Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended June 30, 2002.

OR

For the transition period from                              to                             

Commission File Number 000-23925

MID-STATE BANCSHARES
(Exact name of registrant as specified in its charter)

Issuer's Telephone Number: (805) 473-7700

Securities to be registered under Section 12(b) of the Act: None

Securities to be registered under Section 12(g) of the Act:

Common Stock, no par value
(Title of class)

Check whether the Bank (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Number of shares of common stock of the Company outstanding as of July 25, 2002: 24,005,921 shares.

Mid-State Bancshares
June 30, 2002
Index

2

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

Mid-State Bancshares
Consolidated Statements of Financial Position
(Unaudited—figures in 000's)

3

Mid-State Bancshares
Consolidated Statements of Income
(Unaudited—figures in 000's except earnings per share data)

4

Mid-State Bancshares
Consolidated Statements of Comprehensive Income
(Unaudited—figures in 000's)

5

Mid-State Bancshares
Consolidated Statements of Cash Flows
(Unaudited—figures in 000's)

6

Mid-State Bancshares
Notes to Consolidated Financial Statements
(Information with respect to interim periods is unaudited)

NOTE A—BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION

        The accompanying consolidated financial statements include the accounts of Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank & Trust and the Bank's subsidiaries, MSB Properties and Mid Coast Land Company (collectively the "Company," "Bank" or "Mid-State"). All significant inter-company transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the Form 10-K Annual Report for the year ended December 31, 2001 of Mid-State Bancshares. A summary of the Company's significant accounting policies is set forth in the Notes to Consolidated Financial Statements contained therein.

        These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States on a basis consistent with the accounting policies reflected in the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2001. They do not, however, include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

NOTE B—EARNINGS PER SHARE

        The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute earnings per share ("EPS"). Figures are in thousands, except earnings per share data (unaudited).

7

NOTE C—RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and is effective for all business combinations accounted for by the purchase method completed after June 30, 2001. SFAS No. 141 requires all business combinations be accounted for using the purchase method. The acquisition of Americorp, the parent company of the American Commercial Bank, during the third quarter of 2001 was accounted for in accordance with SFAS No. 141. Management adopted all other provisions of SFAS No. 141 on January 1, 2002. The adoption of SFAS No. 141 did not have a material impact on the Company's results of operations or financial condition

        SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, rather goodwill will be subject to at least an annual assessment for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, with a provision that states goodwill acquired in a business combination for which the acquisition date is after June 30, 2001 should not be amortized. Management adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 resulted in $1,115,000 not being recognized as amortization expense for the six month period ended June 30, 2002.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30. It addresses financial accounting and reporting for the impairment of long-lived assets to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.    Management adopted SFAS No. 144 on January 1, 2002.    The adoption of SFAS No. 144 did not have a material impact on the Company's results of operation or financial condition.

8

NOTE D—OTHER INTANGIBLE ASSETS

        The following is a summary of the Company's other intangible assets. Figures are in thousands (unaudited).

Aggregate Amortization Expense of Other Intangible Assets ($ in 000's):

Estimated Future Aggregate Amortization Expense ($ in 000's):

NOTE E—GOODWILL

        No changes in the carrying amount of goodwill occurred in either the three month period or six month period ended June 30, 2002.

9

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

        Selected Financial Data—Summary.    The following table provides certain selected financial data as of and for the three and six month periods ended June 30, 2002 and 2001 (unaudited).

10

(1)

Includes allowance for loan losses and allowance for losses—unfunded commitments

        Performance Summary.    The Company posted net income of $7.2 million for the three months ended June 30, 2002, compared to $6.7 million earned in the like 2001 period. Diluted earnings per share were $0.29 in the second quarter of 2002 compared to $0.30 in the like period one year earlier. The modest decrease in the earnings per share number is in part related to the additional shares outstanding as a result of the Company's merger with Americorp and its wholly owned subsidiary, American Commercial Bank of Ventura (collectively "Americorp") in September of last year offset by the repurchase of shares under the Company's program. These earnings represent an annualized return on assets of 1.54% and 1.83%, respectively, for the comparable 2002 and 2001 periods. The annualized return on equity was 11.91% for the second quarter of 2002 compared to 14.50% in the second quarter of 2001. When adjusted for the additional goodwill and other intangibles outstanding as a result of the Americorp merger, return on tangible equity was 14.46% for the second quarter of 2002 compared to 14.63% in the second quarter of 2001.

        For the six months year-to-date, the Company posted net income of $14.1 million for the six months ended June 30, 2002, compared to $13.3 million earned in the like 2001 period. Diluted earnings per share were $0.56 in the first half of 2002 compared to $0.59 in the like period one year earlier. The modest decrease in the earnings per share number is in part related to the additional shares outstanding as a result of the Company's merger with Americorp offset by the repurchase of

11

shares under the Company's program. These earnings represent an annualized return on assets of 1.52% and 1.86%, respectively, for the comparable 2002 and 2001 periods. The annualized return on equity was 11.90% for the first six months of 2002 compared to 14.66% in the first six months of 2001. When adjusted for the additional goodwill and other intangibles outstanding as a result of the Americorp merger, return on tangible equity was 14.48% for the 2002 first half of 2002 compared to 14.80% in the like 2001 period.

        Net Interest Income.    Mid-State's annualized yield on interest earning assets was 6.58% for the first six months of 2002 (6.88%% on a taxable equivalent basis) and 6.43% (6.75% on a taxable equivalent basis) for the second quarter of 2002. This compares to 8.27% for the first six months of 2001 (8.59% on a taxable equivalent basis) and 8.04% (8.35% on a taxable equivalent basis) for the second quarter of 2001. This decrease in yield is primarily related to the decrease in interest rates when comparing the two periods. The Prime Rate, to which many of the Bank's loans are tied, averaged 4.75% in the first half of 2002 compared to 7.98% in the same 2001 period. The Prime Rate also averaged 4.75% in the second quarter of 2002 compared to 7.34% in the second quarter of 2001. The change in mix of earning assets had far less of an impact than the lower interest rate environment (average loans represented 66.8% of earning assets in the first half of 2002 compared to 70.4% one year earlier).

        Annualized interest expense as a percent of earning assets also dropped considerably compared to the prior year with the drop in general interest rates. In the first half of 2001, annualized interest expense represented 2.13% of earning assets compared to 1.07% in the first half of this year. Similarly, the annualized interest expense in the second quarter of this year was 0.98% compared to 2.04% in the like quarter of 2001.

        Overall, Mid-State's annualized net interest income, expressed as a percent of earning assets, decreased from 6.14% for the six month period of 2001 (6.47% on a taxable equivalent basis) to 5.51% in the comparable 2002 period (5.81% on a taxable equivalent basis). For the second quarter of 2002 compared to the second quarter of 2001, net interest income, expressed as a percent of earning assets, decreased from 6.00% (6.32% taxable equivalent) to 5.45% (5.77% taxable equivalent). Due to the large quantity of core deposits carried on the balance sheet, the Company has been unable to decrease its cost of funds as quickly as the decrease which it has experienced in the yield on its earning assets, especially on those loans tied to the Prime Rate. Additionally, the mix of earning assets has changed to a larger proportion of investments relative to loans.

        Average earning assets for the six months ended June 30, 2002 increased 26.4% from the like 2001 period ($1,688.5 million compared to $1,335.5 million). Average deposits in this same time-frame were up $354.3 million, ($1,598.2 million compared to $1,243.9 million). In comparing second quarter 2002 to second quarter 2001, average earning assets increased from $1,352.2 million one year ago to $1,696.2 million and average deposits increased $357.2 million from $1,251.4 million one year ago to $1,608.6 million. The increases in large part are a result of the merger with Americorp. At the time of the merger in September 2001, Americorp contributed approximately $256.6 million in earning assets to the combined institution and $254.0 million in deposits.

        Provision and Allowance for Loan Losses.    Mid-State made provisions for loan losses during the second quarter of 2002 in the amount of $300 thousand. During the six months ended June 30, 2002, provisions for loan losses totaled $600 thousand. Both of these amounts are unchanged to the amounts contributed in the comparable 2001 periods.

        During the first quarter of 2002, Management reclassified the portion of its allowance for loan losses related to unfunded commitments and letters of credit to allowance for losses—unfunded commitments. This change was undertaken to be in conformity with accounting principles generally accepted in the United States. Both the allowance for loan losses and the allowance for losses—unfunded commitments, are available to absorb inherent credit losses.

12

        Management continues to believe that the allowances for loan losses and the allowance for losses—unfunded commitments, which collectively stand at 1.9% of total loans at June 30, 2002, up from 1.4% one year earlier, are adequate to cover inherent losses. This increase is primarily due to the composition of the loans purchased from Americorp. The $20.8 million total allowance for credit losses is approximately 166% of the level of non performing assets which stand at $12.5 million compared to $8.0 million one year earlier. Non performing assets consist of loans on non-accrual, accruing loans 90 days or more past due, and other real estate owned. While continuing efforts are made to improve overall asset quality, Management is unable to estimate with certainty, how and under what terms, problem assets will be resolved.

        Changes in the allowance for loan losses (in thousands) for the periods ended June 30, 2002 and 2001 are as follows:

        At June 30, 2002, the recorded investments in loans which have been identified as impaired totaled $13,943,000. Of this amount, $10,822,000 related to loans with no specific valuation allowance and $3,121,000 related to loans with a corresponding specific valuation allowance totaling $1,196,000. Impaired loans totaled $8,711,000 at June 30, 2001. Of that amount, $4,546,000 related to loans with no specific valuation allowance and $4,165,000 related to loans with a corresponding specific valuation allowance of $2,036,000. The specific valuation allowance for impaired loans is included within the general allowance shown above and netted against loans on the accompanying consolidated statements of financial position. For the quarter ended June 30, 2002, the average recorded investment in impaired loans was $8,443,000, which compared to $8,694,000 in the 2001 period. A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Because this definition is very similar to that used by bank regulators to determine on which loans interest should not be accrued, the Bank expects that most impaired loans will be on non-accrual status.

        Non-interest Income.    Non-interest income for the first six months of 2002 was $11.7 million, up from $10.6 million earned in the same 2001 period, an increase of 10.7%. The increase was related primarily to increases in service charge income of $531 thousand over the comparable periods, increases in the Company's merchant mastercard income of $271 thousand, and increases in ATM and debit card related fee income of $235 thousand. Additionally, while not every category of non interest income increased over the comparable periods, collectively, these various categories increased a net $96 thousand.

13

        In comparing the second quarter of 2002 with the second quarter of 2001, non-interest income increased $310 thousand, or 5.7%. The improvement was related to increases in the same categories noted in comparing the six month periods. These were increases in service charge income of $220 thousand over the comparable periods, increases in the Company's merchant mastercard income of $117 thousand, and increases in ATM and debit card related fee income of $136 thousand. Additionally, while not every category of non interest income decreased over the comparable periods, collectively, these various categories decreased a net $163 thousand.

        The increases in the non-interest income categories noted above is in part related to acquisition of Americorp. That acquisition was completed in September 2001, therefore the Company's six months ended income statement in 2002 reflected the benefit of Americorp's customers which was not reflected in the comparable period in 2001. It is difficult to identify the exact amount of the impact. However, it is known that Americorp's non-interest income was approximately 12% of Mid-State's levels prior to the completion of the merger.

        Non-interest Expense.    Non-interest expense for the first six months of 2002 was $35.2 million compared to $31.3 million in the first half of 2001. Increases in salaries and benefits accounted for $2.1 million of the increase, occupancy and furniture accounted for $1.0 million of the increase, merchant processing charges increased $776 thousand and an increase in amortization of intangibles (due to the amoritzation of the core deposit intangible created in the merger with Americorp) of $471 thousand. Offsetting these amounts was a decrease of $1.7 million related to a one-time charge to expense for the donation of property associated with obtaining a Natural Heritage Tax Credit in the first half of 2001. All other categories of expense showed a net $1.3 million increase.

        In comparing the second quarter of 2002 with the second quarter of 2001, non interest expense increased $729 thousand from $16.6 million to $17.3 million. Increases in salaries and benefits accounted for $927 thousand of the increase, occupancy and furniture accounted for $519 thousand of the increase, merchant processing charges increased $622 thousand and an increase in amortization of intangibles (due to the amoritzation of the core deposit intangible created in the merger with Americorp) accounted for $235 thousand. Offsetting these increases was a decrease of $1.7 million related to a one-time charge to expense for the donation of property associated with obtaining a Natural Heritage Tax Credit in the first half of 2001. While some categories of expense showed minor declines, others showed minor increases, and all other categories of expense showed a net $0.1 million increase.

        The increases in the non-interest expense categories noted above is in part related to the acquisition of Americorp. That acquisition was completed in September 2001, therefore the Company's income statement in 2002 reflects the effect of the additional salaries and benefits, occupancy charges and intangible amortization resulting from the merger. However, the impact of these expenses was not part of the comparable 2001 period. It is difficult to identify the exact amount of the impact. However, it is known that Americorp's non-interest expense was approximately 19% of Mid-State's levels prior to the completion of the merger.

        Provision for Income Taxes.    The year-to-date provision for income taxes was $8.0 million, compared to $6.0 million for the same period in 2001. The effective tax rate for the first six months of 2002 was 36.2% compared to 31.0% in 2001. The effective tax rate for the first half of 2001 is lower than the current year's effective tax rate due to the Company benefiting from the State of California's new Natural Heritage Tax Credit and certain attendant deductions. In total, this tax benefit was $1.8 million, which after the offsetting real estate write off included in non interest expense, generated a net improvement to the bottom line of $140 thousand in the 2001 period. Utilization of this benefit occurred during the second quarter of 2001 and as a result, the effective tax rate in the 2001 quarter is 23.7% compared to 35.9% in the comparable 2002 period. The normal combined federal and state statutory tax rate is 42% for Mid-State Bancshares and absent the one-time benefit in 2001 from the

14

Natural Heritage Tax Credit, tax exempt income generated by its municipal bond portfolio is the primary reason that the effective rate is lower.

        Balance Sheet.    Total assets at June 30, 2002 totaled $1,878.6 million, up 24.9% from the level one year earlier of $1,503.9 million. Approximately $307.3 million of the $374.7 million increase is a result of the merger with Americorp on September 2001. A comparison of selected balance sheet components from one year earlier and the contribution toward that change from the merger are presented in the table below:

Mid-State Bancshares
Condensed Balance Sheet—At Period-End