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United States

Securities and Exchange Commission

Washington, D.C. 20429

 

FORM 10-Q

 

ý  Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

for the quarterly period ended June 30, 2003.

 

 

o  Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

for the transition period from      N/A      to      N/A.

 

Commission File Number 000-23925

 

MID-STATE BANCSHARES

(Exact name of registrant as specified in its charter)

 

California

 

77-0442667

(State or Other  Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1026 Grand Ave. Arroyo Grande, CA

 

93420-0580

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 

 

 

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

 

 

 

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

 

Common Stock, no par value

(Title of class)

 

Check whether the Company (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

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý   No   o

 

As of July 24, 2003, the aggregate market value of the common stock held by non-affiliates of the Company was:$447,099,988.

 

Number of shares of common stock of the Company outstanding as of July 24, 2003:  23,470,440 shares.

 

 



 

Mid-State Bancshares

June 30, 2003

Index

 

PART I - FINANCIAL INFORMATION

 

 

Item 1 –Financial Statements

 

 

 

 

Consolidated Statements of  Financial Position (Unaudited)

 

 

 

 

Consolidated Statements of Income (Unaudited)

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Item 2 –Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3 –Quantitative and Qualitative Disclosure About Market Risk

 

 

 

Item 4 –Controls and Procedures

 

PART II - OTHER INFORMATION

 

 

Item 1 –Legal Proceedings

 

 

 

Item 2 –Changes in Securities and Use of Proceeds

 

 

 

Item 3 –Defaults Upon Senior Securities

 

 

 

Item 4 –Submission of Matters to a Vote of Security Holders

 

 

 

Item 5 –Other Information

 

 

 

Item 6 –Exhibits and Reports on Form 8-K

 

 

 

Signatures

 

 

 

 

2



 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Mid-State Bancshares

Consolidated Statements of Financial Position

(Interim Periods Unaudited - figures in 000’s)

 

 

 

June 30, 2003

 

Dec. 31, 2002

 

June 30, 2002

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Cash and Due From Banks

 

$

124,176

 

$

128,036

 

$

115,891

 

Fed Funds Sold

 

79,200

 

16,500

 

50,000

 

Securities Available For Sale

 

601,120

 

608,983

 

535,313

 

Loans Held for Sale

 

49,875

 

22,560

 

4,801

 

 

 

 

 

 

 

 

 

Loans, net of unearned income

 

1,102,210

 

1,087,551

 

1,101,695

 

Allowance for Loan Losses

 

(17,963

)

(17,370

)

(19,160

)

Net Loans

 

1,084,247

 

1,070,181

 

1,082,535

 

 

 

 

 

 

 

 

 

Premises and Equipment, Net

 

25,570

 

25,342

 

25,148

 

Accrued Interest Receivable

 

10,764

 

11,689

 

11,692

 

Investments in Real Estate, Net

 

91

 

239

 

200

 

Goodwill

 

33,448

 

33,448

 

33,448

 

Other Intangibles

 

8,844

 

8,816

 

8,993

 

Other Assets

 

6,919

 

8,946

 

10,570

 

Total Assets

 

$

2,024,254

 

$

1,934,740

 

$

1,878,591

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Non Interest Bearing Demand

 

$

422,732

 

$

390,212

 

$

374,744

 

NOW Accounts, Money Market and Savings Deposits

 

919,768

 

863,142

 

810,468

 

Time Deposits Under $100

 

241,002

 

249,792

 

259,053

 

Time Deposits $100 or more

 

156,632

 

149,801

 

154,749

 

Total Deposits

 

1,740,134

 

1,652,947

 

1,599,014

 

 

 

 

 

 

 

 

 

Other Borrowings

 

6,354

 

10,973

 

12,696

 

Allowance for Losses – Unfunded Commitments

 

1,812

 

1,771

 

1,687

 

Accrued Interest Payable and Other Liabilities

 

13,594

 

14,914

 

19,888

 

Total Liabilities

 

1,761,894

 

1,680,605

 

1,633,285

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common Stock and Surplus (Shares Outstanding of 23,384,  23,697 and 24,050, respectively)

 

71,566

 

77,588

 

83,764

 

Retained Earnings

 

173,489

 

163,309

 

152,498

 

Accumulated Other Comprehensive Income, Net

 

17,305

 

13,238

 

9,044

 

Total Equity

 

262,360

 

254,135

 

245,306

 

Total Liabilities and Equity

 

$

2,024,254

 

$

1,934,740

 

$

1,878,591

 

 

3



 

Mid-State Bancshares

Consolidated Statements of Income

(Unaudited - figures in 000’s except earnings per share data)

 

 

 

Three Month Period
Ended June 30,

 

Six Month Period
Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Interest Income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

20,134

 

$

21,288

 

$

39,887

 

$

43,536

 

Interest on investment securities -

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

154

 

368

 

359

 

772

 

U.S. Government agencies and corporations

 

2,076

 

1,985

 

4,391

 

3,804

 

Obligations of states and political sub-divisions and other securities

 

3,624

 

3,230

 

7,094

 

6,279

 

Interest on fed funds sold and other

 

219

 

334

 

341

 

670

 

Total Interest Income

 

26,207

 

27,205

 

52,072

 

55,061

 

Interest Expense:

 

 

 

 

 

 

 

 

 

Interest on NOW, money market and savings

 

738

 

1,273

 

1,500

 

2,503

 

Interest on time deposits less than $100

 

1,162

 

1,855

 

2,506

 

4,117

 

Interest on time deposits of $100 or more

 

633

 

1,001

 

1,323

 

2,230

 

Interest other

 

35

 

38

 

73

 

107

 

Total Interest Expense

 

2,568

 

4,167

 

5,402

 

8,957

 

Net Interest Income before provision

 

23,639

 

23,038

 

46,670

 

46,104

 

Less: Provision for loan losses

 

150

 

300

 

260

 

600

 

Net Interest Income after provision

 

23,489

 

22,738

 

46,410

 

45,504

 

Other Operating Income:

 

 

 

 

 

 

 

 

 

Service charges and fees

 

2,311

 

2,225

 

4,564

 

4,429

 

Commissions, fees and other service charges

 

3,462

 

2,900

 

6,485

 

5,766

 

Gains (losses) on sale of securities

 

27

 

(7

)

29

 

(9

)

Gain on sale of loans held for sale

 

987

 

95

 

1,960

 

147

 

Other non-interest income

 

697

 

531

 

1,360

 

1,394

 

Total Other Operating Income

 

7,484

 

5,744

 

14,398

 

11,727

 

Other Operating Expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

9,210

 

8,967

 

18,859

 

18,512

 

Occupancy and furniture

 

2,860

 

2,697

 

5,632

 

5,404

 

Other operating expenses

 

5,956

 

5,666

 

11,910

 

11,301

 

Total Other Operating Expense

 

18,026

 

17,330

 

36,401

 

35,217

 

Income Before Taxes

 

12,947

 

11,152

 

24,407

 

22,014

 

Provision for income taxes

 

4,587

 

3,998

 

8,604

 

7,960

 

Net Income

 

$

8,360

 

$

7,154

 

$

15,803

 

$

14,054

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

– basic

 

$

0.36

 

$

0.30

 

$

0.67

 

$

0.58

 

– diluted

 

$

0.34

 

$

0.29

 

$

0.64

 

$

0.56

 

Dividends per share

 

$

0.13

 

$

0.10

 

$

0.24

 

$

0.20

 

Average shares used in earnings per share calculations:

 

 

 

 

 

 

 

 

 

– basic

 

23,442

 

24,067

 

23,520

 

24,078

 

– diluted

 

24,477

 

24,892

 

24,557

 

24,883

 

 

4



 

Mid-State Bancshares

Consolidated Statements of Comprehensive Income

(Unaudited - figures in 000’s)

 

 

 

Three Month Period
Ended June 30,

 

Six Month Period
Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Net Income

 

$

8,360

 

$

7,154

 

$

15,803

 

$

14,054

 

Other Comprehensive Income Before Taxes:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during period

 

6,173

 

8,505

 

6,807

 

4,361

 

Reclassification adjustment for (gains) losses included in net income

 

(27

)

7

 

(29

)

9

 

Other comprehensive income, before tax

 

6,146

 

8,512

 

6,778

 

4,370

 

Income tax expense related to items in comprehensive income

 

2,459

 

3,405

 

2,711

 

1,748

 

Other Comprehensive Income, Net of Taxes

 

3,687

 

5,107

 

4,067

 

2,622

 

Comprehensive Income

 

$

12,047

 

$

12,261

 

$

19,870

 

$

16,676

 

 

5



 

Mid-State Bancshares

Consolidated Statements of Cash Flows

(Unaudited - figures in 000’s)

 

 

 

Six Month Period
Ended June 30,

 

 

 

 

2003

 

2002

 

OPERATING ACTIVITIES

 

 

 

 

 

Net Income

 

$

15,803

 

$

14,054

 

Adjustments to reconcile net income to net cash(used in) provided by operating activities:

 

 

 

 

 

Provision for credit losses

 

260

 

600

 

Depreciation and amortization

 

2,249

 

2,163

 

Net amortization of prem./discounts-investments

 

1,916

 

1,698

 

Gain on sale of loans held for sale

 

(1,960

)

(147

)

Net increase in loans held for sale

 

(25,355

)

(8,803

)

Change in deferred loan fees

 

389

 

(9

)

Changes in assets and liabilities:

 

 

 

 

 

Accrued interest receivable

 

925

 

4,342

 

Other intangibles, net

 

(28

)

301

 

Other assets, net

 

(684

)

3,515

 

Other liabilities

 

(1,279

)

(632

)

Net cash (used in) provided by operating activities

 

(7,764

)

17,082

 

INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from sales and maturities of investments

 

107,925

 

42,646

 

Purchases of investments

 

(95,200

)

(123,942

)

(Increase) decrease in loans

 

(14,715

)

51,653

 

Receipt from investments in real estate

 

148

 

33

 

Purchases of premises and equipment, net

 

(2,477

)

(1,460

)

Net cash used in investing activities

 

(4,319

)

(31,070

)

FINANCING ACTIVITIES

 

 

 

 

 

Increase in deposits

 

87,187

 

14,848

 

Decrease in short-term borrowings

 

(4,619

)

(5,018

)

Exercise of stock options

 

1,480

 

719

 

Cash dividends paid

 

(5,623

)

(4,813

)

Retirement of company stock

 

(7,502

)

(1,827

)

Net cash provided by financing activities

 

70,923

 

3,909

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

58,840

 

(10,079

)

Cash and cash equivalents, beginning of period

 

144,536

 

175,970

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

203,376

 

$

165,891

 

 

 

 

 

 

 

Supplemental  disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest

 

$

5,514

 

$

9,397

 

Cash paid during the period for taxes on income

 

10,536

 

7,550

 

 

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, 2002 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, 2002.  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.

 

 

 

Three Month Period Ended
June 30, 2003

 

Three Month Period Ended
June 30, 2002

 

 

 

 

 

 

 

Earnings

 

Shares

 

EPS

 

Earnings

 

Shares

 

EPS

 

Net Income as reported

 

$

8,360

 

 

 

 

 

$

7,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to Common Shareholders

 

$

8,360

 

23,442

 

$

0.36

 

$

7,154

 

24,067

 

$

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options

 

 

 

1,035

 

 

 

 

 

825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to Common Shareholders

 

$

8,360

 

24,477

 

$

0.34

 

$

7,154

 

24,892

 

$

0.29

 

 

7



 

 

 

Six Month Period Ended
June 30, 2003

 

Six Month Period Ended
June 30, 2002

 

 

 

 

 

Earnings

 

Shares

 

EPS

 

Earnings

 

Shares

 

EPS

 

Net Income as reported

 

$

15,803

 

 

 

 

 

$

14,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to Common Shareholders

 

$

15,803

 

23,520

 

$

0.67

 

$

14,054

 

24,078

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options

 

 

 

1,037

 

 

 

 

 

805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to Common Shareholders

 

$

15,803

 

24,557

 

$

0.64

 

$

14,054

 

24,883

 

$

0.56

 

 

NOTE C – RECENT ACCOUNTING PRONOUNCEMENTS

 

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” in June of 2002.  SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities.  SFAS No. 146 was effective for exit or disposal activities initiated after December 31, 2002, with early adoption permitted.  The adoption of SFAS No. 146 did not have a material impact on its results of operations and financial position.

 

In November of 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”.  FIN No. 45 clarifies the requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees.  The disclosure provisions of FIN No. 45 were effective for financial statements of periods ended after December 15, 2002.  The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002.  Adoption did not have a material impact on its results of operations and financial position.

 

The FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” in December of 2002.  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123.  SFAS No. 148 was effective for fiscal years ending after December 15, 2002.  The Company adopted SFAS No. 148 on December 15, 2002 and adoption did not have a material impact on its results of operations and financial position.

 

The FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” in May of 2003.  SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Many of those instruments were previously classified as equity.  SFAS No. 150 was effective for financial instruments

 

8



 

entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  Management believes that the adoption of SFAS No. 150 will not have a material impact on its results of operations and financial position.

 

In January of 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities”.  FIN No. 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics:  i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and ii) the equity investors lack an essential characteristic of a controlling financial interest.  FIN No. 46 was effective for all financial statements issued on or after February 1, 2003.  The adoption of FIN No. 46 did not have a material impact on the Company’s results of operations and financial position.

 

NOTE D – OTHER INTANGIBLE ASSETS

 

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

 

 

 

June 30, 2003

 

June 30, 2002

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross
Amount 

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Deposit Intangible

 

$

8,869

 

$

(1,903

)

$

6,966

 

$

8,869

 

$

(831

)

$

8,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated Mortgage Servicing Rights

 

2,915

 

(1,037

)

1,878

 

1,474

 

(519

)

955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Other Intangible Assets

 

$

11,784

 

$

(2,940

)

$

8,844

 

$

10,343

 

$

(1,350

)

$

 8,993

 

 

 

 

Dec. 31, 2002

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

Core Deposit Intangible

 

$

8,869

 

$

(1,368

)

$

7,501

 

 

 

 

 

 

 

 

 

Originated Mortgage Servicing Rights

 

2,063

 

(748

)

1,315

 

Total Other Intangible Assets

 

$

10,932

 

$

(2,116

)

$

8,816

 

 

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

 

 

 

Three Month Period
Ended June 30,

 

Six Month Period
Ended June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Amortization of Core Deposit Intangible

 

$

268

 

$

268

 

$

536

 

$

536

 

 

 

 

 

 

 

 

 

 

 

Amortization of Originated Mortgage Servicing Rights

 

228

 

44

 

289

 

79

 

Total aggregate amortization expense

 

$

496

 

$

312

 

$

825

 

$

615

 

 

9



 

The projected  amortization  expense  for  intangible  assets,  assuming no further  acquisitions or dispositions,  is approximately $1.6 million per year over the next five years.  These charges are included in other operating expense on the Consolidated Statements of Income.

 

NOTE E – STOCK OPTIONS

 

At June 30, 2003, the Company had one stock option plan which is described more fully in Note 15 in the Company’s 2002 Annual Report on form 10-K.  The Company accounts for stock options using the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and provides proforma net income and proforma earnings per share disclosures for employee stock option grants as if the fair-value-based method, defined in SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied.  Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below for the three and six month periods ended June 30:

 

 

 

Three Month Period
Ended June 30,

 

Six Month Period
Ended June 30,

 

(dollars in 000’s except per share amounts)

 

2003

 

2002

 

2003

 

2002

 

Net income, as reported

 

$

8,360

 

$

7,154

 

$

15,803

 

$

14,054

 

Deduct:  Total stock-based compensation expense determined under the fair value based method for all awards, net of related taxes

 

(392

)

(356

)

(781

)

(712

)

 

 

 

 

 

 

 

 

 

 

Proforma net income

 

$

7,968

 

$

6,798

 

$

15,022

 

$

13,342

 

 

 

 

 

 

 

 

 

 

 

Basic income per share, as reported

 

$

0.36

 

$

0.30

 

$

0.67

 

$

0.58

 

Proforma basic income per share

 

$

0.34

 

$

0.28

 

$

0.64

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share, as reported

 

$

0.34

 

$

0.29

 

$

0.64

 

$

0.56

 

Proforma diluted income per share

 

$

0.33

 

$

0.27

 

$

0.61

 

$

0.54

 

 

 

NOTE F – MERGER OF MID-STATE BANCSHARES AND OJAI VALLEY BANK

 

On June 30, 2003, the Company signed a definitive agreement (“the Agreement”) to acquire Ojai Valley Bank through merger, subject to the approval of banking regulators and shareholders of Ojai Valley Bank.  The Agreement provides Ojai Valley Bank shareholders with an election to choose Mid-State Bancshares common stock, cash, or a combination of Mid-State Bancshares common stock and cash that is subject to potential adjustments based on changes in the price of Mid-State Bancshares stock preceding the effective date of the transaction and pro ration, if necessary.  50% of the consideration provided will be in the form of Mid-State Bancshares stock with the balance being in cash.  The total consideration is valued at approximately $20.2 million.  The merger is structured to be tax-free for the stock portion of the consideration.  The transaction is expected to close in the fourth quarter of 2003 and is expected to be accretive to earnings in the year 2004.

 

10



 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Selected Financial Data - Summary.  The following table provides certain selected consolidated financial data as of and for the three and six month periods ended June 30, 2003 and 2002 (unaudited).

 

Consolidated Financial Data - Mid-State Bancshares

 

 

 

Quarter Ended

 

Year-to-Date

 

(Unaudited in 000’s except per share data)

 

June 30, 2003

 

June 30, 2002

 

June 30, 2003

 

June 30, 2002

 

 

 

 

 

 

 

 

 

 

 

Interest Income (not taxable equivalent)

 

$

26,207

 

$

27,205

 

$

52,072

 

$

55,061

 

Interest Expense

 

2,568

 

4,167

 

5,402

 

8,957

 

Net Interest Income

 

23,639

 

23,038

 

46,670

 

46,104

 

Provision for Loan Losses

 

150

 

300

 

260

 

600

 

Net Interest Income after provision for loan losses

 

23,489

 

22,738

 

46,410

 

45,504

 

Non-interest income

 

7,484

 

5,744

 

14,398

 

11,727

 

Non-interest expense

 

18,026

 

17,330

 

36,401

 

35,217

 

Income before income taxes

 

12,947

 

11,152

 

24,407

 

22,014

 

Provision for income taxes

 

4,587

 

3,998

 

8,604

 

7,960

 

Net Income

 

$

8,360

 

$

7,154

 

$

15,803

 

$

14,054

 

 

 

 

 

 

 

 

 

 

 

Per share:

 

 

 

 

 

 

 

 

 

Net Income - basic

 

$

0.36

 

$

0.30

 

$

0.67

 

$

0.58

 

Net Income - diluted

 

$

0.34

 

$

0.29

 

$

0.64

 

$

0.56

 

Weighted avg. shares used in Basic E.P.S. calculation

 

23,442

 

24,067

 

23,520

 

24,078

 

Weighted avg. shares used in Diluted E.P.S. calculation

 

24,477

 

24,892

 

24,557

 

24,883

 

Cash dividends

 

$

0.13

 

$

0.10

 

$

0.24

 

$

0.20

 

Book value at period-end

 

 

 

 

 

$

11.22

 

$

10.20

 

Tangible book value at period end

 

 

 

 

 

$

9.41

 

$

8.43

 

Ending Shares

 

 

 

 

 

23,384

 

24,050

 

 

 

 

 

 

 

 

 

 

 

Financial Ratios

 

 

 

 

 

 

 

 

 

Return on assets

 

1.68

%

1.54

%

1.62

%

1.52

%

Return on tangible assets

 

1.72

%

1.57

%

1.65

%

1.56

%

Return on equity

 

12.82

%

11.91

%

12.34

%

11.90

%

Return on tangible equity

 

15.29

%

14.46

%

14.75

%

14.48

%

Net interest margin (not taxable equivalent)

 

5.26

%

5.45

%

5.28

%

5.51

%

Net interest margin (taxable equivalent yield)

 

5.67

%

5.77

%

5.68

%

5.81

%

Net loan (recoveries) losses to avg. loans

 

(0.08

)%

0.05

%

(0.06

)%

0.07

%

Efficiency ratio

 

57.9

%

60.2

%

59.6

%

60.9

%

 

 

 

 

 

 

 

 

 

 

Period Averages

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,990,671

 

$

1,867,782

 

$

1,969,121

 

$

1,858,611

 

Total Tangible Assets

 

1,948,523

 

1,825,298

 

1,926,984

 

1,816,068

 

Total Loans (includes loans held for sale)

 

1,132,369

 

1,126,375

 

1,124,190

 

1,128,360

 

Total Earning Assets

 

1,801,275

 

1,696,190

 

1,782,984

 

1,688,469

 

Total Deposits

 

1,711,342

 

1,608,633

 

1,691,883

 

1,596,422

 

Common Equity

 

261,509

 

240,900

 

258,248

 

238,226

 

Common Tangible Equity

 

219,361

 

198,416

 

216,111

 

195,683

 

 

11



 

(Unaudited in 000’s except per share data)

 

June 30, 2003

 

June 30, 2002

 

Balance Sheet - At Period-End

 

 

 

 

 

Cash and due from banks

 

$

124,176

 

$

115,891

 

Investments and Fed Funds Sold

 

680,320

 

585,313

 

Loans held for sale

 

49,875

 

4,801

 

Loans, net of deferred fees, before allowance for loan losses

 

1,102,210

 

1,101,695

 

Allowance for Loan Losses

 

(17,963

)

(19,160

)

Goodwill and other intangibles

 

42,292

 

42,441

 

Other assets

 

43,344

 

47,610

 

Total Assets

 

$

2,024,254

 

$

1,878,591

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

422,732

 

$

374,744

 

Interest bearing deposits

 

1,317,402

 

1,224,270

 

Other borrowings

 

6,354

 

12,696

 

Allowance for losses - unfunded commitments

 

1,812

 

1,687

 

Other liabilities

 

13,594

 

19,888

 

Shareholders’ equity

 

262,360

 

245,306

 

Total Liabilities and Shareholders’ equity

 

$

2,024,254

 

$

1,878,591

 

 

 

 

 

 

 

Asset Quality & Capital - At Period-End

 

 

 

 

 

Non-accrual loans

 

$

16,436

 

$

12,449

 

Loans past due 90 days or more

 

1

 

68

 

Total non performing assets

 

$

16,437

 

$

12,517

 

 

 

 

 

 

 

Allowance for losses to loans, gross (1)

 

1.8

%

1.9

%

Non-accrual loans to total loans, gross

 

1.5

%

1.1

%

Non performing assets to total assets

 

0.8

%

0.7

%

Allowance for losses to non performing loans (1)

 

120.3

%

166.5

%

 

 

 

 

 

 

Equity to average assets (leverage ratio)

 

10.5

%

10.7

%

Tier One capital to risk-adjusted assets

 

14.6

%

14.7

%

Total capital to risk-adjusted assets

 

15.8

%

16.0

%

 


(1) Includes allowance for loan losses and allowance for losses - unfunded commitments

 

Performance Summary.  The Company posted net income of $8.4 million for the three months ended June 30, 2003 compared to $7.2 million in the like 2002 period.  These earnings represent an annualized return on assets of 1.68% and 1.54%, respectively.  The annualized return on equity was 12.82% for the second quarter of 2003 compared to 11.91% in the second quarter of 2002.  On a per share basis, diluted earnings per share were $0.34 in the 2003 period compared to $0.29 in the like quarter of 2002.

 

For the six months year-to-date, the Company posted net income of $15.8 million compared to $14.1 million earned in the like 2002 period.  Diluted earnings per share were $0.64 in the first half of 2003 compared to $0.56 in the like period one year earlier.  These earnings represent an annualized return on assets of 1.62% and 1.52%, respectively, for the comparable 2003 and 2002 periods.  The annualized return on equity was 12.34% for the first six months of 2003 compared to 11.90% in the first six months of 2002.

 

Net Interest Income.  The following table delineates the impacts of changes in the volume of earning assets, changes in the volume of interest bearing liabilities, and changes in interest rates on net interest income for the three month period ended June 30, 2003 and 2002.

 

12



 

 

 

3 Months Ended
June 30, 2003

 

3 Months Ended
June 30, 2002

 

2003 Compared to 2002
Composition of Change

 

 

 


Average
Balance

 

Interest
Income /
Expense

 

Average
Yield /
Rate

 


Average
Balance

 

Interest
Income /
Expense

 

Average
Yield /
Rate

 


Change Due To:

 


Total
Change

 

Dollars in 000’s

 

 

 

 

 

 

 

Volume

 

Rate

 

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,132,369

 

$

20,134

 

7.13

%

$

1,126,375

 

$

21,288

 

7.58

%

$

110

 

$

(1,264

)

$

(1,154

)

Investment Securities

 

593,674

 

5,854

 

3.96

%

487,698

 

5,583

 

4.59

%

1,129

 

(858

)

271

 

Fed Funds, Other

 

75,232

 

219

 

1.17

%

82,117

 

334

 

1.63

%

(24

)

(91

)

(115

)

TOTAL EARNING ASSETS

 

1,801,275

 

26,207

 

5.84

%

1,696,190

 

27,205

 

6.43

%

1,215

 

(2,213

)

(998

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW, Savings, and Money Market Accounts

 

909,564

 

738

 

0.33

%

811,530

 

1,273

 

0.63

%

117

 

(652

)

(535

)

Time Deposits

 

398,664

 

1,795

 

1.81

%

421,727

 

2,856

 

2.72

%

(130

)

(931

)

(1,061

)

Interest Bearing Deposits

 

1,308,228

 

2,533

 

0.78

%

1,233,257

 

4,129

 

1.34

%

(13

)

(1,583

)

(1,596

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Borrowings

 

3,927

 

35

 

3.57

%

4,948

 

38

 

3.08

%

(8

)

5

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST BEARING LIABILITIES

 

1,312,155

 

2,568

 

0.78

%

1,238,205

 

4,167

 

1.35

%

(22

)

(1,577

)

(1,599

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

$

1,801,275

 

$

23,639

 

5.26

%

$

1,696,190

 

$

23,038

 

5.45

%

$

1,237

 

$

(636

)

$

601

 

 

Mid-State’s annualized yield on interest earning assets was 5.84% for the second quarter of 2003 (6.24% on a taxable equivalent basis) compared to 6.43% in the like 2002 period (6.75% on a taxable equivalent basis).  The decrease in yield is related to the general decline in interest rates.  The Prime Rate, to which many of the Bank’s loans are tied, averaged 4.25% in the second quarter of 2003 compared to 4.75% in the like period of 2002.  Annualized interest expense as a percent of earning assets also decreased from 1.35% in the three months ended June 2002 to 0.78% in the comparable 2003 period.  This too reflected the general decline in interest rates.

 

Overall, Mid-State’s annualized Net Interest Income, expressed as a percent of earning assets, decreased from 5.45% for the second quarter of 2002 (5.77% on a taxable equivalent basis) to 5.26% in the comparable 2003 period (5.67% on a taxable equivalent basis).  Annualized Net Interest Income as a percent of average total assets (not shown in the table above) declined from 4.95% in the second quarter of 2002 (5.24% taxable equivalent) to 4.76% in the comparable 2003 period (5.13% taxable equivalent).  In comparing the second quarter of 2003 to the second quarter of 2002, average earnings assets increased from $1,696.2 million one year ago to $1,801.2 million and average deposits increased from $1,233.3 million one year ago to $1,308.2.  The combination of the increase in earning assets and the impact of the decline in interest rates on deposits offset the negative impact of the decline in interest rates on interest income and allowed the Company to show a small increase in net interest income of $601 thousand over the comparable quarters.

 

The following table presents a similar analysis of changes in interest income and expense for the six month period ended June 30, 2003 and 2002

 

13



 

 

 

6 months ended
June 30, 2003

 

6 months ended
June 30, 2002

 

2003 Compared to 2002
Composition of Change

 

Dollars in 000’s

 


Average
Balance

 

Interest
Income /
Expense

 

Average
Yield /
Rate

 


Average
Balance

 

Interest
Income /
Expense

 

Average
Yield /
Rate

 


Change Due To:

 


Total
Change

 

 

Volume

 

Rate

 

 

EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,124,190

 

$

39,887

 

7.15

%

$

1,128,360

 

$

43,536

 

7.78

%

$

(154

)

$

(3,495

)

$

(3,649

)

Investment Securities

 

599,309

 

11,844

 

3.99

%

474,403

 

10,855

 

4.61

%

2,663

 

(1,674

)

989

 

Fed Funds, Other

 

59,485

 

341

 

1.16

%

85,706

 

670

 

1.58

%

(178

)

(151

)

(329

)

TOTAL EARNING ASSETS

 

1,782,984

 

52,072

 

5.89

%

1,688,469

 

55,061

 

6.58

%

2,331

 

(5,320

)

(2,989

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW, Savings, and Money Market Accounts

 

896,727

 

1,500

 

0.34

%

799,145

 

2,503

 

0.63

%

234

 

(1,237

)

(1,003

)

Time Deposits

 

399,480

 

3,829

 

1.93

%

431,123

 

6,347

 

2.97

%

(385

)

(2,133

)

(2,518

)

Interest Bearing Deposits

 

1,296,207

 

5,329

 

0.83

%

1,230,268

 

8,850

 

1.45

%

(150

)

(3,371

)

(3,521

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Borrowings

 

3,803

 

73

 

3.87

%

8,112

 

107

 

2.66

%

(70

)

36

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST BEARING LIABILITIES

 

1,300,010

 

5,402

 

0.84

%

1,238,380

 

8,957

 

1.46

%

(220

)

(3,335

)

(3,555

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

$

1,782,984

 

$

46,670

 

5.28

%

$

1,688,469

 

$

46,104

 

5.51

%

$

2,551

 

$

(1,985

)

$

566

 

 

Mid-State’s year-to-date annualized yield on interest earning assets was 5.89% for the first six months of 2003 (6.29% on a taxable equivalent basis) compared to 6.58% in the like 2002 period (6.88% on a taxable equivalent basis).  The decrease in yield is related to the general decline in interest rates.  The Prime Rate, to which many of the Bank’s loans are tied, averaged 4.25% in the first six months of 2003 compared to 4.75% in the like period of 2002.  Annualized interest expense as a percent of earning assets also decreased from 1.46% in the first six months of 2002 to 0.84% in the comparable 2003 period.

 

Overall, Mid-State’s annualized Net Interest Income, expressed as a percent of earning assets, decreased from 5.51% for the first six month period of 2002 (5.81% on a taxable equivalent basis) to 5.28% in the comparable 2003 period (5.68% on a taxable equivalent basis).  Annualized Net Interest Income as a percent of average total assets (not shown in the table above) declined from 5.00% in the first six months of 2002 (5.28% taxable equivalent) to 4.78% in the comparable 2003 period (5.14% taxable equivalent).  Average earnings assets for the six months ended June 30, 2003 increased from the like 2002 period ($1,783.0 million compared to $1,688.5 million). The combination of the increase in earning assets and the impact of the decline in interest rates on deposits offset the negative impact of the decline in interest rates on interest income and allowed the Company to show a small increase in net interest income of $566 thousand over the comparable six month periods.

 

Provision and Allowance for Loan Losses.  Mid-State made provisions for loan losses in the second quarter of 2003 in the amount of $150 thousand, declining from $300 thousand in the second quarter of 2002.  During the six months ended June 30, 2003 provisions for loan losses totaled $260 thousand, declining from $600 thousand in the like 2002 period.

 

Management continues to believe that the allowances for loan losses and the allowance for losses - unfunded commitments, which collectively stand at 1.8% of total loans at June 30, 2003, are adequate to cover inherent losses.  The $19.8 million total allowance for credit losses is approximately 120% of the level of non performing loans which stand at $16.4 million compared to $12.5 million one year earlier.  The increase in non performing loans is due to two lending relationships secured by real estate which total $14.4 million.  Management has determined that its reserve requirement allocated to these loans, and held in the general loan loss reserve, are

 

14



 

sufficient to offset potential losses, if any, arising from less than full recovery of the loans from the supporting collateral.  Portions of the reserves associated with these loans are reflected in the impaired loan valuation noted below because Management feels that additional valuation allowances are necessary pursuant to the guidance provided under SFAS No. 114.  Non performing loans consist of loans on non-accrual and accruing loans 90 days or more past due.  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, 2003 and 2002 are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Balance at beginning of period:

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

17,576

 

$

19,000

 

$

17,370

 

$

18,972

 

Allowance for losses-unfunded commitments

 

1,811

 

1,687

 

1,771

 

1,687

 

Total allowances for losses at beginning of period

 

19,387

 

20,687

 

19,141

 

$

20,659

 

 

 

 

 

 

 

 

 

 

 

Additions to the allowances charged to expense

 

1

 

 

41

 

 

Additions to the allowances charged to provision

 

150

 

300

 

260

 

600

 

Loans charged off

 

(172

)

(337

)

(241

)

(787

)

Recoveries of loans previously charged-off

 

409

 

197

 

574

 

375

 

Total allowances for losses-end of quarter

 

$

19,775

 

$

20,847

 

$

19,775

 

$

20,847

 

Allowance for loan losses

 

$

17,963

 

$

19,160

 

$

17,963

 

$

19,160

 

Allowance for losses-unfunded commitments

 

1,812

 

1,687

 

1,812

 

1,687

 

Total allowance for credit losses

 

$

19,775

 

$

20,847

 

$

19,775

 

$

20,847

 

 

At June 30, 2003, the recorded investments in loans which have been identified as impaired totaled $17,504,000.  Of this amount, $2,684,000 related to loans with no valuation allowance and $14,820,000 related to loans with a corresponding valuation allowance of $2,366,000.  Impaired loans totaled $13,943,000 at June 30, 2002.  Of this amount, $10,822,000 related to loans with no valuation allowance and $3,121,000 related to loans with a corresponding valuation allowance of $1,196,000.  The valuation allowance for impaired loans is included within the general allowance shown above and netted against loans on the consolidated statements of financial position.  For the quarter ended June, 2003, the average recorded investment in impaired loans was $17,545,000 compared to $8,443,000 in the 2002 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 2003 was $14.4 million, up from $11.7 million earned in the 2002 period, an increase of 22.8%.  An increase in the Company’s gain on sale of loans of $1.8 million accounted for the largest portion of the increase, reflecting an increase in refinance activity in its mortgage banking operation.  Other commissions, fees and service charges increased by $0.7 million accounting for the balance of the increase which was primarily the result of increases in ATM and Debit card fees collected along with increases from trust department fee income and letters of credit commissions.

 

For the three months ended June 30, 2003, non-interest income rose $1.8 million from $5.7 million in the second quarter of 2002 to $7.5 million in the comparable 2003 period.  An increase in the Company’s gain on sale of loans of $0.9 million accounted for the largest portion of the increase, reflecting an increase in refinance activity in its mortgage banking operation.  Other commissions, fees and service charges increased by $0.5

 

15



 

million accounting for the balance of the increase which was primarily the result of increases in ATM and Debit card fees collected along with increases from trust department fee income and letters of credit commissions.

 

Non-interest Expense.  Non-interest expense for the first six months of 2003 was $36.4 million.  This compares to $35.2 million in the comparable 2002 period, an increase of $1.2 million.  Increases in salaries and benefits accounted for $347 thousand of the increase (while salaries actually decreased by $25K across the two periods, increases in group health insurance and workers compensation premiums accounted for the overall increase in salaries and benefits).  Occupancy and furniture accounted for an additional $228 thousand of the increase.  And outside professional services accounted for $358 thousand of the overall increase with various other operating expenses being up a net $251 thousand.  The Company continues to use an outside professional service to help with its sales management efforts.

 

In comparing the second quarter of 2003 with the second quarter of 2002, non-interest expense increased $697 thousand from $17.3 million to $18.0 million.  This increase was primarily the result of increases in salaries and benefits of $244 thousand (while salaries increased by just $22K across the two periods, increases in group health insurance and workers compensation premiums accounted for the vast majority of the overall increase in salaries and benefits).  Occupancy and furniture accounted for $163 thousand of the increase.  And all other categories of expense showed a net $290 thousand increase led by outside professional services of $215 thousand.

 

Provision for Income Taxes.  The year-to-date provision for income taxes was $8.6 million, which is up from the same period in 2002 when it was $8.0 million.  For the second quarter of 2003 the provision for income taxes rose $589 thousand, up from $4.0 million in the 2002 period to $4.6 million.  The effective tax rate for the six months year-to-date in 2003 was 35.3% compared to 36.2% in 2002.  While the normal combined federal and state statutory tax rate is 42% for Mid-State Bancshares, the tax exempt income generated by its municipal bond portfolio is the primary reason that the effective rate is lower.

 

Balance Sheet. Total assets of the Company were up 7.8% to $2.024 billion from $1.879 billion at June 30, 2002.  This growth was fueled by an increase in deposits of 8.8% to $1.740 billion, up from $1.599 billion one year earlier.  The growth in deposits was centered in core deposits.  While Time Deposits decreased to $397.6 million from one year earlier of $413.8 million, all other categories of Demand, NOW, Money Market and Savings increased to $1.342 billion from $1.185 billion one year earlier.  In an ongoing effort to improve earnings, the Company continues to focus its attention on attracting lower cost core deposits while trying to remain competitive in retaining Time Deposits.  Loan activity over the last year has been slow with the loan portfolio holding steady at $1.102 billion at June 30, 2003, compared to one year earlier.  Consequently, the growth in deposits has funded a $95 million increase in Investments and Fed Funds Sold along with a $45 million increase in the total of Mortgage Loans Available for Sale.

 

Mid-State Bank’s loan to deposit ratio of 63.3% at June 30, 2003 is down from the 68.9% ratio one year earlier.  The decrease in the loan to deposit ratio is a reflection of the decline in loans coupled with an increase in deposits.  There is ample internal liquidity to fund increases in this ratio through liquidation of Mid-State’s investment portfolio which is categorized as available for sale.

 

Investment Securities and Fed Funds Sold.  Of the $680.3 million portfolio at June 30, 2003, 12% is invested in overnight fed funds sold, 2% is invested in U.S. Treasury securities, 32% is invested in U.S. Government agency obligations, 50% is invested in securities issued by states and political subdivisions and 4% is invested in mortgage-backed and other securities.  Sixty-seven percent of all investment securities and fed funds sold combined mature within five years.  Approximately 23% of the total portfolio matures in less than one year.  The Bank’s investment in mortgage-backed securities consist of investments in FNMA and FHLMC pools

 

16



 

which have contractual maturities of up to 17 years.  The actual time of repayment may be shorter due to prepayments made on the underlying collateral.

 

Capital Resources.  During the first half of 2003, the Company has continued its stock repurchase program, repurchasing a total of 185,699 shares during the second quarter and 232,590 shares during the first quarter.  In the comparable 2002 period, the Company repurchased 75,457 shares in the second quarter and 24,481 shares in the first.  Management estimates that the effect of the stock repurchase program in 2003 has been to increase earnings per share by approximately one cent per share in the second quarter compared to what it would have been had no program been in place this year.  The Company has the ability to repurchase an additional 382,589 shares under its current stock repurchase program authorization.  In other matters concerning capital, the dividend declared during the second quarter of 2003 was increased to $0.13 per share up from $0.11 in the first quarter of 2003 and $0.10 per share in each of the first two quarters one year earlier.

 

Total stockholders’ equity increased from $245.3 million at June 30, 2002 to $262.4 million at June 30, 2003.  Changes in stockholders’ equity over this 12 month period includes activity outlined in the following table (dollars in 000’s):

 

 

 

Common Stock &
Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income

 

Total

 

Ending Equity at June 30, 2002

 

$

83,764

 

$

152,498

 

$

9,044

 

$

245,306

 

Net Income 6 Mos 2002 (Jul. - Dec.)

 

 

 

15,801

 

 

 

15,801

 

 

 

 

 

 

 

 

 

 

 

Common Stock Repurchased
6 Mos. 2002 (Jul. - Dec.)

 

(6,559

)

 

 

 

 

(6,559

)

 

 

 

 

 

 

 

 

 

 

Stock Options Exercised -
6 Mos. 2002 (Jul. - Dec.)

 

383

 

 

 

 

 

383

 

 

 

 

 

 

 

 

 

 

 

Regular Dividends
6 Mos. 2002 (Jul. - Dec.)

 

 

 

(4,990

)

 

 

(4,990

)

 

 

 

 

 

 

 

 

 

 

Chg. Accumulated Other
Comprehensive Income (FAS 115)

 

 

 

 

 

4,194

 

4,194

 

 

 

 

 

 

 

 

 

 

 

Ending Equity at December 31, 2002

 

77,588

 

163,309

 

13,238

 

254,135

 

Net Income 6 Mos. Y-T-D 2003

 

 

 

15,803

 

 

 

15,803

 

 

 

 

 

 

 

 

 

 

 

Common Stock Repurchased
6 Mos. Y-T-D 2003

 

(7,502

)

 

 

 

 

(7,502

)

 

 

 

 

 

 

 

 

 

 

Stock Options Exercised 6 Mos Y-T-D 2003

 

1,480

 

 

 

 

 

1,480

 

 

 

 

 

 

 

 

 

 

 

Regular Dividends 6 Mos. 2003

 

 

 

(5,623

)

 

 

(5,623

)

 

 

 

 

 

 

 

 

 

 

Chg. Accumulated Other
Comprehensive Income (FAS 115)

 

 

 

 

 

4,067

 

4,067

 

 

 

 

 

 

 

 

 

 

 

Ending Equity at June 30, 2003

 

$

71,566

 

$

173,489

 

$

17,305

 

$

262,360

 

 

17



 

Liquidity.  The Company maintains a certain amount of liquidity 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 June 30, 2003 was 63.3% versus 68.9% one year earlier.  The decrease in the loan to deposit ratio is a reflection of the decline in loans coupled with an increase in deposits.  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 42.2% at June 30, 2003, which is above its minimum policy of 15% and above the 38.6% level of June 30, 2002.  Management is not aware of any future capital expenditures or other significant demands or commitments which would severely impair liquidity.

 

Off Balance Sheet Transactions.  The Company is contingently liable for letter of credit accommodations made to its customers in the ordinary course of business totaling $35.9 million at June 30, 2003, up from $29.2 million one year earlier.  Additionally, the Company has undisbursed loan commitments, also made in the ordinary course of business, totaling $474.8 million, which was up from the $371.1 million outstanding one year earlier.

 

There are no Special Purpose Entity (“SPE”) trusts, corporations, or other legal entities established by Mid-State which reside off-balance sheet.  There are no other off-balance sheet items other than the aforementioned items related to letter of credit accommodations and undisbursed loan commitments.

 

Critical Accounting Policies and Estimates This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as, disclosures included elsewhere in this Form 10-Q, are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements require Management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies.  A summary of the more significant accounting policies of the Company can be found in Footnote One to the financial statements which is included in Item 8 of the Company’s Annual Report on Form 10-K and in the Management’s Discussion and Analysis included in Item 7 of that same report entitled “Critical Accounting Policies and Estimates.”

 

Important Factors Relating to Forward-Looking Statements.  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements.  All of the statements contained in this Quarterly Report on Form 10-Q, including those in Items 2 and 3, which are not identified as historical should be considered forward-looking.  In connection with certain forward-looking statements contained in this Quarterly Report on Form 10-Q and those that may be made in the future by or on behalf of the Company which are identified as forward-looking, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements.  Such factors include, but are not limited to, the real estate market, the availability of loans at acceptable prices, the general level of economic activity both locally and nationally, interest rates, the actions by the Company’s regulatory agencies, actions by competitors of the Company and other factors referenced in the Company’s 10-K report for December 31, 2002 on file with the Securities and Exchange Commission, included in “Item 1. BUSINESS – Factors That May Affect Future Results of Operations.”  Accordingly, there can be no assurance that the forward-

 

18



 

looking statements contained in this Quarterly Report on Form 10-Q will be realized or that actual results will not be significantly higher or lower.  The forward-looking statements have not been audited by, examined by or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements.  Readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information contained herein.  The inclusion of the forward-looking statements contained in this Quarterly Report on Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be achieved.  In light of the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.  The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

 

Item 3 - Quantitative and Qualitative Disclosure About Market Risk

 

The Bank expects its risk exposure to changes in interest rates to remain manageable and well within acceptable policy ranges.  A recent review as of May 31, 2003 of the potential changes in the Bank’s net interest income over a 12 month time horizon showed that it could fluctuate under extreme alternative rate scenarios from between +2.3% and –7.7% of the base case (rates unchanged) of $90.8 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 expects 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.

 

 

Change From Base

 

Rates Down Very Significant

 

-7.7

%

(Prime down to 2.00% over 12 months)

 

 

 

Rates Down Significant

 

-2.7

%

(Prime down to 3.00% over 12 months)

 

 

 

Rates Down Modestly

 

-1.9

%

(Prime down to 3.25% over 12 months)

 

 

 

Base Case - Rates Unchanged

 

 

(Prime unchanged at 4.00% over 12 months)

 

 

 

Rates Up Modestly

 

+0.7

%

(Prime up to 5.00% over 12 months)

 

 

 

Rates Up Aggressive

 

+1.4

%

(Prime up to 6.00% over 12 months)

 

 

 

Rates Up Very Aggressive

 

+2.3

%

(Prime up to 7.00% over 12 months)

 

 

 

 

Net interest income under the above scenarios is influenced by the characteristics of the Bank’s assets and liabilities.  In the case of N.O.W., savings and money market deposits (total $919.8 million) interest is based on rates set at the discretion of management ranging from 0.05% to 0.41%.  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.

 

19



 

It is important to note that the above table is a summary of several forecasts and actual results may vary.  The forecasts are based on estimates and assumptions of management that may turn out to be different and may change over time.  Factors affecting these estimates and assumptions include, but are not limited to - competitors’ behavior, economic conditions both locally and nationally, actions taken by the Federal Reserve Board, customer behavior, and management’s responses.  Changes that vary significantly from the assumptions and estimates may have significant effects on the Bank’s net interest income.  Therefore the results of this analysis should not be relied upon as indicative of actual future results.  Historically, the Bank has been able to manage its Net Interest Income in a fairly narrow range reflecting the Bank’s relative insensitivity to interest rate changes.  The impact of prepayment behavior on mortgages, real estate loans, mortgage backed securities, securities with call features, etc. is not considered material to the sensitivity analysis.  Over the last 5 calendar years (1999 – 2003), the Bank’s net interest margin (which is net interest income divided by average earning assets of the Bank) had ranged from a low of 5.41% to a high of 6.44% (not taxable equivalent).  The Bank’s net interest margin in 2002 of 5.41% was at the low end of this range by historical standards, coming off the higher levels experienced in 2000 of 6.44%.  In the second quarter of 2003, the net interest margin fell further to 5.26%.  This is a result of both the lower level of interest rates and the change in mix of earning assets (the Bank now has a smaller portion in loans vis-à-vis investment securities compared to 2000 when the margin was at its widest level).  The net interest margin under the forecasted alternative scenarios ranges from 4.54% to 5.03%.  Management feels this range of scenarios, while lower than historical standards, is consistent with current experience and interest rate levels, but no assurances can be given that actual future experience will fall within this range.

 

The Bank’s exposure with respect to interest rate derivatives, exchange rate fluctuations, and/or commodity price movements is nil.  The Bank does not own any instruments within these markets.

 

Item 4 – Controls and Procedures

 

(a)           Evaluation of disclosure controls and procedures:

 

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission Filings.

 

(b)          Changes in internal controls:

 

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

(c)           Asset-Backed issuers:

 

Not applicable.

 

20



 

PART II - OTHER INFORMATION

 

Item 1 - Legal Proceedings

 

Mid-State is not a party to any material legal proceeding.

 

Item 2 - Changes in Securities and Use of Proceeds

 

There were no material changes in securities and uses of proceeds during the period covered by this report.

 

Item 3 - Defaults Upon Senior Securities

 

Not applicable.

 

Item 4 - Submission of Matters to a Vote of Security Holders

 

On May 15, 2003, at the Company’s regular Annual Meeting, Shareholders re-elected four persons to the Company’s Board of Directors whose terms were expiring.  Re-elected to the Board were Trudi G. Carey, H. Edward Heron, James W. Lokey, and Stephen P. Maguire  with no Director receiving less than 74% of the total outstanding shares of the Company.  No other items were submitted to the Shareholders during the second quarter of 2003.

 

Item 5 - Other Information

 

Not applicable.

 

Item 6 - Exhibits and Reports on Form 8-K

 

A)                                  Exhibits

 

Exhibit No.

 

Exhibit

 

 

 

99.1

 

Certification

 

B)                                    Reports on Form 8-K

 

 

 

During the second quarter of 2003, the Company filed one report under Item 12 of Form 8-K.  That report, filed on April 22, 2003 reported that on April 21, 2003, the Company announced that its net income for the three months ended March 31, 2003 was $7.4 million compared to $6.9 million in the first quarter of 2002.  The full text of the earnings release was attached thereto and made a part thereof.

 

 

 

 

 

During the second quarter of 2003, the Company also filed one report under Item 5 of Form 8-K.  That report, filed on June 24, 2003, reported that on June 19, 2003, the Company announced that at its regular Board of Directors meeting on June 18, 2003, the Board declared a thirteen cents per-share quarterly cash dividend for all shareholders of record on June 30, 2003, payable on July 15, 2003.  The full text of the press release announcing the dividend was attached thereto and made a part thereof.

 

21



 

 

 

While not filed until the third quarter of 2003 on July 2, 2003, the Company filed another report under Item 5 of Form 8-K.  That report disclosed that on June 30, 2003, the Company entered into an Agreement to Merge and Plan of Reorganization with Ojai Valley Bank pursuant to which Ojai will merge with and into Mid-State Bank & Trust.  A full copy of the Agreement to Merge and Plan of Reorganization and the June 30 Press Release was attached thereto and made a part thereof.

 

22



 

SIGNATURES

 

Pursuant to the requirement of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Mid-State Bancshares

 

(registrant)

 

 

 

 

Date: August 13, 2003

 

By:

/s/ JAMES W. LOKEY

 

 

 

JAMES W. LOKEY

 

 

President

 

 

Chief Executive Officer

 

 

 

 

Date: August 13, 2003

 

By

/s/ JAMES G. STATHOS

 

 

 

JAMES G. STATHOS

 

 

Executive Vice President

 

 

Chief Financial Officer

 

23