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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|/X/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from  to

Commission file number 000-23925

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

California

77-0442667(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)1026 Grand Ave.
Arroyo Grande, CA

93420(Address of principal executive offices)

(Zip Code)


(805) 473-7700Registrant's telephone number, including area code

NoneSecurities registered pursuant to Section 12(b) of the Act:

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

Common Stock
(no par value)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the Registrant was required to file such reports) days. Yes /X/    No / /, and
(2) has been subject to such filing requirements for the past 90 days. Yes /X/    No / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). days. /X/
    Yes     / / No

The
aggregate market value of the common stock held by non-affiliates of the registrant as of March 24, 2003 was $386,315,435.

The
number of shares of common stock of the registrant outstanding as of March 24, 2003 was 23,515,537.

The
following documents are incorporated by reference herein: Part III, Items 10 through 13 are incorporated from Registrant's definitive proxy statement for the 2002 Annual Meeting of
Shareholders.

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TABLE OF CONTENTS

|         |  |                                                                                       |  | PAGE
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|ITEM 1.  |  | BUSINESS                                                                              |  | 1   
|ITEM 2.  |  | PROPERTIES                                                                            |  | 19  
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 21  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 21  
|PART II 
|ITEM 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                 |  | 22  
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 25  
|ITEM 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 26  
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                             |  | 45  
|ITEM 8   |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 46  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 83  
|PART III
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 83  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  | 83  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 83  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 83  
|ITEM 14. |  | CONTROLS AND PROCEDURES                                                               |  | 83  
|PART IV 
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  | 84  
|         |  | SIGNATURES                                                                            |  | 86  
|         |  | CERTIFICATIONS                                                                        |  | 88  
|         |  | WHERE YOU CAN GET MORE INFORMATION                                                    |  | 90  

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PART I

Certain statements contained in this Annual Report on Form 10-K ("Annual Report"), including, without limitation,
statements containing the words "believes", "anticipates", "intends", "expects", and words of similar impact, constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in
interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Company's business,
economic, political and global changes arising from the terrorist attacks of September 11, 2001 and the conflict in Iraq, and other factors referenced in this report, including in "Item 1.
BusinessFactors that May Affect Future Results of Operations." The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any
of the forward-looking statements contained herein to reflect future events or developments.

ITEM 1. BUSINESS

Mid-State Bancshares and Mid-State Bank & Trust

Mid-State Bancshares (the Company) is the parent company to Mid-State Bank & Trust (the Bank), its 100% owned principal subsidiary.
The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (BHC Act) and is subject to the supervision and regulation of the Board of Governors of the
Federal Reserve System (Federal Reserve Board).

Mid-State
Bank & Trust was incorporated under the laws of the State of California and commenced operations on June 12, 1961 as a California state chartered
bank. The Bank's accounts are insured by the Federal Deposit Insurance Corporation (FDIC), but it is not a member of the Federal Reserve
System. At December 31, 2002 the Company had total assets of $1.935 billion, total deposits of $1.653 billion and total shareholders' equity of $254.1 million.

The
Bank operates 39 full service retail banking offices along the central coast of California in Santa Barbara, San Luis Obispo and Ventura counties. The Bank's headquarters is located
in Arroyo Grande and it also serves the communities of Paso Robles, Cambria, Templeton, Atascadero, Cayucos, Morro Bay, Los Osos, San Luis Obispo, Pismo Beach, Grover Beach, Guadalupe, Nipomo, Santa
Maria, Orcutt, Lompoc, Vandenberg Village, Buellton, Santa Ynez, Solvang, Goleta, Oxnard, Camarillo, Ventura and Santa Barbara. The headquarters' mailing address is 1026 Grand Ave., Arroyo Grande, CA
93420, Telephone: (805) 473-7700. The Bank can also be reached through its internet address atwww.midstatebank.com.

The
Bank is a full-service community bank offering a broad range of banking products and services, including accepting time and demand deposits, originating loans and leases,
providing trust services, and making other investments. The Bank originates several types of loans, including secured and unsecured commercial and consumer loans, residential real estate mortgage
loans, and residential construction loans. The Bank's loans are primarily short-term and adjustable rate. Special services and requests beyond the lending limits of the Bank are arranged
through correspondent banks.

The
Company, through the Bank, derives its income primarily from interest received on loans, and to a lesser extent, from interest on investment securities, fees received in connection
with loans and other services offered, including loan servicing and deposit services. The Company's major operating expenses are the interest it pays on deposits and borrowings and general operating
expenses. The

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Company's operations, like those of other financial institutions operating in California, are significantly influenced by economic conditions in California, including the strength of the real estate
market, the fiscal and regulatory policies of the federal government and of the regulatory authorities that govern financial institutions. See "Supervision and Regulation."

Bank Subsidiaries

The Bank operates two wholly owned subsidiariesMid Coast Land Company and MSB Properties. Mid Coast Land Company was founded in 1984 pursuant to
section 751.3 of the Financial Code of the State of California. Section 751.3 provided that State chartered banks were authorized to invest in a corporation that engaged in real estate
activities. Under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) which became law in December 1991, the Bank, through Mid Coast Land Company, was required to divest itself
of its real estate development activities. That process has now been substantially completed. The holdings and results of operations of Mid Coast Land Company are included within the consolidated
financial statements of the Company. For further information concerning Mid Coast Land Company, see the Subsidiary Activity section of the Management's Discussion and Analysis section included in Item
7. of this Report.

MSB
Properties was incorporated under the laws of the State of California in May of 1968, allowing for the ownership of property which may be reasonably necessary for the expansion of
the Bank's business, or which is otherwise reasonably related to the conduct of the Bank's business, pursuant to Section 752 of the Financial Code of the State of California.

The
holdings and results of operations of MSB Properties are included within the consolidated financial statements of the Company. On a stand-alone basis, MSB Properties had earnings of
$1.3 million, $1.7 million, and $1.4 million in 2002, 2001, and 2000, respectively. For further information concerning MSB Properties, see the Subsidiary Activity portions of the
Management's Discussion and Analysis section included in Item 7. of this Report.

Acquisition of Americorp/American Commercial Bank

On September 28, 2001, Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank & Trust acquired
100 percent of the outstanding common stock of Americorp. The results of Americorp's operations have been included in the consolidated financial statements since that date. Americorp was the
holding company of American Commercial Bank, a community bank that served Ventura County. The merger gave Mid-State Bank & Trust five new offices in Ventura County.

The
aggregate purchase price was $71.5 million, which includes (1) $31.6 million cash paid to Americorp shareholders and for other merger related expenses and
(2) $39.9 million in Mid-State Bancshares' common stock and substitute common stock options issued. The value of the 2.45 million shares issued was determined based on
the average closing market price of Mid-State Bancshares' common stock over the twenty consecutive trading days that Mid-State Bancshares' stock traded ending
September 21, 2001. The average price of Mid-State Bancshares' stock over that period was $15.9853. The merger was accounted for utilizing the purchase method of accounting.

Trust Department

Mid-State Bank & Trust formally opened its new Trust Department on January 2, 2001, to provide trust, investment management and estate
settlement services in San Luis Obispo, Santa Barbara, and Ventura Counties. As of year-end, the Department had approximately $123 million of assets under management of which
$98 million represented temporary funds. These funds are not included in the assets of the Company in its Consolidated Statements of Financial Position. The Trust Department offers a variety of
financial and trust-related services including: trustee or successor trustee for trust accounts, estate settlement services, guardianships and conservatorships for minors and adults who are no longer
able to manage their own affairs. In addition, the Trust Department offers investment

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management services for those who no longer wish to handle the management of their investment portfolios, or who have inherited investments from a family member and need investment management. The
department also provides custody services for customers' financial assets. Its main office is located in the Bank's San Luis Obispo branch at 75 Santa Rosa Street.

Leasing Department

In June of 2001, Mid-State Bank & Trust opened a new leasing department to serve business customers in Ventura, Santa Barbara, and San Luis
Obispo Counties. As of year-end, the department has approximately $6.0 million under management and with its very low overhead operation is already turning a monthly profit. The
Bank leases business equipment for construction, agriculture, marine, industrial and manufacturing, transportation, medical, and warehouse uses. The Bank also leases office equipment and medium and
heavy duty class trucks. Mid-State Bank & Trust offers a number of lease structures with varying tax and accounting advantages to fit most business' needs.

Services

The Bank offers a full range of commercial banking services including Checking accounts, NOW accounts, Savings accounts, Money Market accounts, and various types
of time certificates of deposit (including various maturities and individual retirement accounts). The Bank makes a variety of construction and land development loans, real estate related loans, home
equity credit lines, installment loans, agricultural and commercial loans, business equipment leases and SBA loans. Other services offered by the Bank include, but are not limited to, trust services,
safe deposit boxes, travelers cheques, notary public, merchant depository services for VISA and Mastercard, cash management, home banking, telephone voice response system and ATM's. The Bank's
organization and structure is designed to serve the banking needs of individuals and small to medium sized businesses in Santa Barbara, Ventura and San Luis Obispo counties.

Deposit and Liability Management

Deposits represent the Bank's primary source of funds. As of December 31, 2002 the Bank had approximately 34,624 non interest bearing demand deposit
accounts representing $390.2 million, or an average of $11,270 per account. The Bank also had approximately 110,582 NOW, Money Market and Savings accounts amounting to $863.1 million, or
about $7,802 average per account. There were 17,568 time certificates of deposit outstanding at December 31, 2002, representing $399.6 million with an average deposit balance of
approximately $22,745. Of the total time certificates of deposit, only $149.8 million represented holders who carried an amount on deposit of $100,000 or more, approximately 37% of the total.

The
Bank is not dependent on a single or a few customers for its deposits. Most deposits are obtained from individuals and small-to-medium sized businesses. This
results in the relatively small average balances noted above and allows the Bank to be less subject to the adverse effects of the loss of a large depositor. As of December 31, 2002, no
individual, corporate, or public depositor accounted for more than 2% of the Bank's total deposits.

Liquidity
is the Bank's ability to meet fluctuations in deposit levels and to provide for the credit needs of its customers. The objective in liquidity management is to maintain a
balance between the sources and uses of funds. Principal sources of liquidity include interest and principal payments on loans and investments, proceeds from the maturity of investments and growth in
deposits. The Bank holds overnight Fed Funds Sold as a cushion for temporary liquidity needs. For 2002, Fed Funds Sold averaged $75.6 million representing 4.0% of average assets. In addition,
the Bank maintains Federal Funds lines of credit totaling $70 million with major correspondents, subject to customary terms for such arrangements.

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The
Bank's internally calculated liquidity ratio, which measures the percentage of total liabilities (excluding equity) which are used to fund cash, cash equivalents and
non-pledged marketable securities, was 40.8%in excess of the Bank's policy minimum of 15%.

Loans

The Bank's loan-to-deposit ratio stood at approximately 64.7% at year-end 2002. It is the Bank's goal to maintain its
loan-to-deposit ratio in the 65% to 75% range while maintaining credit quality.

The
Bank maintains an allowance for loan losses which is netted against loans on the balance sheet. Additions to the allowance are made by charges to expense. All loans deemed to be
uncollectable are charged to the allowance; subsequent recoveries are credited to the allowance. The amount in the loan loss allowance is an estimate of the losses inherent in the loan portfolio as
determined by a variety of factors considered by Management. Factors include, but are not limited to, the current economic climate, type and quality of loans in the portfolio, trends in delinquencies,
losses, non-accrual totals, diversification of the portfolio, value of available collateral and the cost of collateral liquidation.

As
of December 31, 2002, the Bank's allowance for loan losses stood at $17.4 million. Additionally, the Bank has an allowance for losses on unfunded commitments totaling
$1.8 million. Collectively, these allowances for losses represent 114.3% of non-performing loans (non-accrual loans plus loans 90 days or more past due). Outside
factors, not within the Bank's control, such as adverse changes in the economy, can affect the adequacy of the allowances and there can be no assurance that in any given period, the Bank might not
suffer losses which are substantial in relation to the size of the allowances.
During 2002, the Bank experienced charge-offs, net of recoveries, of $2.1 million, or 0.19% of average loans.

Underwriting and Credit Administration

The lending activities of Mid-State Bank & Trust are guided by the lending policies established by the Bank's Board of Directors. The credit
policy is managed through periodic reviews and approved annually by the Board.

Each
loan must meet minimum underwriting criteria established in the Bank's lending policy. Lending authority is granted to officers of the Bank on a limited basis, dependent upon
individual knowledge and experience. Loan requests exceeding individual officer approval limits are approved by the Loan Committee. Loan requests exceeding these limits are submitted to the Board Loan
Committee, which consists of the President, Chief Credit Officer and three non-management directors. Each of these committees meets on a regular basis in order to provide timely responses
to the Bank's clients.

Mid-State
Bank & Trust's credit administration function includes an internal review and the regular use of an outside loan review firm.

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Loan Portfolio

At December 31, 2002, Mid-State Bank & Trust's gross loan portfolio totaled $1.1 billion. The portfolio is distributed as
follows:

Construction and Land Development

19.7
%Real EstateFarmland

2.2
%Real EstateResidential

7.0
%Real EstateNon Farm, Non Residential

39.2
%Home Equity Credit Lines

6.8
%Cash Reserve

0.3
%Installment

2.5
%Agricultural Production

2.8
%Commercial, Other

19.5
%100.0
%


The
interest rates charged for the loans made by the Bank vary with the degree of risk, size and maturity of the loans. Rates are generally affected by competition, the client's deposit
relationship with the Bank, and the Bank's cost of funds.

Commercial Loans.The Bank provides financial services to diverse commercial and professional businesses in the marketplace.
Commercial loans consist primarily of short term loans (normally with a maturity of under one year) for working capital and business expansion. Commercial loans typically include revolving lines of
credit collateralized by inventory, accounts receivable and equipment. Emphasis is placed on the borrower's earnings history, capitalization, secondary sources of repayment, and in some instances,
third-party guarantees or highly liquid collateral (such as time deposits and investment securities). Commercial loan pricing is generally at a rate tied to the prime rate (as quoted in the Wall Street Journal) or the Bank's reference rates. Certain equipment loans may be made at fixed rates for short to medium terms.

The
Bank participates in a Small Business Administration (SBA) loan guarantee program. Those programs used include both the 504 program, which is focused toward longer-term
financing of buildings and other long-term assets, and the 7A program, which is primarily used for financing of equipment, inventory and working capital needs of eligible businesses,
generally over a three to twenty-five year term. The Bank's collateral position in the SBA loans is enhanced by the SBA guarantee in the case of 7A loans, and by lower
loan-to-value ratios under the 504 program.

The
Bank was designated in May 2000 as a preferred lender by the SBA, allowing it to process these loans quicker. Under the SBA's Preferred Lending Program, the SBA delegates a
substantial degree of lending authority to participating lenders, such as the Bank.

Agricultural Loans.The Bank provides production loans to help finance the seasonal needs of farming operations, including
crop and livestock financing, inventory purchases, and receivable financing. Equipment loans are also financed on everything from field equipment to office automation systems. Emphasis is placed on
the borrower's earnings history, capitalization, secondary sources of repayment, and in some instances, third-party guarantees or highly liquid collateral (such as time deposits and investment
securities). Agricultural loan pricing, like Commercial loan pricing, is generally at a rate tied to the prime rate (as quoted in theWall Street
Journal) or the Bank's reference rates. Certain equipment loans may be made at fixed rates for short to medium terms.

Real Estate Construction and Development Loans.The Bank's real estate construction loan activity has focused on providing
short-term (maturity of two years or less) loans to individuals and developers with whom the Bank has established relationships, for the construction primarily of single family residences
in the Bank's market area.

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Residential
real estate construction loans are typically secured by first deeds of trust and require guarantees of the borrower. The economic viability of the project and the borrower's
credit-worthiness are primary considerations in the loan underwriting decision. The Bank utilizes approved independent local appraisers as well as in-house staff, and
loan-to-value ratios which generally do not exceed 80% of the appraised value of the property. The Bank monitors projects during the construction phase through regular
construction inspections and a disbursement program tied to the percentage of completion of each project.

The
Bank also occasionally makes land loans to individuals who intend to construct a single-family residence on the lot, generally within 24 months. In addition, the Bank makes
commercial real estate construction loans to high-net-worth clients with adequate liquidity for construction of office and warehouse properties. Such loans are typically
secured by first deeds of trust and require guarantees of borrowers.

Commercial Real Estate Term Loans and Loans Secured by Farmland.The Bank provides medium-term commercial real
estate loans secured by commercial or industrial buildings or farmland where the properties are either used by the owner for business purposes (owner-user properties) or have income
derived from tenants (investment properties). The Bank's loan policies require the principal balance of the loan to be no more than 70% of the stabilized appraised value of the underlying real estate
collateral. The loans, which are typically secured by first deeds of trust only, generally have terms of no more than ten years and are amortized over 25 to 30 years. Some of these loans have
rates tied to the
prime rate that adjust whenever the prime rate changes. The remaining loans adjust every three or five years depending upon the index to which the loan is tied.

Home Equity Credit Lines.The Bank provides lines of credit secured by a second deed of trust on the borrower's single family
residence. These loans have maturities of ten years and have an interest rate that adjusts each month with the one month jumbo C.D. rate. The combination of the Home Equity Credit Line and the first
mortgage may not exceed 80% of the value of the residence.

Consumer and Other Loans.The Bank's consumer and other loan portfolio is divided between installment loans secured by
automobiles, other consumer purposes and revolving, unsecured consumer debt such as reserve lines of credit. Installment loans tend to be fixed rate and longer-term
(one-to-five-year maturity). The Bank's portfolio of revolving credit plans, issued as an additional service to its clients, is minimal at just 0.3% of total loans.

Investment Securities

The Bank maintains a portfolio of investment securities to provide income and to serve as a secondary source of liquidity for its operations in conjunction with
Federal Funds Sold (see Deposit and Liability Management above). The Bank's investment policy provides for the purchase of United States Treasury Securities, United States Government Agency
Securities, Mortgage Backed Securities, Obligations of State and Political Subdivisions, and Other Securities as permitted by Federal and State regulation. As of December 31, 2002, the
aggregate carrying value of the Investment Portfolio was $609.0 million. Of this total, $26.6 million was invested in U.S. Treasury Securities, $235.1 million in U.S. Government
Agencies, $5.9 million in Mortgage Backed Securities, $323.5 million in Obligations of State and Political Subdivisions and $17.9 million in Other Securities. The types of
securities held are influenced by several factors, which include: rate of return, maturity, and risk. Generally, the Bank endeavors to stagger the maturities of its securities so that it has regular
maturities for liquidity purposes.

Acceptable
securities may be pledged to secure public deposits from State and Public Agencies. As of December 31, 2002, the Bank had public funds totaling approximately
$51.4 million. The Bank has made available $100.0 million of securities to securitize these funds. Excess collateral can be released as needed.

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Economic Climate

The economy in the Bank's trade area is based upon agriculture, oil, tourism, light industry, government services, aerospace industries and retail trade. Services
supporting those involved in these industries have also developed in the areas of medical, financial and educational services. Population in the Tri-county area, according to the
California Department of Finance, is estimated at January 2001 to be 1,434,461. Ventura County represents about 54% of this total with Santa Barbara and San Luis Obispo Counties accounting for
29% and 17% respectively. Certain economic activities are unique to the area such as the space launching facilities at Vandenberg Air Force Base (which is now also being used by private commercial
enterprises) and the production of seeds for various flowers grown worldwide. While major oil companies have elected to do business elsewhere (due to very stringent county business regulations),
smaller production companies have moved in to continue the oil industry in the area. The moderate climate allows a year round growing season for numerous vegetables and fruits. Vineyards and cattle
ranches make large contributions to the local economy. Access to numerous recreational activities, including both mountains and beaches, provide a fairly stable tourist industry from larger
metropolitan areas such as the Los Angeles/Orange County basin and the San Francisco Bay area. Real estate values throughout the Tri-counties have steadily increased in recent years,
having continued to increase in value even through the economic slow-down experienced in 2001 and 2002. With the diversity of the various types of industries in the Bank's service area,
the Central Coast, while not immune from economic fluctuations, has historically tended to enjoy a more stable level of economic activity than many other areas of California.

Competition

The banking business in California generally, and in the Bank's primary service areas specifically, is highly competitive with respect to both loans and deposits
and is dominated by a relatively small number of major banks with many offices and operations over a wide geographic area. Among the advantages such major banks have over the Bank are their ability to
finance wide-ranging advertising campaigns and to allocate their investment assets to regions of higher yield and demand. Such banks offer certain services such as international banking
which is not offered directly by the Bank, but which can be offered indirectly by the Bank through correspondent institutions. In addition, by virtue of their greater total capitalization, such banks
have substantially higher lending limits than the Bank. (Legal lending limits to an individual customer are based upon a percentage of a bank's total capital accounts.) The Bank's secured and
unsecured lending limits at December 31, 2002, were approximately $53.9 million and $32.4 million, respectively. These levels are up from $50.7 million and
$30.4 million, respectively, at December 31, 2001.

Within
the Bank's trade area, there are few companies which would require more funds than the Bank can legally lend. Other entities, both governmental and in private industry, seeking to
raise capital through the issuance and sale of debt or equity securities, also provide competition for the Bank in the acquisition of deposits. Banks also compete with money market funds and other
providers of money market instruments.

Commercial
banks compete with savings and loan associations, credit unions, other financial institutions, securities brokerage firms and other entities for funds. For instance, yields on
corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies, mortgage companies and other lending institutions.

The
financial services industry is undergoing rapid technological changes involving frequent introductions of new technology-driven products and services which have further increased
competition. There can also be no assurance that these technological improvements, if made, will increase the Company's operational efficiency or that the Company will be able to effectively implement
new technology-driven products and services or be successful in marketing these products and services to our customers.

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It should also be noted that the trend toward consolidation of banking assets exhibited over the past few years in California continued in 2002. Statewide, 4 banks were merged out of
existence or liquidated during the year and 8 new banks commenced operation.

Stock Repurchase Program

The Board of Directors authorized a stock repurchase program for up to five percent (5%) of its outstanding shares in March of 2000, and upon completing that
initial program, authorized the repurchase of up to an additional five percent of its outstanding shares in May 2002. The buyback reduces the number of outstanding shares resulting in an
improvement to the Company's earnings per share and to its return on equity. These repurchases are being made from time to time by the Company in the open market or privately negotiated transactions
in compliance with the Securities and Exchange Commission (SEC) rules. The total number of shares repurchased was 477,264, 454,126 and 601,312 in 2002, 2001 and 2000, respectively. As of
December 31, 2002, the Company could repurchase up to an additional 800,878 shares under the May 2002 authorization.

Employees

At December 31, 2002, the Bank had a total of 828 employees. A number of these employees are part-time however. On a full-time
equivalent basis, employees represent 756 positions. The Bank believes that its employee relations are positive.

Effect of Governmental Policies and Legislation

Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other
borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise the major portion of the Bank's earnings. These rates are
highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Bank are subject to the influence of local, domestic and foreign economic
conditions, including recession, unemployment and inflation.

The
commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies
of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities which effect short term rates such as the Fed Funds rate, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact on the Bank of any future changes in monetary
policies cannot be predicted.

From
time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance
between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries
are frequently made in Congress, the California legislature and before various bank regulatory and other professional agencies. See "Financial Services Modernization Legislation," and "Sarbanes-Oxley
Act of 2002."

Supervision and Regulation

The Bank is extensively regulated under both federal and state law. Set forth below, is a summary description of certain laws which relate to the regulation of
the Company and the Bank. The

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description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

The Company

The Company is a bank holding company within the meaning of the Bank Holding Company Act and is registered as such with, and subject to the supervision of, the
Federal Reserve Board. The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to
the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.

The
Company is required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the
voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company.

The
Company is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of
the outstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling
banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in,
activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The
Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board
determines that the activity or the control or the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The
Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under
certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.

Under
the Federal Reserve Board's regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe and unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both.

The
Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and files reports and proxy statements pursuant to such Act with the
Securities and Exchange Commission (SEC).

9

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The Bank

The Bank is chartered under the laws of the State of California and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent
provided by law. The Bank is subject to the supervision of, and is regularly examined by, the California Department of Financial Institutions (DFI) and the FDIC. Such supervision and regulation
include comprehensive reviews of all major aspects of the Bank's business and condition.

Various
requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes relate to many
aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends and locations of branch
offices. Further, the Bank is required to maintain certain levels of capital.

If,
as a result of an examination of a bank, the FDIC or the DFI should determine that the financial condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to these
regulatory agencies. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue
an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and
ultimately to terminate the Bank's deposit insurance, which for a California chartered bank would result in a revocation of the bank's charter.

Capital Standards

The Federal Reserve Board and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements,
which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as certain business
loans.

A
banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital.
Tier 1 capital consists primarily of common stock, retained earnings, non-cumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses, cumulative preferred stock, long
term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum
ratio of Tier 1 capital to risk-adjusted assets of 4%.

In
addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform
risk-based capital

10

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guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above
the minimum guidelines and ratios.

Future
changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to
grow and could restrict the amount of profits, if any, available for the payment of dividends to the Company.

On
January 1, 1998 legislation became effective which, among other things, gave the DFI power to take possession of the business and properties of a bank in the event that the
tangible shareholders' equity of the bank is less than the greater of (i) 3% of the bank's total assets or (ii) $1.0 million.

Prompt Corrective Action and Other Enforcement Mechanisms

Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more prescribed minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is
subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually
warrants such treatment.

In
addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators
for unsafe or
unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement
actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of
deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the
issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as
an additional basis for a regulatory action against the holding company.

Safety and Soundness Standards

The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") imposes certain specific restrictions on transactions and requires federal banking regulators
to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the
interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer,
director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.
The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given
the specific circumstances and severity of an institution's noncompliance with one or more standards.

11

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Premiums for Deposit Insurance

Through the Bank Insurance Fund ("BIF"), the FDIC insures the deposits of the Bank up to prescribed limits for each depositor. The amount of FDIC assessments paid
by each BIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution's
capitalization risk category and supervisory subgroup category. An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized,
adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup category is based on the FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required. The assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or
decrease the assessment rate schedule on a semi-annual basis. An increase in the assessment rate could have a material adverse effect on the Company's earnings, depending on the amount of
the increase. Due to continued growth in deposits and some recent bank failures, the bank insurance fund is nearing its minimum ratio of 1.25% on
insured deposits as mandated by law. If the ratio drops below 1.25%, it is likely that the FDIC will be required to assess premiums on all banks for the first time since 1996.

The
FDIC is authorized to terminate a depository institution's deposit insurance upon a finding by the FDIC that the institution's financial condition is unsafe or unsound or that the
institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. The termination of
deposit insurance for the Bank would have a material adverse effect on the Company's condition since it would result in the revocation of the Bank's charter and the cessation of its operations as a
going concern.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "SOA"). The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.

The
SOA is one of the most far-reaching U.S. securities legislation enacted. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are
required to file periodic reports with the SEC under the Securities Exchange Act of 1934, (the "Exchange Act"). The SOA includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the
SEC. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such
as the relationship between a board of directors and management and between a board of directors and its committees.

The
SOA addresses, among other matters:



12

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The
SOA contains provisions which became effective upon enactment on July 30, 2002, and provisions which will become effective within 30 days to one year from enactment.
The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. The Company has
implemented procedures to comply with the requirements for expanded disclosure of internal controls and the certification of financial statements. A significant portion of the remaining items in the
new legislation will become effective during 2003. The Company is currently evaluating what impacts the new legislation and its
implementing regulations will have upon its operations, including a likely increase in certain outside professional costs.

Financial Services Modernization Legislation

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act") was signed into law. The Financial Services
Modernization Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It
provides financial organizations with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank, subject to certain limitations.
The Financial Services Modernization Act establishes a new type of bank holding company, known as a financial holding company, that may engage in an expanded list of activities that are "financial in
nature," which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking.

The
Company currently meets all the requirements for financial holding company status. However, the Company does not expect to elect financial holding company status unless and until it
intends to engage in any of the expanded activities under the Financial Services Modernization Act which require such status. Unless and until it elects such status, the Company will only be permitted
to engage in non-banking activities that were permissible for bank holding companies as of the date of the enactment of the Financial Services Modernization Act.

The
Financial Services Modernization Act also sets forth a system of functional regulation that makes the Federal Reserve Board the "umbrella supervisor" for holding companies, while
providing for the supervision of the holding company's subsidiaries by other federal and state agencies. A bank holding company may not become a financial holding company if any of its subsidiary
financial institutions are not well-capitalized or well-managed. Further, each bank subsidiary of the holding company must have received at least a satisfactory Community
Reinvestment Financial Services Modernization Act (CRA) rating. The Financial Services Modernization Act also expands the types of

13

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financial activities a national bank may conduct through a financial subsidiary, addresses state regulation of insurance, generally prohibits unitary thrift holding companies organized after
May 4, 1999 from participating in new financial activities, provides privacy protection for nonpublic customer information of financial institutions, modernizes the Federal Home Loan Bank
system and makes miscellaneous regulatory improvements. The Federal Reserve Board and the Secretary of the Treasury must coordinate their supervision regarding approval of new financial activities to
be conducted through a financial holding company or through a financial subsidiary of a bank. While the provisions of the Financial Services Modernization Act regarding activities that may be
conducted through a financial subsidiary directly apply only to national banks, those provisions indirectly apply to state-chartered banks.

In
addition, the Bank is subject to other provisions of the Financial Services Modernization Act, including those relating to CRA, privacy and safe-guarding confidential
customer information, regardless of whether the Company elects to become a financial holding company or to conduct activities through a financial subsidiary of the Bank. The Company does not, however,
currently intend to file notice with the Federal Reserve Board to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank.

The
Company and the Bank do not believe that the Financial Services Modernization Act has had thus far, or will have in the near term, a material adverse effect on their operations.
However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services
Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result
of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more
financial resources than the Company and the Bank.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington D.C. which occurred
on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and
financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions,
regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Transactions between Affiliates

Transactions between a bank and its "affiliates" are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act
applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve Board has also recently
issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions.

Regulation W
incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an
affiliate. Affiliates of a bank include, among other entities, the bank's holding company and companies that are under common control with the bank. The Company is considered to be an affiliate of the
Bank. In general,

14

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subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in "covered transactions" with affiliates:



In
addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at
least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" includes:



In
addition, under Regulation W:



Regulation W
generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the
Federal Reserve Board decides to treat these subsidiaries as affiliates.

Interest on Reserves

Legislation to permit interest payments on reserves has been pending for several years. Several versions have passed the House Committee on Financial Services and
one could be before the House and Senate before the end of the year. The legislation would authorize the Federal Reserve to pay interest on required reserves and excess reserve balances, as well as to
pay explicit interest on contractual clearing balances. In addition, a "mark-up" bill implements several provisions:



15

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Interest
payments on required reserves and clearing balances would begin shortly after legislative approval. Other parts of the bill would be phased in, including interest payments on
certain checking accounts and interest payments on excess balances. It is currently impossible to predict accurately whether or in what form the legislation will be passed. Moreover, it is difficult
to predict exactly how
such legislation will affect the Company. It is likely though that balances with the Federal Reserve would increase. The Company may benefit by holding less cash in its vault because it will earn
interest by holding balances with the Federal Reserve. Sweep activity, which is used to minimize reserve requirements, will likely dwindle. Earnings credits would cease with the payment of interest,
and depository institutions would have one year to use existing credits. Finally, institutions may contract for higher clearing balances because they will earn interest.

Community Reinvestment Act

The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act
("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and
moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising other activities.

When
a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant
bank holding company, and such records may be the basis for denying the application. A bank's compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA
ratings on an institution's lending service and investment performance, resulting in a rating by the appropriate bank regulatory agency of "outstanding", "satisfactory", "needs to improve" or
"substantial noncompliance." At its last examination by the FDIC, the Bank received a CRA rating of "Satisfactory."

Accounting Changes

From time to time the Financial Accounting Standards Board ("FASB") issues pronouncements which govern the accounting treatment for the Company's financial
statements. For a description of the recent pronouncements applicable to the Company see the Notes to the Financial Statements included in Item 8 of this Report.

Off Balance Sheet and Other Related Party Transactions

As noted in Footnote 12 to the financial statements, the Company is contingently liable for letter of credit accommodations made to its customers in the ordinary
course of business totaling $39.4 million at December 31, 2002, up from $31.8 million one year earlier. Additionally, the Company has undisbursed loan commitments, also made in
the ordinary course of business, totaling $436.7 million, which was up from the $368.5 million outstanding one year earlier.

There
are no Special Purpose Entity ("SPE") trusts, corporations, or other legal entities established by the Company 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.

As
noted in Footnote 5 to the financial statements, the Company does make loans to related parties (directors and officers) in the ordinary course of business at prevailing rates and
terms. These loans totaled $1.2 million at the end of 2002 compared to $14.1 million one year earlier.

16

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Factors That May Affect Future Results of Operations

Dependence on Real Estate.A significant portion of the loan portfolio of the Company is dependent on real estate. At
December 31, 2002, real estate served as the principal source of collateral with respect to approximately 74.9% percent of the Company's loan portfolio. A decline in current economic conditions
or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and
the value of real estate owned by the Bank, as well as the Company's financial condition and results of operations in general and the market value of the Company's common stock. Acts of nature,
including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition.

Operating Strategies.From time to time, the Company develops long-term financial performance goals to guide and
measure the success of our operating strategies. The Company can make no assurance that we will be successful in achieving these long-term goals or that our operating strategies will be
successful. Achieving success in these areas is dependent on a number of factors, many of which are beyond the Company's direct control. Factors that may adversely affect the Company's ability to
attain its long-term financial performance goals include:



Interest Rate Changes.The earnings of the Company and the Bank are substantially affected by changes in prevailing interest
rates. Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities and the rates the Bank must pay on deposits and
borrowings. The difference between the rates the Bank receives on loans and securities and the rates it must pay on deposits and borrowings is known as the interest rate spread. Given the Bank's
current volume and mix of interest-bearing liabilities and interest-earning assets, the Bank's interest rate spread can be expected to increase when market interest rates are rising, and to decline
when market interest rates are declining. The Federal Reserve Board's decrease in rates during 2001 and 2002 substantially impacted the Bank's interest rate spread, as its spread for 2002 declined to
5.74% (taxable equivalent) from 6.36% (taxable equivalent) in 2001 and from 6.75% (taxable equivalent) for 2000. Although the Bank believes its current level of interest rate sensitivity is
reasonable, significant fluctuations in interest rates may have an adverse impact on its business, financial condition and results of operations.

17

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Competition.Competition may adversely affect the Bank's performance. The financial services business in the Bank's market
area is highly competitive, and becoming more so due to changes in regulation, technological advances and the accelerating pace of consolidation among financial service providers.
Mid-State faces competition both in attracting deposits and making loans. Mid-State competes for loans principally through competitive interest rates and the efficiency and
quality of the services provided. Increasing levels of competition in the banking and financial services businesses may reduce market share or cause the prices charged for services to fall. Results
may differ in future periods depending on the nature or level of competition.

Regulation.Both the Company and the Bank are subject to government regulation that could limit or restrict their activities,
adversely affecting operations. The financial services industry is heavily regulated. Federal and state regulation is designed to protect the deposits of consumers, not to benefit shareholders. The
regulations impose significant limitations on operations, and may be changed at any time, possibly causing results to vary significantly from past results. Government policy and regulation,
particularly as implemented through the Federal Reserve System, significantly affects credit conditions.

In
response to several well-publicized corporate and auditing scandals, the President signed the Sarbanes-Oxley Act into law on July 30, 2002. This act calls for
increased federal regulation of the accounting profession and imposes new requirements upon boards of directors, audit committees and executive officers of public companies. These requirements will
likely increase the accounting and legal costs of the Company. As a public company whose securities on listed on the Nasdaq national market, the Company will be subject to all of these provisions of
the Act and implementing regulations as well as additional corporate governance standards which Nasdaq has proposed for adoption.

Borrowers' Failure to Perform.A significant number of the Bank's borrowers and guarantors may fail to perform their
obligations as required by the terms of their loans, which could result in larger than expected losses. This risk increases when the economy is weak, as it has been recently. The Bank has adopted
underwriting and credit policies, and loan monitoring procedures, including the establishment and monitoring of allowances for credit losses. Management believes these provisions are reasonable and
adequate, and should keep credit losses within expected limits by assessing the likelihood of nonperformance, tracking loan performance and diversifying the credit portfolio. However, these policies
and procedures may not be adequate to prevent unexpected losses that could materially and adversely affect the results of operations.

Operations Risks.The Bank is subject to certain operations risks, including, but not limited to, data processing system
failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. The Bank maintains a system of internal controls to mitigate against such
occurrences and maintains insurance coverage for such risks, but should such an event occur that is not prevented or detected by the Bank's internal controls, uninsured or in excess of
applicable insurance limits, it could have a significant adverse impact on the Company's business, financial condition or results of operations.

Geographic Concentration.The Company's operations are located almost entirely in the Central Coast region of California. As
a result of this geographic concentration, our results depend largely upon economic and business conditions in this region. A deterioration in economic and business conditions in our market area could
have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

War on Terrorism.The terrorist attacks of September 11, 2001, the ensuing worldwide war on terrorism and the conflict
in Iraq, may lead to unexpected shifts in cash flows, deposit levels, and general economic activity. US banking agencies have warned of the possible impact of such events on the capital ratios of
banks.

Company Cash Flow.As a holding company, all of the Company's cash flow typically comes from dividends from the Bank. Various
statutory provisions restrict the amount of dividends the Bank can pay to the Company without regulatory approval.

18

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ITEM 2. PROPERTIES

The Company's principal office is located at 1026 Grand Avenue, Arroyo Grande, California. As of December 31, 2002, the Bank owned 23 of its branch offices
and leased 16 other Bank locations. The Company believes its present facilities are adequate for its present needs.

|Owned by Bank or Subsidiary: |  | Location of Offices        |  | Encumbrance
|---------------------------- |  | -------------------------- |  | -----------
|Arroyo Grande*               |  | 991 Bennett Avenue         |  |            
|Arroyo Grande                |  | 1026 Grand Avenue          |  |            
|Arroyo Grande*               |  | 550 Camino Mercado         |  |            
|Arroyo Grande*               |  | 398 Sunrise Terrace        |  |            
|Atascadero                   |  | 6950 El Camino Real        |  | $          
|Buellton                     |  | West Highway 246 & Central |  |            
|Cambria                      |  | 1070 Main Street           |  |            
|Goleta Valley                |  | 5956 Calle Real            |  |            
|Grover Beach                 |  | 899 Grand Avenue           |  |            
|Grover Beach*                |  | 140 North Second Street    |  |            
|Guadalupe                    |  | 905 Guadalupe Street       |  |            
|Lompoc                       |  | 828 North "H" Street       |  |            
|Los Osos                     |  | 1001 Los Osos Valley Road  |  |            
|Morro Bay                    |  | 251 Harbor Street          |  |            
|Nipomo                       |  | 615 West Tefft Street      |  |            
|Paso Robles                  |  | 845 Spring Street          |  |            
|Pismo Beach                  |  | 801 Price Street           |  |            
|San Luis Obispo              |  | 75 Santa Rosa              |  |            
|San Luis Obispo              |  | 2276 Broad Street          |  |            
|Santa Barbara                |  | 33 East Carrillo Street    |  |            
|Santa Barbara                |  | 2222 Bath Street           |  |            
|Santa Maria                  |  | 720 North Broadway         |  |            
|Santa Maria                  |  | 2739 Santa Maria Way       |  |            
|Santa Maria                  |  | 1554 South Broadway        |  |            
|Santa Maria                  |  | 519 E. Main Street         |  |            
|Templeton                    |  | 1025 Las Tablas Road       |  |            
|Vandenberg Village           |  | 3745 Constellation Road    |  |            

19

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Leased by Bank or Subsidiary

|Arroyo Grande
West Branch In Store Office |  | 1132 West Branch Street        |  | $2,850.00 per month
Expires February, 2005  
|----------------------------------------- |  | ------------------------------ |  | --------------------------------------------
|Camarillo
Camarillo Financial Center      |  | 470 Arneill Road               |  | $6,231.68 per month
Expires June, 2004      
|Camarillo **                              |  | 2357 Pickwick Drive, Suite B   |  | $3,951.72 per month
Expires July, 2005      
|Cayucos                                   |  | 107 North Ocean Avenue         |  | $1,605.00 per month
Expires November, 2007  
|Goleta Valley
Hollister Office            |  | 5340 Hollister Avenue          |  | $4,226.00 per month
Expires February, 2007  
|Orcutt                                    |  | 1110 East Clark Avenue         |  | $11,240.00 per month
Expires October, 2010  
|Oxnard
Esplanade Financial Center         |  | 300 Esplanade Drive, Suite 101 |  | $13,734.62 per month
Expires September, 2012
|Oxnard *                                  |  | 300 Esplanade Drive, Suite 110 |  | $10,954.35 per month
Expires August, 2012   
|Oxnard
Downtown Oxnard Office             |  | 155 "A" Street                 |  | $5,743.26 per month
Expires July, 2005      
|Oxnard
Northside Plaza Office             |  | 121-125 Gonzales Boulevard     |  | $6,044.12 per month
Expires July, 2007      
|Paso Robles
Creston Road Office           |  | 705 Golden Hill Road           |  | $9,030.00 per month
Expires October, 2012   
|Pismo Beach
Oak Park Office               |  | 865 Oak Park Boulevard         |  | $9,777.00 per month
Expires March, 2008     
|Santa Barbara
Milpas Office               |  | 914 Carpinteria Street         |  | $9,944.21 per month
Expires May, 2017       
|Santa Maria***
North Broadway OfficeLand |  | 720 North Broadway             |  | $2,368.00 per month
Expires Dec, 2008       
|Santa Ynez                                |  | 3600 Sagunto Street            |  | $2,500.00 per month
Expires May, 2012       
|Solvang                                   |  | 1600 Copenhagen Drive          |  | $9,688.69 per month
Expires April, 2003     
|Ventura
Mills Road Financial Center       |  | 300 S. Mills Road              |  | $17,306.94 per month
Expires August, 2012   
|                                          |  |                                |  |                                             

20

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|Ventura
Downtown Ventura Office |  | 304 E. Main Street     |  | $9,879.00 per month
Expires November, 2012  
|------------------------------- |  | ---------------------- |  | --------------------------------------------
|Ventura
County Center Office    |  | 6401 E. Telephone Road |  | $10,939.84 per month
Expires September, 2012

Former Bank Offices Leased by BankWhich Are Sub-Leased

|Nipomo
Ground Lease |  | 630 W. Tefft Street |  | $3,770.50 per month
Expires February, 2015
|------------------- |  | ------------------- |  | ------------------------------------------

ITEM 3. LEGAL PROCEEDINGS

The Company is, from time to time, subject to various pending and threatened legal actions which arise out of the normal course of its business. The Company is
not a party to any pending legal or administrative proceedings as of December 31, 2002 (other than ordinary routine litigation incidental to the Company's business) and no such proceedings are
known to be contemplated.

There
are no material proceedings adverse to the Company to which any director, officer, affiliate of the Company, 5% shareholder of the Company, or any associate of any such director,
officer, affiliate or 5% shareholder of the Company is a party, and none of the above persons has a material interest adverse to the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

21

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

The Company's Common Stock trades on the Nasdaq National Market under the symbol "MDST."

The
following table summarizes those trades of the Company's Common Stock on NASDAQ, setting forth the approximate high and low trade prices for each quarterly period ended since
January 1, 2001. The closing price on December 31, 2002 was $16.42 compared to the close one year earlier of $16.28. All prices shown below have been adjusted to reflect the two for one
stock split which became effective February 26, 2001.

Sales PricesQuarter Ended 2002Low

HighMarch 31

$
15.66

$
17.83June 30

$
16.83

$
21.05September 30

$
16.26

$
20.06December 31

$
15.50

$
18.25




Sales PricesQuarter Ended 2001Low

HighMarch 31

$
13.52

$
17.38June 30

$
13.50

$
18.32September 30

$
13.90

$
18.05December 31

$
14.10

$
17.40


Equity Plan Compensation Information

The following table summarizes information as of December 31, 2002 relating to equity compensation plans of the Company pursuant to which grants of
options, restricted stock or other rights to acquire shares may be granted from time to time.

|Plan Category                                          |  | Number of Securities
To be issued upon
Exercise of Options |  | Weighted Average
Exercise Price of
Outstanding Options |       | Number of Securities
Remaining Available
for Future Issuance
|------------------------------------------------------ |  | ---------------------------------------------------------- |  | ------------------------------------------------------ | ----- | ------------------------------------------------------------
|Equity compensation
Plans approved by Stockholders     |  | 1,877,866                                                  |  | $                                                      | 15.03 |                                                             
|Equity compensation
Plans not approved by Stockholders |  | -None-                                                     |  |                                                        | N/A   |                                                             
|                                                       |  |                                                            |  |                                                        |       |                                                             
|Total                                                  |  | 1,877,866                                                  |  | $                                                      | 15.03 |                                                             

Holders

As of December 31, 2002, there were approximately 3,800 holders of the Company's Common Stock. There are no other classes of common equity outstanding.

Dividends

The Company is a legal entity separate and distinct from the Bank. The Company's shareholders are entitled to receive dividends when declared by its Board of
Directors, out of funds legally available

22

---

therefor, subject to the restrictions set forth in the California General Corporation Law (the Corporation Law). The Corporation Law provides that a corporation may make a distribution to its
shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law also provides that, in the event that sufficient retained earnings are
not available for the proposed distribution, a corporation may, nevertheless, make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (i) the
corporation's assets equal at least 11/4 times its liabilities, and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the
corporation's earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation's interest expenses for such fiscal years,
then the corporation's current assets must equal at least 11/4 times its current liabilities.

The
ability of the Company to pay a cash dividend depends largely on the Bank's ability to pay a cash dividend to the Company. The payment of cash dividends by the Bank is subject to
restrictions set forth in the California Financial Code (the Financial Code). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of
(a) the bank's retained earnings; or (b) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary
of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the DFI, make a distribution to its shareholders in an amount not exceeding the greater of
(x) its retained earnings; (y) its net income for its last fiscal year; or (z) its net income for its current fiscal year. In the event that the DFI determines that the
shareholders' equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the DFI may order the bank to refrain from making a proposed distribution. The
FDIC may also restrict the payment of dividends if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the Bank would be included in one of the "undercapitalized"
categories for capital adequacy purposes pursuant to federal law. (See, "Item 1Prompt Corrective Action and Other Enforcement Mechanisms.") Additionally, while the Federal Reserve Board
has no general restriction with respect to the payment of cash dividends by an adequately capitalized bank to its parent holding company, the Federal Reserve Board might, under certain circumstances,
place restrictions on the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular bank, or object to management fees to be paid
by a subsidiary bank to its holding company on the basis that such fees cannot be supported by the value of the services rendered or are not the result of an arm's length transaction.

The
following table sets forth the per share amount and month of payment for all cash dividends paid since January 1, 2001 by the Company to its shareholders.

Payable Date

DividendJanuary 16, 2001

$0.09 per shareApril 16, 2001

$0.09 per shareJuly 16, 2001

$0.09 per shareOctober 15, 2001

$0.09 per shareJanuary 16, 2002

$0.10 per shareApril 15, 2002

$0.10 per shareJuly 15, 2002

$0.10 per shareOctober 15, 2002

$0.10 per shareJanuary 15, 2003

$0.11 per share


Whether
or not dividends will be paid in the future will be determined by the Board of Directors after consideration of various factors. The Company's profitability and regulatory
capital ratios in

23

---

addition to other financial conditions will be key factors considered by the Board of Directors in making such determinations regarding the payment of dividends by the Company.

Transfer Agent

Mellon Investor Services, LLC serves as the Company's transfer agent. Shareholder inquiries regarding holdings of Mid-State Bancshares Common Stock
can be directed to:

Mellon
Investor Services, LLC
P. O. Box 3315
South Hackensack, NJ 07606-1915

Or

85
Challenger Road
Ridgefield Park, NJ 07660

By
Phone:
1-(888)-540-9878 (U.S. & Canada)
1-(201)-329-8660 (Outside U.S.)

Alternatively,
Mellon Investor Services, LLC can be contacted via the Internet atwww.melloninvestor.com.

24

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ITEM 6. SELECTED FINANCIAL DATA

Selected Consolidated Financial DataMid-State Bancshares

|(In thousandsexcept per share data)                |                                            | 2002 |           | 2001      |   | 2000      |           | 1999 |           | 1998      |  
|--------------------------------------------------- | ------------------------------------------ | ---- | --------- | --------- | - | --------- | --------- | ---- | --------- | --------- | -
|Year Ended December 31:                             |                                            |      |           |           |   |           |           |      |           |           |  
|Interest Income (not taxable equivalent)            |                                            | $    | 109,332   |           | $ | 114,002   |           | $    | 109,967   |           | $
|Interest Expense                                    |                                            |      | 16,381    |           |   | 26,480    |           |      | 27,599    |           |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Net Interest Income                                 |                                            |      | 92,951    |           |   | 87,522    |           |      | 82,368    |           |  
|Provision for Loan Losses                           |                                            |      | 600       |           |   | 4,100     |           |      | 700       |           |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Net Interest Income after provision for loan losses |                                            |      | 92,351    |           |   | 83,422    |           |      | 81,668    |           |  
|Non-interest income                                 |                                            |      | 24,321    |           |   | 23,254    |           |      | 17,805    |           |  
|Non-interest expenseoperating                      |                                            |      | 70,925    |           |   | 64,444    |           |      | 57,982    |           |  
|Non-interest expensemerger related                 |                                            |      |          |           |   | 300       |           |      |          |           |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Income before income taxes                          |                                            |      | 45,747    |           |   | 41,932    |           |      | 41,491    |           |  
|Provision for income taxes                          |                                            |      | 15,892    |           |   | 14,530    |           |      | 14,142    |           |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Net Income                                          |                                            | $    | 29,855    |           | $ | 27,402    |           | $    | 27,349    |           | $
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Per share:                                          |                                            |      |           |           |   |           |           |      |           |           |  
|Net Incomebasic                                    |                                            | $    | 1.25      |           | $ | 1.22      |           | $    | 1.23      |           | $
|Net Incomediluted                                  |                                            | $    | 1.20      |           | $ | 1.18      |           | $    | 1.20      |           | $
|Weighted ave. shares for Basic E.P.S. calculation   |                                            |      | 23,962    |           |   | 22,452    |           |      | 22,257    |           |  
|Weighted ave. shares for Diluted E.P.S. calculation |                                            |      | 24,837    |           |   | 23,252    |           |      | 22,722    |           |  
|Cash dividends                                      |                                            | $    | 0.41      |           | $ | 0.37      |           | $    | 0.34      |           | $
|Book value at period-end                            |                                            | $    | 10.72     |           | $ | 9.74      |           | $    | 8.05      |           | $
|Tangible book value at period-end                   |                                            | $    | 8.94      |           | $ | 7.96      |           | $    | 7.96      |           | $
|Ending Shares                                       |                                            |      | 23,697    |           |   | 24,089    |           |      | 22,019    |           |  
|Period Averages:                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Total Assets                                        |                                            | $    | 1,892,137 |           | $ | 1,570,098 |           | $    | 1,389,625 |           | $
|Total Tangible Assets                               |                                            |      | 1,849,767 |           |   | 1,557,995 |           |      | 1,387,759 |           |  
|Total Loans & Leases                                |                                            |      | 1,109,245 |           |   | 999,501   |           |      | 847,797   |           |  
|Total Earning Assets                                |                                            |      | 1,718,280 |           |   | 1,444,631 |           |      | 1,279,119 |           |  
|Total Deposits                                      |                                            |      | 1,623,510 |           |   | 1,351,256 |           |      | 1,205,826 |           |  
|Common Equity                                       |                                            |      | 244,295   |           |   | 195,955   |           |      | 166,402   |           |  
|Common Tangible Equity                              |                                            |      | 201,925   |           |   | 183,852   |           |      | 164,536   |           |  
|At December 31,                                     |                                            |      |           |           |   |           |           |      |           |           |  
|Cash and cash equivalents                           |                                            | $    | 128,036   |           | $ | 102,970   |           | $    | 88,988    |           | $
|Investments and Fed Funds Sold                      |                                            |      | 625,483   |           |   | 524,345   |           |      | 407,462   |           |  
|Loans held for sale                                 |                                            |      | 22,560    |           |   | 13,604    |           |      |          |           |  
|Loans, net of deferred fees, before allowance       |                                            |      | 1,087,551 |           |   | 1,136,099 |           |      | 919,967   |           |  
|Allowance for Loan & Lease Losses                   |                                            |      | (17,370   | )         |   | (19,073   | )         |      | (10,920   | )         |  
|Goodwill and Other Intangibles                      |                                            |      | 42,264    |           |   | 42,742    |           |      | 1,771     |           |  
|Other assets                                        |                                            |      | 46,216    |           |   | 52,977    |           |      | 50,970    |           |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|                                                    | Total Assets                               |      | $         | 1,934,740 |   | $         | 1,853,664 |      | $         | 1,458,238 |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|Non-interest bearing deposits                       |                                            | $    | 390,212   |           | $ | 367,370   |           | $    | 275,624   |           | $
|Interest bearing deposits                           |                                            |      | 1,262,735 |           |   | 1,216,796 |           |      | 955,538   |           |  
|Other borrowings                                    |                                            |      | 10,973    |           |   | 17,714    |           |      | 30,240    |           |  
|Allowance for lossesunfunded commitments           |                                            |      | 1,771     |           |   | 1,586     |           |      | 2,360     |           |  
|Other liabilities                                   |                                            |      | 14,914    |           |   | 15,647    |           |      | 17,334    |           |  
|Shareholders' equity                                |                                            |      | 254,135   |           |   | 234,551   |           |      | 177,142   |           |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  
|                                                    | Total Liabilities and Shareholders' equity |      | $         | 1,934,740 |   | $         | 1,853,664 |      | $         | 1,458,238 |  
|                                                    |                                            |      |           |           |   |           |           |      |           |           |  

25

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|(In thousandsexcept per share data) |                                                 | 2002 |   | 2001   |   | 2000 |       | 1999 |   | 1998  |  
|------------------------------------ | ----------------------------------------------- | ---- | - | ------ | - | ---- | ----- | ---- | - | ----- | -
|Asset Quality                        |                                                 |      |   |        |   |      |       |      |   |       |  
|                                     | Non-accrual loans                               |      | $ | 16,748 |   | $    | 2,986 |      | $ | 4,510 |  
|                                     | Loans past due 90 days or more                  |      |   |       |   |      | 690   |      |   | 222   |  
|                                     | Other real estate owned                         |      |   |       |   |      |      |      |   |      |  
|                                     |                                                 |      |   |        |   |      |       |      |   |       |  
|                                     | Total non performing assets                     |      | $ | 16,748 |   | $    | 3,676 |      | $ | 4,732 |  
|                                     |                                                 |      |   |        |   |      |       |      |   |       |  
|Financial Ratios                     |                                                 |      |   |        |   |      |       |      |   |       |  
|For the year:                        |                                                 |      |   |        |   |      |       |      |   |       |  
|                                     | Return on assets                                |      |   | 1.58   | % |      | 1.75  | %    |   | 1.97  | %
|                                     | Return on tangible assets                       |      |   | 1.61   | % |      | 1.76  | %    |   | 1.97  | %
|                                     | Return on equity                                |      |   | 12.22  | % |      | 13.98 | %    |   | 16.44 | %
|                                     | Return on tangible equity                       |      |   | 14.79  | % |      | 14.90 | %    |   | 16.62 | %
|                                     | Net interest margin (not taxable equivalent)    |      |   | 5.41   | % |      | 6.06  | %    |   | 6.44  | %
|                                     | Net interest margin (taxable equivalent)        |      |   | 5.74   | % |      | 6.36  | %    |   | 6.75  | %
|                                     | Net loan losses (recoveries) to avg. loans      |      |   | 0.19   | % |      | 0.22  | %    |   | 0.06  | %
|                                     | Efficiency ratio                                |      |   | 60.5   | % |      | 58.4  | %    |   | 57.9  | %
|At December 31:                      |                                                 |      |   |        |   |      |       |      |   |       |  
|                                     | Equity to average assets (leverage ratio)       |      |   | 10.6   | % |      | 10.2  | %    |   | 12.3  | %
|                                     | Tier One capital to risk-adjusted assets        |      |   | 14.7   | % |      | 13.8  | %    |   | 15.5  | %
|                                     | Total capital to risk-adjusted assets           |      |   | 16.0   | % |      | 15.0  | %    |   | 16.7  | %
|                                     | Loan loss allowance to loans, gross(1)          |      |   | 1.8    | % |      | 1.8   | %    |   | 1.4   | %
|                                     | Non-accrual loans to total loans, gross         |      |   | 1.5    | % |      | 0.3   | %    |   | 0.5   | %
|                                     | Non performing assets to total assets           |      |   | 0.9    | % |      | 0.2   | %    |   | 0.3   | %
|                                     | Allowance for losses to non performing loans(1) |      |   | 114    | % |      | 562   | %    |   | 281   | %

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction and Business of the Company

The Company has as its single, wholly owned subsidiary, Mid-State Bank & Trust (the Bank). The Bank has two wholly owned
subsidiariesMSB Properties and Mid Coast Land Company (discussed above in Part I of this report and later in this Management's Discussion and Analysis). The Bank was founded in
1961 and operates a full service commercial banking business serving its customers on the Central Coast of California. Headquartered in Arroyo Grande, it operates 39 offices in communities throughout
San Luis Obispo, Santa Barbara and Ventura Counties and serves over 115,000 households and businesses.

The
following discussion and analysis will provide insight and supplementary information into the accompanying consolidated financial statements of the Company. It also provides
Management's assessment of the operating trends over the past few years and certain of their expectations for 2003.

Certain
statements contained in this Management's Discussion and Analysis (MD&A), including, without limitation, statements containing the words "believes", "anticipates", "intends",
"expects", and words of similar impact, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to
be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general
economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in interest rates,

26

---

changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Company's business, economic, political
and global changes arising from the terrorist attacks of September 11, 2001 and the potential conflict in Iraq, and other factors referenced in this report, including in "Item 1.
Business-Factors that May Affect Future Results of Operations." The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or developments.

2002 RESULTS AND ACCOMPLISHMENTS

Financial

The Company, on a consolidated basis, reported net income of $29.9 million in 2002 and $27.4 million in 2001 after generating $27.3 million
in 2000. The diluted Earnings Per Share (EPS) was $1.20 for 2002 compared to $1.18 in 2001 and $1.20 in 2000. Consolidated total assets at December 31, 2002 were $1.935 billion compared
to $1.852 billion at December 31, 2001, up 4.5%. Total deposits also increased from $1.584 billion as of December 31, 2001 to $1.653 billion as of
December 31, 2002. Shareholders' common equity stood at $254.1 million at year end up from its $234.6 million level one year earlier. Factors contributing to the increase in
shareholders' common equity included; 1) the $29.9 million of net income generated for the year, 2) a $6.8 million after-tax change in the unrealized gain on
available for
sale securities, and 3) the $1.1 million received for the exercise of stock options. Partially offsetting these increases were $9.8 million in dividends paid out and
$8.4 million paid for the repurchase of common stock outstanding.

The
table below illustrates net income by subsidiary unit.

Income (Loss) by subsidiary (000's)

2002

2001

2000Bank only, pre-tax

$
44,292

$
41,211

$
39,441MSB Properties, pre-tax


2,142


844


2,166Mid Coast Land Co., pre-tax


(124
)

543


483Parent only, pre-tax


(563
)

(666
)

(599
)Tax expense


15,892


14,530


14,142Consolidated Mid-State Bancshares

$
29,855

$
27,402

$
27,349


Other Events and Items of Note in 2002

With the addition of the former American Commercial Bank branches in Ventura County to the Company's service area, much time was spent "blue-printing"
a new structure to manage the larger
Company with its expanded customer base and geographic reach. Broadly speaking, in terms of customer contact areas, the Company approaches its customer base from three perspectivesretail
banking, business banking and corporate banking. Corporate banking will handle the needs of larger companies with annual revenue in excess of five million dollars, large private banking clients,
agricultural banking and real estate developers. Business banking will focus on the needs of smaller businesses with annual sales in the one to five million dollar range which typically have borrowing
needs under one million dollars. Retail banking focuses more on the needs of the individual consumer and small "Main Street" business through such products as traditional checking and savings
accounts, installment loans, mortgage loans, merchant services and cash reserve. Both business and retail banking are broken into three regions. The North/Mid-San Luis Obispo County Region
includes the communities of San Luis Obispo, coastal areas from Los Osos north, and cities in northern San Luis Obispo County. The Five Cities/Santa Maria Valley Region includes the five cities area,
Nipomo, the Santa Maria Valley and Lompoc. The Santa Barbara/Ventura County Region includes the Santa Ynez Valley, Santa Barbara/Goleta and the communities in Ventura County. Corporate Banking is
managed

27

---

by a mid-coast and southern sectional manager. Offices however are maintained in key communities with local corporate bankers in Paso Robles, San Luis Obispo, the Five Cities, Santa Maria
(corporate and agricultural), Santa Barbara, Ventura and Oxnard.

With
the early retirement of the Company's former Chief Credit Officer, Mid-State undertook an extensive search for a new Chief Credit Officer in early 2002 involving both
external and internal candidates. On March 14, the Company announced the appointment of Mr. Harry Sackrider to the position of Chief Credit Officer, overseeing all credit policy and
analysis, risk management, credit administration, and loan review for the Bank. Mr. Sackrider has over 35 years in banking with extensive real estate experience. Mr. Sackrider
joined the Bank in 1997 and most recently held the position of Senior Vice President and real estate credit administrator since 2000. In January 2003, Mr. Sackrider was given the
additional corporate title of Executive Vice President and Chief Credit Officer.

The
Board of Directors authorized a stock repurchase program for up to five percent (5%) of its outstanding shares in March of 2000, and upon completing that initial program, authorized
the repurchase of an additional five percent of its outstanding shares in May 2002. The buyback reduces the number of outstanding shares resulting in an improvement to the Company's earnings
per share and to its return on equity. These repurchases are being made from time to time by the Company in the open market or privately negotiated transactions in compliance with the Securities and
Exchange Commission (SEC) rules. The total number of shares repurchased was 477,264, 454,126 and 601,312 in 2002, 2001 and 2000, respectively. As of December 31, 2002, the Company could
repurchase up to an additional 800,878 shares under the May 2002 authorization.

There
were two changes of note on the Company's Board of Directors during the year. Mr. Raymond Jones, who had served on the Board since 1991 and prior to that had worked for the
Bank since 1967 in the capacity of Cashier and later Chief Financial Officer, retired from the Board in May 2002. He will continue to serve the board as a director emeritus. On a sadder note,
A.J. Diani, who had served on the Board since the Company's merger with Bank of Santa Maria as Vice Chairman of the Board, passed away on October 31, 2002. His exemplary record of service to
the community is held in the highest regard by members of the Company. He will be greatly missed.

Other
milestones for the Bank in 2002, while less significant than those noted above, are certainly notable. Approvals were finally obtained and work commenced on a permanent structure
to replace the Bank's office in Cambria. The final property held by Mid Coast Land Company was sold with closing occurring in January 2003. And the Mid-State Bank Foundation,
started in 2001, contributed over $215 thousand throughout the tri-county area. Coupled with donations made directly by the Bank, Mid-State contributed over
$302 thousand in support of charitable causes throughout its trade area.

EXTERNAL FACTORS IMPACTING THE BANK

Economic Conditions

At the start of 2002, Management noted in last year's annual report that we expected to "...witness a positive and improving level of economic activity over the
course of the year." In spite of the potential lingering effects of the war on terrorism, we expected this improving economic activity to extend beyond Mid-State's trade area and that the
Federal Reserve would likely need to raise interest rates in the middle part of the year with Prime raising to somewhere in the 5.5% range by the end of 2002. As the Company enters 2003, we note that
our outlook for 2002 was optimistic and was only reasonably accurate with respect to the local economy of the tri-county service area of the Bank. The most comprehensive review of local
economic conditions known to Management comes from the University of California at Santa Barbara (UCSB) Economic Forecast Project. According to UCSB, Gross County Product in the tri-county
area was estimated at $69.1 billion in 2002, up 6.5% from the $64.9 level in the prior year. Adjusted for real dollars, it was up 3.3% following a 4.3% growth rate in 2001. While these rates of
growth were down from the double digit increases witnessed in the late

28

---

1990's, they were nonetheless substantially better than those exhibited by the State as a whole. California's real State Product was flat in 2001 and is estimated to actually have declined in 2002 by
0.7%. On a national level, real gross domestic product was better than the State, but not quite as healthy as the local tri-county area, having increased 2.4% in 2002 following a 0.3%
increase in the prior year. Growth in 2002 was centered earlier in the year as it slowed to an annualized rate of just 0.7% in the fourth quarter.

The
Federal Reserve Board, which had lowered interest rates frequently and dramatically during 2001, followed a steady course through most of 2002, hoping that the lower interest rate
levels would work to stimulate activity during the year. But as the year progressed, with unemployment hovering near 6.0%, with gross domestic product slowing, with the S&P 500 off some 23% for the
first 10 months of the year and with continuing geo-political risk creating a large degree of uncertainty throughout the country, the Federal Reserve Board took the unusual step of
lowering rates again by 0.50% in November 2002. Commercial banks quickly followed suit lowering the Prime Rate to 4.25%. Early data suggest that, except in the housing industry, the additional
rate cuts are having little effect on stimulating economic
activity. Management believes that it is possible that the low rate environment is actually having the opposite of the desired effect. Low interest rate levels, while helping refinancing homeowners
realize lower monthly payments, are negatively impacting the disposable incomes of those who are dependent on earnings from their savings. Commercial borrowing is not benefiting as was hoped because
lenders can not make sufficient returns in the low rate environment to justify the risk inherent in certain loans. Moreover, potential commercial borrowers would appear to be more concerned about
economic activity in general than the absolute level of rates currently.

Current
economic difficulties being experienced by the State are expected to have a negative effect on the local tri-county area. As the State moves to narrow its $26 to
$34 billion deficit, the impacts on local cities, counties and schools are inescapable. The public sector, which accounts for 17% of employment in the tri-counties, will see
employment decline as funding from the State declines. Non employment related spending will also decrease in the face of tighter budgets. The State is also expected to impose higher vehicle license
fees, higher DMV use fees, higher State park fees, higher taxes for farmers on the use of pesticides, public safety surcharges on intrastate telephone calls, increased tuition costs at community
colleges and State universities, and more.

National
indicators do not yet show any significant improvement in the outlook for economic activity, though potentially positive impacts are on the horizon. Policymakers in Washington
would appear to be considering a number of potential stimulants for the economy which would be of help later this year. It is generally agreed that a quick resolution of the war in Iraq will also have
a positive effect on the economy if for no other reason than through improved "psychological" sentiment. A return of lower oil prices and stability of oil supplies would also have a positive impact.

Local
economic conditions, in spite of the problems at the State and National levels, are clearly better than in other parts of the State. Real Gross County Product, as noted above,
continues at a positive pace and is expected by UCSB to improve in 2003 by 4.8% across the tri-county area. Unemployment rates are still low relative to the State and the Nation at 3.5% in
San Luis Obispo County, 4.6% in Santa Barbara County and 5.7% in Ventura County. The local real estate market continues strong with demand far outpacing supply and median home prices at record highs.
Lenders are more prudent in their lending practices having learned the lessons of the early 1990's and building is far less speculative.

Management
is very cautious in its outlook for 2003. While local conditions would appear to be relatively favorable in the near term, the effects of National and State conditions are
likely to be negative. Management does not see a return of robust economic conditions until at least 2004 and that will be highly dependent on the outcome of events in the Middle East. Interest rates
are not expected to rise until at least late 2003 and more than likely 2004. It is even possible that the Federal Reserve

29

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may, with no other effective tools available to it, lower rates again in their efforts to stimulate the economy.

Competitive Factors

Competitive pressures from other financial institutions continue to be intense both in the Company's trade area and throughout the nation. Many banks are
suffering from insufficient loan volumes and have become very aggressive on the pricing of those good credits available. Various mortgage bankers are blanketing the central coast communities with
sales promotions and are extremely competitive with their rate programs.

It
should also be noted that the trend toward consolidation of banking assets exhibited over the past few years in California continued in 2002. Statewide, 4 banks were merged out of
existence or liquidated during the year and 8 new banks commenced operation.

30

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ANALYSIS OF STATEMENT OF FINANCIAL POSITION

Loans

The Bank experienced a decrease in net loans from $1,117.0 million at the end of 2001, to $1,070.2 million at the end of 2002. This represents a
decrease in the loan portfolio of $46.8 million following the $208.0 million increase in 2001, which was primarily attributed to the merger with Americorp. The loan portfolio represents
approximately 55% of the Bank's assets. Additionally, loans held for sale (which are single family residential mortgages pending sale) total $22.6 million at the end of 2002, up from
$13.6 million one year earlier.

Mid-Sate BancsharesTrends in Loan Categories

GRAPHIC

The
graph above displays the trend over the past five years in the various components of the loan portfolio. Construction loans have risen from their level five years
earlier$90.7 million at December 31, 1998 compared to $213.4 million at year-end 2002. Real Estate loans nearly doubled from $285.9 million at the
end of 1998 to $525.2 million at the end of 2002. Home Equity Credit Lines have generally increased from $57.4 million at the end of 1998 compared to $74.3 million at the end of
2002. Consumer loans (installment and credit reserve) have decreased from $59.3 million at December 31, 1998 to $30.9 million at year-end 2002 which is due to the sale
in December 2001 of Credit Card receivables. Commercial loans, while growing in recent years, declined to $214.0 million at December 31, 2002. Agricultural production loans
decreased from $35.1 million at the end of 1998 to $29.9 million at the end
of 2002. The Bank expects to continue to emphasize all types of lending activity in order to diversify the risk in its portfolio. Economic activity in the Central Coast will determine the types of
credit the Bank will be able to extend and hence its ability to achieve this objective.

The
Bank's allowance for losses stands at $19.1 million, or 1.8% of gross loans, and represents losses not yet realized, but inherent in the loan portfolio and on unfunded
commitments. This amount is down from the $20.7 million at December 31, 2001. The year-end 2002 balance now represents 114%

31

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of non-performing loans which is down from 562% at the end of 2001. A five-year review of activity in the allowance for losses and an allocation by loan type of the allowance
is shown in the tables below.

|Allowance for Losses (in 000's)                                    |                                    | 2002 |        | 2001   |   | 2000   |        | 1999 |        | 1998   |  
|------------------------------------------------------------------ | ---------------------------------- | ---- | ------ | ------ | - | ------ | ------ | ---- | ------ | ------ | -
|Allowance for loan losses beginning of year                        |                                    | $    | 19,073 |        | $ | 10,920 |        | $    | 10,905 |        | $
|Allowance for lossesunfunded commitments                          |                                    |      | 1,586  |        |   | 2,360  |        |      | 2,200  |        |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|Total allowance for losses                                         |                                    | $    | 20,659 |        | $ | 13,280 |        | $    | 13,105 |        | $
|Provision charged to operating expense                             |                                    |      | 600    |        |   | 4,100  |        |      | 700    |        |  
|Adjustmentsacquisition through merger                             |                                    |      |       |        |   | 5,464  |        |      |       |        |  
|Loans charged off:                                                 |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Construction and development loans |      |        |       |   |        |       |      |        |       |  
|                                                                   | Real estate loans                  |      |        |       |   |        | (3     | )    |        | (93    | )
|                                                                   | Home equity credit lines           |      |        |       |   |        | (4     | )    |        | (70    | )
|                                                                   | Installment loans                  |      |        | (275   | ) |        | (275   | )    |        | (278   | )
|                                                                   | Commercial loans                   |      |        | (2,475 | ) |        | (2,377 | )    |        | (512   | )
|                                                                   | Credit cards and related loans     |      |        | (88    | ) |        | (255   | )    |        | (239   | )
|Recoveries of loans previously charged off:                        |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Construction and development loans |      |        | 2      |   |        | 2      |      |        | 2      |  
|                                                                   | Real estate loans                  |      |        | 8      |   |        | 147    |      |        | 14     |  
|                                                                   | Home equity credit lines           |      |        | 14     |   |        |       |      |        | 86     |  
|                                                                   | Installment loans                  |      |        | 196    |   |        | 186    |      |        | 134    |  
|                                                                   | Commercial loans                   |      |        | 451    |   |        | 309    |      |        | 330    |  
|                                                                   | Credit cards and related loans     |      |        | 49     |   |        | 85     |      |        | 101    |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Total Allowance for Losses         |      | $      | 19,141 |   | $      | 20,659 |      | $      | 13,280 |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|Allocation of Allowance for Losses (in 000's)                      |                                    |      |        |        |   |        |        |      |        |        |  
|Allowance for loan losses                                          |                                    | $    | 17,370 |        | $ | 19,073 |        | $    | 10,920 |        | $
|Allowance for lossesunfunded commitments                          |                                    |      | 1,771  |        |   | 1,586  |        |      | 2,360  |        |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Total Allowance for Losses         |      | $      | 19,141 |   | $      | 20,659 |      | $      | 13,280 |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|Ratio of Net Loan Losses (Recoveries) to Average Loans Outstanding |                                    |      | 0.19   | %      |   | 0.22   | %      |      | 0.06   | %      |  

Allocation
of the allowance for losses at December 31:

|(dollars in 000's)
Balance applicable to: |                        | 2002 |       | Percent
of
Loans |      | 2001  |   | Percent
of
Loans |        | 2000 |       | Percent
of
Loans |       | 1999   |      | Percent
of
Loans |   | 1998  |        | Percent
of
Loans |      
|----------------------------------------- | ---------------------- | ---- | ----- | ---------------- | ---- | ----- | - | ---------------- | ------ | ---- | ----- | ---------------- | ----- | ------ | ---- | ---------------- | - | ----- | ------ | ---------------- | -----
|Construction and Land Dev.                |                        | $    | 2,636 |                  | 19.7 | %     | $ | 1,969            |        | 18.8 | %     | $                | 2,095 |        | 18.3 | %                | $ | 1,979 |        | 15.3             | %    
|Real Estate                               |                        |      | 4,047 |                  | 48.4 | %     |   | 2,949            |        | 46.8 | %     |                  | 3,993 |        | 48.4 | %                |   | 2,291 |        | 49.1             | %    
|H.E.C.L.                                  |                        |      | 295   |                  | 6.8  | %     |   | 443              |        | 6.0  | %     |                  | 390   |        | 6.0  | %                |   | 344   |        | 6.9              | %    
|Installment                               |                        |      | 254   |                  | 2.5  | %     |   | 780              |        | 3.1  | %     |                  | 292   |        | 3.4  | %                |   | 283   |        | 3.9              | %    
|Credit Card and Related                   |                        |      | 97    |                  | 0.3  | %     |   | 393              |        | 0.3  | %     |                  | 1,203 |        | 1.0  | %                |   | 770   |        | 1.6              | %    
|Commercial, Other                         |                        |      | 6,296 |                  | 22.3 | %     |   | 5,712            |        | 25.0 | %     |                  | 2,247 |        | 22.9 | %                |   | 2,248 |        | 23.2             | %    
|Unfunded commitments                      |                        |      | 1,771 |                  | N/A  |       |   | 1,586            |        | N/A  |       |                  | 2,360 |        | N/A  |                  |   | 2,200 |        | N/A              |      
|Unallocated                               |                        |      | 3,745 |                  | N/A  |       |   | 6,827            |        | N/A  |       |                  | 700   |        | N/A  |                  |   | 2,990 |        | N/A              |      
|                                          |                        |      |       |                  |      |       |   |                  |        |      |       |                  |       |        |      |                  |   |       |        |                  |      
|                                          | Balance at End of Year |      | $     | 19,141           |      | 100.0 | % | $                | 20,659 |      | 100.0 | %                | $     | 13,280 |      | 100.0            | % | $     | 13,105 |                  | 100.0
|                                          |                        |      |       |                  |      |       |   |                  |        |      |       |                  |       |        |      |                  |   |       |        |                  |      

The increase in the unallocated portion of the allowance for losses in 2001 to $6.8 million from $0.7 million in 2000 is related to
1) concerns by Management of a pending recession and its impact on

32

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the losses inherent in the loan portfolio, 2) refinements to the loss allowance methodology as it relates to historical loss experience and 3) concerns by Management of the losses
inherent in the acquisition of American Commercial Bank's loan portfolio. The reduction of the unallocated portion in 2002 to $3.7 million reflects additional specific allocations, especially
on the Company's Construction & Land Development and Real Estate loan portfolios.

Non-accrual
loans within the Bank's portfolio increased from $3.0 million as of December 31, 2001, to $16.7 million, at the end of 2002. Loans
90 days or more past due decreased from $690 thousand at December 31, 2001, to zero at the end of 2002. Additional information on non-accrual loans, past due loans and
troubled debt restructurings can be found in Footnote 5 to the financial statements. The level of non-accrual loans at the end of 2002 is centered primarily in two real estate secured
loans (total $14.4 million). Management has established specific reserves that would offset potential losses, if any, arising from less than full recovery of the loans from the supporting
collateral. Recoveries in 2002 of loans previously charged-off totaled $720 thousand compared to charge-offs of $2.8 million taken during the year resulting in
net charge-offs of $2.1 million. This compares to net charge-offs incurred during 2001 of $2.2 million and net charge-offs of $525 thousand in
2000. The Bank anticipates that charge-offs (actual losses) will continue during 2003. It is unlikely that recoveries would exceed charge-offs in the coming year.

With
the combination of the collateral securing the problem loans and the size of the allowance for losses, Management feels that the allowance is sufficient to cover inherent losses.
Management reviews the adequacy of the allowance and also employs an independent third party loan review group to, among other things, review the adequacy of the allowance and make recommendations.
Management, as necessary, adjusts the allowance on a regular basis. The allowance is also examined annually by one or more of the Bank's regulatory bodies including the FDIC and DFI. During the
3rd quarter of 2001, the effects of an economic slow-down 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 loans losses at that time. No additional provision for loan losses was made after June of 2002 in view of the
adequacy of the allowance. The need for additional provision for loan losses in 2003 will be dependent upon Management's on-going analysis of the adequacy of the allowance for loan losses.
While Management believes it to be adequate at the present time, the appropriate value can fluctuate over time in response to economic conditions and the subjective decisions which must be made in
response to those conditions.

The
allowance for losses as a percentage of total loans stands at 1.8% at the end of 2002. The adequacy of the allowance is determined by considering the type and quality of loans in the
loan
portfolio, trends in non-accrual loans, trends in delinquencies, trends in actual losses, geographical distribution of loans, management expertise, economic outlook, diversification of the
loan portfolio, value of available collateral, and the costs of collateral liquidation. In establishing the allowance at December 31, 2002, Management considered the quality of the loan
portfolio obtained by acquisition and the slow-down in economic activity and continues to acknowledge the combined high concentration of real estate loans, increases in certain higher risk
activities such as construction lending, and higher levels of individually large corporate loans.

The
allowance for losses consists of a statistically allocated portion and a specifically allocated portion. The total of these components is considered adequate to provide for losses,
which can be reasonably anticipated. However, since these amounts are based on estimates, ultimate losses relating to these loans may vary.

A
summary of maturities and sensitivities of loans to changes in interest rates at December 31, 2002 and 2001 is shown in the table below. A more complete discussion of the Bank's
exposure to

33

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changes in interest rates can be found in the MD&A under the section titled "Net Interest Income and Interest Rate Risk".

|(dollars in 000's)
December 31, 2002 |           | 3 Months
or less                       |         | Over
3 Months
through
12 Months |   | Due after
one year
to three
years |        | Due after
three years
to five
years |        | Due after
five years |   | Total 
|------------------------------------ | --------- | -------------------------------------- | ------- | ------------------------------- | - | --------------------------------- | ------ | ----------------------------------- | ------ | -------------------- | - | ------
|Fixed rate loans                     |           | $                                      | 23,503  |                                 | $ | 43,992                            |        | $                                   | 62,458 |                      | $ | 57,506
|Floating rate loans                  |           |                                        | 539,662 |                                 |   | 5,552                             |        |                                     | 64,653 |                      |   | 56,701
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     | Sub-total |                                        |         | 563,165                         |   |                                   | 49,544 |                                     |        | 127,111              |   |       
|Non accrual loans                    |           |                                        |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |           | Total loans, net of deferred loan fees |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |        |                      |   |       

|(dollars in 000's)
December 31, 2001 |           | 3 Months
or less                       |         | Over
3 Months
through
12 Months |   | Due after
one year
to three
years |        | Due after
three years
to five
years |         | Due after
five years |   | Total 
|------------------------------------ | --------- | -------------------------------------- | ------- | ------------------------------- | - | --------------------------------- | ------ | ----------------------------------- | ------- | -------------------- | - | ------
|Fixed rate loans                     |           | $                                      | 27,102  |                                 | $ | 47,470                            |        | $                                   | 82, 845 |                      | $ | 67,100
|Floating rate loans                  |           |                                        | 581,932 |                                 |   | 10,909                            |        |                                     | 56,009  |                      |   | 95,486
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |         |                      |   |       
|                                     | Sub-total |                                        |         | 609,034                         |   |                                   | 58,379 |                                     |         | 138,854              |   |       
|Non accrual loans                    |           |                                        |         |                                 |   |                                   |        |                                     |         |                      |   |       
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |         |                      |   |       
|                                     |           | Total loans, net of deferred loan fees |         |                                 |   |                                   |        |                                     |         |                      |   |       
|                                     |           |                                        |         |                                 |   |                                   |        |                                     |         |                      |   |       

Investment Portfolio

The Bank's investment portfolio primarily consists of US Treasury Notes and Bills, Federal Agency Notes, Mortgage Backed Securities and Municipal Bonds. See
Footnote No. 4 to the consolidated financial statements for a detailed composition of the investment portfolio. The Treasury and Agency portion of the portfolio increased by
$54.7 million from one year ago. The Bank increased its holdings in the Municipal Bond portfolio from $225.5 million at the end of 2001, to $323.5 million at the end of 2002. The
U.S. Treasury portion of the portfolio decreased by $14.6 million while the Federal Agencies increased by $69.3 million from December 31, 2001 to December 31, 2002.
Mortgage Back Securities increased $2.3 million. In total, the Bank increased its investment portfolio from $451.3 million at the end of 2001 to $609.0 million at the end of 2002,
a $157.7 million increase.

The
Bank may segregate its portfolio into three categoriesa "Trading Portfolio" (which is carried at market value, with changes in market value reflected in the income
statement), a "Held to Maturity" portfolio (which is carried at amortized cost, with changes in market value having no impact on the financial statements) and an "Available for Sale" portfolio (which
is carried at market value, with changes in market value reflected in comprehensive income). The Bank holds no securities that should be classified as Trading securities. The Bank has determined that
since its securities may be sold prior to maturity because of interest rate changes, to meet liquidity needs, or to better match the re-pricing characteristics of funding sources, that the
entire portfolio should be classified as Available for Sale. On January 1, 2001, $25.6 million in the Held to Maturity portfolio which the Bank inherited from a prior meger was
transferred to the Available for Sale portion of the investment portfolio. Ordinarily such transfers are prohibited, however, concurrent with the adoption of Statement of Financial Accounting
Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities, a one time reclassification was permitted.

Adjustments
to the Available for Sale portfolio for changes in market values resulted in an unrealized gain of $13.2 million included in accumulated other comprehensive income as
of December 31, 2002 compared to an unrealized gain of $6.4 million at December 31, 2001, net of

34

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related taxes. Purchases exceeded maturities and sales over the full year and the total investment portfolio increased by $157.6 million from the end of 2001 to the end of 2002.

Shown
below is a summary maturity distribution of the investment portfolio, which is all classified as available for sale, by type and weighted taxable equivalent yield as of
December 31, 2002. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity information for Mortgage Backed securities shown below is based on contractual maturities.

|(dollars in 000's)     |                            | One Year
Or Less |   | After One
Year to
Five Years |         | After Five
Years to
Ten Years |         | After
Ten Years |   | Total  
|---------------------- | -------------------------- | ---------------- | - | ---------------------------- | ------- | ----------------------------- | ------- | --------------- | - | -------
|Maturity Distribution: |                            |                  |   |                              |         |                               |         |                 |   |        
|                       | U.S. Treasury Securities   |                  | $ | 11,004                       |         | $                             | 15,595  |                 | $ |       
|                       | U.S. Government Agencies   |                  |   | 79,092                       |         |                               | 156,010 |                 |   |       
|                       | Mortgage Backed Securities |                  |   | 97                           |         |                               | 343     |                 |   | 4,890  
|                       | Municipal Bonds, Other     |                  |   | 48,065                       |         |                               | 139,341 |                 |   | 148,133
|                       |                            |                  |   |                              |         |                               |         |                 |   |        
|                       |                            | Total            |   | $                            | 138,258 |                               | $       | 311,289         |   | $      
|                       |                            |                  |   |                              |         |                               |         |                 |   |        
|                       |                            |                  |   |                              |         |                               |         |                 |   |        

|                        |                            | One Year
Or Less |      | After One
Year to
Five Years |      | After Five
Years to
Ten Years |      | After
Ten Years |      | Total |     
|----------------------- | -------------------------- | ---------------- | ---- | ---------------------------- | ---- | ----------------------------- | ---- | --------------- | ---- | ----- | ----
|Weighted Average Yield: |                            |                  |      |                              |      |                               |      |                 |      |       |     
|                        | U.S. Treasury Securities   |                  | 2.90 | %                            | 3.29 | %                             |     |                 |     |       | 3.13
|                        | U.S. Government Agencies   |                  | 3.88 | %                            | 4.12 | %                             |     |                 |     |       | 4.04
|                        | Mortgage Backed Securities |                  | 6.58 | %                            | 6.61 | %                             | 6.42 | %               | 6.34 | %     | 6.43
|                        | Municipal Bonds, Other     |                  | 6.18 | %                            | 5.91 | %                             | 6.32 | %               | 5.91 | %     | 6.12
|                        |                            |                  |      |                              |      |                               |      |                 |      |       |     
|                        |                            | Total            |      | 4.60                         | %    | 4.89                          | %    | 6.33            | %    | 5.96  | %   
|                        |                            |                  |      |                              |      |                               |      |                 |      |       |     

Other Real Estate Owned ("OREO")

The Company held no OREO at either December 31, 2002 or 2001. Moreover, the Bank did not need to liquidate any OREO holdings during the year. Future OREO
activity will depend, among other things, on how many borrowers the Bank may need to foreclose upon, and the strength of the real estate market and general economic activity.

Goodwill and Other Intangibles

Goodwill was unchanged at $33.4 million for both December 31, 2002 and 2001. The majority of this amount ($32.2 million) is a result of the
acquisition of Americorp and its wholly owned subsidiary, American Commercial Bank of Ventura, which was completed on September 28, 2001. The remaining portion represents an acquisition of a
bank in Paso Robles dating back to 1996.

In
June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 was 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 Company adopted SFAS
No. 141 during the third quarter of 2001, therefore, the merger was accounted for in accordance with SFAS No. 141.

35

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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 was 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 was after June 30, 2001 should not be amortized.
Accordingly, the goodwill generated through the merger was not amortized. Management adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 did not have a material
impact on the Company's results of operations or financial condition, other than increasing Net Income by $2.3 million for the year ending December 31, 2002, assuming that goodwill would
have been amortized over a useful life of 15 years (see Footnote No. 1 to the consolidated financial statements for a summary of significant accounting policies). It should be noted that
the results of annual assessments in future years could impact the Company's results of operations or financial condition if the goodwill is considered to be impaired.

Other
intangibles total $8.8 million at December 31, 2002 compared to $9.3 million one year earlier. Of these amounts, $7.5 million and $8.6 million at
December 31, 2002 and 2001, respectively, represent the amortized value of the $8.9 million core deposit intangible created upon the acquisition of American Commercial Bank. The core
deposit intangible represents the fair value of long-term deposit relationships acquired and is being amortized over its expected useful economic life of 8.25 years. The remaining
balance totals $1.3 million and $0.7 million at December 31, 2002 and 2001, respectively, and represents the amortized value of the Bank's originated mortgage servicing rights.

Deposits

While the Bank is competitive with major institutions in terms of its structure of interest rates on deposit products offered, Management was not overly
aggressive during 2002 in terms of pricing to attract additional deposits, a decision which reflects the Bank's strong liquidity at the present time.

As
discussed in the Income Statement Analysis, most of the Bank's deposit rates have fallen in concert with the general decline in rates. A comparison of the rates paid on the Bank's
deposit products at December 31, 2002 and 2001 is as follows:

|Selected Quoted Interest Rates              |  | 2002 |   | 2001 |   | Change |  
|------------------------------------------- |  | ---- | - | ---- | - | ------ | -
|Demand Deposits                             |  | 0    | % | 0    | % | 0      | %
|NOW Account (50 & Betterover $10,000)      |  | 0.15 | % | 0.25 | % | -0.10  | %
|Money Market Deposits (over $100,000)       |  | 0.69 | % | 1.21 | % | -0.52  | %
|Passbook Savings Account                    |  | 0.50 | % | 1.00 | % | -0.50  | %
|Individual Retirement Account (2 Year term) |  | 2.00 | % | 3.00 | % | -1.00  | %
|Time Deposit ($100,000 - 6 month term)      |  | 1.35 | % | 2.00 | % | -0.65  | %
|Wall Street Journal Prime Rate              |  | 4.25 | % | 4.75 | % | -0.50  | %

36

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Average
deposits grew dramatically in 2002 reflecting growth at Mid-State Bank & Trusts' existing offices and the acquisition of American Commercial Bank on
September 28, 2001. Below is a summary of the average deposits outstanding and the average rate paid by category over the last three years.

|                                                             |                                 | 2002 |         | 2001      |   | 2000   |       
|------------------------------------------------------------ | ------------------------------- | ---- | ------- | --------- | - | ------ | ------
|
|
|Interest Bearing Demand and Money Market Investment Accounts |                                 | $    | 581,439 |           | $ | 2,639  |       
|Savings Accounts                                             |                                 |      | 245,615 |           |   | 2,255  |       
|Time Deposits                                                |                                 |      | 418,536 |           |   | 11,275 |       
|                                                             |                                 |      |         |           |   |        |       
|                                                             | Total Interest Bearing Deposits |      |         | 1,245,590 |   |        | 16,169
|Non Interest Bearing Demand                                  |                                 |      | 377,920 |           |   |       |       
|                                                             |                                 |      |         |           |   |        |       
|                                                             | Total Deposits                  |      | $       | 1,623,510 |   | $      | 16,169
|                                                             |                                 |      |         |           |   |        |       

The majority of the Bank's time deposits (approximately 63%) have balances which are under $100,000 in size. While all time deposits are somewhat
more rate sensitive than the Bank's other deposit categories, the smaller time deposit balances tend to be more stable and less sensitive to absolute rate levels than do time deposits of $100,000 or
more. Approximately 89% of the Bank's time deposits mature within one year and would be potentially subject to a change in rate on their maturity date. The following table as of December 31,
2002, displays summary size and maturity information on the Bank's time deposits.

|(dollars in 000's)
Balance by Size |  | Three
Months or
Less |         | After Three
Months to
Six Months |   | After Six
Months to
One Year |  | After
One Year |        | Total
|---------------------------------- |  | -------------------- | ------- | -------------------------------- | - | ---------------------------- |  | -------------- | ------ | -----
|Under $100,000                     |  | $                    | 91,890  |                                  | $ | 71,769                       |  | $              | 51,672 |      
|$100,000 or More                   |  |                      | 74,324  |                                  |   | 42,606                       |  |                | 22,242 |      
|                                   |  |                      |         |                                  |   |                              |  |                |        |      
|Total Time Deposits                |  | $                    | 166,214 |                                  | $ | 114,375                      |  | $              | 73,914 |      
|                                   |  |                      |         |                                  |   |                              |  |                |        |      

Other Borrowings

While not a significant component of the Bank's structure, other borrowings decreased from $17.7 million, at the end of 2001 to $11.0 million at the
end of 2002. These consist primarily of borrowings under the U.S. Treasury Tax and Loan note account, federal funds purchased, securities sold under agreements to repurchase, Federal Home Loan Bank
borrowings and mortgages payable. The Bank had outstanding borrowings of $8.9 million and $15.6 million at December 31, 2002 and 2001, respectively, under the US Treasury Tax and
Loan note account program. The Company had one borrowing from the Federal Home Loan Bank for $2.0 million at December 31, 2002 and 2001. Mortgages payable were $70 thousand and
$104 thousand at year-end 2002 and 2001, respectively.

Capital

Capital ratios for commercial banks and their holding companies in the United States are generally calculated using three different formulas. These calculations
are referred to as the "Leverage Ratio" and two "risk based" calculations known as "Tier One Risk Based Capital Ratio" and the "Total Risk Based Capital Ratio." The Company and the Bank are subject to
certain standards concerning these ratios. These standards were developed through the joint efforts of banking authorities from 12 different countries around the world. The standards essentially take
into account the fact that different types of assets have different levels of risk associated with them. Further, they take into account the off-balance sheet exposures of banks when
assessing capital adequacy.

37

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The
Leverage Ratio calculation simply divides common stockholders' equity (reduced by goodwill and certain other intangibles that a bank may have) by the total assets of the bank. In the
Tier One Risk Based Capital Ratio, the numerator is the same as the leverage ratio, but the denominator is the total "risk-weighted assets" of the bank. Risk-weighted assets
are determined by segregating all the assets and off-balance sheet exposures into different risk categories and weighting them by a percentage ranging from 0% (lowest risk) to 100%
(highest risk). The Total Risk Based Capital Ratio again uses "risk-weighted assets" in the denominator, but expands the numerator to include other capital items besides equity such as a
limited amount of the allowance for loan losses, long-term capital debt, preferred stock and other instruments. Summarized below are the capital ratios at December 31, 2002 and
2001, for both Mid-State Bancshares and Mid-State Bank & Trust. Additionally, the standards for a well-capitalized institution, as defined by the federal
banking agencies, are displayed.

|                                  |  |     |   |      |   | Mid-State Bancshares |   | Mid-State Bank & Trust |  
|--------------------------------- |  | --- | - | ---- | - | -------------------- | - | ---------------------- | -
|
|
|Leverage Ratio                    |  | 4.0 | % | 5.0  | % | 10.6                 | % | 10.2                   | %
|Tier One Risk Based Capital Ratio |  | 4.0 | % | 6.0  | % | 14.7                 | % | 13.8                   | %
|Total Risk Based Capital Ratio    |  | 8.0 | % | 10.0 | % | 16.0                 | % | 15.0                   | %

While
it is the intent of management to continue to maintain strong capital ratios, the Board of Directors has initiated a stock repurchase program and increased the quarterly dividend
payments in an effort to reduce its capital ratios somewhat.

Without
deducting for goodwill and other intangibles from equity, two other commonly followed ratios related to capital have trended as follows over the past three years.

2002

2001

2000Dividend Payout Ratio

32.8
%
30.3
%
27.6
%Average Common Equity to Average Assets

12.9
%
12.5
%
12.0
%


Liquidity

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

The
Bank has adequate liquidity at the present time. Its loan to deposit ratio at year-end was 65.8% versus 71.7% one year earlier. The Bank normally strives for a loan to
deposit ratio in the 65% to 75% range. The Bank's internally calculated liquidity ratio stands at 40.8% at December 31, 2002, which is above its minimum policy of 15%.

The
Bank strives to make high quality loans to optimize earnings while still maintaining adequate liquidity. Management's ability to maintain its loan portfolio in the desired target
range will be partly dependent on the strength of the local economy.

Off Balance Sheet and Other Related Party Transactions

As noted in Footnote 12 to the financial statements, the Company is contingently liable for letter of credit accommodations made to its customers in the ordinary
course of business totaling $39.4 million at December 31, 2002, up from $31.8 million one year earlier. Additionally, the Company

38

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has undisbursed loan commitments, also made in the ordinary course of business, totaling $436.7 million, which was up from the $368.5 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.

As
noted in Footnote 5 to the financial statements, the Company does make loans and leases to related parties (directors and officers) in the ordinary course of business at prevailing
rates and terms. These loans and leases totaled $1.2 million at the end of 2002 compared to $14.1 million one year earlier.

INCOME STATEMENT ANALYSIS

Net Interest Income and Interest Rate Risk

Net Interest Income is the difference between interest and fees earned on all earning assets and interest paid on interest bearing liabilities. Net Interest
Income for 2002 was $93.0 million, up from $87.5 million recorded in 2001 and $82.4 million in 2000. The components of net interest income change in response to both changes in
rate, average balance and mix of both earning assets and liabilities. The following tables present an analysis of yields/rates, interest income and expense, and average balances for 2002, 2001, and
2000.

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           | 2002 Compared to 2001
Composition of Change |       
|--------------------------------------- | ------------------------- | ---------------------------------- | --------- | --------- | --------- | ------ | ------ | ------- | ----- | ----- | --------- | --------- | --------- | ------------------------------------------- | ------
|
|
|
|
|EARNING ASSETS:                         |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|Loans                                   |                           | $                                  | 1,109,245 |           | $         | 84,962 |        | 7.66%   |       | $     | 999,501   |           | $         | 92,148                                      |       
|Investment Securities                   |                           |                                    | 533,427   |           |           | 23,201 |        | 4.35%   |       |       | 385,215   |           |           | 19,884                                      |       
|Fed Funds, Other                        |                           |                                    | 75,608    |           |           | 1,169  |        | 1.55%   |       |       | 59,915    |           |           | 1,970                                       |       
|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|                                        |                           | TOTAL EARNING ASSETS               |           | $         | 1,718,280 |        | $      | 109,332 |       | 6.36% |           | $         | 1,444,631 |                                             | $     
|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|INTEREST BEARING LIABILITIES:           |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|NOW, Savings, and Money Market Accounts |                           | $                                  | 827,054   |           | $         | 4,894  |        | 0.59%   |       | $     | 655,606   |           | $         | 7,721                                       |       
|Time Deposits                           |                           |                                    | 418,536   |           |           | 11,275 |        | 2.69%   |       |       | 395,633   |           |           | 18,459                                      |       
|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|                                        | Interest Bearing Deposits |                                    |           | 1,245,590 |           |        | 16,169 |         | 1.30% |       |           | 1,051,239 |           |                                             | 26,180
|Other Borrowings                        |                           |                                    | 7,595     |           |           | 212    |        | 2.79%   |       |       | 6,733     |           |           | 300                                         |       
|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|                                        |                           | TOTAL INTEREST BEARING LIABILITIES |           |           | 1,253,185 |        |        | 16,381  |       | 1.31% |           |           | 1,059,972 |                                             |       
|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       
|NET INTEREST INCOME                     |                           | $                                  | 1,718,280 |           | $         | 92,951 |        | 5.41%   |       | $     | 1,444,631 |           | $         | 87,522                                      |       
|                                        |                           |                                    |           |           |           |        |        |         |       |       |           |           |           |                                             |       

39

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|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   | 2001 Compared to 2000
Composition of Change |        
|--------------------------------------- | ---------------------------------- | - | --------- | --------- | - | ------ | ------- | ----- | ----- | - | --------- | --------- | - | ------------------------------------------- | -------
|
|
|
|
|EARNING ASSETS:                         |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|Loans                                   |                                    | $ | 999,501   |           | $ | 92,148 |         | 9.22% |       | $ | 847,797   |           | $ | 85,685                                      |        
|Investment Securities                   |                                    |   | 385,215   |           |   | 19,884 |         | 5.16% |       |   | 406,795   |           |   | 22,800                                      |        
|Fed Funds, Other                        |                                    |   | 59,915    |           |   | 1,970  |         | 3.29% |       |   | 24,527    |           |   | 1,482                                       |        
|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|                                        | TOTAL EARNING ASSETS               |   | $         | 1,444,631 |   | $      | 114,002 |       | 7.89% |   | $         | 1,279,119 |   | $                                           | 109,967
|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|INTEREST BEARING LIABILITIES:           |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|NOW, Savings, and Money Market Accounts |                                    | $ | 655,606   |           | $ | 7,721  |         | 1.15% |       | $ | 616,393   |           | $ | 9,474                                       |        
|Time Deposits                           |                                    |   | 395,633   |           |   | 18,459 |         | 4.67% |       |   | 337,605   |           |   | 17,650                                      |        
|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|Interest Bearing Deposits               |                                    |   | 1,051,239 |           |   | 26,180 |         | 2.45% |       |   | 953,998   |           |   | 27,124                                      |        
|Other Borrowings                        |                                    |   | 6,733     |           |   | 300    |         | 4.46% |       |   | 8,063     |           |   | 475                                         |        
|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|                                        | TOTAL INTEREST BEARING LIABILITIES |   |           | 1,059,972 |   |        | 26,480  |       | 2.47% |   |           | 962,061   |   |                                             | 27,599 
|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        
|NET INTEREST INCOME                     |                                    | $ | 1,444,631 |           | $ | 87,522 |         | 6.06% |       | $ | 1,279,119 |           | $ | 82,368                                      |        
|                                        |                                    |   |           |           |   |        |         |       |       |   |           |           |   |                                             |        

During 2002 there was a $4.7 million decrease in interest income along with a decrease of $10.1 million in interest expense compared
to 2001. The resulting $5.4 million increase in net interest income for 2002 is a result of a number of dynamics affecting both average balance and interest rate considerations. First, the
Company experienced an increase in its average earning assets outstanding of $273.6 million. The increase was primarily attributable to the net increase in average loans, which were up by
$109.7 million coupled with an increase in average investments of $148.2 million and an increase in average federal funds sold of $15.7 million. Second, while the Company's
average interest bearing liabilities increased by $193.2 million, earning assets increased by a larger $273.6 million. Both increases in earning assets and interest bearing liabilities
are largely attributable to the acquisition of American Commercial Bank on September 28, 2001 which had a larger affect on the averages of these categories in 2002 than it did in 2001. Third,
interest rates were considerably lower in 2002 compared to the average for 2001. For example, the Prime Rate averaged 4.68% in 2002 compared to 6.91% in 2001. Fourth, there was a recovery of interest
totaling $2.8 million in 2001 on a loan previously charged-off representing prior years interest which was recognized into interest income and unrelated to either volume or rate
considerations for that year.

In
2001, there was a $4.0 million increase in interest income along with a decrease of $1.1 million in interest expense compared to 2000. The resulting $5.1 million
increase in net interest income for 2001 is a result of similar, yet slightly different dynamics. First, the Company experienced an increase in its average earning assets outstanding of
$165.5 million. The increase in interest income was primarily attributable to the net increase in average loans, which were up by $151.7 million, while investments decreased by
$21.6 million and federal funds sold increased by $35.4 million. Second, the Company's interest bearing liabilities increased by $111.3 million while earning assets increased by a
larger $165.5 million. Third, interest rates were considerably lower in 2001 compared to 2000. Fourth, there was a recovery of interest totaling $2.8 million in 2001 on a loan previously
charged-off representing prior years interest which was recognized into interest income and unrelated to either volume or rate considerations.

The
Bank expects its risk exposure to changes in interest rates to remain manageable and well within acceptable policy ranges. A recent review as of the end of 2002 of the potential
changes in the

40

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Bank's net interest income over a 12 month time horizon showed that it could fluctuate under extreme alternative rate scenarios from between +4.2% and7.1% of the base case (rates
unchanged) of
$91.4 million. The Bank's policy is to maintain a structure of assets and liabilities which are such that net interest income will not vary more than plus or minus 15% of the base forecast over
the next 12 months. Management expects that its exposure to interest rate risk is manageable and it will continue to strive for an optimal trade-off between risk and earnings.

The
following table presents a summary of the Bank's net interest income forecasted for the coming 12 months under alternative interest rate scenarios.

Change
From BaseRates Down Very Significant
(Prime down to 2.50% over 12 months)

-7.1
%Rates Down Significant
(Prime down to 3.00% over 12 months)

-2.6
%Rates Down Modestly
(Prime down to 3.50% over 12 months)

-1.1
%Base CaseRates Unchanged
(Prime unchanged at 4.25% over 12 months)

Rates Up Modestly
(Prime up to 5.00% over 12 months)

+1.6
%Rates Up Aggressive
(Prime up to 5.75% over 12 months)

+2.8
%Rates Up Very Aggressive
(Prime up to 7.25% over 12 months)

+4.2
%


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
$863.1 million) interest is based on rates set at the discretion of management ranging from 0.15% to 0.69%. In a downward rate environment, there is a limit to how far these deposit instruments
can be re-priced and this behavior is similar to that of fixed rate instruments. In an upward rate environment, the magnitude and
timing of changes in rates on these deposits is assumed to be more reflective of variable rate instruments.

It
is important to note that the above table is a summary of several forecasts and actual results may vary. The forecasts are based on estimates and assumptions of management that may
turn out to be different and may change over time. Factors affecting these estimates and assumptions include, but are not limited tocompetitors' behavior, economic conditions both locally
and nationally, actions taken by the Federal Reserve Board, customer behavior, and management's responses. Changes that vary significantly from the assumptions and estimates may have significant
effects on the Bank's net interest income. Therefore the results of this analysis should not be relied upon as indicative of actual future results. Historically, the Bank has been able to manage its
Net Interest Income in a fairly narrow range reflecting the Bank's relative insensitivity to interest rate changes. The impact of prepayment behavior on mortgages, real estate loans, mortgage backed
securities, securities with call features, etc. is not considered material to the sensitivity analysis. Over the last 5 years, 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 5.41% to a high of 6.44% (not taxable equivalent). The Bank's net interest margin in 2002 of 5.41% is at the low end of this
range by historical standards, coming off the higher levels experienced in 2000 of 6.44%. This is a result of both the lower level of interest rates and the change in mix of earning assets (the Bank
now has a smaller portion in loans vis-à-vis investment securities compared to 2000 when the

41

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margin was at its widest level). The net interest margin under the alternative scenarios ranges from 4.70% to 5.27%. Management feels this range of scenarios, while lower than historical standards,
is consistent with current experience and interest rate levels, but no assurances can be given that actual future experience will fall within this range.

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

Provision for Loan Losses

The Company made contributions to the allowance for loan losses of $600 thousand, $4.1 million and $700 thousand in 2002, 2001 and 2000,
respectively. This reflects management's assessment of the level of inherent losses identified in the portfolio which has been supplemented by recoveries of loans previously charged off, amounting to
$0.7 million annually, for 2002, 2001 and 2000. During the 3rd quarter of 2001, the effects of an economic slow-down 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 loans losses at that time. No additional provision
for loan losses was made after June of 2002 in view of the adequacy of the allowance. The need for additional provision for loan losses in 2003 will be dependent upon Management's on-going
analysis of the adequacy of the allowance for loan losses. While Management believes it to be adequate at the present time, the appropriate value can fluctuate over time in response to economic
conditions and the subjective decisions which must be made in response to those conditions.

Non-Interest Income

Non-Interest Income for 2002 totaled $24.3 million compared to $23.3 million in 2001 and $17.8 million in 2000. Service charges
on deposit accounts increased $0.8 million to $8.9 million in 2002 versus 2001. This followed an increase of $1.2 million in 2001 over 2000. The increase in 2002 over 2001 was
mostly related to increases in service charge rates, coupled with an increase in the number of deposits accounts acquired in the American Commercial Bank merger. Commissions, fees and other service
charges increased by $1.3 million in 2002 over 2001 after a $1.9 million increase in 2001. The majority of the increase in 2002 was primarily related to increased fee income from its
Debit Cards of $388 thousand along with increased fee income from its Trust and Investment Division activities of $311 thousand. In addition, approximately $451 thousand of the
increase in 2002 was related to the Bank's Mastercard merchant fees. The balance is related to modest increases across several other fee areas and the fact that 2001 reflected three months of activity
generated from the newly acquired American Commercial Bank, whereas in 2002, Mid-State benefited from their inclusion for the full year. All other sources of income decreased to
$3.4 million in 2002, after reaching $4.4 million in 2001 and $2.0 million in 2000. Results in 2001 reflect the gain on sale of the Bank's credit card portfolio in the amount of
$1.7 million. Management's expectation for 2003 is that most categories of non-interest income will increase.

Non-Interest Expense

Total non-interest expense for 2002 was $70.9 million, which was up from $64.7 million in 2001 and $58.0 million in 2000. In
comparing results across the three year period, it should be noted that 2001 reflects three months of activity generated by the overhead created from the acquisition of the former American Commercial
Bank. Results for 2002 reflect a full year. Additionally, economies of scale were realized from the merger and it is estimated that the expenses of the combined institution are now approximately
$2.9 million per year lower than the sum of the two institutions would have been on a stand alone basis.

42

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Salaries
and employee benefits increased by $3.1 million in 2002 over 2001 after having increased by $638 thousand in 2001 over 2000. The increase in 2002 over 2001 related
to an increase in salaries of approximately $2.7 million with the balance representing benefits cost increases. The increase in 2001 over 2000 related to increase in salaries of approximately
$2.1 million and a decrease in employee benefits costs of $1.5 million. Management considers containment of salaries and benefits costs in 2003 to be one of its top challenges. A number
of factors are creating unusually strong upward pressure on these costs, especially in the areas of medical benefits and competitive wages. The Company is addressing this by focusing on ways of
becoming more efficient in its processes and using technology wherever possible to hold down staffing requirements.

Occupancy
expense has increased during this period to $11.0 million in 2002 from $9.3 million in 2001 and $8.4 million in 2000. Rental payments on leased buildings,
capital expenditures for computer equipment, ATM's and new signage due to the Bank's name change and the merger with American Commercial Bank all have contributed to the increase in occupancy expense.
The new equipment and signage was placed into service in the middle of 2001 and occupancy expense increased as these items are depreciated over useful lives of between 5 and 7 years.
Management's expectation for 2003 is that occupancy and furniture expense will increase. Plans are in motion to purchase a new mainframe computer system during the middle of 2003 (replacing the old
system which was acquired in 1998 and will be fully depreciated in mid 2003), thereby improving the capability and speed of the Bank's information processing. Also planned in 2003 is the purchase of
new item imaging equipment which will dramatically improve checking account processing and research capabilities for customers, along with improving the efficiency of the Bank.

Advertising
and promotion expenditures were $6.9 million in 2002 following charges of $7.7 million in 2001 and $6.1 million in 2000. Expenditures in 2001 reflect the
impact of the Company's name change to Mid-State Bank & Trust on its 40th anniversary celebration in mid 2001, the merger with American Commercial Bank later that
year, and the donation of property in Cambria in order to obtain a Natural Heritage State Tax Credit that year. Management expects 2003 results to be more in line with the "normalized" 2002
expenditure levels.

General
office expenditures rose to $4.1 million in 2002 from $3.5 million in 2001 and $3.6 million in 2000. This category includes primarily charges for stationery
and supplies, telephone expenses, and postage. Mangement does not expect an increase in this expenditure area in 2003 as it has taken a number of steps to hold down costs related to telephone
expenditures and expenditures on stationery and supplies. Moreover, the eventual implementation later in 2003 of item imaging will reduce postage costs.

Merchant
processing charges have increased steadily over the three year period reflecting increased volume and customers. These charges amounted to $6.4 million in 2002,
$5.6 million in 2001, and $4.9 million in 2000. Management's expectation for 2003 is that merchant processing expense will continue to increase due to the additional activity and volume.

Regulatory
assessments (charges for FDIC assessments and DFI fees) have remained relatively constant over the past three years at $368, $326, and $336 thousand in 2002, 2001, and
2000, respectively.

Other
operating expenses increased in 2002 to $5.7 million compared to $4.9 million in 2001 and $1.8 million in 2000. The increase in 2002 over 2001 reflects
primarily the increased amortization of the core deposit intangible related to the American Commercial Bank acquisition ($775 thousand more for the full year of 2002 compared to the three
months in 2001). The increase in 2001 over 2000 reflects $297 thousand of the amortization of the core deposit intangible, a $557 thousand increase in other operating losses,
$300 thousand of merger related charges in 2001 following none in 2000, a $667 thousand increase in the cost of other professional services primarily the result of contracting out
internal audit services, a $212 thousand increase in insurance costs, and a variety of smaller increases.

43

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Taxes

Book tax expense amounted to $15.9 million in 2002 following $14.5 million in 2001 and $14.1 million in 2000. While the statutory tax rate of
the Company is 42.05%, the actual rate accrued was 34.7%, 34.7% and 34.1% in 2002, 2001, and 2000, respectively. The primary reason for the difference relates to the tax exempt income generated by the
Company's Municipal bond portfolio.

As
described in Footnote No. 10 to the financial statements, the Company has deferred tax assets primarily related to the timing difference associated with charge-offs
and provisions for losses on certain loans and with the timing difference on deferred compensation.

SUBSIDIARY ACTIVITY

Mid Coast Land Company

Investments in real estate shown on the Consolidated Statement of Financial Position principally represent the assets of the Bank's real estate development
subsidiary, Mid Coast Land Company. Mid Coast Land Company recorded a loss during 2002 of $72 thousand compared to earnings during 2001 of $315 thousand and $280 thousand in 2000.
The loss in 2002 was related to the write-off of a note carried by the subsidiary to a developer for which no allowance had been provided based on the conditions of the loan prior to 2002.
The Company is in the final phases of winding down Mid Coast Land Company, having sold its final property which closed during the first quarter of 2003.

MSB Properties, Inc.

This wholly owned subsidiary was formed to engage in the specific business of acquiring, owning, and improving real property and tangible personal property which
may be necessary or convenient for the operation or housing of the administrative departments and branch offices of the Bank. Incorporated under the laws of the State of California in May of 1968, it
also allows for the ownership of property which may be reasonably necessary for future expansion of the Bank's business, or which is otherwise
reasonably related to the conduct of the Bank's business, pursuant to Section 752 of the Financial Code of the State of California.

Earnings
for this subsidiary consist primarily of rental income from the Bank's offices and administrative center coupled with a minor amount of rental income from non-bank
tenants and interest earnings on its cash assets. Leases are written with market terms and at market rates. Expenses are principally interest on mortgages, depreciation of leasehold improvements,
general maintenance and utilities expense. The affairs of the subsidiary are managed by Bank employees and as such this subsidiary has no paid staff members.

Earnings
for MSB Properties have remained relatively unchanged over the years with net earnings after-tax of $1.3 million, $1.7 million, and
$1.4 million, in 2002, 2001 and 2000, respectively. The larger figure in 2001 reflects the net benefit to the Company (accounted for on the subsidiary's books) of the donation of the Cambria
property to obtain a Natural Heritage State Tax Credit.

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-K, 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,

44

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liabilities, revenues, expenses and related disclosure of contingencies. Management believes that the most significant subjective judgements that it is required to make include the following:



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Certain information concerning market risk is contained in the notes to the financial statements which are included in Item 8 of this Report and in Management
Discussion and Analysis of Financial Condition and Results of Operations which is included in Item 7 of this Report.

45

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

|                                                       |  | PAGE
|------------------------------------------------------ |  | ----
|Report of Independent Accountants                      |  | 47  
|Report of Previous Independent Public Accountants      |  | 48  
|Consolidated Statements of Financial Position          |  | 49  
|Consolidated Statements of Income                      |  | 50  
|Consolidated Statements of Comprehensive Income        |  | 51  
|Consolidated Statements of Changes in Capital Accounts |  | 52  
|Consolidated Statements of Cash Flows                  |  | 53  
|Notes to Consolidated Financial Statements             |  | 54  
|Management Statement                                   |  | 81  
|Report of Independent Public Accountants               |  | 82  

46

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Report of Independent Accountants

To
the Board of Directors and Stockholders of Mid-State Bancshares:

In
our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of income, of comprehensive income, of changes in capital accounts,
and of cash flows present fairly, in all material respects, the financial position of Mid-State Bancshares and its subsidiary at December 31, 2002, and the results of their
operations and their cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are
the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance
with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note One
to the Consolidated Financial Statements, the Company adopted Statement of Financial Accounting Standards No. 142 and consequently changed its method of accounting for goodwill in 2002. The
financial statements of Mid-State Bancshares as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 22, 2002.

PricewaterhouseCoopers
LLP
Los Angeles, California
January 31, 2003

47

---

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.

Report of Previous Independent Public Accountants

To
the Shareholders and Board of Directors of Mid-State Bancshares:

We
have audited the accompanying consolidated statements of financial position of Mid-State Bancshares and subsidiary (the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of income, comprehensive income, changes in capital accounts and cash flows for the three years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of Mid-State Bancshares and Subsidiary as of
December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

|                                           |  | 
|------------------------------------------ |  | 
|/s/ARTHUR ANDERSEN LLPARTHUR ANDERSEN LLP  |  | 
|                                           |  | 
|Orange County, California
January 22, 2002 |  | 

48

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Consolidated Statements of Financial Position        (amounts in 000's except share amounts)

|                                                     |                                                                                            | December 31,                        
|---------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------
|
|
|CASH AND DUE FROM BANKS                              |                                                                                            | $                                   
|FEDERAL FUNDS SOLD                                   |                                                                                            |                                     
|SECURITIES AVAILABLE FOR SALE                        |                                                                                            |                                     
|LOANS HELD FOR SALE                                  |                                                                                            |                                     
|LOANS, net                                           |                                                                                            |                                     
|PREMISES AND EQUIPMENT, net                          |                                                                                            |                                     
|ACCRUED INTEREST RECEIVABLE                          |                                                                                            |                                     
|INVESTMENTS IN REAL ESTATE                           |                                                                                            |                                     
|GOODWILL                                             |                                                                                            |                                     
|OTHER INTANGIBLES                                    |                                                                                            |                                     
|OTHER ASSETS                                         |                                                                                            |                                     
|                                                     |                                                                                            |                                     
|                                                     |                                                                                            | TOTAL ASSETS                        
|                                                     |                                                                                            |                                     
|Liabilities                                          |                                                                                            |                                     
|DEPOSITS:                                            |                                                                                            |                                     
|                                                     | Demand deposits                                                                            |                                     
|                                                     | Savings, money market and NOW accounts                                                     |                                     
|                                                     | Time deposits$100,000 or more                                                             |                                     
|                                                     | Time depositsUnder $100,000                                                               |                                     
|                                                     |                                                                                            |                                     
|                                                     | Total Deposits                                                                             |                                     
|                                                     |                                                                                            |                                     
|OTHER BORROWINGS                                     |                                                                                            |                                     
|ALLOWANCE FOR LOSSESUNFUNDED COMMITMENTS            |                                                                                            |                                     
|ACCRUED INTEREST PAYABLE & OTHER LIABILITIES         |                                                                                            |                                     
|                                                     |                                                                                            |                                     
|                                                     |                                                                                            | TOTAL LIABILITIES                   
|                                                     |                                                                                            |                                     
|Commitments and Contingencies (Note 12)              |                                                                                            |                                     
|Capital Accounts                                     |                                                                                            |                                     
|CAPITAL STOCK, NO PAR VALUE:                         |                                                                                            |                                     
|                                                     | Authorized100,000,000 shares
Outstanding23,697,235 shares in 2002 and 24,088,633 in 2001 |                                     
|UNDIVIDED PROFITS                                    |                                                                                            |                                     
|ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES |                                                                                            |                                     
|                                                     |                                                                                            |                                     
|                                                     |                                                                                            | TOTAL CAPITAL ACCOUNTS              
|                                                     |                                                                                            |                                     
|                                                     |                                                                                            | TOTAL LIABILITIES & CAPITAL ACCOUNTS
|                                                     |                                                                                            |                                     

The
accompanying notes are an integral part of these consolidated statements.

49

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Consolidated Statements of Income        (amounts in 000's except per share amounts)

|                                                       |                                                         | Year Ended December 31, |       
|------------------------------------------------------ | ------------------------------------------------------- | ----------------------- | ------
|
|Interest Income:                                       |                                                         |                         |       
|Interest and fees on loans and leases                  |                                                         | $                       | 84,962
|Interest on securities:                                |                                                         |                         |       
|                                                       | U.S. Treasury securities                                |                         |       
|                                                       | U.S. Government agencies and corporations               |                         |       
|                                                       | Obligations of states and political subdivisions, other |                         |       
|Interest on federal funds sold                         |                                                         |                         | 1,169 
|                                                       |                                                         |                         |       
|                                                       | TOTAL INTEREST INCOME                                   |                         |       
|                                                       |                                                         |                         |       
|Interest Expense:                                      |                                                         |                         |       
|Interest on deposits                                   |                                                         |                         | 16,169
|Interest on other borrowings                           |                                                         |                         | 212   
|                                                       |                                                         |                         |       
|                                                       | TOTAL INTEREST EXPENSE                                  |                         |       
|                                                       |                                                         |                         |       
|Net Interest Income                                    |                                                         |                         | 92,951
|Provision for loan losses                              |                                                         |                         | 600   
|                                                       |                                                         |                         |       
|                                                       | NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     |                         |       
|                                                       |                                                         |                         |       
|Other Income:                                          |                                                         |                         |       
|Service charges on deposit accounts                    |                                                         |                         | 8,909 
|Commissions, fees and other service charges            |                                                         |                         | 12,031
|Gains (losses) on sale of securities                   |                                                         |                         | 17    
|Gain on sale of loans held for sale                    |                                                         |                         | 1,011 
|Other income                                           |                                                         |                         | 2,353 
|                                                       |                                                         |                         |       
|                                                       | TOTAL OTHER INCOME                                      |                         |       
|                                                       |                                                         |                         |       
|Other Expenses:                                        |                                                         |                         |       
|Salaries & employee benefits                           |                                                         |                         | 36,537
|Occupancy expenses                                     |                                                         |                         | 10,954
|Advertising & promotion                                |                                                         |                         | 7,108 
|General office                                         |                                                         |                         | 4,141 
|Merchant processing fees                               |                                                         |                         | 6,385 
|Regulatory assessments                                 |                                                         |                         | 368   
|Other operating expenses                               |                                                         |                         | 5,432 
|                                                       |                                                         |                         |       
|                                                       | TOTAL OTHER EXPENSES                                    |                         |       
|                                                       |                                                         |                         |       
|Income before taxes                                    |                                                         |                         | 45,747
|Tax expense                                            |                                                         |                         | 15,892
|                                                       |                                                         |                         |       
|                                                       | NET INCOME                                              |                         | $     
|                                                       |                                                         |                         |       
|Earnings per share:                                    |                                                         |                         |       
|                                                       |                                                         | Basic                  |       
|                                                       |                                                         | Diluted                |       
|Average shares used in earnings per share calculation: |                                                         |                         |       
|                                                       |                                                         | Basic                  |       
|                                                       |                                                         | Diluted                |       

The accompanying notes are an integral part of these consolidated statements.

50

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Consolidated Statements of Comprehensive Income        (amounts in 000's)

|                                                                      |                                          | Year Ended December 31,
|--------------------------------------------------------------------- | ---------------------------------------- | -----------------------
|
|                                                                      | NET INCOME                               |                        
|Other Comprehensive Income Before Taxes:                              |                                          |                        
|Unrealized gains on securities available for sale:                    |                                          |                        
|Unrealized holding gains arising during year                          |                                          |                        
|Reclassification adjustment for (gains) losses included in net income |                                          |                        
|                                                                      |                                          |                        
|Other comprehensive income, before tax                                |                                          |                        
|Income tax expense related to items in comprehensive income           |                                          |                        
|                                                                      |                                          |                        
|                                                                      | OTHER COMPREHENSIVE INCOME, NET OF TAXES |                        
|                                                                      |                                          |                        
|                                                                      | COMPREHENSIVE INCOME                     |                        
|                                                                      |                                          |                        

The
accompanying notes are an integral part of these consolidated statements.

51

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Consolidated Statements of        Changes in Capital Accounts        (amounts in 000's except share amounts)

|                           |                                                                       | Number of
Shares |           | Capital
Stock |        | Undivided
Profits |   | Accumulated
Other
Comprehensive
Income (Loss) |        | Total |       
|-------------------------- | --------------------------------------------------------------------- | ---------------- | --------- | ------------- | ------ | ----------------- | - | --------------------------------------------- | ------ | ----- | ------
|BALANCE, December 31, 1999 |                                                                       | 22,573,886       |           | $             | 59,681 |                   | $ | 104,357                                       |        | $     | (3,707
|                           | Cash dividend                                                         |                  |          |               |        |                  |   |                                               | (7,543 | )     |       
|                           | Exercise of stock options                                             |                  | 46,008    |               |        | 345               |   |                                               |       |       |       
|                           | Net income                                                            |                  |          |               |        |                  |   |                                               | 27,349 |       |       
|                           | Change in net unrealized gain (loss) on available for sale securities |                  |          |               |        |                  |   |                                               |       |       |       
|                           | Stock repurchased                                                     |                  | (601,312  | )             |        | (8,254            | ) |                                               |       |       |       
|                           |                                                                       |                  |           |               |        |                   |   |                                               |        |       |       
|BALANCE, December 31, 2000 |                                                                       | 22,018,582       |           |               | 51,772 |                   |   | 124,163                                       |        |       | 1,207 
|                           | Cash dividend                                                         |                  |          |               |        |                  |   |                                               | (8,308 | )     |       
|                           | Exercise of stock options                                             |                  | 73,446    |               |        | 714               |   |                                               |       |       |       
|                           | Shares issued in connection with merger                               |                  | 2,450,731 |               |        | 39,178            |   |                                               |       |       |       
|                           | Fair market value of stock options issued in connection with merger   |                  |          |               |        | 722               |   |                                               |       |       |       
|                           | Net income                                                            |                  |          |               |        |                  |   |                                               | 27,402 |       |       
|                           | Change in net unrealized gain (loss) on available for sale securities |                  |          |               |        |                  |   |                                               |       |       |       
|                           | Stock repurchased                                                     |                  | (454,126  | )             |        | (7,514            | ) |                                               |       |       |       
|                           |                                                                       |                  |           |               |        |                   |   |                                               |        |       |       
|BALANCE, December 31, 2001 |                                                                       | 24,088,633       |           |               | 84,872 |                   |   | 143,257                                       |        |       | 6,422 
|                           | Cash dividend                                                         |                  |          |               |        |                  |   |                                               | (9,803 | )     |       
|                           | Exercise of stock options                                             |                  | 85,866    |               |        | 1,102             |   |                                               |       |       |       
|                           | Net income                                                            |                  |          |               |        |                  |   |                                               | 29,855 |       |       
|                           | Change in net unrealized gain (loss) on available for sale securities |                  |          |               |        |                  |   |                                               |       |       |       
|                           | Stock repurchased                                                     |                  | (477,264  | )             |        | (8,386            | ) |                                               |       |       |       
|                           |                                                                       |                  |           |               |        |                   |   |                                               |        |       |       
|BALANCE, December 31, 2002 |                                                                       | 23,697,235       |           | $             | 77,588 |                   | $ | 163,309                                       |        | $     | 13,238
|                           |                                                                       |                  |           |               |        |                   |   |                                               |        |       |       

The
accompanying notes are an integral part of these consolidated statements.

52

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Consolidated Statements of Cash Flows        (amounts in 000's)

|                                                                                  |                                                                       | Year Ended December 31, |         
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------- | --------
|
|Operating Activities:                                                             |                                                                       |                         |         
|Net Income                                                                        |                                                                       | $                       | 29,855  
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                       |                         |         
|                                                                                  | Provision for depreciation and amortization                           |                         |         
|                                                                                  | Amortization of investment security premiums, net                     |                         |         
|                                                                                  | Amortization of deferred loan fees                                    |                         |         
|                                                                                  | Amortization of intangible assets                                     |                         |         
|                                                                                  | (Gain) loss on sale of investments                                    |                         |         
|                                                                                  | Reversal of allowance for losses on investments in real estate        |                         |         
|                                                                                  | Originations of loans held for sale                                   |                         |         
|                                                                                  | Proceeds from sales of loans held for sale                            |                         |         
|                                                                                  | (Gain) loss on sale of loans held for sale                            |                         |         
|                                                                                  | Provision for credit losses                                           |                         |         
|                                                                                  | Net gain on sales of other real estate owned                          |                         |         
|                                                                                  | Deferred tax (benefit) charge                                         |                         |         
|                                                                                  | Increase in other intangibles                                         |                         |         
|                                                                                  | Decrease (increase) in accrued interest and other assets              |                         |         
|                                                                                  | (Decrease) increase in accrued interest payable and other liabilities |                         |         
|                                                                                  |                                                                       |                         |         
|                                                                                  | Net cash provided by operating activities                             |                         |         
|                                                                                  |                                                                       |                         |         
|Investing Activities:                                                             |                                                                       |                         |         
|Proceeds from sales and maturities of securities                                  |                                                                       |                         | 112,811 
|Purchases of securities                                                           |                                                                       |                         | (263,089
|Proceeds from sales of other real estate owned                                    |                                                                       |                         |        
|Net decrease (increase) in loans                                                  |                                                                       |                         | 46,323  
|Receipts from real estate investments, net of advances                            |                                                                       |                         | (6      
|Cash acquired in acquisition, net of cash used                                    |                                                                       |                         |        
|Purchases of premises and equipment                                               |                                                                       |                         | (3,878  
|Proceeds from sales of premises and equipment                                     |                                                                       |                         | 15      
|                                                                                  |                                                                       |                         |         
|                                                                                  | Net cash used in investing activities                                 |                         |         
|                                                                                  |                                                                       |                         |         
|Financing Activities:                                                             |                                                                       |                         |         
|Net increase in deposits                                                          |                                                                       |                         | 68,781  
|Net (decrease) increase in other borrowings                                       |                                                                       |                         | (6,741  
|Cash dividend paid                                                                |                                                                       |                         | (9,803  
|Proceeds from exercise of stock options                                           |                                                                       |                         | 1,102   
|Purchase of bank stock for retirement                                             |                                                                       |                         | (8,386  
|                                                                                  |                                                                       |                         |         
|                                                                                  | Net cash provided by financing activities                             |                         |         
|                                                                                  |                                                                       |                         |         
|(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS                                    |                                                                       |                         | (31,434 
|CASH AND CASH EQUIVALENTS, beginning of year                                      |                                                                       |                         | 175,970 
|                                                                                  |                                                                       |                         |         
|CASH AND CASH EQUIVALENTS, end of year                                            |                                                                       | $                       | 144,536 
|                                                                                  |                                                                       |                         |         

53

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|Supplemental disclosure of cash flow information |                                                              |   |   |        |   |          |         |   |   |       
|------------------------------------------------ | ------------------------------------------------------------ | - | - | ------ | - | -------- | ------- | - | - | ------
|(amounts in 000's)                               |                                                              |   |   |        |   |          |         |   |   |       
|Cash paid during the year for:                   |                                                              |   |   |        |   |          |         |   |   |       
|                                                 | Interest (net of amounts capitalized)                        |   | $ | 16,678 |   | $        | 26,724  |   | $ | 27,542
|                                                 | Taxes on income, net                                         |   |   | 15,265 |   |          | 12,925  |   |   | 14,850
|                                                 | Transfers from loans to other real estate owned              |   |   |       |   |          |        |   |   | 1,007 
|ACQUISITIONS                                     |                                                              |   |   |        |   |          |         |   |   |       
|Fair value of tangible assets acquired           |                                                              | $ |  |        | $ | 285,935  |         | $ |  |       
|Fair value of core deposit intangible acquired   |                                                              |   |  |        |   | 8,869    |         |   |   |       
|Goodwill created in acquisition                  |                                                              |   |  |        |   | 32,232   |         |   |  |       
|Liabilities assumed                              |                                                              |   |  |        |   | (255,536 | )       |   |  |       
|                                                 |                                                              |   |   |        |   |          |        
|Acquisition price                                |                                                              |   |  |        |   | 71,500   |         |   |  |       
|Less:                                            |                                                              |   |   |        |   |          |         |   |   |       
|                                                 | Common stock issued                                          |   |   |       |   |          | (39,900 | ) |   |      
|                                                 | Amounts payable to Americorp shareholders and other accruals |   |   |       |   |          | (416    | ) |   |      
|                                                 |                                                              |   |   |        |   |          |        
|Cash paid                                        |                                                              |   |  |        |   | (31,184  | )       |   |  |       
|Cash acquired                                    |                                                              |   |  |        |   | 76,406   |         |   |  |       
|                                                 |                                                              |   |   |        |   |          |        
|Cash acquired, net of cash paid                  |                                                              | $ |  |        | $ | 45,222   |         | $ |  |       
|                                                 |                                                              |   |   |        |   |          |        

The accompanying notes are an integral part of these consolidated statements.

54

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2002

1. Summary of Significant Accounting Policies

The accounting and reporting policies of Mid-State Bancshares and subsidiary (the "Company") conform with accounting principles generally accepted in
the United States (GAAP) and general practice within the banking industry. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. The following are descriptions of the more significant accounting policies of the Company.

Consolidation:The consolidated financial statements include the accounts of Mid-State Bancshares and its wholly
owned subsidiary, Mid-State Bank & Trust, (the "Bank") which includes Mid-State Bank & Trust's wholly owned subsidiaries, Mid Coast Land Company and MSB
Properties. All inter-company accounts and transactions have been eliminated in the consolidated financial statements.

Securities:Securities for which the Company has the positive intent and ability to hold until maturity are classified as
held-to-maturity securities. Securities which are purchased principally for the purpose of selling them in the near term for a gain are classified as trading securities.
Securities not classified as held-to-maturity or trading are classified as available for sale. The Company holds no securities that should be classified as trading securities
or held-to-maturity securities. Securities classified as available for sale are reported on the consolidated statements of financial position as of December 31, 2002 and
2001, at their market value. The net unrealized gains or losses for these securities are reported, net of related taxes, in the statements of comprehensive income for the years ended
December 31, 2002, 2001 and 2000 and as a separate component of the capital accounts for the years ended December 31, 2002 and 2001.

On
January 1, 2001, the remaining Held-to-Maturity portion of the Investment Securities Portfolio was transferred to the Available for Sale portion of the
Investment Securities Portfolio. Ordinarily such transfers are prohibited, however, concurrent with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," a one time reclassification was permitted. Additionally, in connection with the merger
with Americorp (see Note 2 below), Mid-State Bancshares' classified approximately $3.7 million of securities as Available for Sale which were previously categorized as Held
to Maturity on Americorp's Statement of Financial Position. This action was taken in conformance with Mid-State Bancshares' overall asset/liability and investment management policy and is
permitted under SFAS No. 115,"Accounting for Certain Investments in Debt and Equity Securities."

Interest
income from the securities portfolio is accrued as earned including the accretion of discounts and the amortization of premiums based on the original cost of each security
owned.

Loans Held for Sale:Loans held for sale are carried at the lower of cost or market, which is determined on an aggregate
basis. They are stated at the amount of unpaid principal, reduced by market valuation adjustments and increased or reduced by net deferred loan origination fees and costs. Interest on loans is
recognized over the terms of the loans and is calculated on principal amounts outstanding. Direct loan origination fees and costs are deferred until the related loan is sold.

Loans:Loans are stated at face amount, less payments collected and net deferred loan fees. The allowance for loan losses,
which is based on estimates, is maintained at a level considered adequate to

55

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provide for losses that are considered to be inherent in the portfolio. Ultimate losses may vary from the current estimates. Management reviews these estimates periodically, considers the borrower's
financial status, current economic conditions, historical loan loss experience and other factors. As adjustments become necessary, they are reported in earnings in the periods in which they become
known. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

In
determining income recognition on loans, generally no interest is recognized with respect to loans on which a default of interest or principal has occurred for a period of
90 days or more. Loans are placed on non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business
conditions and collection efforts, is such that the presumption of collectibility of interest no longer is prudent. When a loan is placed on non-accrual status, previously accrued and
uncollected interest is reversed from income.

Investments in Real Estate:Real estate acquired for sale or development is stated at cost or market value, whichever is
less. Real estate operations from investments acquired for development are conducted and profits are shared pursuant to agreements with outside joint venture investors and are accounted for under the
equity method. Gains on sales of such real estate are recognized when certain criteria relating to the buyer's initial and continuing investment in the property are met. Under certain
circumstances, the gain, or a portion thereof, may be deferred until the criteria are met. The Company capitalizes interest on funds disbursed during the active development phases of real estate
development projects and the construction of Bank premises.

Premises and Equipment:Premises and equipment are carried at cost, less accumulated depreciation and amortization.
Depreciation and amortization are computed principally on the straight-line method over the lesser of the estimated useful life of each type of asset or the lease term.

Accounting for Income Taxes:Deferred income tax assets or liabilities are computed based on the difference between the
financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the deferred asset or
liability from period to period. The Company estimates its quarterly effective income tax rate based upon a variety of factors, including, but not limited to, the expected revenues for the year and
the product mix of revenue, and the ratio of permanent differences to total revenue. Any changes to the estimated rate are made prospectively in accordance with APB 28 "Interim Financial Reporting".
Additionally, Management makes estimates as to the amount of reserves, if any, that are necessary for known and potential tax exposures.

Recent Accounting Pronouncements:

In June 2001, the Financial Accounting Standards Board ("FASB") issued 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 was 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 Company adopted SFAS No. 141 during the third quarter of 2001, and the merger with Americorp, which is
discussed in Note 2, was accounted for in accordance with SFAS No. 141.

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

56

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over its estimated useful life, rather goodwill will be subject to at least an annual assessment for impairment. SFAS No. 142 was 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. Accordingly, the goodwill generated
through the merger with Americorp, which is discussed in Note 2, was not amortized. The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 did
not have a material impact on the Company's results of operations or financial condition, other than increasing net income by $2.3 million for the year ending December 31, 2002, assuming
that goodwill would have been amortized over a useful life of 15 years. However, it should be noted that the results of annual assessments in future years could impact the Company's results of
operations or financial condition if goodwill is considered to be impaired.

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 was effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did
not have a material impact on the Company's results of operation or financial condition.

In
December 2001, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 01-6,"Accounting by
Certain Entities (including Entities with Trade Receivables) that Lend to or Finance the Activities of Others."It addresses financial accounting and reporting for any entity
that lends to or finances the activities of others. SOP No. 01-6 was effective for fiscal years beginning after December 15, 2001. The adoption of SOP
No. 01-6 did not have a material impact on the Company's results of operations or financial condition.

The
FASB issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" in April of 2002. SFAS
No. 145 amends existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicablility under changed conditions. SFAS No. 145 is
effective in fiscal years beginning after May 15, 2002, with certain provisions effective for financial statements issued on or after May 15, 2002, with early adoption permitted. The
Company adopted the provisions effective for financial statements issued on or after May 15, 2002 on May 15, 2002. Management believes that the adoption of SFAS No. 145 will not
have a material impact on its results of operations and financial position.

The
FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" in June of 2002. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early adoption permitted.
Management believes that the adoption of SFAS No. 146 will not have a material impact on its results of operations and financial position.

The
FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" in July of 2002. SFAS No. 147 addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution. SFAS No. 147 was effective on October 1, 2002. The Company adopted SFAS No. 147 on October 1, 2002, and the adoption
did not have a material impact on its results of operations and financial position.

57

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In
November of 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN No. 45 clarifies the requirements relating to the guarantor's accounting for, and disclosure
of, the issuance of certain types of guarantees. The disclosure provisions of FIN No. 45 were effective for financial statements of periods that end after December 15, 2002, and the
required disclosures are included in these notes to consolidated financial statements. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that
are issued or modified after December 31, 2002. Management believes that adoption will not have a material impact on its results of operations and financial position.

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

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

Reclassifications:Certain items in the consolidated financial statements for 2001 and 2000 were reclassified to conform to
the 2002 presentation.

2. Mergers

Americorp

On September 28, 2001, Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank & Trust acquired
100 percent of the outstanding common stock of Americorp. The results of Americorp's operations have been included in the consolidated financial statements since that date. Americorp was the
holding company of American Commercial Bank. American Commercial Bank was a community bank that served Ventura County. The merger gives Mid-State Bank & Trust five new offices in
Ventura County.

The
aggregate purchase price was $71.5 million, including $31.6 million in cash paid to Americorp shareholders and for other merger related expenses along with
$39.9 million in Mid-State Bancshares' common stock and common stock options issued. The value of the 2.45 million shares issued was determined based on the average closing
market price of Mid-State Bancshares' common stock over the twenty consecutive trading days that Mid-State Bancshares' stock traded ending September 21, 2001. The
average price of Mid-State Bancshares' stock over that period was $15.9853. The merger was accounted for utilizing the purchase method of accounting.

58

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A
pro forma summary of revenue, net income and earnings per share, as if the merger was in effect at the beginning of each period, is presented below. This summary specifically excludes
any expense savings achieved as a result of the merger. Adjustments have been made to reflect the amortization of the core deposit intangible and the loss of interest on cash utilized to complete the
merger. These results are not included in the financial statements included herein. Pro forma information for 2002 is not presented since the merger was completed in 2001. Figures are in thousands
(unaudited).

|                                            |                                             | For the Years Ended December 31,
|------------------------------------------- | ------------------------------------------- | --------------------------------
|
|Pro Forma Interest and Non Interest Income: |                                             |                                 
|                                            | Combined Mid-State Bancshares and Americorp |                                 
|Pro Forma Net Income:                       |                                             |                                 
|                                            | Combined Mid-State Bancshares and Americorp |                                 
|Pro Forma Earnings Per ShareBasic          |                                             | $                               
|Pro Forma Earnings Per ShareDiluted        |                                             | $                               

The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, September 28, 2001 (in 000's).

Cash and Due From Banks

$
24,406Federal Funds Sold


52,000Securities, net


14,606Loans, Net


184,579Goodwill (A)


32,232Other Intangibles (B)


8,870Deferred Tax Asset


3,641Other Assets


6,702Total Assets Acquired


327,036Total Deposits


(253,998
)Other Liabilities


(1,538
)Total Liabilities Assumed


(255,536
)Net Assets Acquired

$
71,500


---

59

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3. Cash Reserves

The average reserve balances required to be maintained by the Federal Reserve Bank were approximately $24.2 million and $36.3 million at
December 31, 2002 and 2001, respectively.

4. Securities

A summary of investment securities owned is as follows:

|December 31, 2002                                       |       |   |         |         |   |        |        |  
|------------------------------------------------------- | ----- | - | ------- | ------- | - | ------ | ------ | -
|
|U.S. Treasury securities                                |       | $ | 26,101  |         | $ | 497    |        | $
|Securities of U.S. government agencies and corporations |       |   | 228,653 |         |   | 6,472  |        |  
|Mortgage backed securities                              |       |   | 5,842   |         |   | 106    |        |  
|Obligations of states and political subdivisions        |       |   | 309,236 |         |   | 14,396 |        |  
|Other investments                                       |       |   | 17,087  |         |   | 793    |        |  
|                                                        |       |   |         |         |   |        |        |  
|                                                        | TOTAL |   | $       | 586,919 |   | $      | 22,264 |  
|                                                        |       |   |         |         |   |        |        |  

|December 31, 2001                                       |       |   |         |         |   |       |        |  
|------------------------------------------------------- | ----- | - | ------- | ------- | - | ----- | ------ | -
|
|U.S. Treasury securities                                |       | $ | 40,777  |         | $ | 399   |        | $
|Securities of U.S. government agencies and corporations |       |   | 161,612 |         |   | 4,253 |        |  
|Mortgage backed securities                              |       |   | 3,296   |         |   | 389   |        |  
|Obligations of states and political subdivisions        |       |   | 220,672 |         |   | 5,067 |        |  
|Other investments                                       |       |   | 14,285  |         |   | 996   |        |  
|                                                        |       |   |         |         |   |       |        |  
|                                                        | TOTAL |   | $       | 440,642 |   | $     | 11,104 |  

Securities
having an amortized cost of $95,936,000 and $85,567,000 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes as
required by law.

Proceeds
from maturities, calls, partial pay-downs and/or sales of securities were $112,811,000, $137,709,000, and $143,191,000 for the years ended 2002, 2001, and 2000,
respectively. Gross gains of $27,000, $155,000, and $3,000 and gross losses of $10,000, $99,000, and $10,000 were realized on that activity for the years ended 2002, 2001, and 2000, respectively.

60

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The
amortized cost and market value of securities at December 31, 2002 and 2001, by contractual maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

|                                  |       | Available For Sale
|--------------------------------- | ----- | ------------------
|
|Due in one year or less           |       | $                 
|Due after one year to five years  |       |                   
|Due after five years to ten years |       |                   
|Due after ten years               |       |                   
|                                  |       |                   
|                                  | Total |                   
|                                  |       |                   

|                                  |       | Available For Sale
|--------------------------------- | ----- | ------------------
|
|Due in one year or less           |       | $                 
|Due after one year to five years  |       |                   
|Due after five years to ten years |       |                   
|Due after ten years               |       |                   
|                                  |       |                   
|                                  | Total |                   
|                                  |       |                   

5. Loans and Allowance for Loan Losses

The loan portfolio consists of the following:

|                                   |                      | December 31, |          
|---------------------------------- | -------------------- | ------------ | ---------
|
|
|Construction and development loans |                      | $            | 214,595  
|Real estate loans                  |                      |              | 528,238  
|Home equity credit lines           |                      |              | 74,278   
|Installment loans                  |                      |              | 27,226   
|Cash reserve                       |                      |              | 3,511    
|Agricultural production            |                      |              | 29,996   
|Commercial, other                  |                      |              | 213,175  
|                                   |                      |              |          
|                                   |                      |              | 1,091,019
|                                   |                      |              |          
|Less allowance for loan losses     |                      |              | (17,370  
|Less deferred loan fees, net       |                      |              | (3,468   
|                                   |                      |              |          
|                                   | TOTAL LOAN PORTFOLIO |              | $        
|                                   |                      |              |          

At
December 31, 2002, $817,111,000 of the Bank's portfolio was collateralized by various forms of real estate. The Company attempts to reduce its concentration of credit risk by
making loans, which are

61

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diversified by project type and geographic locations throughout the Central Coast of California. While management of the Company believes that the collateral presently securing this portfolio is
adequate, there can be no assurances that a deterioration in the California real estate market would not expose the Bank to significantly greater credit risk.

Loans
on non-accrual status totaled $16,748,000 and $2,986,000 at December 31, 2002 and 2001, respectively. If interest income on non-accrual loans had
been recorded as originally scheduled, approximately $1,103,794, $671,589, and $485,672 of additional interest income would have been recorded for the years ended December 31, 2002, 2001 and
2000, respectively. Additionally, there was no interest income which was recognized for loans on non-accrual during 2002, 2001, or 2000.

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 Company expects that most impaired loans will be on non-accrual status.
Therefore, in general, the accrual of interest on impaired loans is discontinued, and any uncollected interest is written off against interest from other loans in the current period. No further income
is recognized until all recorded amounts of principal are recovered in full or until circumstances have changed such that the loan is no longer regarded as impaired. Certain impaired loans are both
fully secured by collateral and are current in their interest and principal payments. These impaired loans are not classified as non-accrual and $401,277, $774,251 and $525,999 in interest
was recognized from these loans during 2002, 2001 and 2000, respectively.

The
amount of the valuation allowance for impaired loans is determined by comparing the recorded investment in each loan with its value measured by one of three methods: (1) the
expected future cash flows discounted at the effective interest rate; (2) the loan's observable market price, if available from a secondary market; or (3) by valuing the underlying
collateral if the loan is collateral dependent. A valuation allowance is computed as any amount by which the recorded investment exceeds the value of the impaired loan. If the value of the loan, as
determined by one of the above methods, exceeds the recorded investment in the loan, a valuation allowance for the loan is not established. The following table discloses information about impaired
loans and their related allowance.

|                                                                         |  | December 31,
|------------------------------------------------------------------------ |  | ------------
|
|
|Loans identified as impaired at year end                                 |  | $           
|Impaired loans for which a valuation allowance has been determined       |  |             
|Impaired loans for which no valuation allowance was determined necessary |  |             
|Amount of valuation allowance                                            |  |             
|                                                                         |  |             

The
average amount of the recorded investment in impaired loans during the year ended December 31, 2002, 2001 and 2000 was approximately $10,937,000, $8,579,000 and $6,148,000,
respectively.

The
valuation allowance reported above is determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics. Because the loans
currently identified as impaired have unique risk characteristics, the valuation allowance was determined on a loan-by-loan basis.

62

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The
Company also provides an allowance for losses for (1) loans that while not individually identified as being currently impaired, are internally evaluated as having a relatively
higher level of credit risk and (2) losses inherent in the balance of the loan portfolio which have not been specifically identified as of the year-end. The allowance is based on
review of individual loans, historical trends, current economic conditions, and other factors. The allowance for loan losses consists of an amount allocated to loans which are impaired, a
statistically allocated portion and a specifically allocated portion. The total of these components is considered adequate to provide for losses which can be reasonably anticipated.

The
allowance for loan losses is netted against loans on the Statements of Financial Position for December 31, 2002 and 2001. A summary of the changes in the allowance account is
as follows:

|                                                |  | December 31, |       
|----------------------------------------------- |  | ------------ | ------
|
|
|Balance at beginning of year:                   |  |              |       
|Allowance for loan losses                       |  | $            | 19,073
|Allowance for lossesunfunded commitments       |  |              | 1,586 
|                                                |  |              |       
|Total allowance for losses at beginning of year |  |              | 20,659
|Additions to the allowance charged to expense   |  |              | 600   
|Loans charged off                               |  |              | (2,838
|Recoveries of loans previously charged off      |  |              | 720   
|AdjustmentAcquired through Merger              |  |              |      
|                                                |  |              |       
|TOTAL ALLOWANCE FOR LOSSESEND OF YEAR          |  | $            | 19,141
|                                                |  |              |       
|Allowance for loan losses                       |  | $            | 17,370
|Allowance for lossesunfunded commitments       |  |              | 1,771 
|                                                |  |              |       
|TOTAL ALLOWANCE FOR LOSSESEND OF YEAR          |  | $            | 19,141
|                                                |  |              |       

The
increase in provision in 2001 was primarily a result of the increased uncertainty concerning economic conditions.

An
analysis of loans and leases to directors and executive officers is as follows:

|                                        |                        | December 31, |        
|--------------------------------------- | ---------------------- | ------------ | -------
|
|
|Balance, at beginning of year           |                        | $            | 14,082 
|Additional loans and leases made        |                        |              | 587    
|Payments received and other adjustments |                        |              | (13,480
|                                        |                        |              |        
|                                        | BALANCE AT END OF YEAR |              | $      
|                                        |                        |              |        

These
loans were made in the ordinary course of the Bank's business and, in management's opinion, were made at prevailing rates and terms. In addition, there were un-funded
commitments to loan up to an additional $1,444,000 in extensions of credit to directors and executive officers.

63

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6. Premises and Equipment

Premises and equipment consisted of the following:

|                                                 |                              | December 31, |        
|------------------------------------------------ | ---------------------------- | ------------ | -------
|
|
|Land                                             |                              | $            | 7,732  
|Buildings                                        |                              |              | 26,850 
|Furniture and equipment                          |                              |              | 22,581 
|Construction and equipment purchases in progress |                              |              | 2,097  
|                                                 |                              |              |        
|                                                 |                              |              | 59,260 
|LessAccumulated depreciation and amortization   |                              |              | (33,918
|                                                 |                              |              |        
|                                                 | TOTAL PREMISES AND EQUIPMENT |              | $      
|                                                 |                              |              |        

Depreciation
and amortization included in occupancy expenses was $4,372,000, $4,396,000, and $3,869,000 2002, 2001 and 2000, respectively, based on the following estimated useful lives:

|Buildings               |  | 20-40 years
|----------------------- |  | -----------
|Furniture and equipment |  | 3-20 years 

Total
rental expense for banking premises was $1,548,000, $910,000, and $980,000, in 2002, 2001 and 2000, respectively. As of December 31, 2002 the approximate minimum future
lease rentals payable under non-cancelable lease contracts for bank premises were as follows (dollars in 000's):

Year2003

$
1,7342004


1,6612005


1,5412006


1,4802007


1,394Thereafter


6,005TOTAL LEASE COMMITMENTS

$
13,815


7. Goodwill and Other Intangible Assets

No changes in the carrying amount of Goodwill occurred in 2002. Additional Goodwill in the amount of $32.2 million was created in 2001 as a result of the
merger with Americorp.

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

64

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the periods presented (dollars in 000's). Adjusted amounts are not presented for the year ended December 31, 2000 as SFAS 142 was not in effect during 2000.

|                                             |  | 2002 |        | 2001 |  
|-------------------------------------------- |  | ---- | ------ | ---- | -
|Net Income:                                  |  |      |        |      |  
|Reported net income                          |  | $    | 29,855 |      | $
|Less: Amortization of Goodwill, net of taxes |  |      | (2,279 | )    |  
|                                             |  |      |        |      |  
|Adjusted Net Income                          |  | $    | 27,576 |      | $
|                                             |  |      |        |      |  
|Basic earnings per share:                    |  |      |        |      |  
|Reported basic earnings per share            |  | $    | 1.25   |      | $
|Less: Amortization of Goodwill, net of taxes |  |      | (0.10  | )    |  
|                                             |  |      |        |      |  
|Adjusted basic earnings per share            |  | $    | 1.15   |      | $
|                                             |  |      |        |      |  
|Diluted earnings per share:                  |  |      |        |      |  
|Reported diluted earnings per share          |  | $    | 1.20   |      | $
|Less: Amortization of Goodwill, net of taxes |  |      | (0.09  | )    |  
|                                             |  |      |        |      |  
|Adjusted diluted earnings per share          |  | $    | 1.11   |      | $
|                                             |  |      |        |      |  

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

|                                     |  | Dec. 31, 2002 |        | Dec. 31, 2001
|------------------------------------ |  | ------------- | ------ | -------------
|
|Core Deposit Intangible              |  | $             | 8,870  |              
|Originated Mortgage Servicing Rights |  |               | 2,062  |              
|                                     |  |               |        |              
|Total Other Intangible Assets        |  | $             | 10,932 |              
|                                     |  |               |        |              

The
aggregate amount of amortization expense of other intangible assets is as follows ($in 000's):

|                                                     |  | 2002 |       | 2001 |   | 2000
|---------------------------------------------------- |  | ---- | ----- | ---- | - | ----
|Amortization of Core Deposit Intangible              |  | $    | 1,072 |      | $ | 297 
|Amortization of Originated Mortgage Servicing Rights |  |      | 307   |      |   | 186 
|                                                     |  |      |       |      |   |     
|Total aggregate amortization expense                 |  | $    | 1,379 |      | $ | 483 
|                                                     |  |      |       |      |   |     

The
projected amortization expense for intangible assets, assuming no further acquisitions or dispositions, is approximately $1.4 million per year over the next five years.

8. Disclosures about Fair Value of Financial Instruments

Where applicable, the Company is required by GAAP to disclose the fair value of financial instruments and the methods and significant assumptions used to estimate
those fair values. In the case of financial instruments for which it is not practicable to estimate the fair value, the Company is

65

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required to disclose information pertinent to estimating the fair value such as interest rates and maturity, and also state the reasons why it is not practicable to estimate fair value.

Fair
values of financial instruments depict the market's assessment of the present value of net future cash flows directly or indirectly embodied in them, discounted to reflect both
current interest rates and the market's assessment of the risk that the cash flows will not occur. The information about fair value is said to better enable investors, creditors, and other users to
assess the consequences of an entity's investment and financing strategies, that is, to assess its performance.

There
are several factors which users of these financial statements should consider. First, there are uncertainties inherent in the process of estimating the fair value of financial
instruments. Secondly, the
statement covers financial instruments only, not other assets like premises and equipment, the fair value of which might differ significantly from the amounts at which they are carried in an entity's
financial statements. Thirdly, the Company must exclude from its estimate of the fair value of deposit liabilities any consideration of its ongoing customer relationships which provide stable sources
of investable funds. Lastly, these disclosures do not address means of evaluating an entity's performance in areas other than the management of financial instruments; for example, the ability to
generate non-interest income and the control of non-interest expense. For these reasons, users are advised not to regard the disclosure of the fair market value of financial
instruments as in any way equivalent to a valuation of the Company as a whole.

The
following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due from Banks and Fed Funds Sold



Investment Securities



Loans Held for Sale and Loans, net)



Accrued Interest Receivable



66

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Deposits



Other Borrowings



Commitments to Extend Credit and Letters of Credit



Accrued Interest Payable



The
estimated fair values of the Company's financial instruments are as follows:

|                       |                             | 2002 |   | 2001     
|---------------------- | --------------------------- | ---- | - | ---------
|
|Financial assets:      |                             |      |   |          
|                       | Cash and due from banks     |      | $ | 128,036  
|                       | Fed funds sold              |      |   | 16,500   
|                       | Investment securities       |      |   | 608,983  
|                       | Loans held for sale         |      |   | 22,560   
|                       | Loans, net                  |      |   | 1,070,181
|                       | Accrued interest receivable |      |   | 11,689   
|Financial liabilities: |                             |      |   |          
|                       | Deposits                    |      |   | 1,652,947
|                       | Other borrowings            |      |   | 10,973   
|                       | Accrued interest payable    |      |   | 450      

67

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9. Deposits

Deposits are insured up to $100,000 per member by the Federal Deposit Insurance Corporation (FDIC). The following is a break-down by type and maturity
at year-end of the Bank's deposits:

|December 31, 2002                      |       |   |         |           |   |        |         |  
|-------------------------------------- | ----- | - | ------- | --------- | - | ------ | ------- | -
|
|Demand Deposits                        |       | $ | 390,212 |           | $ |       |         | $
|Savings, Money Market and NOW Accounts |       |   | 863,142 |           |   |       |         |  
|Time Deposits$100,000 or more         |       |   |        |           |   | 74,324 |         |  
|Time DepositsUnder $100,000           |       |   |        |           |   | 91,891 |         |  
|                                       |       |   |         |           |   |        |         |  
|                                       | Total |   | $       | 1,253,354 |   | $      | 166,215 |  
|                                       |       |   |         |           |   |        |         |  

|December 31, 2001              |       |   |         |           |   |         |         |  
|------------------------------ | ----- | - | ------- | --------- | - | ------- | ------- | -
|
|Demand Deposits                |       | $ | 367,370 |           | $ |        |         | $
|Savings, Money Market          |       |   |         |           |   |         |         |  
|and NOW Accounts               |       |   | 769,173 |           |   |        |         |  
|Time Deposits$100,000 or more |       |   |        |           |   | 86,411  |         |  
|Time DepositsUnder $100,000   |       |   |        |           |   | 108,689 |         |  
|                               |       |   |         |           |   |         |         |  
|                               | Total |   | $       | 1,136,543 |   | $       | 195,100 |  
|                               |       |   |         |           |   |         |         |  

10. Income Taxes

The current and deferred amounts of the provision for taxes in the years ended December 31, were:

|(dollars in 000's)                  |          | 2002                |        | 2001   |        | 2000   |      
|----------------------------------- | -------- | ------------------- | ------ | ------ | ------ | ------ | -----
|Federal:                            |          |                     |        |        |        |        |      
|                                    | Current  |                     | $      | 10,937 |        | $      | 9,753
|                                    | Deferred |                     |        | 613    |        |        | 1,433
|                                    |          |                     |        |        |        |        |      
|                                    |          | Total Federal Taxes |        |        | 11,550 |        |      
|                                    |          |                     |        |        |        |        |      
|State:                              |          |                     |        |        |        |        |      
|                                    | Current  |                     |        | 5,693  |        |        | 3,388
|                                    | Deferred |                     |        | (1,351 | )      |        | (44  
|                                    |          |                     |        |        |        |        |      
|                                    |          | Total State Taxes   |        |        | 4,342  |        |      
|TOTAL FEDERAL AND STATE TAX EXPENSE |          | $                   | 15,892 |        | $      | 14,530 |      
|                                    |          |                     |        |        |        |        |      

68

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The
provision for taxes on income differed from the amounts computed using the federal statutory rate of 35 percent as follows:

|(dollars in 000's)                                   |                   | 2002 |        | 2001   |   | 2000   |       
|---------------------------------------------------- | ----------------- | ---- | ------ | ------ | - | ------ | ------
|Tax expense at federal statutory tax rate            |                   | $    | 16,012 |        | $ | 14,676 |       
|State income tax expense                             |                   |      | 2,791  |        |   | 2,125  |       
|Tax savings from exempt investment and loan income ) |                   |      | (3,030 | )      |   | (2,245 | )     
|Other, net                                           |                   |      | 119    |        |   | (26    | )     
|                                                     |                   |      |        |        |   |        |       
|                                                     | TOTAL TAX EXPENSE |      | $      | 15,892 |   | $      | 14,530

The principal items giving rise to deferred taxes were:

|(dollars in 000's)                 |                      | 2002 |        | 2001 |   | 2000   |      
|---------------------------------- | -------------------- | ---- | ------ | ---- | - | ------ | -----
|Allowance for loan losses          |                      | $    | 86     |      | $ | (1,142 | )    
|Gain on loan workouts              |                      |      |       |      |   | 1,205  |      
|Real estate joint ventures         |                      |      | 20     |      |   | (21    | )    
|Deferred compensation              |                      |      | 153    |      |   | 106    |      
|Merger related expenses            |                      |      |       |      |   |       |      
|State income taxes                 |                      |      | (283   | )    |   | 444    |      
|Provisions for OREO properties     |                      |      |       |      |   |       |      
|Capital loss carryforward          |                      |      | 248    |      |   | 65     |      
|Reversal of valuation allowance    |                      |      | (248   | )    |   |       |      
|Depreciation                       |                      |      | (611   | )    |   | 34     |      
|Securitiesdiscount accretion      |                      |      | (136   | )    |   | 20     |      
|Accrued liabilities and other, net |                      |      | 1,063  |      |   | 189    |      
|Accrued compensation               |                      |      | 125    |      |   | 489    |      
|Credit carryovers                  |                      |      | (1,155 | )    |   |       |      
|                                   |                      |      |        |      |   |        |      
|                                   | TOTAL DEFERRED TAXES |      | $      | (738 | ) | $      | 1,389

69

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As of December 31, the deferred tax assets and liabilities, which include the deferred tax asset acquired in the Americorp transaction, are as
follows:

|(dollars in 000's)                                                                           |                                    | 2002 |        | 2001  |   | 2000   |      
|-------------------------------------------------------------------------------------------- | ---------------------------------- | ---- | ------ | ----- | - | ------ | -----
|Assets:                                                                                      |                                    |      |        |       |   |        |      
|                                                                                             | Allowance for loan losses          |      | $      | 7,853 |   | $      | 7,939
|                                                                                             | Gain on loan workouts              |      |        | 167   |   |        | 167  
|                                                                                             | Deferred compensation              |      |        | 2,257 |   |        | 2,410
|                                                                                             | Merger related expenses            |      |        | 226   |   |        | 226  
|                                                                                             | State income taxes                 |      |        | 1,449 |   |        | 1,166
|                                                                                             | Capital loss carryforward          |      |        |      |   |        | 248  
|                                                                                             | Accrued liabilities and other, net |      |        |      |   |        | 644  
|                                                                                             | Securitiesdiscount accretion      |      |        | 147   |   |        | 11   
|                                                                                             | Accrued compensation               |      |        | 107   |   |        | 232  
|                                                                                             | Credit carryovers                  |      |        | 1,155 |   |        |     
|                                                                                             |                                    |      |        |       |   |        |      
|Total Assets                                                                                 |                                    |      | 13,361 |       |   | 13,043 |      
|                                                                                             |                                    |      |        |       |   |        |      
|Liabilities:                                                                                 |                                    |      |        |       |   |        |      
|                                                                                             | Real estate joint ventures         |      |        | (672  | ) |        | (652 
|                                                                                             | Depreciation and amortization      |      |        | (216  | ) |        | (827 
|                                                                                             | Securitiesdiscount accretion      |      |        |      |   |        |     
|                                                                                             | Mark-to-market adjustment          |      |        | (293  | ) |        | (293 
|                                                                                             | Accrued liabilities and other, net |      |        | (419  | ) |        |     
|                                                                                             |                                    |      |        |       |   |        |      
|Total Liabilities                                                                            |                                    |      | (1,600 | )     |   | (1,772 | )    
|                                                                                             |                                    |      |        |       |   |        |      
|Valuation Allowance                                                                          |                                    |      |       |       |   | (248   | )    
|Net deferred tax asset before tax effect of unrealized gain on securities available for sale |                                    |      | 11,761 |       |   | 11,023 |      
|Tax effect of unrealized gain on securities available for sale                               |                                    |      | (8,826 | )     |   | (4,280 | )    
|                                                                                             |                                    |      |        |       |   |        |      
|DEFERRED TAX ASSET, NET                                                                      |                                    | $    | 2,935  |       | $ | 6,743  |      
|                                                                                             |                                    |      |        |       |   |        |      

The
net deferred tax asset above is included in Other Assets on the Consolidated Statements of Financial Position. As of December 31, 2002, the Company has State tax credit
carryforwards of $1,155,000 for financial reporting purposes. There are no alternative minimum tax credit carryforwards for tax purposes. A valuation allowance, which was zero at December 31,
2002, provides for deferred taxes that are not anticipated to be offset by taxable income projected for the next 12 months. A valuation allowance is based on estimates by Management which can
change over time.

11. Other Borrowings

The Company has obtained first trust deed mortgage financing for several of the properties and investments that they own. Mortgages payable totaled $70,000 and
$104,000 at December 31, 2002 and 2001, respectively. Other borrowings also include borrowings under the Treasury Tax and Loan note account of $8,903,000 and $15,609,000 at December 31,
2002 and 2001, respectively. Federal Home Loan borrowings remained at $2,000,000 for both 2002 and 2001.

70

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12. Commitments and Contingencies

At December 31, 2002 and 2001, the Company was contingently liable for letter of credit accommodations made to its customers totaling $39,431,000 and
$31,787,000, respectively. At December 31, 2002 and 2001, the Company also had undisbursed loan commitments in the amount of $436,730,000 and $368,543,000, respectively.

Letters
of credit are issued in connection with agreements made by customers to counterparties. If the customer fails to comply with the agreement, the counterparty may enforce the
letter of credit as a remedy. Credit risk arises from the possibility that the customer may not be able to repay the Company. The notional amount of the letter of credit accomodations represents the
maximum amount of future cash payments.

Many
of the commitments are expected to expire without being drawn upon. Accordingly, the total outstanding commitment amount does not necessarily represent future cash requirements. The
Company does not anticipate any significant losses as a result of these transactions. Provision has been made for losses which may be sustained in the fulfillment of, or from an inability to fulfill,
any commitments.

The
Company is involved in litigation of a routine nature which is being handled and defended in the ordinary course of the Company's business. In the opinion of management, based in
part on the advice
of legal counsel, the resolution of this litigation will not have a material impact on the Company's financial condition or results of operations.

13. Earnings Per Share

Earnings per share (EPS) have been computed in 2002, 2001 and 2000, based on the weighted average number of shares outstanding each year of 23,962,000,
22,452,000, and 22,257,000, respectively. Average outstanding shares in prior years have been restated to reflect stock dividends paid to former shareholders of Mid-State Bank, as well as,
additional shares issued in connection with the mergers. Also, on January 26, 2001, the Company declared a 2 for 1 stock split. All EPS and share data has been retroactively restated taking
into account this split.

71

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The
following is a reconciliation of the numerators and denominators used in the calculation of basic EPS and diluted EPS for the years ended December 31.

|(figures in 000's except per share data) |                                                                     | Earnings |   | Weighted Average Shares
Outstanding |  | EPS   
|---------------------------------------- | ------------------------------------------------------------------- | -------- | - | ----------------------------------- |  | ------
|2002                                     |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:                |                                                                     |          |   |                                     |  |       
|                                         | Net Income available to Common Stockholders                         |          | $ | 29,855                              |  | 23,962
|Effect of Dilutive Securities:           |                                                                     |          |   |                                     |  |       
|                                         | Stock Options                                                       |          |   |                                     |  | 875   
|Diluted Earnings Per Share:              |                                                                     |          |   |                                     |  |       
|                                         | Net Income available to Common Stockholders and assumed conversions |          | $ | 29,855                              |  | 24,837
|2001                                     |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:                |                                                                     |          |   |                                     |  |       
|                                         | Net Income available to Common Stockholders                         |          | $ | 27,402                              |  | 22,452
|Effect of Dilutive Securities:           |                                                                     |          |   |                                     |  |       
|                                         | Stock Options                                                       |          |   |                                     |  | 800   
|Diluted Earnings Per Share:              |                                                                     |          |   |                                     |  |       
|                                         | Net Income available to Common Stockholders and assumed conversions |          | $ | 27,402                              |  | 23,252
|2000                                     |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:                |                                                                     |          |   |                                     |  |       
|                                         | Net Income available to Common Stockholders                         |          | $ | 27,349                              |  | 22,257
|Effect of Dilutive Securities:           |                                                                     |          |   |                                     |  |       
|                                         | Stock Options                                                       |          |   |                                     |  | 465   
|Diluted Earnings Per Share:              |                                                                     |          |   |                                     |  |       
|                                         | Net Income available to Common Stockholders and assumed conversions |          | $ | 27,349                              |  | 22,722

14. Capital Accounts

The Company declared cash dividends during 2002 of $9,803,000. The California Financial Code provides that a bank may not make a cash distribution to its
shareholders in excess of (1) the bank's undivided profits or (2) the bank's net income for its last three fiscal years less the amount of any distributions made by the bank during such
period. The Bank paid cash dividends to the Holding Company in 2002, 2001 and 2000 of $81,155,000 which the Company needed to pay its regular cash dividends, as well as, to execute the Company's
common stock repurchase plan and to complete the merger with Americorp in 2001. Due to the technical restriction in the California Financial Code, the Bank could have made additional cash dividends
totaling $4,526,000 at December 31, 2002. The Bank has requested, and the Federal Deposit Insurance Corporation and State Department of Financial Institutions have both agreed, to allow the
Bank to pay dividends in 2003 of up to $21,250,000.

72

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15. Stock Options

The Bank adopted a new stock option plan (the "Plan") in 1998. The Plan replaced earlier plans granted by the former BSM Bancorp, the former City Commerce Bank
and the former Mid-State Bank. Options are granted at a price not less than the fair market value of the stock at the grant date. Options are exercisable and expire as determined by the
Board of Directors. However, options expire no later than ten years from the date of grant. The Plan provides for issuance of up to 3,000,000 shares of common stock and is subject to termination as
determined by the Board of Directors. As of December 31, 2002, 1,877,866 shares are currently under option. The shares are exercisable at prices ranging from $5.38 to $20.05. There were 85,866
shares exercised during 2002 and 73,446 and 46,008 shares exercised in 2001 and 2000, respectively.

The
Bank applies Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees,"and related
Interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized for grants under the Plan. Consistent with the methods of SFAS No. 123,
pro-forma compensation expense for the Plan had been determined based on the fair value at the grant date. Fair values were estimated using the Black-Scholes option-pricing model with the
following assumptions: dividend yields ranging from 2.04% to 2.57%, expected volatility of 25%, risk-free interest rates ranging from 2.88% to 6.38% and expected lives of five years. The
Bank's net income and earnings per share for the years ended December 31, 2002, 2001 and 2000 would have been reduced to pro forma amounts indicated below:

|(dollars in 000's except per share data)           |                             | 2002        |        | 2001 |      | 2000  
|-------------------------------------------------- | --------------------------- | ----------- | ------ | ---- | ---- | ------
|Net income to common shareholders:                 |                             |             |        |      |      |       
|As reported                                        |                             | $           | 29,855 |      | $    | 27,402
|Pro forma                                          |                             | $           | 28,432 |      | $    | 26,115
|Net income per common and common share equivalent: |                             |             |        |      |      |       
|                                                   | Basic earnings per share:   |             |        |      |      |       
|                                                   |                             | As reported |        | $    | 1.25 |       
|                                                   |                             | Pro forma   |        | $    | 1.19 |       
|                                                   | Diluted earnings per share: |             |        |      |      |       
|                                                   |                             | As reported |        | $    | 1.20 |       
|                                                   |                             | Pro forma   |        | $    | 1.14 |       

A
summary of the Company's stock options as of December 31, 2002, 2001 and 2000, and changes during the periods then ended, is presented below:

|                                 |  | 2002      |   | 2001 |       | 2000
|-------------------------------- |  | --------- | - | ---- | ----- | ----
|
|Outstanding at beginning of year |  | 1,871,514 |   | $    | 14.69 |     
|Granted                          |  | 238,529   |   |      | 17.19 |     
|Exercised/Forfeited              |  | (232,177  | ) |      | 14.53 |     
|                                 |  |           |   |      |       |     
|Outstanding at end of year       |  | 1,877,866 |   | $    | 15.03 |     
|                                 |  |           |   |      |       |     

73

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16. Employee Benefits

The Company offers a combination qualified profit sharing plan (the "Profit Sharing Plan") and a savings and retirement plan designed to comply with Internal
Revenue Service Code Section 401(k) (the "401(k) Plan") to substantially all employees. The Company's contributions to the Profit Sharing and 401(k) Plans for the years ended
December 31, 2002, 2001, and 2000 were $2,291,000, $2,064,000, and $2,185,000, respectively.

A
deferred compensation plan was in effect to provide performance oriented deferred compensation for the Company's senior executives prior to 2001. Allocations to participant's accounts
were made at the discretion of the Board of Directors. The amount of contributions was determined by the Board of Directors as a function of net profits and prior year return on equity. In 2000,
$820,000 was contributed to participants. No contributions were made in 2001 and 2002 because senior executives now participate in the Company's bonus incentive system which began in 1996 (the
"Incentive Reward System"). A bonus is paid to selected employees who exceed certain goals under formulas established at the start of the year. Included in employee benefits expense for 2002, 2001 and
2000 was a charge of $1,772,000, $1,621,000 and $2,253,000, respectively, which was accrued during those years and paid in the following year under the Incentive Reward System. Virtually all employees
received bonuses under this program in 2002 ranging from 0.55% of their salary to as much as 50.0% of their salary.

17. Regulatory Matters

The
Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatoryand possibly additional discretionaryactions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As
of December 31, 2002, the latest regulatory examinations indicated that, Mid-State Bancshares and Mid-State Bank & Trust were categorized as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Mid-State Bancshares and Mid-State Bank & Trust must
maintain minimum total risk-based, Tier One risk-based and Tier One Leverage ratios as set forth in the following table. There are no conditions or events that Management
believes

74

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have changed Mid-State Bancshares' and Mid-State Bank & Trust's category. The actual capital amounts and ratios as of December 31, 2002 and 2001 are also
presented in the following table:

|                                           |  |   |         |  |      |   |   |         |  | To be Considered
Well Capitalized
For Capital
Adequacy Purposes |  
|------------------------------------------ |  | - | ------- |  | ---- | - | - | ------- |  | --------------------------------------------------------------- | -
|
|
|
|
|Mid-State BancsharesConsolidated:         |  |   |         |  |      |  
|As of December 31, 2002:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(to Risk Weighted Assets)    |  | $ | 216,820 |  | 16.0 | % | $ | 108,661 |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 199,815 |  | 14.7 | % | $ | 54,330  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 199,815 |  | 10.6 | % | $ | 75,702  |  | 4.0                                                             | %
|As of December 31, 2001:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(To Risk Weighted Assets)    |  | $ | 202,943 |  | 15.0 | % | $ | 107,940 |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 186,031 |  | 13.8 | % | $ | 53,970  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 186,031 |  | 10.2 | % | $ | 72,825  |  | 4.0                                                             | %
|Mid-State Bank & TrustOnly:               |  |   |         |  |      |  
|As of December 31, 2002:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(to Risk Weighted Assets)    |  | $ | 213,614 |  | 15.7 | % | $ | 108,661 |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 196,609 |  | 14.5 | % | $ | 54,330  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 196,609 |  | 10.4 | % | $ | 75,784  |  | 4.0                                                             | %
|As of December 31, 2001:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(To Risk Weighted Assets)    |  | $ | 199,116 |  | 14.8 | % | $ | 107,935 |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 182,204 |  | 13.5 | % | $ | 53,967  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 182,204 |  | 10.0 | % | $ | 72,975  |  | 4.0                                                             | %

75

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18. Reportable Business Segments

Reportable business segments are determined using the "management approach" and are intended to present reportable segments consistent with how the chief
operating decision maker organizes segments within the company for making operating decisions and assessing performance. Presently, the Company is segregated into four reportable business segments,
Community Banking, Mid Coast Land Company, Trust Services and All Other.

The
Community Banking business segment consists of commercial and retail banking. This segment is managed as a single strategic unit which derives its revenues from a wide range of
banking services, including lending and investing activities, acceptance of demand, savings, and time deposits, and mortgage servicing. As previously noted, Mid Coast Land Company engages in real
estate investment activities. Trust Services commenced operations on January 2, 2001. The operation provides custody
services, investment management and trust-related services such as trustee for trust accounts, estate settlement services, guardianships and conservatorships.

Non
reportable operating segments of the Company's operations which do not have similar characteristics to any other banking operations and do not meet the quantitative thresholds
requiring disclosure, are included in the "All Other" category. "All Other" includes certain items, such as: a recovery of prior periods interest on a previously charged-off note totaling
$2.8 million in 2001, an additional provision for loan losses of $2.9 million in 2001 in anticipation of the negative impact on credit quality of a deterioration in economic activity, a
one-time gain on the sale of the credit card portfolio of $1.7 million in 2001, one-time charges to expense in 2001 for costs of donated property, an early retirement
program and the Bank's name change.

Below
is a summary statement of income and certain selected financial data for each of the three years ended December 31, 2002. The accounting policies used in the disclosure of
business segments are the same as those described in the summary of significant accounting policies. Certain assumptions are made concerning the allocations of costs between segments which may
influence relative results,

76

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most notably, allocations of various types of overhead and administrative costs. Management believes that the allocations utilized below are reasonable and consistent with the way it manages the
business.

|                             |  | Community Banking |         | Mid Coast Land Company |   | Trust Department
|---------------------------- |  | ----------------- | ------- | ---------------------- | - | ----------------
|
|
|Interest Income              |  | $                 | 109,318 |                        | $ | 111,181         
|Interest Expense             |  |                   | 16,381  |                        |   | 26,480          
|                             |  |                   |         |                        |   |                 
|Net Interest Income          |  |                   | 92,937  |                        |   | 84,701          
|Provision                    |  |                   | 600     |                        |   | 1,200           
|Non Interest Income          |  |                   | 23,872  |                        |   | 20,890          
|Non Interest Expense         |  |                   | 70,110  |                        |   | 61,801          
|                             |  |                   |         |                        |   |                 
|Pre-Tax Income               |  | $                 | 46,099  |                        | $ | 42,590          
|                             |  |                   |         |                        |   |                 
|Average Assets
(in millions) |  | $                 | 1,882   |                        | $ | 1,564           
|                             |  |                   |         |                        |   |                 
|
|
|
|Interest Income              |  |                   |        |                        |   | 2,807           
|Interest Expense             |  |                   |        |                        |   |                
|                             |  |                   |         |                        |   |                 
|Net Interest Income          |  |                   |        |                        |   | 2,807           
|Provision                    |  |                   |        |                        |   | 2,900           
|Non Interest Income          |  |                   |        |                        |   | 1,713           
|Non Interest Expense         |  |                   |        |                        |   | 2,437           
|                             |  |                   |         |                        |   |                 
|Pre-Tax Income               |  |                   |        |                        | $ | (817            
|                             |  |                   |         |                        |   |                 
|Average Assets
(in millions) |  |                   |        |                        | $ | 1               

77

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19. Quarterly Financial Data

The following table presents condensed consolidated statements of income for each of the quarters covering the past two years (unauditedin 000's):

|                          |          | 2002
|------------------------- | -------- | ----
|
|Interest Income           |          | $   
|Interest Expense          |          |     
|                          |          |     
|Net Interest Income       |          |     
|Provision for loan losses |          |     
|Non-interest income       |          |     
|Non-interest expense      |          |     
|                          |          |     
|Income before taxes       |          |     
|Taxes                     |          |     
|                          |          |     
|Net Income                |          | $   
|                          |          |     
|Earnings Per Share:       |          |     
|                          | Basic   |     
|                          | Diluted |     
|                          |          |     
|
|
|Interest Income           |          | $   
|Interest Expense          |          |     
|                          |          |     
|Net Interest Income       |          |     
|Provision for loan losses |          |     
|Non-interest income       |          |     
|Non-interest expense      |          |     
|                          |          |     
|Income before taxes       |          |     
|Taxes                     |          |     
|                          |          |     
|Net Income                |          | $   
|                          |          |     
|Earnings Per Share:       |          |     
|                          | Basic   |     
|                          | Diluted |     

20. Parent Company Financial Information

Condensed financial information of Mid-State Bancshares (parent only) follows:
(dollars in 000's)

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Condensed Balance Sheets

|                                     |                                            | December 31, |        
|------------------------------------ | ------------------------------------------ | ------------ | -------
|
|ASSETS                               |                                            |              |        
|Cash                                 |                                            | $            | 2,985  
|Investment in Mid-State Bank         |                                            |              | 253,534
|Other Assets                         |                                            |              |       
|                                     |                                            |              |        
|                                     | Total Assets                               |              | $      
|                                     |                                            |              |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                            |              |        
|Dividend Payable                     |                                            | $            | 2,606  
|Accrued Liabilities                  |                                            |              | (222   
|                                     |                                            |              |        
|                                     | Total Liabilities                          |              |        
|Shareholders' Equity                 |                                            |              | 254,135
|                                     |                                            |              |        
|                                     | Total Liabilities and Shareholders' Equity |              | $      
|                                     |                                            |              |        

Condensed Income Statements

|                                    |               | December 31, |       
|----------------------------------- | ------------- | ------------ | ------
|
|Equity in earnings of subsidiaries: |               |              |       
|                                    | Undistributed |              | $     
|                                    | Dividends     |              |       
|Operating Expenses                  |               |              | (563  
|Income Tax Benefit                  |               |              | 222   
|                                    |               |              |       
|Net Income                          |               | $            | 29,855
|                                    |               |              |       

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Condensed Statements of Cash Flows

|                                                                                  |                                  | December 31,                    |                                          
|--------------------------------------------------------------------------------- | -------------------------------- | ------------------------------- | -----------------------------------------
|
|Cash flows from operation activities:                                             |                                  |                                 |                                          
|                                                                                  | Net Income                       |                                 | $                                        
|Adjustments to reconcile net income to net cash provided by operating activities: |                                  |                                 |                                          
|                                                                                  | Net earnings of Bank             |                                 |                                          
|                                                                                  |                                  | Net change in other liabilities |                                          
|                                                                                  |                                  | Net change in other assets      |                                          
|                                                                                  |                                  |                                 |                                          
|                                                                                  |                                  |                                 | Net cash provided by operating activities
|                                                                                  |                                  |                                 |                                          
|Net Cash Flow from Investing Activities                                           |                                  |                                 |                                         
|                                                                                  |                                  |                                 |                                          
|Net Cash Flows from Financing Activities:                                         |                                  |                                 |                                          
|                                                                                  | Proceeds from stock options      |                                 |                                          
|                                                                                  | Payment to purchase common stock |                                 |                                          
|                                                                                  | Dividends paid by parent         |                                 |                                          
|                                                                                  | Other                            |                                 |                                          
|Net cash used in financing activities                                             |                                  |                                 | (16,891                                  
|                                                                                  |                                  |                                 |                                          
|Net Increase (Decrease) in Cash                                                   |                                  |                                 | (668                                     
|Cash, beginning of year                                                           |                                  |                                 | 3,653                                    
|                                                                                  |                                  |                                 |                                          
|Cash, at end of year                                                              |                                  | $                               | 2,985                                    
|                                                                                  |                                  |                                 |                                          

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Management Statement

Mid-State Bancshares is responsible for the preparation, integrity, and fair presentation of its published consolidated
financial statements as of December 31, 2002 and the year then ended. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States and, as such, include amounts, some of which are based on judgments and estimates of management.

Internal Control Structure Over Financial Reporting

Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. The system contains monitoring
mechanisms, and actions are taken to correct deficiencies identified.

There
are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls.
Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.

Management
assessed its internal control structure over financial reporting as of December 31, 2002. This assessment was based on criteria for effective internal control over
financial reporting described in "Internal ControlIntegrated Framework" issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based upon this assessment,
management believes that Mid-State Bancshares maintained an effective internal control structure over financial reporting as of December 31, 2002.

Compliance With Laws and Regulations

Management is also responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations
concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations.

Management
assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that Mid-State
Bancshares complied, in all significant aspects, with the designated laws and regulations relating to safety and soundness for the year ended December 31, 2002.

|/s/JAMES W. LOKEYJames W. Lokey
President |  | /s/JAMES G. STATHOSJames G. Stathos
Executive Vice President
Chief Financial Officer
|----------------------------------------- |  | ------------------------------------------------------------------------------------

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Report of Independent Public Accountants  On Management's Report on Internal Control Structure

To
the Board of Directors and Shareholders of Mid-State Bancshares:

We
have examined management's assertion included in the accompanyingManagement Statement, that Mid-State Bancshares and its
subsidiary maintained effective internal control over financial reporting as of December 31, 2002, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mid-State Bancshares and its
subsidiary's management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on management's assertion based on our
examination.

Our
examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an
understanding of internal control over financial reporting, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

Because
of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of internal control over
financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In
our opinion, management's assertion that Mid-State Bancshares and its subsidiary maintained effective internal control over financial reporting as of December 31,
2002 is fairly stated, in all material respects, based on criteria established in theInternal Control-Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

|/s/PRICEWATERHOUSECOOPERS LLP |  | 
|----------------------------- |  | 

Los
Angeles, California
January 31, 2003

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On May 14, 2002, the Company terminated the engagement with Arthur Andersen, LLP ("Andersen") as its independent auditor. The decision to terminate the
engagement with Andersen was made by the Audit Committee of the Company. Andersen's report on the financial statements of the Company for each of the years ended December 31, 2001 and
December 31, 2000 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.

During
the years ended December 31, 2001 and December 31, 2000 and the interim period between December 31, 2001 and May 14, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of Andersen, would have caused it to make reference to the subject matter of the disagreements in connection with its report. During the same periods, there were no reportable events as
defined in Item 304(a) (1) (v) of Regulation S-K promulgated by the Securities and Exchange Commission.

On
July 12, 2002, the Company announced that it had appointed PricewaterhouseCoopers LLP as the Company's independent accounting firm to replace Arthur Andersen LLP. During the
years ended December 31, 2001 and 2000, and the interim period between December 31, 2001 and July 15, 2002, the Company did not consult with PricewaterhouseCoopers regarding any
of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 of Form 10-K is incorporated by reference from the information contained in the Bank's Proxy Statement for
the 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the Bank's Proxy Statement for
the 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the Bank's Proxy Statement for
the 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the Bank's Proxy Statement for
the 2003 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.

ITEM 14. CONTROLS AND PROCEDURES



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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|Exhibit
Number |  | Index to Exhibits                                                                                                                      |  | Sequentially
Numbered
Pages
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------
|3.1            |  | Articles of Incorporation, as amended1                                                                                                 |  |                            
|3.2            |  | Bylaws of Registrant2                                                                                                                  |  |                            
|4.1            |  | Specimen Certificate evidencing shares of Mid-State Bancshares Common Stock3                                                           |  |                            
|10.1           |  | Mid-State Bancshares 1996 Stock Option Plan, form of Stock Option Agreement and form of Substitute Stock Option Agreement, as amended4 |  |                            
|10.2           |  | Deferred Compensation Plan, and as further amended on January 9, 20026                                                                 |  |                            
|10.3           |  | Profit Sharing and Salary Deferral 401(K) Plan5                                                                                        |  |                            
|10.4           |  | Change in Control Agreement for Carrol R. Pruett, as amended6                                                                          |  |                            
|10.5           |  | Change in Control Agreement for James G. Stathos6                                                                                      |  |                            
|10.6           |  | Change in Control Agreement for James W. Lokey6                                                                                        |  |                            
|10.7           |  | 2001 Deferred Compensation Plan6                                                                                                       |  |                            
|10.8           |  | Change in Control Agreement for Harry Sackrider                                                                                        |  |                            
|21             |  | Subsidiary of Mid-State BancsharesMid-State Bank & Trust is the only subsidiary                                                       |  |                            
|23.1           |  | Consent of AccountantsPricewaterhouseCoopers LLP                                                                                      |  |                            
|23.2           |  | Consent of AccountantsArthur Andersen LLP                                                                                             |  |                            
|99.1           |  | Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                    |  |                            

(b)  Schedules:

Not Applicable

(c)  Reports on Form 8-K

During the fourth quarter of 2002, the Company did not file any Reports.

---

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85

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Bank has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |  | MID-STATE BANCHSARES 
| |  | ---------------------
| |  | By:                  
| |  | Dated: March 26, 2003
| |  |                      
| |  |                      
| |  | Dated: March 26, 2003

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SIGNATURES

In accordance with the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Bank and in the capacities and on
the dates indicated.

|Name                                          |  | Title                 |  | Date          
|--------------------------------------------- |  | --------------------- |  | --------------
|                                              |  |                       |  |               
|/s/CARROL R. PRUETTCARROL R. PRUETT           |  | Chairman of the Board |  | March 26, 2003
|/s/JAMES W. LOKEYJAMES W. LOKEY               |  | Director              |  | March 26, 2003
|/s/GRACIA B. BELLOGRACIA B. BELLO             |  | Director              |  | March 26, 2003
|/s/DARYL L. FLOODDARYL L. FLOOD               |  | Director              |  | March 26, 2003
|/s/TRUDI CAREYTRUDI CAREY                     |  | Director              |  | March 26, 2003
|/s/H. EDWARD HERONH. EDWARD HERON             |  | Director              |  | March 26, 2003
|/s/STEPHEN P. MAGUIRESTEPHEN P. MAGUIRE       |  | Director              |  | March 26, 2003
|/s/GREGORY R. MORRISGREGORY R. MORRIS         |  | Director              |  | March 26, 2003
|/s/WILLIAM L. SNELLINGWILLIAM L. SNELLING     |  | Director              |  | March 26, 2003
|/s/ROBERT J. LAGOMARSINOROBERT J. LAGOMARSINO |  | Director              |  | March 26, 2003

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CERTIFICATIONS

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





|Dated: March 26, 2003 |  | /s/JAMES W. LOKEYJames W. Lokey
President and Chief Executive Officer
|--------------------- |  | ---------------------------------------------------------------------

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CERTIFICATIONS

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





|Dated: March 26, 2003 |  | /s/JAMES G. STATHOSJames G. Stathos
Executive Vice President
Chief Financial Officer
|--------------------- |  | ------------------------------------------------------------------------------------

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WHERE YOU CAN FIND MORE INFORMATION

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The Company electronically files the
following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 11-K (Annual Report for Employees' Stock Purchase
and Savings Plans), Form 8-K (Report of Unscheduled Material Events), and Form DEF 14A (Proxy Statement). The Company may file additional forms. The SEC maintains an Internet site, www.sec.gov,in
which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information
is available free of charge on the Company's website:www.midstatebank.com.The Company posts these reports to its website as soon as reasonably
practicable after filing them (commencing with this 2002 Annual Report on Form 10-K) with the SEC. None of the information on or hyperlinked from the Company's website is
incorporated into this Annual Report on Form 10-K.

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------
|10.8           |  | Change in Control Agreement for Harry Sackrider                                                                       
|23.1           |  | Consent of AccountantsPricewaterhouseCoopers LLP                                                                     
|23.2           |  | Consent of AccountantsArthur Andersen LLP                                                                            
|99.1           |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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