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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD N/A TO N/A
COMMISSION FILE NUMBER 000-23925
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MID-STATE BANCSHARES
(Exact name of registrant as specified in its charter)
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CALIFORNIA 77-0442667
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1026 GRAND AVE., ARROYO GRANDE, 93420
CA (Zip Code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code: (805) 473-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(NO PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or shorter period that the Registrant was
required to file such reports) Yes /X/ No / /
, and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K./X/
The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 20, 2000 was $262,533,257.
The number of shares of common stock of the registrant outstanding as of
March 20, 2000 was 11,300,033.
The following documents are incorporated by reference herein: Part III,
Items 10 through 13 are incorporated from Registrant's definitive proxy
statement for the 2000 Annual Meeting of Shareholders.
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TABLE OF CONTENTS
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS..................................... 3
ITEM 2. PROPERTIES.................................................. 16
ITEM 3. LEGAL PROCEEDINGS........................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 17
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 18
ITEM 6. SELECTED FINANCIAL DATA..................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 36
ITEM 7B. DISCLOSURE ABOUT RISKS ASSOCIATED WITH YEAR 2000 ISSUES..... 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 70
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 70
ITEM 11. EXECUTIVE COMPENSATION...................................... 70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 70
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 70
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 70
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
MID-STATE BANCSHARES AND MID-STATE BANK
Mid-State Bancshares (the Company) is the parent company to Mid-State Bank
(the Bank), its 100% owned principal subsidiary. Mid-State Bancshares (formerly
BSM Bancorp) was formed on July 10, 1998, the effective date of the merger of
Bank of Santa Maria with and into Mid-State Bank. The Company is registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended (BHC
Act) and is subject to the supervision and regulation of the Board of Governors
of the Federal Reserve System (Federal Reserve Board).
Mid-State Bank was incorporated under the laws of the State of California
and commenced operations on June 12, 1961 as a California state chartered bank.
The Bank's accounts are insured by the Federal Deposit Insurance Corporation
(FDIC), but it is not a member of the Federal Reserve System. At December 31,
1999 the Company had total assets of $1.4 billion, total deposits of
$1.2 billion and total shareholders' equity of $160.3 million.
The Bank operates 32 full service retail banking offices along the central
coast of California throughout Santa Barbara, San Luis Obispo and Ventura
counties. The Bank's headquarters is located in Arroyo Grande and it also serves
the communities of Paso Robles, Cambria, Templeton, Atascadero, Cayucos, Morro
Bay, Los Osos, San Luis Obispo, Pismo Beach, Grover Beach, Guadalupe, Nipomo,
Santa Maria, Orcutt, Lompoc, Vandenberg Village, Buellton, Santa Ynez, Solvang,
Goleta, Oxnard and Santa Barbara. In the first quarter of 2000, the Bank plans
to open a supermarket office in Arroyo Grande. The headquarters' mailing address
is 1026 Grand Ave., Arroyo Grande, CA 93420, Telephone: (805) 473-7700. The Bank
can also be reached through its internet address at WWW.MIDSTATEBANK.COM.
The Bank is a full-service community bank offering a broad range of banking
products and services, including accepting time and demand deposits, originating
commercial loans, consumer loans and real estate loans, providing escrow
services, and making other investments. The Bank originates several types of
loans, including secured and unsecured commercial and consumer loans, commercial
and residential real estate mortgage loans, and commercial and residential
construction loans. The Bank's loans are primarily short-term and adjustable
rate. Special services and requests beyond the lending limits of the Banks are
arranged through correspondent banks.
The Company, through the Bank, derives its income primarily from interest
received on real estate loans, commercial loans and consumer loans and, to a
lesser extent, from interest on investment securities, fees received in
connection with loans and other services offered, including loan servicing and
escrow and deposit services. The Company's major operating expenses are the
interest it pays on deposits and borrowings and its general operating expenses.
The Bank relies on a foundation of locally generated deposits, and management
believes it has a relatively low cost of funds due to a high percentage of low
cost and non-interest bearing deposits. The Company's operations, like those of
other financial institutions operating in California, are significantly
influenced by economic conditions in California, including the strength of the
real estate market, and the fiscal and regulatory policies of the federal
government and of the regulatory authorities that govern financial institutions.
See "Supervision and Regulation."
When the Company uses or incorporates by reference in this Annual Report on
Form 10-K (the Annual Report) the words "anticipate," "estimate," "expect,"
"project," "intend," "commit," "believe" and similar expressions, the Company
intends to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions, including those described in this
Annual Report. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove
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incorrect, actual results may vary materially from those anticipated, estimated,
expected, projected, intended, committed or believed.
BANK SUBSIDIARIES
The Bank operates two wholly owned subsidiaries--Mid-Coast Land Company and
MSB Properties. Mid-Coast Land Company was founded in 1984 pursuant to
section 751.3 of the Financial Code of the State of California. Section 751.3
provided that State chartered banks were authorized to invest in a corporation
that engaged in real estate activities. The Federal Deposit Insurance
Corporation (FDIC) Improvement Act (FDICIA) became law in December 1991. Under
FDICIA the Bank, through Mid-Coast Land Company, would have been required to
substantially eliminate its real estate development activities. The Bank
received an extension of that deadline to December 31, 2000 for good cause. The
Bank is in the process of completing the divestiture of the assets held by
Mid-Coast Land Company which were approximately $1.5 million on the Bank's
consolidated investments in real estate (reflecting $1.8 million in gross
holdings netted against a $0.3 million reserve). The holdings and results of
operations of Mid- Coast Land are included within the consolidated financial
statements of the Bank. For further information concerning Mid-Coast Land
Company, see the Subsidiary Activity section of the Management's Discussion and
Analysis section and Footnote number 7 to the Financial Statements included in
Item 8 of this Report.
MSB Properties was incorporated under the laws of the State of California in
May of 1968 allowing for the ownership of property which may be reasonably
necessary for the expansion of the Bank's business, or which is otherwise
reasonably related to the conduct of the Bank's business, pursuant to
Section 752 of the Financial Code of the State of California.
The holdings and results of operations of MSB Properties are included within
the consolidated financial statements of the Bank. On a stand-alone basis, MSB
Properties had earnings of $1.5 million, $1.4 million, and $1.6 million in 1999,
1998 and 1997, respectively. For further information concerning MSB Properties,
see the Subsidiary Activity portions of the Management's Discussion and Analysis
section of the Financial Condition and Results of Operations which is included
in Item 7 of this Report.
ACQUISITION OF BANK OF SANTA MARIA
On January 29, 1998, the Bank entered into an Agreement to Merge and Plan of
Reorganization (the Agreement) with BSM Bancorp (Bancorp) and its wholly owned
subsidiary Bank of Santa Maria, Santa Maria, California (Santa Maria). The
merger was completed after obtaining all requisite approvals on July 10, 1998.
The transaction was structured as a so-called "reverse triangular merger."
Pursuant to the transaction, among other things, (1) Bank of Santa Maria was
merged with and into Mid-State Bank, (2) BSM Bancorp became the bank holding
company for Mid-State Bank and changed its name to Mid-State Bancshares and
(3) the outstanding shares of BSM Bancorp at the effective date of the
transaction remained outstanding and the shareholders of Mid-State Bank became
shareholders of BSM Bancorp in accordance with the exchange ratio set forth in
the Agreement. The merger was accounted for as a pooling of interests and as a
result the financial statements for all periods presented herein have been
restated to include the accounts of BSM Bancorp and Subsidiary. As a result,
prior periods are combined and restated as if the two organizations were
historically one unit.
ACQUISITION OF CITY COMMERCE BANK
On April 19, 1999, the Company and City Commerce Bank signed a definitive
agreement to merge, subject to the approval of banking regulators and City
Commerce Bank shareholders. The merger became effective at the close of business
on August 31, 1999. The Agreement provided for the exchange of common stock at
an exchange ratio of .6775 shares of Mid-State Bancshares common stock for each
share of City Commerce common stock, based on the price of Mid-State Bancshares
stock preceding the
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effective date of the transaction. The merger was structured to be tax-free, and
was accounted for as a pooling-of-interests. As a result of this accounting
treatment the financial statements for all periods presented herein have been
restated to include the accounts of City Commerce Bank.
SELECTION OF NEW BANK PRESIDENT
On February 4, 2000, the Board of Directors of Mid-State Bank announced that
they had selected Mr. James W. Lokey to be President and Chief Executive Officer
of Mid-State Bank. Mr. Carrol R. Pruett, formerly President, will remain active
as Chairman of the Board of Mid-State Bank and Chairman, President and Chief
Executive Officer of Mid-State Bancshares, the parent company.
Mr. Lokey has been in banking for over 25 years. He began his banking career
with First Interstate Bank in 1973, after receiving his Bachelor of Science in
Finance from California State University-Long Beach. While with First Interstate
Bank, he rose through various assignments, achieving the position of Executive
Vice President. Mr. Lokey has had extensive experience in most areas of banking,
including retail banking, branch management, commercial lending, small business
lending, agricultural lending, commercial real estate lending, and credit policy
and administration. With the 1996 merger of First Interstate Bank into Wells
Fargo Bank, Lokey was responsible for the integration of the Southern California
commercial divisions of the two banks, with consolidated assets of $3.6 billion
and deposits of $1.3 billion. In 1997, Lokey left Wells Fargo Bank to become
President and Chief Executive Officer of Downey Savings, a $5.2 billion
financial institution with 73 offices, headquartered in Newport Beach. During
Lokey's tenure, Downey posted record earnings, record loan production, and by
year-end 1998, had increased its assets to $6.3 billion with 91 offices.
Mr. Lokey, who officially joined the organization on March 1, 2000, will be
responsible for the day-to-day operations. It is contemplated that this will
allow Mr. Pruett to devote more of his time and energy to developing strategies
and exploring opportunities that will contribute to the Company's future
success. Mr. Pruett has served in the capacity of President since 1967 when, at
the age of 29, he became the youngest Bank President in the State of California.
His continued involvement will be important to the Company, while assuring a
smooth transition to a new Chief Executive Officer for the Bank.
NEW APPOINTEE TO THE BOARD OF DIRECTORS
In connection with the merger with City Commerce Bank, an additional board
seat was created on the Mid-State Bancshares Board of Directors. Mr. H. Edward
Heron was appointed to this position. Mr. Heron had served on the Board of
Directors for City Commerce Bank for three years and has been a Santa Barbara
resident since 1948. Active in the community, Mr. Heron has been a Director of
the Santa Barbara Chamber of Commerce and the Santa Barbara Industry Education
Council. He is an honorary Director for life for the California Association or
Realtors, a current member of the Fighting Back Task Force, and a past member of
the Calfiornia Department of Real Estate Advisory Commission. With the increased
presence in southern Santa Barbara and Venura counties following the acquisition
of City Commerce Bank, the addition of Mr. Heron will help expand the Bank's
involvement in these communities.
SERVICES
The Bank offers a full range of commercial banking services including the
acceptance of checking accounts, NOW accounts, Savings accounts, Money Market
accounts, and various types of time certificates of deposit (including various
maturities and individual retirement accounts). The Bank makes a variety of
construction and land development loans, real estate related loans, home equity
credit lines, installment loans, agricultural and commercial loans, SBA loans,
and credit card lines. Other services offered by the Bank include, but are not
limited to, safe deposit boxes, travelers cheques, notary public, merchant
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depository services for VISA and Mastercard, cash management, home banking,
telephone voice response system and ATM's.
The Bank's organization and structure is designed to serve the banking needs
of individuals and small to medium sized businesses in Santa Barbara, Ventura
and San Luis Obispo counties.
DEPOSIT AND LIABILITY MANAGEMENT
Deposits represent the Bank's primary source of funds. As of December 31,
1999 the Bank had approximately 28,278 non interest bearing demand deposit
accounts representing $230.3 million, or $8,144 per account. The Bank also had
over 101,288 NOW, Money Market and Savings accounts amounting to $611.1 million
on deposit, or about $6,033 per account. There were over 17,653 time
certificates of deposit outstanding at December 31, 1999 representing
$327.1 million on deposit with an average deposit balance of approximately
$18,530. Of the total time certificates of deposit, only $99.5 million
represented holders who carried an amount on deposit of $100,000 or more--about
30% of the total.
The Bank is not dependent on a single or a few customers for its deposits,
most of which are obtained from individuals and small to medium sized
businesses. This results in the relatively small average balances noted above
and allows the Bank to be less subject to the adverse effects of the loss of a
large depositor. As of December 31, 1999, no individual, corporate, or public
depositor accounted for more than 1% of the Bank's total deposits.
Liquidity is the Bank's ability to meet fluctuations in deposit levels and
to provide for the credit needs of its customers. The objective in liquidity
management is to maintain a balance between the sources and uses of funds.
Principal sources of liquidity include interest and principal payments on loans
and investments, proceeds from the maturity of investments and growth in
deposits. The Bank holds overnight Fed Funds Sold as a cushion for temporary
liquidity needs. For 1999, Fed Funds Sold averaged $49.1 million representing
3.5% of average assets. In addition, the Bank maintains Federal Funds lines of
$30 million with major correspondents, subject to customary terms for such
arrangements.
The Bank's internally calculated liquidity ratio, which measures the
percentage of total liabilities (excluding equity) which are used to fund cash,
cash equivalents and non-pledged marketable securities, was 42.3%--well above
the Bank's policy minimum of 15%.
LOANS
The Bank's Loan to Deposit ratio stood at approximately 65.8% at year-end
1999. It is the Bank's goal to maintain its Loan to Deposit ratio in the 65% to
75% range while maintaining credit quality. The Bank has been able to improve
this ratio in 1999.
The Bank maintains an allowance for loan losses which is netted against
loans on the balance sheet. Additions to the allowance are made by charges to
operating expenses. All loans deemed to be uncollectible are charged to the
allowance; subsequent recoveries are credited to the allowance. The amount in
the loan loss allowance is an estimate of the losses inherent in the loan
portfolio as determined by a variety of factors considered by Management.
Factors include, but are not limited to, the current economic climate, type and
quality of loans in the portfolio, trends in delinquencies, trends in losses,
trends in non-accrual totals, diversification of the portfolio, value of
available collateral and the cost of collateral liquidation.
As of December 31, 1999, the Bank's allowance for loan losses stood at
$13.1 million or 1.7% of gross loans. It also represents 229% of non performing
loans (non-accrual loans plus loans 90 days or more past due). Outside factors,
not within the Bank's control, such as adverse changes in the economy, can
effect the adequacy of the allowance and there can be no assurance that, in any
given period, the Bank might not suffer losses which are substantial in relation
to the size of the allowance. During the year 1999, the Bank experienced
charge-offs, net of recoveries, of $1.4 million, or 0.20% of average loans.
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UNDERWRITING AND CREDIT ADMINISTRATION
The lending activities of Mid-State Bank are guided by the lending policies
established by the Bank's Board of Directors. The credit policy is managed
through periodic reviews and approved annually by the Board.
Each loan must meet minimum underwriting criteria established in the Bank's
lending policy. Lending authority is granted to officers of the Bank on a
limited basis, dependent upon individual knowledge and experience. Loan requests
exceeding individual officer approval limits are approved by the Administrative
Loan Committee. Loan requests exceeding these limits are submitted to the
Executive Loan Committee, which consists of the President and Chief Executive
Officer and three outside directors. Each of these committees meets on a regular
basis in order to provide timely responses to the Bank's clients.
Mid-State Bank's credit administration function includes an internal review
and the regular use of an outside loan review firm.
LOAN PORTFOLIO
At December 31, 1999, Mid-State Bank's gross loan portfolio totaled
$768.8 million. By portfolio segment, this is distributed as follows:
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Construction and Land Development........................... 15.3%
Real Estate--Farmland....................................... 3.0%
Real Estate--Residential.................................... 11.7%
Real Estate--Non Farm, Non Residential...................... 34.2%
Home Equity Credit Lines.................................... 6.9%
Credit Card and Related..................................... 1.6%
Installment................................................. 3.9%
Agricultural Production..................................... 5.4%
Commercial, Other........................................... 18.0%
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100.0%
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The interest rates charged for the loans made by the Bank vary with the
degree of risk, size and maturity of the loans. Rates are generally affected by
competition, associated factors stemming from the client's deposit relationship
with the Bank along with the cost of funds.
COMMERCIAL LOANS. The Bank provides personal financial services to diverse
commercial and professional businesses in the marketplace. Commercial loans
consist primarily of short term loans (normally with a maturity of under one
year) for working capital and business expansion. Commercial loans typically
include revolving lines of credit collateralized by inventory, accounts
receivable and equipment. Emphasis is placed on the borrower's earnings history,
capitalization, secondary sources of repayment, and in some instances,
third-party guarantees or highly liquid collateral (such as time deposits and
investment securities). Commercial loan pricing is generally at a rate tied to
the prime rate (as quoted in the WALL STREET JOURNAL) or the Bank's reference
rates.
The Bank participates in a Small Business Administration (SBA) loan
guarantee program. Those programs used include both the 504 program, which is
focused toward longer-term financing of buildings and other long-term assets,
and the 7A program, which is primarily used for financing of the equipment,
inventory and working capital needs of eligible businesses, generally over a
three-to-seven year term. The Bank's collateral position in the SBA loans is
enhanced by the SBA guarantee in the case of 7A loans, and by lower
loan-to-value ratios under the 504 program.
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REAL ESTATE CONSTRUCTION AND DEVELOPMENT LOANS. The Bank's real estate
construction loan activity has focused on providing short-term (less than one
year maturity) loans to individuals and developers with whom the Bank has
established relationships for the construction primarily of single family
residences in the Bank's market area.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability of
the project and the borrower's credit-worthiness are primary considerations in
the loan underwriting decision. The Bank utilizes approved independent local
appraisers as well as in-house staff, and loan-to-value ratios which generally
do not exceed 70% to 80% of the appraised value of the property. The Bank
monitors projects during the construction phase through regular construction
inspections and a disbursement program tied to the percentage of completion of
each project.
The Bank also occasionally makes land loans to individuals who intend to
construct a single-family residence on the lot, generally within 24 months. In
addition, the Bank has occasionally in the past, and may to a greater extent in
the future, make commercial real estate construction loans to high-net-worth
clients with adequate liquidity for construction of office and warehouse
properties. Such loans are typically secured by first deeds of trust and require
guarantees of borrowers.
COMMERCIAL REAL ESTATE TERM LOANS. The Bank provides medium-term commercial
real estate loans secured by commercial or industrial buildings where the
properties are either used by the owner for business purposes (owner-used
properties) or have income derived from tenants (investment properties). The
Bank's loan policies require the principal balance of the loan to be no more
than 70% of the stabilized appraised value of the underlying real estate
collateral. The loans, which are typically secured by first deeds of trust only,
generally have terms of no more than ten years and are amortized over 25 years.
Most of these loans have rates tied to the prime rate, with many adjusting
whenever the prime rate changes; the remaining loans adjust every five years
depending upon the term of the loan.
CONSUMER AND OTHER LOANS. The Bank's consumer and other loan portfolio is
divided between installment loans secured by automobiles and other consumer
purposes. Installment loans tend to be fixed rate and longer-term
(one-to-five-year maturity). The Bank also has a minimal portfolio of credit
card and related loans, issued as an additional service to its clients.
INVESTMENT SECURITIES
The Bank maintains a portfolio of investment securities to provide income
and to serve as a secondary source of liquidity for its operations in
conjunction with Federal Funds Sold (see liquidity management above). The Bank's
investment policy provides for the purchase of United States Treasury
Securities, United States Government Agency Securities, Mortgage Backed
Securities, Obligations of State and Political Subdivisions, and Other
Securities as permitted by Federal and State regulation. As of December 31,
1999, the aggregate carrying value of the Investment Portfolio was
$465.3 million. Of this total, $115.1 million was invested in U.S. Treasury
Securities, $104.4 million in U.S. Government Agencies, $6.6 million in Mortgage
Backed Securities, $236.4 million in Obligations of State and Political
Subdivisions and $2.8 million in Other Securities. The types of securities held
are influenced by several factors, among which are: rate of return, maturity,
and risk. Generally, the Bank endeavors to stagger the maturities of its
securities so that it has regular maturities for liquidity purposes.
Acceptable securities may be pledged to secure public deposits from State
and Public Agencies. As of December 31, 1999, the Bank had public funds totaling
approximately $8.2 million. The Bank has made available $42.4 million of
securities to securitize these funds. Excess collateral can be released as
needed.
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ECONOMIC CLIMATE
The economy in the Bank's trade area is based upon agriculture, oil,
tourism, light industry, the aerospace industries and retail trade. Services
supporting those involved in these industries have also developed in the areas
of medical, financial and educational services. Population in the three county
area, according to the U.S. Bureau of the Census, is estimated at July 1998 to
be 1.4 million. Ventura County represents about 54% of this total with Santa
Barbara and San Luis Obispo counties accounting for 29% and 17% respectively.
Certain economic activities are unique to the area such as the space launching
facilities at Vandenberg Air Force Base (which is now also being used by private
commercial enterprises) and the production of seeds for various flowers grown
worldwide. While major oil companies have elected to do business elsewhere (due
to very stringent county business regulations), smaller production companies
have moved in to continue the oil industry in the area. The moderate climate
allows a year round growing season for numerous vegetables and fruits. Vineyards
and cattle ranches make large contributions to the local economy. Access to
numerous recreational activities, including both mountains and beaches, provide
a fairly stable tourist industry from larger metropolitan areas such as the Los
Angeles/Orange County basin and the San Francisco Bay area. With the diversity
of the various types of industries in the Bank's service area, the Central
Coast, while not immune from economic fluctuations, does tend to enjoy a more
stable level of economic activity than many other areas of California.
COMPETITION
The banking business in California generally, and in the Bank's primary
service areas specifically, is highly competitive with respect to both loans and
deposits and is dominated by a relatively small number of major banks with many
offices and operations over a wide geographic area. Among the advantages such
major banks have over the Bank are their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets to regions of
higher yield and demand. Such banks offer certain services such as trust
services and international banking which are not offered directly by the Bank;
but which can be offered indirectly by the Bank through correspondent
institutions. In addition, by virtue of their greater total capitalization, such
banks have substantially higher lending limits than the Bank. (Legal lending
limits to an individual customer are based upon a percentage of a bank's total
capital accounts.) The Bank's unsecured and secured lending limits were
approximately $26.0 million and $43.3 million, respectively, at December 31,
1999.
Although within the Bank's trade area, there are few companies who would
require more funds than the Bank can legally lend. Other entities, both
governmental and in private industry, seeking to raise capital through the
issuance and sale of debt or equity securities also provide competition for the
Bank in the acquisition of deposits. Banks also compete with money market funds
and other money market instruments which are not subject to interest rate
ceilings.
In order to compete with other competitors in their primary service areas,
the Bank attempts to use, to the fullest extent, the flexibility which its
independent status permits. This includes an emphasis on specialized services,
local promotional activity, and personal contacts by its officers, directors and
employees. In particular, the Bank offers highly personalized banking services.
EMPLOYEES
At December 31, 1999, the Bank had a total of 779 employees. A number of
these employees are part-time however. On a full-time equivalent basis, these
employees represent 711 positions. The Bank believes that its employee relations
are satisfactory.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the
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Bank on loans extended to its customers and securities held in the Bank's
portfolio comprise the major portion of the Bank's earnings. These rates are
highly sensitive to many factors that are beyond the control of the Bank.
Accordingly the earnings and growth of the Bank are subject to the influence of
local, domestic and foreign economic conditions, including recession,
unemployment and inflation.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
intermediaries. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. For example,
legislation was recently passed in Congress that would repeal the current
statutory restrictions on affiliations between commercial banks and securities
firms. See "Financial Modernization Legislation."
SUPERVISION AND REGULATION
The Bank is extensively regulated under both federal and state law. Set
forth below, is a summary description of certain laws which relate to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations.
THE COMPANY
The Company is a bank holding company within the meaning of the BHC Act and
is registered as such with, and subject to the supervision of, the Federal
Reserve Board. The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the Bank Holding Company Act. The Federal
Reserve Board may conduct examinations of bank holding companies and their
subsidiaries.
The Company is required to obtain the approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after giving effect to
such acquisition of shares, the Company would own or control more than 5% of the
voting shares of such bank. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the Bank Holding Company Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any company that is
not a bank or bank holding company and from engaging, directly or indirectly, in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company may, subject to
the prior approval of the Federal Reserve Board, engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
10
<PAGE>
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest subsidiaries or affiliates when
the Federal Reserve Board determines that the activity or the control or the
subsidiary or affiliates constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. The Federal Reserve
Board also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, the Company must file
written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the Federal Reserve Board's regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe and unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and filed reports and proxy
statements pursuant to such Act with the Securities and Exchange Commission
("SEC").
THE BANK
The Bank is chartered under the laws of the State of California and its
deposits are insured by the FDIC to the extent provided by law. The Bank is
subject to the supervision of, and is regularly examined by, the State
Department of Financial Institutions and the FDIC. Such supervision and
regulation include comprehensive reviews of all major aspects of the Bank's
business and condition.
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal and
California statutes relate to many aspects of the Banks operations, including
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. Further, the Bank is required to maintain certain levels of
capital.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for loan and lease losses, cumulative preferred
stock, long term preferred stock, eligible
11
<PAGE>
term subordinated debt and certain other instruments with some characteristics
of equity. The inclusion of elements of Tier 2 capital is subject to certain
other requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends.The following table presents the
amounts of regulatory capital and the capital ratios for the Company, compared
to its minimum regulatory capital requirements as of December 31, 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
MINIMUM
CAPITAL WELL
ACTUAL REQUIREMENT CAPITALIZED
-------- ----------- -----------
<S> <C> <C> <C>
Leverage ratio......................................... 11.6% 4.0% 5.0%
Tier 1 risk-based ratio................................ 16.0% 4.0% 6.0%
Total risk-based ratio................................. 17.2% 8.0% 10.0%
</TABLE>
Under applicable regulatory guidelines, the Bank was also considered "Well
Capitalized" at December 31, 1999.
On January 1, 1998 new legislation became effective which, among other
things, gave the power to the DFI to take possession of the business and
properties of a bank in the event that the tangible shareholders' equity of the
bank is less than the greater of (i) 3% of the banks total assets or
(ii) $1.0 million.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
12
<PAGE>
An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
<TABLE>
<S> <C>
"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; Tier 1 risk-based capital of 4%;
and and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than Total risk-based capital less than
8%; 6%;
Tier 1 risk-based capital less than Tier 1 risk-based capital less than
4%; or Leverage ratio less than 4%. 3%; or Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets
less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment. The law prohibits insured
depository institutions from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions if after such
transaction the institution would be undercapitalized. If an insured depository
institution is undercapitalized, it will be closely monitored by the appropriate
federal banking agency, subject to asset growth restrictions and required to
obtain prior regulatory approval for acquisitions, branching and engaging in new
lines of business. Any undercapitalized depository institution must submit an
acceptable capital restoration plan to the appropriate federal banking agency
45 days after becoming undercapitalized. The appropriate federal banking agency
cannot accept a capital plan unless, among other things, it determines that the
plan (i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is limited
to the lesser of (a) an amount equal to 5% of the depository institution's total
assets at the time the institution became undercapitalized or (b) the amount
which is necessary to bring the institution into compliance with all capital
standards applicable to such institution as of the time the institution fails to
comply with its capital restoration plan. Finally, the appropriate federal
banking agency may impose any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the prompt correction action
provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers; (vii) prohibitions on the receipt of
13
<PAGE>
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
PREMIUMS FOR DEPOSIT INSURANCE
All deposits of the Bank are insured by the FDIC through the Bank Insurance
Fund ("BIF") which are subject to FDIC insurance assessment. The amount of FDIC
assessment paid by individual insured depository institutions is based upon
their relative risk as measured by regulatory capital ratios and certain other
factors. During 1995, the FDIC significantly reduced premium rates assessed on
deposits insured by the BIF. As a result of its "Well Capitalized" status, the
Bank paid the minimum required premium in 1999.
FINANCIAL MODERNIZATION LEGISLATION
Various proposals to adopt comprehensive financial modernization legislation
have been introduced in Congress which include, among other things, elimination
of the federal thrift charter, creation of a uniform financial institutions
charter, expansion of bank powers, and integration of banking, commerce,
securities activities and insurance. In 1999, Congress enacted legislation to
modernize the nation's financial services system through S.900 known as the
Gramm-Leach-Bliley Act of 1999. The bill allows the affiliation of
financially-related firms such as banking, insurance and securities; allows
banks to offer any service of a financial nature; protects the Community
Reinvestment Act while at the same time extending the examination period for
banks with satisfactory or outstanding CRA ratings; restricts the ability of
unitary
14
<PAGE>
thrift institutions to be sold to commercial firms; protects banks' ability to
sell title insurance and generally is viewed as ensuring healthy competition
among financial institutions and more choices at lower prices of services for
consumers.
COMMUNITY REINVESTMENT ACT
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to
improve" or "substantial noncompliance." At its last examination by the FDIC,
the Bank received a CRA rating of "Satisfactory."
ACCOUNTING CHANGES
From time to time the Financial Accounting Standards Board ("FASB") issues
pronouncements which govern the accounting treatment for the Company's financial
statements. For a description of the recent pronouncements applicable to the
Company (see the Notes to the Financial Statements included in Item 7 of this
Report). The FASB recently agreed to solicit comments by means of an Invitation
to Comment as part of its business combinations project. Through this process,
the FASB has determined to make certain changes to the methods of accounting for
business combinations. Most notably, the "pooling method" of accounting will be
eliminated, effective January 2001. Financial institutions often prefer to
account for mergers using this method and many of the mergers in the financial
institutions industry in the last several years have been accounted for using
the pooling method. The impact of this accounting change, if adopted, on mergers
and acquisitions involving financial institutions and upon the Company and the
value of its Common Stock cannot presently be predicted.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Company and the Bank, may be
subject to potential enforcement actions by the FDIC and the DFI for unsafe or
unsound practices in conducting their businesses or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits
(in the case of a depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution-affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDIC Improvement
Act.
15
<PAGE>
ITEM 2. PROPERTIES
The Company's principal office is located at 1026 Grand Avenue, Arroyo
Grande, California. As of December 31, 1999, the Bank owned 23 of its offices
and leased 9 other Bank locations. Information regarding offices of Bank of
Santa Maria consolidated and discontinued is set forth below.
<TABLE>
<CAPTION>
OWNED BY BANK OR SUBSIDIARY: LOCATION OF OFFICES ENCUMBRANCE
- ---------------------------- -------------------------- -------------
<S> <C> <C>
Arroyo Grande*.................................... 991 Bennett Avenue NONE
Arroyo Grande..................................... 1026 Grand Avenue NONE
Arroyo Grande*.................................... 550 Camino Mercado NONE
Arroyo Grande*.................................... 398 Sunrise Terrace NONE
Atascadero........................................ 6950 El Camino Real $163,763.16
Buellton.......................................... West Highway 246 & Central NONE
Cambria........................................... 1070 Main Street NONE
Goleta Valley..................................... 5956 Calle Real NONE
Grover Beach...................................... 899 Grand Avenue NONE
Grover Beach*..................................... 140 North Second Street NONE
Guadalupe......................................... 905 Guadalupe Street NONE
Lompoc............................................ 828 North "H" Street NONE
Los Osos.......................................... 1001 Los Osos Valley Road NONE
Morro Bay......................................... 251 Harbor Street NONE
Nipomo............................................ 615 West Tefft Street NONE
Paso Robles....................................... 845 Spring Street NONE
Pismo Beach....................................... 801 Price Street NONE
San Luis Obispo................................... 75 Santa Rosa NONE
San Luis Obispo................................... 2276 Broad Street NONE
Santa Barbara..................................... 33 East Carrillo Street NONE
Santa Barbara..................................... 2222 Bath Street NONE
Santa Maria....................................... 720 North Broadway NONE
Santa Maria....................................... 2739 Santa Maria Way NONE
Santa Maria....................................... 1554 South Broadway NONE
Santa Maria....................................... 519 E. Main Street NONE
Templeton......................................... 1025 Las Tablas Road NONE
Vandenberg Village................................ 3745 Constellation Road NONE
FORMER BANK OF SANTA MARIA OFFICES WHICH HAVE BEEN CONSOLIDATED AND ARE BEING SOLD:
<CAPTION>
OWNED BY BANK OR SUBSIDIARY: LOCATION OF OFFICES ENCUMBRANCE
- ---------------------------- -------------------------- -------------
<S> <C> <C>
Orcutt Oak Knolls 1070 East Clark NONE
Santa Maria 528 South Broadway NONE
</TABLE>
16
<PAGE>
LEASED BY BANK OR SUBSIDIARY
<TABLE>
<S> <C> <C>
Cayucos..................... 107 North Ocean Avenue $1,455.50 per month
Expires November, 2002
Paso Robles................. 705 Golden Hill Road $9,463.00 per month
Expires October, 2002
Orcutt...................... 1110 East Clark, Santa Maria $8,959.00 per month
Expires October, 2000
Oak Park--Pismo Beach....... 865 Oak Park Boulevard $10,098.00 per month
Expires March, 2008
Oxnard...................... 445 Esplanade Drive, Ste 110 $2,947.12 per month
Expires June, 2000
Oxnard*..................... 300 Esplanade Drive, Ste 470/480 $3,360.00 per month
Expires December, 2002
Milpas--Santa Barbara....... 914 Carpinteria Street $9,562.94 per month
Expires May, 2017
Hollister--Goleta Valley.... 5340 Hollister Avenue $5,907.38 per month
Expires February, 2002
Santa Barbara*.............. 911 Olive Street $10,280.49 per month
Expires December, 2003
Santa Maria*................ 2801--B Santa Maria Way $1,313.90 per month
Expires April, 2000
Santa Ynez.................. 3600 Sagunto Street $2,000.00 per month
Expires May, 2002
Solvang..................... 1600 Copenhagen Drive $9,688.69 per month
Expires April, 2003
FORMER BANK OFFICES LEASED BY BANK--WHICH ARE SUB-LEASED
Nipomo...................... 630 W. Tefft Street $3,460.80 per month
Expires February, 2015
</TABLE>
* ALL OFFICES LISTED ABOVE (EXCLUDING THOSE FORMER BANK OF SANTA MARIA OFFICES
BEING SOLD OR SUB-LEASED) ARE FULL-SERVICE OFFICES, EXCEPT THOSE WITH
ASTERISKS NOTED ABOVE. ASTERISKS REPRESENT NON-BANKING SUPPORT OFFICES
(E.G., ADMINISTRATION, DATA PROCESSING, SUPPLIES WAREHOUSE, CREDIT SERVICES,
TRAINING FACILITIES, ET. AL.).
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to various pending and threatened
legal actions which arise out of the normal course of its business. The Company
is not a party to any pending legal or administrative proceedings (other than
ordinary routine litigation incidental to the Company's business) and no such
proceedings are known to be contemplated.
There are no material proceedings adverse to the Company to which any
director, officer, affiliate of the Company or 5% shareholder of the Company, or
any associate of any such director, officer, affiliate or 5% shareholder of the
Company is a party, and none of the above persons has a material interest
adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
17
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "MDST."
Prior to July 10, 1998, trading of the Company's Common Stock occurred
solely "over the counter," and was limited. Consequently, the prices listed
before that date represent quotations by dealers making a market in the
Company's Common Stock and reflect inter-dealer prices, without adjustments for
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions. On July 10, 1998, the Company's Common Stock was designated for
quotation on the Nasdaq National Market. The prices listed below for periods
subsequent to July 10, 1998 are as reported by the Nasdaq National Market.
The following table summarizes those trades of the Company's Common Stock of
which Management is aware, setting forth the approximate high and low trade
prices for each quarterly period ended since January 1, 1998.
<TABLE>
<CAPTION>
QUARTER SALES PRICES
ENDED -------------------
1998 LOW HIGH
------- -------- --------
<S> <C> <C>
March 31.................................................... $25.63 $29.25
June 30..................................................... $28.75 $32.00
September 30................................................ $24.00 $31.25
December 31................................................. $22.88 $28.88
<CAPTION>
QUARTER SALES PRICES
ENDED -------------------
1999 LOW HIGH
------- -------- --------
<S> <C> <C>
March 31.................................................... $27.88 $28.38
June 30..................................................... $33.63 $35.50
September 30................................................ $29.63 $30.63
December 31................................................. $30.38 $31.88
</TABLE>
HOLDERS
As of December 31, 1999, there were approximately 3,800 holders of the
Company's Common Stock. There are no other classes of common equity outstanding.
DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
Company's shareholders are entitled to receive dividends when and as declared by
its Board of Directors, out of funds legally available therefor, subject to the
restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make a
distribution to its shareholders if the corporation's retained earnings equal at
least the amount of the proposed distribution. The Corporation Law also provides
that, in the event that sufficient retained earnings are not available for the
proposed distribution, a corporation may nevertheless make a distribution to its
shareholders if it meets two conditions, which generally stated are as follows:
(i) the corporation's assets equal at least 1 1/4 times its liabilities, and
(ii) the corporation's current assets equal at least its current liabilities or,
if the average of the corporation's earnings before taxes on income and before
interest expenses for the two preceding fiscal
18
<PAGE>
years was less than the average of the corporation's interest expenses for such
fiscal years, then the corporation's current assets must equal at least 1 1/4
times its current liabilities.
The ability of the Company to pay a cash dividend depends largely on the
Bank's ability to pay a cash dividend to the Company. The payment of cash
dividends by the Bank is subject to restrictions set forth in the California
Financial Code (the "Financial Code"). The Financial Code provides that a bank
may not make a cash distribution to its shareholders in excess of the lesser of
(a) the bank's retained earnings; or (b) the bank's net income for its last
three fiscal years, less the amount of any distributions made by the bank or by
any majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the DFI, make a
distribution to its shareholders in an amount not exceeding the greater of
(x) its retained earnings; (y) its net income for its last fiscal year; or
(z) its net income for its current fiscal year. In the event that the DFI
determines that the shareholders' equity of a bank is inadequate or that the
making of a distribution by the bank would be unsafe or unsound, the DFI may
order the bank to refrain from making a proposed distribution. The FDIC may also
restrict the payment of dividends if such payment would be deemed unsafe or
unsound or if after the payment of such dividends, the Bank would be included in
one of the "undercapitalized" categories for capital adequacy purposes pursuant
to federal law. (See, "Item 1--Description of Business--Prompt Corrective Action
and Other Enforcement Mechanisms.") Additionally, while the Federal Reserve
Board has no general restriction with respect to the payment of cash dividends
by an adequately capitalized bank to its parent holding company, the Federal
Reserve Board might, under certain circumstances, place restrictions on the
ability of a particular bank to pay dividends based upon peer group averages and
the performance and maturity of the particular bank, or object to management
fees to be paid by a subsidiary bank to its holding company on the basis that
such fees cannot be supported by the value of the services rendered or are not
the result of an arm's length transaction.
The following table sets forth the per share amount and month of payment for
all cash dividends paid since January 1, 1998.
<TABLE>
<CAPTION>
PAYABLE DATE DIVIDEND
- ------------ ----------------------------
<S> <C> <C>
January 23, 1998 Mid-State Bank................... 5%--Stock
June 26, 1998 Mid-State Bank................... $0.15 per share--Cash
January 22, 1999 Mid-State Bancshares............. $0.12 per share--Cash
April 22, 1999 Mid-State Bancshares............. $0.12 per share--Cash
July 22, 1999 Mid-State Bancshares............. $0.12 per share--Cash
October 22, 1999 Mid-State Bancshares............. $0.14 per share--Cash
January 18, 2000 Mid-State Bancshares............. $0.14 per share--Cash
</TABLE>
Whether or not stock dividends or any cash dividends will be paid in the
future will be determined by the Board of Directors after consideration of
various factors. The Company's profitability and regulatory capital ratios in
addition to other financial conditions will be key factors considered by the
Board of Directors in making such determinations regarding the payment of
dividends by the Company.
TRANSFER AGENT
ChaseMellon Shareholder Services serves as the Company's transfer agent.
Shareholder inquiries regarding holdings of Mid-State Bancshares Common Stock
can be directed to:
ChaseMellon Shareholder Services, LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
1-(888)-540-9878 (U.S. & Canada)
1-(201)-329-8660 (Outside U.S.)
Alternatively, ChaseMellon can be contacted via the Internet at
www.chasemellon.com.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA--MID-STATE BANCSHARES
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995
- --------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31:
Interest Income (not taxable
equivalent)........................ $ 99,627 $ 98,882 $ 93,091 $ 85,217 $ 84,340
Interest Expense..................... 26,071 29,441 29,060 27,068 26,693
---------- ---------- ---------- ---------- ----------
Net Interest Income.................. 73,556 69,441 64,031 58,149 57,647
Provision for Loan Losses............ 50 300 105 7 1,025
---------- ---------- ---------- ---------- ----------
Net Interest Income after provision for
loan losses........................ 73,506 69,141 63,926 58,142 56,622
Non-interest income.................. 17,465 24,736 17,834 17,303 16,469
Non-interest expense................. 57,488 62,306 57,674 60,596 67,271
---------- ---------- ---------- ---------- ----------
Income before income taxes........... 33,483 31,571 24,086 14,849 5,820
Provision for income taxes........... 11,430 10,576 5,220 5,668 692
---------- ---------- ---------- ---------- ----------
Net Income........................... $ 22,053 $ 20,995 $ 18,866 $ 9,181 $ 5,128
========== ========== ========== ========== ==========
PER SHARE:
Net Income--basic.................... $ 1.96 $ 1.88 $ 1.70 $ 0.83 $ 0.47
Net Income--diluted.................. $ 1.94 $ 1.86 $ 1.68 $ 0.82 $ 0.46
Weighted average shares for Basic
E.P.S. calculation................. 11,230 11,176 11,097 11,058 10,991
Weighted average shares for Diluted
E.P.S. calculation................. 11,364 11,273 11,262 11,131 11,050
Cash dividends....................... $ 0.49 $ 0.28 $ 0.16 $ 0.09 $ 0.02
Book value at year-end............... $ 14.20 $ 13.48 $ 11.71 $ 10.11 $ 9.50
Ending Shares........................ 11,287 11,206 11,104 11,084 11,041
AT DECEMBER 31,
Cash and cash equivalents............ $ 56,080 $ 84,557 $ 102,060 $ 99,883 $ 97,227
Investments and Fed Funds Sold....... 482,781 578,034 518,739 473,826 415,367
Loans, net of deferred fees, before
allowance.......................... 768,814 675,481 643,675 600,418 561,605
Allowance for Loan & Lease Losses.... (13,105) (14,441) (15,065) (14,561) (15,798)
Other assets......................... 60,648 65,694 73,796 81,104 100,119
---------- ---------- ---------- ---------- ----------
Total Assets....................... $1,355,218 $1,389,325 $1,323,205 $1,240,670 $1,158,520
========== ========== ========== ========== ==========
Non-interest bearing deposits........ $ 230,271 $ 258,629 $ 243,315 $ 220,850 $ 198,823
Interest bearing deposits............ 938,183 965,850 938,663 891,613 840,549
Other borrowings..................... 15,357 3,049 4,494 7,424 5,589
Other liabilities.................... 11,076 10,706 6,646 8,757 8,659
Capital Accounts..................... 160,331 151,091 130,087 112,026 104,900
---------- ---------- ---------- ---------- ----------
Total Liabilities and Shareholders'
equity........................... $1,355,218 $1,389,325 $1,323,205 $1,240,670 $1,158,520
========== ========== ========== ========== ==========
</TABLE>
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--MID-STATE BANCSHARES (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997 1996 1995
- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PERIOD AVERAGES:
Total Assets............................ 1,391,279 1,331,954 1,254,686 1,177,624 1,120,956
Total Loans............................. 685,566 633,324 605,688 561,375 571,846
Total Earning Assets.................... 1,269,656 1,194,352 1,110,560 1,018,546 946,539
Total Deposits.......................... 1,220,340 1,184,293 1,107,842 1,058,743 1,003,763
Common Equity........................... 155,419 140,989 121,450 108,614 97,798
ASSET QUALITY
Non-accrual loans..................... 1,520 2,019 3,939 5,336 14,692
Loans past due 90 days or more........ 4,199 4,408 663 2,803 2,048
Other real estate owned............... -- 259 5,188 7,838 11,814
--------- --------- --------- --------- ---------
Total non performing assets........... 5,719 6,686 9,790 15,977 28,554
FINANCIAL RATIOS
For the year:
Return on assets...................... 1.59% 1.58% 1.50% 0.78% 0.46%
Return on equity...................... 14.19% 14.89% 15.53% 8.45% 5.24%
Net interest margin (not taxable
equivalent)......................... 5.79% 5.81% 5.77% 5.71% 6.09%
Net interest margin (taxable
equivalent)........................... 6.02% 5.91% 5.83% 5.78% 6.16%
Net loan losses (recoveries) to avg.
loans................................. 0.20% 0.15% -0.07% 0.26% 0.35%
Efficiency ratio...................... 63.2% 66.2% 70.5% 80.3% 90.8%
At December 31:
Equity to average assets (leverage
ratio)................................ 11.6% 10.7% 9.7% 8.9% 8.9%
Tier One capital to risk-adjusted
assets................................ 16.0% 16.1% 14.7% 13.7% 13.2%
Total capital to risk-adjusted
assets................................ 17.2% 17.4% 15.8% 15.0% 14.4%
Loan loss allowance to loans, gross... 1.7% 2.1% 2.3% 2.4% 2.8%
Non-accrual loans to total loans,
gross................................. 0.2% 0.3% 0.6% 0.9% 2.6%
Non performing assets to total
assets................................ 0.4% 0.5% 0.7% 1.3% 2.5%
Allowance for loan losses to non
performing loans.................... 229% 225% 327% 179% 94%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION AND BUSINESS OF THE COMPANY
The Company has as its single, wholly owned subsidiary, Mid-State Bank (the
Bank). The Bank itself has two wholly owned subsidiaries--MSB Properties and
Mid-Coast Land Company (discussed above in Part I of this report and later in
this Management's Discussion and Analysis). The Bank was founded in 1961 and
operates a full service commercial banking business serving its customers on the
Central Coast of California. Headquartered in Arroyo Grande, it operates 32
offices in communities throughout San Luis Obispo, Santa Barbara and Ventura
counties. Based on data supplied by Banks in its trade area, Mid-State is the
second largest Bank in terms of total assets. Of the 300 banks in the State of
California, only 23 of them were chartered prior to the Bank.
An Agreement to Merge and Plan of Reorganization by and among Mid-State Bank
and City Commerce Bank was effective at close of business August 31, 1999. The
acquisition of City Commerce
21
<PAGE>
Bank increases the Bank's market presence along the south coast of Santa Barbara
County and provides an important entree into the Ventura County marketplace. The
merger was accounted for on a pooling of interests basis and as a result, the
financial statements for all periods presented have been restated to include the
accounts of City Commerce Bank.
The following discussion and analysis will provide insight and supplementary
information into the accompanying consolidated financial statements of the Bank.
It also provides Management's assessment of the operating trends over the past
few years and certain of their expectations for 2000.
Management's Discussion and Analysis (MD&A) includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act. All of the
statements contained in the MD&A, other than statements of historical fact,
should be considered forward-looking statements, including, but not limited to,
those concerning (i) the Company's strategies, objectives and plans for
expansion of its operations, products and services, and growth of its portfolio
of loans, investments and deposits, (ii) the Company's beliefs and expectations
regarding actions that may be taken by regulatory authorities having oversight
of the operation, and (iii) the Company's beliefs as to the adequacy of its
existing and anticipated allowances for loan and real estate losses. Although
the Company believes the expectations reflected in those forward-looking
statements are reasonable, it can give no assurance that those expectations will
prove to have been correct. All subsequent written and oral forward-looking
statements by or attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by this qualification. Investors are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof and are not intended to give any assurance as
to future results. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
1999 RESULTS AND ACCOMPLISHMENTS
FINANCIAL
For 1999, the Company on a consolidated basis reported net income of
$22.1 million compared to $21.0 million in 1998 and $18.9 million in 1997. The
diluted Earnings Per Share was $1.94 compared to $1.86 in 1998 and $1.68 in
1997. Consolidated total assets at December 31, 1999 were $1.355 billion
compared to $1.389 billion at December 31, 1998, down 2.5%. Total deposits also
decreased slightly from $1.224 billion as of December 31, 1998 to
$1.168 billion at year-end 1999. Shareholders' common equity stood at
$160.3 million at year end up from its $151.1 million level a year earlier,
owing primarily to net income of $22.1 million for 1999. Also impacting
shareholders' equity were the unrealized loss on securities available for sale
of $3.7 million compared to a gain of $4.4 million one year earlier, as well as,
cash dividends paid during 1999 of $5.6 million.
The table below illustrates net income by subsidiary unit. Significant items
affecting the income statement in 1999 include: 1) non-recurring merger charges
of $2.1 million after-tax, and 2) tax deductions not previously benefited in
prior years of $1.4 million. These items are discussed more fully below in the
analysis of income and expense.
<TABLE>
<CAPTION>
INCOME (LOSS) BY SUBSIDIARY (000'S) 1999 1998 1997
- ----------------------------------- -------- -------- --------
<S> <C> <C> <C>
Bank only, pre-tax....................................... $32,340) $24,320) $24,948)
MSB Properties, pre-tax.................................. 2,175) 2,165) 2,203)
Mid Coast Land Co., pre-tax.............................. 349 5,410 (2,891)
Parent only, pre-tax..................................... (1,381) (324) (174)
Tax expense.............................................. 11,430 10,576 5,220
------- ------- -------
Consolidated Mid-State Bancshares........................ $22,053 $20,995 $18,866
</TABLE>
22
<PAGE>
OTHER ACCOMPLISHMENTS IN 1999
The most significant accomplishment during the year, was the successful
completion of the merger of City Commerce Bank with the Bank. Prior to the
announcement of the merger in the first quarter of 1999, Mid-State Bank had
$1.222 billion in assets, 28 office locations and 644 full time equivalent
employees. City Commerce Bank, which operated in the southern portion of
Mid-State Bank's geographical territory, maintained $150 million in assets and
75 full time equivalent employees. The integration of these two entities was
complex and involved significant management effort. The goal of this in-market
merger was to attain the synergy's available to benefit the stockholders of both
organizations, while minimizing the disruption to customers and employees alike.
City Commerce Bank had four branches- two in Santa Barbara, one in Goleta and
one in Oxnard. All four branches became new offices of Mid-State Bank and will
complement the Bank's two existing offices in Santa Barbara and Goleta.
Also during 1999, the Bank completed implementation of its Year 2000 Plan
begun in 1997. (See item 7.b. below--"Disclosure about risks associated with
Year 2000 issues)." Activities completed included testing of various "Mission
Critical" systems, development and testing of contingency plans, reviews of
customer readiness status and public information awareness campaigns. No
meaningful Year 2000 issues have arisen with the century date change rollover.
ENVIRONMENTAL FACTORS IMPACTING THE BANK
ECONOMIC CONDITIONS
The most comprehensive review of local economic conditions known to
Management comes from the UCSB Economic Forecast Project which provides both
annual forecast information and periodic updates of economic conditions in the
Company's trade area. The economy continues a steady improvement, as measured by
a variety of data. In San Luis Obispo County, job growth increased by 1.2% in
1999 compared to 3.6% in 1998. The slowdown in job creation in 1999 could in
large part, be attributed to the decline in the labor force availability. The
unemployment rate in San Luis Obispo County remained approximately the same with
3.5% in 1999 compared to 3.6% one year earlier. The County rate is now less than
the national rate of 4.1%, a rare occurrence in recent years. According to UCSB
estimates, if the unemployment rate drops much further, the existing labor force
will not be able to accommodate new job demand, thus placing pressure for
additional population growth pursuing employment opportunities. Santa Barbara
County is seeing a similar situation with an exceptionally low unemployment rate
of 3.8% in 1999 compared to 4.7% in 1998. Ventura County employment remained
strong in 1999 also.
Tourism in San Luis Obispo and Santa Barbata counties remained solid in
1999. Hotel/motel occupancy rates have seen steady improvement with hotel/motel
room sales up 5.0% during 1999 in San Luis Obispo County over 1998. Visitor
spending in San Luis Obispo County has been estimated for 1999 to be up 9.8% to
$431 million. Similarly, in Santa Barbara County on the south coast, hotel/motel
room sales are estimated to be up 9.2% in 1999 indicating positive tourism
trends there as well. This important sector to the Company's trade area appears
to be healthy and improving. With a wealthier population contributing to
increases in travel dollars being spent and with prospects for drier weather,
tourism in 2000 should enjoy another robust year.
Solid retail sales figures were noted throughout the Company's trade area,
especially in the larger cities of Paso Robles, Arroyo Grande, San Luis Obispo,
Santa Maria, and Santa Barbara. Retail sales in San Luis Obispo County jumped a
healthy 8% in 1998 followed by an estimated 9% in 1999. Rates in Santa Barbara
County were estimated to be in excess of 5%. Management would expect retail
sales growth, adjusted for inflation, to continue to grow in 2000. Growth rates
in excess of 5% are likely in view of the strong economic conditions throughout
the tri-counties.
Residential real estate sales were strong in 1999 throughout the Company's
trade area. Home sales are estimated to be up some 18.6% in San Luis Obispo
County and 14.3% in Santa Barbara County. The
23
<PAGE>
median price of homes sold in San Luis Obispo increased 13.2% (third quarter
compared to third quarter) and 4.4% in Santa Barbara County. The UCSB Economic
Forecast Project is projecting an increase in selling prices of about 6.7% for
2000 owing to a lack of housing inventory of both new and existing homes.
In last year's Annual Report the Bank was anticipating "...Interest rates
are not expected to change dramatically during 1999." This was indeed the case
for the first six months of the year. The Prime Rate began the year at 7.75% and
remained at that level until the start of the third quarter. Three 25 basis
point increases on July 1(st), August 24(th) and November 17(th) saw the Prime
Rate finish the year at 8.50%. On average for the full year 1999, Prime was
8.00% compared to 8.36% in 1998. Other key interest rates followed similar
patterns. The closely watched Fed Funds Rate began the year at 4.75% and rose to
5.50% by December 31(st). Similarly, the thirty year Treasury Bond which had
started the year at 5.09 was 6.48% by the end of 1999.
Management's expectations for 2000 are for continued strong growth rates
throughout the Bank's trade area. Projections would be for 2 or 3 modest
increases in the Prime Rate. The willingness by the Federal Reserve Bank and
Chairman Greenspan to raise rates in an effort to curb inflation would appear to
be the likely course for some months to come. Other factors also arguing against
any drop in interest rates include; 1) a tight labor market, and 2) both lofty,
and fairly volatile, stock market levels. These interest rate conditions,
coupled with the steady momentum developed in the local economy over the past
few years, would appear to indicate another favorable year overall for the local
Central Coast economy.
COMPETITIVE FACTORS
Competitive pressures from other financial institutions continue to be
intense both in the Company's trade area and throughout the Nation. Many banks
are suffering from sufficient loan volumes and have become very aggressive on
the pricing of those good credits available. Various mortgage bankers are
blanketing the central coast communities with sales promotions and are extremely
competitive with their rate programs. Brokerage houses are indeed a factor
through their marketing of mutual funds and numerous banks are now offering
these products.
It should also be noted that the trend toward consolidation of banking
assets exhibited over the past few years in California continued in 1999.
Statewide, 16 banks were merged out of existence during the year. Locally, the
only Bank merger in the tri-county area was Mid-State Bank's merger with City
Commerce Bank. While no new banks were started in Mid-State Bank's trade area
during 1999, 8 were established throughout the State during the year (with
another 4 approved pending start-up). Two new banks began operating locally in
1997 and a savings bank began operation in San Luis Obispo during early 1999.
LEGAL MATTERS
The Bank is involved in litigation of a routine nature which is being
handled and defended in the ordinary course of the Bank's business. In the
opinion of Management, based on the advice of legal counsel, the resolution of
pending litigation will have no material impact on the Bank's income or
financial position.
ANALYSIS OF STATEMENT OF FINANCIAL POSITION
LOANS
The Bank experienced an increase in its net loan portfolio from
$661.0 million at the end of 1998 to $755.7 million at the end of 1999. This
represents continued growth of the loan portfolio of $94.7 million following the
$32.4 million increase in 1998. Loans now represent approximately 56% of the
Bank's assets which is below the level at which Management would prefer to
operate. The Investment Portfolio has decreased by $60.9 million, over this
period of time as funds are being allocated to the loan portion of the
24
<PAGE>
balance sheet. The section immediately following provides a more extensive
discussion of the Investment Portfolio.
The composition of the loan portfolio is also changing. The graph below
displays the trend over the past five years in the various components of the
loan portfolio. Construction loans have risen from their level three years
earlier--$46.6 million at December 31, 1996 compared to $118.4 million at
year-end 1999. Real Estate loans generally trended up from $270.6 million at the
end of 1996 to nearly $285.9 million at December 31, 1998, and $379.8 million at
the end of 1999. Home Equity Credit Lines have steadily declined from
$83.6 million at the end of 1996 to $52.7 million at the end of 1999. Consumer
loans (installment, credit cards and credit reserve) have generally exhibited
declines over the last 3 years reaching $42.0 million at year-end 1999 compared
to $56.2 million at the end of 1996. Commercial loans have grown in recent years
having reached $138.1 million at December 31, 1999. Agricultural production
loans have also grown from $26.6 million at the end of 1996 to $41.3 million at
the end of 1999. The Bank expects to continue to emphasize other types of
lending activity in order to diversify the risk in those categories relative to
term real estate loans. Economic activity in the Central Coast will determine
the types of credit the Bank will be able to extend and hence its ability to
achieve this objective.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CONSTRUCTION AND REAL ESTATE HECL'S INSTALLMENT CREDIT CARD AGRICULTURE COMMERCIAL, OTHER
<S> <C> <C> <C> <C> <C> <C> <C>
Land Development & Related
1995 $43,564 $253,154 $89,673 $39,899 $12,009 $19,588 $104,852
1996 $46,596 $270,559 $83,624 $38,553 $17,688 $26,632 $117,891
1997 $46,415 $307,065 $74,850 $35,611 $18,469 $35,523 $127,374
1998 $90,689 $287,440 $57,428 $47,210 $12,153 $35,128 $147,396
1999 $117,340 $377,435 $52,681 $29,652 $12,308 $41,303 $138,095
</TABLE>
The Bank's allowance for loan losses stands at $13.1 million, or 1.7% of
gross loans, representing losses inherent in the Loan Portfolio but not yet
realized. This amount is down from the $14.4 million at December 31, 1998. The
year-end 1999 balance now represents 229% of non-performing loans slightly up
25
<PAGE>
from 225% at the end of 1998. A five year review of activitiy in the allowance
for loan losses and an allocation by loan type of the allowance is shown in the
two tables below.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES (IN 000'S) 1999 1998 1997 1996 1995
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................... $14,441 $15,065 $14,561 $15,798 $17,256
Provision charged to operating expense......... 50 300 105 7 1,025
After Adjustments--Merger -- -- -- 228 --
Loans charged off:
Construction and development loans........... (14) -- -- (73) (1,156)
Real estate loans............................ (15) (151) (265) (785) (1,273)
Home equity credit lines..................... (178) (94) (15) (293) (278)
Installment loans............................ (132) (405) (477) (355) (407)
Commercial loans............................. (1,852) (674) (462) (1,422) (1,509)
Credit cards and related loans............... (331) (397) (443) (409) (435)
Recoveries of loans previously charged off:
Construction and development loans........... 198 32 44 908 1,616
Real estate loans............................ 180 188 84 96 161
Home equity credit lines..................... 111 17 20 23 49
Installment loans............................ 115 122 111 113 100
Commercial loans............................. 425 362 1,721 661 566
Credit cards and related loans............... 107 76 81 64 83
------- ------- ------- ------- -------
BALANCE AT END OF YEAR....................... $13,105 $14,441 $15,065 $14,561 $15,798
======= ======= ======= ======= =======
Ratio of Net Loan Losses (Recoveries) to
Average Loans Outstanding.................... 0.20% 0.15% -0.07% 0.26% 0.43%
</TABLE>
Allocation of the allowance for loan losses at December 31, is as follows:
<TABLE>
<CAPTION>
PERCENT PERCENT PERCENT PERCENT
(DOLLARS IN 000'S) OF OF OF OF
BALANCE APPLICABLE TO: 1999 LOANS 1998 LOANS 1997 LOANS 1996 LOANS 1995
- -------------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction and Land
Dev..................... $ 1,979 15.3% $ 946 13.4% $ 617 7.2% $ 958 7.3% $ 2,344
Real Estate............... 2,291 49.1% 3,798 42.4% 4,243 47.5% 6,693 48.2% 6,605
H.E.C.L................... 344 6.9% 753 8.5% 922 11.6% 1,143 15.1% 1,546
Installment............... 283 3.9% 1,092 7.0% 591 5.5% 470 5.6% 808
Credit Card and Related... 770 1.6% 1,170 1.8% 736 2.9% 503 3.4% 599
Commercial, Other......... 4,448 23.2% 4,973 26.9% 3,049 25.3% 2,598 20.4% 3,415
Contingency............... 2,990 N/A 1,709 N/A 4,907 N/A 2,196 N/A 481
------- ----- ------- ----- ------- ----- ------- ----- -------
BALANCE AT END OF
YEAR.................. $13,105 100.0% $14,441 100.0% $15,065 100.0% $14,561 100.0% $15,798
======= ===== ======= ===== ======= ===== ======= ===== =======
<CAPTION>
PERCENT
(DOLLARS IN 000'S) OF
BALANCE APPLICABLE TO: LOANS
- -------------------------- --------
<S> <C>
Construction and Land
Dev..................... 7.5%
Real Estate............... 46.4%
H.E.C.L................... 18.2%
Installment............... 6.8%
Credit Card and Related... 2.3%
Commercial, Other......... 18.8%
Contingency............... N/A
-----
BALANCE AT END OF
YEAR.................. 100.0%
=====
</TABLE>
Non-Accrual loans within the Bank's portfolio stood at $1.5 million as of
December 31, 1999, an improvement from the $2.0 million at the end of 1998.
Loans 90 days or more past due stood at $4.2 million at December 31, 1999, which
is slightly down from the $4.4 million at the end of 1998. The vast majority of
the loans on non-accrual ($1.4 million) are secured by real estate. There is
potential for this collateral to be liquidated to recover principal and unpaid
interest. To the extent this is insufficient, a charge-off to the allowance may
result. $0.8 million of 90 days or more past due loans are secured by real
estate and $3.2 million is secured by loans to finance agricultural production.
Recoveries in 1999 of loans previously charged-off totaled $1.1 million compared
to charge-offs of $2.5 million taken during the year resulting in NET
CHARGE-OFFS of $1.4 million. This compares to net charge-offs incurred during
1998 of $924 thousand and net recoveries of $399 thousand in 1997. The Bank
anticipates that charge-offs (actual losses) will continue during 2000. It is
unlikely that recoveries would exceed charge-offs in the coming year.
26
<PAGE>
With the combination of the collateral securing the problem loans and the
size of the allowance for loan losses, Management feels that the allowance is
sufficient to cover inherent losses. Management reviews the adequacy of the
allowance and adjusts it as necessary on a regular basis. The allowance is also
examined annually by one or more of the Bank's regulatory bodies including the
FDIC and The State Of California Department of Financial Institutions.
The allowance for loan losses as a percentage of total loans has gradually
decreased from 2.8% in 1995 to 1.7% in 1999, reflecting an improvement in asset
quality during this period. This is evident in the reduction of non-performing
assets from $28.6 million in 1995 to $5.7 million by the end of 1999. The
adequacy of the allowance is determined by considering the type and quality of
loans in the loan portfolio, trends in non-accrual loans, trends in
delinquencies, trends in actual losses, geographical distribution of loans,
management expertise, economic outlook, diversification of the loan portfolio,
value of available collateral, and the costs of collateral liquidation. In
establishing the allowance at December 31, 1999, Management acknowledged the
combined high concentration of real estate loans, increases in certain higher
risk activities such as construction lending, concern with respect to the Year
2000 readiness of borrowers, and higher levels of individually large corporate
loans. These factors directly offset the beneficial trends in non-performing
loans.
The allowance for loan losses consists of an amount allocated to loans which
are impaired, a statistically allocated portion and a specifically allocated
portion. The total of these components is considered adequate to provide for
losses which can be reasonably anticipated. However, since these amounts are
based on estimates, ultimate losses relating to these loans may vary.
A summary of maturities and sensitivities of loans to changes in interest
rates at December 31, is shown in the table below. A more complete discussion of
the Bank's exposure to changes in interest rates can be found in the MD&A under
the section titled "Net Interest Income and Interest Rate Risk".
<TABLE>
<CAPTION>
OVER DUE AFTER DUE AFTER
3 MONTHS ONE YEAR THREE YEARS
(DOLLARS IN 000'S) 3 MONTHS THROUGH TO THREE TO FIVE DUE AFTER
1999 OR LESS 12 MONTHS YEARS YEARS FIVE YEARS TOTAL
- ----------------------------------------- -------- --------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans......................... $18,877 $63,241 $66,639 $41,109 $176,611 $366,477
Floating rate loans...................... 364,063 5,602 19,393 8,043 3,715 400,816
------- ------- ------- ------- -------- --------
Sub-total.............................. 382,940 68,843 86,032 49,152 180,326 767,293
Non accrual loans........................ 1,520
--------
Total Loans, gross..................... $768,813
========
</TABLE>
<TABLE>
<CAPTION>
OVER DUE AFTER DUE AFTER
3 MONTHS ONE YEAR THREE YEARS
(DOLLARS IN 000'S) 3 MONTHS THROUGH TO THREE TO FIVE DUE AFTER
1998 OR LESS 12 MONTHS YEARS YEARS FIVE YEARS TOTAL
- ----------------------------------------- -------- --------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans......................... $ 9,462 $67,255 $80,598 $52,812 $154,952 $365,079
Floating rate loans...................... 305,007 3,376 -- -- -- 308,383
------- ------- ------- ------- -------- --------
Sub-total.............................. 314,469 70,631 80,598 52,812 154,952 673,462
Non accrual loans........................ 2,019
--------
Total Loans, gross..................... $675,481
========
</TABLE>
27
<PAGE>
INVESTMENT PORTFOLIO
The Bank's Investment Portfolio primarily consists of US Treasury Notes and
Bills, Federal Agency Notes, Mortgage Backed Securities and Municipal Bonds. See
footnote No. 4 to the consolidated financial statements for a detailed
composition of the Investment Portfolio. Most of the growth in the portfolio was
centered in the Municipal Portfolio as it increased from $193.3 million at the
end of 1998 to $236.4 million at the end of 1999. The Bank has focused on this
segment of the portfolio because it generates better returns and there is
already ample liquidity with the Treasury and Agency portion of the portfolio
($219.5 million at year-end 1999). The U.S. Treasury portion of the portfolio
decreased by $60.1 million while Federal Agencies and Mortgage Backed Securities
decreased by $43.7 million from December 31, 1998 to December 31, 1999.
The Bank may segregate its portfolio into three categories--a "Trading
Portfolio" (which is carried at market value, with changes reflected in the
income statement), a "Held to Maturity" portfolio (which is carried at
historical amortized cost) and an "Available for Sale" portfolio (which is
carried at market value, with changes reflected in comprehensive income, but
provides for the same income statement treatment as the Held-to-Maturity
portfolio.) The Bank holds no securities that should be classified as Trading
securities. The Bank has determined that since its securities may be sold prior
to maturity because of interest rate changes, to meet liquidity needs, or to
better match the repricing characteristics of funding sources, the majority of
the portfolio ($433.9 million) should be classified as Available for Sale. The
remaining $31.4 million in the held-to-maturity portion of the portfolio will
likely be allowed to mature with the funds re-invested either in the loan
portfolio or the Available for Sale portion of the Investment Portfolio.
The mark to market adjustment on the Available for Sale portfolio resulted
in a loss in the equity section of $3.7 million as of December 31, 1999 compared
to an unrealized gain of $4.4 million at December 31, 1998. Maturities/sales
exceeded Purchases over the full year and the total investment portfolio thus
decreased by $60.9 million from the end of 1998 to the end of 1999.
Shown below is a summary maturity distribution of the investment portfolio
by type and weighted taxable equivalent yield as of December 31, 1999. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Maturity information for Mortgage Backed securities shown below is
based on contractual maturities.
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
AVAILABLE FOR SALE (AT MARKET VALUE): ONE YEAR YEAR TO YEARS TO AFTER
(DOLLARS IN 000'S) OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
- -------------------------------------------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Treasury Securities.................. $ 63,118 $ 52,025 $ -- $ -- $115,143
U.S. Government Agencies.................. 45,398 54,462 -- -- 99,860
Mortgage Backed Securities................ 511 3,199 526 1,937 6,173
Municipals, Other Securities.............. 26,825 115,308 70,242 347 212,722
-------- -------- ------- ------ --------
Total................................... $135,852 $224,994 $70,768 $2,284 $433,898
======== ======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
ONE YEAR YEAR TO YEARS TO AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Weighted Average Yield:
U.S. Treasury Securities....................... 5.85% 6.05% -- -- 5.92%
U.S. Government Agencies....................... 6.00% 6.70% -- -- 6.37%
Mortgage Backed Securities..................... 5.98% 6.64% 6.02% 6.79% 6.58%
Municipals, Other Securities................... 6.13% 6.47% 6.09% 6.22% 6.27%
---- ---- ---- ---- ----
Total........................................ 6.03% 6.13% 6.05% 6.30% 6.11%
==== ==== ==== ==== ====
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
HELD TO MATURITY (AT AMORTIZED COST): ONE YEAR YEAR TO YEARS TO AFTER
(DOLLARS IN 000'S) OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
- ---------------------------------------------- -------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Maturity Distribution:
U.S. Government Agencies.................... $2,000 $ 2,501 $ -- $ -- $ 4,501
Mortgage Backed Securities.................. -- 437 -- -- 437
Municipals, Other Securities................ 4,662 9,963 11,450 370 26,445
------ ------- ------- ---- -------
Total..................................... $6,662 $12,901 $11,450 $370 $31,383
====== ======= ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
ONE YEAR YEAR TO YEARS TO AFTER
OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Weighted Average Yield:
U.S. Government Agencies....................... 6.42% 6.33% -- -- 6.37%
Mortgage Backed Securities..................... -- 6.77% -- -- 6.77%
Municipals, Other Securities................... 6.53% 6.64% 6.74% 8.20% 6.60%
---- ---- ---- ---- ----
Total........................................ 6.50% 6.54% 6.74% 8.20% 6.57%
==== ==== ==== ==== ====
</TABLE>
OTHER REAL ESTATE OWNED ("OREO")
As noted in the financial statements, the Company held no OREO at
December 31, 1999 compared to holdings of $0.3 million at the end of 1998.
During 1999, the Bank received net proceeds from sale of OREO properties of
$0.4 million. Future OREO activity will depend, among other things, on how many
borrowers that the Bank may need to foreclose on and on the strength of the real
estate market and general economic activity. In general however, Management does
not anticipate substantial additions of OREO holdings.
DEPOSITS
While the Bank is competitive with major banks in terms of its structure of
interest rates on deposit products offered, Management was not overly aggressive
during 1999 in terms of pricing to attract additional deposits, a decision which
reflects the Bank's strong liquidity at the present time. As a result, the
balances on some of the more interest sensitive accounts, in particular passbook
savings, have remained the same in recent years.
As discussed in the Income Statement Analysis, interest rates were little
changed during the first half of 1999, having risen modestly during the latter
part of the year. A comparison of the rates paid on the Bank's deposit products
at year-end 1999 compared to year-end 1998 is as follows:.
<TABLE>
<CAPTION>
SELECTED QUOTED INTEREST RATES 1999 1998 * CHANGE
- ------------------------------ -------- -------- --------
<S> <C> <C> <C>
Demand Deposits............................................. 0% 0% --
NOW Account (50 & Better--over $10,000)..................... 0.50% 0.75% -0.25%
Money Market Deposits (over $2,500)......................... 2.00% 2.00% --
Passbook Savings Account.................................... 2.00% 2.00% --
Individual Retirement Account (2 Year term)................. 5.15% 4.15% +1.00%
Time Deposit ($100,000--6 month term)....................... 5.30% 4.40% +0.90%
Wall Street Journal Prime Rate.............................. 8.50% 7.75% +0.75%
</TABLE>
*Rates shown for 1998 are Mid-State Bank rates.
Average deposits have grown steadily over the last few years. The rates paid
on these deposits have provided a relatively stable cost of funds to the Bank
with a modest drop occurring during 1999. Below is a
29
<PAGE>
summary of the average deposits outstanding and the average rate paid by
category over the last three years.
<TABLE>
<CAPTION>
1999 1998 1997
(DOLLARS IN 000'S) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
- ------------------ ---------- -------- -------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Bearing Demand......... $ 428,739 $ 5,133 1.20% $ 406,312 $ 6,223 1.53% $ 381,280 $ 6,332
Savings Accounts................ 195,128 4,668 2.39% 189,088 4,819 2.55% 181,831 4,846
Time Deposits................... 346,659 15,941 4.60% 346,187 18,059 5.22% 340,467 17,680
---------- ------- ---- ---------- ------- ---- ---------- -------
Total Interest Bearing
Deposits...................... 970,526 25,742 2.65% 941,587 29,101 3.09% 903,578 28,858
Non Interest Bearing Demand..... 249,814 -- -- 242,706 -- -- 204,264 --
---------- ------- ---- ---------- ------- ---- ---------- -------
Total Deposits................ $1,220,340 $25,742 2.11% $1,184,293 $29,101 2.46% $1,107,842 $28,858
========== ======= ==== ========== ======= ==== ========== =======
<CAPTION>
(DOLLARS IN 000'S) RATE
- ------------------ --------
<S> <C>
Interest Bearing Demand......... 1.66%
Savings Accounts................ 2.67%
Time Deposits................... 5.22%
----
Total Interest Bearing
Deposits...................... 3.19%
Non Interest Bearing Demand..... --
----
Total Deposits................ 2.60%
====
</TABLE>
The majority of the Bank's time deposits (approximately 70%) have balances
which are under $100,000 in size. While all time deposits are somewhat more rate
sensitive than the Bank's other deposit categories, the smaller balance time
deposits do tend to be more stable and less sensitive to absolute rate levels
than do time deposits of $100,000 or more. Approximately 88% of the Bank's time
deposits mature within one year and would be subject to a change in rate at that
time. The following table as of December 31, 1999, displays summary size and
maturity information on the Bank's time deposits.
<TABLE>
<CAPTION>
AFTER THREE AFTER SIX
THREE MONTHS TO MONTHS
(DOLLARS IN 000'S) MONTHS OR SIX TO AFTER
BALANCE BY SIZE LESS MONTHS ONE YEAR ONE YEAR TOTAL
- -------------------------------------------------- --------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Under $100,000.................................... $ 82,771 $69,783 $47,992 $27,000 $227,546
$100,000 or More.................................. 45,075 24,095 20,162 10,186 99,518
-------- ------- ------- ------- --------
Total Time Deposits............................... $127,846 $93,878 $68,154 $37,186 $327,064
======== ======= ======= ======= ========
</TABLE>
OTHER BORROWINGS
While not a significant component of the Bank's structure, other borrowings
increased from $3.0 million at the end of 1998 to $15.4 million at the end of
1999. These consist primarily of borrowings under the U.S. Treasury Tax and Loan
note account, securities sold under agreements to repurchase and mortgages
payable. The Bank had outstanding borrowings of $12.3 million and $1.6 million
at December 31, 1999 and 1998, respectively, under the US Treasury Tax and Loan
note account program. Securities sold under agreement to repurchase were
$2.9 million and $1.2 million at December 31, 1999 and 1998, respectively.
Mortgages payable were $164 thousand and $189 thousand at year-end 1999 and
1998, respectively.
CAPITAL
Capital ratios for commercial banks and their holding companies in the
United States are generally calculated using 3 different formulas. These
calculations are referred to as the "Leverage Ratio" and two "risk based"
calculations known as "Tier One Risk Based Capital Ratio" and the "Total Risk
Based Capital Ratio." The Company and the Bank are subject to certain standards
concerning these ratios. These standards were developed through the joint
efforts of banking authorities from 12 different countries around the world. The
standards essentially take into account the fact that different types of assets
have different levels of risk associated with them. Further, they take into
account the off-balance sheet exposures of banks when assessing capital
adequacy. The Leverage Ratio calculation simply divides common stockholders'
equity (reduced by any goodwill a bank may have) by the total assets of the
bank. In the Tier One Risk Based Capital Ratio, the numerator is the same as the
leverage ratio, but the denominator is the total "risk-weighted assets" of the
bank. Risk weighted assets are determined by segregating all the assets and
off-balance sheet exposures into different risk categories and weighting them by
a percentage ranging from 0% (lowest risk) to 100% (highest risk). The Total
Risk Based Capital Ratio again uses "risk-weighted assets" in the denominator,
but expands the numerator to include other capital
30
<PAGE>
items besides equity such as a limited amount of the allowance for loan losses,
long-term capital debt, preferred stock and other instruments. Summarized below
are the capital ratios at December 31, 1999 and 1998, for both Mid-State
Bancshares and Mid-State Bank. Additionally, the standards for a well
capitalized institution, as defined by the federal banking agencies, are
displayed.
<TABLE>
<CAPTION>
MID-STATE MID-STATE
MINIMUM WELL-CAPITALIZED BANCSHARES BANK
REGULATORY REGULATORY ---------------------- ----------------------
STANDARD STANDARD 1999 1998 1999 1998
---------- ---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio............................ 4.0% 5.0% 11.6% 10.7% 11.6% 9.7%
Tier One
Risk Based..............................
Capital Ratio........................... 4.0% 6.0% 16.0% 16.1% 16.0% 14.3%
Total Risk
Based...................................
Capital Ratio........................... 8.0% 10.0% 17.2% 17.4% 17.2% 17.2%
</TABLE>
It is the intent of Management to continue to maintain strong capital
ratios. This has meant that the Company's dividend payout ratio is relatively
modest and the ratio of average equity to average assets is high as displayed in
the following table for the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Dividend Payout Ratio....................................... 25.0% 14.9% 9.4%
Average Common Equity to Average Assets..................... 11.1% 10.6% 9.7%
</TABLE>
LIQUIDITY
The focus of the Bank's liquidity management is to ensure its ability to
meet cash requirements. Sources of liquidity include Cash, Due From Bank
Balances (net of Federal Reserve requirements to maintain reserves against
deposit liabilities), Fed Funds Sold, Investment Securities (net of pledging
requirements), loan repayments, deposits and Fed Funds Borrowing lines. Typical
demands on liquidity are deposit run-off from demand deposits and savings
accounts, maturing time deposits which are not renewed, and anticipated funding
under credit commitments to customers.
The Bank has adequate liquidity at the present time. Its loan to deposit
ratio at year-end was 64.7% versus 54.0% one year earlier. The Bank normally
strives for a loan to deposit ratio in the 65% to 75% range. The Bank's
internally calculated liquidity ratio stands at 42.3% at December 31, 1999,
which is above its normal desired range of between 15% and 30%, but is down from
one year earlier.
The Bank strives to make high quality loans to optimize earnings while still
maintaining adequate liquidity. Until recently, the Bank operated with excess
liquidity. It was able to use some of that excess in the fourth quarter of 1999
and increase its loan totals closer to its desired target range. Management's
ability to maintain its loan portfolio in the desired target range will be
partly dependent on the strength of the local economy.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME AND INTEREST RATE RISK
Net Interest Income is the difference between interest and fees earned on
all earning assets and interest paid on interest bearing liabilities. Net
Interest Income for 1999 was $73.6 million, up from $69.4 million recorded in
1998 and $64.0 million in 1997. The components of net interest income change in
response to both changes in rate, average balance and mix of both earning assets
and liabilities. The following tables present an analysis of yields/rates,
interest income and expense, and average balances for 1999, 1998, and 1997.
31
<PAGE>
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
1999 COMPARED TO 1998
1999 1998 COMPOSITION OF CHANGE
-------------------------------- -------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE CHANGE DUE TO
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ ------------------- TOTAL
(DOLLARS IN 000'S) BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME RATE CHANGE
- ------------------ ---------- -------- -------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans...................... $ 685,566 $67,372 9.83% $ 633,324 $65,758 10.38% $5,279 $(3,665) $ 1,614
Investment Securities...... 534,666 29,899 5.59% 508,260 30,200 5.94% 1,523 (1,824) (301)
Fed Funds, Other........... 49,424 2,356 4.77% 52,768 2,924 5.54% (172) (396) (568)
---------- ------- ---- ---------- ------- ----- ------ ------- -------
TOTAL EARNING ASSETS..... $1,269,656 $99,627 7.85% $1,194,352 $98,882 8.28% $6,630 $(5,885) $ 745
---------- ------- ---- ---------- ------- ----- ------ ------- -------
INTEREST BEARING
LIABILITIES:
NOW, Savings, and Money
Market Accounts.......... $ 623,867 $ 9,801 1.57% $ 595,400 $11,042 1.85% $ 488 $(1,729) $(1,241)
Time Deposits.............. 346,659 15,941 4.60% 346,187 18,059 5.22% 23 (2,140) (2,117)
---------- ------- ---- ---------- ------- ----- ------ ------- -------
Interest Bearing
Deposits................. 970,526 25,742 2.65% 941,587 29,101 3.09% 511 (3,869) (3,358)
Other Borrowings........... 6,235 329 5.28% 6,437 340 5.28% (11) 0 (11)
---------- ------- ---- ---------- ------- ----- ------ ------- -------
TOTAL INTEREST BEARING
LIABILITIES............ 976,761 26,071 2.67% 948,024 29,441 3.11% 500 (3,869) (3,369)
---------- ------- ---- ---------- ------- ----- ------ ------- -------
NET INTEREST INCOME........ $1,269,656 $73,556 5.79% $1,194,352 $69,441 5.81% $6,130 $(2,016) $ 4,114
========== ======= ==== ========== ======= ===== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 COMPARED TO 1997
1998 1997 COMPOSITION OF CHANGE
-------------------------------- -------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE CHANGE DUE TO
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ ------------------- TOTAL
(DOLLARS IN 000'S) BALANCE EXPENSE RATE BALANCE EXPENSE RATE VOLUME RATE CHANGE
- ------------------ ---------- -------- -------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans...................... $ 633,324 $65,758 10.38% $ 605,688 $62,892 10.38% $2,870 $ (4) $ 2,866
Investment Securities...... 508,260 30,200 5.94% 460,871 27,951 6.06% 2,845 (596) 2,249
Fed Funds, Other........... 52,768 2,924 5.54% 44,001 2,248 5.11% 467 209 676
---------- ------- ----- ---------- ------- ----- ------ ------- -------
TOTAL EARNING ASSETS..... $1,194,352 $98,882 8.28% $1,110,560 $93,091 8.38% $6,182 $ (391) $ 5,791
========== ======= ===== ========== ======= ===== ====== ======= =======
INTEREST BEARING
LIABILITIES:
NOW, Savings, and Money
Market Accounts.......... $ 595,400 $11,042 1.85% $ 563,111 $11,179 1.99% $ 620 $ (757) $ (137)
Time Deposits.............. 346,187 18,059 5.22% 340,467 17,679 5.19% 298 81 379
---------- ------- ----- ---------- ------- ----- ------ ------- -------
Interest Bearing
Deposits................. 941,587 29,101 3.09% 903,578 28,858 3.19% 918 (676) 242
Other Borrowings........... 6,437 340 5.28% 3,282 202 6.15% 180 (42) 138
---------- ------- ----- ---------- ------- ----- ------ ------- -------
TOTAL INTEREST BEARING
LIABILITIES............ 948,024 29,441 3.11% 906,860 29,060 3.20% 1,098 (718) 380
---------- ------- ----- ---------- ------- ----- ------ ------- -------
NET INTEREST INCOME........ $1,194,352 $69,441 5.81% $1,110,560 $64,031 5.77% $5,084 $ 327 $ 5,411
========== ======= ===== ========== ======= ===== ====== ======= =======
</TABLE>
During 1999, there was a $745 thousand increase in interest income along
with a decrease of $3.4 million in interest expense compared to 1998. The
resulting $4.1 million increase in net interest income for 1999 is a result of a
number of dynamics affecting both average balance and interest rate
considerations. First, the Company experienced an increase in its average
earning assets outstanding of $75.3 million. The increase in interest income was
primarily attributable to the net increase in outstanding loans, which were up
by $52.2 million, despite the fact that the effective yield on the loan
portfolio declined by approximately 55 basis points. Secondly, the Company's
interest bearing liabilities increased by just $28.9 million compared to the
$75.3 million increase in average earning assets. Third, while interest rates
were slightly lower in 1999 than 1998, the Company's cost of funds declined more
dramatically than its interest earnings due to the growth and mix of its earning
assets.
32
<PAGE>
The $5.4 million increase in net interest income for 1998 compared to 1997
was the result of similar, yet slightly different dynamics. First, the Company
experienced an increase in its average earning assets outstanding in all
categories (loans, investments and fed funds) of $83.8 million. Secondly, the
prime rate on which many of Company's loans are tied was lower in 1998 (8.36%)
compared to 1997 (8.44%). Third, the volume of average earning assets was higher
on average in 1998 than in 1997 while the Company's interest bearing liabilities
increased by just $41.2 million. Fourth, while interest rates were slightly
lower in 1998 than 1997, they had a positive impact on interest income as well
as that on the Company's cost of funds.
The Company's risk exposure to changes in interest rates is minimal and is
centered in the Bank. A recent review of the potential changes in the Bank's net
interest income over the next 12 month time horizon indicated possible
fluctuations under very extreme alternative rate scenarios from between +2.3%
and -4.8% of the base case (Prime rate unchanged at 8.50%) of $78.0 million. The
Bank's policy is to maintain a structure of assets and liabilities which are
such that 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................................. -4.8%
(Prime down incrementally to 4.50% by Nov. 2000)
Rates Down Significant...................................... -3.4%
(Prime down incrementally to 6.00% by Oct. 2000)
Rates Down Modestly......................................... -2.2%
(Prime down incrementally to 7.50% by Oct. 2000)
Base Case--Rates Unchanged.................................. --
(Prime unchanged at 8.50% over 12 months)
Rates Up Modestly........................................... +2.2%
(Prime up incrementally to 9.50% by Oct. 2000)
Rates Up Aggressive......................................... +2.1%
(Prime up incrementally to 11.00% by Oct. 2000)
Rates Up Very Aggressive.................................... +2.3%
(Prime up incrementally to 12.50% by Nov. 2000)
</TABLE>
Net interest income under the above scenarios is influenced by the
characteristics of the Bank's assets and liabilities. In the case of NOW,
savings and money market deposits (total $595.4 million) interest is based on
rates set at the discretion of Management ranging from 0.50% to 2.38%. This
characteristic is the major reason why it is assumed that a 4% decline in Prime
decreases net interest income by 4.8% while a 4% increase in Prime only improves
net interest income by 2.3%. 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.
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. As
33
<PAGE>
noted in the Financial Summary at the beginning of the Management's Discussion
and Analysis, over the last 5 years, the Company's net interest margin (which is
net interest income divided by average earning assets of the Company) has ranged
from a low of 5.71% to a high of 6.09% (not taxable equivalent). Based on the
scenarios above, the net interest margin under the alternative scenarios ranges
from 5.56% to 5.97%. Management feels this range of scenarios is conservative,
but no assurances can be given that actual experience will fall within this
range.
The Company has no exposure with respect to interest rate derivatives,
exchange rate fluctuations, and/or commodity price movements. The Company does
not own any instruments within these markets.
PROVISION FOR LOAN LOSSES
The Company made contributions to the allowance for loan losses of
$50 thousand, $300 thousand and $105 thousand in 1999, 1998 and 1997,
respectively. This reflects management's assessment of the level of inherent
losses identified in the portfolio which has been supplemented by higher than
expected recoveries of loans previously charged off, amounting to $1.1 million,
$.8 million and $2.1 million, in 1999, 1998, and 1997, respectively. The need
for additional provision for loan losses in 2000 will be dependent upon
Management's on-going analysis of the adequacy of the allowance for loan losses.
While Management believes it to be adequate at the present time, the appropriate
value can fluctuate over time in response to economic conditions and the
subjective decisions which must be made in response to those conditions.
NON-INTEREST INCOME
Non-Interest Income for 1999 totaled $17.5 million compared to
$24.7 million in 1998 and $17.8 million in 1997. The major reason for the
increase in 1998 was the reversal into income of $5.3 million of the reserve for
losses on investments in real estate which Management felt was no longer
required at Mid-Coast Land Company. This decision came about because of the
improved real estate market and the higher than anticipated sales prices being
received on certain of the subsidiary's real estate development projects--most
notably San Luis Bay Estates. A more detailed description of this activity
follows in the section below about subsidiary activity. Service charges on
deposit accounts were down $209 thousand to $6.8 million in 1999 versus 1998.
This followed a decrease of $253 thousand in 1998 over 1997. The decline in 1999
was related to certain waivers of accounts during the merger of City Commerce
Bank and Mid-State Bank. Commissions, fees and other service charges decreased
by $635 thousand in 1999 over 1998 after a $891 thousand increase in 1998. The
decrease in 1999 was primarily related to the drop in refinance activity
affecting the Bank's mortgage banking operation which had experienced a robust
period of activity in 1998. Earnings from investments in real estate at
Mid-Coast Land Company were down $97 thousand in 1999 after a $420 thousand
increase in 1998. Securities gains, net of losses, were modest throughout the
three years ended in 1999 and other categories of non-interest income were $2.4,
$3.9 and $2.8 million, respectively, in 1999, 1998 and 1997. The larger amount
in 1998 reflects a one-time gain of sale of Other Real Estate at City Commerce
Bank.
NON-INTEREST EXPENSE
Total non-interest expense for 1999 was $57.5 million, which was down from
$62.3 million in 1998 and $57.7 million in 1997. The most dramatic impact in
this category which caused the decrease in 1999 was the charge of $2.9 million
of non-recurring, merger related costs for the City Commerce merger compared to
$7.4 million in 1998 for the Bank of Santa Maria merger. The $2.9 million charge
in 1999 was comprised of $0.8 million in severance charges for displaced
personnel, $0.7 million of losses on surplus computer equipment, furniture and
fixtures of City Commerce Bank, $427 thousand of investment bank fees, and
$1.0 million of various charges for legal fees, accounting fees, filings and
other miscellaneous charges incurred.
34
<PAGE>
Salaries and employee benefits decreased by $13 thousand in 1999 over 1998
after having decreased by $472 thousand in 1998 over 1997. The relatively flat
staff expense level in 1999 compared to 1998 reflects both wage increases to
employees and fewer staff members due to the merger with City Commerce Bank. The
decrease in 1998 over 1997 represented certain savings generated in the latter
part of the year through synergies and the reduced staffing requirements of the
merged Mid-State Bank and Bank of Santa Maria.
Occupancy expense has remained virtually unchanged throughout the last
3 years at $8.5 million in 1999 and $8.5 and $8.9 million in 1998 and 1997,
respectively. Major capital expenditures for computer equipment and ATM's were
completed in 1998. This equipment came on stream in the middle of the year and
occupancy expense increased as these items are depreciated over useful lives of
between 5 and 7 years. These items cost approximately $7.2 million and are being
depreciated at a total rate of $119 thousand per month. The decline in occupancy
expense was due to the consolidation of the eight former offices of the Bank of
Santa Maria despite the additional costs related to the computer equipment and
ATM's. No other major expenditures are planned for 2000.
Expenses from write-downs and provisions for losses on investments in real
estate were nil in 1999 and 1998, down from $2.0 million in 1997. These amounts
were determined by reviewing appraisals, updated annually, for each material
investment in real estate. The Bank continues to work towards divestiture of
these activities by its current deadline of December 31, 2000 to conform to the
requirements of the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA). Management believes that the allowance for losses on investments
in real estate, which stood at $0.3 million at December 31, 1999, is sufficient
to cover any remaining potential losses as the divestiture winds down.
OREO expense decreased from $0.4 million in 1997 to $0.2 million in 1998 and
nil in 1999. The reduction in OREO expense reflects lower foreclosures and an
improved real estate market. While the anticipated level of OREO expense for
2000 is unknown at this time, it is expected that some costs, albeit minor, will
continue. Management is hopeful however that the positive trend seen in 1998 and
1999 will continue in 2000.
Other operating expense remained relatively unchanged in 1999 at
$16.2 million compared to $16.3 million in 1998 and $16.1 million in 1997.
Management expects that this category should decline in 2000 as the synergies
from the merger begin to benefit the income statement. The Company has already
begun to note savings at the end of the year in the areas of advertising,
auditing charges, insurance premiums, printing, supplies, professional fees,
dues & memberships and others.
TAXES
As described in Footnote No. 9 to the financial statements, the Company has
deferred tax assets primarily related to the timing difference associated with
charge-offs and provisions for losses on certain loans. The amount generated for
book purposes compared to the actual loss experience recorded for tax purposes
has been different. Because of regulatory restrictions on the amount of deferred
tax assets which can be recognized for regulatory capital purposes, the Company
had previously established a valuation allowance for taxes on the Consolidated
Statement of Financial Position. This allowance was reduced to $183 thousand at
the end of 1998 resulting in a reversal of $3.5 million of the valuation
allowance that existed at December 31, 1997. The limitation on the amount of the
deferred tax assets was based on a number of factors, including the level of
projected future taxable income. The reduction of the valuation allowance
results from a decrease in the level of deferred tax assets and an expectation
of increased future taxable income. The remaining $183 thousand valuation
allowance at December 31, 1999 and 1998 relates to the uncertain realizability
of capital loss carryforwards acquired through the City Commerce Bank merger.
The reduction in the valuation allowance during 1998 directly benefited the tax
expense recognized for the year, compared to normal statutory tax rates. The
valuation allowance decreased in 1997
35
<PAGE>
compared to 1996 by $5.5 million and thus 1997 tax expense recognized for the
year was also lower compared to the normal statutory tax rates. No such benefit
to tax expense was received in 1999.
SUBSIDIARY ACTIVITY
MID-COAST LAND COMPANY
Investments in real estate shown on the Consolidated Statement of Financial
Position principally represent the assets of the Bank's real estate development
subsidiary, Mid-Coast Land Company. Footnote No. 7 to the accompanying financial
statements provides additional information about this wholly owned subsidiary.
Mid-Coast Land Company recorded earnings during 1999 of $349 thousand compared
to earnings during 1998 of $3.1 million and a $2.9 million loss in 1997. The
gain in 1999 was related to certain remaining parcels sold on its San Luis Bay
Estates project. The profit in 1998 was principally because of the reversal of
$5.3 million of its reserve for losses on investments in real estate, which was
no longer necessary given the sales of most of the remaining parcels. The
remaining $262 thousand in Mid-Coast Land's reserve is sufficient to cover any
losses on its remaining two parcels to be sold. It is anticipated that these
will be sold by the end of 2000.
Because of the progress made to liquidate the real estate development
assets, the FDIC granted an extension of the original required divestiture date
in July 1996 until December 1998. The regional director of the FDIC, extended
the deadline to December 31, 2000.
MSB PROPERTIES, INC.
This wholly owned subsidiary was formed to engage in the specific business
of acquiring, owning, and improving real property and tangible personal property
which may be necessary or convenient for the operation or housing of the
administrative departments and branch offices of the Bank. Incorporated under
the laws of the State of California in May of 1968, it also allows for the
ownership of property which may be reasonably necessary for future expansion of
the Bank's business, or which is otherwise reasonably related to the conduct of
the Bank's business, pursuant to Section 752 of the Financial Code of the State
of California.
Earnings for this subsidiary consist primarily of rental income from the
Bank's offices and administrative center coupled with a minor amount of rental
income from non-bank tenants and interest earnings on its cash assets. Expenses
are principally interest on mortgages, depreciation of leasehold improvements,
general maintenance and utilities expense. The affairs of the subsidiary are
managed by Bank employees and as such this subsidiary has no paid staff members.
Earnings for MSB Properties have increased over the years with net earnings
after-tax of $1.5 million, $1.4 million, and $1.6 million, in 1999, 1998 and
1997, respectively. Leases are written with market terms and at market rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Certain information concerning market risk is contained in the notes to the
financial statements which are included in Item 8 of this Report and in
Management Discussion and Analysis of Financial Condition and Results of
Operations which is included in Item 7 of this Report.
ITEM 7B. DISCLOSURE ABOUT RISKS ASSOCIATED WITH YEAR 2000 ISSUES
"YEAR 2000 READINESS DISCLOSURE"
STATE OF READINESS. The Company began implementation of its Year 2000 Plan
in 1997. It complied with all time-frames associated with that Plan. 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.
36
<PAGE>
That task was completed in July 1998 with the installation of the Information
Technology Incorporated software on new Unisys equipment. Testing of "Mission
Critical" systems and implementations of compliant systems was substantially
complete by early 1999 with all testing completed by year end. The Company also
spent a great deal of time assessing the state of readiness of its customers,
especially those to whom it had extended credit, and conducting various public
awareness campaigns.
There were no significant withdrawals experienced by the Bank as a result of
concerns surrounding the Y2K issue. There were no disruptions of service
experienced by Bank customers because of Y2K related problems. There have been
no unusual losses experienced by the Bank as a result of extensions of credit to
Bank customers. In summary, there was nothing unusual in the Bank's operations
either during the century date change rollover, or since that time. Management
does not expect any future Y2K related disruptions either.
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
$7.2 million, all of which has been capitalized and will be amortized over their
expected useful lives. There were some modest additional purchases of certain
equipment, and the Company spent approximately $7.5 million in total for all of
these items. The costs associated with the mailings, questionnaires, seminars
and other public awareness campaign activities, which the Company conducted, did
not have a material effect on the financial position or results of operations of
the Company.
RISKS FOR THE COMPANY FROM YEAR 2000 ISSUES. No major concerns exist at this
point.
THE COMPANY'S CONTINGENCY PLANS. The Company completed development of
contingency plans in preparation for the Y2K event during 1999. While these
plans were not needed, they have served as a catalyst to update and complete the
Company's disaster recovery plans.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants--Arthur Andersen
LLP....................................................... 39
Report of Independent Public Accountants--Vavrinek, Trine,
Day & Co. LLP............................................. 40
Independent Auditors' Report--KPMG LLP...................... 41
Consolidated Statements of Financial Position............... 42
Consolidated Statements of Income........................... 43
Consolidated Statements of Comprehensive Income............. 44
Consolidated Statements of Changes in Capital Accounts...... 45
Consolidated Statements of Cash Flows....................... 46
Notes to Consolidated Financial Statements.................. 47
Management Statement........................................ 68
Report of Independent Public Accountants.................... 69
</TABLE>
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Mid-State Bancshares:
We have audited the accompanying consolidated statements of financial
position of Mid-State Bancshares and Subsidiary (the Company) as of
December 31, 1999 and 1998, and the related consolidated statements of income,
comprehensive income, changes in capital accounts and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of City Commerce Bank, a company acquired during
1999 in a transaction accounted for as a pooling of interests, as discussed in
Note 2. Such statements are included in the related consolidated statement of
financial position of Mid-State Bancshares and Subsidiary and reflect total
assets of 11.1% of the related consolidated totals for 1998. Such statements are
included in the related consolidated statements of income of Mid-State
Bancshares and Subsidiary and reflect net interest income and net income of
12.3% and 9.4%, respectively, of the related consolidated totals for 1998, and
net interest income and net income of 11.3% and 6.5%, respectively, of the
related consolidated totals for 1997. We did not audit the financial statements
of BSM Bancorp, a company acquired during 1998 in a transaction accounted for as
a pooling of interests, as discussed in Note 2. Such statements are included in
the related consolidated statement of income of Mid-State Bancshares and
Subsidiary and reflect net interest income and net income of 25.9% and 22.3%,
respectively, of the related consolidated totals for 1997. These statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to amounts included for City Commerce Bank and
BSM Bancorp, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits, and the reports of other
auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Mid-State Bancshares and Subsidiary as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
January 28, 2000
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF BSM BANCORP AND SUBSIDIARY:
We have audited the related consolidated statements of income, changes in
shareholders' equity and cash flows of BSM Bancorp and Subsidiary for the year
ended December 31, 1997. These financial statements, which are not presented
separately herein, are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for the year
ended December 31, 1997 of BSM Bancorp and Subsidiary in conformity with
generally accepted accounting principles.
/s/ Vavrinek, Trine, Day & Co., LLP
- --------------------------------------------------------------------------------
VAVRINEK, TRINE, DAY & CO., LLP
Laguna Hills, California
January 8, 1998
40
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CITY COMMERCE BANK:
We have audited the balance sheet of City Commerce Bank (the Bank) as of
December 31, 1998 and the related statements of operations, changes in
stockholders' equity and comprehensive income and cash flows for each of the
years in the two-year period ended December 31, 1999. These financial
statements, which are not included herein, are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of City Commerce Bank as of
December 31, 1998 and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
- --------------------------------------------------------------------------------
KPMG LLP
Los Angeles, California
January 20, 1999
(except as to note 17, which is as of April 19, 1999)
41
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
ASSETS ---------- ----------
<S> <C> <C>
CASH AND DUE FROM BANKS..................................... $ 56,080 $ 84,557
FEDERAL FUNDS SOLD.......................................... 17,500 51,865
SECURITIES, net:
Securities available for sale............................. 433,898 484,253
Securities held to maturity (market value of $31,075 and
$42,704, respectively).................................. 31,383 41,916
---------- ----------
TOTAL SECURITIES........................................ 465,281 526,169
---------- ----------
LOANS, net.................................................. 755,709 661,040
BANK PREMISES AND EQUIPMENT, net............................ 29,282 32,603
ACCRUED INTEREST RECEIVABLE................................. 12,014 11,640
INVESTMENTS IN REAL ESTATE, net............................. 1,517 6,769
OTHER REAL ESTATE OWNED, net................................ 0 259
OTHER ASSETS................................................ 17,835 14,423
---------- ----------
TOTAL ASSETS.......................................... $1,355,218 $1,389,325
========== ==========
LIABILITIES
DEPOSITS:
Demand deposits........................................... $ 230,271 $ 258,629
Savings, money market and NOW accounts.................... 611,119 615,836
Time deposits--$100,000 or more........................... 99,518 96,160
Time deposits--Under $100,000 227,546 253,854
---------- ----------
TOTAL DEPOSITS.......................................... 1,168,454 1,224,479
---------- ----------
OTHER BORROWINGS............................................ 15,357 3,049
ACCRUED INTEREST PAYABLE & OTHER LIABILITIES................ 11,076 10,706
TOTAL LIABILITIES..................................... $1,194,887 $1,238,234
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
CAPITAL ACCOUNTS
CAPITAL STOCK, NO PAR VALUE:
Authorized--at 50,000,000 shares
Outstanding--11,286,943 shares in 1999 and 11,205,637 in
1998.................................................... $ 59,681 $ 58,821
UNDIVIDED PROFITS........................................... 104,357 87,887
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX... (3,707) 4,383
TOTAL CAPITAL ACCOUNTS.................................... 160,331 151,091
---------- ----------
TOTAL LIABILITIES & CAPITAL ACCOUNTS.................. $1,355,218 $1,389,325
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
42
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED)
(DOLLARS IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans and leases....................... $67,372 $65,758 $62,892
Interest on securities:
U.S. Treasury securities.................................. 9,797 10,705 11,741
U.S. Government agencies and corporations................. 7,514 9,333 9,732
Obligations of states and political subdivisions, other... 12,588 10,162 6,478
Interest on funds sold...................................... 2,356 2,924 2,248
------- ------- -------
TOTAL INTEREST INCOME................................... 99,627 98,882 93,091
------- ------- -------
Interest Expense:
Interest on deposits........................................ 25,742 29,101 28,858
Interest on mortgages payable, other........................ 329 340 202
------- ------- -------
TOTAL INTEREST EXPENSE.................................. 26,071 29,441 29,060
------- ------- -------
Net Interest Income......................................... 73,556 69,441 64,031
Provision for loan losses................................... 50 300 105
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..... 73,506 69,141 63,926
------- ------- -------
OTHER INCOME:
Service charges on deposit accounts....................... 6,798 7,007 7,260
Commissions, fees and other service charges............... 7,412 8,047 7,156
Investments in real estate................................ 830 927 507
Reversal of reserve for losses on investments in real
estate.................................................. -- 5,300 --
Securities gains, net of (losses)......................... (5) (407) 96
Other income.............................................. 2,430 3,862 2,815
------- ------- -------
TOTAL OTHER INCOME...................................... 17,465 24,736 17,834
------- ------- -------
OTHER EXPENSES:
Salaries & employee benefits.............................. 29,827 29,840 30,312
Occupancy expenses........................................ 8,495 8,514 8,873
Provision for losses and expenses on real estate.......... -- 177 2,387
Merger related charges.................................... 2,930 7,440 --
Other operating expenses.................................. 16,236 16,335 16,102
------- ------- -------
TOTAL OTHER EXPENSES.................................... 57,488 62,306 57,674
------- ------- -------
Income before taxes......................................... 33,483 31,571 24,086
Tax expense................................................. 11,430 10,576 5,220
------- ------- -------
NET INCOME.............................................. $22,053 $20,995 $18,866
------- ------- -------
Earnings per share:
--Basic................................................... $ 1.96 $ 1.88 $ 1.70
--Diluted................................................. $ 1.94 $ 1.86 $ 1.68
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET INCOME................................................ $22,053 $20,995 $18,866
Other Comprehensive (loss) Income Before Taxes:
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising during year....... (13,489) 4,565 1,447
Less: reclassification adjustment for losses (gains)
included in net income.................................... 5 407 (96)
------- ------- -------
Other comprehensive (loss) income, before tax............... (13,484) 4,972 1,351
Income tax (benefit) expense related to items in
comprehensive income...................................... (5,394) 2,238 481
------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXES........... (8,090) 2,734 870
------- ------- -------
COMPREHENSIVE INCOME...................................... $13,963 $23,729 $19,736
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL ACCOUNTS
(DOLLARS IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NUMBER OF CAPITAL UNDIVIDED COMPREHENSIVE
SHARES STOCK PROFITS INCOME (LOSS) TOTAL
---------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996............. 11,084,160 $44,517 $ 66,729 $ 779 $112,025
Stock dividend....................... -- 10,749 (10,792) -- (43)
Cash dividend........................ -- -- (1,831) -- (1,831)
Over accrual of 1996 cash dividend on
partial shares related to stock
dividend........................... -- -- (5) -- (5)
Exercise of stock options............ 20,267 204 -- -- 204
Net income........................... -- -- 18,866 -- 18,866
Change in unrealized gain on
available for sale securities...... -- -- -- 870 870
---------- ------- -------- ------- --------
BALANCE, December 31, 1997............. 11,104,427 $55,470 $ 72,967 $ 1,649 $130,086
Stock dividend....................... -- 2,933 (2,936) -- (3)
Cash dividend........................ -- -- (3,147) -- (3,147)
Over accrual of 1997 cash dividend on
partial shares related to stock
dividend........................... -- -- 8 -- 8
Exercise of stock options............ 156,260 1,883 -- -- 1,883
Net income........................... -- -- 20,995 -- 20,995
Change in unrealized gain on
available for sale securities...... -- -- -- 2,734 2,734
Stock repurchased.................... (55,050) (1,465) -- -- (1,465)
---------- ------- -------- ------- --------
BALANCE, December 31, 1998............. 11,205,637 $58,821 $ 87,887 $ 4,383 $151,091
Cash dividend........................ -- -- (5,583) -- (5,583)
Exercise of stock options............ 100,810 1,349 -- -- 1,349
Net income........................... -- -- 22,053 -- 22,053
Change in unrealized (loss) on
available for sale securities...... -- -- -- (8,090) (8,090)
Stock repurchased.................... (19,504) (489) -- -- (489)
---------- ------- -------- ------- --------
BALANCE, December 31, 1999............. 11,286,943 $59,681 $104,357 $(3,707) $160,331
========== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income.................................................. $ 22,053 $ 20,995 $ 18,866
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation and amortization............... 3,857 4,005 4,373
Amortization of investment security premiums, net......... 2,663 1,268 823
Merger related losses on sale of bank premises and
equipment............................................... 2,371 2,500 --
Provision for losses on investments in real estate........ -- (5,300) 1,997
Provision for credit losses............................... 50 300 105
Net gain on sales of other real estate owned.............. (125) (2,338) (1,032)
Deferred tax charge (benefit)............................. 1,960 1,656 (3,828)
(Increase) decrease in accrued interest and other
assets.................................................. (3,786) (2,280) 341
Increase (decrease) in accrued interest payable and other
liabilities............................................. 370 4,060 (3,583)
Other changes, net........................................ 2,001 (2,643) (1,819)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 31,414 22,223 16,243
--------- --------- ---------
Investing Activities:
Proceeds from sales and maturities of securities............ 248,548 179,018 166,601
Purchases of securities..................................... (203,817) (204,522) (211,819)
Proceeds from sales of other real estate owned.............. 444 6,619 7,368
Net increase in loans....................................... (94,336) (31,983) (40,782)
Receipts from real estate investments, net of advances...... 5,903 8,142 4,105
Purchases of premises and equipment......................... (2,625) (8,974) (7,247)
Proceeds from sales of premises and equipment............... 67 6,052 1,790
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES..................... (45,816) (45,648) (79,984)
--------- --------- ---------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, savings and
money market accounts..................................... (33,075) 44,078 42,438
Net (decrease) increase in time deposits.................... (22,950) (1,577) 27,078
Net increase (decrease) in other borrowings................. 12,308 (1,446) (2,930)
Cash dividend paid.......................................... (5,583) (3,147) (1,831)
Proceeds from exercise of stock options..................... 1,349 1,883 204
Purchase of bank stock for retirement....................... (489) (1,465) --
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES....... (48,440) 38,326 64,959
--------- --------- ---------
(DECREASE) INCREASE USED IN CASH & CASH
EQUIVALENTS............................................... (62,842) 14,901 1,218
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 136,422 121,521 120,303
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 73,580 $ 136,422 $ 121,521
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)..................... $ 25,698 $ 28,957 $ 29,760
Taxes on income, net...................................... 10,710 8,090 7,403
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Mid-State Bancshares and Subsidiary
(the "Company") conform with accounting principles generally accepted in the
United States (GAAP) and general practice within the banking industry. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The following are descriptions of the more significant
accounting policies of the Company.
CONSOLIDATION: The consolidated financial statements include the accounts
of Mid-State Bancshares and its wholly owned Subsidiary, Mid-State Bank, which
includes Mid-State Bank's wholly owned subsidiaries, Mid-Coast Land Company and
MSB Properties. All inter-company accounts and transactions have been eliminated
in the consolidated financial statements.
STATEMENT OF CASH FLOWS: The Company presents its cash flows using the
indirect method and reports certain cash receipts and payments arising from
customer loans and deposits and deposits placed with other financial
institutions on a net basis. Cash and cash equivalents include short-term,
highly liquid investments that generally have an original maturity of three
months or less.
SECURITIES: Securities for which the Company has the positive intent and
ability to hold until maturity are classified as held-to-maturity securities.
Securities which are purchased principally for the purpose of selling them in
the near term for a gain are classified as trading securities. Securities not
classified as held-to-maturity or trading are classified as available for sale.
The Company holds no securities that should be classified as trading securities.
Securities classified as available for sale are reported on the consolidated
statements of financial position as of December 31, 1999 and 1998, at their
market value. The net unrealized gains or losses for these securities are
reported, net of related taxes, in the statements of comprehensive income for
the years ended December 31, 1999, 1998 and 1997 and as a separate component of
the capital accounts for the years ended December 31, 1999 and 1998. Securities
classified as held-to-maturity are reported on the consolidated statements of
financial position as of December 31, 1999 and 1998 at their amortized cost
basis. Interest income from the securities portfolio is accrued as earned
including the accretion of discounts and the amortization of premiums based on
the original cost of each security owned.
LOANS: Loans are stated at face amount, less payments collected and
deferred loan fees. The allowance for loan losses, which is based on estimates,
is maintained at a level considered adequate to provide for losses that are
considered to be inherent in the portfolio. Ultimate losses may vary from the
current estimates. Management reviews these estimates periodically, considering
the borrower's financial status, current economic conditions, historical loan
loss experience and other factors. As adjustments become necessary, they are
reported in earnings in the periods in which they become known. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs.
In determining income recognition on loans, generally no interest is
recognized with respect to loans on which a default of interest or principal has
occurred for a period of 90 days or more. Loans are placed on non-accrual status
when management believes that the borrower's financial condition, after giving
consideration to economic and business conditions and collection efforts, is
such that the presumption of collectibility of interest no longer is prudent.
When a loan is placed on non-accrual status, previously accrued and uncollected
interest is reversed from income.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE OWNED: Other real estate owned (OREO), comprised of real
estate acquired through foreclosure, is carried at the lower of cost or
estimated fair value less estimated costs of disposal.
INVESTMENTS IN REAL ESTATE: Real estate acquired for sale or development is
stated at cost or market value, whichever is less. Real estate operations from
investments acquired for development are conducted and profits are shared
pursuant to agreements with outside joint venture investors and are accounted
for under the equity method. Gains on sales of such real estate are recognized
when certain criteria relating to the buyer's initial and continuing investment
in the property are met. Under certain circumstances, the gain, or a portion
thereof, may be deferred until the criteria are met. The Company capitalizes
interest on funds disbursed during the active development phases of real estate
development projects and the construction of Bank premises.
The Bank's real estate development subsidiary, Mid-Coast Land Company, has
established a reserve for losses on real estate investment activities. This
amount is netted against investments in real estate in the Consolidated
Statements of Financial Position.
BANK PREMISES AND EQUIPMENT: Bank premises and equipment are carried at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are computed principally on the straight-line method over the
lesser of the estimated useful life of each type of asset or the lease term.
ACCOUNTING FOR INCOME TAXES: Deferred income tax assets or liabilities are
computed based on the difference between the financial statement and income tax
basis of assets and liabilities using the enacted marginal tax rate. Deferred
income tax expenses or benefits are based on the changes in the deferred asset
or liability from period to period.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS
NO. 133 requires companies to record derivatives on the balance sheet as assets
or liabilities measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for in income depending on
the purpose of the derivative and whether or not it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133, which was amended by SFAS No. 137, is
effective in fiscal years beginning after June 15, 2000. Management believes
that the adoption of SFAS No. 133 will not have a material impact on the
Company's results of operations or financial condition.
RECLASSIFICATIONS: Certain items in the consolidated financial statements
for 1998 and 1997 were reclassified to conform to the 1999 presentation.
2. MERGERS
The Company entered into an "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. 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
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. MERGERS (CONTINUED)
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 Company also signed a definitive agreement to merge on April 19, 1999,
subject to the approval of banking regulators and City Commerce Bank
shareholders. The merger became effective at close of business on August 31,
1999. The agreement provided for the exchange of common stock at an exchange
ratio of .6775 shares of Mid-State Bancshares common stock for each share of
City Commerce common stock, based on the price of Mid-State Bancshares stock
preceding the effective date of the transaction. The merger was structured to be
tax-free, and was accounted for as a pooling of interests. As a result of this
accounting treatment, all financial statements presented, including 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,
City Commerce Bank and Mid-State Bank that have been reported in the restated
financial statements of Mid-State Bancshares for the years ending December 31:
<TABLE>
<CAPTION>
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Interest and non-interest income:
BSM Bancorp*.............................................. $ -- $ 14,721 $ 28,481
City Commerce Bank**...................................... 8,999 13,776 12,189
Mid-State................................................. 108,093 95,121 70,255
-------- -------- --------
Mid-State Bancshares.................................... $117,092 $123,618 $110,925
Net income:
BSM Bancorp*.............................................. $ -- $ 2,306 $ 4,205
City Commerce Bank**...................................... 1,349 1,975 1,224
Mid-State................................................. 20,704 16,714 13,437
-------- -------- --------
Mid-State Bancshares.................................... $ 22,053 $ 20,995 $ 18,866
</TABLE>
* For the year ended December 31, 1998, results for BSM Bancorp reflect the
six month period ended June 30, 1998. Results from July 1, 1998 through
July 10, 1998, the date of the merger, have not been separately identified
and were not considered material to the financial statements.
** For the year ended December 31, 1999, results for City Commerce Bank reflect
the eight month period ended August 31, 1999, the date of the merger.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. MERGERS (CONTINUED)
The shares outstanding for Mid-State Bancshares at December 31, 1998, result
from the following activity in 1998:
<TABLE>
<CAPTION>
BSM MID-STATE MID-STATE
BANCORP BANK BANCSHARES
--------- --------- ----------
<S> <C> <C> <C>
Shares Outstanding December 31, 1997:...................... 2,990,939 6,905,100
Stock Options Exercised Prior to Merger.................... 71,400 2,700
Additional Shares Issued in Connection with the Exchange
for Mid-State Bancshares stock........................... 83,813
3,062,339 6,991,613 10,053,952
========= =========
Stock Options Exercised After the Merger................... 24,464
----------
Shares Outstanding December 31, 1998, before giving rise to
City Commerce Bank....................................... 10,078,416
Retroactive impact of City Commerce Bank acquisition....... 1,127,221
----------
Reported Shares Outstanding December 31, 1998:............. 11,205,637
==========
</TABLE>
The shares outstanding for Mid-State Bancshares at December 31, 1999, result
from the following activity in 1999:
<TABLE>
<CAPTION>
CITY MID-STATE MID-STATE
COMMERCE BANCSHARES BANCSHARES
BANK PRE-MERGER POST-MERGER
--------- ---------- -----------
<S> <C> <C> <C>
Shares Outstanding December 31, 1998:..................... 1,663,795 10,078,416
Stock Options Exercised Prior to Merger................... 101,108 30,386
Stock Repurchased and Retired Prior to Merger............. (28,570)
Reduction in Shares Issued in Connection with the Exchange
for Mid-State Bancshares stock.......................... (560,115)
1,176,218 10,108,802 11,285,020
========= ==========
Stock Options Exercised After the Merger.................. 1,923
----------
Shares Outstanding December 31, 1999:..................... 11,286,943
==========
</TABLE>
3. CASH RESERVES
The average reserve balances required to be maintained by the Federal
Reserve Bank were approximately $19.7 million and $20.0 million at December 31,
1999 and 1998, respectively.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. SECURITIES
A summary of investment securities owned as of December 31, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------
GROSS GROSS
(DOLLARS IN 000'S) AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ---------------------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $115,254 $195 $ 306 $115,143
Securities of U.S. government agencies and
corporations...................................... 101,040 32 1,212 99,860
Mortgage backed securities.......................... 6,282 2 111 6,173
Obligations of states and political subdivisions.... 215,250 152 4,852 210,550
Other investments................................... 2,251 -- 79 2,172
-------- ---- ------ --------
TOTAL............................................. $440,077 $381 $6,560 $433,898
======== ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES HELD TO MATURITY COST GAINS LOSSES VALUE
- --------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities of U.S. government agencies and
corporations....................................... $ 4,501 $ 5 $ 5 $ 4,501
Mortgage backed securities........................... 437 -- 2 435
Obligations of states and political subdivisions..... 25,844 22 328 25,538
Other investments.................................... 601 -- -- 601
------- --- ---- -------
TOTAL.............................................. $31,383 $27 $335 $31,075
======= === ==== =======
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ----------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities............................ $172,604 $2,680 $-- $175,284
Securities of U.S. government agencies and
corporations...................................... 131,435 1,277 5 132,707
Mortgage backed securities.......................... 12,505 20 31 12,494
Obligations of states and political subdivisions.... 159,063 3,421 59 162,425
Other investments................................... 1,336 8 1 1,343
-------- ------ --- --------
TOTAL............................................. $476,943 $7,406 $96 $484,253
======== ====== === ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES HELD TO MATURITY COST GAINS LOSSES VALUE
- --------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities of U.S. government agencies and
corporations....................................... $ 8,754 $107 $-- $ 8,861
Mortgage backed securities........................... 706 9 -- 715
Obligations of states and political subdivisions..... 30,852 673 -- 31,525
Other investments.................................... 1,604 2 3 1,603
------- ---- --- -------
TOTAL.............................................. $41,916 $791 $ 3 $42,704
======= ==== === =======
</TABLE>
Securities having an amortized cost of $42,403,000 and $46,351,000 at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes as required by law.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. SECURITIES (CONTINUED)
Proceeds from calls, partial paydowns and/or sales of securities during 1999
were $42,970,492. Gross gains of $3,030 and gross losses of $8,213 were realized
on that activity.
The amortized cost and market value of securities at December 31, 1999 and
1998, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD-TO-MATURITY
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
1999 (DOLLARS IN 000'S) COST VALUE COST VALUE
- ----------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less.............................. $136,058 $135,852 $ 6,662 $ 6,656
Due after one year to five years..................... 227,778 224,993 12,901 12,870
Due after five years to ten years.................... 73,866 70,769 11,450 11,202
Due after ten years.................................. 2,375 2,284 370 347
-------- -------- ------- -------
Total.............................................. $440,077 $433,898 $31,383 $31,075
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD-TO-MATURITY
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
1998 (DOLLARS IN 000'S) COST VALUE COST VALUE
- ----------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Due in one year or less.............................. $163,369 $164,354 $10,037 $10,075
Due after one year to five years..................... 279,196 285,099 20,860 21,275
Due after five years to ten years.................... 29,913 30,314 11,019 11,354
Due after ten years.................................. 4,465 4,486 -- --
-------- -------- ------- -------
Total.............................................. $476,943 $484,253 $41,916 $42,704
======== ======== ======= =======
</TABLE>
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
THE LOAN PORTFOLIO CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(DOLLARS IN 000'S) 1999 1998
- ------------------ -------- --------
<S> <C> <C>
Construction and development loans.......................... $118,418 $ 89,844
Real estate loans........................................... 379,781 285,859
Home equity credit lines.................................... 52,681 57,425
Installment loans........................................... 29,680 47,513
Credit cards & related...................................... 12,308 12,134
Agricultural production..................................... 41,314 35,128
Commercial, other........................................... 138,095 150,036
-------- --------
772,277 677,939
-------- --------
Less allowance for loan losses.............................. (13,105) (14,441)
Less deferred loan fees..................................... (3,463) (2,458)
-------- --------
TOTAL LOAN PORTFOLIO...................................... $755,709 $661,040
======== ========
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
At December 31, 1999, $550,883,000 of the Bank's portfolio was
collateralized by various forms of real estate. The Bank attempts to reduce its
concentration of credit risk by making loans which are diversified by project
type and geographic locations throughout the Central Coast of California. While
management of the Bank believes that the collateral presently securing this
portfolio is adequate, there can be no assurances that a deterioration in the
California real estate market would not expose the Bank to significantly greater
credit risk.
Loans on non-accrual status totaled $1,520,000 and $2,019,000 at
December 31, 1999 and 1998, respectively. If interest income on non-accrual
loans had been recorded as originally scheduled, approximately $231,000,
$254,000, and $1,613,000 of additional interest income would have been recorded
for the years ended December 31, 1999, 1998 and 1997. Additionally, interest
income which was recognized for loans on non accrual totaled $243,000, $47,000,
and $135,000, for 1999, 1998, and 1997, respectively.
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. Therefore, in
general, the accrual of interest on impaired loans is discontinued, and any
uncollected interest is written off against interest from other loans in the
current period. No further income is recognized until all recorded amounts of
principal are recovered in full or until circumstances have changed such that
the loan is no longer regarded as impaired. Certain impaired loans are both
fully secured by collateral and are current in their interest and principal
payments. These impaired loans are not classified as non accrual and $620,000,
$321,000 and $313,000 in interest was recognized from these loans during 1999,
1998 and 1997, respectively.
The amount of the valuation allowance for impaired loans is determined by
comparing the recorded investment in each loan with its value measured by one of
three methods: (1) the expected future cash flows discounted at the effective
interest rate; (2) the loan's observable market price, if available from a
secondary market; or (3) by valuing the underlying collateral if the loan is
collateral dependent. A valuation allowance is computed as any amount by which
the recorded investment exceeds the value of the impaired loan. If the value of
the loan, as determined by one of the above methods, exceeds the recorded
investment in the loan, a valuation allowance for the loan is not established.
The following table discloses information about impaired loans and their related
allowance.
<TABLE>
<CAPTION>
(DOLLARS IN 000'S) 1999 1998
- ------------------ -------- --------
<S> <C> <C>
Loans identified as impaired at year end.................... $9,136 $4,105
Impaired loans for which a valuation allowance has been
determined................................................ 6,566 2,693
Impaired loans for which no valuation allowance was
determined necessary...................................... 2,570 1,412
Amount of valuation allowance............................... $3,113 $1,012
====== ======
</TABLE>
The average amount of the recorded investment in impaired loans during the
year ended December 31, 1999 and 1998, was approximately $6,621,000 and
$4,243,000, respectively.
The valuation allowance reported above is determined on a loan-by-loan basis
or by aggregating loans with similar risk characteristics. Because the loans
currently identified as impaired have unique risk characteristics, the valuation
allowance was determined on a loan-by-loan basis.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The Bank also provides an allowance for losses for (1) loans that while not
individually identified as being currently impaired, are internally evaluated as
having a relatively higher level of credit risk and (2) losses inherent in the
balance of the loan portfolio which have not been specifically identified as of
the year-end. The allowance is based on review of individual loans, historical
trends, current economic conditions, and other factors. The allowance for loan
losses consists of an amount allocated to loans which are impaired, a
statistically allocated portion and a specifically allocated portion. The total
of these components is considered adequate to provide for losses which can be
reasonably anticipated.
The allowance for loan losses is netted against loans on the statement of
financial position for December 31, 1999 and 1998. A summary of the changes in
the allowance account is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $14,441 $15,065 $14,561
Additions to the allowance charged to expense............... 50 300 105
Loans charged off........................................... (2,522) (1,721) (1,662)
Recoveries of loans previously charged off.................. 1,136 797 2,061
------- ------- -------
BALANCE AT END OF YEAR.................................... $13,105 $14,441 $15,065
======= ======= =======
</TABLE>
An analysis of loans to directors and officers is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(DOLLARS IN 000'S) 1999 1998
- ------------------ -------- --------
<S> <C> <C>
Balance, at beginning of year............................... $6,196 $7,080
Additional loans made....................................... 109 1,000
Payments received........................................... (2,823) (1,884)
------ ------
BALANCE AT END OF YEAR.................................... $3,482 $6,196
====== ======
</TABLE>
These loans were made in the ordinary course of the Bank's business and, in
management's opinion, were made at prevailing rates and terms.
6. BANK PREMISES AND EQUIPMENT
BANK PREMISES AND EQUIPMENT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(DOLLARS IN 000'S) 1999 1998
- ------------------ -------- --------
<S> <C> <C>
Land........................................................ $ 8,859 $ 10,059
Buildings................................................... 24,672 22,592
Furniture and equipment..................................... 16,179 23,934
Construction in progress.................................... 674 217
-------- --------
50,384 56,802
Less--Accumulated depreciation and amortization............. (21,102) (24,199)
-------- --------
TOTAL PREMISES AND EQUIPMENT.............................. $ 29,282 $ 32,603
======== ========
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. BANK PREMISES AND EQUIPMENT (CONTINUED)
Depreciation and amortization included in occupancy expenses was $3,457,000,
$4,005,000, and $4,373,000 in 1999, 1998 and 1997, respectively, based on the
following estimated useful lives:
<TABLE>
<S> <C>
Buildings................................................... 20-40 years
Furniture and equipment..................................... 3-20 years
</TABLE>
Total rental expense for banking premises was $1,027,000, $1,112,000, and
$999,000, in 1999, 1998 and 1997, respectively. As of December 31, 1999 the
approximate minimum future lease rentals payable under non-cancelable lease
contracts for bank premises were as follows:
<TABLE>
<CAPTION>
YEAR (DOLLARS IN 000'S)
- ---- ------------------
<S> <C>
2000........................................................ $ 766
2001........................................................ 743
2002........................................................ 650
2003........................................................ 440
2004........................................................ 277
Thereafter.................................................. 2,241
------
TOTAL LEASE COMMITMENTS..................................... $5,117
======
</TABLE>
7. INVESTMENTS IN REAL ESTATE
Real estate held for sale or development includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
(DOLLARS IN 000'S) 1999 1998
- ------------------ -------- --------
<S> <C> <C>
Advances to and investments in real estate joint ventures... $ 406 $ 699
Direct investments in real estate development............... 1,373 6,332
Allowance for losses on investments in real estate.......... (262) (262)
------ ------
TOTAL INVESTMENTS IN REAL ESTATE, NET..................... $1,517 $6,769
====== ======
</TABLE>
The Federal Deposit Insurance Corporation (FDIC) Improvement Act (FDICIA)
became law in December 1991. Under FDICIA the Bank was originally required to
substantially eliminate its real estate development activities by December 19,
1996. In July 1996, the Bank received an extension of the deadline for two years
to December 31, 1998. On December 15, 1998, the Regional Director of the FDIC
extended the deadline to December 31, 2000. Management fully expects to achieve
the December 31, 2000 deadline.
The Bank's real estate operations are significant to the local real estate
market. Based on current estimates of the fair value of the Bank's real estate
operations, management believes that the properties are carried at the lower of
cost or market. However, there can be no assurances that a deterioration in the
local real estate markets would not expose the Bank to the risk of significant
additional losses. Management continues with its liquidation plans for its
various development projects. If adjustments become necessary, they will be
reported in earnings in the period in which they become known.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Where applicable, the Bank is required by GAAP to disclose the fair value of
financial instruments and the methods and significant assumptions used to
estimate those fair values. In the case of financial instruments for which it is
not practicable to estimate the fair value, the Bank is required to disclose
information pertinent to estimating the fair value such as interest rates and
maturity, and also state the reasons why it is not practicable to estimate fair
value.
"Fair values of financial instruments depict the market's assessment of the
present value of net future cash flows directly or indirectly embodied in them,
discounted to reflect both current interest rates and the market's assessment of
the risk that the cash flows will not occur." The information about fair value
is said to better enable "investors, creditors, and other users to assess the
consequences of an entity's investment and financing strategies, that is, to
assess its performance."
Nonetheless, there are several factors which users of these financial
statements should consider. First, there are uncertainties inherent in the
process of estimating the fair value of financial instruments. Secondly, the
statement covers financial instruments only, not other assets like premises and
equipment, the fair value of which might differ significantly from the amounts
at which they are carried in an entity's financial statements. Thirdly, the Bank
must exclude from its estimate of the fair value of deposit liabilities any
consideration of its ongoing customer relationships which provide stable sources
of investable funds. Lastly, these disclosures do not address means of
evaluating an entity's performance in areas other than the management of
financial instruments; for example, the ability to generate non-interest income
and the control of non-interest expense. For these reasons, users are advised
not to regard the disclosure of the fair market value of financial instruments
as in any way equivalent to a valuation of the Bank as a whole.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS AND FED FUNDS SOLD
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS, NET
For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSITS
The fair value of demand deposits is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit, savings accounts and money
market deposits is estimated using the rates currently offered for deposits of
similar remaining maturities.
OTHER BORROWINGS
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
Commitments to extend credit and letters of credit are written at current
market rates. The Bank does not anticipate any interest rate or credit factors
that would affect the fair value of commitments or letters of credit outstanding
at December 31, 1999.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN 000'S) AMOUNT VALUE AMOUNT VALUE
- ------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks..................... $ 56,080 $ 56,080 $ 84,557 $ 84,557
Fed funds sold.............................. 17,500 17,500 51,865 51,865
Investment securities....................... 465,281 464,973 526,169 526,957
Loans, net.................................. 755,709 770,537 661,040 658,577
Financial liabilities:
Deposits.................................... 1,168,454 1,184,851 1,224,479 1,193,625
Other borrowings............................ 15,357 15,357 3,049 3,049
</TABLE>
9. INCOME TAXES
The current and deferred amounts of the provision for taxes in the years
ended December 31, were:
<TABLE>
<CAPTION>
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Federal:
Current................................................... $ 6,565 $ 6,440 $ 6,783
Deferred.................................................. 1,483 1,853 (3,502)
------- ------- -------
TOTAL FEDERAL TAXES..................................... $ 8,048 $ 8,293 $ 3,281
------- ------- -------
State:
Current................................................... $ 2,905 $ 2,480 $ 2,265
Deferred.................................................. 477 (197) (326)
------- ------- -------
TOTAL STATE TAXES....................................... $ 3,382 $ 2,283 $ 1,939
------- ------- -------
TOTAL FEDERAL AND STATE TAX EXPENSE......................... $11,430 $10,576 $ 5,220
======= ======= =======
</TABLE>
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. INCOME TAXES
The provision for taxes on income differed from the amounts computed using
the federal statutory rate of 35 percent as follows:
<TABLE>
<CAPTION>
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Tax expense at federal statutory tax rate................... $11,719 $11,014 $ 8,412
State income tax expense.................................... 1,986 2,426 1,674
Tax savings from exempt investment and loan income)......... (1,391) (580) (379)
Merger related expenses..................................... 328 921 --
Other, net.................................................. (1,212) 280 1,011
------- ------- -------
Total before change in valuation allowance................ $11,430 $14,061 $10,718
Change in valuation allowance............................... -- (3,485) (5,498)
------- ------- -------
TOTAL TAX EXPENSE......................................... $11,430 $10,576 $ 5,220
======= ======= =======
</TABLE>
The principal items giving rise to deferred taxes were:
<TABLE>
<CAPTION>
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Allowance for loan losses................................... $ 358 $ (32) $ 36
Gain on loan workouts....................................... 95 (25) (581)
Real estate joint ventures.................................. 1,480 5,852 1,047
Deferred compensation....................................... (344) (139) (66)
Merger related expenses..................................... 336 (1,016) --
State income taxes.......................................... (516) 40 (67)
Provisions for OREO properties.............................. 137 991 857
Capital loss carryforward................................... -- (183) --
AMT credit carryforward..................................... -- -- 155
Depreciation................................................ 482 (212) (342)
Securities--discount accretion (68) (286) 114
Prepaid expenses............................................ (145) 49 (72)
Change in valuation allowance............................... -- (3,485) (5,498)
Other, net.................................................. 145 102 589
------ ------- -------
TOTAL DEFERRED TAXES...................................... $1,960 $ 1,656 $(3,828)
====== ======= =======
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
9. INCOME TAXES (CONTINUED)
AS OF DECEMBER 31, THE DEFERRED TAX ASSETS AND LIABILITIES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
ASSETS:
Allowance for loan losses................................. $ 4,593 $ 4,951 $ 4,919
Gain on loan workouts..................................... 1,424 1,519 1,494
Real estate joint ventures................................ -- 1,293 7,145
Deferred compensation..................................... 1,497 1,153 1,014
Merger related expenses................................... 680 1,016 --
State income taxes........................................ 1,187 671 711
Provisions for OREO properties............................ 155 292 1,283
Capital loss carryforward................................. 183 183 --
All other, net............................................ 55 200 302
------- ------- -------
TOTAL ASSETS................................................ 9,774 11,278 16,868
------- ------- -------
Liabilities:
Prepaid expenses.......................................... -- (145) (96)
Real estate joint ventures................................ (187) -- --
Depreciation and amortization............................. (1,207) (725) (937)
Securities--discount accretion............................ (2) (70) (356)
------- ------- -------
TOTAL LIABILITIES........................................... (1,396) (940) (1,389)
------- ------- -------
Valuation Allowance......................................... (183) (183) (3,668)
------- ------- -------
Net deferred tax asset before tax effect of unrealized gain
on securities available for sale.......................... $ 8,195 $10,155 $11,811
Tax effect of unrealized gain on securities available for
sale...................................................... 2,472 (2,926) (1,096)
------- ------- -------
DEFERRED TAX ASSET, NET..................................... $10,667 $ 7,229 $10,715
======= ======= =======
</TABLE>
The valuation allowance provides for deferred taxes that are not anticipated
to be offset by taxable income projected for the next 12 months. The valuation
allowance is based on estimates by management which could change in the near
term.
As of December 31, 1999, the Bank has no operating loss and tax credit
carryforwards for financial reporting purposes, however, a capital loss
carryforward exists that is scheduled to expire in 2002. There are also no
alternative minimum tax credit carryforwards for tax purposes.
10. OTHER BORROWINGS
Mid-State Bank's wholly owned subsidiaries have obtained first trust deed
mortgage financing for several of the properties and investments that they own.
Mortgages payable totaled $164,000 and $189,000 at December 31, 1999 and 1998,
respectively. Other borrowings also include borrowings under the Treasury Tax
and Loan note account of $12,263,000 and $1,659,000 at December 31, 1999 and
1998, respectively. Securities sold under agreement to repurchase are also
included in other borrowings of $2,930,000 and $1,200,000 at December 31, 1999
and 1998, respectively.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1999 and 1998, the Bank was contingently liable for letter
of credit accommodations made to its customers totaling $21,546,000 and
$20,734,000, respectively. At December 31, 1999 and 1998, the Bank also had
undisbursed loan commitments in the amount of $369,753,000 and $280,685,000,
respectively.
Many of the commitments are expected to expire without being drawn upon.
Accordingly, the total outstanding commitment amount does not necessarily
represent future cash requirements. The Bank does not anticipate any significant
losses as a result of these transactions. Provision has been made for losses
which may be sustained in the fulfillment of, or from an inability to fulfill,
any commitments.
The Bank is involved in litigation of a routine nature which is being
handled and defended in the ordinary course of the Bank's business. In the
opinion of management, based on the advice of legal counsel, the resolution of
this litigation will have no material impact on the Bank's financial condition
or results of operations.
12. EARNINGS PER SHARE
Earnings per share (EPS) have been computed in 1999, 1998 and 1997, based on
the weighted average number of shares outstanding each year of 11,230,000,
11,176,000, and 11,097,000, respectively. Average outstanding shares in prior
years have been restated to reflect stock dividends paid to former shareholders
of Mid-State Bank, as well as, additional shares issued in connection with the
mergers.
The following is a reconciliation of the numerators and denominators used in
the calculation of basic EPS and diluted EPS for the years ended December 31.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
12. EARNINGS PER SHARE (CONTINUED)
(figures in 000's except per share data)
<TABLE>
<CAPTION>
1999 EARNINGS SHARES EPS
- ---- -------- -------- --------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income available to Common Stockholders............... $22,053 11,230 $1.96
Effect of Dilutive Securities:
Stock Options............................................. 134
Diluted Earnings Per Share:
Net Income available to Common Stockholders and assumed
conversions............................................. $22,053 11,364 $1.94
1998
- ------------------------------------------------------------
Basic Earnings Per Share:
Net Income available to Common Stockholders............... $20,995 11,176 $1.88
Effect of Dilutive Securities:
Stock Options............................................. 97
Diluted Earnings Per Share:
Net Income available to Common Stockholders and assumed
conversions............................................. $20,995 11,273 $1.86
1997
- ------------------------------------------------------------
Basic Earnings Per Share:
Net Income available to Common Stockholders............... $18,866 11,097 $1.70
Effect of Dilutive Securities:
Stock Options............................................. 165
Diluted Earnings Per Share:
Net Income available to Common Stockholders and assumed
conversions............................................. $18,866 11,262 $1.68
</TABLE>
13. CAPITAL ACCOUNTS
The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of (1) the company's undivided
profits or (2) the company's net income for its last three fiscal years less the
amount of any distributions made by the company to shareholders during such
period. Under these restrictions, the Bank can make cash dividends totaling
$43,080,000 at December 31, 1999. The Company declared cash dividends during
1999 of $5,583,000.
14. STOCK OPTIONS
The Bank adopted a new stock option plan, the "Plan", in 1998. The Plan
replaced earlier plans granted by the former BSM Bancorp, the former City
Commerce Bank and the former Mid-State Bank. Options are granted at a price not
less than the fair market value of the stock at the grant date. Options are
exercisable and expire as determined by the Board of Directors. However, options
expire no later than ten years from the date of grant. The Plan provides for
issuance of up to 892,542 shares of common stock and is subject to termination
as determined by the Board of Directors. As of December 31, 1999, 655,967 shares
are currently under option. The shares are exercisable at prices ranging from
$7.93 to $36.00. During 1998, 98,564 shares were exercised and 38,133 shares
were exercised in 1999.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
14. STOCK OPTIONS (CONTINUED)
The Bank applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and related Interpretations in accounting for its
Plan. Accordingly, no compensation expense has been recognized for grants under
the Plan.
Consistent with the methods of SFAS No. 123, proforma compensation expense
for the Plan had been determined based on the fair value at the grant date. Fair
values were estimated using the Black-Scholes option--pricing model with the
following assumptions: dividend yields (dividend per share divided by earnings
per share) ranging from 14% to 27%, expected volatility of 25%, risk-free
interest rates ranging from 4.23% to 6.06% and expected lives of five years. The
Bank's net income and earnings per share for the years ended December 31, 1999,
1998 and 1997 would have been reduced to pro forma amounts indicated below:
<TABLE>
<CAPTION>
(DOLLARS IN 000'S EXCEPT PER SHARE DATA) 1999 1998 1997
- ---------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net income to common shareholders:
As reported................................................. $22,053 $20,995 $18,866
Pro forma................................................... $21,232 $20,461 $18,844
Net income per common and common share equivalent:
Basic earnings per share:
As reported............................................. $ 1.96 $ 1.88 $ 1.70
Pro forma............................................... $ 1.89 $ 1.83 $ 1.70
Diluted earnings per share:
As reported............................................. $ 1.94 $ 1.86 $ 1.68
Pro forma............................................... $ 1.87 $ 1.81 $ 1.68
</TABLE>
A summary of the Bank's stock options as of December 31, 1999, 1998 and
1997, and changes during the periods then ended, is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period.... 515,622 $26.31 215,077 $12.57 236,794 $12.27
Granted............................... 195,148 33.31 414,500 30.05 4,000 16.00
Exercised/Forfeited................... (54,803) 17.38 (113,955) 13.84 (25,717) 10.28
------- ------ -------- ------ ------- ------
Outstanding at end of period.......... 655,967 $29.14 515,622 $26.31 215,077 $12.57
======= ====== ======== ====== ======= ======
</TABLE>
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
15. EMPLOYEE BENEFITS
The Company offers a combination qualified profit sharing plan (the Profit
Sharing Plan) and a savings and retirement plan designed to comply with Internal
Revenue Service Code Section 401(k) (the 401(k) Plan) to substantially all
employees. The Company's contributions to the Profit Sharing and 401(k) Plans
for the years ended December 31, 1999, 1998, and 1997 were $1,814,000,
$1,738,000, and $1,642,000, respectively.
A deferred compensation plan is also in effect to provide performance
oriented deferred compensation for the Company's senior management. Allocations
to the participants accounts are made at the discretion of the Board of
Directors. The amount of contributions is determined by the Board of Directors
as a function of net profits and prior year return on equity. In 1998, $571,000
was contributed to participants with $662,000 contributed for 1999.
Prior to the merger, Mid-State Bank began a bonus incentive system in 1996
(the Incentive Reward System) for many of the Bank's employees. A bonus is paid
to selected employees who exceed certain goals under formulas established at the
start of the year. Included in employee benefits expense for 1999, 1998 and 1997
was a charge of $1,214,000, $504,000 and $667,850, respectively, which was
accrued during those years and paid in the following year under the Incentive
Reward System. Approximately 741 employees received bonuses under this program
in 1999 ranging from 0.8% of their salary to as much as 17.6% of their salary.
Prior to the merger, BSM Bancorp through its wholly owned subsidiary, Bank
of Santa Maria paid bonuses to employees amounting to $285,000 and $570,000 for
the years 1998 and 1997, respectively.
Also prior to the merger, City Commerce Bank paid bonuses to employees
amounting to $98,038, $439,000 and $348,000 for the years 1999, 1998, and 1997,
respectively.
16. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
As of December 31, 1999, based on the regulations, Mid-State Bancshares and
Mid-State Bank are categorized as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
Mid-State Bancshares and Mid-State Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the following
table. There are no conditions or events that Management believes have changed
Mid-State Bancshares' and Mid-State Bank's category.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
16. REGULATORY MATTERS (CONTINUED)
The actual capital amounts and ratios as of December 31, 1999 and 1998 are
presented in the following table:
<TABLE>
<CAPTION>
TO BE CONSIDERED
FOR CAPITAL WELL CAPITALIZED
ADEQUACY FOR CAPITAL
ACTUAL PURPOSES ADEQUACY PURPOSES
------------------- ------------------- -------------------
(DOLLARS IN 000'S) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
MID-STATE BANCSHARES--CONSOLIDATED:
As of December 31, 1999:
- -----------------------------------------
Total Capital (to Risk Weighted
Assets)................................ $175,151 17.2% $81,257 8.0% $101,572 10.0%
Tier One Capital (to Risk Weighted
Assets)................................ $162,450 16.0% $40,629 4.0% $ 60,943 6.0%
Tier One Capital (to Average Assets)..... $162,450 11.6% $55,846 4.0% $ 69,807 5.0%
As of December 31, 1998:
- -----------------------------------------
Total Capital (To Risk Weighted
Assets)................................ $156,227 17.4% $71,980 8.0% $ 89,988 10.0%
Tier One Capital (to Risk Weighted
Assets)................................ $145,062 16.1% $35,996 4.0% $ 53,992 6.0%
Tier One Capital (to Average Assets)..... $145,062 10.7% $54,318 4.0% $ 67,897 5.0%
MID-STATE BANK--ONLY:
As of December 31, 1999:
- -----------------------------------------
Total Capital (to Risk Weighted
Assets)................................ $175,023 17.2% $81,074 8.0% $101,572 10.0%
Tier One Capital (to Risk Weighted
Assets)................................ $162,321 16.0% $40,537 4.0% $ 60,943 6.0%
Tier One Capital (to Average Assets)..... $162,321 11.6% $55,826 4.0% $ 69,783 5.0%
As of December 31, 1998:
- -----------------------------------------
Total Capital (To Risk Weighted
Assets)................................ $154,953 17.2% $71,958 8.0% $ 89,948 10.0%
Tier One Capital (to Risk Weighted
Assets)................................ $143,793 14.3% $35,980 4.0% $ 53,968 6.0%
Tier One Capital (to Average Assets)..... $143,793 9.7% $54,302 4.0% $ 67,878 5.0%
</TABLE>
17. REPORTABLE BUSINESS SEGMENTS
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," is a new model for segment reporting, referred to as the
"management approach." The management approach is intended to present reportable
segments consistent with how the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. Presently, the Company is segregated into Community Banking, Mid
Coast Land Company, and "All Other".
The Community Banking business segment consists of commercial and retail
banking. This segment is managed as a single strategic unit which derives its
revenues from a wide range of banking services, including lending and investing
activities, acceptance of demand, savings, and time deposits, and mortgage
servicing. As previously noted, Mid-Coast Land Company engages in real estate
investment activities. There is no major customer and the Company operates
within a single geographic area.
Non reportable operating segments of the Company's operations which do not
have similar characteristics to any other banking operations and do not meet the
quantitative thresholds requiring disclosure, are included in the "All Other"
category. "All Other" includes the activities of the Parent Company (excluding
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
17. REPORTABLE BUSINESS SEGMENTS (CONTINUED)
equity in earnings of subsidiaries) and certain non-recurring items such as
merger related expenses of $2.9 and $7.4 million in 1999 and 1998, respectively,
and the reversal of the reserve for losses on investments in real estate of
$5.3 million in 1998. These items are not considered attributable to the
assessment of performance of the business segments to which they relate.
Below is a summary statement of income and certain selected financial data
for the three years ended December 31, 1999. The accounting policies used in the
disclosure of business segments are the same as those described in the summary
of significant accounting policies. Certain assumptions are made concerning the
allocations of costs between segments which may influence relative results, most
notably, allocations of various types of overhead and administrative costs.
Management believes that the allocations utilized below are reasonable and
consistent with the way it manages the business.
<TABLE>
<CAPTION>
MID-COAST LAND
COMMUNITY BANKING COMPANY ALL OTHER
------------------------------ ------------------------------ ------------------------------
(DOLLARS IN 000'S) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income................. $99,565 $98,783 $92,998 $ 62 $ 99 $ 93 $ -- $ -- $ --
Interest Expense................ 26,071 29,441 29,060 -- -- -- -- -- --
------- ------- ------- ---- ---- ------- ------- ------- -----
Net Interest Income............. 73,494 69,342 63,938 62 99 93 -- -- --
Provision....................... 50 300 105 -- -- -- -- -- --
Non Interest Income............. 16,680 18,509 17,327 785 727 507 -- 5,500 --
Non Interest Expense............ 53,614 53,626 54,009 498 916 3,491 3,376 7,764 174
------- ------- ------- ---- ---- ------- ------- ------- -----
Pre-Tax Income.................. $36,510 $33,925 $27,151 $349 $(90) $(2,891) $(3,376) $(2,264) $(174)
======= ======= ======= ==== ==== ======= ======= ======= =====
Average Assets (in millions).... $ 1,385 $ 1,323 $ 1,237 $ 5 $ 8 $ 18 $ 1 $ 1 $ 1
<CAPTION>
MID STATE BANCSHARES
------------------------------
(DOLLARS IN 000'S) 1999 1998 1997
- ------------------ -------- -------- --------
<S> <C> <C> <C>
Interest Income................. $99,627 $98,882 $93,091
Interest Expense................ 26,071 29,441 29,060
------- ------- -------
Net Interest Income............. 73,556 69,441 64,031
Provision....................... 50 300 105
Non Interest Income............. 17,465 24,736 17,834
Non Interest Expense............ 57,488 62,306 57,674
------- ------- -------
Pre-Tax Income.................. $33,483 $31,571 $24,086
======= ======= =======
Average Assets (in millions).... $ 1,391 $ 1,332 $ 1,255
</TABLE>
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Mid-State Bancshares (parent only)
follows:
(dollars in 000's)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSETS 1999 1998
- ------ -------- --------
<S> <C> <C>
Cash........................................................ $ 158 $ 2,112
Investment in Mid-State Bank................................ 160,158 149,822
Other Assets................................................ 1,624 394
-------- --------
Total Assets.............................................. $161,940 $152,328
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
Dividend Payable............................................ $ 1,580 $ 1,209
Accrued Liabilities......................................... 29 28
-------- --------
Total Liabilities......................................... 1,609 1,237
Shareholders' Equity........................................ 160,331 151,091
-------- --------
Total Liabilities and Shareholders' Equity.............. $161,940 $152,328
======== ========
</TABLE>
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
18. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Equity in earnings of subsidiaries:
Undistributed............................................. $17,851 $19,221 $18,123
Dividends................................................. 5,583 2,000 850
Operating Expenses.......................................... (1,381) (324) (174)
Income Tax Benefit.......................................... -- 98 67
------- ------- -------
Net Income.................................................. $22,053 $20,995 $18,866
======= ======= =======
</TABLE>
66
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss)........................................... $ 22,053 $ 20,995 $ 18,866
Adjustments to reconcile net income to net cash provided by
operating activities:
Net earnings of Bank.................................... (17,851) (19,221) (18,123)
Amortization of organizational expenses................. (43) 15 15
Other................................................... (1,186) (243) (129)
-------- -------- --------
Net cash provided by (used in) operating activities... 2,973 1,546 629
-------- -------- --------
Net Cash Flow from Investing Activities................... -- -- --
Net Cash Flows from Financing Activities:
Net change in short term note payable................... -- -- (40)
(Redemption) issuance of organizational stock........... -- -- (1)
Proceeds from stock options............................. 286 1,282 176
Dividends paid by parent................................ (5,213) (901) (596)
-------- -------- --------
Net cash (used in) provided by financing activities... (4,927) 381 (461)
-------- -------- --------
Net (Decrease) Increase in Cash............................. (1,954) 1,927 168
Cash, beginning of year..................................... 2,112 185 17
-------- -------- --------
Cash, at end of year........................................ $ 158 $ 2,112 $ 185
======== ======== ========
</TABLE>
67
<PAGE>
MANAGEMENT STATEMENT
MID-STATE BANK IS RESPONSIBLE FOR THE PREPARATION, INTEGRITY, AND FAIR
PRESENTATION OF ITS PUBLISHED CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1999 AND THE YEAR THEN ENDED. THE CONSOLIDATED FINANCIAL STATEMENTS
HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND, AS SUCH, INCLUDE AMOUNTS, SOME OF WHICH ARE BASED ON JUDGMENTS AND
ESTIMATES OF MANAGEMENT.
INTERNAL CONTROL STRUCTURE OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed its internal control structure over financial reporting
as of December 31, 1999. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal
Control--Integrated Framework" issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based upon this assessment,
management believes that Mid-State Bank maintained an effective internal control
structure over financial reporting as of December 31, 1999.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for compliance with the federal and state
laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that Mid-State Bank complied, in all significant aspects, with the designated
laws and regulations relating to safety and soundness for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ JAMES G. STATHOS /s/ CARROL R. PRUETT
- ------------------------ ------------------------
James G. Stathos Carrol R. Pruett
EXECUTIVE VICE PRESIDENT PRESIDENT
CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER
</TABLE>
68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Mid-State Bancshares:
We have examined management's assertions that Mid-State Bancshares
maintained an effective internal control structure over financial reporting as
of December 31, 1999 included in the accompanying Management Statement.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure and such other procedures as we considered necessary
in the circumstances. We believe that our examination provides a reasonable
basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assertion that Mid-State Bancshares maintained
an effective internal control structure over financial reporting as of
December 31, 1999, is fairly stated, in all material respects, based on criteria
established in the INTERNAL CONTROL-INTEGRATED FRAMEwork issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
January 28, 2000
69
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by
reference from the information contained in the Bank's Proxy Statement for the
2000 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the Bank's Proxy Statement for the
2000 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the Bank's Proxy Statement for the
2000 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the Bank's Proxy Statement for the
2000 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 14A.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
2.1 Agreement to Merge dated April 19,1999 by and between
Mid-State Bancshares and City Commerce Bank.**
3.1 Articles of Incorporation, as amended
3.2 Bylaws of Registrant*
27 Financial Data Schedule
</TABLE>
- ------------------------
* Filed as an exhibit to Registrant's Registration Statement (File
No. 333-16952) filed on November 27, 1996.
** Filed as part of Registrant's Registration Statement on Form S-4 (File
No. 333-81531) filed on July 9, 1999.
(b) Schedules:
Not Applicable
(c) Reports on Form 8-K
During the fourth quarter of 1999, the Company did not file any Reports.
Notice of Annual Meeting and Proxy Statement for the Bank's 2000 Annual
Meeting will be mailed to shareholders subsequent to the date of filing of this
Report. Copies of said materials will be furnished to the FDIC in accordance
with applicable rules and regulations.
70
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Bank has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
MID-STATE BANK
By: /s/ CARROL R. PRUETT
-------------------------------
CARROL R. PRUETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 27, 2000
By: /s/ JAMES G. STATHOS
-------------------------------
JAMES G. STATHOS
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
Dated: March 27, 2000
</TABLE>
71
<PAGE>
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Bank and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
DATED:
<S> <C> <C>
/s/ CARROL R. PRUETT President and Chairman March 27, 2000
- --------------------------- of the Board
CARROL R. PRUETT
/s/ GRACIA B. BELLO Director March 27, 2000
- ---------------------------
GRACIA B. BELLO
/s/ CLIFFORD H. CLARK Director March 27, 2000
- ---------------------------
CLIFFORD H. CLARK
/s/ A. J. DIANI Director March 27, 2000
- ---------------------------
A. J. DIANI
/s/ DARYL L. FLOOD Director March 27, 2000
- ---------------------------
DARYL L. FLOOD
/s/ WILLIAM A. HARES Director March 27, 2000
- ---------------------------
WILLIAM A. HARES
/s/ H. EDWARD HERON Director March 27, 2000
- ---------------------------
H. EDWARD HERON
/s/ RAYMOND E. JONES Director March 27, 2000
- ---------------------------
RAYMOND E. JONES
/s/ STEPHEN P. MAGUIRE Director March 27, 2000
- ---------------------------
STEPHEN P. MAGUIRE
/s/ GREGORY R. MORRIS Director March 27, 2000
- ---------------------------
GREGORY R. MORRIS
/s/ WILLIAM L. SNELLING Director March 27, 2000
- ---------------------------
WILLIAM L. SNELLING
</TABLE>
72
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
--------------------- ----------- -----------
<C> <S> <C>
27........ Financial Data Schedule
</TABLE>
73
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001027324
<NAME> MID-STATE BANCSHARES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 56,080
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 433,898
<INVESTMENTS-CARRYING> 31,383
<INVESTMENTS-MARKET> 31,075
<LOANS> 768,814
<ALLOWANCE> 13,105
<TOTAL-ASSETS> 1,355,218
<DEPOSITS> 1,168,454
<SHORT-TERM> 15,357
<LIABILITIES-OTHER> 11,076
<LONG-TERM> 0
0
0
<COMMON> 59,681
<OTHER-SE> 100,650
<TOTAL-LIABILITIES-AND-EQUITY> 1,355,218
<INTEREST-LOAN> 67,372
<INTEREST-INVEST> 29,899
<INTEREST-OTHER> 2,356
<INTEREST-TOTAL> 99,627
<INTEREST-DEPOSIT> 25,742
<INTEREST-EXPENSE> 26,071
<INTEREST-INCOME-NET> 73,556
<LOAN-LOSSES> 50
<SECURITIES-GAINS> (5)
<EXPENSE-OTHER> 57,488
<INCOME-PRETAX> 33,483
<INCOME-PRE-EXTRAORDINARY> 22,053
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,053
<EPS-BASIC> 1.96
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 7.85
<LOANS-NON> 1,520
<LOANS-PAST> 4,199
<LOANS-TROUBLED> 2,527
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,441
<CHARGE-OFFS> 2,522
<RECOVERIES> 1,136
<ALLOWANCE-CLOSE> 13,105
<ALLOWANCE-DOMESTIC> 13,105
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,990
</TABLE>
