant under the 1992 Plan.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The members of the Compensation and Nominations Committee review and recommend
to the full Scripps board of directors the salaries and other terms of
employment of executive officers of Scripps. The Scripps Compensation and
Nominations Committee, comprised of Scripps directors F. Seth Brown, Christopher
C. Calkins, Ronald J. Carlson, Martin C. Dickinson, James A. McKellar, William
F. Miller, Jr., Gail K. Naughton, and William E. Nelson held seven meetings in
1999. Except for Mr. Carlson, none of these individuals was at any time during
1999 an officer or employee of Scripps. Martin Dickinson was formerly a senior
vice president of Scripps but retired in 1996. The Compensation and Nomination
Committee considers and sets, by recommendation to the full board, the
individuals to be nominated for election to the board as well as the
compensation, titles, and other aspects of the powers and names of individuals
acting as, or being considered for, executive officers. Further, the Committee
considers and sets, by similar recommendation, the general levels of
compensation for all employees by class, not individually, and it reviews and
sets by recommendation, any and all bonus, incentive plans, or other special
awards and payments.
In its consideration of individual executive officers, weight is given to the
recommendations of the Chief Executive Officer; however, supporting data such as
industry comparisons and individual performance outcomes are also reviewed.
With respect to the CEO, his performance standards are established and agreed to
in writing at the start of each year. The Chairman of the Board (who is not an
officer or employee) reviews with the CEO the objective achievements as compared
to those agreed upon standards each quarter. This review is documented as a
signed report kept in the appropriate file.
The CEO's compensation is discussed and decided by the board when he is not
present. The degree of difficulty of the agreed performance standards, the
actual accomplishments, any special achievements, and the local industry
66
trends rae all issues bearing on the ultimate compensation. Since the CEO's
age at the commencement of his employment was significantly different than
the ages of other executive officers, it was clear that the standard
retirement program would seriously disadvantage him. Therefore, with the
concurrence of the full board (except the CEO who was not present) special
supplementary retirement programs were designed by a consultant and adopted
by the board.
With respect to all compensation and benefits, the performance of SFC,
objectively measured by Return on Equity, Return on Assets and other criteria
approved by the Board, is a primary factor; however, subjective factors such as
"shopping reports," customer comments and growth also have weight.
SHAREHOLDER TOTAL RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return to
shareholders on the SFC's Common Stock with the cumulative total return on the
American Stock Exchange Composite Index (Amex) and the S & P Banks Index for the
five year period ending December 31, 1999. Since SFC was established in 1999,
the data presented prior to 1999 represents the return for Scripps Bank Common
Stock. (1)
[GRAPHIC]
- - ----------------------------------------------------------------------------------------------------------
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
- - ----------------------------------------------------------------------------------------------------------
SFC $100 $125.10 $179.10 $431.70 $ 351.90 $ 281.90
- - ----------------------------------------------------------------------------------------------------------
Amex $100 $126.42 $134.50 $163.13 $ 165.96 $ 214.40
- - ----------------------------------------------------------------------------------------------------------
S & P Banks $100 $158.40 $223.00 $321.00 $ 342.00 $ 298.60
- - ----------------------------------------------------------------------------------------------------------
(1) Assumes that $100 was invested in SFC's Common Stock on December 31, 1994,
and that all dividends were reinvested. Stockholder returns over the indicated
period should not be considered indicative of future stockholder returns.
67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of February 29, 2000,
with respect to the beneficial ownership of SFC Common Stock by (i) all persons
known by SFC to be the beneficial owners of more than five percent of the
outstanding SFC Common Stock, (ii) each director of SFC, and (iii) each
executive officer of SFC named in the Summary Compensation Table.
SHARES THAT
MAY BE
ACQUIRED
WITHIN 60 DAYS
NAME AND ADDRESS OF PERCENTAGE OF OF FEBRUARY
BENEFICIAL OWNERS (1) SHARES OWNED CLASS (2) 29, 2000
- - --------------------------------------------------------------------- ------------ ------------- --------------
Ronald J. Carlson (3) 31,200 * 9,840
M. Catherine Wright (3) 1,852 * 1,200
Christopher C. Calkins (3) 57,535 * 1,000
Christopher S. McKellar (3)(4)(5) 286,650 4.15% 1,000
William E. Nelson (3)(6) 578,068 8.36% 1,000
Alfred B. Salganick, M.D. (3) 492,384 7.12% 1,000
William T. Stephens (3) 16,822 * 1,000
Thomas W. Sefton Trust (7) 710,208 10.27% 0
Executive Officers and Directors as a group (7 persons) 2,174,719 31.38% 16,040
*Less than 1%
- - -----------------------------
(1) Except as indicated in the footnotes to this table, (a) the address of the
persons named in this table is 5787 Chesapeake Court, San Diego, California
92123 and (b) the persons named in the table have sole voting and
investment power with respect to all shares of SFC Common Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
(2) Calculated on the basis of 6,913,139 shares of Scripps Common Stock
outstanding. Shares of Scripps Common Stock underlying options exercisable
within 60 days of February 29, 2000 are deemed to be outstanding for
purposes of calculating the beneficial ownership of securities of the
holders of such options.
(3) Includes shares beneficially owned as a participant in SFC Restated Stock
Purchase Plan for employees, officers and directors of SFC and Scripps.
(4) Christopher S. McKellar is the son of James A. McKellar, who is on the
Scripps Bank board of directors.
(5) Includes 5,240 shares held in trust for which Christopher S. McKellar is
trustee, 56,332 shares held as custodian for the benefit of his children,
and 57,474 shares held as a general partner and 114,460 shares held in the
name of Axiom Inc.
(6) Includes 140,788 shares owned by Nelson Management, Inc., of which Mr.
Nelson is President and 399,491 shares held in trust for which Mr. Nelson
is co-trustee.
(7) The address of the Thomas W. Sefton Trust is 2550 Fifth Avenue, Suite 808,
San Diego, California 92103-6624.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Scripps from time to time has outstanding extensions of credit to individual
officers, directors, principal security holders or their associates. Extensions
of credit to such persons were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectability or present other
unfavorable features. The aggregate extensions of credit by Scripps to
directors, executive officers, principal shareholders, employees and their
associates as of December 31, 1999 totaled approximately $333,194.
SFC has entered into indemnification agreements in a form originally approved by
its shareholders with each director and various executive officers containing
provisions which may require it, among other things, to indemnify its officers
and directors against liabilities that m may arise by reasons of their status or
service as officers or directors and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
Scripps and SFC intend to execute these agreements with their future directors
and executive officers.
68
Richard B. Huntington, a director of Scripps, and his wife own shares of a
corporation that is the general partner of the lessor of Scripps' Point Loma
branch. Together, Mr. Huntington and his wife own one-third of the real estate
partnership. The ten-year lease of Scripps for this office space began in 1997.
Scripps paid for tenant improvements, which are amortized over the lease term,
and monthly rent, which increases by 4% annually; 2000 rental and premises and
equipment expenses are expected to be approximately $162,000.
In 1997 Sefton Capital Management began providing advisory services for the
securities portfolio of Scripps. This agreement was approved by the Scripps
Board of Directors. In 1998 an independent committee of the Scripps board of
directors approved the Scripps trust department entering into a contract with
Sefton Capital Management for the management of trust investment vehicles for
which investment was not otherwise designated. The fees for these services were
based upon the bank's understanding of the market rate for such services. In
1999, aggregate fees paid to Sefton Capital Management were approximately
$217,000. In the first quarter of 1999, the Trust Department reviewed the
services it could obtain elsewhere; it terminated the agreement with Sefton
Capital Management effective May 1999. Harley K. Sefton, a director of Scripps,
is an officer, principal and shareholder of Sefton Capital Management. In
November 1999 Sefton Capital Management merged into another company, at which
time the investment portfolio advisory service was moved to Chandler Asset
Management in San Diego.
The husband of Susan Whiteley, the Senior Vice President/Services and Support
Division Manager of Scripps, is the Chief Operating Officer of Advanced Network,
Inc. ANI provides Scripps with information technology consulting, automated
teller machine processing and servicing and merchant deposit processing
services. The fee arrangements with ANI were based in part on competitive bids
and were approved by the board of directors of Scripps. Scripps paid ANI an
aggregate of approximately $373,000 in 1999.
When PCB merged with and into Scripps in 1998, Dr. Salganick, the former
Chairman of PCB, became a director of Scripps and began to receive compensation
and stock options at the same level as the other outside directors of Scripps.
Pursuant to the terms of the merger agreement, each of the directors of PCB who
was party to an ongoing deferred compensation agreement elected, effective as of
the effective date of the PCB merger, to have all deferred compensation drawn
and paid within ten years of the "normal retirement date" or "expiration date."
69
PART IV
ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Documents Filed as Part of this Report
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - ------- -----------------------------------------------------------------
3.1 * Articles of Incorporation of SFC.
3.2 * By-laws of SFC.
4.1 * Specimen Common Stock Certificate of SFC.
10.1 * Form of Indemnification Agreement for directors and executive
officers
10.2 * 1995 Stock Option Plan, and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement thereunder
10.3 * 1992 Stock Option Plan, and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement thereunder
10.4 * 1998 Outside Directors Stock Option Plan
10.5 * Agreement and Plan of Merger between Scripps and PCB
10.6 * Form of Employment Agreement for executive officers
10.7 * Employment Agreement dated October 1, 1995, between Thomas D.
Michelli and Pacific Commerce Bank, as amended
10.8 * Lease, dated September 1, 1983, between Scripps and Oklahoma City
Investment Group, as amended
10.9 * Lease, dated April 25, 1995, between Scripps and Kearny Villa
Center East
10.10 * Sublease, dated March 1, 1999, between Scripps and Wells Fargo
Bank, N.A.
10.11 * Supplemental Retirement Plan between Scripps and Ronald J.
Carlson
10.12 * 1992 Unfunded Deferred Compensation Agreement between Scripps and
Ronald J. Carlson
10.13 * 1999 Unfunded Deferred Compensation Agreement between Scripps and
Ronald J. Carlson
10.14 Lease, dated October 21, 1999, between Scripps and Prentiss
Properties Acquisition Partners, L.P.
10.15 Lease, dated September 23, 1999, between Scripps and Balboa
Investors 1 Ltd.
10.16 Long-Term Incentive Compensation Plan between Scripps and Ronald
J. Carlson
21.1* List of SFC Subsidiaries.
23.1 Consent of PricewaterhouseCoopers, LLP
27.1 Financial Data Schedule.
- - ----------------------
* Incorporated by reference herein from the SFC Registration Statement on Form
10 (Registration No. 0-26081) filed with the SEC on May 14, 1999, as
subsequently amended.
(b) SFC did not file any reports on Form 8-K during the quarter ended December
31, 1999.
(c) See (a) above for all exhibits filed herewith and the exhibit index.
(d) There are no financial statements or schedules which were excluded from
Item 8 which are required to be reported herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
SCRIPPS FINANCIAL CORPORATION
March 30, 2000 /s/ Ronald J. Carlson
- - ---------------- -------------------------------------
Date Name: Ronald J. Carlson, President, Chief
Executive Officer and Director
70
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, this report has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
/s/ Ronald J. Carlson March 30, 2000
- - ------------------------------------- ----------------
Ronald J. Carlson, President, Chief Executive Officer and Date
Director
/s/ Christopher C. Calkins March 30, 2000
- - ------------------------------------- ----------------
Christopher C. Calkins, Director Date
/s/ Christopher S. McKellar March 30, 2000
- - ------------------------------------- ----------------
Christopher S. McKellar, Director Date
/s/ William E. Nelson March 30, 2000
- - ------------------------------------- ----------------
William E. Nelson, Director Date
/s/ M. Catherine Wright March 30, 2000
- - ------------------------------------- ----------------
M. Catherine Wright, Chief Financial Officer (Principal Date
Accounting Officer)
71