<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20429
FORM 10-Q
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1998.
/ / Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from N/A to N/A.
------- -------
Commission File Number 333-16951
MID-STATE BANCSHARES
--------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0442667
- -------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1026 GRAND AVE. ARROYO GRANDE, CA 93420
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (805) 473-7700
----------------
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of class)
Check whether the Bank (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
As of November 4, 1998, the aggregate market value of the common stock held by
non-affiliates of the Bank was: $233,730,286.
-------------
Number of shares of common stock of the Bank outstanding as of November 4, 1998:
10,066,200 shares
<PAGE>
MID-STATE BANCSHARES
September 30, 1998
Index
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Financial Position as of
September 30, 1998, December 31, 1997, and September 30, 1997. .... 3
Consolidated Statements of Income for the three and nine months
ended September 30, 1998 and September 30, 1997.................... 4
Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 1998 and September 30, 1997............. 5
Notes to Consolidated Financial Statements......................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 9
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.......... 13
Item 4 - Disclosures concerning Year 2000 issues............................ 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................. 18
Item 2 - Changes in Securities and Use of Proceeds......................... 18
Item 3 - Defaults Upon Senior Securities................................... 18
Item 4 - Submission of Matters to a Vote of Security Holders............... 18
Item 5 - Other Information................................................. 18
Item 6 - Exhibits and Reports on Form 8-K.................................. 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MID-STATE BANCSHARES
Consolidated Statements of Financial Position
(Interim Periods Unaudited - figures in 000's)
<TABLE>
<CAPTION>
ASSETS Sept. 30, 1998 December 31, 1997 Sept. 30, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Due From Banks $ 84,776 $ 92,180 $ 91,721
Fed Funds Sold 29,865 17,461 17,074
Investment Securities:
Available For Sale 457,665 419,314 419,012
Held-to-Maturity (Market value of 51,494 62,767 56,620
$52,411, $63,074 and $56,729,
respectively)
Loans, net of unearned income 543,576 540,877 523,986
Allowance for Loan Losses (13,257) (13,365) (12,977)
----------- ----------- -----------
Net Loans 530,319 527,512 511,009
Premises and Equipment 30,714 33,172 31,111
Accrued Interest Receivable 10,917 10,503 10,285
Investments in Real Estate, Net 8,386 8,768 9,603
Other Real Estate Owned, Net 278 3,480 5,764
Other Assets 11,187 11,188 11,447
----------- ----------- -----------
TOTAL ASSETS $ 1,215,601 $ 1,186,345 $ 1,163,646
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND EQUITY
- -----------------------------------------------------------------------------------------------------------
Non Interest Bearing Demand $ 219,907 $ 212,077 $ 200,920
NOW Accounts, Money Market
and Savings Deposits 527,882 523,577 515,242
Time Deposits Under $100,000 241,089 240,391 237,836
Time Deposits $100,000 or more 89,792 87,301 82,336
----------- ----------- -----------
TOTAL DEPOSITS 1,078,670 1,063,346 1,036,334
Accrued Interest Payable and
Other Liabilities 10,443 8,970 19,024
----------- ----------- -----------
TOTAL LIABILITIES 1,089,113 1,072,316 1,055,358
Shareholders' Equity:
Common Stock and Surplus (Shares 42,720 41,576 31,978
Outstanding of 10,059, 9,896 and
9,558, respectively)
Retained Earnings 77,568 70,667 74,959
Unrealized Gain
on Available for Sale Securities 6,200 1,786 1,351
----------- ----------- -----------
TOTAL EQUITY 126,488 114,029 108,288
----------- ----------- -----------
TOTAL LIABILITIES AND EQUITY $ 1,215,601 $ 1,186,345 $ 1,163,646
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
3
<PAGE>
MID-STATE BANCSHARES
Consolidated Statements of Income
(Unaudited - figures in 000's except earnings per share data)
<TABLE>
<CAPTION>
Three Month Period Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $13,907 $13,427 $41,572 $39,734
Interest on investment securities 7,578 6,916 21,897 19,708
Interest on fed funds sold, other 700 522 1,706 1,322
------- ------- ------- -------
TOTAL INTEREST INCOME 22,185 20,865 65,175 60,764
------- ------- ------- -------
INTEREST EXPENSE:
Interest on NOW, money market and savings 2,225 2,249 6,595 6,637
Interest on time deposits 4,277 4,206 12,852 12,087
Interest on mortgages, other 105 63 256 135
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,607 6,518 19,703 18,859
------- ------- ------- -------
NET INTEREST INCOME BEFORE PROVISION 15,578 14,347 45,472 41,905
Less: Provision for loan losses 0 0 300 30
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION 15,578 14,347 45,172 41,875
------- ------- ------- -------
OTHER OPERATING INCOME:
Service charges and fees 1,590 1,707 4,897 5,107
Other noninterest income 2,551 2,319 8,218 6,659
------- ------- ------- -------
TOTAL OTHER OPERATING INCOME 4,141 4,026 13,115 11,766
------- ------- ------- -------
OTHER OPERATING EXPENSE:
Salaries and employee benefits 6,317 6,786 19,816 19,759
Occupancy and furniture 1,805 1,963 5,583 5,779
Provisions for losses on investments in 0 600 0 1,800
real estate
Other operating expenses 3,257 3,581 10,482 10,522
Non-recurring merger related charges 6,938 0 6,938 0
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSE 18,317 12,930 42,819 37,860
------- ------- ------- -------
Income before taxes 1,402 5,443 15,468 15,781
Provision for income taxes 2,000 1,240 6,637 3,385
------- ------- ------- -------
NET (LOSS) INCOME $( 598) $ 4,203 $ 8,831 $12,396
------- ------- ------- -------
------- ------- ------- -------
EARNINGS PER SHARE - BASIC $( 0.06) $ 0.42 $ 0.88 $ 1.24
- DILUTED $( 0.06) $ 0.42 $ 0.87 $ 1.23
</TABLE>
4
<PAGE>
MID-STATE BANCSHARES
Consolidated Statements of Cash Flows
(Unaudited - figures in 000's)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (Loss) Income $ (598) $ 4,203 $ 8,831 $ 12,396
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for credit losses 0 0 300 30
Provision for losses on investments in real estate 0 600 0 1,800
Provision for losses: merger related surplus assets 2,500 0 2,500 0
Depreciation and amortization 896 993 2,673 2,805
Net amortization of prem./discounts-investments 310 230 851 786
Decrease (increase) in accrued interest receivable 612 140 (414) 19
(Decrease) Increase in other liabilities (148) 2,225 1,485 2,984
Decrease in other assets 3,278 1,442 1 934
Other changes, net (1,650) (502) (1,795) (2,186)
--------- --------- --------- ---------
Net cash provided by operating activities 5,200 9,331 14,432 19,568
--------- --------- --------- ---------
INVESTING ACTIVITIES
Net cash from proceeds of real estate 422 3,130 3,584 6,637
Proceeds from sales and maturities of investments 26,435 34,828 118,869 98,327
Purchases of investments (38,196) (69,562) (140,989) (136,147)
Increase in loans (1,496) (9,359) (2,699) (16,902)
Purchases of premises and equipment, net (466) (710) (2,715) (1,639)
--------- --------- --------- ---------
Net cash used in investing activities (13,301) (41,673) (23,950) (49,724)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Increase in deposits 12,641 29,927 15,324 35,331
(Decrease) Increase in short-term borrowings (6,663) (912) (13) 411
Exercise of stock options 66 32 1,144 84
Cash dividends paid (0) (1,385) (1,937) (1,831)
--------- --------- --------- ---------
Net cash provided by financing activities 6,044 27,662 14,518 33,995
--------- --------- --------- ---------
(Decrease) Increase in cash and cash equivalents (2,057) (4,680) 5,000 3,839
Cash and cash equivalents at beginning of period 116,698 113,475 109,641 104,956
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 114,641 $ 108,795 $ 114,641 $ 108,795
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
5
<PAGE>
MID-STATE BANCSHARES
Notes to Consolidated Financial Statements
(Information with respect to interim periods is unaudited)
NOTE A - BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying consolidated financial statements include the accounts of
Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank which
includes the Bank and the Bank's subsidiaries, MSB Properties and Mid Coast Land
Company (collectively the "Company" or "Bank" or "Mid-State"). All significant
intercompany transactions have been eliminated in consolidation. These
consolidated financial statements should be read in conjunction with the Form
10-K Annual Reports for the year ended December 31, 1997 of both Mid-State Bank
and BSM Bancorp (see Note D below). A summary of the Company's significant
accounting policies is set forth in the Notes to consolidated financial
statements contained therein.
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles on a basis consistent with the
accounting policies reflected in the audited consolidated financial statements
included in the Annual Reports on Form 10-K for the year ended December 31, 1997
of both Mid-State and BSM Bancorp (see Note D below). The merger of BSM Bancorp,
Bank of Santa Maria and Mid-State was completed on July 10, 1998. The merger was
accounted for on a pooling of interests basis and as a result, prior periods are
combined and restated as if the two organizations were historically one unit.
They do not, however, include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments including normal recurring accruals
considered necessary for a fair presentation have been included. Operating
results for the interim periods presented are not necessarily indicative of the
results that may be expected for any other interim period or for the year as a
whole.
NOTE B - EARNINGS PER SHARE
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute Earnings Per Share ("EPS"). Figures
are in thousands, except earnings per share data.
<TABLE>
<CAPTION>
Three Month Period Ended Three Month Period Ended
Sept. 30, 1998 Sept. 30, 1997
Earnings Shares EPS Earnings Shares EPS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net (Loss) Income as reported $(598) $ 4,203
BASIC EARNINGS PER SHARE:
(Loss) Income available to
common shareholders $(598) 10,055 $ (0.06) $ 4,203 9,959 $ 0.42
Effect of dilutive securities:
Stock options 93 85
DILUTED EARNINGS PER SHARE:
(Loss) Income available to
common shareholders $(598) 10,148 $ (0.06) $ 4,203 10,044 $ 0.42
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Nine Month Period Ended Nine Month Period Ended
Sept. 30, 1998 Sept. 30, 1997
Earnings Shares EPS Earnings Shares EPS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as reported $8,831 $12,396
BASIC EARNINGS PER SHARE:
Income available to
common shareholders $8,831 10,017 $ 0.88 $12,396 9,956 $ 1.24
Effect of dilutive securities:
Stock options 93 85
DILUTED EARNINGS PER SHARE:
Income available to
common shareholders $8,831 10,110 $ 0.87 $12,396 10,041 $ 1.23
</TABLE>
NOTE C - NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. Comprehensive Income, which encompasses
net income and unrealized gains (losses) on available for sale securities
adjustments, is presented below.
<TABLE>
<CAPTION>
Three Month Period Ended,
(In thousands) Sept. 30, 1998 Sept. 30, 1997
-------------------------------
<S> <C> <C>
Net (Loss) Income $( 598) $ 4,203
Other Comprehensive Income - unrealized gain on
available for sale securities, net of tax expense of
$2,797 and $848 for the three months ended Sept
30, 1998 and 1997, respectively 4,195 1,270
------- -------
Comprehensive Income $ 3,597 $ 5,473
------- -------
------- -------
<CAPTION>
(In thousands) Nine Month Period Ended,
Sept. 30, 1998 Sept. 30, 1997
-------------------------------
<S> <C> <C>
Net Income $ 8,831 $12,396
Other Comprehensive Income - unrealized
gain on available for sale securities,
net of tax expense of $2,856 and
$296 for the nine months ended Sept. 30,
1998 and 1997, respectively 4,500 449
------- -------
Comprehensive Income $13,331 $12,845
------- -------
------- -------
</TABLE>
7
<PAGE>
NOTE D - MERGER OF MID-STATE BANK, BANK OF SANTA MARIA AND BSM BANCORP
As reported in the Company's recent Reports on Form 10-K and Form 8-K, the
Company entered into an Agreement to Merge and Plan of Reorganization (the
"agreement") dated January 29, 1998 and amended on March 27, 1998 by and among
Mid-State Bank, BSM Bancorp and Bank of Santa Maria. This matter was submitted
to a vote of the shareholders of Mid-State Bank at its Annual Meeting on June
17, 1998. The matter was also submitted to a vote of the shareholders of BSM
Bancorp, the parent company of Bank of Santa Maria, on June 18, 1998. The
shareholders of both organizations approved the merger. Co-terminus with the
completion of the merger on July 10, 1998, BSM Bancorp changed its name to
Mid-State Bancshares and remained the parent company to the merged bank, which
retained the Mid-State Bank name. The merger was accounted for on a pooling of
interests basis and as a result, prior periods are combined and restated as if
the two banks were historically one unit.
The following summarizes the separate revenue and net income of BSM Bancorp and
Mid-State Bank that have been reported in the restated financial statements
included herein (dollars in 000's):
<TABLE>
<CAPTION>
Nine Month Three Month Nine Month
Period Ended Period Ended Period Ended
September 30, 1998* September 30, 1997 September 30, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and non-interest income:
BSM Bancorp * $14,721 $ 7,208 $21,000
Mid-State Bank: Pre-merger* 37,243 17,683 51,530
Mid-State Bank: Post-merger 26,326 0 0
------- ------- -------
Total $78,290 $24,891 $72,530
------- ------- -------
------- ------- -------
Net Income (Loss):
BSM Bancorp * $ 2,306 $ 1,142 $ 2,992
Mid-State Bank: Pre-merger* 7,123 3,061 9,404
Mid-State Bank: Post-merger ( 598) 0 0
------- ------- -------
Total $ 8,831 $ 4,203 $12,396
------- ------- -------
------- ------- -------
</TABLE>
* For the nine month period ended September 30, 1998, figures for BSM Bancorp
and Mid-State Bank (pre-merger), reflect the six month period ended June 30,
1998. The merger was completed July 10, 1998 so that figures for the three month
period ended September 30, 1998 showing the separate revenue and net income for
BSM Bancorp and Mid-State Bank are not meaningful. Results from July 1st through
July 10, 1998 are not material to the financial statements.
The shares outstanding for Mid-State Bancshares at September 30, 1998 results
from the following activity in 1998:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1997 - Shares Outstanding: Mid-State Bank 6,905,100
BSM Bancorp 2,990,939
Stock Options Exercised Prior to Merger: Mid-State Bank 2,700
BSM Bancorp 71,400
Additional shares issued in connection with the exchange
for Mid-State Bancshares stock (effective July 10, 1998) 83,813
Stock Options Excercised Post Merger: Mid-State Bancshares 4,740
----------
September 30, 1998 - Shares Outstanding Mid-State Bancshares 10,058,692
----------
----------
</TABLE>
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA - SUMMARY. The following table provides certain
selected financial data at September 30, 1998 and September 30, 1997 and the
unaudited results of operations for the quarter ended and year-to-date ended on
those dates (unaudited). Prior year information has been restated to reflect the
merger of BSM Bancorp, Bank of Santa Maria, and Mid-State Bank as if the
organizations were historically one unit.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Quarter-ended Year-to-Date
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Interest Income $ 22,185 $ 20,865 $65,175 $60,764
Interest Expense 6,607 6,518 19,703 18,859
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income 15,578 14,347 45,472 41,905
Provision for Loan Losses - - 300 30
Non-interest income 4,141 4,026 13,115 11,766
Non-interest expense 18,317 12,930 42,819 37,860
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,402 5,443 15,468 15,781
Provision for income taxes 2,000 1,240 6,637 3,385
- -----------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (598) $ 4,203 $ 8,831 $12,396
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE:
Net (Loss) Income - basic $ (0.06) $ 0.42 $ 0.88 $ 1.24
Net (Loss) Income - diluted $ (0.06) $ 0.42 $ 0.87 $ 1.23
Weighted avg. shares used in basic E.P.S. calculation 10,055 9,959 10,017 9,956
Cash dividends $ - $ 0.14 $ 0.19 $ 0.18
Stock dividend - - - -
Dividend payout ratio 0.0% 33.3% 21.6% 14.5%
Book value at period-end (adjusted for stock dividends) $ 12.57 $ 10.87
Shares outstanding at period end (actual) 10,059 9,558
Closing Market Price of Stock (1) $ 24.00 $ 20.65
AT PERIOD-END:
Cash and cash equivalents $ 84,776 $ 91,721
Investments and Fed Funds Sold 539,024 492,706
Loans, net 530,319 511,009
Other assets 61,482 68,210
- -------------------------------------------------------------------------------------
Total Assets $ 1,215,601 $1,163,646
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Non-interest bearing deposits $ 219,907 $ 200,920
Interest bearing deposits 858,763 835,414
Other borrowings 4,482 7,835
Other liabilities 5,961 11,189
Shareholders' equity 126,488 108,288
- -------------------------------------------------------------------------------------
Total Liabilities and Shareholders' equity $ 1,215,601 $1,163,646
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
SELECTED FINANCIAL DATA - SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
Quarter-ended Year-to- Date
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
-------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET QUALITY:
Non Accrual Loans 1,283 3,539
Loans past due 90 days or more 2,286 1,410
Other real estate owned (acquired through foreclosure) 278 5,764
Total non performing assets 3,847 10,713
Ratio of ending non performing assets to ending assets 0.32% 0.92%
FINANCIAL RATIOS
For the period:
Return on assets (2) -0.19% 1.46% 0.99% 1.49%
Return on equity (2) -1.90% 15.76% 9.82% 16.13%
Net interest margin (2) 5.77% 5.66% 5.74% 5.66%
Net loan charge-offs (recoveries) to avg. loans (2) 0.25% 0.19% 0.10% 0.04%
Efficiency ratio 92.9% 70.4% 73.1% 70.5%
At Period-End:
Equity to average assets (leverage ratio) 9.8% 9.2%
Tier One capital to risk-adjusted assets 16.1% 14.9%
Total capital to risk-adjusted assets 17.3% 16.0%
Loan loss reserve to loans, gross 2.4% 2.5%
Ending loans (net) to ending deposits 49.2% 49.3%
</TABLE>
(1) Closing price shown for September 30, 1997 reflects combined market
capitalization of Mid-State Bank and BSM Bancorp, divided by shares
outstanding as of September 30, 1998, for comparability purposes.
(2) Ratio reflects annualized performance.
PERFORMANCE SUMMARY. The Company incurred $6.9 million of one-time only
charges to expense in the third quarter of 1998 as a result of the merger
between Bank of Santa Maria, Mid-State Bank and BSM Bancorp. The effect of this
mostly non-deductible, one-time only charge was to reduce reported earnings of
the Company. Mid-State's net income for the first 9 months of 1998 was
$8,831,000, a decrease of 28.9% over the $12,423,000 earned in the like 1997
period. Absent the merger charges, earnings would have increased to $15,769,000,
or 26.9%. The Company posted a Net Loss for the third quarter in 1998 of
$(598,000) compared to Net Income of $4,203,000 in the comparable 1997 quarter.
Absent the merger charges, earnings would have increased to $6,340,000, or
50.8%.
These earnings represented an annualized return on assets of 0.99% (1.77%
when the one-time charges are excluded) on a year-to-date basis and -0.19%
(2.06% when the one-time charges are excluded) for the third quarter,
compared to 1.63% and 1.79%, respectively, earned in the comparable 1997
periods. The annualized return on equity was 9.82% (17.39% when the one-time
charges are excluded) for the nine months of 1998 compared to 16.13% for the
1997 period. In comparing the third quarter only results, the return on
equity was -1.90% (20.17% when the one-time charges are excluded) in 1998
compared to 15.76% in 1997. Year-to-date, basic net income per share was
$0.88 ($0.87 diluted) compared to $1.24 basic and $1.23 diluted, after giving
effect to the 5% stock dividend which was effective at the end of 1997 and
the additional shares issued in connection with the merger. For the third
quarter, per share results were $(0.06) (basic and diluted) compared to $0.42
(basic and diluted) in 1997. Absent the impact of the merger related charges,
basic net income per share was $1.57 for the 9 month period and $0.63 for the
three month period ended September 30, 1998. Absent the impact of the merger
related charges, diluted income per share was $1.56 for the nine month period
and $0.62 for the three month period ended September 30, 1998.
10
<PAGE>
Earnings, excluding the $6.9 million of one-time merger charges, for the
nine months increased compared to the 1997 period due primarily to improvements
in Mid-State's net interest margin (up $3.6 million) and non interest income
sources (up $1.3 million). Non interest expense, excluding the one-time merger
charges, were down during the nine months of 1998 compared to the 1997 period by
$2.0 million. Tax expense partially offset some of these gains, having increased
from $3.4 million in the nine month 1997 period to $6.7 million in the
comparable 1998 period.
NET INTEREST INCOME. Mid-State's year-to-date annualized yield on
interest earning assets was 8.22% for the first nine months of 1998 compared
to 8.21% in the like 1997 period. In a similar manner, annualized interest
expense as a percent of earning assets declined from 2.55% in the first nine
months of 1997 to 2.48% in this year's first nine months. As a result,
Mid-State's annualized Net Interest Income, expressed as a percent of earning
assets, was up slightly at 5.74% for the nine month period of 1998 compared
to 5.66% in the comparable 1997 period. Annualized Net Interest Income as a
percent of average total assets improved from 5.04% in the first nine months
of 1997 to 5.11% in the 1998 period.
Earning assets on average were $71 million higher in the nine month 1998
period ($1,060 million compared to $989 million) which is up about 7.2% from
the like 1997 period. Average deposits in this same time-frame were up $48
million ($1,042 million compared to $994 million) explaining part of the
increase in average assets. The remaining portion of the increase is a result
of a combination of three factors - (1) the retention of earnings in the
Bank, (2) the decline in non performing assets and investments in real estate
and (3) a reduction in non earning balances held at the Federal Reserve Bank.
PROVISION AND ALLOWANCE FOR LOAN LOSSES. Mid-State did not make a
provision to the allowance for loan losses in the third quarter of 1998.
Year-to-date, the Bank provided $300,000 as a charge to expense to the
Allowance for Loan Losses. Management continues to believe that the
allowance, which stands at 2.4% of total loans at September 30, 1998, down
from 2.5% one year earlier, is adequate to cover future losses. The $13.3
million allowance is now more than three times the level of non performing
assets which have declined to $3.8 million from $10.7 million one year
earlier. Non performing assets consist of loans on nonaccrual, accruing loans
90 days or more past due and Other Real Estate Owned. While continuing
efforts are made to improve overall asset quality, Management is unable to
estimate what and under what exact terms problem assets will be resolved.
Changes in the allowance for loan losses for the periods ended September
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(000's)
Quarter ended Sept. 30, Year-to-date Sept. 30,
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, beginning of the period $13,592 $13,223 $13,365 $13,140
Provision for loan losses 0 0 300 30
Recoveries of loans previously charged-off 166 180 606 1,051
Loans charged off (501) (426) (1,014) (1,244)
------- ------- ------- -------
Balance, end of period $13,257 $12,977 $13,257 $12,977
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
11
<PAGE>
At September 30, 1998, the recorded investment in loans which have been
identified as impaired loans, totaled $4,542,356. Of this amount, $2,387,985
related to loans with no valuation allowance and $2,154,371 related to loans
with a corresponding valuation allowance of $257,065. Impaired loans totaled
$6,871,305 at September 30, 1997. Of that amount, $2,863,003 related to loans
with no valuation allowance and $4,008,302 related to loans with a corresponding
valuation allowance of $763,183. The valuation allowance for impaired loans is
included within the general allowance shown above and netted against loans on
the consolidated statements of financial position. For the quarter ended
September 30, 1998, the average recorded investment in impaired loans was
$4,723,530 compared to $7,931,242 in the 1997 period.
NONINTEREST INCOME. Noninterest income for the first nine months of 1998
was $13.1 million, up $1.3 million from the 1997 period, or 11.5%. The major
explanation for the increase was in gain on sale of OREO properties (up $400
thousand) and in the amount of recoveries of prior periods losses (up $518
thousand). Recoveries of prior periods losses included recoveries of legal
charges, accrued interest write-offs, operating losses and other losses.
Additionally, sales of properties at Mid Coast Land Company resulted in an
increase of $424 thousand in income. Service Charge earnings, which are a major
component of noninterest income, were down by $210 thousand compared to the
year-to-date figure one year ago. Other categories of noninterest income showed
modest to flat growth over this time frame.
NONINTEREST EXPENSE. Noninterest expense for the first nine months of 1998
was $42.8 million ($35.9 million without the non-recurring merger charges). This
compares to $37.9 million in the comparable 1997 period. There was a reduction
of $1.8 million charged to expense for the allowance for losses on investments
in real estate in 1998 compared to the 1997 period. This reduction was in
addition to other modest decreases of $196 thousand in occupancy expenses and
$40 thousand net across the remaining other categories. Recurring staff expense
charges were up a modest $57 thousand when comparing the 9 month period of 1998
to the like period in 1997.
PROVISION FOR INCOME TAXES. The year-to-date provision for income taxes was
$6,735,000, compared to $3,384,800 for the same period in 1997. The effective
tax rate in 1998 was 43.2% compared to 21.4% in 1997. The effective tax rate in
1998 is slightly higher than a normalized effective tax rate due to the
non-deductibility of certain merger related expenses for tax purposes, offset in
part by the reversal of approximately $2.6 million of valuation allowance during
the 9 month year-to-date 1998 period. The 1997 effective tax rate was lower than
a normalized rate due to the reversal of $5.4 million of tax valuation
allowance. The continued reversal of the tax valuation allowance reflects a
general reduction in the level of net deferred tax assets of the Company,
combined with an increase in the overall earnings capacity of the Company. For
the full year 1998, the Company expects to utilize most, if not all, of the $3.7
million in valuation allowance available to it as of January 1, 1998.
BALANCE SHEET. Total assets at September 30, 1998 totaled $1,215.6 million,
up 4.5% from the level one year earlier of $1,163.6 million. Net loans were a
component of this growth, increasing from $511.0 million at the end of
September, 1997 to $530.3 million in 1998. Investments and fed funds sold grew
significantly from $492.7 million one year earlier to $539.0 million this year.
Other non earning asset categories declined when comparing 1998 to 1997.
Total asset growth was funded through a $42.3 million increase in deposits
and an $18.2 million increase in stockholders' equity when comparing 1998 over
1997. There was a modest decrease in other liabilities of $8.6 million,
comparing the mid-year periods. Of the $18.2 million increase in stockholders'
equity, $4.8 million was generated by an increase in the unrealized gain (loss)
on available for sale securities.
Mid-State's loan to deposit ratio of 49.2% at September 30, 1998 is down
slightly from the 49.3% ratio one year earlier. There is ample internal
liquidity to fund improvements in this ratio through Mid-State's investment
portfolio which is categorized 90% as available for sale.
12
<PAGE>
INVESTMENT SECURITIES. Fed funds sold represent $29.9 million of the $539.0
million portfolio noted above. Of the remaining $509.1 million, 37% is invested
in U.S. Treasury securities, 25% is invested in U.S. Government agency
obligations, 34% is invested in securities issued by states and political
subdivisions in the U.S. and 4% is invested in mortgage-backed securities and
other securities. 90% of all these investment securities have stated maturities
which are due prior to December 31, 2002. Approximately 33% matures in less than
one year. Actual maturities will vary somewhat from stated maturities because
certain issuers, especially in the mortgage-backed securities portfolio, may
have the right to prepay their obligations at a faster rate than that indicated
by their contractual maturity.
CAPITAL RESOURCES. Total stockholders' equity increased from $108.3 million
at September 30, 1997 to $126.5 million at September 30, 1998. Net income over
this 12 month time period of $14.1 million less cash dividends of $1.9 million
plus a $4.8 million increase in unrealized gains on available for sale
securities plus $1.2 million in stock options exercised accounted for the $18.2
million increase. Capital continues to be strong with Mid-State Bancshare's
ratio of tier one equity capital to average assets ("leverage ratio") at 9.8% up
from 9.2% one year earlier. Similarly, Mid-State's ratios of tier one capital
and total capital to risk-adjusted assets also increased. The Tier One ratio
went from 14.9% one year earlier to 16.1% at September 30, 1998. The Total
Capital ratio went from 16.0% one year earlier to 17.3% at September 30, 1998.
LIQUIDITY. Management is not aware of any future capital expenditures
or other significant demands or commitments which would severely impair
liquidity.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include, but are not limited to,
the real estate market, the availability of loans at acceptable prices, the
general level of economic activity both locally and nationally, interest rates,
actions by the Company's regulatory agencies, the Company's ability to
profitably integrate the operations of the now merged institutions of Bank of
Santa Maria into Mid-State Bank, and actions by competitors of the Company.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Quarterly Report on Form 10-Q will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by or subjected to agreed-upon
procedures by independent accountants, and no third-party has independently
verified or reviewed such statements. Readers of this Quarterly Report on Form
10-Q should consider these facts in evaluating the information contained herein.
The inclusion of the forward-looking statements contained in this Quarterly
Report on Form 10-Q should not be regarded as a representation by the Company or
any other person that the forward-looking statements contained in this Quarterly
Report on Form 10-Q will be achieved. In light of the foregoing, readers of this
Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the
forward-looking statements contained herein.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Bank's risk exposure to changes in interest rates is minimal. A recent
review, using eight months 1998 year-to-date data, of the potential changes in
the Bank's net interest income over a 12 month time horizon showed that it could
fluctuate under very extreme alternative rate scenarios from between +4.9% and
- -12.1% of the base case (rates unchanged) of $60.9 million. The Bank's policy is
to maintain a structure of assets and liabilities which are such that
13
<PAGE>
net interest income will not vary more than plus or minus 15% of the base
forecast over the next 12 months. Management feels that its exposure to
interest rate risk is manageable and it will continue to strive for an
optimal trade-off between risk and earnings.
The following table presents a summary of the Bank's net interest income
forecasted for the coming 12 months under alternative interest rate scenarios.
<TABLE>
<CAPTION>
Change
From Base
---------
<S> <C>
Rates Down Very Significant -12.1%
(Prime down to 4.50% over 12 months)
Rates Down Significant -9.2%
(Prime down to 6.00% over 12 months)
Rates Down Modestly -3.9%
(Prime down to 7.50% over 12 months)
Base Case - Rates Unchanged --
(Prime unchanged at 8.50% over 12 months)
Rates Up Modestly +3.7%
(Prime up to 9.50% over 12 months)
Rates Up Aggressive +4.9%
(Prime up to 11.00% over 12 months)
Rates Up Very Aggressive +3.6%
(Prime up to 12.50% over 12 months)
</TABLE>
Net interest income under the above scenarios is influenced by the
characteristics of the Bank's assets and liabilities. In the case of N.O.W.,
savings and money market deposits (total $527.9 million) interest is based on
rates set at the discretion of Management ranging from 1.00% to 2.30%. In a
downward rate environment, there is a limit to how far these deposit instruments
can be re-priced and this behavior is similar to that of fixed rate instruments.
In an upward rate environment, the magnitude and timing of changes in rates on
these deposits is assumed to be more reflective of variable rate instruments.
These characteristics are the main reasons that a 4% decline in Prime decreases
net interest income by 12.1% while a 4% increase in Prime increases net interest
income just 3.6%. Management believes that under current market conditions,
deposit rates would be increased more aggressively in order to maintain the
Bank's deposit base.
It is important to note that the above table is a summary of several forecasts
and actual results may vary. The forecasts are based on estimates and
assumptions of Management that may turn out to be different and may change over
time. Factors affecting these estimates and assumptions include, but are not
limited to - competitors' behavior, economic conditions both locally and
nationally, actions taken by the Federal Reserve Bank, customer behavior, and
Management's responses. Historically, the Bank has been able to manage its Net
Interest Income in a fairly narrow range reflecting the Bank's relative
insensitivity to interest rate changes. The impact of prepayment behavior on
mortgages, real estate loans, mortgage backed securities, securities with call
features, etc. is not considered material to the sensitivity analysis. Over the
last 5 years, the Bank's net interest margin (which is net interest income
divided by average earning assets of the Bank) has ranged from a low of 5.43% to
a high of 5.93%. Based on the scenarios above, the net interest margin under the
alternative scenarios ranges from 4.78% to 5.67%. Management feels this range of
14
<PAGE>
scenarios is conservative in view of its historical performance, but no
assurances can be given that actual experience will fall within this range.
The Bank's exposure with respect to interest rate derivatives, exchange rate
fluctuations, and/or commodity price movements is nil. The Bank does not own any
instruments within these markets.
15
<PAGE>
ITEM 4 - DISCLOSURES CONCERNING YEAR 2000 ISSUES
STATE OF READINESS. The Company began implementation of its Year 2000
Plan in 1997. It has complied with all time-frames associated with that Plan and
is on schedule to meet all remaining deadlines. The most significant component
of that plan was the replacement of the Bank's mainframe computer and software
system with a Year 2000 compliant system. That task was completed in July 1998
with the installation of the Information Technology Incorporated software on new
Unisys equipment. This system is widely believed to be Year 2000 compliant and
other banking organizations have completed Year 2000 testing with favorable
results. The Company plans to complete its own testing of the system by the end
of 1998. Other systems are currently being assessed including in-house
applications, outside vendor applications, environmental systems and parties
with whom the Company exchanges information. This process has been actively
underway for some time and while no assurance can be given that all systems will
be addressed, the Management feels that it should be able to address all
"Mission Critical" tasks in a timely matter. Testing of "Mission Critical"
systems and implementations of compliant systems should be substantially
complete by the end of 1998.
Additionally, the Bank has been mailing, and received a number of
positive responses to, its Request for Compliance Assessment Letters to certain
of its credit customers. The Company has also issued Compliance Acknowledgement
Questionaires to new credit customers. While no assurance can be given that the
Year 2000 problem could not negatively effect certain of the Bank's credit
customers and hence negatively effect the Bank, Management feels that it has
proactively addressed the Year 2000 issue as it may affect its customers. The
Company has also been designing and distributing printed materials through
mailings and statement stuffers, holding informational seminars for the Bank's
business customers, and engaged a speaker at its October 1997 Annual Economic
Symposium who addressed this issue.
COSTS TO ADDRESS YEAR 2000 ISSUES. It is important to note that the
Company's current computer system had been fully depreciated after serving the
Bank for over 7 years. It was due for replacement irrespective of the Year 2000
issue. The total capital cost of the new mainframe, software, terminals and
ATM's associated with the Bank's conversion to date have totaled approximately
$6.9 million, all of which has been capitalized and will be amortized over their
expected useful lives. It is expected that additional purchases of certain
equipment will be necessary, but the Company does not expect that the total cost
will exceed $7.5 million. Amortizing these capitalized costs over their expected
useful lives, Management would expect monthly depreciation expense in the $150
thousand range. A majority of this expected amount did begin impacting the
income statement in August of 1998. The costs associated with the mailings,
questionaires, seminars and other activities noted above is not expected to have
a material effect on the financial position or results of operations of the
Company.
RISKS FOR THE COMPANY FROM YEAR 2000 ISSUES. Like all financial
institutions, Mid-State Bank relies heavily on its computer and software
programs to accurately process and keep track of customer financial records and
transactions. Failure of this hardware and software, especially if for an
extended period of time, could pose a significant risk to the viability of the
Company. Management believes that its Year 2000 plan, especially as it relates
to its recent computer hardware and software conversion noted above, fully
mitigates this direct risk from the Year 2000 problem.
Credit risks associated with the difficulties incurred by the Bank's
customers which have problems resulting from Year 2000 issues are considered low
to moderate. Factors considered include, but are not limited to, 1) the review
of the Request for Compliance Assessment Letters and Compliance Acknowledgment
Questionaires received to date, 2) the understanding of each customer's business
which the Bank has, 3) underlying secondary sources of collateral available to
the Bank in the event of default by the customer, 4) the Bank's allowance for
loan losses, 5) the potential effects of general economic disruptions (e.g. -
transportation, communications, electrical) on the customer and 6) the "ripple
effects" from problems elsewhere in the economy which end up effecting the
customer.
16
<PAGE>
THE COMPANY'S CONTINGENCY PLAN. The Company has set a goal of
completing its Contingency Plans for all Mission Critical processes by December
31, 1998. The Company has been working on these plans and would expect to test
certain of these contingency plans during 1999. Moreover, should additional
contingency plans be needed or revisions to developed plans be appropriate,
Management believes it would still have time to make adjustments prior to the
end of 1999.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Mid-State is not a party to any material legal proceeding.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no material changes in securities and uses of proceeds
during the period covered by this report.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Shareholders for a vote during the
third quarter of 1998.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ------------------------------------------------------------------------------------------------
<S> <C>
1.0 Agreement to Merge and Plan of Reorganization dated January 29,1998
and amended on March 27, 1998 by and among Mid-State Bank, BSM Bancorp
and Bank of Santa Maria. Incorporated by reference from Appendix A to
the Company's definitive proxy materials for its 1998 Annual Meeting.
27 Financial Data Schedule (for SEC use only)
</TABLE>
B) Reports on Form 8-K
During the first quarter of 1998, the Company filed
two Current Reports on Form 8-K, one as of January 29,
1998 and the second as of February 3, 1998. Both reports
were filed related to the Agreement to Merge and Plan of
Reorganization by and among the Mid-State Bank, BSM
Bancorp and Bank of Santa Maria.
On July 20, 1998, the Company filed an additional
report related to the Agreement to Merge and Plan of
Reorganization by and among the Company, BSM Bancorp and
Bank of
18
<PAGE>
Santa Maria. That report indicated that the merger
transaction contemplated by this Agreement had been
completed as of close of business on July 10, 1998.
On August 19, 1998, the Company filed a report
changing the registrant's certifying independent public
accountant. This report was subsequent to the regular
Board of Directors meeting of Mid-State Bancshares on
August 12, 1998 at which the Board voted to appoint
Arthur Andersen, LLP, as its independent public
accountants, replacing Vavrinek, Trine, Day and Company.
Arthur Andersen, LLP, had been the independent public
accountants for Mid-State Bank prior to the merger of
Bank of Santa Maria into Mid-State Bank, at which time
BSM Bancorp became the holding company for Mid-State
Bank and changed its name to Mid-State Bancshares. The
change of accountants was related solely to the merger.
There had been no adverse opinions issued, no
qualifications or modifications of opinion related to BSM
Bancorp's financial statements, no disagreements with
respect to accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The
change was related solely to the merger.
19
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mid-State Bank
(registrant)
Date: November 6, 1998 By: /s/ CARROL R. PRUETT
-------------------------------------
CARROL R. PRUETT
President and Chief Executive Officer
Date: November 6, 1998 By /s/ JAMES G. STATHOS
-------------------------------------
JAMES G. STATHOS
Executive Vice President
and Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 84,776
<INT-BEARING-DEPOSITS> 858,763
<FED-FUNDS-SOLD> 29,865
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 457,665
<INVESTMENTS-CARRYING> 51,494
<INVESTMENTS-MARKET> 52,411
<LOANS> 530,319
<ALLOWANCE> 13,257
<TOTAL-ASSETS> 1,215,601
<DEPOSITS> 1,078,670
<SHORT-TERM> 4,482
<LIABILITIES-OTHER> 5,961
<LONG-TERM> 0
0
0
<COMMON> 120,288
<OTHER-SE> 6,200
<TOTAL-LIABILITIES-AND-EQUITY> 1,215,601
<INTEREST-LOAN> 41,572
<INTEREST-INVEST> 21,897
<INTEREST-OTHER> 1,706
<INTEREST-TOTAL> 65,175
<INTEREST-DEPOSIT> 19,447
<INTEREST-EXPENSE> 19,703
<INTEREST-INCOME-NET> 45,472
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 42,819
<INCOME-PRETAX> 15,468
<INCOME-PRE-EXTRAORDINARY> 8,831
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,831
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 5.74
<LOANS-NON> 1,283
<LOANS-PAST> 2,286
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,365
<CHARGE-OFFS> 1,014
<RECOVERIES> 606
<ALLOWANCE-CLOSE> 13,257
<ALLOWANCE-DOMESTIC> 13,257
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
