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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 September 30, 2002.

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
(State or Other Jurisdiction of
Incorporation or Organization)
  77-0442667
(I.R.S. Employer Identification No.)

1026 Grand Ave.
Arroyo Grande, CA
(Address of Principal Executive Offices)

 

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 ý    No o

As of November 5, 2002, the aggregate market value of the common stock held by non-affiliates of the Company was: $406,644,982.

Number of shares of common stock of the Company outstanding as of November 5, 2002: 23,790,233 shares.





Mid-State Bancshares
September 30, 2002
Index

 
   
   
  Page
PART I—FINANCIAL INFORMATION    

 

 

Item 1—

 

Financial Statements

 

 

 

 

 

 

Consolidated Statements of Financial Position (Unaudited)

 

3

 

 

 

 

Consolidated Statements of Income (Unaudited)

 

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

 

5

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

6

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

8

 

 

Item 2—

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

12

 

 

Item 3—

 

Quantitative and Qualitative Disclosure About Market Risk

 

21

 

 

Item 4—

 

Controls and Procedures

 

22

PART II—OTHER INFORMATION

 

 

 

 

Item 1—

 

Legal Proceedings

 

23

 

 

Item 2—

 

Changes in Securities and Use of Proceeds

 

23

 

 

Item 3—

 

Defaults Upon Senior Securities

 

23

 

 

Item 4—

 

Submission of Matters to a Vote of Security Holders

 

23

 

 

Item 5—

 

Other Information

 

23

 

 

Item 6—

 

Exhibits and Reports on Form 8-K

 

23

 

 

Signatures

 

24

 

 

Certifications

 

25

 

 

EX-99.1 Certification Pursuant to 18 U.S.C. Sec. 1350

 

 

2



PART I—FINANCIAL INFORMATION
Item 1—Financial Statements

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

 
  Sept. 30,
2002

  Dec. 31,
2001

  Sept. 30,
2001

 
ASSETS                    
Cash and Due From Banks   $ 110,454   $ 102,970   $ 95,742  
Fed Funds Sold     5,000     73,000     72,000  

Securities Available For Sale

 

 

632,124

 

 

451,345

 

 

441,492

 

Loans, Net of Unearned Income

 

 

1,109,944

 

 

1,149,703

 

 

1,176,486

 
Allowance for Loan Losses     (17,465 )   (19,073 )   (18,238 )
   
 
 
 
Net Loans     1,092,479     1,130,630     1,158,248  

Premises and Equipment, Net

 

 

24,555

 

 

25,851

 

 

26,047

 
Accrued Interest Receivable     13,700     11,060     12,797  
Investments in Real Estate, Net     200     233     231  
Goodwill     33,448     33,448     35,383  
Other Intangibles     8,806     9,294     6,894  
Other Assets     7,256     15,833     14,857  
   
 
 
 
  Total Assets   $ 1,928,022   $ 1,853,664   $ 1,863,691  
   
 
 
 
LIABILITIES AND EQUITY                    
Non Interest Bearing Demand   $ 391,350   $ 367,370   $ 359,628  
NOW Accounts, Money Market and Savings Deposits     842,791     769,173     765,555  
Time Deposits Under $100     253,391     280,667     287,333  
Time Deposits $100 or More     151,805     166,956     177,220  
   
 
 
 
  Total Deposits     1,639,337     1,584,166     1,589,736  

Other Borrowings

 

 

11,573

 

 

17,714

 

 

14,238

 
Allowance for Losses—
Unfunded Commitments
    1,687     1,586     2,297  
Accrued Interest Payable
and Other Liabilities
    23,515     15,647     23,678  
   
 
 
 
  Total Liabilities     1,676,112     1,619,113     1,629,949  
Shareholders' Equity:                    
Common Stock, No Par Value:                    
  Authorized—100,000 shares                    
  Outstanding—23,839, 24,089 and 24,197, respectively     80,098     84,872     87,346  
Undivided Profits     157,200     143,257     137,184  
Accumulated Other Comprehensive Income, Net of Taxes     14,612     6,422     9,212  
   
 
 
 
  Total Equity     251,910     234,551     233,742  
   
 
 
 
  Total Liabilities and Equity   $ 1,928,022   $ 1,853,664   $ 1,863,691  
   
 
 
 

3



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

 
  Three Month Period
Ended September 30,

  Nine Month Period
Ended September 30,

 
  2002
  2001
  2002
  2001
Interest Income:                        
  Interest and fees on loans   $ 20,771   $ 24,279   $ 64,307   $ 68,482
  Interest on investment securities                      
    U.S. Treasury securities     296     328     1,068     1,337
    U.S. Government agencies and corporations     2,579     1,482     6,383     3,786
    Obligations of states and political Subdivisions and other securities     3,175     3,093     9,454     9,501
  Interest on fed funds sold and other     343     720     1,013     1,540
   
 
 
 
      Total Interest Income     27,164     29,902     82,225     84,646
   
 
 
 
Interest Expense:                        
  Interest on NOW, money market and savings     1,364     2,043     3,867     6,327
  Interest on time deposits less than $100     1,694     2,734     5,811     8,807
  Interest on time deposits of $100 or more     907     1,579     3,137     5,191
  Interest on mortgages, other     56     71     163     191
   
 
 
 
      Total Interest Expense     4,021     6,427     12,978     20,516
   
 
 
 
Net Interest Income before provision     23,143     23,475     69,247     64,130
Less: Provision for loan losses         3,200     600     3,800
   
 
 
 
Net Interest Income after provision     23,143     20,275     68,647     60,330
   
 
 
 
Other Operating Income:                        
  Service charges and fees     2,155     1,920     6,584     5,818
  Other non-interest income     4,020     3,265     11,318     9,961
   
 
 
 
      Total Other Operating Income     6,175     5,185     17,902     15,779
   
 
 
 
Other Operating Expense:                        
  Salaries and employee benefits     9,122     8,588     27,634     25,022
  Occupancy and furniture     2,873     2,187     8,277     6,607
  Other operating expenses     6,272     5,773     17,573     16,267
   
 
 
 
      Total Other Operating Expense     18,267     16,548     53,484     47,896
   
 
 
 
Income Before Taxes     11,051     8,912     33,065     28,213
Provision for income taxes     3,965     3,317     11,925     9,294
   
 
 
 
Net Income   $ 7,086   $ 5,595   $ 21,140   $ 18,919
   
 
 
 

Earnings per share—basic

 

$

0.30

 

$

0.26

 

$

0.88

 

$

0.86
                                —diluted   $ 0.29   $ 0.25   $ 0.85   $ 0.84
Dividends per share   $ 0.10   $ 0.09   $ 0.30   $ 0.27
   
 
 
 

4



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

 
  Three Month Period
Ended September 30,

  Nine Month Period
Ended September 30,

 
 
  2002
  2001
  2002
  2001
 
Net Income   $ 7,086   $ 5,595   $ 21,140   $ 18,919  
Unrealized gains on securities available for sale:                          
Unrealized holding gains arising during period     9,301     8,542     13,662     13,412  
Reclassification adjustment for (gains) included in net income     (21 )   (6 )   (12 )   (69 )
   
 
 
 
 
Other comprehensive income, before tax     9,280     8,536     13,650     13,343  
Income tax provision related to items in comprehensive income     3,712     3,415     5,460     5,338  
   
 
 
 
 
Other Comprehensive Income, Net of Taxes     5,568     5,121     8,190     8,005  
   
 
 
 
 
Total Comprehensive Income   $ 12,654   $ 10,716   $ 29,330   $ 26,924  
   
 
 
 
 

5



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

 
  Nine Month Period
Ended September 30,

 
 
  2002
  2001
 
OPERATING ACTIVITIES              
  Net income   $ 21,140   $ 18,919  
  Adjustments to reconcile net income to net cash provided by operating activities:              
  Provision for loan losses     600     3,800  
  Depreciation     3,277     2,941  
  Net amortization of premiums/discounts     2,863     785  
  Amortization of other intangibles     960     73  
  Increase in mortgage servicing rights     (472 )   (277 )
  Change in deferred loan fees     (32 )   717  
  Changes in assets and liabilities:              
    Accrued interest receivable     (2,640 )   (43 )
    Other assets, net     3,117     (226 )
    Other liabilities     7,969     (3,492 )
   
 
 
  Net cash provided by operating activities     36,782     23,197  
   
 
 
INVESTING ACTIVITIES              
  Net cash proceeds from investment in real estate     33     (3 )
  Proceeds from sales and maturities of investments     73,280     115,512  
  Purchases of investments     (243,272 )   (122,378 )
  Decrease (increase) in loans     37,583     (69,202 )
  Cash acquired in acquisition, net of cash used         53,308  
  Purchases of premises and equipment, net     (1,981 )   (30 )
   
 
 
  Net cash used in investing activities     (134,357 )   (22,793 )
   
 
 
FINANCING ACTIVITIES              
  Increase in deposits     55,171     104,576  
  Decrease in other borrowings     (6,141 )   (16,002 )
  Exercise of stock options     792     379  
  Cash dividends paid     (7,197 )   (5,898 )
  Retirement of company stock     (5,566 )   (4,705 )
   
 
 
  Net cash provided by financing activities     37,059     78,350  
   
 
 
  (Decrease) increase in cash and cash equivalents     (60,516 )   78,754  
  Cash and cash equivalents, beginning of period     175,970     88,988  
   
 
 
  Cash and cash equivalents, end of period   $ 115,454   $ 167,742  
   
 
 
Supplemental disclosure of cash flow information:              
  Cash paid during the period for interest   $ 13,364   $ 20,247  
  Cash paid during the period for taxes on income     9,500     8,700  

6


Supplemental disclosure of cash flow information (continued):
(Unaudited—figures in 000's)

 
  Nine Month Period
Ended September 30,

 
 
  2002
  2001
 
ACQUISITIONS              
The following table outlines the assets acquired, liabilities assumed and cash paid:              
 
Fair value of assets acquired

 

$


 

$

292,901

 
  Goodwill created in acquisition         34,135  
  Liabilities assumed         (255,536 )
   
 
 
  Acquisition price         71,500  
 
Less:

 

 

 

 

 

 

 
    Common stock issued         (39,900 )
    Amounts payable to Americorp shareholders and other accruals         (8,502 )
   
 
 
  Cash paid         (23,098 )
  Cash acquired         76,406  
   
 
 
  Cash acquired, net of cash paid   $   $ 53,308  
   
 
 

7



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

NOTE A—BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION

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

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

NOTE B—EARNINGS PER SHARE

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

 
  Three Month Period Ended
Sept. 30, 2002

  Three Month Period Ended
Sept. 30, 2001

 
  Earnings
  Shares
  EPS
  Earnings
  Shares
  EPS
Net Income as reported   $ 7,086   $ 5,595                      

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Income available to Common Shareholders   $ 7,086     23,924   $ 0.30   $ 5,595   21,827   $ 0.26

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Stock Options           891               599      

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Income available to Common Shareholders   $ 7,086     24,815   $ 0.29   $ 5,595   22,426   $ 0.25

8


       

 
  Nine Month Period Ended
Sept. 30, 2002

  Nine Month Period Ended
Sept. 30, 2001

 
  Earnings
  Shares
  EPS
  Earnings
  Shares
  EPS
Net Income as reported   $ 21,140             $ 18,919          

Basic Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Income available to Common Shareholders   $ 21,140   24,026   $ 0.88   $ 18,919   21,894   $ 0.86

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Stock Options         834               520      

Diluted Earnings Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Income available to Common Shareholders   $ 21,140   24,860   $ 0.85   $ 18,919   22,414   $ 0.84

NOTE C—RECENT ACCOUNTING PRONOUNCEMENTS

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

        SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life, rather goodwill will be subject to at least an annual assessment for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, with a provision that states goodwill acquired in a business combination for which the acquisition date is after June 30, 2001 should not be amortized. Management adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 resulted in $1,672,000 not being recognized as amortization expense for the nine month period ended September 30, 2002.

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

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Terminations Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to the date of an entity's commitment to an exit plan as required under EITF Issue No. 94-3. SFAS No. 146 also requires that measurement of the liability associated with exit or disposal activities be at fair value. SFAS No. 146 is effective for the Company for exit or disposal activities that are initiated after

9



December 31, 2002. The implementation of SFAS No. 146 is not expected to have a material impact on the Company's financial statements.

        In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and FASB Interpretation No. 9, "Applying APB Opinions Nos. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method." This Statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of SFAS No. 72 and FASB Interpretation No. 9. SFAS No. 147 also amends SFAS No. 144 to include long-term customer-relationship intangible assets such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. The provisions of SFAS No. 147 are effective October 1, 2002. Management does not anticipate the adoption of SFAS No. 147 having a material impact on the Company's results of operations or financial condition.

NOTE D—OTHER INTANGIBLE ASSETS

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

 
  Sept. 30, 2002
  Sept. 30, 2001
 
  Gross
Amount

  Accumulated
Amortization

  Net Carrying
Amount

  Gross
Amount

  Accumulated
Amortization

  Net Carrying
Amount

Core Deposit Intangible   $ 8,869   $ (1,100 ) $ 7,769   $ 6,266   $ (— ) $ 6,266

Originated Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Servicing Rights     1,633     (596 )   1,037     955     (327 )   628
   
 
 
 
 
 

Total Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Intangible Assets   $ 10,502   $ (1,696 ) $ 8,806   $ 7,221   $ (327 ) $ 6,894
   
 
 
 
 
 

       

 
  Dec. 31, 2001
 
  Gross
Amount

  Accumulated
Amortization

  Net Carrying
Amount

Core Deposit Intangible   $ 8,869   $ (296 ) $ 8,573

Originated Mortgage

 

 

 

 

 

 

 

 

 
  Servicing Rights     1,161     (440 )   721
   
 
 
Total Other                  
  Intangible Assets   $ 10,030   $ (736 ) $ 9,294
   
 
 

10


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

 
  Three Month Period
Ended Sept. 30,

  Nine Month Period
Ended Sept. 30,

 
  2002
  2001
  2002
  2001
Amortization of Core Deposit Intangible   $ 268   $   $ 804   $

Amortization of Originated Mortgage Servicing Rights

 

 

77

 

 

32

 

 

156

 

 

73
   
 
 
 
Total aggregate amortization expense   $ 345   $ 32   $ 960   $ 73
   
 
 
 

        The projected amortization expense for intangible assets, assuming no further acquisitions or dispositions, is approximately $1.3 million per year over the next five years.

NOTE E—GOODWILL

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

        The following table presents net income and basic and diluted earnings per common share, adjusted to reflect results as if the non-amortization provisions of SFAS 142 had not been in effect for the periods presented:

 
  Three Month Period
Ended Sept. 30,

  Nine Month Period
Ended Sept. 30,

 
  2002
  2001
  2002
  2001
Net Income:                        
Reported net income   $ 7,086   $ 5,595   $ 21,140   $ 18,919

Less: Amortization of Goodwill, net of taxes

 

 

(323

)

 


 

 

(970

)

 

   
 
 
 
Adjusted Net Income   $ 6,763   $ 5,595   $ 20,170   $ 18,919
   
 
 
 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 
Reported basic earnings per share   $ 0.30   $ 0.26   $ 0.88   $ 0.86

Less: Amortization of Goodwill, net of taxes

 

 

(0.02

)

 


 

 

(0.04

)

 

   
 
 
 
Adjusted basic earnings per share   $ 0.28   $ 0.26   $ 0.84   $ 0.86
   
 
 
 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 
Reported diluted earnings per share   $ 0.29   $ 0.25   $ 0.85   $ 0.84

Less: Amortization of Goodwill, net of taxes

 

 

(0.02

)

 


 

 

(0.04

)

 

   
 
 
 
Adjusted diluted earnings per share   $ 0.27   $ 0.25   $ 0.81   $ 0.84
   
 
 
 

11



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

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

 
  Quarter Ended
  Year-to-Date
 
(Unaudited in thousands, except per share data)

  Sept. 30,
2002

  Sept. 30,
2001

  Sept. 30,
2002

  Sept. 30,
2001

 
Interest Income (not taxable equivalent)   $ 27,164   $ 29,902   $ 82,225   $ 84,646  
Interest Expense     4,021     6,427     12,978     20,516  
   
 
 
 
 
Net Interest Income     23,143     23,475     69,247     64,130  
Provision for Loan Losses         3,200     600     3,800  
   
 
 
 
 
Net Interest Income after provision for loan losses     23,143     20,275     68,647     60,330  
Non-interest income     6,175     5,185     17,902     15,779  
Non-interest expense—operating     18,267     16,548     53,484     47,896  
   
 
 
 
 
Income before income taxes     11,051     8,912     33,065     28,213  
Provision for income taxes     3,965     3,317     11,925     9,294  
   
 
 
 
 
Net Income   $ 7,086   $ 5,595   $ 21,140   $ 18,919  
   
 
 
 
 

Per share:

 

 

 

 

 

 

 

 

 

 

 

 

 
Net Income—basic   $ 0.30   $ 0.26   $ 0.88   $ 0.86  
Net Income—diluted   $ 0.29   $ 0.25   $ 0.85   $ 0.84  
Weighted average shares used in Basic E.P.S.     23,924     21,827     24,026     21,894  
Weighted average shares used in Diluted E.P.S.     24,815     22,426     24,860     22,414  
Cash dividends   $ 0.10   $ 0.09   $ 0.30   $ 0.27  
Book value at period-end               $ 10.57   $ 9.66  
Tangible Book value at period-end               $ 8.79   $ 7.91  
Ending Shares                 23,839     24,197  

Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 
Return on assets     1.47 %   1.44 %   1.51 %   1.71 %
Return on tangible assets     1.50 %   1.44 %   1.54 %   1.71 %
Return on equity     11.31 %   11.70 %   11.69 %   13.64 %
Return on tangible equity     13.63 %   11.84 %   14.18 %   13.78 %
Net interest margin (not taxable equivalent)     5.28 %   6.48 %   5.43 %   6.26 %
Net interest margin (taxable equivalent yield)     5.61 %   6.77 %   5.74 %   6.57 %
Net loan losses to avg. loans     0.62 %   0.80 %   0.25 %   0.28 %
Efficiency ratio     62.3 %   57.7 %   61.4 %   59.9 %

Period Averages

 

 

 

 

 

 

 

 

 

 

 

 

 
Total Assets   $ 1,914,466   $ 1,542,430   $ 1,877,434   $ 1,477,056  
Total Tangible Assets     1,872,173     1,540,171     1,834,976     1,475,133  
Total Loans & Leases     1,081,936     974,885     1,112,715     951,568  
Total Earning Assets     1,739,554     1,438,098     1,705,685     1,370,051  
Total Deposits     1,641,953     1,330,620     1,610,677     1,273,122  
Common Equity     248,608     189,679     241,725     185,448  
Common Tangible Equity     206,315     187,420     199,267     183,525  

12


(unaudited in thousands)

  Sept. 30,
2002

  Sept. 30,
2001

 
Balance Sheet—At Period-End              
Cash and due from banks   $ 110,454   $ 95,742  
Investments and Fed Funds Sold     637,124     513,492  
Loans, net of deferred fees, before allowance for loan losses     1,109,944     1,176,486  
Allowance for Loan Losses     (17,465 )   (18,238 )
Goodwill and Other Intangibles     42,254     42,277  
Other assets     45,711     53,932  
   
 
 
  Total Assets   $ 1,928,022   $ 1,863,691  
   
 
 
Non-interest bearing deposits   $ 391,350   $ 359,628  
Interest bearing deposits     1,247,987     1,230,109  
Other borrowings     11,573     14,238  
Allowance for losses—unfunded commitments     1,687     2,297  
Other liabilities     23,515     23,677  
Shareholders' equity     251,910     233,742  
   
 
 
  Total Liabilities and Shareholders' equity   $ 1,928,022   $ 1,863,691  
   
 
 
Asset Quality & Capital—At Period-End              
Non-accrual loans   $ 10,729   $ 6,845  
Loans past due 90 days or more     4     243  
Other real estate owned          
   
 
 
Total non-performing assets   $ 10,733   $ 7,088  

Loan loss allowance to loans, gross (1)

 

 

1.7

%

 

1.7

%
Non-accrual loans to total loans, gross     1.0 %   0.6 %
Non-performing assets to total assets     0.6 %   0.4 %
Allowance for loan losses to non-performing loans (1)     178.4 %   289.7 %

Equity to average assets (leverage ratio)

 

 

10.5

%

 

12.2

%
Tier One capital to risk-adjusted assets     14.5 %   13.2 %
Total capital to risk-adjusted assets     15.7 %   14.4 %
(1)
Includes allowance for loan losses and allowance for losses — unfunded commitments

        Performance Summary.    The Company posted net income of $7.1 million for the three months ended September 30, 2002, compared to $5.6 million earned in the like 2001 period. Diluted earnings per share were $0.29 in the third quarter of 2002 compared to $0.25 in the like period one year earlier. These earnings represent an annualized return on assets of 1.47% and 1.44%, respectively, for the comparable 2002 and 2001 periods. The annualized return on equity was 11.31% for the third quarter of 2002 compared to 11.70% in the third quarter of 2001.

        For the nine months year-to-date, the Company posted net income of $21.1 million compared to $18.9 million earned in the like 2001 period. Diluted earnings per share were $0.85 compared to $0.84 in the like period one year earlier. The annualized return on assets for the first nine months is 1.51% and 1.71%, respectively, for the comparable 2002 and 2001 periods. The annualized return on equity was 11.69% for the nine months year-to-date in 2002 compared to 13.64% in 2001. When adjusted for the additional goodwill and other intangibles outstanding as a result of the Company's merger with Americorp and it's wholly owned subsidiary, American Commercial Bank of Ventura (collectively "Americorp"), return on tangible equity was 14.18% for the first nine months of 2002 compared to 13.78% in the like 2001 period.

13



        Net Interest Income.    The following tables delineate 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 both the nine month and three month periods ended September 30, 2002 and 2001.

 
  9 Months
2002

  9 Months
2001

  2002 Compared to 2001
Composition of Change

 
 
   
   
   
   
   
   
  Change Due To:
   
 
dollars in 000's

  Average
Balance

  Interest
Income/
Expense

  Average
Yield /
Rate

  Average
Balance

  Interest
Income/
Expense

  Average
Yield /
Rate

  Total
Change

 
  Volume
  Rate
 
EARNING ASSETS:                                      
Loans   1,112,715   64,307   7.73 % 951,568   68,482   9.62 % 13,979   (18,154 ) (4,175 )
Investment Securities   507,699   16,905   4.45 % 366,006   14,624   5.34 % 6,939   (4,658 ) 2,281  
Fed Funds, Other   85,271   1,013   1.59 % 52,477   1,540   3.92 % 904   (1,431 ) (527 )
  TOTAL EARNING ASSETS   1,705,685   82,225   6.45 % 1,370,051   84,646   8.26 % 21,822   (24,243 ) (2,421 )

INTEREST BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
NOW, Savings, and Money Market Accounts   1,189,962   3,867   0.43 % 635,484   6,327   1.33 % 4,895   (7,355 ) (2,460 )
Time Deposits   424,193   8,948   2.82 % 375,678   13,998   4.98 % 1,893   (6,943 ) (5,050 )
Interest Bearing Deposits   1,614,155   12,815   1.06 % 1,011,162   20,325   2.69 % 6,788   (14,298 ) (7,510 )

Other Borrowings

 

8,086

 

163

 

2.70

%

5,808

 

191

 

4.40

%

81

 

(109

)

(28

)
 
TOTAL INTEREST BEARING LIABILITIES

 

1,622,241

 

12,978

 

1.07

%

1,016,970

 

20,516

 

2.70

%

6,869

 

(14,407

)

(7,538

)

NET INTEREST INCOME

 

1,705,685

 

69,247

 

5.43

%

1,370,051

 

64,130

 

6.26

%

14,953

 

(9,836

)

5,117

 

       

 
  3 Months
2002

  3 Months
2001

  2002 Compared to 2001
Composition of Change

 
 
   
   
   
   
   
   
  Change Due To:
   
 
dollars in 000's

  Average
Balance

  Interest
Income/
Expense

  Average
Yield /
Rate

  Average
Balance

  Interest
Income/
Expense

  Average
Yield /
Rate

  Total
Change

 
  Volume
  Rate
 
EARNING ASSETS:                                      
Loans   1,081,936   20,771   7.62 % 974,885   24,279   9.88 % 9,365   (12,873 ) (3,508 )
Investment Securities   573,403   6,050   4.19 % 379,529   4,903   5.13 % 9,026   (7,879 ) 1,147  
Fed Funds, Other   84,215   343   1.62 % 83,684   720   3.41 % 13   (390 ) (377 )
  TOTAL EARNING ASSETS   1,739,554   27,164   6.09 % 1,438,098   29,902   8.26 % 18,404   (21,142 ) (2,738 )

INTEREST BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
NOW, Savings, and Money Market Accounts   840,885   1,364   0.64 % 669,995   2,043   1.21 % 1,584   (2,263 ) (679 )
Time Deposits   410,557   2,601   2.51 % 383,139   4,313   4.47 % 957   (2,669 ) (1,712 )
Interest Bearing Deposits   1,251,442   3,965   1.26 % 1,053,134   6,356   2.39 % 2,541   (4,932 ) (2,391 )

Other Borrowings

 

8,035

 

56

 

2.77

%

7,542

 

71

 

3.73

%

16

 

(31

)

(15

)
 
TOTAL INTEREST BEARING LIABILITIES

 

1,259,477

 

4,021

 

1.27

%

1,060,676

 

6,427

 

2.40

%

2,557

 

(4,963

)

(2,406

)

NET INTEREST INCOME

 

1,739,554

 

23,143

 

5.28

%

1,438,098

 

23,475

 

6.48

%

15,847

 

(16,179

)

(332

)

14


        Mid-State's annualized yield on interest earning assets was 6.45% for the first nine months of 2002 (6.76% on a taxable equivalent basis) and 6.20% (6.53% on a taxable equivalent basis) for the third quarter of 2002. This compares to 8.26% in the nine month 2001 period (8.57% on a taxable equivalent basis) and 8.25% in the third quarter of 2001 (8.54% 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, was steady at 4.75% in the first nine months of 2002 compared to an average of 7.50% in the 2001 period. The decrease in yield was magnified by virtue of the $2.8 million recovery of interest on loans previously charged-off which was realized in the third quarter of 2001 and was of a non-recurring nature. Annualized interest expense as a percent of earning assets has also declined from the prior year. In the first nine months of 2001, annualized interest expense represented 2.00% of earning assets compared to 1.02% in this year's first nine month period. Similarly, the annualized interest expense in the third quarter of this year was 0.92% compared to 1.77% in the like quarter of 2001. The following table delineates the components of net interest income, both as reported and as adjusted for the non-recurring recovery, covering the three month and nine month periods of 2002 and 2001 on a taxable equivalent and non taxable equivalent basis.

 
  Q3-2002
  As
Reported
Q3-2001

  As
Adjusted*
Q3-2001

  9 Mos "02
  As
Reported
9 Mos "01

  As
Adjusted*
9 Mos "01

 
Interest Income   6.20 % 8.25 % 7.48 % 6.45 % 8.26 % 7.99 %
Interest Expense   0.92 % 1.77 % 1.77 % 1.02 % 2.00 % 2.00 %
   
 
 
 
 
 
 
  Net Interest Income   5.28 % 6.48 % 5.71 % 5.43 % 6.26 % 5.99 %
 
  Q3-2002
  As
Reported
Q3-2001

  As
Adjusted*
Q3-2001

  9 Mos "02
  As
Reported
9 Mos "01

  As
Adjusted*
9 Mos "01

 
Interest Income   6.53 % 8.54 % 7.76 % 6.76 % 8.57 % 8.30 %
Interest Expense   0.92 % 1.77 % 1.77 % 1.02 % 2.00 % 2.00 %
   
 
 
 
 
 
 
  Net Interest Income   5.61 % 6.77 % 5.99 % 5.74 % 6.57 % 6.30 %

        Overall, Mid-State's annualized net interest income, when adjusted for the non-recurring recovery and expressed as a percent of earning assets, decreased from 5.99% for the nine month period of 2001 (6.30% on a taxable equivalent basis) to 5.43% in the comparable 2002 period (5.74% on a taxable equivalent basis). For the third quarter of 2002 compared to the third quarter of 2001, net interest income when adjusted for the non-recurring recovery and expressed as a percent of earning assets, decreased from 5.71% (5.99% taxable equivalent) to 5.28% (5.61% taxable equivalent).

        Average earning assets for the nine months ended September 30, 2002 increased from the like 2001 period ($1,705.7 million compared to $1,370.1 million). Average deposits in this same time-frame were up $337.6 million ($1,610.7 million compared to $1,273.1 million). In comparing third quarter 2002 to third quarter 2001, average earning assets increased from $1,438.1 million one year ago to $1,739.6 million and average deposits increased $311.4 million from $1,330.6 million one year ago to $1,642.0 million. The increases in average balances noted are to a large extent the result of the

15



Company's Americorp acquisition. That merger was effective near the very end of the third quarter on September 28, 2001 and as a result, the quarterly and 9 month year-to-date average balances in 2001 were not significantly influenced by the addition of the Americorp totals. However, in 2002, the averages fully reflect the addition of the Americorp totals.

        Provision and Allowance for Loan Losses.    The Bank made a provision to the allowance for loan losses of $600 thousand in the first nine months of 2002. The Bank provided $3.8 million in the comparable 2001 period. The effects of an economic slowdown in 2001 prompted management to re-evaluate the allowance for loan losses. Accordingly management recommended, and the Board of Directors authorized, an additional $2.9 million provision for loan losses during the third quarter of that year. On a quarterly basis, management performs an analysis of the adequacy of the allowance for loan losses. The results of this analysis for the quarter ended September 30, 2002 determined that the allowance was adequate to cover losses inherent in the portfolio and therefore no additional provision for loan losses was recorded in the quarter.

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

        The $19.2 million total allowance for credit losses is approximately 178% of the level of non performing assets which stand at $10.7 million. This compares to one year earlier when the allowance for credit losses stood at $20.5 million which was 290% of the $7.1 million in non performing assets at that time. The decline in the ratio was thus a result of an increase in non performing assets coupled with a decrease in the level of the reserve relative to one year ago. Non performing assets consist of loans on non-accrual, accruing loans 90 days or more past due, and other real estate owned.

        Management believes that the allowance, which stands at 1.7% of total loans at September 30, 2002, the same as the 1.7% level one year earlier, is adequate to cover inherent losses. 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.

16



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

 
  3 Months Ended Sept. 30,
  9 Months Ended Sept. 30,
 
 
  2002
  2001
  2002
  2001
 
Allowance for loan losses
at beginning of period
  $ 19,160   $ 12,245   $ 20,659   $ 13,280  

Provision for loan losses

 

 


 

 

3,200

 

 

600

 

 

3,800

 

Reclassification of allowance for
losses—unfunded commitments

 

 


 

 

(703

)

 

(1,687

)

 

(2,297

)

Loans charged off

 

 

(1,882

)

 

(2,124

)

 

(2,669

)

 

(2,548

)

Recoveries of loans previously
charged-off

 

 

187

 

 

156

 

 

562

 

 

539

 

Acquisition of allowance for loan
losses—Americorp

 

 


 

 

5,464

 

 


 

 

5,464

 
   
 
 
 
 

Allowance for loan losses
at end of period

 

$

17,465

 

$

18,238

 

$

17,465

 

$

18,238

 

Allowance for losses—
unfunded commitments

 

 

1,687

 

 

2,297

 

 

1,687

 

 

2,297

 
   
 
 
 
 

Balance at end of period

 

$

19,152

 

$

20,535

 

$

19,152

 

$

20,535

 
   
 
 
 
 

        At September 30, 2002, the recorded investment in loans, which have been identified as impaired, totaled $11,843,000. Of this amount, $9,814,000 related to loans with no valuation allowance and $2,029,000 related to loans with a corresponding valuation allowance of $431,000. Impaired loans totaled $7,568,000 at September 30, 2001. Of that amount, $4,531,000 related to loans with no valuation allowance and $3,036,000 related to loans with a corresponding valuation allowance of $1,204,000. 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 September 30, 2002, the average recorded investment in impaired loans was $12,959,000, compared to $8,224,000 in the 2001 period. A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Because this definition is very similar to that used by bank regulators to determine on which loans interest should not be accrued, the Bank expects that most impaired loans will be on non-accrual status.

        Non-interest Income.    Non-interest income for the first nine months of 2002 was $17.9 million, up from $15.8 million earned in the same 2001 period, an increase of 13.3%. The increase was primarily related to improved service charge income of $766 thousand over the comparable periods, a $408 thousand increase in ATM and debit card fee income, and a $390 thousand increase in merchant mastercard fee income. The same categories accounted for the overall increase in non-interest income from $5.2 million in the third quarter of 2001 to $6.2 million in the third quarter of 2002.

        Much of these increases in non-interest income are related to the activity generated by the customers of the former American Commercial Bank in Ventura. That acquisition was completed on September 28, 2001, therefore the Company's income statement for the nine month period ended September 30, 2002 reflected the benefit of Americorp's customers which was, except for two days, not

17



reflected in the comparable period in 2001. Americorp's non interest income was approximately 12% of Mid-State's levels prior to the completion of the merger.

        Non-interest Expense.    Non-interest expense for the first nine months of 2002 totaled $53.5 million compared to $47.9 million in the like 2001 period. This increase was primarily the result of increases in salaries and benefits of approximately $2.6 million and an increase in occupancy expense of $1.7 million as a result of the Americorp merger. In addition, the increase was caused by an increase in merchant mastercard processing charges of $1.0 million and an increase in amortization of core deposit intangibles (due to the amortization of the core deposit intangible created in the merger with Americorp) of $804 thousand. All other categories of expense showed a net $516 thousand decrease.

        For the three months ended September 30, 2002 non-interest expense totaled $18.3 million compared to $16.5 million in the 2001 quarter. This increase was primarily the result of increases in occupancy expense of $686 thousand and an increase in salaries and benefits of $534 thousand. All other categories of expense showed a net $499 thousand increase.

        Provision for Income Taxes.    The year-to-date provision for income taxes was $11.9 million, compared to $9.3 million for the same period in 2001. The effective tax rate in 2002 was 36.1% compared to 32.9% in 2001. The effective tax rate for the first nine months of 2001 is lower than the current year's effective tax rate due to the Company benefiting from the State of California's new Natural Heritage Tax Credit and certain attendant deductions.

        For the three months ended September 30, 2002 the provision for income taxes was $4.0 million, compared to $3.3 million for the same 2001 time frame. The effective tax rate in 2002 was 35.9% compared to 37.2% in 2001. While the statutory 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 usually lower.

        Balance Sheet.    Total assets at September 30, 2002 totaled $1,928.0 million, up 3.5% from the level one year earlier of $1,863.7 million. This growth was fueled primarily by an increase in deposits of 3.1% to $1.639 billion, up from $1.590 billion one year earlier. The growth in deposits was centered in core deposits. While Time Deposits decreased from $464.6 million one year earlier to $405.2 million at period end, all other core deposit categories of Demand, NOW, Money Market and Savings increased to $1.234 billion from $1.125 billion one year earlier. In an ongoing effort to improve earnings, the Company continues to focus its attention on attracting lower cost core deposits and has consciously chosen not to pay the higher rates on certain more expensive Time Deposits. Loan activity over the last year has been slow with loans declining by $66.5 million from $1.176 billion to $1.110 billion at period-end. Other liabilities decreased from $40.2 million at September 30, 2001 to $36.8 million at September 30, 2002. Other borrowings contributed $2.7 million of this decrease. Stockholders' equity increased by $18.2 million when comparing September, 2002 over September, 2001.

        Mid-State Bank's loan to deposit ratio of 67.7% at September 30, 2002 is down from the 74.0% ratio one year earlier. A continued decline in this ratio could result in lower net interest income in future periods. There is ample internal liquidity to fund improvements in this ratio through Mid-State's investment portfolio which is categorized as available for sale.

        Investment Securities and Fed Funds Sold.    Of the $637.1 million portfolio at September 30, 2002, 1% is invested in overnight fed funds sold, 4% is invested in U.S. Treasury securities, 41% is invested in U.S. Government agency obligations, 50% is invested in securities issued by states and political subdivisions in the U.S. and 4% is invested in mortgage-backed securities and other securities. 68% of all investment securities and fed funds sold combined mature within five years. Approximately 25% of investment securities and fed funds sold combined mature in less than one year. The Bank's investment in mortgage-backed securities consist of investments in FNMA, FHLMC and other pass-thru pools

18



which have contractual maturities of up to 30 years. The actual time of repayment will be shorter due to prepayments made on the underlying collateral.

        Capital Resources.    The Company announced on May 1, 2002 that it had authorized a stock repurchase program for up to five percent (5%) of its outstanding shares. Based on the then outstanding shares, the buyback may result in the purchase of up to approximately 1,203,580 shares. These 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 rules. The program began in early May 2002 and is expected by Management to be effective for one year. Through September 30, 2002, the Company has purchased 240,296 shares under the new repurchase program. The Company's previous stock repurchase program began in April 2000 and saw the repurchase of 1,130,000 shares of stock. The new authorization allowed the Company to continue its buy-back program uninterrupted. During 2002 the Company repurchased a total of 99,938 shares in the first half of the year and an additional 215,120 shares in the third quarter for a total of 315,058 shares in the first nine months of 2002. In the comparable 2001 period, the Company repurchased 186,612 shares in the first half of the year and 126,944 shares in the third quarter for a total of 313,556 shares repurchased for the nine month period.

        Total stockholders' equity increased from $233.7 million at September 30, 2001 to $251.9 million at September 30, 2002. Changes in stockholders' equity over this 12 month period includes activity outlined in the following table:

 
  Common
Stock & Surplus

  Undivided
Profits

  Accumulated
Comprehensive
Income

  Total
Equity

 
Ending Equity at September 30, 2001   $ 87,346   $ 137,184   $ 9,212   $ 233,742  
 
Net Income

 

 

 

 

 

8,483

 

 

 

 

 

8,483

 
 
Common Stock Repurchased and Retired

 

 

(2,809

)

 

 

 

 

 

 

 

(2,809

)
 
Stock Options Exercised

 

 

335

 

 

 

 

 

 

 

 

335

 
 
Dividends Declared

 

 

 

 

 

(2,410

)

 

 

 

 

(2,410

)
 
Change in Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

(2,790

)

 

(2,790

)
   
 
 
 
 

Ending Equity at December 31, 2001

 

 

84,872

 

 

143,257

 

 

6,422

 

 

234,551

 
 
Net Income

 

 

 

 

 

21,140

 

 

 

 

 

21,140

 
 
Common Stock Repurchased and Retired

 

 

(5,566

)

 

 

 

 

 

 

 

(5,566

)
 
Stock Options Exercised

 

 

792

 

 

 

 

 

 

 

 

792

 
 
Dividends Declared

 

 

 

 

 

(7,197

)

 

 

 

 

(7,197

)
 
Change in Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

8,190

 

 

8,190

 
   
 
 
 
 

Ending Equity at September 30, 2002

 

$

80,098

 

$

157,200

 

$

14,612

 

$

251,910

 
   
 
 
 
 

        Liquidity.    The focus of the Company's liquidity management is to ensure its ability to meet cash requirements. Sources of liquidity include cash, due from bank balances (net of Federal Reserve requirements to maintain reserves against deposit liabilities), fed funds sold, investment securities (net of pledging requirements), loan repayments, deposits and fed funds borrowing lines. Typical demands on liquidity are deposit run-off from demand deposits and savings accounts, maturing time deposits, which are not renewed, and anticipated funding under credit commitments to customers.

        The Bank has adequate liquidity at the present time. Its loan to deposit ratio at September 30, 2002 was 67.7% versus 74.0% one year earlier. The Bank's internally calculated liquidity ratio stands at 40.6% at September 30, 2002, which is above its minimum policy of 15% and above the 33.3% level as

19



of September 30, 2001. This ratio is calculated by combining cash, fed funds sold, and securities, less securities pledged, divided by total liabilities. 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 $35.7 million at September 30, 2002, up from $30.9 million one year earlier. Additionally, the Company has undisbursed loan commitments, also made in the ordinary course of business, totaling $556.5 million at September 30, 2002, which is up from the $461.6 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 for the year ended December 31, 2001. Additionally, because it involves some of the more significant judgments and estimates used in preparation of the consolidated financial statements, the reader's attention is directed to the earlier section on page 14 addressing the allowance for loan losses.

        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. Additional information on these and other factors that could affect financial results are included in the Company's Securities and Exchange Commission filings. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any forward-looking statements contained herein to reflect future events or developments. 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

20



be achieved. In light of the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.


Item 3—Quantitative and Qualitative Disclosure About Market Risk

        The Bank's risk exposure to changes in interest rates is not expected to be significant. 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 interest rate assumptions, which are set at the discretion of Management, from between +6.6% and —11.8% of the base case (rates unchanged). 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 2.00% within 8 months)
  -11.8 %

Rates Down Significant
(Prime down to 2.75% within 10 months)

 

-5.7

%

Rates Down Modestly
(Prime down to 3.75% within 10 months)

 

-3.0

%

Base Case—Rates Unchanged
(Prime unchanged at 4.75% over 12 months)

 


 

Rates Up Modestly
(Prime up to 5.75% within 10 months)

 

+2.2

%

Rates Up Aggressive
(Prime up to 6.75% within 10 months)

 

+3.6

%

Rates Up Very Aggressive
(Prime up to 8.75% over 12 months)

 

+6.6

%

        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 $842.8 million) interest is based on rates set at the discretion of Management ranging from 0.25% to 1.04%. 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 2.75% decline in Prime decreases net interest income by 11.8% while a 4% increase in Prime increases net interest income 6.6%.

        It is important to note that the above table is a summary of several forecasts and actual results may vary. The forecasts are based on estimates and assumptions of Management that may turn out to be different and may change over time. Factors affecting these estimates and assumptions include, but are not limited to—competitors' behavior, economic conditions both locally and nationally, actions taken by the Federal Reserve Board, customer behavior, and Management's responses. Historically, the Bank has been able to manage its Net Interest Income in a fairly narrow range reflecting the Bank's relative insensitivity to interest rate changes. The impact of prepayment behavior on mortgages, real estate loans, mortgage backed securities, securities with call features, etc. is not considered material to the sensitivity analysis. Over the last 5 years, and excluding the first nine months of 2002, 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 5.77% to a high of 6.44% (not taxable equivalent). The Bank's net interest

21



margin in the third quarter of 2002 of 5.28% is certainly below average by these historical standards. Based on the scenarios above, the net interest margin under the alternative scenarios ranges from 4.54% to 5.50%. Management feels this range of scenarios is appropriate in view of recent 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.


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.

22



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

        No matters were submitted to the Shareholders for a vote during the third quarter of 2002.


Item 5—Other Information

        On October 31, 2002, the Company lost its Vice Chairman of the Board of Directors as a result of the death of Mr. A.J. Diani.


Item 6—Exhibits and Reports on Form 8-K


Exhibit No.

  Exhibit

99.1   Certification

23



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: November 6, 2002   By: /s/  JAMES W. LOKEY      
JAMES W. LOKEY
President
Chief Executive Officer

 

 

 

 
Date: November 6, 2002   By: /s/  JAMES G. STATHOS      
JAMES G. STATHOS
Executive Vice President
Chief Financial Officer

24



CERTIFICATIONS

I, James W. Lokey, President and Chief Executive Officer of Mid-State Bancshares, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Mid-State Bancshares;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


 

 

 

 
Date: November 6, 2002   By: /s/  JAMES W. LOKEY      
JAMES W. LOKEY
President
Chief Executive Officer

25



CERTIFICATIONS

I, James G. Stathos, Executive Vice President and Chief Financial Officer of Mid-State Bancshares, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Mid-State Bancshares;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


 

 

 

 
Date: November 6, 2002   By: /s/  JAMES G. STATHOS      
JAMES G. STATHOS
Executive Vice President
Chief Financial Officer

26



EXHIBIT INDEX

Exhibit No.

  Description

  Page No.

99.1   Certification   28

27




QuickLinks

FORM 10-Q
Index
PART I—FINANCIAL INFORMATION Item 1—Financial Statements
Mid-State Bancshares Consolidated Statements of Financial Position (Unaudited—figures in 000's)
Mid-State Bancshares Consolidated Statements of Income (Unaudited—figures in 000's except earnings per share data)
Mid-State Bancshares Consolidated Statements of Comprehensive Income (Unaudited—figures in 000's)
Mid-State Bancshares Consolidated Statements of Cash Flows (Unaudited—figures in 000's)
Mid-State Bancshares Notes to Consolidated Financial Statements (Information with respect to interim periods is 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
CERTIFICATIONS
CERTIFICATIONS
EXHIBIT INDEX