SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 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)
7817 Ivanhoe Avenue, La Jolla, CA 92037
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 858-456-2265
Not applicable
---------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes [X] No [ ], and (2) has
been subject to such filing requirements for the past 90 days. Yes [ ] No [X].
As of August 26, 1999 there were 6,895,000 shares of Common Stock outstanding.
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
June 30 December 31,
1999 1998
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ASSETS
Cash and amounts due from banks $ 29,199,000 $ 24,330,000
Federal funds sold 12,783,000 42,790,000
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Cash and cash equivalents 41,982,000 67,120,000
Interest bearing due from banks 1,877,000 4,352,000
Investment securities 142,657,000 162,317,000
Loans and leases, net 365,328,000 336,008,000
Premises and equipment, net 4,872,000 4,985,000
Other assets and accrued interest receivable 9,621,000 7,848,000
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$566,337,000 $582,630,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $163,406,000 $152,697,000
Money market, NOW and savings accounts 265,263,000 290,113,000
Time certificates:
Under $100,000 33,294,000 31,861,000
$100,000 or greater 55,210,000 56,303,000
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Total deposits 517,173,000 530,974,000
Guarantee of loan to ESOP Trust 58,000 76,000
Other liabilities and accrued interest expense 4,061,000 7,825,000
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Total liabilities 521,292,000 538,875,000
Stockholders' equity:
Common stock, no par value; authorized
10,000,000 shares; issued and outstanding
6,876,000 shares at June 30, 1999 and
6,797,000 shares at December 31, 1998 34,582,000 34,092,000
Retained earnings 11,445,000 8,896,000
Guarantee of loan to ESOP Trust (58,000) (76,000)
Accumulated other comprehensive income, net (924,000) 843,000
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Total stockholders' equity 45,045,000 43,755,000
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$566,337,000 $582,630,000
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The accompanying notes are an integral part of these
consolidated condensed financial statements
2
SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---------------------------------------------------------------------
Interest income:
Loans and leases, including fees earned $8,788,000 $8,029,000 $17,111,000 $15,423,000
Investment securities:
Taxable 1,814,000 1,361,000 3,809,000 2,914,000
Exempt from federal income tax 229,000 229,000 458,000 461,000
Dividends 22,000 32,000 37,000 32,000
Federal funds sold 229,000 443,000 590,000 679,000
Balances due from Banks 37,000 91,000 93,000 175,000
----------- ---------- ----------- ----------
Total interest income 11,119,000 10,185,000 22,098,000 19,684,000
Interest expense on deposits (3,011,000) (3,190,000) (6,324,000) (6,236,000)
----------- ---------- ----------- ----------
Net interest income 8,108,000 6,995,000 15,774,000 13,448,000
Provision for possible loan losses (1,275,000) (465,000) (2,160,000) (925,000)
----------- ---------- ----------- ----------
Net interest income after provision for
possible loan losses 6,833,000 6,530,000 13,614,000 12,523,000
Non-interest income 1,404,000 1,613,000 2,800,000 3,281,000
Non-interest expense (5,854,000) (5,636,000) (11,498,000) (11,060,000)
----------- ---------- ----------- ----------
Income before provision for income taxes 2,383,000 2,507,000 4,916,000 4,744,000
Provision for income taxes (952,000) (1,002,000) (1,952,000) (1,882,000)
----------- ---------- ----------- ----------
Net income $1,431,000 $1,505,000 $2,964,000 $2,862,000
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Basic net income per share $ 0.21 $ 0.22 $ 0.43 $ 0.43
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted net income per share $ 0.21 $ 0.22 $ 0.43 $ 0.41
----------- ---------- ----------- ----------
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The accompanying notes are an integral part of these
consolidated condensed financial statements
3
SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended June 30,
1999 1998
------------------------------------------
Net Income $ 1,431,000 $ 1,506,000
Unrealized holding loss
on available-for-sale securities (1,454,000) (18,000)
------------ ------------
Total comprehensive income $ (23,000) $ 1,488,000
------------ ------------
------------ ------------
Six months ended June 30,
1999 1998
-------------------------------------
Net Income $ 2,964,000 $ 2,862,000
Unrealized holding loss
on available-for-sale securities (1,767,000) (118,000)
------------ ------------
Total comprehensive income $ 1,197,000 $ 2,744,000
------------ ------------
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The accompanying notes are an integral part of these
consolidated condensed financial statements
4
SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended
June 30,
1999 1998
------------------------------
Cash flows from operating activities:
Net income $ 2,964,000 $ 2,862,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 827,000 658,000
Provision for possible loan losses 2,160,000 925,000
Amortization of loan discounts and fees and
investment securities premiums and discounts (152,000) (96,000)
Gain on sale of real estate owned 0 (10,000)
Increase in other assets and accrued interest receivable (547,000) (508,000)
Increase (decrease) in other liabilities and accrued
interest expense (3,828,000) 250,000
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Net cash provided (used) by operating activities 1,424,000 4,081,000
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Cash flows from investing activities:
Proceeds from maturities and principal payments of investment securities 96,550,000 19,847,000
Proceeds from sale of furniture, fixtures & equip 0 108,000
Proceeds from sale (transfer to) real estate owned (24,000) 438,000
Maturities/(purchases) of investment certificates of deposit 2,475,000 (893,000)
Purchases of investment securities (80,245,000) (7,563,000)
Net funding of loans (30,942,000) (36,667,000)
Purchases of premises and equipment, net (714,000) (1,067,000)
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Net cash used in investing activities (12,900,000) (25,797,000)
------------- ---------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts (14,141,000) 38,121,000
Net increase in certificates of deposit 340,000 1,734,000
Proceeds from exercise of stock options 547,000 203,000
Dividends paid (408,000) (294,000)
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Net cash provided by financing activities (13,662,000) 39,764,000
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Net increase (decrease) in cash and cash equivalents (25,138,000) 18,048,000
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Cash and cash equivalents at beginning of year 67,120,000 44,499,000
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Cash and cash equivalents at end of year/quarter $41,982,000 $62,547,000
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The accompanying notes are an integral part of these
consolidated condensed financial statements
5
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
SCRIPPS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying financial information has been prepared in accordance with
the Securities and Exchange Commission rules and regulations for quarterly
reporting and therefore does not necessarily include all information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. This information
should be read in conjunction with Scripps Financial Corporation's
registration statement on Form 10 as amended, including notes thereto, filed
July 13, 1999.
Operating results for interim periods are not necessarily indicative of
operating results for an entire fiscal year. In the opinion of management,
the unaudited financial information for the three and six months ended June
30, 1999 and 1998, reflect all adjustments, consisting only of normal
recurring accruals and provisions, necessary for a fair presentation thereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Scripps Financial Corporation, a California corporation ("SFC"), was
formed on May 14, 1999 as a federally regulated bank holding company. Scripps
Bank, a California banking corporation ("Scripps"), is a federally insured
bank. Scripps merged with and into a subsidiary of SFC on July 1, 1999. As a
result of the merger, each shareholder of Scripps received a number of shares
of SFC equal to that number of shares such shareholder held in Scripps. SFC
currently holds all of the outstanding stock of Scripps. As SFC is newly
formed, the following discussion will compare financial results of Scripps
for the three and six-month periods ended June 30, 1999 and 1998. Effective
with the close of business August 31, 1998 Scripps acquired Pacific Commerce
Bank ("PCB"). All prior period results include the combined financial results
of both entities. The following discussion is intended to provide information
to facilitate the understanding and assessment of the primary asset of SFC,
which is its ownership of Scripps. This discussion and analysis should be
read in conjunction with Scripps' audited financial statements provided in
SFC's registration statement on Form 10, as amended, including notes thereto.
FINANCIAL CONDITION
Total assets of SFC decreased $16 million or 2.8% to $566.3 million at
June 30, 1999, from $582.6 million at December 31, 1998. Gross loans increased
$29.3 million or 8.7% to $365.3 million from $336.0 million at the end of 1998.
Within the loan portfolio, real estate loans increased $23.7 million to $155.3
million and commercial loans increased $2.2 million to $158.5 million at June
30, 1999. Total consumer loans increased by $2.9 million to $51.3 million. There
was little change in the loan portfolio mix of which real estate and commercial
loans comprised 42% and 43%, respectively, at the end of June 1999, a change
from 39% and 46%, respectively, at year end 1998. Consumer loans were unchanged
at 14% at the end of both periods. Contraction of deposits, coupled with loan
growth has caused Federal funds sold to decline by $30 million to $12.7 million
at the end of the second quarter 1999. Nonperforming assets of $2.4 million or
0.42% of total assets at June 30, 1999 compares to $1.4 million or 0.23% of
total assets for December 31, 1998.
Total deposits at June 30, 1999 decreased $13.8 million or 2.6% from
December 31, 1998. This decrease consisted of $24.5 million in
interest-bearing accounts partially offset by an increase of $11.0 million in
non-interest bearing deposits. In the interest-bearing deposit categories,
NOW accounts decreased $900,000 to $36.9 million, savings and money market
accounts decreased $25.5 million to $228.4 million, while net time deposits
increased $400,000 to $88.5 million. Total stockholders' equity at June 30,
1999 was $45.0 million compared to $43.8 million at December 31, 1998, an
increase of $1.3 million or 3.0% due to earnings of $3.0 million, offset by
dividends of $414,000 and a decrease in the unrealized gain/loss on
securities available for sale of $1.8 million. Scripp's Tier I leverage
capital ratios were 8.08% and 7.63%, at June 30, 1999 and December 31, 1998,
respectively. (See CAPITAL RESOURCES.)
RESULTS OF OPERATIONS
6
SUMMARY
Net earnings were $3.0 million ($.43 per share basic and diluted)
for the six months ended June 30, 1999, compared with $2.9 million ($.43 per
share basic; $.41 per share diluted) for the same period in 1998. This
represents an increase of $102,000 or 3.4%. Scripps' improved performance
between 1999 and 1998 resulted primarily from an increase in average
interest-earning assets, primarily in loans and investment securities. The
provision for loan and lease losses increased $1.2 million or 57.2% to $2.2
million for the six months ended June 30, 1999 from $925,000 for the six
months ended June 30, 1998. Non-interest income decreased $481,000, while
non-interest expense increased $438,000, for the six months ended June 30,
1999 over the same period in 1998. The provision for income taxes increased
$70,000 to $2.0 million from $1.9 million due to an increase in pre-tax
earnings of $172,000. The annualized return on average assets and average
stockholders' equity decreased during the first six months of 1999 to 1.05%
and 13.24%, respectively, from 1.22% and 14.26%, respectively for the same
1998 period. (See RESULTS OF OPERATIONS -- NET INTEREST INCOME, RESULTS OF
OPERATIONS -- NON-INTEREST INCOME AND EXPENSE and RESULTS OF OPERATIONS -
PROVISION FOR POSSIBLE LOAN LOSSES.) For the quarter ended June 30, 1999, SFC
reported net income of $1.4 million compared to $1.5 million for the second
quarter of 1998, a decrease of $100,000 or 4.9%. The decrease in second
quarter earnings is primarily due to increases in the provision for loans and
lease losses of $390,000 and non-interest expense of $210,000 which were
partially offset by increases in net interest income of $442,000 and
non-interest income of $8,000. The provision for income taxes decreased
$48,000 to $952,000 for the second quarter of 1999. The annualized return on
average assets and average stockholders' equity for the quarter ended June
30, 1999 decreased to1.01% and 12.47%, respectively, from 1.26% and 15.31%,
respectively, for the second quarter of 1998. Basic and diluted earnings per
share for the second quarters were $0.21 in 1999, compared to $0.22 in 1998.
7
NET INTEREST INCOME
Net interest income, which constitutes one of the principal sources of
income for Scripps, represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The net yield on total interest-earning assets, also referred to as interest
rate margin or net interest margin, represents net interest income divided by
average interest-earning assets. Scripps' principal interest-earning assets are
loans, investment securities and Federal funds sold, while its principal
interest-bearing liabilities are interest-bearing demand accounts, savings
deposits and time deposits.
Net interest income was $15.8 million for six months ended June 30,
1999, an increase of $2.4 million or 17.5% compared with net interest income
of $13.4 million for the same period in 1998. Scripps' average
interest-earning assets increased to $531.5 million for the six-months ended
June 30, 1999 from $412.4 million for the same period in 1998, representing
an increase of $119 million, primarily in loans and investment securities.
Average interest-bearing deposits increased to $365 million for the
six-months ended June 30, 1999 from $304 million in the same period for 1998,
representing an increase of $61 million, and average non-interest-bearing
demand deposits increased $31 million or 24.9%. The net interest margin of
5.98% for June 30, 1999 reflects a decrease of 58 basis points from 6.56% for
the same period in 1998. This decrease in net interest margin resulted
primarily from both the decrease in the prime rate from an average of 8.50%
in the first six months of 1998 to 7.75% in the first six months of 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, partially offset by declining rates on interest
bearing deposits.
Net interest income for the second quarter of 1999 increased $1.1
million or 15.7% from $7.0 million, for the second quarter of 1998. Interest
income for the second quarter for loans increased by $800,000 or 10.0% from
$8.0 million in 1998. Average loans in the second quarter 1999 were $361.0
million, an increase of $53.5 million or 17.3% compared to $307.6 million for
1998. Yields for the second quarter 1999 were 9.16%, significantly lower than
the 1998 yield of 9.8%, due primarily to the change in prime rate from 8.5%
in 1998 to 7.75% in 1999. The increase in prime to 8.0% in early July 1999
and 8.25% in late August 1999 should improve loan yields in the third quarter
of 1999. Interest income from investment securities and Federal funds sold
for the second quarter 1999 increased $175,000 or 8.0%, due to volume growth
in securities, partially offset by a volume decrease in Federal funds sold,
due to a decline in deposits in the second quarter primarily as a result of
customer tax payments. Management expects deposit levels to increase in the
third quarter over the lower second quarter levels. Interest expense for the
second quarter 1999 was $3.0 million, a decrease of $200,000 or 5.6% compared
to 1998, due to lower overall rates on interest bearing accounts and to the
fact that interest bearing deposits decreased by $42 million or 10.5% in the
second quarter 1999 from $400 million in 1998. With market interest rates
rising during the third quarter of 1999, management expects interest expense
yields to increase for the balance of 1999. Net interest margin was 6.17% and
6.22% for the three months ended June 30, 1999 and 1998, respectively.
NON-INTEREST INCOME
Non-interest income was $2.8 million for the six-months ended June 30,
1999, a decrease of $481,000 or 14.1% compared with non-interest income of $3.3
million for the same period in 1998. The primary reasons for the decreases in
non-interest income over the period presented are: (1) in 1998, PCB, prior to
the merger with Scripps, sold its merchant Mastercard/Visa program and certain
SBA loans; (2) in 1998, Scripps outsourced its merchant
8
Mastercard/Visa program which reduced the gross income recognized for the
program, (the expenses associated with the old program were reflected in the
non-interest expense category); and (3) deposit service charge income
declined due primarily to the collection of fewer non-sufficient fund ("NSF")
charges. Fewer NSF charges collected was as a result of the former PCB
branches adopting Scripps's more conservative policy regarding collection of
NSF fees and an overall effort in all offices to maintain fewer accounts with
habitual NSF activity. Second quarter non-interest income decreased $209,000
or 13% in 1999 compared to 1998 due to items (1), (2) and (3) as described
above.
NON-INTEREST EXPENSE
Non-interest expense was $11.5 million for the six-months ended June
30, 1999, an increase of $438,000 or 3.8% compared with non-interest expense of
$11.0 million for the same period in 1998. Personnel expense was $6.7 million
for 1999, an increase of $800,000 or 13.5% compared with personnel expense of
$5.9 million for 1998. Occupancy expense was $2.1 million for the six-months
ended June 30, 1999, an increase of $172,000 or 8.9% compared with occupancy
expense of $1.9 million for the same period in 1998. The aggregate increases
over the period principally reflect the additional costs associated with an
increase in staff due to growth in loans and deposits, organization of a new
branch office in Carmel Valley, and in the second quarter, the start up of
additional business lines of business such as Investment Services and Property
Management Banking.
Data processing expense was $110,000 for the six-months ended June 30,
1999, a decrease of $175,000 or 61.4% compared with data processing expense of
$285,000 for the same period in 1998. The decrease in data processing expense
over the period resulted principally from converting the acquired PCB offices
over to the in-house data processing system of Scripps in November 1998; and in
part by enhanced technical functionality from equipment acquired in 1998. Other
expense was $2.6 million for the six-months ended June 30, 1999, a decrease of
$400,000 or 13.3% compared with other expense of $3.0 million for the same
period in 1998. The decrease in other expense resulted primarily from the fact
that 1998 included legal and professional fees associated with the PCB merger
and the outsourcing of Scripps merchant Mastercard/Visa program, which were
partially offset by increased other expense related to deposit account customer
services expense. Second quarter non-interest expense increased $218,000 or 4%
in 1999 compared to 1998, due to the same reasons noted in the preceding
paragraph.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $2.2 million for the
six-months ended June 30, 1999, compared to $925,000 for the same period in
1998, an increase of $1.2 million or 57.2%. The provision amount reflects
management's judgment of the adequacy of the reserve for loan losses and is
determined by the periodic review and assessment of the overall risk in the
loan portfolio, the Bank's loan loss experience, and the current and expected
economic conditions. The increase in provision for possible loan losses for
the period in 1999 was primarily to replenish the allowance for loan losses,
due to $1.8 million in loan charge-offs for the six-months ended June 30,
1999. The $1.8 million is comprised of one loan for $1.7 million and several
small loans of less than $25,000 each. The allowance for loan losses was $5.2
million and $4.4 million for June 30, 1999 and 1998, respectively. As a
percent of gross loans, it was 1.40% and 1.37%, respectively, for June 30,
1999 and 1998. Management expects the allowance for possible loan losses to
range between 1.4% and 1.5% of gross loans for the remainder of 1999.
The provision for possible loan losses for the three months ended June
30, 1999 was $1.3 million compared to $465,000 for the second quarter of 1998.
The provision for possible loan losses during the second quarter of 1999
reflected an increased provision of $810,000 or 174%; as noted in the preceding
paragraph, this increase was to replenish the allowance for loan losses.
LIQUIDITY
The objective of liquidity management is to maintain a balance between
sources and uses of funds in such a way that the cash requirements of customers
for loans and deposit withdrawals are met in the most economical manner.
Management monitors its liquidity position continuously in relation to trends of
loans and deposits for short term as well as long term requirements. Liquid
resources are monitored on a daily basis to assure maximum availability.
Liquidity requirements are managed by maintaining an adequate level of readily
marketable assets (primarily Federal funds and available for sale investment
securities) and access to short term funding sources. Currently, Scripps has a
line of credit of $20.0 million from a non-affiliated financial institution,
which enables it to borrow Federal funds on an unsecured basis. Scripps also has
a secured discount window borrowing facility with the Federal Reserve Bank of
$2.3 million and a secured borrowing facility with the Federal Home Loan Bank of
approximately $5 million. At June 30, 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 33% at June 30,
1999, and 42% at December 31, 1998. Scripps' management strives to maintain
liquidity levels between 20% and 35%. Additionally, Scripps closely monitors its
loan-to-deposit ratio. This ratio (calculated as gross loans divided by total
deposits) was 71% at June 30, 1999. This ratio increased from 63% at December
31, 1998, primarily as a result of loan growth. Management anticipated this
ratio increase in 1999 due to increased loan demand from the expanding local
economy; however, there can be no assurances that the economy will continue to
expand or that loans will outpace deposit growth.
Scripps' ratio of core deposits (defined as customers' deposits less
time certificates of deposit of $100,000 or more) to total deposits has
remained stable at 89% for December 31, 1998 and June 30, 1999. A significant
portion of Scripps' core deposits is concentrated in the Scripps Money Fund,
a higher interest-bearing demand deposit product that comprised $162 million
or 31% of total deposits at June 30, 1999. This represents a decrease of $33
million or 17% from the balance of $195 million or 37% of deposits at
December 31, 1998. Management believes this decrease is cyclical, due
primarily to customer tax payments. Another significant portion of Scripps'
core deposits is non-interest bearing demand deposits. These deposits
increased to $163.4 million or 31.6% of total deposits at June 30, 1999 from
$152.7 million or 28.8% at December 31, 1998. 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
9
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
WELL
JUNE 30, DECEMBER 31, CAPITALIZED MINIMUM
CAPITAL RATIOS(1): 1999 1998 RATIOS CAPITAL RATIOS
--------- ------------ ----------- --------------
Leverage (2).......................... 8.08% 7.63% 5.0% 4.0%
Tier 1 risk-based..................... 10.31% 10.19% 6.0% 4.0%
Total risk-based...................... 11.48% 11.32% 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.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue (Y2K) exists because many computer programs use only
two-digit dates to reference years. Some computer systems infer the century
1900, rather than 2000.
Unless they are changed, interpreting the 00 as 1900 will result in
miscalculations when processing critical dates. To the extent that the problem
is not successfully addressed, the consequences, the extent of which are
unknown, could impact Scripps' business operations, customers and vendors. In
1997 Scripps formed a task force to supervise all issues associated with the
century date change, consisting of representatives from all divisions of
Scripps. The Scripps board of directors has given this project top priority and
has dedicated resources, both staffing and financial, to support the efforts
necessary to provide Year 2000 readiness. A comprehensive plan has been
established to ensure compliance with regulations regarding preparation of
computer systems for the year 2000 and its status is reported to the Scripps
board on a monthly basis. Scripps completed Awareness and Assessment phases in
1998. The Y2K team, under the oversight of the task force, identified all
critical functions performed and the hardware, software and supplies necessary
to perform these functions. First, high-level test plans were developed, then
detailed test plans and scripts were written to use for testing mission critical
systems. Scripps substantially completed testing of mission critical systems and
processes during the first quarter of 1999. The testing encompassed our Unisys
ClearPath host computer, the COMPAQ Alpha used by the trust accounting system,
our Information Technology Inc. banking application software, Sunguard Trustware
II accounting system, the servers and PCs on our network, numerous PC
applications software, and online testing with Federal Reserve Bank. These
systems were tested using the thirteen critical dates identified by the Federal
Financial Institutions Examination Council.
The only mission critical system with some testing still to be completed is
the ATM system. ATMs were tested in the current batch authorization mode, but
since the Bank is in the process of changing from the batch mode to an
on-line authorization mode, we are still in the process of completing the Y2K
testing with the ATM processor in the on-line
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mode. To date, ATM transaction testing has been completed successfully. Still
to be finalized with the vendor is ATM report testing. This should be
complete by September 15, 1999.
Very little renovation has been required. Early on, Scripps recognized that
our voice response unit was not compliant. It has been replaced with a Year
2000 compliant version. Network servers were upgraded or replaced in the
first quarter of 1999. Another product, BankLink, a business cash management
system, is not compliant and is being retired, effective September 30, 1999.
Customers using that product are being offered the choice of existing,
compliant products offered by Scripps Bank. All non-compliant PCs
(approximately 50) have been upgraded or replaced. We are currently upgrading
the telephone system to ensure that voice mail will be Y2K compliant. This
upgrade will be complete by September 23, 1999. Any new software and hardware
will be certified Year 2000 ready and tested by Scripps prior to
implementation. New software purchases are expected to be insignificant. New
releases of existing software will be tested before being brought on line.
Contingency plans have been developed to contend with a wide array of
situations from a single process failure, to a power outage at a regional
office, to a liquidity crisis due to substantial customer withdrawals. To
fulfill the FDIC requirement of an independent audit review of Y2K
contingency plans, the Bank's internal auditor, who is not a member of the
Y2K task force, reviewed the plans to ensure that all critical functions were
covered and that the plans adequately covered the potential problem. All
contingency plans were tested in early June, necessary revisions made and all
re-testing completed by the end of June 1999. In an effort to confirm that
the procedures written in the contingency plans are still current, a
walk-through test will be performed for each procedure in September 1999. In
late November and early December, walk-throughs will be performed again to
verify that the then current staff is trained. As a final readiness check, on
January 1, 2000 all departments will be checked to determine if each software
application is operational at each site. The results of this readiness check
will be reported to executive management that day.
Scripps has identified fifty-six critical vendors. Vendors have been
contacted to ascertain their level of readiness and those identified as
critical to the day-to-day operation of the Bank are monitored. Early in the
process, critical vendors were assigned a probability of failure factor of
low, medium or high. Those vendors that are currently not certified to be
compliant had all been assigned a risk factor of "low". Of the fifty-six
vendors identified, forty-five, or eighty percent, have certified that they
are compliant. Of the remaining eleven, or twenty percent, which are
currently not compliant, seven have indicated that they would be compliant by
June 30, 1999. We are in the process of following up with these vendors. The
remaining four have indicated they will be ready by October 1, 1999. The
monitoring process includes verification by phone, letter and web-site. A
tracking report is maintained and reviewed by the task force. Vendor status
will be monitored monthly from July 1999, through year-end. Vendors that
provided products to the Bank have been tested. Those that provide services,
such as the phone company, the gas and electric company, and the US Postal
Service are not testable.
The only vendor not yet certified as compliant that was rated as having a high
impact on the Bank should the vendor fail, was Pacific Bell, who provides data
and voice communication. As noted above, the Bank rated the probability of
failure of this vendor as "low"; however, there are contingency plans in place
should failure occur. The Bank will be able to produce reports and data in
hardcopy form and use cellular or digital wireless communications in the event
of telephone line service disruption.
By September 15, 1999 the task force will evaluate any remaining
non-compliant vendors on a case-by-case basis to decide which vendor
relationships should be terminated. Factors to be considered include the
probability of failure and the availability of a replacement vendor. The Bank
has taken proactive measures to work together with our customers to ensure
their own Year 2000 readiness and has a program in place for risk analysis
and monitoring of significant borrowers and depositors. To date, significant
borrowers have been assessed and none have been identified as having a
significant Y2K risk that would materially impact the operations of the Bank.
Scripps has included Y2K risk ratings as part of the loan application and
credit review process since the first quarter of 1999. While Y2K compliance
is not being required on an absolute basis, it is considered in each lending
decision and is an integral part of the risk rating used to determine credit
worthiness. Based on interviews with customers and on account officer
knowledge, a Y2K risk assessment was completed for all existing borrowers
with balances of $250,000 or more. This is an ongoing process as borrowers
continue to meet the criteria. The assessment of large depositors continues.
Through a questionnaire or personal interview, the Bank is evaluating these
customers' level of comfort with the banking industry and with Scripps. Also,
all depositors were sent a survey to capture their Y2K
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perceptions and intentions. A statistically valid response was received and
was used to assist us in writing our Y2K liquidity contingency plan. The
survey will be sent again in October 1999 to monitor any change in our
customers' perceptions or intentions. Based on interviews and survey results
to date, Scripps' customers appear satisfied with the Bank's Y2K readiness.
The related costs of Y2K, which are expensed as incurred or capitalized, if
appropriate, are primarily included in professional services, equipment repairs
or depreciation and salary expense. Y2K expenses incurred through the end of
1998 amounted to approximately $147,000 and the remaining costs of the project
are estimated to be $638,000. Scripps holds directors' and officers' liability
and product liability policies, none of which include exclusions for Y2K claims;
however, there can be no assurances that any Y2K claims will be covered by
insurance or that the insurance coverage will be adequate. Scripps does not
believe that the costs associated with the Y2K issue will have a material effect
on the results of its operations; nonetheless, since the outcome of the century
date change is unknown, there can be no assurances that the Bank will not be
materially affected, particularly by events that are not within the Bank's
control.
FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis of Financial Conditions and
Results of Operations contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forwarded-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 and
Year 2000 issues. Forward-looking statements should be read in light of these
factors. Potential risks and uncertainties include, but are not limited to,
those listed below under "Quantitative and Qualitative Disclosures about
Market Risk" as well as other risks and uncertainties detailed in our
Registration Statement on Form 10, as amended, filed with the Securities and
Exchange Commission on July 13, 1999.
The above Management's Discussion and Analysis should be read in conjunction
with the consolidated financial statements and notes thereto included in SFC's
Registration Statement on Form 10, as amended, filed with the Securities and
Exchange Commission on July 13, 1999.
ITEM 3. 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 in 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
12
interest rates or they may precede or lag behind changes in market interest
rates. In addition, certain interest rate sensitive assets may have
contractual limitations to changes in interest rates. SFC considers these
various factors and their anticipated effects in managing the bank's exposure
to interest rate risk.
Management seeks to maintain a reasonably balanced interest rate risk
position within one year to protect its financial condition and net interest
margin from market fluctuations in interest rates. Overall management strategies
to reduce SFC's interest rate risk consist of: (i) maintaining a majority of its
loan assets and deposit liabilities on an adjustable rate basis, (ii) limiting
the volume of its loans with terms-to-maturity in excess of five years and (iii)
maintaining a portion of its investment securities with varied terms to
maturity. Additionally, SFC maintains a Management Asset/Liability Committee and
a Directors Asset/Liability Committee, both of which review on a regular and
periodic basis such matters as earnings, asset quality, asset and liability mix,
liquidity and funding sources, investment resources, capital, interest rate
risk, and economic events and trends, among other matters. Both Committees
review bank compliance with a set of Board-approved directives with which SFC
should comply to meet its asset and liability management objectives.
INTEREST-SENSITIVE FINANCIAL INSTRUMENTS
(Dollars in thousands)
Expected Maturity Date as of June 30, 1999
AFTER 1 YEAR AFTER 2 YEARS AFTER 3 YEARS AFTER 4 YEARS
WITHIN BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN FAIR
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS THEREAFTER TOTAL VALUE
-------- ------------ ------------- ------------- ------------- ---------- -------- --------
FINANCIAL ASSETS:
Loans:
Variable rate $154,409 $22,098 $11,280 $23,760 $17,205 $29,413 $258,165 $258,165
Average interest rate 9.07% 8.95% 9.17% 8.96% 8.98% 9.53% 9.10%
Fixed rate 18,484 9,760 16,818 29,126 11,402 26,753 112,343 113,936
Average interest rate 8.78% 8.73% 9.13% 8.97% 8.70% 8.81% 8.88%
Investment securities:
CMO's 8,412 7,690 6,909 3,118 1,939 2,704 30,772 30,457
Average interest rate 6.14% 6.03% 5.98% 6.15% 6.38% 7.09% 6.10%
MBS 6,128 5,329 4,623 3,937 3,381 14,132 37,529 37,026
Average interest rate 7.08% 7.07% 7.01% 7.03% 7.16% 6.90% 7.05%
SBA's 173 2,756 3,617 6,546 6,494
Average interest rate 8.98% 5.38% 5.47% 5.53%
U.S. Treasury and
Agency 5,506 17,761 15,947 9,713 48,927 48,278
Average interest rate 7.06% 6.22% 6.54% 5.99% 6.38%
States and political
subdivisions 1,706 6,909 8,622 17,237 19,341
Average interest rate 5.64% 5.24% 5.29% 5.31%
Equity 1,461 1,748 3,209 3,061
Average interest rate 3.89% 5.49% 4.76%
Interest bearing due from
banks 1,877 1,877 1,877
Average interest rate 5.85% 5.85%
Federal funds sold 12,783 12,783 12,873
Average interest rate 4.62% 4.62%
FINANCIAL LIABILITIES:
Interest bearing deposits:
Non-maturing deposits 264,544 264,544 264,544
Average interest rate 2.41% 2.41%
Time deposits 85,825 3,295 65 38 89,223 89,203
Average interest rate 4.41% 5.03% 4.74% 5.25% 4.43%
Guarantee of loan to
ESOP Trust $ 17 $ 38 $ 3 $ 58 $ 58
Average interest rate 7.75% 7.75% 7.75% 7.75%
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since SFC is recently formed, no matters have been submitted to a vote of the
security holders.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
* 3.1 Articles of Incorporation of SFC
* 3.2 Bylaws of SFC
* 4.1 Specimen Common Stock Certificate
27.01 Financial Data Schedule
- ----------------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form 10 (File No. 0-26081)
(b) THERE WERE NO REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED
JUNE 30, 1999
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCRIPPS FINANCIAL CORPORATION
Date: August 27, 1999 By: /s/ Ronald J. Carlson
--------------- ---------------------
Ronald J. Carlson
President
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