<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 June 30, 1999.
/ / Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period
from N/A N/A
--------------------- to --------------------.
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 July 22, 1999, the aggregate market value of the common stock held by
non-affiliates of the Company was: $355,465,477.
Number of shares of common stock of the Company outstanding as of July 22, 1999:
10,100,920 shares.
<PAGE>
MID-STATE BANCSHARES
June 30, 1999
Index
PAGE
PART I - FINANCIAL INFORMATION
Item 1 -Financial Statements
Consolidated Statements of Financial Position as of
June 30, 1999, December 31, 1998, and June 30, 1998 3
Consolidated Statements of Income and Comprehensive
Income for the three month and six month periods ended
June 30, 1999 and June 30, 1998 4
Consolidated Statements of Cash Flows for the three month
and six month periods ended June 30, 1999 and June 30, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 -Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 -Quantitative and Qualitative Disclosure
About Market Risk 14
PART II - OTHER INFORMATION
Item 1 -Legal Proceedings 16
Item 2 -Changes in Securities and Use of Proceeds 16
Item 3 -Defaults Upon Senior Securities 16
Item 4 -Submission of Matters to a Vote of Security Holders 16
Item 5 -Other Information 16
Item 6 -Exhibits and Reports on Form 8-K 17
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 June 30, 1999 Dec. 31, 1998 June 30, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Due From Banks $ 65,240 $ 66,761 $ 82,453
Fed Funds Sold 41,500 51,865 34,245
Investment Securities:
Available For Sale 493,542 474,754 434,055
Held-to-Maturity (Market value of 35,135 41,916 58,303
$35,111, $42,704 and $58,673,
respectively)
Loans, net of unearned income 564,867 551,780 542,080
Allowance for Loan Losses (12,640) (12,901) (13,592)
- -----------------------------------------------------------------------------------------------------------------
Net Loans 552,227 538,879 528,488
Premises and Equipment, Net 28,111 29,736 33,644
Accrued Interest Receivable 10,944 10,869 11,529
Investments in Real Estate, Net 2,892 6,769 8,646
Other Real Estate Owned, Net 120 259 440
Other Assets 14,987 13,148 14,465
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,244,698 $ 1,234,956 $ 1,206,268
=================================================================================================================
LIABILITIES AND EQUITY
- -----------------------------------------------------------------------------------------------------------------
Non Interest Bearing Demand $ 224,213 $ 224,516 $ 213,824
NOW Accounts, Money Market
and Savings Deposits 541,890 539,394 519,094
Time Deposits Under $100 227,950 236,022 242,056
Time Deposits $100 or more 90,986 88,743 91,055
- -----------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,085,039 1,088,675 1,066,029
Accrued Interest Payable and
Other Liabilities 22,944 12,557 17,271
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,107,983 1,101,232 1,083,300
- -----------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common Stock and Surplus (Shares 43,102 42,894 42,654
Outstanding of 10,099, 10,078 and
9,970, respectively)
Retained Earnings 94,731 86,548 78,167
Accumulated other comprehensive
(loss) income, net of tax (1,118) 4,282 2,147
- -----------------------------------------------------------------------------------------------------------------
TOTAL EQUITY 136,715 133,724 122,968
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 1,244,698 $ 1,234,956 $ 1,206,268
=================================================================================================================
</TABLE>
3
<PAGE>
MID-STATE BANCSHARES
Consolidated Statements of Income and Comprehensive Income
(Unaudited - figures in 000's except earnings per share data)
<TABLE>
<CAPTION>
Three Month Period Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 13,443 $ 13,989 $ 26,843 $ 27,664
Interest on investment securities - taxable 6,441 6,829 13,006 13,628
Interest on investment securities - tax exempt 911 358 1,561 691
Interest on fed funds sold, other 563 535 1,263 1,007
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 21,358 21,711 42,673 42,990
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on NOW, money market and savings 1,830 2,187 3,688 4,370
Interest on time deposits less than $100 2,590 3,385 5,317 6,486
Interest on time deposits of $100 or more 1,026 927 2,083 2,089
Interest on mortgages, other 69 86 139 151
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 5,515 6,585 11,227 13,096
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION 15,843 15,126 31,446 29,894
Less: Provision for loan losses - 150 - 300
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION 15,843 14,976 31,446 29,594
- ------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Service charges and fees 1,567 1,652 3,072 3,307
Other non interest income 2,800 3,154 5,005 5,667
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER OPERATING INCOME 4,367 4,806 8,077 8,974
- ------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE:
Salaries and employee benefits 6,602 6,663 13,327 13,499
Occupancy and furniture 1,834 1,874 3,621 3,778
Other operating expenses 3,718 3,509 7,070 7,225
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER OPERATING EXPENSE 12,154 12,046 24,018 24,502
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes 8,056 7,736 15,505 14,066
Provision for income taxes 2,630 2,375 4,900 4,637
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,426 $ 5,361 $ 10,605 $ 9,429
OTHER COMPREHENSIVE INCOME BEFORE TAXES:
==============================================================================================================================
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising during period (6,275) (302) (9,001) 513
Less: reclassification adjustment for (gains) losses
included in net income - (3) - (3)
Other comprehensive (loss) income, before tax (6,275) (299) (9,001) 516
Income (benefit) tax provision related to items in
comprehensive income (2,510) (172) (3,601) 154
- ------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES (3,765) (127) (5,400) 362
COMPREHENSIVE INCOME $ 1,661 $ 5,234 $ 5,205 $ 9,791
==============================================================================================================================
EARNINGS PER SHARE - BASIC $ 0.54 $ 0.54 $ 1.05 $ 0.94
- DILUTED $ 0.53 $ 0.53 $ 1.05 $ 0.94
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
MID-STATE BANCSHARES
Consolidated Statements of Cash Flows
(Unaudited - figures in 000's)
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, Ended June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 5,426 $ 5,361 $ 10,605 $ 9,429
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses - 150 - 300
Depreciation and amortization 894 882 1,691 1,776
Net amortization of prem./discounts-investments 703 (119) 1,289 94
Increase in accrued interest receivable (78) (692) (75) (956)
(Decrease) Increase in other liabilities (948) 1,095 3,278 2,496
Increase in other assets (714) (3,876) (1,839) (3,176)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,283 2,801 14,949 9,963
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash from proceeds of real estate 4,009 2,845 4,076 3,145
Proceeds from sales and maturities of investments 34,651 39,967 116,735 92,434
Purchases of investments (72,153) (54,741) (135,449) (102,793)
Increase in loans (13,429) (3,763) (13,087) (2,497)
Sale (Purchase) of premises and equipment, net 651 (1,507) (66) (2,251)
Other changes, net 470 1,179 (303) 726
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (45,801) (16,020) (28,094) (11,236)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in deposits 17,785 12,418 (3,636) 2,683
Increase in short-term borrowings 5,444 6,544 7,109 6,505
Exercise of stock options 33 959 208 1,078
Cash dividends paid (1,212) (1,036) (2,422) (1,937)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,050 18,885 1,259 8,329
- --------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (18,468) 5,666 (11,886) 7,056
Cash and cash equivalents at beginning of period 125,208 111,032 118,626 109,642
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 106,740 $ 116,698 $ 106,740 $ 116,698
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</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 Report for the year ended December 31, 1998 of Mid-State
Bancshares. 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 Report on Form 10-K for the year ended
December 31, 1998. 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
June 30, 1999 June 30, 1998
Earnings Shares EPS Earnings Shares EPS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as reported $ 5,426 $ 5,361
Basic Earnings Per Share:
Income available to
Common Shareholders $ 5,426 10,097 $ 0.54 $ 5,361 10,003 $ 0.54
Effect of dilutive securities:
Stock Options 45 54
Diluted Earnings Per Share:
Income available to
Common Shareholders $ 5,426 10,142 $ 0.53 $ 5,361 10,057 $ 0.53
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Six Month Period Ended Six Month Period Ended
June 30, 1999 June 30, 1998
Earnings Shares EPS Earnings Shares EPS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as reported $ 10,605 $ 9,429
Basic Earnings Per Share:
Income available to
Common Shareholders $ 10,605 10,090 $ 1.05 $ 9,429 9,998 $ 0.94
Effect of dilutive securities:
Stock Options 45 53
Diluted Earnings Per Share:
Income available to
Common Shareholders $ 10,605 10,135 $ 1.05 $ 9,429 10,051 $ 0.94
</TABLE>
NOTE C - MERGER OF MID-STATE BANCSHARES AND CITY COMMERCE BANK
On April 19, 1999, the Company signed a definitive agreement to merge,
subject to the approval of banking regulators and City Commerce Bank
shareholders. The agreement provides for an exchange of common stock at a
fixed exchange ratio of .7791 shares of Mid-State Bancshares common stock for
each one share of City Commerce common stock, subject to potential
adjustments based on changes in the price of Mid-State Bancshares stock
preceding the effective date of the transaction. The merger is structured to
be tax-free, and is intended to be accounted for as a pooling-of-interests.
As of June 30, 1999, City Commerce Bank had total assets of $150.5 million,
total deposits of $131.4 million, and stockholders' equity of $17.8 million.
Before giving rise to any merger related charges, the pro forma combined
Mid-State Bancshares and City Commerce Bank would have total assets of
approximately $1.395 billion, total deposits of approximately $1.216 billion
and stockholders' equity of $154.5 million.
-7-
<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 June 30, 1999 and 1998 and the results of operations
for the 3 month and 6 month periods ended on those dates (unaudited).
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL DATA - MID-STATE BANCSHARES
(Unaudited) Quarter Ended Year-to-Date
- -------------------------------------------------- ------------------------------ -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
- -------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest Income (not taxable equivalent)...................... $ 21,358 $ 21,711 $ 42,673 $ 42,990
Interest Expense.............................................. 5,515 6,585 11,227 13,096
----------- ----------- ----------- ---------
Net Interest Income........................................... 15,843 15,126 31,446 29,894
Provision for Loan Losses..................................... - 150 - 300
----------- ----------- ----------- ---------
Net Interest Income after provision for loan losses........... 15,843 14,976 31,446 29,594
Non-interest income........................................... 4,367 4,806 8,077 8,974
Non-interest expense.......................................... 12,154 12,046 24,018 24,502
----------- ----------- ----------- ---------
Income before income taxes.................................... 8,056 7,736 15,505 14,066
Provision for income taxes.................................... 2,630 2,375 4,900 4,637
----------- ----------- ----------- ---------
Net Income.................................................... $ 5,426 $ 5,361 $ 10,605 $ 9,429
----------- ----------- ----------- ---------
Quarter Ended Year-to-Date
------------------------------ -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
- ---------------------------------------------------- ------------- ------------- ------------- -------------
PER SHARE:
Net Income - basic............................................ $ 0.54 $ 0.54 $ 1.05 $ 0.94
Net Income - diluted.......................................... $ 0.53 $ 0.53 $ 1.05 $ 0.94
Weighted average shares used in Basic E.P.S. calculation...... 10,097 10,003 10,090 9,998
Weighted average shares used in Diluted E.P.S. calculation.... 10,142 10,057 10,135 10,051
Cash dividends......................................... ...... 0.12 0.10 0.24 0.19
Book value at period-end...................................... 13.54 12.23
Ending Shares................................................. 10,099 10,053
FINANCIAL RATIOS
Return on assets.............................................. 1.77% 1.82% 1.74% 1.62%
Return on equity.............................................. 15.95% 17.86% 15.82% 16.05%
Net interest margin (not taxable equivalent).................. 5.66% 5.70% 5.67% 5.72%
Net interest margin (taxable equivalent yield)................ 5.87% 5.79% 5.85% 5.81%
Net loan losses to avg. loans................................. -0.15% 0.14% 0.10% 0.09%
Efficiency ratio.............................................. 60.1% 60.4% 60.8% 63.0%
PERIOD AVERAGES
Total Assets.................................................. $ 1,232,419 $ 1,182,768 $ 1,228,655 $ 1,172,488
Total Loans................................................... 545,876 536,474 543,666 534,142
Total Earning Assets.......................................... 1,123,586 1,064,113 1,118,947 1,054,176
Total Deposits................................................ 1,077,978 1,056,163 1,077,313 1,047,303
Common Equity................................................. 136,474 120,389 135,219 118,498
BALANCE SHEET - AT PERIOD-END
Cash and due from banks....................................... $ 65,240 $ 82,453
Investments and Fed Funds Sold................................ 570,177 526,603
Loans, net of deferred fees, before allowance for loan losses. 564,867 542,080
Allowance for Loan Losses.............................. (12,640) (13,592)
Other assets........................................... 57,054 68,724
----------- ------------
Total Assets...................................... $ 1,244,698 $ 1,206,268
----------- ------------
----------- ------------
Non-interest bearing deposits.......................... $ 224,213 $ 213,824
Interest bearing deposits.............................. 860,826 852,205
Other borrowings....................................... 10,158 11,145
Other liabilities...................................... 12,787 6,126
Shareholders' equity................................... 136,714 122,968
----------- ------------
Total Liabilities and Shareholders' equity........ $ 1,244,698 $ 1,206,268
----------- ------------
----------- ------------
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------
ASSET QUALITY & CAPITAL - AT PERIOD-END JUNE 30, 1999 JUNE 30, 1998
----------------------------
<S> <C> <C>
Non-accrual loans $ 1,568 $ 1,226
Loans past due 90 days or more 1,688 954
Other real estate owned 120 440
- --------------------------------------------------------------------------------------
Total non performing assets $ 3,376 $ 2,620
Loan loss allowance to loans, gross 2.2% 2.5%
Non-accrual loans to total loans, gross 0.3% 0.2%
Non performing assets to total assets 0.3% 0.2%
Allowance for loan losses to non performing loans 388.2% 623.5%
Equity to average assets (leverage ratio) 11.1% 10.1%
Tier One capital to risk-adjusted assets 17.5% 15.7%
Total capital to risk-adjusted assets 18.8% 16.9%
</TABLE>
PERFORMANCE SUMMARY. The Company posted net income of $5.4 million for
the three months ended June 30, 1999 compared to $5.4 million in the like
1998 period. These earnings represent an annualized return on assets of 1.77%
and 1.82%, respectively, for the comparable periods. The annualized return on
equity was 15.95% for the second quarter of 1999 compared to 17.86% in the
second quarter of 1998. On a per share basis, diluted earnings were $0.53 in
the 1999 period, identical to the $0.53 in the like quarter of 1998. Earnings
in the second quarter of 1998 were bolstered by one-time gains on the sale of
Other Real Estate Owned and miscellaneous recoveries, which totaled $1.3
million pre-tax, compared to $0.7 million pre-tax in the second quarter of
1999. The decrease in one-time gains from the 1998 period to the 1999 is
equivalent to about $0.03 per share.
NET INTEREST INCOME. Mid-State's year-to-date annualized yield on
interest earning assets was 7.69% for the first half of 1999 (7.87% on a
taxable equivalent basis) compared to 8.22% in the like 1998 period (8.31% on
a taxable equivalent basis). This decline in yield is related primarily to
the drop in interest rates when comparing the first half of 1999 with the
1998 period. The Prime Rate, to which many of the Bank's loans are tied,
averaged 7.75% in the 1999 period compared to 8.50% in the 1998 period. In a
similar manner, annualized interest expense as a percent of earning assets
declined from 2.50% in the first half of 1998 to 2.02% in this year's first
six months. This also reflected the general decline in market interest rates
as the Bank lowered rates paid on various deposit products. Overall, the Bank
was able to drop its interest cost on deposits by an approximately comparable
amount to the decline in interest income from earning assets. As a result,
Mid-State's annualized Net Interest Income, expressed as a percent of earning
assets, remained virtually the same at 5.67% for the six month period of 1999
(5.85% on a taxable equivalent basis) compared to 5.72% in the comparable
1998 period (5.81% on a taxable equivalent basis). Annualized Net Interest
Income as a percent of average total assets improved slightly from 5.14% in
the first half of 1998 (5.22% taxable equivalent) to 5.16% in the 1999 period
(5.33% taxable equivalent).
Earning assets on average were $65 million higher in the six month 1999
period ($1,119 million compared to $1,054 million) which is up about 6.1%
from the like 1998 period. Average deposits in this same time-frame were up
$30 million, or 2.9% ($1,077 million compared to $1,047 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 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 first half of 1999. The Bank provided
$300 thousand in the comparable 1998 period. Management continues to believe
that the allowance, which stands at 2.2% of total loans at June 30, 1999, down
from 2.5% one year earlier, is adequate to cover inherent losses. The $12.6
million allowance is just under four times the level
9
<PAGE>
of non performing assets which stand at $3.4 million compared to $2.6 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. Other
Real Estate Owned reflects property acquired through foreclosure which had
secured Bank loans on which the borrower defaulted. While continuing efforts
are made to improve overall asset quality, Management is unable to estimate
with certainty, how and under what terms, problem assets will be resolved.
Changes in the allowance for loan losses for the periods ended June 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30, Year-to-date June 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 12,436 $ 13,459 $ 12,901 13,366
Provision for loan losses -- 150 -- 300
Loans charged off (221) (217) (863) (514)
Recoveries of loans previously
Charged-off 425 200 602 440
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period $ 12,640 $ 13,592 $ 12,640 $ 13,592
===============================================================================================================
</TABLE>
At June 30, 1999, the recorded investment in loans which have been identified
as impaired loans, totaled $6,064,000. Of this amount, $1,266,000 related to
loans with no valuation allowance and $4,798,000 related to loans with a
corresponding valuation allowance of $917,000. Impaired loans totaled
$3,411,000 at June 30, 1998. Of that amount, $1,989,000 related to loans with
no valuation allowance and $1,422,000 related to loans with a corresponding
valuation allowance of $374,000. 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
June 30, 1999, the average recorded investment in impaired loans was
$5,911,000 compared to $3,743,000 in the 1998 period. A loan is identified as
impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreement. Because
this definition is very similar to that used by bank regulators to determine
on which loans interest should not be accrued, the Bank expects that most
impaired loans will be on non-accrual status. However, during the first
quarter of 1999, one large credit totaling $3.4 million was classified as
impaired, even though it continues to be on accrual status. Its
classification as impaired stems from the potential inadequacy of collateral
value relative to the size of the loan. This one credit explains the apparent
anomaly between the fact that total impaired loans have increased from one
year ago, while total non-accrual loans have remained relatively unchanged
($1.6 million versus $1.2 million one year ago).
NONINTEREST INCOME. Noninterest income for the first six months of 1999
was $8.1 million, down from $9.0 million earned in the 1998 period, a decline
of 10.0%. One explanation for the decrease was a drop in service charge
income of some $237 thousand over the comparable periods. This was primarily
related to the fact that the merger of the two banks resulted in the
consolidation of deposit products, which represented the lowest cost to
customers of the two products being brought together. Gains on sale of Other
Real Estate Owned and miscellaneous recoveries were also $864 thousand less
than the like period of 1998. Income from credit card merchant fee activity
was up $193 thousand, offsetting some of the noted declines.
10
<PAGE>
NONINTEREST EXPENSE. Non-interest expense for the first half of 1999 was
$24.0 million. This compares to $24.5 million in the comparable 1998 period.
There was an overall reduction of $172 thousand charged to expense for
salaries and benefits in 1999 compared to the 1998 period, in spite of
certain non recurring expenses totaling $239 thousand. There were reductions
in expense in a variety of categories related to the synergies resulting from
the merger with Bank of Santa Maria in 1998. The first half of 1999 compared
to the 1998 period saw reductions of $157 thousand in occupancy and furniture
costs, $120 thousand in accounting and professional fees, and $102 thousand
in regulatory expenses. While other categories of expense showed minor
declines, others showed minor increases, all of which in total were expense
neutral.
PROVISION FOR INCOME TAXES. The year-to-date provision for income taxes
was $4.9 million, compared to $4.6 for the same period in 1998. The effective
tax rate in 1999 was 31.6% compared to 33.0% in 1998. The effective tax rate
in 1999 is somewhat lower than the prior year's first half due to an increase
in tax exempt income recognized by the Company, and the realization of
certain tax benefits available to Mid-State, both of which should continue to
benefit tax expense through the balance of 1999.
BALANCE SHEET. Total assets at June 30, 1999 totaled $1,244.7 million,
up 3.2% from the level one year earlier of $1,206.3 million. Loans, net of
unearned income, but before allowance for loan losses were a component of
this growth, increasing from $542.1 million at the end of June, 1998 to
$564.9 million in 1999. Investments and fed funds sold grew significantly
from $526.6 million one year earlier to $570.2 million this year. Other non
earning asset categories declined when comparing 1999 to 1998.
Total asset growth was funded through a $19.0 million increase in
deposits and an $13.7 million increase in stockholders' equity when comparing
1999 over 1998. There was a modest increase in other borrowing and
liabilities of $5.7 million, comparing the periods. There was a $13.7 million
increase in stockholders' equity, in spite of a $3.3 million decrease in the
unrealized gain on available for sale securities.
Mid-State's loan to deposit ratio of 51.0% at June 30, 1999 is up
slightly from the 50.0% ratio one year earlier. There is ample internal
liquidity to fund improvements in this ratio through Mid-State's investment
portfolio which has over 93% of the total categorized as available for sale.
INVESTMENT SECURITIES. Fed funds sold represent $41.5 million of the
$570.2 million portfolio noted above. Of the remaining $528.7 million, 31% is
invested in U.S. Treasury securities, 25% is invested in U.S. Government
agency obligations, 42% is invested in securities issued by states and
political subdivisions in the U.S. and 2% is invested in mortgage-backed
securities and other securities. 84% of all these investment securities have
stated maturities which are due prior to December 31, 2003. Approximately 39%
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 $123.0
million at June 30, 1998 to $136.7 million at June 30, 1999. Net income over
this 12 month time period was $20.2 million, less cash dividends of $3.6
million and a $3.3 million decrease in unrealized gains on available for sale
securities, plus $0.4 million in stock options exercised, accounted for the
$13.7 million increase. Capital continues to be strong with Mid-State
Bancshare's ratio of tier one equity capital to average assets ("leverage
ratio") at 11.1% up from 10.1% 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 15.7% one year earlier to 17.5% at
June 30, 1999. The Total Capital ratio went from 16.9% one year earlier to
18.8% at June 30, 1999.
-11-
<PAGE>
LIQUIDITY. Management is not aware of any future capital expenditures or
other significant demands or commitments which would severely impair
liquidity.
DISCLOSURES CONCERNING YEAR 2000 ISSUES - YEAR 2000 READINESS DISCLOSURE.
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 believed to be
Year 2000 compliant and other banking organizations have completed Year 2000
testing with favorable results. The Company has also completed its own
testing. The system is installed nationwide at some 1,500 data processing
sites for over 3,000 banks. Other systems are also 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 has addressed all
"Mission Critical" processes in a timely matter. Testing of "Mission
Critical" systems and implementations of compliant systems was substantially
complete by early 1999.
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. No assurance can be
given that the Year 2000 problem could not negatively effect certain of the
Bank's credit customers. This in turn could negatively affect the Bank.
Management feels that it has proactively addressed the Year 2000 issue as it
may affect its customers and potential customers. 303 credit relationships
meet the Bank's criteria for an assessment and questionaire. These
relationships represent approximately 85% of the total loan portfolio. At
this point, no relationships are believed to have a high Year 2000 related
risk. This is down from December 31, 1998 when it was believed that four
relationships represented a high risk totaling approximately $2.0 million.
New information has allowed the Bank to reduce risk on these credits to the
moderate category. Approximately 88 credit relationships are considered to be
of moderate risk, 211 are considered to be low risk and 4 are pending
analysis (awaiting additional information). The Bank has established reserves
within the allowance for loan losses to provide for Year 2000 related losses.
This reserve stood at $608 thousand at June 30, 1999.
The Company has 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. Year 2000 seminars were
conducted in March 1999 in Santa Maria and San Luis Obispo with over 300
residents in attendance. Moreover, the Bank has proactively participated in
numerous community meetings dealing with this topic. Examples of this
participation include working with the San Luis Obispo Y2K Action Alliance,
exhibits at the Y2K expos, television interviews and tour for a local
television station showcasing the Bank's level of Y2K readiness,
participating in local radio panel discussions on the topic, and
presentations to local community groups on Year 2000 readiness and the
specific accomplishments of the Bank.
During the month of June 1999, the Company sent surveys to all
depositors in order to ascertain the level of customer concern for the year
2000 computer issue. This information will be used during a fourth customer
awareness campaign that will focus on specific concerns as raised in this
survey.
COSTS TO ADDRESS YEAR 2000 ISSUES. It is important to note that the
Company's former 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 $7.2 million, all of which has been capitalized and will be
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<PAGE>
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, when allowing for additional charges, will exceed
$7.5 million. Amortizing these capitalized costs over their expected useful
lives, Management would expect monthly depreciation expense of approximately
$125 thousand. A majority of this expected amount did begin impacting the
income statement in August of 1998. The costs associated with the mailings,
questionnaires, 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. Year 2000 related failure of this hardware or 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. While the Company has back-up generating capacity for its mainframe
computer system and a contingency plan for its implementation, an extensive
and protracted power outage throughout the Bank's system could prove
difficult to mitigate.
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 knowledge of the
customer's business, which the Bank possesses, 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.
Risks associated with the Year 2000 readiness status of the Company's
vendors have also been reviewed. A due diligence process has been initially
completed with the 320 identified vendors serving the Bank. Responses from
these vendors have been reviewed and assessed. Alternate arrangements will be
made where appropriate, but no major concerns exist at this point. The
Company has since reduced the number of vendors it is tracking to 255.
THE COMPANY'S CONTINGENCY PLAN. The Company set a goal to complete its
Contingency Plans for all Mission Critical processes by June 30, 1999. The
Company has completed all 55 of these plans. The plans were reviewed by an
independent panel and tested by the Year 2000 Committee. The Company's Year
2000 Contingency Plans were approved by the Board of Directors on June 9,
1999. Should additional contingency planning be needed, or revisions to
developed plans be appropriate, Management believes it will still have time
to make adjustments prior to the end of 1999.
CURRENT TARGET DATES. All projects associated with prior target dates
included in the Company's Year 2000 Plan have been completed. While there can
be no guarantee that the Company will be able to continue to meet all future
target dates associated with its Year 2000 Plan, there are no outstanding
exceptions to either its previous or future target dates. By June 30, 1999,
business resumption contingency plans were complete and the testing of all
mission critical systems and implementation of compliant systems was
substantially complete.
It should be noted that the Company will be progressively heightening
its customer awareness efforts in the communities it serves between now and
year-end 1999.
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
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<PAGE>
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, the actions by the Company's regulatory agencies,
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 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 +1.2% and -4.0% of the base case
(rates unchanged) of $64.5 million. The Bank's policy is to maintain a
structure of assets and liabilities which are such that net interest income
under alternative rate scenarios will not vary more than plus or minus 15% of
the base forecast over the next 12 months. Management feels that the Bank's
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 -4.0%
(Prime down to 3.75% over 12 months)
Rates Down Significant -3.0%
(Prime down to 5.25% over 12 months)
Rates Down Modestly -1.1%
(Prime down to 6.75% over 12 months)
Base Case - Rates Unchanged --
(Prime unchanged over 12 months)
Rates Up Modestly +1.2%
(Prime up to 8.75% over 12 months)
Rates Up Aggressive +0.1%
(Prime up to 10.25% over 12 months)
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C>
Rates Up Very Aggressive -2.7%
(Prime up to 11.75% 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 $541.9 million) interest is based on
rates set at the discretion of Management ranging from 0.50% to 2.00%. 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. 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 Board, 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 5.62% to a high of 5.94% (not taxable equivalent).
Based on the scenarios above, the net interest margin under the alternative
scenarios ranges from 5.31% to 5.60%. Management feels this range of
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>
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
At the Company's regular Annual Meeting of Shareholders on May 20,
1999, shareholders overwhelmingly elected 10 Directors with staggered expiration
terms. Those members elected with the Terms set forth next to their names are
listed below.
Gracia B. Bello (Term expiring in 2001)
Clifford H. Clark (Term expiring in 2000)
A. J. Diani (Term expiring in 2001)
Daryl L. Flood (Term expiring in 2001)
William A. Hares (Term expiring in 2000)
Raymond E. Jones (Term expiring in 2002)
Stephen P. Maguire (Term expiring in 2000)
Gregory R. Morris (Term expiring in 2002)
William L. Snelling (Term expiring in 2002)
Carrol R. Pruett (Term expiring in 2002)
All the directors elected were incumbents, having served several years, with the
exception of Stephen P. Maguire, who had been appointed to fill the seat of
Albert L. Maguire beginning in March of 1999. Albert L. Maguire had been
appointed Director Emeritus. No other matters were submitted to a vote of the
shareholders during the second quarter of 1999.
ITEM 5 - OTHER INFORMATION
Not applicable.
16
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
Exhibit No. Exhibit
- -------------------------------------------------------------------------------
27 Financial Data Schedule (for SEC use only)
B) Reports on Form 8-K
- -------------------------------------------------------------------------------
On a year-to-date basis in 1999, the Company filed two
reports on Form 8-K, one as an amendment to a November 17, 1998 filing on
February 18, 1999 concerning the Company's dividend policy and one on April
27, 1999 concerning the City Commerce Bank merger.
17
<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 Bancshares
(registrant)
Date: July 30, 1999 By: /s/ CARROL R. PRUETT
-------------------------------------
CARROL R. PRUETT
President and Chief Executive Officer
Date: July 30, 1999 By /s/ JAMES G. STATHOS
-------------------------------------
JAMES G. STATHOS
Executive Vice President
and Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 59,640
<INT-BEARING-DEPOSITS> 5,600
<FED-FUNDS-SOLD> 41,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 493,542
<INVESTMENTS-CARRYING> 35,135
<INVESTMENTS-MARKET> 35,111
<LOANS> 564,867
<ALLOWANCE> 12,640
<TOTAL-ASSETS> 1,244,698
<DEPOSITS> 1,085,039
<SHORT-TERM> 10,158
<LIABILITIES-OTHER> 12,786
<LONG-TERM> 0
0
0
<COMMON> 43,102
<OTHER-SE> 93,613
<TOTAL-LIABILITIES-AND-EQUITY> 1,244,698
<INTEREST-LOAN> 26,843
<INTEREST-INVEST> 14,567
<INTEREST-OTHER> 1,263
<INTEREST-TOTAL> 42,673
<INTEREST-DEPOSIT> 11,088
<INTEREST-EXPENSE> 11,227
<INTEREST-INCOME-NET> 31,446
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24,018
<INCOME-PRETAX> 15,505
<INCOME-PRE-EXTRAORDINARY> 10,605
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,605
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 7.69
<LOANS-NON> 1,568
<LOANS-PAST> 1,688
<LOANS-TROUBLED> 2,489
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,901
<CHARGE-OFFS> 863
<RECOVERIES> 602
<ALLOWANCE-CLOSE> 12,640
<ALLOWANCE-DOMESTIC> 12,640
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 169
</TABLE>
