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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20429
FORM 10-Q
/x/ |
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2000. |
/ / |
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 (State or Other Jurisdiction of Incorporation or Organization) |
77-0442667 (I.R.S. Employer Identification No.) |
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1026 Grand Ave. Arroyo Grande, CA (Address of Principal Executive Offices) |
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93420-0580 (Zip Code) |
Issuer's Telephone Number: (805) 473-7700
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Check whether the Bank (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
As of May 3, 2000, the aggregate market value of the common stock held by non-affiliates of the Company was: $281,011,274.
Number of shares of common stock of the Company outstanding as of May 3, 2000: 11,244,213 shares.
Mid-State Bancshares
March 31, 2000
Index
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Page |
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PART IFINANCIAL INFORMATION | |||
Item 1 |
Financial Statements |
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Consolidated Statements of Financial Position as of March 31, 2000, December 31, 1999, and March 31, 1999 |
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3 |
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Consolidated Statements of Income for the three month period ended March 31, 2000 and March 31, 1999 |
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4 |
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Consolidated Statements of Comprehensive Income for the three month period ended March 31, 2000 and March 31, 1999 |
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5 |
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Consolidated Statements of Cash Flows for the three month period ended March 31, 2000 and March 31, 1999 |
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6 |
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Notes to Consolidated Financial Statements |
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7 |
Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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8 |
Item 3 |
Quantitative and Qualitative Disclosure About Market Risk |
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13 |
PART IIOTHER INFORMATION |
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Item 1 |
Legal Proceedings |
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15 |
Item 2 |
Changes in Securities and Use of Proceeds |
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15 |
Item 3 |
Defaults Upon Senior Securities |
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15 |
Item 4 |
Submission of Matters to a Vote of Security Holders |
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15 |
Item 5 |
Other Information |
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15 |
Item 6 |
Exhibits and Reports on Form 8-K |
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15 |
2
PART IFINANCIAL INFORMATION
Item 1Financial Statements
Mid-State Bancshares
Consolidated Statements of Financial Position
(Interim Periods Unauditedfigures in 000's)
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Mar. 31, 2000 |
Dec. 31, 1999 |
Mar. 31, 1999 |
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ASSETS | ||||||||||
Cash and Due From Banks | $ | 67,641 | $ | 56,080 | $ | 71,847 | ||||
Fed Funds Sold | 14,270 | 17,500 | 68,365 | |||||||
Investment Securities: | ||||||||||
Available For Sale | 379,916 | 433,898 | 468,839 | |||||||
Held-to-Maturity (Market value of $29,263, $31,075 and $37,091, respectively) | 29,646 | 31,383 | 36,486 | |||||||
Loans, net of unearned income | 831,439 | 768,814 | 672,909 | |||||||
Allowance for Loan Losses | (12,931 | ) | (13,105 | ) | (14,002 | ) | ||||
Net Loans | 818,508 | 755,709 | 658,907 | |||||||
Premises and Equipment, Net | 29,076 | 29,282 | 32,528 | |||||||
Accrued Interest Receivable | 11,343 | 12,014 | 11,595 | |||||||
Investments in Real Estate, Net | 1,318 | 1,517 | 6,755 | |||||||
Other Real Estate Owned, Net | 77 | 0 | 206 | |||||||
Other Assets | 18,346 | 17,835 | 15,985 | |||||||
Total Assets | $ | 1,370,141 | $ | 1,355,218 | $ | 1,371,513 | ||||
LIABILITIES AND EQUITY | ||||||||||
Non Interest Bearing Demand | $ | 232,370 | $ | 230,271 | $ | 233,176 | ||||
NOW Accounts, Money Market and Savings Deposits | 630,019 | 611,119 | 608,888 | |||||||
Time Deposits Under $100 | 228,073 | 227,546 | 243,428 | |||||||
Time Deposits $100 or more | 99,630 | 99,518 | 112,705 | |||||||
Total Deposits | 1,190,092 | 1,168,454 | 1,198,197 | |||||||
Accrued Interest Payable and Other Liabilities | 15,665 | 26,433 | 19,781 | |||||||
Total Liabilities | 1,205,757 | 1,194,887 | 1,217,978 | |||||||
Shareholders' Equity: | ||||||||||
Common Stock and Surplus (Shares Outstanding of 11,300, 11,287 and 11,205, respectively) | 59,902 | 59,681 | 58,513 | |||||||
Retained Earnings | 108,976 | 104,357 | 92,312 | |||||||
Accumulated Other Comprehensive (Loss) Income, Net | (4,494 | ) | (3,707 | ) | 2,710 | |||||
Total Equity | 164,384 | 160,331 | 153,535 | |||||||
Total Liabilities and Equity | $ | 1,370,141 | $ | 1,355,218 | $ | 1,371,513 | ||||
3
Mid-State Bancshares
Consolidated Statements of Income
(Unauditedfigures in 000's except earnings per share data)
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Three Month Period Ended March 31, |
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2000 |
1999 |
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Interest Income: | ||||||
Interest and fees on loans | $ | 19,925 | $ | 16,292 | ||
Interest on investment securitiestaxable | 4,772 | 6,655 | ||||
Interest on investment securitiestax exempt | 1,376 | 694 | ||||
Interest on fed funds sold, other | 212 | 776 | ||||
Total Interest Income | 26,285 | 24,417 | ||||
Interest Expense: | ||||||
Interest on NOW, money market and savings | 2,376 | 2,438 | ||||
Interest on time deposits less than $100 | 2,679 | 2,834 | ||||
Interest on time deposits of $100 or more | 1,255 | 1,312 | ||||
Interest on mortgages, other | 134 | 71 | ||||
Total Interest Expense | 6,444 | 6,655 | ||||
Net Interest Income before provision | 19,841 | 17,762 | ||||
Less: Provision for loan losses | | 15 | ||||
Net Interest Income after provision | 19,841 | 17,747 | ||||
Other operating income: | ||||||
Service charges and fees | 1,757 | 1,639 | ||||
Other non interest income | 2,618 | 2,296 | ||||
Total other operating income | 4,375 | 3,935 | ||||
Other operating expense: | ||||||
Salaries and employee benefits | 8,118 | 7,600 | ||||
Occupancy and furniture | 2,078 | 1,941 | ||||
Other operating expenses | 4,037 | 3,922 | ||||
Total other operating expense | 14,233 | 13,463 | ||||
Income before taxes | 9,983 | 8,219 | ||||
Provision for income taxes | 3,556 | 2,584 | ||||
Net Income | $ | 6,427 | $ | 5,635 | ||
Earnings per sharebasic | $ | 0.57 | $ | 0.50 | ||
diluted | $ | 0.56 | $ | 0.50 |
4
Mid-State Bancshares
Consolidated Statements of Comprehensive Income
(Unauditedfigures in 000's)
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Three Month Period Ended March 31, |
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2000 |
1999 |
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Net Income | $ | 6,427 | $ | 5,635 | |||
Other Comprehensive Income Before Taxes: | |||||||
Unrealized losses on securities available for sale: | |||||||
Unrealized holding losses arising during period | (1,316 | ) | (3,015 | ) | |||
Reclassification adjustment for losses included in net income | 4 | | |||||
Other comprehensive loss, before tax | (1,312 | ) | (3,015 | ) | |||
Income tax benefit related to items in comprehensive income | (525 | ) | (1,350 | ) | |||
Other Comprehensive Loss, Net of Taxes | (787 | ) | (1,665 | ) | |||
Comprehensive Income | $ | 5,640 | $ | 3,970 | |||
5
Mid-State Bancshares
Consolidated Statements of Cash Flows
(Unauditedfigures in 000's)
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Three Month Period Ended March 31, |
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2000 |
1999 |
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OPERATING ACTIVITIES | |||||||
Net Income | $ | 6,427 | $ | 5,635 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for credit losses | | 15 | |||||
Depreciation and amortization | 690 | 1,029 | |||||
Net amortization of prem./discounts-investments | 372 | 593 | |||||
Changes in assets and liabilities: | |||||||
Accrued interest receivable | (671 | ) | (124 | ) | |||
Other liabilities | 3,502 | 4,432 | |||||
Other assets | 213 | (1,562 | ) | ||||
Other changes, net | 1,112 | (1,001 | ) | ||||
Net cash provided by operating activities | 11,645 | 9,017 | |||||
INVESTING ACTIVITIES | |||||||
Net cash from proceeds of real estate | | 67 | |||||
Proceeds from sales and maturities of investments | 55,745 | 83,654 | |||||
Purchases of investments | (1,715 | ) | (64,796 | ) | |||
(Increase) Decrease in loans | (62,876 | ) | 2,803 | ||||
Purchases of premises and equipment, net | (477 | ) | (823 | ) | |||
Net cash (used in) provided by investing activities | (9,323 | ) | 20,905 | ||||
FINANCING ACTIVITIES | |||||||
Increase (Decrease) in deposits | 21,638 | (26,281 | ) | ||||
(Decrease) Increase in short-term borrowings | (14,270 | ) | 1,665 | ||||
Exercise of stock options | 221 | 182 | |||||
Cash dividends paid | (1,580 | ) | (1,209 | ) | |||
Retirement of company stock | 0 | (489 | ) | ||||
Net cash provided by (used in) financing activities | 6,009 | (26,132 | ) | ||||
Increase in cash and cash equivalents | 8,331 | 3,790 | |||||
Cash and cash equivalents, beginning of period | 73,580 | 136,422 | |||||
Cash and cash equivalents, end of period | $ | 81,911 | $ | 140,212 | |||
6
Mid-State Bancshares
Notes to Consolidated Financial Statements
(Information with respect to interim periods is unaudited)
NOTE ABASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION
The accompanying consolidated financial statements include the accounts of Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank which includes the Bank and the Bank's subsidiaries, MSB Properties and Mid Coast Land Company (collectively the "Company," "Bank" or "Mid-State"). All significant intercompany transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the Form 10-K Annual Report for the year ended December 31, 1999 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, 1999. 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 BEARNINGS 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.
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Three Month Period Ended March 31, 2000 |
Three Month Period Ended March 31, 1999 |
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Earnings |
Shares |
EPS |
Earnings |
Shares |
EPS |
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Net Income as reported | $ | 6,427 | $ | 5,635 | ||||||||||||
Basic Earnings Per Share: | ||||||||||||||||
Income available to Common Shareholders | $ | 6,427 | 11,294 | $ | 0.57 | $ | 5,635 | 11,197 | $ | 0.50 | ||||||
Effect of dilutive securities: | ||||||||||||||||
Stock Options | 122 | 92 | ||||||||||||||
Diluted Earnings Per Share: | ||||||||||||||||
Income available to Common Shareholders | $ | 6,427 | 11,416 | $ | 0.56 | $ | 5,635 | 11,289 | $ | 0.50 |
7
Item 2Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial DataSummary. The following table provides certain selected financial data as of and for the three months ended March 31, 2000 and 1999 (unaudited).
Consolidated Financial DataMid-State Bancshares
(Unaudited)
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Year-to-Date |
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Mar. 31, 2000 |
Mar. 31, 1999 |
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(In thousands, except per share data) |
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Interest Income (not taxable equivalent) | $ | 26,285 | $ | 24,417 | ||
Interest Expense | 6,444 | 6,655 | ||||
Net Interest Income | 19,841 | 17,762 | ||||
Provision for Loan Losses | | 15 | ||||
Net Interest Income after provision for loan losses | 19,841 | 17,747 | ||||
Non-interest income | 4,375 | 3,935 | ||||
Non-interest expense | 14,233 | 13,463 | ||||
Income before income taxes | 9,983 | 8,219 | ||||
Provision for income taxes | 3,556 | 2,584 | ||||
Net Income | $ | 6,427 | $ | 5,635 | ||
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Year-to-Date |
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Mar. 31, 2000 |
Mar. 31, 1999 |
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(In thousands, except per share data) |
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Per share: | |||||||
Net Income (adjusted for stock dividends)basic | $ | 0.57 | $ | 0.50 | |||
Net Income (adjusted for stock dividends)diluted | $ | 0.56 | $ | 0.50 | |||
Weighted average shares used in Basic E.P.S. calculation | 11,294 | 11,197 | |||||
Weighted average shares used in Diluted E.P.S. calculation | 11,416 | 11,289 | |||||
Cash dividends | $ | 0.16 | $ | 0.11 | |||
Book value at period-end | $ | 14.55 | $ | 13.70 | |||
Ending Shares | 11,300 | 11,205 | |||||
Financial Ratios |
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Return on assets | 1.90 | % | 1.66 | % | |||
Return on equity | 15.92 | % | 15.00 | % | |||
Net interest margin (not taxable equivalent) | 6.37 | % | 5.76 | % | |||
Net interest margin (taxable equivalent yield) | 6.66 | % | 5.91 | % | |||
Net loan losses to avg. loans | 0.09 | % | 0.28 | % | |||
Efficiency ratio | 58.8 | % | 62.1 | % | |||
Period Averages |
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Total Assets | $ | 1,362,725 | $ | 1,373,733 | |||
Total Loans | 799,238 | 662,337 | |||||
Total Earning Assets | 1,253,328 | 1,250,637 | |||||
Total Deposits | 1,193,270 | 1,206,566 | |||||
Common Equity | 162,358 | 152,313 |
8
Balance SheetAt Period-End |
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Cash and due from banks | $ | 67,641 | $ | 71,847 | |||
Investments and Fed Funds Sold | 423,832 | 573,690 | |||||
Loans, net of deferred fees, before allowance for loan losses | 831,439 | 672,909 | |||||
Allowance for Loan Losses | (12,931 | ) | (14,002 | ) | |||
Other assets | 60,160 | 67,069 | |||||
Total Assets | $ | 1,370,141 | $ | 1,371,513 | |||
Non-interest bearing deposits | $ | 232,370 | $ | 233,176 | |||
Interest bearing deposits | 957,722 | 965,021 | |||||
Other borrowings | 1,087 | 4,715 | |||||
Other liabilities | 14,578 | 15,066 | |||||
Shareholders' equity | 164,384 | 153,535 | |||||
Total Liabilities and Shareholders' equity | $ | 1,370,141 | $ | 1,371,513 | |||
Asset Quality & CapitalAt Period-End | |||||||
Non-accrual loans | $ | 4,812 | $ | 1,564 | |||
Loans past due 90 days or more | 2,180 | 1,708 | |||||
Other real estate owned | 77 | 206 | |||||
Total non performing assets | $ | 7,069 | $ | 3,478 | |||
Loan loss allowance to loans, gross | 1.6 | % | 2.1 | % | |||
Non-accrual loans to total loans, gross | 0.6 | % | 0.2 | % | |||
Non performing assets to total assets | 0.5 | % | 0.3 | % | |||
Allowance for loan losses to non performing loans | 184.9 | % | 427.9 | % | |||
Equity to average assets (leverage ratio) |
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12.3 |
% |
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10.9 |
% |
Tier One capital to risk-adjusted assets | 16.0 | % | 16.5 | % | |||
Total capital to risk-adjusted assets | 17.3 | % | 17.8 | % |
Performance Summary. The Company posted net income of $6.4 million for the three months ended March 31, 2000 compared to $5.6 million in the like 1999 period. These earnings represent an annualized return on assets of 1.90% and 1.66%, respectively, for the comparable periods. The annualized return on equity was 15.92% for the first quarter of 2000 compared to 15.00% in the first quarter of 1999. On a per share basis, diluted earnings were $0.56 in the 2000 period compared to $0.50 in the like quarter of 1999.
Net Interest Income. Mid-State's year-to-date annualized yield on interest earning assets was 8.44% for the first three months of 2000 (8.73% on a taxable equivalent basis) compared to 7.92% in the like 1999 period (8.07% on a taxable equivalent basis). This increase in yield is related to a change in mix of earning assets (average loans represented 63.8% of earning assets in the first quarter of 2000 compared to 53.0% one year earlier) and to the rise in interest rates when comparing the two periods. The Prime Rate, to which many of the Bank's loans are tied, averaged 8.69% in the 2000 period compared to 7.75% in the 1999 period. Conversely, annualized interest expense as a percent of earning assets declined slightly from 2.16% in the first three months of 1999 to 2.07% in this year's first three months. This reflected the fact that the Bank did not roll over certain higher cost time deposits which matured in the latter part of 1999. Overall, Mid-State's annualized Net Interest Income, expressed as a percent of earning assets, improved from 5.76% for the three month period of 1999 (5.91% on a taxable equivalent basis) to 6.37% in the comparable 2000 period (6.66% on a taxable equivalent basis). Annualized Net Interest Income as a percent of average total assets improved from 5.24% in the first three months of 1999 (5.38% taxable equivalent) to 5.86% in the comparable 2000 period (6.13% taxable equivalent).
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Earning assets on average were $2.7 million higher in the three month 2000 period than the comparable 1999 period ($1,253.3 million compared to $1,250.6 million). Average deposits in this same time-frame were down $13.3 million, ($1,193.3 million compared to $1,206.6 million), reflecting a conscious decision to reduce dependence on certain high cost brokered deposits acquired through the Bank's recent merger with City Commerce Bank. In spite of the decline in deposits, the Bank did achieve the increase in earning assets as a result of a combination of three factors(1) the retention of earnings in the Bank, (2) the decline in investments in real estate and (3) a reduction in non earning balances held at the Federal Reserve Bank.
Provision and Allowance for Loan Losses. Mid-State did not make a provision to the allowance for loan losses in the first quarter of 2000. The Bank provided $15 thousand in the comparable 1999 quarter. Management continues to believe that the allowance, which stands at 1.6% of total loans at March 31, 2000, down from 2.1% one year earlier, is adequate to cover future losses. The $12.9 million allowance is about 185% of the level of non performing assets which stand at $7.1 million compared to $3.5 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. Other Real Estate Owned reflects property acquired through foreclosure which had secured Bank loans on which the borrower defaulted. While continuing efforts are made to improve overall asset quality, Management is unable to estimate with certainty, how and under what terms, problem assets will be resolved.
Changes in the allowance for loan losses (in thousands) for the periods ended March 31, 2000 and 1999 are as follows:
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March 31, |
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2000 |
1999 |
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Balance at beginning of period | $ | 13,105 | $ | 14,441 | |||
Provision for loan losses | | 15 | |||||
Loans charged off | (286 | ) | (655 | ) | |||
Recoveries of loans previously Charged-off | 112 | 201 | |||||
Balance at end of period | $ | 12,931 | $ | 14,002 | |||
At March 31, 2000, the recorded investments in loans which have been identified as impaired totaled $6,461,000, all of which were tied to corresponding valuation allowances totaling $1,416,000. Impaired loans totaled $5,195,000 at March 31, 1999, all of which were tied to corresponding valuation allowances totaling $1,591,000. 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 March 31, 2000, the average recorded investment in impaired loans was $5,554,000 compared to $5,023,000 in the 1999 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 three months of 2000 was $4.4 million, up from $3.9 million earned in the 1999 period, an increase of 11.2%. The increase was related to improved service charge income of some $118 thousand over the comparable periods, to increases in the Company's merchant mastercard income of about $221 thousand, and to the reversal of a reserve on investments in real estate of $261 thousand. Income from mortgage origination and loan servicing was off some $165 thousand from the levels in the first quarter of 1999, partially offsetting these gains.
Non-interest Expense. Non-interest expense for the first three months of 2000 was $14.2 million. This compares to $13.5 million in the comparable 1999 period. Increases in salaries accounted for $47 thousand of this increase, while increases in employee benefits accounted for $471 thousand of the increase. While
10
other categories of expense showed minor declines, others showed minor increases, all of which in total were expense neutral.
Provision for Income Taxes. The year-to-date provision for income taxes was $3.6 million, compared to $2.6 million for the same period in 1999. The effective tax rate in 2000 was 35.6% compared to 31.4% in 1999. The effective tax rate in 2000 is somewhat higher than the prior year's first quarter due to the realization of certain tax benefits available to Mid-State in 1999. 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 at March 31, 2000 totaled $1,370.1 million, about the same as the level one year earlier of $1,371.5 million. The mix of these assets has changed considerably from one year earlier. Net loans have increased from $658.9 million at the end of March, 1999 to $818.5 million in 2000. Investments and fed funds sold were significantly lower, having declined from $573.7 million one year earlier to $423.8 million this year. Other non earning asset categories declined when comparing 2000 to 1999.
There was an $8.1 million decrease in deposits primarily related to the Bank's conscious decision to reduce dependence on certain high cost brokered deposits acquired through the Bank's recent merger with City Commerce Bank. Stockholders' equity increased by $10.8 million when comparing March 31, 2000 over March 31, 1999, owing primarily to the retention of earnings over the intervening 12 month period which was partially offset by an unrealized loss on available for sale securities over the same time period. There was a modest decrease in other borrowing and liabilities of $4.1 million, comparing the quarter-end periods.
Mid-State's loan to deposit ratio of 69.9% at March 31, 2000 is up significantly from the 56.2% ratio one year earlier. There is ample internal liquidity to fund improvements in this ratio through Mid-State's investment portfolio which has approximately 92% of it's investments categorized as available for sale.
Investment Securities. Fed funds sold represent $14.3 million of the $423.8 million portfolio noted above. Of the remaining $409.5 million, 20% is invested in U.S. Treasury securities, 21% is invested in U.S. Government agency obligations, 57% is invested in securities issued by states and political subdivisions in the U.S. and 2% is invested in mortgage-backed securities and other securities. Eighty percent of all investment securities mature prior to December 31, 2004. Approximately 31% of these securities mature in less than one year. The Bank's investment in mortgage-backed securities consist of investments in FNMA and FHLMC pools 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. Total stockholders' equity increased from $153.5 million at March 31, 1999 to $164.4 million at March 31, 2000. Net income over this 12 month time period of $22.8 million less cash dividends of $6.2 million less a $7.2 million increase in unrealized losses on available for sale securities plus $1.4 million in stock options exercised accounted for the $10.8 million increase. Capital continues to be strong with Mid-State Bancshare's ratio of tier one equity capital to average assets ("leverage ratio") at 12.3% up from 10.9% one year earlier. Mid-State's ratios of tier one capital and total capital to risk-adjusted assets declined, principally because of the change in asset mix away from investment securities with lower risk weightings into loans with their 100% risk weightings. The Tier One ratio went from 16.5% one year earlier to 16.0% at March 31, 2000. The Total Capital ratio went from 17.8% one year earlier to 17.3% at March 31, 2000. Mid-State substantially exceeds the standards to be considered well capitalized which are 6.0% for the ratio of tier one capital to risk weighted assets, 10.0% for the ratio of total capital to risk weighted assets, and 5.0% for the ratio of tier one capital to total assets.
Liquidity. Management is not aware of any future capital expenditures or other significant demands or commitments which would severely impair liquidity.
11
Disclosures Concerning Year 2000 IssuesYear 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. 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.
Important Factors Relating to Forward-Looking Statements. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. All of the statements contained in this Quarterly Report on Form 10-Q which are not identified as historical should be considered forward-looking. In connection with certain forward-looking statements contained in this Quarterly Report on Form 10-Q and those that may be made in the future by or on behalf of the Company which are identified as forward-looking, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. Such factors include, but are not limited to, the real estate market, the availability of loans at acceptable prices, the general level of economic activity both locally and nationally, interest rates, the actions by the Company's regulatory agencies, and actions by competitors of the Company. Accordingly, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be realized or that actual results will not be significantly higher or lower. The forward-looking statements have not been audited by, examined by or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information contained herein. The inclusion of the forward-looking statements contained in this Quarterly Report on Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be achieved. In light of the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.
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Item 3Quantitative and Qualitative Disclosure About Market Risk
The Bank's risk exposure to changes in interest rates is minimal. A recent review of the potential changes in the Bank's net interest income over a 12 month time horizon showed that it could fluctuate under very extreme alternative rate scenarios from between +2.3% and -4.8% of the base case (rates unchanged) 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.
|
Change From Base |
||
---|---|---|---|
Rates Down Very Significant (Prime down to 4.50% over 12 months) |
-4.8 | % | |
Rates Down Significant (Prime down to 6.00% over 12 months) |
-3.4 | % | |
Rates Down Modestly (Prime down to 7.50% over 12 months) |
-2.2 | % | |
Base CaseRates Unchanged (Prime unchanged at 8.50% over 12 months) |
| ||
Rates Up Modestly (Prime up to 9.50% over 12 months) |
+2.2 | % | |
Rates Up Aggressive (Prime up to 11.00% over 12 months) |
+2.1 | % | |
Rates Up Very Aggressive (Prime up to 12.50% over 12 months) |
+2.3 | % |
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 $630.0 million) interest is based on rates set at the discretion of Management ranging from 0.50% to 2.37%. In a downward rate environment, there is a limit to how far these deposit instruments can be re-priced and this behavior is similar to that of fixed rate instruments. In an upward rate environment, the magnitude and timing of changes in rates on these deposits is assumed to be more reflective of variable rate instruments. These characteristics are the main reasons that a 4% decline in Prime decreases net interest income by 4.8% while a 4% increase in Prime increases net interest income just 2.3%. 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 tocompetitors' behavior, economic conditions both locally and nationally, actions taken by the Federal Reserve Board, customer behavior, and Management's responses. Historically, the Bank has been able to manage its Net Interest Income in a fairly narrow range reflecting the Bank's relative insensitivity to interest rate changes. The impact of prepayment behavior on mortgages, real estate loans, mortgage backed securities, securities with call features, etc. is not considered material to the sensitivity analysis. Over the last 5 years, and excluding the first quarter of 2000, the Bank's net interest margin (which is net interest income divided by average earning assets of the Bank) has ranged from a low of 5.71% to a high of
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6.09% (not taxable equivalent). The Bank's net interest margin in the first quarter of 6.37% is high by historical standards. 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 in view of its historical performance, but no assurances can be given that actual experience will fall within this range.
The Bank's exposure with respect to interest rate derivatives, exchange rate fluctuations, and/or commodity price movements is nil. The Bank does not own any instruments within these markets.
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PART IIOTHER INFORMATION
Mid-State is not a party to any material legal proceeding.
Item 2Changes 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 3Defaults Upon Senior Securities
Not applicable.
Item 4Submission of Matters to a Vote of Security Holders
No matters were submitted to the Shareholders for a vote during the first quarter of 2000.
Not applicable.
Item 6Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit No. |
Exhibit |
|
---|---|---|
27 | Financial Data Schedule (for SEC use only) |
B) Reports on Form 8-K
The Company filed two reports on Form 8-K during the first quarter of 2000. On February 8, 2000, the Company filed one report on Form 8-K concerning the appointment of Mr. James W. Lokey as President and Chief Executive Officer of Mid-State Bank, the Company's wholly owned subsidiary, effective March 1, 2000. Mr. Carrol R. Pruett, former Mid-State Bank President continues as Chairman of the Board of Mid-State Bank and Mid-State Bancshares, as well as, President and Chief Executive Officer of Mid-State Bancshares.
The Company filed its second report on Form 8-K on March 21, 2000. This report reflected the Company's announcement that the Board of Directors had authorized a stock repurchase program for up to five percent (5%) of its outstanding shares. Based on the outstanding shares at that time, the buyback may result in the purchase of up to approximately 565,000 shares of stock. The repurchases will be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions in compliance with the Securities and Exchange Commission (SEC) rules. The program began in April 2000 and is expected to be effective for one year.
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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: May 8, 2000 |
|
By: |
/s/ CARROL R. PRUETT CARROL R. PRUETT Chairman and Chief Executive Officer |
Date: May 8, 2000 |
|
By |
/s/ JAMES G. STATHOS JAMES G. STATHOS Executive Vice President and Chief Financial Officer |
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Mid-State Bancshares Consolidated Statements of Financial Position (Interim Periods Unauditedfigures in 000's)Mid-State Bancshares Consolidated Statements of Income (Unauditedfigures in 000's except earnings per share data)
Mid-State Bancshares Consolidated Statements of Comprehensive Income (Unauditedfigures in 000's)
Mid-State Bancshares Consolidated Statements of Cash Flows (Unauditedfigures in 000's)
Mid-State Bancshares Notes to Consolidated Financial Statements (Information with respect to interim periods is unaudited)