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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20529

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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
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For the fiscal year ended December 31, 2000
or

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

Commission file number 000-23925

MID-STATE BANCSHARES

(Exact name of registrant as specified in its charter)

California(State or other jurisdiction of
incorporation or organization)

77-0442667(I.R.S. Employer
Identification No.)


1026 Grand Ave., Arroyo Grande, CA 93420
(Address of principal executive offices, including Zip Code)

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

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

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) 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/

The
aggregate market value of the common stock held by non-affiliates of the registrant as of March 14, 2001 was $315,900,633.

The
number of shares of common stock of the registrant outstanding as of March 14, 2001 was 21,915,880.

The
following documents are incorporated by reference herein: Part III, Items 10 through 13 are incorporated from Registrant's definitive proxy statement for the 2001 Annual Meeting of Shareholders.

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TABLE OF CONTENTS

|         |  |                                                                                       |  | PAGE
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|ITEM 1.  |  | DESCRIPTION OF BUSINESS                                                               |  | 1   
|ITEM 2.  |  | PROPERTIES                                                                            |  | 17  
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 19  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 19  
|PART II 
|ITEM 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                 |  | 20  
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 22  
|ITEM 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 23  
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                             |  | 39  
|ITEM 7B. |  | DISCLOSURE ABOUT RISKS ASSOCIATED WITH YEAR 2000 ISSUES                               |  | 39  
|ITEM 8   |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 40  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 68  
|PART III
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 68  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  | 68  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 68  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 68  
|ITEM 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  | 68  

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PART I

Certain statements contained in this Annual Report on Form 10-KSB ("Annual Report"), including, without limitation, statements
containing the words "believes", "anticipates", "intends", "expects", and words of similar impact, constitute "forwardlooking 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, 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. DESCRIPTION OF BUSINESS

Mid-State Bancshares and Mid-State Bank

Mid-State
Bancshares (the Company) is the parent company to Mid-State Bank (the Bank), its 100% owned principal subsidiary. Mid-State Bancshares (formerly BSM Bancorp) was formed on
July 10, 1998, the effective date of the merger of Bank of Santa Maria with and into Mid-State Bank. 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 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, 2000 the Company had total assets of $1.46 billion, total deposits of
$1.23 billion and total shareholders' equity of $177.1 million.

The
Bank operates 34 full service retail banking offices along the central coast of California throughout 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 and Santa Barbara. In the first quarter of 2001, the Bank plans to open another office in
Camarillo. 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 at www.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 commercial loans, consumer
loans and real estate loans, providing escrow services, and making other investments. The Bank originates several types of loans, including secured and unsecured commercial and consumer loans,
commercial and residential real estate mortgage loans, and commercial 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 Banks are arranged through correspondent banks.

The
Company, through the Bank, derives its income primarily from interest received on real estate loans, commercial loans and consumer loans and, to a lesser extent, from interest on
investment

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securities, fees received in connection with loans and other services offered, including loan servicing, escrow and deposit services. The Company's major operating expenses are the interest it pays on
deposits and borrowings and its general operating expenses. The Bank relies on a foundation of locally generated deposits which has a relatively low cost of funds due to a high percentage of low cost
and non-interest bearing deposits. The 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."

When
the Company uses or incorporates by reference in this Annual Report on Form 10-K (the Annual Report) the words "anticipate," "estimate," "expect," "project," "intend," "commit,"
"believe" and similar expressions, the Company intends to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

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 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 and Footnote number 7 to the Financial
Statements included in Item 8 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 $1.4 million, $1.5 million, and $1.4 million in 2000, 1999, and 1998, respectively. For further information concerning MSB Properties, see the Subsidiary Activity portions of the Management's
Discussion and Analysis section of the Financial Condition and Results of Operations which is included in Item 7 of this Report.

Acquisition of Bank of Santa Maria

On January 29, 1998, the Bank entered into an Agreement to Merge and Plan of Reorganization (the Agreement) with BSM Bancorp (Bancorp) and its wholly owned
subsidiary Bank of Santa Maria (Santa Maria). The merger was completed on July 10, 1998 after obtaining all requisite approvals.

The
transaction was structured as a so-called "reverse triangular merger." Pursuant to the transaction, among other things, (1) Bank of Santa Maria was merged with and into Mid-State
Bank, (2) BSM Bancorp became the bank holding company for Mid-State Bank and changed its name to Mid-State Bancshares and (3) the outstanding shares of BSM Bancorp at the effective date of the
transaction remained outstanding and the shareholders of Mid-State Bank became shareholders of

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BSM Bancorp in accordance with the exchange ratio set forth in the Agreement. The merger was accounted for as a pooling of interests and as a result the financial statements for all periods presented
herein have been restated to include the accounts of BSM Bancorp and Subsidiary. As a result, prior periods are combined and restated as if the two organizations were historically one unit.

Acquisition of City Commerce Bank

On April 19, 1999, the Company and City Commerce Bank signed a definitive agreement to merge, subject to the approval of banking regulators and City Commerce
Bank shareholders. The merger became effective at the close of business on August 31, 1999. The Agreement provided for the exchange of common stock at a ratio of .6775 shares of Mid-State Bancshares
common stock for each share of City Commerce common stock, based on the price of Mid-State Bancshares common stock on the effective date of the transaction. The merger was structured to be tax-free,
and was accounted for as a pooling-of-interests. As a result prior periods presented herein have been restated to include the accounts of City Commerce Bank.

Selection of New Bank President

On February 4, 2000, the Board of Directors of Mid-State Bank announced that they had selected Mr. James W. Lokey to be President and Chief Executive
Officer of Mid-State Bank. In addition, Mr. Lokey was also appointed to the Board of Directors. Mr. Carrol R. Pruett, formerly President, remains active as Chairman of the Board of Mid-State
Bank and Chairman, President and Chief Executive Officer of Mid-State Bancshares, the parent company.

Mr.
Lokey has been in banking for over 25 years. He began his banking career with First Interstate Bank in 1973, after receiving his Bachelor of Science in Finance from California
State University-Long Beach. While with First Interstate Bank, he rose through various assignments, achieving the position of Executive Vice President. Mr. Lokey has had extensive experience in most
areas of banking, including retail banking, branch management, commercial lending, small business lending, agricultural lending, commercial real estate lending, credit policy and administration. With
the 1996 merger of First
Interstate Bank into Wells Fargo Bank, Mr. Lokey was responsible for the integration of the Southern California commercial divisions of the two banks, with consolidated assets of $3.6 billion and
deposits of $1.3 billion. In 1997, Mr. Lokey left Wells Fargo Bank to become President and Chief Executive Officer of Downey Savings, a $5.2 billion financial institution with 73 offices,
headquartered in Newport Beach, California. During Mr. Lokey's tenure, Downey posted record earnings and loan production, and by year-end 1998, had increased its assets to $6.3 billion with 91
offices.

Mr.
Lokey, who officially joined the Bank on March 1, 2000, is responsible for the Bank's day-to-day operations. It is contemplated that this will allow Mr. Pruett to devote more of
his time and energy to developing strategies and exploring opportunities that will contribute to the Company's future success. Mr. Pruett had served in the capacity of President since 1967 when, at
the age of 29, he became the youngest Bank President in the State of California. His continued involvement is important to the Company and provided for a smooth transition to a new Chief Executive
Officer for the Bank.

New Appointee to the Board of Directors

Two of Mid-State Bancshares Board of Directors stepped down from their duties during 2000. Mr. Clifford H. Clark was named director emeritus and Mr.
William A. Hares retired. As previously noted, Mr. Lokey joined the Board of Directors and the Company subsequently announced the appointment of Ms. Trudi G. Carey in June of 2000. Ms. Carey is the
president of The Carey Group, Inc., an architectural, construction, property management and development firm. She has been a licensed architect, real estate broker and general contractor in the state
of California since 1978. In

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addition, she is president of Salesworks, Inc., a new home marketing brokerage firm. Both firms are headquartered in Santa Barbara, California. Active in the community, Ms. Carey has been a member of
the National Association of Home Builders, the Building Industry Association, National Association of Realtors, California Association of Realtors, Santa Barbara Board of Realtors and the Sales and
Marketing Council. With the increased presence in southern Santa Barbara and Ventura counties following the acquisition of City Commerce Bank, the addition of Ms. Carey will help expand the Bank's
involvement in these communities.

New Trust Department

Mid-State Bank 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. The Trust Department will offer 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 will offer investment 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 will also provide custody services for customers' financial assets. This department will conduct business from regional trust centers and offer
personalized face-to-face service. The first office is located in the Bank's San Luis Obispo branch at 75 Santa Rosa Street.

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, SBA loans, and credit card lines. Other services offered by the Bank include, but are not limited to, 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, 2000 the Bank had approximately 28,183 non-interest bearing demand deposit accounts
representing $275.6 million, or $9,779 per account. The Bank also had over 103,164 NOW, Money Market and Savings accounts amounting to $606.9 million on deposit, or about $5,883 per account. There
were over 17,176 time certificates of deposit outstanding at December 31, 2000, representing $348.7 million on deposit with an average deposit balance of approximately $20,302. Of the total time
certificates of deposit, only $120.4 million represented holders who carried an amount on deposit of $100,000 or more, approximately 35% of the total.

The
Bank is not dependent on a single or a few customers for its deposits, most of which 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, 2000, no individual, corporate, or public depositor accounted for more than 2% of the Bank's total deposits.

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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 2000, Fed Funds Sold averaged $24.5 million representing 1.8% of average assets. In addition, the Bank
maintains Federal Funds lines of $60 million with major correspondents, subject to customary terms for such arrangements.

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 34.0%well above the Bank's policy minimum of 15%.

Loans

The Bank's Loan to Deposit ratio stood at approximately 74.7% at year-end 2000. 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 operating expenses. All loans
deemed to be uncollectible 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, 2000, the Bank's allowance for loan losses stood at $13.3 million or 1.4% of gross loans. It also represents 281% of nonperforming 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 effect the adequacy of the allowance 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 allowance. During 2000, the Bank experienced charge-offs, net of recoveries, of $0.5 million, or 0.06% of average loans.

Underwriting and Credit Administration

The lending activities of Mid-State Bank 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 Administrative Loan Committee. Loan requests exceeding these limits are submitted to
the Executive Loan Committee, which consists of the President and Chief Executive Officer and three outside directors. Each of these committees meets on a regular basis in order to provide timely
responses to the Bank's clients.

Mid-State
Bank'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, 2000, Mid-State Bank's gross loan portfolio totaled $923.2 million. The portfolio is distributed as follows:

Construction and Land Development

18.3
%Real EstateFarmland

2.9
%Real EstateResidential

7.3
%Real EstateNon Farm, Non Residential

38.2
%Home Equity Credit Lines

6.0
%Credit Card and Related

1.0
%Installment

3.4
%Agricultural Production

3.1
%Commercial, Other

19.8
%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 personal 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.

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-seven 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.

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

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 creditworthiness 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 70% to 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 has
occasionally in the past, and may to a greater extent in the future, make commercial real estate construction loans to high-net-worth

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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. The Bank provides medium-term commercial real estate loans secured by commercial or industrial
buildings where the properties are either used by the owner for business purposes (owner-used 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 years. Most of these loans have rates tied to the prime rate, with many adjusting whenever the prime rate changes. The
remaining loans adjust every five years depending upon the term of the loan.

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 credit card receivables. Installment loans tend to be fixed rate and longer-term (one-to-five-year maturity). The Bank's
portfolio of credit card and related loans, issued as an additional service to its clients, is minimal at just 1.0% 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, 2000, the aggregate
carrying value of the Investment Portfolio was $407.5 million. Of this total, $52.1 million was invested in U.S. Treasury Securities, $88.0 million in U.S. Government Agencies, $4.4 million in
Mortgage Backed Securities, $255.2 million in Obligations of State and Political Subdivisions and $7.7 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, 2000, the Bank had public funds totaling approximately $22.0 million.
The Bank has made available $30.0 million of securities to securitize these funds. Excess collateral can be released as needed.

Economic Climate

The
economy in the Bank's trade area is based upon agriculture, oil, tourism, light industry, 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 three county area, according to the U.S. Bureau of the Census, is estimated at July 1999
to be 1.4 million. 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. With the
diversity of the various types of industries in the Bank's service area, the Central Coast, while not immune from economic fluctuations, does tend to enjoy a more stable level of economic activity
than many other areas of California.

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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 unsecured and secured lending limits at December 31,
2000, and December 31, 1999, were approximately $28.2 million and $47.0 million, respectively.

Within
the Bank's trade area there are few companies who 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
money market instruments which are not subject to interest rate ceilings.

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.

In
order to compete with other competitors in their primary service areas, the Bank attempts to use, to the fullest extent, the flexibility which its independent status permits. This
includes an emphasis on specialized services, local promotional activity, and personal contacts by its officers, directors and employees. In particular, the Bank offers highly personalized banking
services.

Employees

At
December 31, 2000, the Bank had a total of 806 employees. A number of these employees are part-time however. On a full-time equivalent basis, employees represent 734 positions. The
Bank believes that its employee relations are satisfactory.

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, 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

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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."

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 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

9

---

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 filed reports and proxy statements pursuant to such Act with the
Securities and Exchange Commission ("SEC").

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 State 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 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, noncumulative 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

10

---

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 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. The following table presents the capital ratios for the Company and the Bank as of December 31, 2000
compared to minimum applicable regulatory capital requirements and the requirement to be a "well capitalized" bank.

December 31, 2000Company
Actual

Bank
Actual

Minimum
Capital
Requirement

Well
CapitalizedLeverage Ratio

12.3
%
12.1
%
4.0
%
5.0
%Tier One Risk-Based Ratio

15.5
%
15.3
%
4.0
%
6.0
%Total Risk-Based Ratio

16.7
%
16.5
%
8.0
%
10.0
%


On
January 1, 1998, new legislation became effective which, among other things, gave the power to the DFI 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.

11

---

Safety and Soundness Standards

The
federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems; loan documentation; credit
underwriting; asset growth; earnings; and compensation, fees and benefits.

In
addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six
standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: conduct
periodic asset-quality reviews to identify problem assets; estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses; compare problem asset
totals to capital; take appropriate corrective action to resolve problem assets; consider the size and potential risks of material asset concentrations; and provide periodic asset quality reports with
adequate information for management and the board of directors to assess the level of asset risk. These guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that
earnings are sufficient for the maintenance of adequate capital and reserves.

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. 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.

All
FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation
chartered under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation. The
FDIC established the FICO assessment rates effective for the third quarter of 2000 at approximately $.021 per $100 annually for assessable deposits. The FICO assessments are adjusted quarterly to
reflect changes in the assessment bases of the FDIC's insurance funds and do not vary depending on a depository institution's capitalization or supervisory evaluations.

12

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Financial Services Modernization Legislation

On
November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act
repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In
addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to
establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA
framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company.

The
law also: broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; provides an enhanced
framework for protecting the privacy of consumer information; adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize
the Federal Home Loan Bank system; modifies the laws governing the implementation of the Community Reinvestment Act; and addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.

The
Company and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on their operations in the near-term. 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 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 Company and the Bank.

Financial Holding Companies

Bank
holding companies that elect to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial
in nature or are incidental or complementary to activities that are financial in nature. The Company has not yet elected to become a financial holding company.

"Financial
in nature" activities include: securities underwriting; securities dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking; and activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines from time to time to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.

A
bank holding company must meet three requirements before becoming a financial holding company: all of the bank holding company's depository institution subsidiaries must be (1) well
capitalized, (2) well managed, and (3) in compliance with the Community Reinvestment Act (except in limited circumstances). In addition, the bank holding company must file with the Federal Reserve
Board a declaration of its election to become a financial holding company, including a certification that its depository institution subsidiaries meet the foregoing criteria.

Failure
to comply with the financial holding company requirements could lead to divestiture of subsidiary banks or require all activities of the company to conform to those
permissible for a bank

13

---

holding company. No Federal Reserve Board approval is required for a financial holding company to acquire a company (other than a bank holding company, bank or savings association) engaged in
activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. In December 2000, the Federal Reserve Board approved an
interim rule defining the three categories of activities financial in nature or incidental to a financial activity: lending, exchanging, transferring, investing for others, or safeguarding financial
assets other than money or securities; providing any device or other instrumentality for transferring money or other financial assets; or arranging, effecting or facilitating financial transactions
for the account of third parties. The interim rule also establishes a mechanism through which financial holding companies or other interested parties may request that the Federal Reserve Board find
that a particular activity falls within one of these three categories. For example, the Federal Reserve Board has recently issued a proposed rule that would grant financial holding companies the right
to act as real estate brokers and managers.

A
bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper incident thereto.

Privacy

Under
the Financial Services Modernization Act, federal banking regulators are required to adopt rules that will limit the ability of banks and other financial institutions to
disclose non-public information about consumers to nonaffiliated third parties. These limitations will require disclosure of privacy policies to consumers and, in some circumstances, will allow
consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Federal banking regulators issued final rules on May 10, 2000. Pursuant to the rules, financial
institutions must provide: initial notices to customers
about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; annual notices of their privacy
policies to current customers; and a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. The rules were effective November 13, 2000, but compliance is optional
until July 1, 2001. These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. It is not possible at this
time to assess the impact of the privacy provisions on the Company's financial condition or results of operations.

Consumer Protection RulesSale of Insurance

In
December 2000, pursuant to the requirements of the Financial Services Modernization Act, the federal bank and thrift regulatory agencies adopted consumer protection rules for the
sale of insurance products by depository institutions. The rule is effective on April 1, 2001 and applies to any depository institution or any person selling, soliciting, advertising, or offering
insurance products or annuities to a consumer at an office of the institution or on behalf of the institution. The regulation requires oral and written disclosure, before the completion of the sale of
an insurance product or annuity, that such product: is not a deposit or other obligation of, or guaranteed by, the depository institution or its affiliate; is not insured by the FDIC or any other
agency of the United States, the depository institution or its affiliates; and has certain risks of investment, including the possible loss of value. The depository institution may not condition an
extension of credit on the consumer's purchase of an insurance product or annuity from the depository institution or from any of its affiliates, or on the consumer's agreement not to obtain, or a
prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity. Furthermore, to the extent practicable, a depository institution must keep insurance and
annuity sales activities physically segregated from the areas where retail deposits are routinely accepted from the general public. Finally, the rule addresses cross marketing and referral fees.

14

---

Safeguarding Confidential Customer Information

In
January 2000, the banking agencies adopted guidelines requiring financial institutions to establish an information security program to: identify and assess the risks that may
threaten customer information; develop a written plan containing policies and procedures to manage and control these risks; implement and test the plan; and adjust the plan on a continuing basis to
account for changes in technology, the sensitivity of customer information and internal or external threats to information
security. Each institution may implement a security program appropriate to its size and complexity and the nature and scope of its operations. The guidelines are effective July 1, 2001.

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 GLB 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.

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.

In
connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating 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 7 of this Report. The FASB recently agreed to solicit comments by means of
an Invitation to Comment as part of its business combinations project. Through this process, the FASB has determined to make certain changes to the methods of accounting for business combinations,
among them, most notably, the elimination of the "pooling method" of accounting. The FASB currently plans to issue its final
Statement on this matter in June 2001. Financial institutions often prefer to account for mergers using this method and many of the mergers in the financial institutions industry in the last several
years have been accounted for using the pooling method. The impact of this accounting change, if adopted, on mergers and acquisitions involving financial institutions and upon the Company and the
value of its common stock cannot presently be predicted.

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,
2000, real estate served as the principal source of collateral with respect to approximately 72.7% 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

15

---

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.

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. If interest rates continue to decline, competitive pressure and other factors may prevent us from making proportionate decreases in the interest rates we pay on deposits,
especially MMDA and NOW accounts, resulting in a larger decrease in our interest rate spread. Although the Bank believes its current level of interest rate sensitivity is reasonable, significant
fluctuations in interest rates may have an adverse impact on our business, financial condition and results of operations.

Competition. Competition may adversely affect our performance. The financial services business in our 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. We face competition both in attracting deposits and in making loans. We compete for loans principally through the
interest rates and loan fees we charge and the efficiency and quality of the services we provide. Increasing levels of competition in the banking and financial services businesses may reduce our
market share or cause the prices we charge for our services to fall. Our results may differ in future periods depending on the nature or level of competition.

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

Borrowers' Failure to Perform. A significant number of our borrowers and guarantors may fail to perform their obligations as required
by the terms of their loans, resulting in losses for us. We have 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 our credit portfolio. However, these policies and procedures may not be adequate to prevent unexpected losses that could materially and adversely affect our results of
operations.

California Energy Crisis. The recent California energy crisis has resulted in higher energy costs to consumers, who have also seen
disruptions in service and face uncertainty about the future availability and cost of power. Various legislative, regulatory and legal remedies to the California crisis are being pursued, but their
outcome is uncertain and far reaching and the solution is not likely to be immediate. Continued deterioration of the California energy resources could have a material adverse affect on the Company's
customers, which may result in adverse affects in the Company's business, financial condition and results of operations.

16

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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, 2000, the Bank owned 23 of its branch offices and
leased 12 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    |  |            

17

---

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**                                             |  | 2357 Pickwick Drive, Suite B   |  | $3,814.50 per month
Expires July, 2005    
|Cayucos                                                 |  | 107 North Ocean Avenue         |  | $1,507.00 per month
Expires November, 2007
|Goleta Valley
Hollister Office                          |  | 5340 Hollister Avenue          |  | $5,907.38 per month
Expires February, 2002
|Orcutt                                                  |  | 1110 East Clark Avenue         |  | $11,240.00 per month
Expires October, 2010
|Oxnard                                                  |  | 300 Esplanade Drive, Suite 110 |  | $10,266.00 per month
Expires August, 2012 
|Oxnard
Northside Plaza Office                           |  | 121-125 Gonzales Boulevard     |  | $6,890.40 per month
Expires July, 2007    
|Paso Robles
Creston Road Office                         |  | 705 Golden Hill Road           |  | $9,529.00 per month
Expires October, 2002 
|Pismo Beach
Oak Park Office                             |  | 865 Oak Park Boulevard         |  | $10,366.00 per month
Expires March, 2008  
|Santa Barbara
Milpas Office                             |  | 914 Carpinteria Street         |  | $9,676.64 per month
Expires May, 2017     
|Santa Maria
North Broadway OfficeLand                  |  | 720 North Broadway             |  | $2,226.00 per month
Expires December, 2008
|Santa Ynez                                              |  | 3600 Sagunto Street            |  | $2,000.00 per month
Expires May, 2002     
|Solvang                                                 |  | 1600 Copenhagen Drive          |  | $9,688.69 per month
Expires April, 2003   
|Former Bank Offices Leased by BankWhich Are Sub-Leased
|Nipomo
Ground Lease                                     |  | 630 W. Tefft Street            |  | $3,538.67 per month
Expires February, 2015

18

---

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 (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 or 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 2000.

19

---



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."

Prior
to July 10, 1998, trading of the Company's Common Stock occurred solely "over the counter," and was limited. On July 10, 1998, the Company's Common Stock was designated for
quotation on the Nasdaq National Market.

The
following table summarizes those trades of the Company's Common Stock of which Management is aware, setting forth the approximate high and low trade prices for each quarterly
period ended since January 1, 1999. All prices shown below have been adjusted to reflect the two for one stock split which became effective February 26, 2001.

Sales PricesQuarter Ended 1999

Low

HighMarch 31

$
13.94

$
14.19June 30

$
16.82

$
17.75September 30

$
14.82

$
15.32December 31

$
15.19

$
15.94


Sales PricesQuarter Ended 2000

Low

HighMarch 31

$
10.50

$
14.00June 30

$
13.25

$
14.00September 30

$
14.69

$
15.94December 31

$
14.50

$
18.63


Holders

As of December 31, 2000, there were approximately 3,400 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 and as declared by its
Board of Directors, out of funds legally available 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

20

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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Description of Business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, 1999.

Payable Date



DividendJanuary 22, 1999

Mid-State Bancshares

$0.06 per shareApril 22, 1999

Mid-State Bancshares

$0.06 per shareJuly 22, 1999

Mid-State Bancshares

$0.06 per shareOctober 22, 1999

Mid-State Bancshares

$0.07 per shareJanuary 18, 2000

Mid-State Bancshares

$0.07 per shareApril 17, 2000

Mid-State Bancshares

$0.08 per shareJuly 17, 2000

Mid-State Bancshares

$0.08 per shareOctober 16, 2000

Mid-State Bancshares

$0.09 per shareJanuary 16, 2001

Mid-State Bancshares

$0.09 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 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

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

ChaseMellon
Shareholder Services, LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
1-(888)-540-9878 (U.S. & Canada)
1-(201)-329-8660 (Outside U.S.)

Alternatively,
ChaseMellon can be contacted via the Internet at www.chasemellon.com.

21

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ITEM 6. SELECTED FINANCIAL DATA

Selected Consolidated Financial DataMid-State Bancshares

|(In thousands, except per share amounts)               |                                            | 2000 |           | 1999      |   | 1998      |           | 1997 |           | 1996      |  
|------------------------------------------------------ | ------------------------------------------ | ---- | --------- | --------- | - | --------- | --------- | ---- | --------- | --------- | -
|Year Ended December 31:                                |                                            |      |           |           |   |           |           |      |           |           |  
|Interest income (not taxable equivalent)               |                                            | $    | 109,967   |           | $ | 99,627    |           | $    | 98,882    |           | $
|Interest expense                                       |                                            |      | 27,599    |           |   | 26,071    |           |      | 29,441    |           |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Net interest income                                    |                                            |      | 82,368    |           |   | 73,556    |           |      | 69,441    |           |  
|Provision for loan losses                              |                                            |      | 700       |           |   | 50        |           |      | 300       |           |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Net interest income after provision for loan losses    |                                            |      | 81,668    |           |   | 73,506    |           |      | 69,141    |           |  
|Non-interest income                                    |                                            |      | 17,805    |           |   | 17,465    |           |      | 24,736    |           |  
|Non-interest expense                                   |                                            |      | 57,982    |           |   | 57,488    |           |      | 62,306    |           |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Income before income taxes                             |                                            |      | 41,491    |           |   | 33,483    |           |      | 31,571    |           |  
|Provision for income taxes                             |                                            |      | 14,142    |           |   | 11,430    |           |      | 10,576    |           |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Net income                                             |                                            | $    | 27,349    |           | $ | 22,053    |           | $    | 20,995    |           | $
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Per share:                                             |                                            |      |           |           |   |           |           |      |           |           |  
|Net incomebasic                                       |                                            | $    | 1.23      |           | $ | 0.98      |           | $    | 0.94      |           | $
|Net incomediluted                                     |                                            | $    | 1.20      |           | $ | 0.97      |           | $    | 0.93      |           | $
|Weighted average shares for Basic E.P.S. calculation   |                                            |      | 22,257    |           |   | 22,461    |           |      | 22,351    |           |  
|Weighted average shares for Diluted E.P.S. calculation |                                            |      | 22,722    |           |   | 22,729    |           |      | 22,547    |           |  
|Cash dividends                                         |                                            | $    | 0.34      |           | $ | 0.25      |           | $    | 0.14      |           | $
|Book value at year-end                                 |                                            | $    | 8.05      |           | $ | 7.10      |           | $    | 6.74      |           | $
|Ending shares                                          |                                            |      | 22,019    |           |   | 22,574    |           |      | 22,411    |           |  
|Period Averages:                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Total Assets                                           |                                            |      | 1,389,625 |           |   | 1,391,279 |           |      | 1,331,954 |           |  
|Total Loans                                            |                                            |      | 847,797   |           |   | 685,566   |           |      | 633,324   |           |  
|Total Earning Assets                                   |                                            |      | 1,279,119 |           |   | 1,269,656 |           |      | 1,194,352 |           |  
|Total Deposits                                         |                                            |      | 1,205,826 |           |   | 1,220,340 |           |      | 1,184,293 |           |  
|Common Equity                                          |                                            |      | 166,402   |           |   | 155,419   |           |      | 140,989   |           |  
|At December 31,                                        |                                            |      |           |           |   |           |           |      |           |           |  
|Cash and cash equivalents                              |                                            | $    | 88,988    |           | $ | 56,080    |           | $    | 84,557    |           | $
|Investments and federal funds sold                     |                                            |      | 407,462   |           |   | 482,781   |           |      | 578,034   |           |  
|Loans, net of deferred fees, before allowance          |                                            |      | 919,967   |           |   | 768,814   |           |      | 675,481   |           |  
|Allowance for loan losses                              |                                            |      | (13,280   | )         |   | (13,105   | )         |      | (14,441   | )         |  
|Other assets                                           |                                            |      | 52,741    |           |   | 60,648    |           |      | 65,694    |           |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|                                                       | Total Assets                               |      | $         | 1,455,878 |   | $         | 1,355,218 |      | $         | 1,389,325 |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|Non-interest bearing deposits                          |                                            | $    | 275,624   |           | $ | 230,271   |           | $    | 258,629   |           | $
|Interest bearing deposits                              |                                            |      | 955,538   |           |   | 938,183   |           |      | 965,850   |           |  
|Other borrowings                                       |                                            |      | 30,240    |           |   | 15,357    |           |      | 3,049     |           |  
|Other liabilities                                      |                                            |      | 17,334    |           |   | 11,076    |           |      | 10,706    |           |  
|Capital accounts                                       |                                            |      | 177,142   |           |   | 160,331   |           |      | 151,091   |           |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  
|                                                       | Total Liabilities and Shareholders' equity |      | $         | 1,455,878 |   | $         | 1,355,218 |      | $         | 1,389,325 |  
|                                                       |                                            |      |           |           |   |           |           |      |           |           |  

22

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Selected Consolidated Financial DataMid-State Bancshares (continued)

|(In thousands)   |                                                   | 2000 |   | 1999  |   | 1998 |       | 1997 |   | 1996  |  
|---------------- | ------------------------------------------------- | ---- | - | ----- | - | ---- | ----- | ---- | - | ----- | -
|Asset Quality    |                                                   |      |   |       |   |      |       |      |   |       |  
|                 | Non-accrual loans                                 |      | $ | 4,510 |   | $    | 1,520 |      | $ | 2,019 |  
|                 | Loans past due 90 days or more                    |      |   | 222   |   |      | 4,199 |      |   | 4,408 |  
|                 | Other real estate owned                           |      |   |      |   |      |      |      |   | 259   |  
|                 |                                                   |      |   |       |   |      |       |      |   |       |  
|                 | Total nonperforming assets                        |      | $ | 4,732 |   | $    | 5,719 |      | $ | 6,686 |  
|                 |                                                   |      |   |       |   |      |       |      |   |       |  
|Financial Ratios |                                                   |      |   |       |   |      |       |      |   |       |  
|For the year:    |                                                   |      |   |       |   |      |       |      |   |       |  
|                 | Return on assets                                  |      |   | 1.97  | % |      | 1.59  | %    |   | 1.58  | %
|                 | Return on equity                                  |      |   | 16.44 | % |      | 14.19 | %    |   | 14.89 | %
|                 | Net interest margin (not taxable  equivalent)     |      |   | 6.44  | % |      | 5.79  | %    |   | 5.81  | %
|                 | Net interest margin (taxable equivalent)          |      |   | 6.75  | % |      | 6.02  | %    |   | 5.91  | %
|                 | Net loan losses (recoveries) to avg. loans        |      |   | 0.06  | % |      | 0.20  | %    |   | 0.15  | %
|                 | Efficiency ratio                                  |      |   | 57.9  | % |      | 63.2  | %    |   | 66.2  | %
|At December 31:  |                                                   |      |   |       |   |      |       |      |   |       |  
|                 | Equity to average assets (leverage ratio)         |      |   | 12.3  | % |      | 11.6  | %    |   | 10.7  | %
|                 | Tier One capital to risk-adjusted assets          |      |   | 15.5  | % |      | 16.0  | %    |   | 16.1  | %
|                 | Total capital to risk-adjusted assets             |      |   | 16.7  | % |      | 17.2  | %    |   | 17.4  | %
|                 | Loan loss allowance to loans, gross               |      |   | 1.4   | % |      | 1.7   | %    |   | 2.1   | %
|                 | Non-accrual loans to total loans, gross           |      |   | 0.5   | % |      | 0.2   | %    |   | 0.3   | %
|                 | Nonperforming assets to total assets              |      |   | 0.3   | % |      | 0.4   | %    |   | 0.5   | %
|                 | Allowance for loan losses to  nonperforming loans |      |   | 281   | % |      | 229   | %    |   | 225   | %

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 (the Bank). The Bank itself 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 34 offices in communities throughout San Luis Obispo, Santa Barbara and Ventura
counties.

The
following discussion and analysis will provide insight and supplementary information into the accompanying consolidated financial statements of the Bank. It also provides
Management's assessment of the operating trends over the past few years and certain of their expectations for 2001.

Management's
Discussion and Analysis (MD&A) includes "forward-looking statements" within the meaning of Section 27A of the Securities Act. All of the statements contained in the MD&A,
other than statements of historical fact, should be considered forward-looking statements, including, but not limited to, those concerning (i) the Company's strategies, objectives and plans for
expansion of its operations, products and services, and growth of its portfolio of loans, investments and deposits, (ii) the
Company's beliefs and expectations regarding actions that may be taken by regulatory authorities having oversight of the operation, and (iii) the Company's beliefs as to the adequacy of its existing
and anticipated allowances for loan losses. Although the Company believes the expectations reflected in

23

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those forward-looking statements are reasonable, it can give no assurance that those expectations will prove to have been correct. All subsequent written and oral forward-looking statements by or
attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this qualification. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof and are not intended to give any assurance as to future results. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

2000 RESULTS AND ACCOMPLISHMENTS

Financial

For 2000, the Company on a consolidated basis reported net income of $27.4 million compared to $22.1 million in 1999 and $21.0 million in 1998. The diluted
Earnings Per Share (EPS) was $1.20 compared to $0.97 in 1999 and $0.93 in 1998. Consolidated total assets at December 31, 2000 were $1.456 billion compared to $1.355 billion at December 31, 1999, up
7.0%. Total deposits also increased slightly from $1.168 billion as of December 31, 1999 to $1.231 billion as of December 31, 2000. Shareholders' common equity stood at $177.1 million at year end up
from its $160.3 million level one year earlier. Factors contributing to the increase in shareholders' common equity included $27.4 million of net income for the year, a $4.9 million after-tax change
in the unrealized gain on available-for-sale securities, and $0.3 million received for the exercise of stock options. Partially offsetting these factors were $7.5 million in dividends paid out and
$8.3 million paid for the repurchase of common stock outstanding.

The
table below illustrates net income by subsidiary unit.

Income (Loss) by subsidiary (000's)

2000

1999

1998Bank only, pre-tax

$
39,441

$
32,340

$
24,320MSB Properties, pre-tax


2,166


2,175


2,165Mid Coast Land Co., pre-tax


483


349


5,410Parent only, pre-tax


(599
)

(1,381
)

(324
)Tax expense


14,142
)

11,430
)

10,576Consolidated Mid-State Bancshares

$
27,349

$
22,053

$
20,995


Other Events in 2000

On February 4th, 2000, the Company announced the appointment of James W. Lokey as President and Chief Executive Officer of Mid-State Bank, the
wholly-owned subsidiary of Mid-State Bancshares. Former Bank President, Carrol Pruett, remains active as Chairman of the Board of the Bank, as well as President and CEO of the Mid-State Bancshares.

The
Company announced that the Board of Directors has authorized a stock repurchase program for up to five percent (5%) of its outstanding shares. The buyback was expected to reduce
the number of outstanding shares with the fewer shares resulting in an improvement in its EPS and a corresponding improvement in the return on equity of the Company. These repurchases are being made
from to time
by the Company in the open market, block purchases or in privately negotiated transactions in compliance with the Securities and Exchange Commission (SEC) rules. The program began in April and is
expected to be effective for one year. As of December 31, 2000, the Company has repurchased a total of 601,312 shares.

On
January 17, 2001, the Board of Directors of the Company announced the approval of a two-for-one stock split of its common shares. The split entitles each shareholder of record at
the close of

24

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business on January 26, 2001 to receive an additional share for each share of Mid-State Bancshares common stock held on that date. The Board believes that the split will make Mid-State Bancshares
stock accessible to a broader base of investors and will improve trading liquidity. The financial statements presented herein have been restated to reflect the stock split.

Mid-State
Bank also 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. Based on data supplied by banks in its trade area, Mid-State is the second largest Bank in terms of total assets.

In
March of 2000, the Company opened a full service "In-Store" office located in Albertson's supermarket in Arroyo Grande with an ATM on site. In addition, during the fourth quarter,
the Company opened a new, full service office located in Oxnard. The Company also plans to open an office in Camarillo to better serve the residents and businesses of Ventura County during the first
quarter of 2001.

Also
new this year, through the Company's web-site (www.midstatebank.com), customers can access several online services. Some of these services are Internet Banking, which enables
customers to review account statements, transfer funds between accounts, pay bills, place stop payments and more. The online services also offers "Savings Bond Direct", which allows the customer to
buy Savings Bonds from a home personal computer. Also offered is a function where a customer can order personal checks online through the Bank's check vendor, Deluxe Check Printers. This service is
fast, easy and secure.

ENTERNAL FACTORS IMPACTING THE BANK

Economic Conditions

There is evidence that the nation's longest economic expansion, one that saw soaring stock prices and the rise of "dot com" companies, is slowing, and some
economists are predicting a 60% chance that a national recession may occur in 2001. There are, however, others who feel the that a soft landing is more likely as our national economy moderates. They
feel that this record-setting economic expansion has additional room for growth. They point to rising budget surpluses, productivity gains, less robust consumer spending, full employment, moderate
inflation, declines in interest rates and a solid global economy. Collectively, they consider these to be a favorable "mix" of circumstances which should mitigate the possibility of a recession and at
the very least, minimize its severity.

There
are several areas on a national level that are of concern. Many believe that consumers are simply "spent out". As an example, record auto sales in the last two years will mean a
glut of used vehicles to compete with new vehicle sales that have slowed as consumers became concerned about the economy. Car sales are leveling and are expected to be down by some one million units
from the record high of 15.5 million last year. Capital is also becoming scarce and corporate profits are modest and shrinking. Banks are concerned about credit quality. Venture capitalists are less
willing to invest in "dot com" ideas not backed by solid collateral. There have been significant increases in oil and energy prices coupled with shortages of supplies. If all of these negatives were
to escalate, a slowdown may be unavoidable. However, it should also be noted that the Federal Reserve, under Alan Greenspan's direction, has been very willing to take aggressive actions regarding the
economy. Management believes that this, coupled with proposed tax cuts, would likely forestall a recession.

While
on a national level, we have seen some economic slowing in most major sectors, including job creation, manufacturing, consumer spending and housing; this is not necessarily the
case in California. While Management expects that California could have a couple of months of no real economic growth in 2001 with minimal consequence, the real concern and severity is how California
deals with its energy crisis. The shortage of electricity and the possibility of blackouts impose

25

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substantial burdens on businesses, governments and consumers. Businesses may experience significant losses in the event of electrical interruptions. Many businesses are paying large amounts for their
own emergency generating facilities. Blackouts can cause disruptions in the supply of oil, natural gas, gasoline and watereach of these commodities is moved around the state with
electrical pumps. Crops can be destroyed or lose value if they cannot be protected from frost, irrigated or cooled prior to shippingeach of these are energy intensive processes. The
additional expenses and inconvenience resulting from energy interruptions will almost surely result in decreased investment in plant, equipment and jobs in California. Businesses cannot be expected to
move to or expand in a state with an unreliable source of electricity. Furthermore, the attractiveness of other states for California firms increases as the crisis is prolonged.

The
bright spots in the California economy are most certainly job creation and low unemployment. Job growth in December 2000 was 3.1%, up from 2.7% one year ago. Statewide
unemployment continues to drop, hitting an 8-year low of 4.6% in December.

In
the residential real estate market, the median price of an existing single family home in California rose 12% in 2000 to $243,390. While sales volume slipped 0.4% from 1999, it was
still the second best year on record. California tourism grew over 8% last year. California agriculture had a banner year in production, albeit at low prices.

Management
does not believe there is enough adversity to derail California's growth. While it may moderate, California continues to grow at a pace which is twice as fast as the U.S.
average. Despite costs, California is still the place where skilled workers want to live.

The
most comprehensive review of local economic conditions known to Management comes from the University of California at Santa Barbara Economic Forecast Project, which provides both
annual forecast information and periodic updates of economic conditions in the Company's trade area. Much of Management's expectations for local economic conditions are dependent on this information.
Management expects that Mid-State's trade area will likely follow some of the national and state economic trends and experience slower growth in some segments, but overall should fare pretty well.

In
terms of growth, the area can expect a population increase of 1.0% to 1.5% for 2001. "In-migration" from other areas will drive most of this growth as births and deaths are
expected to mostly off-set one another. For many years, it was Southern California and the San Joaquin Valley which drove much of the "in-migration" to the Bank's trade area. Now San Luis Obispo
County and parts of Santa Barbara County have been discovered by emigrants from the high-cost, San Jose/Santa Clara Valley areas. Approximately 25% of the area's "in-migration" is now from Northern
California. Another interesting aspect of the area's "in-migration" is that many of the home sales in our area are now to "pre-retirees"those planning to retire in 3-5 years who buy a
house now and use it for a second home until retirement. Housing affordability continues to be a major issue for the area. Currently, only 20% of the San Luis Obispo County population can afford a
median priced home in the County.

Management
would expect continuing strong demand for workers throughout the Bank's trade area with average salaries increasing 5% and continued unemployment rates below 4%. Retail
sales over the Tri-county area should rise in the 5% to 6% range during 2001. New construction will continue, but will be limited due to lack of availability of land and the restrictive approval
processes requiring tedious review and revision. In addition, public comment processes are needed to approve projects which are evident throughout much of the Bank's trade area. This will cause home
sales and prices to rise
another 8-10% due to demand and lack of new product. Additionally, the rental market will continue to provide very few vacancies. Tourism should provide another 5-8% increase, especially as Southern
Californians favor shorter trips to the Central Coast in lieu of more costly travel to go out of the state. Overall, Management sees 2001 as a good year for the economy with some moderation evident.

26

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In last year's Annual Report, the Bank was anticipating "... 2 or 3 modest increases in the Prime Rate. The willingness by the Federal Reserve Bank and Chairman Greenspan to raise
rates in an effort to curb inflation would appear to be the likely course for some months to come." This was indeed the case for the first six months of the year. The Prime Rate began the year at
8.50% and saw increases to 8.75% on February 3, 2000, to 9.00% on March 21, 2000 and finally to 9.50% on May 17, 2000. On average for the full year 2000, the Prime Rate was 9.24% compared to 8.00% in
1999. Interest rates generally did not fall again until the fourth quarter of the year with the Prime Rate not falling from its 9.50% level until the drop to 9.00% on January 4, 2001. An additional
0.50% drop to 8.50% took place on the last day of January. Management would expect a couple more drops in this closely followed rate before the end of 2001 to put the Prime Rate in the 7.75% to 8.00%
range.

CompetitiveFactors

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 sufficient 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. Brokerage houses are indeed a factor through their marketing of mutual funds and numerous banks are now offering these products.

It
should also be noted that the trend toward consolidation of banking assets exhibited over the past few years in California continued in 2000. Statewide, 21 banks were merged out of
existence during the year. One of those occurred locally with Bank of Ventura having been acquired by First Bank and Trust out of Newport Beach. While no new banks were started in Mid-State Bank's
trade area during 2000, 15 were approved and/or established throughout the state during the year. Locally, two banks are expected to open in 2001 in Santa Maria and Santa Barbara.

Legal Matters

The Bank is involved in litigation of a routine nature which is being handled and defended in the ordinary course of the Bank's business. In the opinion of
management, based on the advice of legal counsel, the resolution of pending litigation will have no material impact on the Bank's net income or financial position.

ANALYSIS OF STATEMENT OF FINANCIAL POSITION

Loans

The Bank experienced an increase in its net loan portfolio from $755.7 million at the end of 1999, to $906.7 million at the end of 2000. This represents
continued growth of the loan portfolio of $151.0 million following the $94.7 million increase in 1999. Loans now represent approximately 62% of the Bank's assets.

27

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The
composition of the loan portfolio is also changing. The graph below displays the trend over the past five years in the various components of the loan portfolio. Construction loans
have risen from their level three years earlier$46.6 million at December 31, 1996 compared to $168.7 million at year-end 2000. Real Estate loans generally trended up from $270.6 million
at the end of 1996 to nearly $377.4 million at December 31, 1999, and $447.5 million at the end of 2000. Home Equity Credit Lines have steadily declined from 83.6 million at the end of 1996, to $52.7
million at the end of 1999 and then rose slightly to $55.6 million at the end of 2000. Consumer loans (installment, credit cards and credit reserve) have generally exhibited declines over the last 4
years reaching $40.3 million at year-end 2000 compared to $56.2 million at the end of 1996. Commercial loans have grown in recent years having reached $182.3 million at December 31, 2000. Agricultural
production loans have also grown from $26.6 million at the end of 1996, to $41.3 million at the end of 1999 and then decreased to $28.8 at the end of 2000. The Bank expects to continue to emphasize
other types of lending activity in order to diversify the risk in those categories relative to term real estate loans. 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.

Mid-State Bank  Trends In Loan Categories

LOGO

The Bank's allowance for loan losses stands at $13.3 million, or 1.4% of gross loans, representing losses inherent in the loan portfolio but not yet realized. This amount is up from
the $13.1 million at December 31, 1999. The year-end 2000 balance now represents 281% of non-performing loans which is up slightly from 229% at the end of 1999. A five-year review of activity in the
allowance for loan losses and an allocation by loan type of the allowance is shown in the two tables below.

28

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|Allowance for Loan Losses (in 000's)                               |                                    | 2000 |        | 1999   |   | 1998   |        | 1997 |        | 1996   |  
|------------------------------------------------------------------ | ---------------------------------- | ---- | ------ | ------ | - | ------ | ------ | ---- | ------ | ------ | -
|Balance at beginning of year                                       |                                    | $    | 13,105 |        | $ | 14,441 |        | $    | 15,065 |        | $
|Provision charged to operating expense                             |                                    |      | 700    |        |   | 50     |        |      | 300    |        |  
|After adjustmentsmerger                                           |                                    |      |       |        |   |       |        |      |       |        |  
|Loans charged off:                                                 |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Construction and development loans |      |        |       |   |        | (14    | )    |        |       |  
|                                                                   | Real estate loans                  |      |        | (93    | ) |        | (15    | )    |        | (151   | )
|                                                                   | Home equity credit lines           |      |        | (70    | ) |        | (178   | )    |        | (94    | )
|                                                                   | Installment loans                  |      |        | (278   | ) |        | (132   | )    |        | (405   | )
|                                                                   | Commercial loans                   |      |        | (512   | ) |        | (1,852 | )    |        | (674   | )
|                                                                   | Credit cards and related loans     |      |        | (239   | ) |        | (331   | )    |        | (397   | )
|Recoveries of loans previously charged off:                        |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Construction and development loans |      |        | 2      |   |        | 198    |      |        | 32     |  
|                                                                   | Real estate loans                  |      |        | 14     |   |        | 180    |      |        | 188    |  
|                                                                   | Home equity credit lines           |      |        | 86     |   |        | 111    |      |        | 17     |  
|                                                                   | Installment loans                  |      |        | 134    |   |        | 115    |      |        | 122    |  
|                                                                   | Commercial loans                   |      |        | 330    |   |        | 425    |      |        | 362    |  
|                                                                   | Credit cards and related loans     |      |        | 101    |   |        | 107    |      |        | 76     |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | BALANCE AT END OF YEAR             |      | $      | 13,280 |   | $      | 13,105 |      | $      | 14,441 |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|Ratio of Net Loan Losses (Recoveries) to Average Loans Outstanding |                                    |      | 0.06   | %      |   | 0.20   | %      |      | 0.15   | %      |  

Allocation
of the allowance for loan losses at December 31:

|(dollars in 000's)
Balance applicable to: |                        | 2000 |       | Percent
of
Loans |      | 1999  |   | Percent
of
Loans |        | 1998 |       | Percent
of
Loans |       | 1997   |      | Percent
of
Loans |   | 1996  |        | Percent
of
Loans |      
|----------------------------------------- | ---------------------- | ---- | ----- | ---------------- | ---- | ----- | - | ---------------- | ------ | ---- | ----- | ---------------- | ----- | ------ | ---- | ---------------- | - | ----- | ------ | ---------------- | -----
|Construction and Land Dev.                |                        | $    | 2,095 |                  | 18.3 | %     | $ | 1,979            |        | 15.3 | %     | $                | 946   |        | 13.4 | %                | $ | 617   |        | 7.2              | %    
|Real Estate                               |                        |      | 3,993 |                  | 48.4 | %     |   | 2,291            |        | 49.1 | %     |                  | 3,798 |        | 42.4 | %                |   | 4,243 |        | 47.5             | %    
|H.E.C.L.                                  |                        |      | 390   |                  | 6.0  | %     |   | 344              |        | 6.9  | %     |                  | 753   |        | 8.5  | %                |   | 922   |        | 11.6             | %    
|Installment                               |                        |      | 292   |                  | 3.4  | %     |   | 283              |        | 3.9  | %     |                  | 1,092 |        | 7.0  | %                |   | 591   |        | 5.5              | %    
|Credit Card and Related                   |                        |      | 1,203 |                  | 1.0  | %     |   | 770              |        | 1.6  | %     |                  | 1,170 |        | 1.8  | %                |   | 736   |        | 2.9              | %    
|Commercial, Other                         |                        |      | 4,607 |                  | 22.9 | %     |   | 4,448            |        | 23.2 | %     |                  | 4,973 |        | 26.9 | %                |   | 3,049 |        | 25.3             | %    
|Unallocated                               |                        |      | 700   |                  | N/A  |       |   | 2,990            |        | N/A  |       |                  | 1,709 |        | N/A  |                  |   | 4,907 |        | N/A              |      
|                                          |                        |      |       |                  |      |       |   |                  |        |      |       |                  |       |        |      |                  |   |       |        |                  |      
|                                          | Balance at End of Year |      | $     | 13,280           |      | 100.0 | % | $                | 13,105 |      | 100.0 | %                | $     | 14,441 |      | 100.0            | % | $     | 15,065 |                  | 100.0
|                                          |                        |      |       |                  |      |       |   |                  |        |      |       |                  |       |        |      |                  |   |       |        |                  |      

Non-accrual loans within the Bank's portfolio increased from $1.5 million as of December 31, 1999, to $4.5 million, at the end of 2000. Loans,
90 days or more past due decreased from $4.2 million at December 31, 1999, to $222 thousand at the end of 2000. The vast majority of the loans on non-accrual ($3.6 million) are secured by real estate.
There is potential for this collateral to be liquidated to recover principal and unpaid interest. To the extent this is insufficient, a charge-off to the allowance may result. Approximately $186
thousand of loans 90 days or more past due are secured by real estate and $36 thousand are secured by loans to finance agricultural production. Recoveries in 2000 of loans previously charged-off
totaled $667 thousand compared to charge-offs of $1.2 million taken during the year resulting innet charge-offsof $525 thousand. This compares to net
charge-offs incurred during 1999 of $1.4 million and net charge-offs of $924 thousand in 1998. The Bank anticipates that charge-offs (actual losses) will continue during 2001. 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 loan losses, Management feels that the allowance is sufficient to cover inherent
losses. Management

29

---

reviews the adequacy of the allowance and adjusts it as necessary 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.

The
allowance for loan losses as a percentage of total loans has gradually decreased from 2.4% in 1996 to 1.4% in 2000, reflecting an improvement in asset quality during this period.
This is evident in the reduction of non-performing assets from $15.8 million in 1996 to $5.7 million in 1999 and $4.7 million at the end of 2000. 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, 2000,
management 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. These factors directly offset the beneficial trends in non-performing loans.

The
allowance for loan 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, 2000 is shown in the table below. A more complete discussion of the Bank's exposure to
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, 2000 |                    | 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                     |                    | $                | 39,249  |                                 | $ | 47,494                            |        | $                                   | 60,733 |                      | $ | 65,059
|Floating rate loans                  |                    |                  | 430,176 |                                 |   | 4,897                             |        |                                     | 10,382 |                      |   | 46,520
|                                     |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     | Sub-total          |                  |         | 469,425                         |   |                                   | 52,391 |                                     |        | 71,115               |   |       
|Non accrual loans                    |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     | Total Loans, gross |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       

|(dollars in 000's)
December 31, 2000 |                    | 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                     |                    | $                | 18,877  |                                 | $ | 63,241                            |        | $                                   | 66,639 |                      | $ | 41,109
|Floating rate loans                  |                    |                  | 364,064 |                                 |   | 5,602                             |        |                                     | 19,393 |                      |   | 8,043 
|                                     |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     | Sub-total          |                  |         | 382,941                         |   |                                   | 68,843 |                                     |        | 86,032               |   |       
|Non accrual loans                    |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     | Total Loans, gross |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       
|                                     |                    |                  |         |                                 |   |                                   |        |                                     |        |                      |   |       

Investment Portfolio

The Bank's investment portfolio primarily consists of U.S. 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 Bank did increase its holdings in the Municipal Bond portfolio from $236.4 million
at the end of 1999, to $255.2 million at the end of 2000. The Bank has focused on this segment of the portfolio because it generates

30

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better returns. The Treasury and Agency portion of the portfolio ($140.2 million at year-end 2000), was reduced during the year to provide funding for the increase in the Bank's loan portfolio. The
U.S. Treasury portion of the portfolio decreased by $63.0 million while Federal Agencies and Mortgage Backed Securities decreased by $18.5 million from December 31, 1999 to December 31, 2000.

The
Bank may segregate its portfolio into three categoriesa "Trading Portfolio" (which is carried at market value, with changes reflected in the income statement), a
"Held to Maturity" portfolio (which is carried at historical amortized cost) and an "Available for Sale" portfolio (which is carried at market value, with changes reflected in comprehensive income,
but provides for the same income statement treatment as the Held-to-Maturity portfolio.) 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, the majority of the
portfolio ($381.8 million) should be classified as Available for Sale. On January 1, 2001, the remaining $25.6 million in the Held to Maturity portfolio 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 is permitted.

Adjustments
to the Available for Sale portfolio for changes in market values resulted in an unrealized gain of $1.2 million included in Accumulated Other Comprehensive Income (Loss)
as of December 31, 2000 compared to an unrealized loss of $3.7 million at December 31, 1999, net of related taxes. Maturities and sales exceeded purchases over the full year and the total investment
portfolio thus decreased by $57.8 million from the end of 1999 to the end of 2000.

Shown
below is a summary maturity distribution of the investment portfolio by type and weighted taxable equivalent yield as of December 31, 2000. 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.

|Available for Sale (at market value):
(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   |                  | $ | 38,695                       |         | $                             | 13,437  |                 | $ |      
|                                                         | U.S. Government Agencies   |                  |   | 28,835                       |         |                               | 51,600  |                 |   | 5,103 
|                                                         | Mortgage Backed Securities |                  |   | 376                          |         |                               | 850     |                 |   | 2,274 
|                                                         | Municipal Bonds, Other     |                  |   | 44,123                       |         |                               | 130,856 |                 |   | 63,541
|                                                         |                            |                  |   |                              |         |                               |         |                 |   |       
|                                                         |                            | Total            |   | $                            | 112,029 |                               | $       | 196,743         |   | $     
|                                                         |                            |                  |   |                              |         |                               |         |                 |   |       

|                        |                            | 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   |                  | 6.00 | %                            | 5.99 | %                             |     |                 |     |       | 6.00
|                        | U.S. Government Agencies   |                  | 6.13 | %                            | 6.24 | %                             | 6.78 | %               |     |       | 6.38
|                        | Mortgage Backed Securities |                  | 6.95 | %                            | 7.15 | %                             | 6.81 | %               | 6.34 | %     | 6.81
|                        | Municipal Bonds, Other     |                  | 6.67 | %                            | 6.42 | %                             | 7.53 | %               | 7.54 | %     | 7.04
|                        |                            |                  |      |                              |      |                               |      |                 |      |       |     
|                        |                            | Total            |      | 6.28                         | %    | 6.35                          | %    | 7.45            | %    | 7.23  | %   
|                        |                            |                  |      |                              |      |                               |      |                 |      |       |     

31

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|Held to Maturity (at amortized cost):
(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. Government Agencies   |                  | $ | 2,500                        |       | $                             |       |                 | $ |     
|                                                         | Mortgage Backed Securities |                  |   | 56                           |       |                               | 283    |                 |   |     
|                                                         | Municipal Bonds, Other     |                  |   | 3,709                        |       |                               | 15,089 |                 |   | 4,003
|                                                         |                            |                  |   |                              |       |                               |        |                 |   |      
|                                                         |                            | Total            |   | $                            | 6,265 |                               | $      | 15,372          |   | $    
|                                                         |                            |                  |   |                              |       |                               |        |                 |   |      

|                        |                            | 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. Government Agencies   |                  | 6.33 | %                            |     |                               |     |                 |  |       | 6.33
|                        | Mortgage Backed Securities |                  | 6.75 | %                            | 6.80 | %                             |     |                 |  |       | 6.77
|                        | Municipal Bonds, Other     |                  | 6.71 | %                            | 6.62 | %                             | 7.77 | %               |  |       | 6.63
|                        |                            |                  |      |                              |      |                               |      |                 |   |       |     
|                        |                            | Total            |      | 6.50                         | %    | 6.54                          | %    | 6.74            | % |      |     
|                        |                            |                  |      |                              |      |                               |      |                 |   |       |     

Other Real Estate Owned ("OREO")

The Company held no OREO at December 31, 2000, as well as at the end of 1999. During 2000, the Bank received net proceeds from sale of OREO properties of $1.1
million. Future OREO activity will depend, among other things, on how many borrowers the Bank may need to foreclose on and on the strength of the real estate market and general economic activity. In
general, however, management does not anticipate substantial additions of OREO.

Deposits

While the Bank is competitive with major banks in terms of its structure of interest rates on deposit products offered, management was not overly aggressive
during 2000 in terms of pricing to attract additional deposits, a decision which reflects the Bank's strong liquidity at the present time. As a result, the balances on some of the more interest
sensitive accounts, in particular passbook savings, have remained the same in recent years.

As
discussed in the Income Statement Analysis, most of the Bank's deposit rates were little changed during 2000, while time deposit rates rose through much of the year mirroring the
increases seen in the Prime Rate. A comparison of the rates paid on the Bank's deposit products at December 31, 2000 and 1999 is as follows:

|Selected Quoted Interest Rates              |  | 2000 |   | 1999 * |   | Change |  
|------------------------------------------- |  | ---- | - | ------ | - | ------ | -
|Demand Deposits                             |  | 0    | % | 0      | % |       |  
|NOW Account (50 & Betterover $10,000)      |  | 0.50 | % | 0.50   | % |       |  
|Money Market Deposits (over $2,500)         |  | 2.00 | % | 2.00   | % |       |  
|Passbook Savings Account                    |  | 2.00 | % | 2.00   | % |       |  
|Individual Retirement Account (2 Year term) |  | 5.60 | % | 5.15   | % | +0.45  | %
|Time Deposit ($100,0006 month term)        |  | 5.75 | % | 5.30   | % | +0.45  | %
|Wall Street Journal Prime Rate              |  | 9.50 | % | 8.50   | % | +1.00  | %

Average
deposits have grown steadily over the last few years but declined slightly for the period ending December 2000, reflecting the run-off in the latter part of 1999 and early
2000 of certain higher

32

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cost deposit balances acquired through the merger with City Commerce Bank. Below is a summary of the average deposits outstanding and the average rate paid by category over the last three years.

|                            |                                 | 2000 |         | 1999      |   | 1998   |       
|--------------------------- | ------------------------------- | ---- | ------- | --------- | - | ------ | ------
|
|Interest Bearing Demand     |                                 | $    | 423,694 |           | $ | 4,551  |       
|Savings Accounts            |                                 |      | 192,699 |           |   | 4,923  |       
|Time Deposits               |                                 |      | 337,605 |           |   | 17,650 |       
|                            |                                 |      |         |           |   |        |       
|                            | Total Interest Bearing Deposits |      |         | 953,998   |   |        | 27,124
|Non Interest Bearing Demand |                                 |      | 251,828 |           |   |       |       
|                            |                                 |      |         |           |   |        |       
|                            | Total Deposits                  |      | $       | 1,205,826 |   | $      | 27,124
|                            |                                 |      |         |           |   |        |       

The majority of the Bank's time deposits (approximately 65%) 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 balance time deposits do tend to be more stable and less sensitive to absolute rate levels than do time deposits of
$100,000 or more. Approximately 88% of the Bank's time deposits mature within one year and would be subject to a change in rate at that time. The following table as of December 31, 2000, 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                     |  | $                    | 81,669  |                                  | $ | 65,082                       |  | $              | 49,814 |      
|$100,000 or More                   |  |                      | 56,374  |                                  |   | 31,345                       |  |                | 23,282 |      
|                                   |  |                      |         |                                  |   |                              |  |                |        |      
|Total Time Deposits                |  | $                    | 138,043 |                                  | $ | 96,427                       |  | $              | 73,096 |      
|                                   |  |                      |         |                                  |   |                              |  |                |        |      

Other Borrowings

While
not a significant component of the Bank's structure, other borrowings increased from $15.4 million, at the end of 1999 to $30.2 million at the end of 2000. These consist
primarily of borrowings under the U.S. Treasury Tax and Loan note account, federal funds purchased, securities sold under agreements to repurchase and mortgages payable. The Bank had outstanding
borrowings of $4.0 million and $12.3 million at December 31, 2000 and 1999, respectively, under the U.S. Treasury Tax and Loan note account program. Federal funds purchased were $26.0 million at
December 31, 2000, compared to one year earlier. Securities sold under agreement to repurchase were $125 thousand and $2.9 million at December 31, 2000 and 1999, respectively. Mortgages payable were
$135 thousand and $164 thousand at year-end 2000 and 1999, respectively.

Capital

Capital
ratios for commercial banks and their holding companies in the United States are generally calculated using 3 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.

The
Leverage Ratio calculation simply divides common stockholders' equity (reduced by any goodwill 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"

33

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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, 2000 and 1999, for both Mid-
State Bancshares and Mid-State Bank. Additionally, the standards for a well-capitalized institution, as defined by the federal banking agencies, are displayed.

|                                  |  |     |   |      |   | Mid-State Bancshares |   | Mid-State Bank |  
|--------------------------------- |  | --- | - | ---- | - | -------------------- | - | -------------- | -
|
|
|Leverage Ratio                    |  | 4.0 | % | 5.0  | % | 12.3                 | % | 11.6           | %
|Tier One Risk Based Capital Ratio |  | 4.0 | % | 6.0  | % | 15.5                 | % | 16.0           | %
|Total Risk Based Capital Ratio    |  | 8.0 | % | 10.0 | % | 16.7                 | % | 17.2           | %

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. However, the Company's ratio of average equity to average assets continues to rise even in the face of this effort as evidenced in
the following table for the years ended December 31.

2000

1999

1998Dividend Payout Ratio

27.6
%
25.3
%
15.0
%Average Common Equity to Average Assets

12.0
%
11.1
%
10.6
%


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 74.7% versus 64.7% 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 34.0% at December 31, 2000, which is above its minimum policy of 15%.

The
Bank strives to make high quality loans to optimize earnings while still maintaining adequate liquidity. Until recently, the Bank operated with excess liquidity. It was able to
use some of that excess throughout 2000 and increased its loan totals closer to the upper end of its desired target range. Management's ability to maintain its loan portfolio in the desired target
range will be partly dependent on the strength of the local economy.

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 2000 was $82.4
million, up from $73.6 million recorded in 1999 and $69.4 million in 1998. 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 2000, 1999, and 1998.

34

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ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           | 2000 Compared to 1999
Composition of Change |       
|----------------------------- | ------------------------- | ---------------------------------- | --------- | ------- | --------- | ------ | ------ | ------- | ----- | ----- | --------- | ------- | --------- | ------------------------------------------- | ------
|
|
|
|
|EARNING ASSETS:               |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|Loans                         |                           | $                                  | 847,797   |         | $         | 85,685 |        | 10.11%  |       | $     | 685,566   |         | $         | 67,372                                      |       
|Investment Securities         |                           |                                    | 406,795   |         |           | 22,800 |        | 5.60%   |       |       | 534,666   |         |           | 29,899                                      |       
|Fed Funds, Other              |                           |                                    | 24,527    |         |           | 1,482  |        | 6.04%   |       |       | 49,424    |         |           | 2,356                                       |       
|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|                              |                           | TOTAL EARNING ASSETS               |           | $       | 1,279,119 |        | $      | 109,967 |       | 8.60% |           | $       | 1,269,656 |                                             | $     
|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|INTEREST BEARING LIABILITIES: |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|NOW, Savings, and             |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|                              | Money Market Accounts     |                                    | $         | 616,393 |           | $      | 9,474  |         | 1.54% |       | $         | 623,867 |           | $                                           | 9,801 
|Time Deposits                 |                           |                                    | 337,605   |         |           | 17,650 |        | 5.23%   |       |       | 346,659   |         |           | 15,941                                      |       
|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|                              | Interest Bearing Deposits |                                    |           | 953,998 |           |        | 27,124 |         | 2.84% |       |           | 970,526 |           |                                             | 25,742
|Other Borrowings              |                           |                                    | 8,063     |         |           | 475    |        | 5.89%   |       |       | 6,235     |         |           | 329                                         |       
|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|                              |                           | TOTAL INTEREST BEARING LIABILITIES |           |         | 962,061   |        |        | 27,599  |       | 2.87% |           |         | 976,761   |                                             |       
|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       
|NET INTEREST INCOME           |                           | $                                  | 1,279,119 |         | $         | 82,368 |        | 6.44%   |       | $     | 1,269,656 |         | $         | 73,556                                      |       
|                              |                           |                                    |           |         |           |        |        |         |       |       |           |         |           |                                             |       

|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           | 1999 Compared to 1998
Composition of Change |       
|--------------------------------------- | ------------------------- | ---------------------------------- | --------- | ------- | --------- | ------ | ------ | ------ | ----- | ----- | --------- | ------- | --------- | ------------------------------------------- | ------
|
|
|
|
|EARNING ASSETS:                         |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|Loans                                   |                           | $                                  | 685,566   |         | $         | 67,372 |        | 9.83%  |       | $     | 633,324   |         | $         | 65,758                                      |       
|Investment Securities                   |                           |                                    | 534,666   |         |           | 29,899 |        | 5.59%  |       |       | 508,260   |         |           | 30,200                                      |       
|Fed Funds, Other                        |                           |                                    | 49,424    |         |           | 2,356  |        | 4.77%  |       |       | 52,768    |         |           | 2,924                                       |       
|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|                                        |                           | TOTAL EARNING ASSETS               |           | $       | 1,269,656 |        | $      | 99,627 |       | 7.85% |           | $       | 1,194,352 |                                             | $     
|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|INTEREST BEARING LIABILITIES:           |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|NOW, Savings, and Money Market Accounts |                           | $                                  | 623,867   |         | $         | 9,801  |        | 1.57%  |       | $     | 595,400   |         | $         | 11,042                                      |       
|Time Deposits                           |                           |                                    | 346,659   |         |           | 15,941 |        | 4.60%  |       |       | 346,187   |         |           | 18,059                                      |       
|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|                                        | Interest Bearing Deposits |                                    |           | 970,526 |           |        | 25,742 |        | 2.65% |       |           | 941,587 |           |                                             | 29,101
|Other Borrowings                        |                           |                                    | 6,235     |         |           | 329    |        | 5.28%  |       |       | 6,437     |         |           | 340                                         |       
|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|                                        |                           | TOTAL INTEREST BEARING LIABILITIES |           |         | 976,761   |        |        | 26,071 |       | 2.67% |           |         | 948,024   |                                             |       
|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       
|NET INTEREST INCOME                     |                           | $                                  | 1,269,656 |         | $         | 73,556 |        | 5.79%  |       | $     | 1,194,352 |         | $         | 69,441                                      |       
|                                        |                           |                                    |           |         |           |        |        |        |       |       |           |         |           |                                             |       

During 2000, there was a $10.3 million increase in interest income along with an increase of $1.5 million in interest expense compared to 1999.
The resulting $8.8 million increase in net interest income for 2000 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 $9.5 million. The increase in interest income was primarily attributable to the net increase in average loans, which were up by $162.2 million,
while investments decreased by $127.9 million and federal funds sold decreased by $24.9 million. Second, the Company's interest bearing liabilities decreased by

35

---

$14.7 million while earning assets increased by the $17.4 million. Third, interest rates were higher in 2000 compared to 1999, having a relatively larger positive impact on interest income than the
impact the rates had on the Company's cost of funds.

The
$4.1 million increase in net interest income for 1999 compared to 1998 was the result of similar, yet slightly different dynamics. First, the Company experienced an increase in
its average earning assets outstanding of $75.3 million. Second, the Company's interest bearing liabilities increased by just $28.9 million compared to the $75.3 million increase in average earning
assets. Third, while interest rates were slightly lower in 1999 than 1998, the Company's cost of funds declined more dramatically than its interest earnings due to the growth and mix of its earning
assets.

The
Bank's risk exposure to changes in interest rates is minimal. A recent review of the potential changes in the Bank's net interest income over a 12 month time horizon showed that
it could fluctuate under very extreme alternative rate scenarios from between +1.7% and -6.4% of the base case (rates unchanged) of $86.0 million. The Bank's policy is to maintain a structure of
assets and liabilities which are such that net interest income will not vary more than plus or minus 15% of the base forecast over the next 12 months. Management feels that its exposure to interest
rate risk is manageable and it will continue to strive for an optimal trade-off between risk and earnings.

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

Change
From BaseRates Down Very Significant

-6.4
%(Prime down to 5.50% over 12 months)Rates Down Significant

-4.6
%(Prime down to 7.00% over 12 months)Rates Down Modestly

-1.8
%(Prime down to 8.50% over 12 months)Base Case - Rates Unchanged

(Prime unchanged at 9.50% over 12 months)Rates Up Modestly

+1.8
%(Prime up to 10.50% over 12 months)Rates Up Aggressive

+1.6
%(Prime up to 12.00% over 12 months)Rates Up Very Aggressive

+1.7
%(Prime up to 13.50% over 12 months)


Net
interest income under the above scenarios is influenced by the characteristics of the Bank's assets and liabilities. In the case of N.O.W., savings and money market deposits
(total $606.9 million) interest is based on rates set at the discretion of management ranging from 0.50% to 2.37%. In a downward rate environment, there is a limit to how far these deposit instruments
can be re-priced and this behavior is similar to that of fixed rate instruments. In an upward rate environment, the magnitude and timing of changes in rates on these deposits is assumed to be more
reflective of variable rate instruments. These characteristics are the main reasons that a 4% decline in Prime decreases net interest income by 6.4% while a 4% increase in Prime increases net interest
income just 1.7%. 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

36

---

taken by the Federal Reserve Board, customer behavior, and management's responses. Historically, the Bank has been able to manage its Net Interest Income in a fairly narrow range reflecting the Bank's
relative insensitivity to interest rate changes. The impact of prepayment behavior on mortgages, real estate loans, mortgage backed securities, securities with call features, etc. is not considered
material to the sensitivity analysis. Over the last 5 years, the Bank's net interest margin (which is net interest income divided by average earning assets of the Bank) has ranged from a low of 5.71%
to a high of 6.44% (not taxable equivalent). The Bank's net interest margin in 2000 of 6.44% is high by historical standards and relates to both the higher level of interest rates and the change in
mix of earning assets (the Bank now has a larger portion in loans vis-a-vis investment securities). The net interest margin under the alternative scenarios ranges from 5.94% to 6.45%. Management feels
this range of scenarios, while high by historical standards, is consistent with current experience, 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 $700 thousand, $50 thousand and $300 thousand in 2000, 1999 and 1998, respectively. This reflects management's
assessment of the level of inherent losses identified in the portfolio which has been supplemented by higher than expected recoveries of loans previously charged off, amounting to $0.7 million, $1.1
million and $0.8 million, in 2000, 1999 and 1998, respectively. The need for additional provision for loan losses in 2001 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 2000 totaled $17.8 million compared to $17.5 million in 1999 and $24.7 million in 1998. A major element for the larger number in 1998 was the reversal into
income of $5.3 million of
the reserve for losses on investments in real estate which Management felt was no longer required at Mid-Coast Land Company. This decision came about because of the improved real estate market and the
higher than anticipated sales prices being received on certain of the subsidiary's real estate development projectsmost notably San Luis Bay Estates. A more detailed description of this
activity follows in the section below about subsidiary activity. Service charges on deposit accounts increased $141 thousand to $6.9 million in 2000 versus 1999. This followed a decrease of $209
thousand in 1999 over 1998. The decline in 1999 was related to certain waivers of accounts during the merger of City Commerce Bank and Mid-State Bank. Commissions, fees and other service charges
increased by $1.5 million in 2000 over 1999 after a $635 thousand decrease in 1999. The decrease in 1999 was primarily related to the drop in refinance activity affecting the Bank's mortgage banking
operation which had experienced a robust period of activity in 1998. About $1.0 million of the increase in 2000 related to increases from the Bank's mastercard merchant fees. The balance is related to
modest increases across several other fee areas. Earnings from investments in real estate declined to $331 thousand in 2000 after decreases to $830 thousand in 1999 and $927 thousand in 1998. These
declines reflect the continuing divestiture of Mid-Coast Land Company. All other sources of income fell to $1.4 million in 2000, after reaching $2.4 million in 1999 and $3.9 million in 1998. The
decline in 2000 reflects primarily a drop in miscellaneous recoveries of prior period interest earnings on loans charged off where principal had been fully recovered. The decline from 1998 to 1999
primarily reflects a large decline in one-time gains on the sale of Other Real Estate Owned.

37

---

Non-Interest Expense

Total
non-interest expense for 2000 was $58.0 million, which was up from $57.5 million in 1999 and down from $62.3 million in 1998. A major factor in the trend of total non-interest
expense related to one-time merger charges. The Company did not incur any merger related charges in 2000, but incurred $2.9 million of these costs for the City Commerce merger in 1999 and $7.4 million
in 1998 for the Bank of Santa Maria merger. The $2.9 million charge in 1999 was comprised of $0.8 million in severance charges for displaced personnel, $0.7 million of losses on surplus computer
equipment, furniture and fixtures of City Commerce Bank, $427 thousand of investment bank fees, and $1.0 million of various charges for legal fees, accounting fees, filings and other miscellaneous
charges incurred.

Salaries
and employee benefits increased by $3.0 million in 2000 over 1999 after having decreased by $13 thousand in 1999 over 1998. The increase in 2000 over 1999 related to
increases in profit sharing, deferred compensation for executive officers and increases in bonuses paid which were related to the improved performance of the Company. The relatively flat staff expense
level in 1999 compared to 1998 reflects both wage increases to employees and fewer staff members due to the merger with City Commerce Bank.

Occupancy
expense has remained virtually unchanged throughout the last 3 years at $8.4 million in 2000 and $8.5 million in both 1999 and 1998. Major capital expenditures for computer
equipment and ATM's were completed in 1998. This equipment was placed in service in the middle of the year and occupancy expense increased as these items are depreciated over useful lives of between 5
and 7 years. These items cost approximately $7.2 million and are being depreciated at a rate of $119 thousand per month. No major expenditures are planned for 2001.

Merchant
processing charges have increased steadily over the three year period reflecting increased volume and customers. These charges amounted to $4.9 million in 2000, $3.9 million
in 1999, and $3.7 million in 1998.

Other
operating expenses continue to decline. In 2000, they were $11.9 million compared to $12.3 million in 1999 and $12.9 million in 1998. Management expects that this category
should continue to decline in 2001 as the Company places continued emphasis on expense control and reduction.

Taxes

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. The amount generated for book purposes compared to the actual loss experience recorded for tax purposes has been different. Because of regulatory restrictions
on the amount of deferred tax assets which can be recognized for regulatory capital purposes, the Company had previously established a valuation allowance for taxes on the Consolidated Statement of
Financial Position. This allowance was reduced to $183 thousand at the end of 1998 resulting in a reversal of $3.5 million of the valuation allowance that existed at December 31, 1997. The limitation
on the amount of the deferred tax assets was based on a number of factors, including the level of projected future taxable income. The reduction of the valuation allowance results from a decrease in
the level of deferred tax assets and an expectation of increased future taxable income. The remaining $183 thousand valuation allowance at December 31, 1999, relates to the uncertain realizability of
capital loss carryforwards acquired through the City Commerce Bank merger. The reduction in the valuation allowance during 1998 directly benefited the tax expense recognized for the year, compared to
normal statutory tax rates. No such benefit to tax expense was received in 2000 or 1999.

38

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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. Footnote No. 7 to the accompanying financial statements provides additional information about this wholly owned subsidiary. Mid-Coast Land Company recorded earnings during 2000 of $280
thousand compared to earnings during 1999 of $349 thousand and a $3.1 million gain in 1998. The gain in 1999 and 2000 was related to certain remaining parcels sold on its San Luis Bay Estates project.
The profit in 1998 was principally because of the reversal of $5.3 million of its reserve for losses on investments in real estate, which was no longer necessary given the sales of most of the
remaining parcels.

Because
of the progress made to liquidate the real estate development assets, the FDIC granted an extension of the original required divestiture date in July 1996 until December 1998.
The regional director of the FDIC, extended the deadline to December 31, 2000, for good cause and with the substantial progress made to date, no further deadlines are being imposed.

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. 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 $1.4 million, $1.5 million and $1.4 million, in 2000, 1999 and 1998,
respectively. Leases are written with market terms and at market rates.

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.

ITEM 7B. DISCLOSURE ABOUT RISKS ASSOCIATED WITH YEAR 2000 ISSUES

"Year 2000 Readiness Disclosure"

No major concerns exist at this point. The Company completed development of contingency plans in preparation for the Y2K event during 1999. While these plans
were not needed, they have served as a catalyst to update and complete the Company's disaster recovery plans.

39

---



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

|                                                             |  | PAGE
|------------------------------------------------------------ |  | ----
|Report of Independent Public AccountantsArthur Andersen LLP |  | 41  
|Independent Auditors' ReportKPMG LLP                        |  | 42  
|Consolidated Statements of Financial Position                |  | 43  
|Consolidated Statements of Income                            |  | 44  
|Consolidated Statements of Comprehensive Income              |  | 45  
|Consolidated Statements of Changes in Capital Accounts       |  | 46  
|Consolidated Statements of Cash Flows                        |  | 47  
|Notes to Consolidated Financial Statements                   |  | 48  
|Management Statement                                         |  | 66  
|Report of Independent Public Accountants                     |  | 67  

40

---

Report of 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, 2000 and
1999, and the related consolidated statements of income, comprehensive income, changes in capital accounts and cash flows for the 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 did not audit the financial statements of City Commerce Bank, a company
acquired during 1999 in a transaction accounted for as a pooling of interests, as discussed in Note 2. Such statements are included in the accompanying consolidated statements of income of
Mid-State Bancshares and Subsidiary and reflect net interest income and net income of 12.3% and 9.4%, respectively, of the related consolidated totals for 1998. These statements were
audited by another auditor whose report has been furnished to us and our opinion, insofar as it relates to amounts included for City Commerce Bank, is based solely upon the report of the other
auditor.

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 and the report of the other auditor provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the report of the other auditor, the financial statements referred to above present fairly, in all material respects, the financial position of
Mid-State Bancshares and Subsidiary as of December 31, 2000 and 1999, 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 19, 2001

41

---

Independent Auditors' Report

To the Stockholders and Board of Directors of City Commerce Bank:

We
have audited the statements of operations, changes in stockholders' equity and comprehensive income and cash flows of City Commerce Bank for the year ended December 31,
1998. These financial statements, which are not included herein, are the responsibility of the Bank'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 of America. 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 results of operations and cash flows of City Commerce Bank for the year ended
December 31, 1998 in conformity with accounting principles generally accepted in the United States of America.

| |  |                    
| |  | -------------------
| |  | /s/KPMG LLPKPMG LLP

Los Angeles, California
January 20, 1999

42

---



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

|                                             |                                                                                 | December 31,                         |        
|-------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------ | -------
|
|CASH AND DUE FROM BANKS                      |                                                                                 | $                                    | 88,988 
|FEDERAL FUNDS SOLD                           |                                                                                 |                                      |       
|SECURITIES, net:                             |                                                                                 |                                      |        
|                                             | Securities available-for-sale                                                   |                                      |        
|                                             | Securities held-to-maturity (market value of $25,845 and $31,075, respectively) |                                      |        
|                                             |                                                                                 |                                      |        
|                                             | Total Securities                                                                |                                      |        
|                                             |                                                                                 |                                      |        
|LOANS, net                                   |                                                                                 |                                      | 906,687
|PREMISES AND EQUIPMENT, net                  |                                                                                 |                                      | 28,003 
|ACCRUED INTEREST RECEIVABLE                  |                                                                                 |                                      | 11,753 
|INVESTMENTS IN REAL ESTATE, net              |                                                                                 |                                      | 228    
|OTHER ASSETS                                 |                                                                                 |                                      | 12,757 
|                                             |                                                                                 |                                      |        
|                                             |                                                                                 | 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                             |                                                                                 |                                      | 30,240 
|ACCRUED INTEREST PAYABLE & OTHER LIABILITIES |                                                                                 |                                      | 17,334 
|                                             |                                                                                 |                                      |        
|                                             |                                                                                 | TOTAL LIABILITIES                    |        
|                                             |                                                                                 |                                      |        
|Commitments and Contingencies (Note 12)      |                                                                                 |                                      |        
|Capital Accounts                             |                                                                                 |                                      |        
|CAPITAL STOCK, NO PAR VALUE:                 |                                                                                 |                                      |        
|                                             | Authorized100,000,000 shares                                                   |                                      |        
|                                             | Outstanding22,018,582 shares in 2000 and 22,573,886 in 1999                    |                                      |        
|UNDIVIDED PROFITS                            |                                                                                 |                                      | 124,163
|ACCUMULATED OTHER COMPREHENSIVE              |                                                                                 |                                      |        
|                                             | INCOME (LOSS), NET OF TAXES                                                     |                                      |        
|                                             |                                                                                 | TOTAL CAPITAL ACCOUNTS               |        
|                                             |                                                                                 |                                      |        
|                                             |                                                                                 | TOTAL LIABILITIES & CAPITAL ACCOUNTS |        
|                                             |                                                                                 |                                      |        

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

43

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

|                                                             |                                                     | Year Ended December 31, |       
|------------------------------------------------------------ | --------------------------------------------------- | ----------------------- | ------
|
|Interest Income:                                             |                                                     |                         |       
|Interest and fees on loans and leases                        |                                                     | $                       | 85,685
|Interest on securities:                                      |                                                     |                         |       
|                                                             | U.S. Treasury securities                            |                         |       
|                                                             | U.S. Government agencies and corporations           |                         |       
|Obligations of states and political subdivisions, other      |                                                     |                         | 12,415
|Interest on federal funds sold                               |                                                     |                         | 1,482 
|                                                             |                                                     |                         |       
|                                                             | TOTAL INTEREST INCOME                               |                         |       
|                                                             |                                                     |                         |       
|Interest Expense:                                            |                                                     |                         |       
|Interest on deposits                                         |                                                     |                         | 27,124
|Interest on mortgages payable, other                         |                                                     |                         | 475   
|                                                             |                                                     |                         |       
|                                                             | TOTAL INTEREST EXPENSE                              |                         |       
|                                                             |                                                     |                         |       
|Net Interest Income                                          |                                                     |                         | 82,368
|Provision for loan losses                                    |                                                     |                         | 700   
|                                                             |                                                     |                         |       
|                                                             | NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |                         |       
|                                                             |                                                     |                         |       
|Other Income:                                                |                                                     |                         |       
|Service charges on deposit accounts                          |                                                     |                         | 6,939 
|Commissions, fees and other service charges                  |                                                     |                         | 8,880 
|Investments in real estate                                   |                                                     |                         | 331   
|Reversal of reserve for losses on investments in real estate |                                                     |                         | 262   
|Security (losses)                                            |                                                     |                         | (7    
|Other income                                                 |                                                     |                         | 1,400 
|                                                             |                                                     |                         |       
|                                                             | TOTAL OTHER INCOME                                  |                         |       
|                                                             |                                                     |                         |       
|Other Expenses:                                              |                                                     |                         |       
|Salaries & employee benefits                                 |                                                     |                         | 32,779
|Occupancy expenses                                           |                                                     |                         | 8,436 
|Merger-related charges                                       |                                                     |                         |      
|Merchant processing fees                                     |                                                     |                         | 4,867 
|Other operating expenses                                     |                                                     |                         | 11,900
|                                                             |                                                     |                         |       
|                                                             | TOTAL OTHER EXPENSES                                |                         |       
|                                                             |                                                     |                         |       
|Income before taxes                                          |                                                     |                         | 41,491
|Tax expense                                                  |                                                     |                         | 14,142
|                                                             |                                                     |                         |       
|                                                             | NET INCOME                                          |                         | $     
|                                                             |                                                     |                         |       
|Earnings per share:                                          |                                                     |                         |       
|                                                             | Basic                                              |                         | $     
|                                                             | Diluted                                            |                         | $     
|                                                             |                                                     |                         |       

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

44

---



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

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

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

45

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

|                           |                                                                                | Number of
Shares |          | Capital
Stock |        | Undivided
Profits |   | Accumulated
Other
Comprehensive
Income (Loss) |        | Total |       
|-------------------------- | ------------------------------------------------------------------------------ | ---------------- | -------- | ------------- | ------ | ----------------- | - | --------------------------------------------- | ------ | ----- | ------
|BALANCE, December 31, 1997 |                                                                                | 22,208,854       |          | $             | 55,470 |                   | $ | 72,967                                        |        | $     | 1,649 
|                           | Stock dividend                                                                 |                  |         |               |        | 2,933             |   |                                               | (2,936 | )     |       
|                           | Cash dividend                                                                  |                  |         |               |        |                  |   |                                               | (3,147 | )     |       
|                           | Over accrual of 1997 cash dividend on partial shares related to stock
dividend |                  |         |               |        |                  |   |                                               | 8      |       |       
|                           | Exercise of stock options                                                      |                  | 312,520  |               |        | 1,883             |   |                                               |       |       |       
|                           | Net income                                                                     |                  |         |               |        |                  |   |                                               | 20,995 |       |       
|                           | Change in net unrealized gain (loss) on available-for-sale securities          |                  |         |               |        |                  |   |                                               |       |       |       
|                           | Stock repurchased                                                              |                  | (110,100 | )             |        | (1,465            | ) |                                               |       |       |       
|                           |                                                                                |                  |          |               |        |                   |   |                                               |        |       |       
|BALANCE, December 31, 1998 |                                                                                | 22,411,274       |          |               | 58,821 |                   |   | 87,887                                        |        |       | 4,383 
|                           | Cash dividend                                                                  |                  |         |               |        |                  |   |                                               | (5,583 | )     |       
|                           | Exercise of stock options                                                      |                  | 201,620  |               |        | 1,349             |   |                                               |       |       |       
|                           | Net income                                                                     |                  |         |               |        |                  |   |                                               | 22,053 |       |       
|                           | Change in net unrealized gain (loss) on available-for-sale securities          |                  |         |               |        |                  |   |                                               |       |       |       
|                           | Stock repurchased                                                              |                  | (39,008  | )             |        | (489              | ) |                                               |       |       |       
|                           |                                                                                |                  |          |               |        |                   |   |                                               |        |       |       
|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 
|                           |                                                                                |                  |          |               |        |                   |   |                                               |        |       |       

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

46

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

|                                                                                  |                                                              | Year Ended December 31, |         
|--------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------- | --------
|
|Operating Activities:                                                             |                                                              |                         |         
|Net Income                                                                        |                                                              | $                       | 27,349  
|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                           |                         |         
|                                                                                  | Merger-related losses on sale of bank premises and equipment |                         |         
|                                                                                  | Provision for losses on investments in real estate           |                         |         
|                                                                                  | Provision for credit losses                                  |                         |         
|                                                                                  | Net gain on sales of other real estate owned                 |                         |         
|                                                                                  | Deferred tax (benefit) charge                                |                         |         
|                                                                                  | Decrease (increase) in accrued interest and other assets     |                         |         
|                                                                                  | Increase in accrued interest payable and other liabilities   |                         |         
|                                                                                  |                                                              |                         |         
|                                                                                  | Net cash provided by operating activities                    |                         |         
|                                                                                  |                                                              |                         |         
|Investing Activities:                                                             |                                                              |                         |         
|Proceeds from sales and maturities of securities                                  |                                                              |                         | 143,191 
|Purchases of securities                                                           |                                                              |                         | (78,438 
|Proceeds from sales of other real estate owned                                    |                                                              |                         | 1,125   
|Net increase in loans                                                             |                                                              |                         | (152,899
|Receipts from real estate investments, net of advances                            |                                                              |                         | 1,551   
|Purchases of premises and equipment                                               |                                                              |                         | (3,593  
|Proceeds from sales of premises and equipment                                     |                                                              |                         | 961     
|                                                                                  |                                                              |                         |         
|                                                                                  | Net cash used in investing activities                        |                         |         
|                                                                                  |                                                              |                         |         
|Financing Activities:                                                             |                                                              |                         |         
|Net increase (decrease) in demand deposits, savings and money market accounts     |                                                              |                         | 41,091  
|Net increase (decrease) in time deposits                                          |                                                              |                         | 21,617  
|Net increase (decrease) in other borrowings                                       |                                                              |                         | 14,883  
|Cash dividend paid                                                                |                                                              |                         | (7,543  
|Proceeds from exercise of stock options                                           |                                                              |                         | 345     
|Purchase of bank stock for retirement                                             |                                                              |                         | (8,254  
|                                                                                  |                                                              |                         |         
|                                                                                  | Net cash provided by (used in) financing activities          |                         |         
|                                                                                  |                                                              |                         |         
|INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS                                    |                                                              |                         | 15,408  
|CASH AND CASH EQUIVALENTS, beginning of year                                      |                                                              |                         | 73,580  
|                                                                                  |                                                              |                         |         
|CASH AND CASH EQUIVALENTS, end of year                                            |                                                              | $                       | 88,988  
|                                                                                  |                                                              |                         |         
|Supplemental disclosure of cash flow information                                  |                                                              |                         |         
|Cash paid during the year for:                                                    |                                                              |                         |         
|Interest (net of amounts capitalized)                                             |                                                              | $                       | 27,542  
|Taxes on income, net                                                              |                                                              |                         | 14,850  
|Transfers from loans to other real estate owned                                   |                                                              |                         | 1,007   
|                                                                                  |                                                              |                         |         

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

47

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  DECEMBER 31, 2000

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, (the "Bank") which includes Mid-State Bank'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.
Securities classified as available for sale are reported on the consolidated statements of financial position as of December 31, 2000 and 1999, 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, 2000, 1999 and 1998 and as a separate component of
the capital accounts for the years ended December 31, 2000 and 1999. Securities classified as held-to-maturity are reported on the consolidated statements of financial
position as of December 31, 2000 and 1999 at their amortized cost basis. 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: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 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

48

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capitalizes interest on funds disbursed during the active development phases of real estate development projects and the construction of Bank premises.

The
Bank's real estate development subsidiary, Mid-Coast Land Company, has established a reserve for losses on real estate investment activities. This amount is netted
against investments in real estate in the Consolidated Statements of Financial Position.

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.

Recent Accounting Pronouncements:In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133,"Accounting for Derivative Instruments and Hedging Activities."SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for
in income depending on the purpose of the derivative and whether or not it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No. 133, which was amended by SFAS No. 137 and SFAS No. 138, is effective in fiscal years beginning
after June 15, 2000. Concurrent with the adoption of SFAS No. 133, the Company is permitted to make a one-time reclassification of securities in the
held-to-maturity portfolio to the available-for-sale portfolio. On January 1, 2001, management elected to reclass the entire
held-to-maturity portfolio to the available-for-sale portfolio. The adoption of SFAS No. 133 did not have a material impact on the Company's
results of operations or financial condition, except as noted above.

In
September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 140 replaces
SFAS No. 125. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of
SFAS No. 125's provisions. The disclosures discussed in paragraphs 15 and 17 of SFAS No. 140 are effective as of December 31, 2000. These disclosures were not material to the
Company's financial statements. The other provisions of SFAS No. 140 are effective for fiscal years ending after March 31, 2001. Management believes that the adoption of SFAS
No. 140 will not have a material impact on the Company's results of operations or financial condition.

Reclassifications:Certain items in the consolidated financial statements for 1999 and 1998 were reclassified to
conform to the 2000 presentation.

2.  Mergers

The Company entered into an "Agreement to Merge and Plan of Reorganization" dated January 29, 1998 and amended on March 27, 1998 by and among
Mid-State Bank, BSM Bancorp and Bank of Santa Maria. This matter was submitted to a vote of the shareholders of Mid-State Bank at its Annual Meeting on June 17, 1998.
The matter was also submitted to a vote of the shareholders of BSM Bancorp, the parent company of Bank of Santa Maria, on June 18, 1998. The shareholders of both organizations approved the
merger. Concurrently with the completion of the merger on July 10, 1998,
BSM Bancorp changed its name to Mid-State Bancshares and remained the parent company to the merged bank, which retained the Mid-State Bank name. The merger was accounted for on
a

49

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pooling of interests basis and, as a result, prior periods are combined and restated as if the two banks were historically one unit.

The
Company also signed a definitive agreement with City Commerce Bank to merge on April 19, 1999, subject to the approval of banking regulators and City Commerce Bank
shareholders. The merger became effective at close of business on August 31, 1999. The agreement provided for the exchange of common stock at an exchange ratio of .6775 shares of
Mid-State Bancshares common stock for each share of City Commerce common stock, based on the price of Mid-State Bancshares stock preceding the effective date of the
transaction. The merger was structured to be tax-free, and was accounted for as a pooling of interests. As a result of this accounting treatment, all financial statements presented,
including prior periods, are combined and restated as if the two banks were historically one unit.

3.  Cash Reserves

The average reserve balances required to be maintained by the Federal Reserve Bank were approximately $24.5 million and $19.7 million at
December 31, 2000 and 1999, respectively.

4.  Securities

A summary of investment securities owned is as follows:

December 31, 2000

|(dollars in 000's)
Securities Available For Sale        |       | Amortized
Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |       | Market
Value
|------------------------------------------------------- | ----- | -------------- | ------- | ---------------------- | - | ----------------------- | ----- | ------------
|U.S. Treasury securities                                |       | $              | 51,928  |                        | $ | 211                     |       | $           
|Securities of U.S. government agencies and corporations |       |                | 85,304  |                        |   | 857                     |       |             
|Mortgage backed securities                              |       |                | 4,057   |                        |   | 5                       |       |             
|Obligations of states and political subdivisions        |       |                | 231,871 |                        |   | 2,067                   |       |             
|Other investments                                       |       |                | 6,650   |                        |   | 57                      |       |             
|                                                        |       |                |         |                        |   |                         |       |             
|                                                        | TOTAL |                | $       | 379,810                |   | $                       | 3,197 |             
|                                                        |       |                |         |                        |   |                         |       |             

|Securities Held to Maturity                             |       | Amortized
Cost |        | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |     | Market
Value
|------------------------------------------------------- | ----- | -------------- | ------ | ---------------------- | - | ----------------------- | --- | ------------
|Securities of U.S. government agencies and corporations |       | $              | 2,500  |                        | $ | 6                       |     | $           
|Mortgage backed securities                              |       |                | 339    |                        |   |                        |     |             
|Obligations of states and political subdivisions        |       |                | 21,801 |                        |   | 199                     |     |             
|Other investments                                       |       |                | 1,000  |                        |   |                        |     |             
|                                                        |       |                |        |                        |   |                         |     |             
|                                                        | TOTAL |                | $      | 25,640                 |   | $                       | 205 |             
|                                                        |       |                |        |                        |   |                         |     |             

50

---

December 31, 1999

|(dollars in 000's)
Securities Available For Sale        |       | Amortized
Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |     | Market
Value
|------------------------------------------------------- | ----- | -------------- | ------- | ---------------------- | - | ----------------------- | --- | ------------
|U.S. Treasury securities                                |       | $              | 115,254 |                        | $ | 195                     |     | $           
|Securities of U.S. government agencies and corporations |       |                | 101,040 |                        |   | 32                      |     |             
|Mortgage backed securities                              |       |                | 6,282   |                        |   | 2                       |     |             
|Obligations of states and political subdivisions        |       |                | 215,250 |                        |   | 152                     |     |             
|Other investments                                       |       |                | 2,251   |                        |   |                        |     |             
|                                                        |       |                |         |                        |   |                         |     |             
|                                                        | TOTAL |                | $       | 440,077                |   | $                       | 381 |             
|                                                        |       |                |         |                        |   |                         |     |             

|Securities Held to Maturity                             |       | Amortized
Cost |        | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |    | Market
Value
|------------------------------------------------------- | ----- | -------------- | ------ | ---------------------- | - | ----------------------- | -- | ------------
|Securities of U.S. government agencies and corporations |       | $              | 4,501  |                        | $ | 5                       |    | $           
|Mortgage backed securities                              |       |                | 437    |                        |   |                        |    |             
|Obligations of states and political subdivisions        |       |                | 25,844 |                        |   | 22                      |    |             
|Other investments                                       |       |                | 601    |                        |   |                        |    |             
|                                                        |       |                |        |                        |   |                         |    |             
|                                                        | TOTAL |                | $      | 31,383                 |   | $                       | 27 |             
|                                                        |       |                |        |                        |   |                         |    |             

Securities
having an amortized cost of $73,302,000 and $42,403,000 at ecember 31, 2000 and 1999, respectively, were pledged to secure public deposits and for other purposes as
required by law.

Proceeds
from calls, partial pay-downs and/or sales of securities during 2000 were $143,189,960. Gross gains of $3,381 and gross losses of $9,973 were realized on that
activity. On December 8, 2000, the Company sold, at book value, a held-to-maturity security for proceeds of $1,000,000. The sale represented a change in management's
intent to hold this security to maturity resulting from a significant deterioration in the credit rating of the issue to a non-investment grade status.

The
amortized cost and market value of securities at December 31, 2000 and 1999, 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 |         | Held-to-Maturity
|--------------------------------- | ----- | ------------------ | ------- | ----------------
|
|Due in one year or less           |       | $                  | 111,809 |                 
|Due after one year to five years  |       |                    | 197,577 |                 
|Due after five years to ten years |       |                    | 68,347  |                 
|Due after ten years               |       |                    | 2,078   |                 
|                                  |       |                    |         |                 
|                                  | Total |                    | $       | 379,811         
|                                  |       |                    |         |                 

|                                  |       | Available For Sale |         | Held-to-Maturity
|--------------------------------- | ----- | ------------------ | ------- | ----------------
|
|Due in one year or less           |       | $                  | 136,058 |                 
|Due after one year to five years  |       |                    | 227,778 |                 
|Due after five years to ten years |       |                    | 73,866  |                 
|Due after ten years               |       |                    | 2,375   |                 
|                                  |       |                    |         |                 
|                                  | Total |                    | $       | 440,077         
|                                  |       |                    |         |                 

51

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5.  Loans and Allowance for Loan Losses

The loan portfolio consists of the following:

|                                   |                      | December 31, |        
|---------------------------------- | -------------------- | ------------ | -------
|
|Construction and development loans |                      | $            | 168,721
|Real estate loans                  |                      |              | 447,464
|Home equity credit lines           |                      |              | 55,619 
|Installment loans                  |                      |              | 31,001 
|Credit cards and related items     |                      |              | 9,254  
|Agricultural production            |                      |              | 28,802 
|Commercial, other                  |                      |              | 182,338
|                                   |                      |              |        
|                                   |                      |              | 923,199
|                                   |                      |              |        
|Less allowance for loan losses     |                      |              | (13,280
|Less deferred loan fees, net       |                      |              | (3,232 
|                                   |                      |              |        
|                                   | TOTAL LOAN PORTFOLIO |              | $      
|                                   |                      |              |        

At
December 31, 2000, $671,804,000 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 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 $4,510,000 and $1,520,000 at December 31, 2000 and 1999, respectively. If interest income on non-accrual loans had
been recorded as originally scheduled, approximately $416,000, $231,000 and $254,000 of additional interest income would have been recorded for the years ended December 31, 2000, 1999 and 1998.
Additionally, interest income which was recognized for loans on non-accrual totaled $220,000, $243,000 and $47,000, for 2000, 1999 and 1998, respectively.

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 $10,000, $620,000 and
$321,000 in interest was recognized from these loans during 2000, 1999 and 1998, 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

52

---

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 years ended December 31, 2000, 1999 and 1998 was approximately $6,148,000, $6,621,000 and $4,243,000,
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.

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, 2000 and 1999. A summary of the changes in the allowance account
is as follows:

|                                              |                        | December 31, |       
|--------------------------------------------- | ---------------------- | ------------ | ------
|
|Balance at beginning of year                  |                        | $            | 13,105
|Additions to the allowance charged to expense |                        |              | 700   
|Loans charged off                             |                        |              | (1,192
|Recoveries of loans previously charged off    |                        |              | 667   
|                                              |                        |              |       
|                                              | BALANCE AT END OF YEAR |              | $     
|                                              |                        |              |       

53

---

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

December 31,(dollars in 000's)

2000

1999Balance, at beginning of year

$
3,482

$
6,196Additional loans made


4,317


109Payments received


(3,128
)

(2,823
)BALANCE AT END OF YEAR

$
4,671

$
3,482


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.

6.  Premises and Equipment

Premises and equipment consisted of the following:

December 31,(dollars in 000's)

2000

1999Land

$
8,482

$
8,859Buildings


24,822


24,672Furniture and equipment


17,517


16,179Construction in progress


1,330


67452,151


50,384LessAccumulated depreciation and amortization


(24,148
)

(21,102
)TOTAL PREMISES AND EQUIPMENT

$
28,003

$
29,282


Depreciation
and amortization included in occupancy expenses was $3,911,000, $3,857,000 and $4,005,000 in 2000, 1999 and 1998, respectively, based on the following estimated useful
lives:

Buildings

20-40 yearsFurniture and equipment

3-20 years


Total
rental expense for banking premises was $980,000, $1,027,000 and $1,112,000 in 2000, 1999 and 1998, respectively. As of December 31, 2000, the approximate minimum future
lease rentals payable under non-cancelable lease contracts for bank premises were as follows:

Year

(dollars in 000's)2001

$
1,0322002


9222003


7352004


7062005


652Thereafter


3,272TOTAL LEASE COMMITMENTS

$
7,319


54

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7.  Investments in Real Estate

Real estate held for sale or development includes the following:

December 31,(dollars in 000's)

2000

1999Advances to and investments in real estate joint ventures

$
228

$
406Direct investments in real estate development





1,373Allowance for losses on investments in real estate





(262
)TOTAL INVESTMENTS IN REAL ESTATE, NET

$
228

$
1,517


The
Federal Deposit Insurance Corporation (FDIC) Improvement Act (FDICIA) became law in December 1991. Under FDICIA the Bank was originally required to substantially eliminate
its real estate development activities by December 19, 1996. In July 1996, the Bank received an extension of the deadline for two years to December 31, 1998. On
December 15, 1998, the Regional Director of the FDIC extended the deadline to December 31, 2000 for good cause and no further deadlines have been imposed.

8.  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, 2000

|(dollars in 000's)                     |       | No Contractual
Maturity |         | Three Months
or Less |   | After 3 Months,
to 12 Months |         | After
One Year |         | Total  
|-------------------------------------- | ----- | ----------------------- | ------- | -------------------- | - | ---------------------------- | ------- | -------------- | ------- | -------
|Demand Deposits                        |       | $                       | 275,624 |                      | $ |                             |         | $              |        |        
|Savings, Money Market
and Now Accounts |       |                         | 606,857 |                      |   |                             |         |                |        |        
|Time Deposits$100,000 or more         |       |                         |        |                      |   | 56,374                       |         |                | 54,627  |        
|Time DepositsUnder $100,000           |       |                         |        |                      |   | 81,669                       |         |                | 114,896 |        
|                                       |       |                         |         |                      |   |                              |         |                |         |        
|                                       | Total |                         | $       | 882,481              |   | $                            | 138,043 |                | $       | 169,523
|                                       |       |                         |         |                      |   |                              |         |                |         |        

December 31, 1999

|(dollars in 000's)                     |       | No Contractual
Maturity |         | Three Months
or less |   | After 3 Months,
to 12 Months |         | After
One Year |         | Total  
|-------------------------------------- | ----- | ----------------------- | ------- | -------------------- | - | ---------------------------- | ------- | -------------- | ------- | -------
|Demand Deposits                        |       | $                       | 230,271 |                      | $ |                             |         | $              |        |        
|Savings, Money Market
and Now Accounts |       |                         | 611,119 |                      |   |                             |         |                |        |        
|Time Deposits$100,000 or more         |       |                         |        |                      |   | 45,075                       |         |                | 44,257  |        
|Time DepositsUnder $100,000           |       |                         |        |                      |   | 82,771                       |         |                | 117,775 |        
|                                       |       |                         |         |                      |   |                              |         |                |         |        
|                                       | Total |                         | $       | 841,390              |   | $                            | 127,846 |                | $       | 162,032
|                                       |       |                         |         |                      |   |                              |         |                |         |        

9.  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

55

---

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:



For those short-term instruments, the carrying amount is a reasonable estimate of fair value.



For securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.



For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated
using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

The
fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.



The fair value of demand deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit, savings accounts and money market
deposits is estimated using the rates currently offered for deposits of similar remaining maturities.



Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

56

---



Commitments to extend credit and letters of credit are written at current market rates. The Company does not anticipate any interest rate or credit factors
that would affect the fair value of commitments or letters of credit outstanding at December 31, 2000.

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

|                       |                         | 2000 |   | 1999     
|---------------------- | ----------------------- | ---- | - | ---------
|
|Financial assets:      |                         |      |   |          
|                       | Cash and due from banks |      | $ | 88,988   
|                       | Fed funds sold          |      |   |         
|                       | Investment securities   |      |   | 407,462  
|                       | Loans, net              |      |   | 906,687  
|Financial liabilities: |                         |      |   |          
|                       | Deposits                |      |   | 1,231,162
|                       | Other borrowings        |      |   | 30,240   

57

---

10.  Income Taxes

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

|(dollars in 000's)                  |          | 2000                |        | 1999   |       | 1998   |      
|----------------------------------- | -------- | ------------------- | ------ | ------ | ----- | ------ | -----
|Federal:                            |          |                     |        |        |       |        |      
|                                    | Current  |                     | $      | 10,208 |       | $      | 6,565
|                                    | Deferred |                     |        | (248   | )     |        | 1,483
|                                    |          |                     |        |        |       |        |      
|                                    |          | Total Federal Taxes |        |        | 9,960 |        |      
|                                    |          |                     |        |        |       |        |      
|State:                              |          |                     |        |        |       |        |      
|                                    | Current  |                     |        | 4,431  |       |        | 2,905
|                                    | Deferred |                     |        | (249   | )     |        | 477  
|                                    |          |                     |        |        |       |        |      
|                                    |          | Total State Taxes   |        |        | 4,182 |        |      
|                                    |          |                     |        |        |       |        |      
|TOTAL FEDERAL AND STATE TAX EXPENSE |          | $                   | 14,142 |        | $     | 11,430 |      
|                                    |          |                     |        |        |       |        |      

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)                                 |                                            | 2000 |        | 1999   |   | 1998   |       
|-------------------------------------------------- | ------------------------------------------ | ---- | ------ | ------ | - | ------ | ------
|Tax expense at federal statutory tax rate          |                                            | $    | 14,522 |        | $ | 11,719 |       
|State income tax expense                           |                                            |      | 2,434  |        |   | 1,986  |       
|Tax savings from exempt investment and loan income |                                            |      | (1,872 | )      |   | (1,391 | )     
|Merger-related expenses                            |                                            |      |       |        |   | 328    |       
|Other, net                                         |                                            |      | (942   | )      |   | (1,212 | )     
|                                                   |                                            |      |        |        |   |        |       
|                                                   | Total before change in valuation allowance |      |        | 14,142 |   |        | 11,430
|Change in valuation allowance                      |                                            |      |       |        |   |       |       
|                                                   |                                            |      |        |        |   |        |       
|                                                   | TOTAL TAX EXPENSE                          |      | $      | 14,142 |   | $      | 11,430
|                                                   |                                            |      |        |        |   |        |       

The principal items giving rise to deferred taxes were:

|(dollars in 000's)             |                      | 2000 |      | 1999 |   | 1998  |      
|------------------------------ | -------------------- | ---- | ---- | ---- | - | ----- | -----
|Allowance for loan losses      |                      | $    | (239 | )    | $ | 358   |      
|Gain on loan workouts          |                      |      | 52   |      |   | 95    |      
|Real estate joint ventures     |                      |      | 460  |      |   | 1,480 |      
|Deferred compensation          |                      |      | (558 | )    |   | (344  | )    
|Merger-related expenses        |                      |      | 637  |      |   | 336   |      
|State income taxes             |                      |      | (409 | )    |   | (516  | )    
|Provisions for OREO properties |                      |      | 155  |      |   | 137   |      
|Capital loss carryforward      |                      |      |     |      |   |      |      
|Depreciation                   |                      |      | (393 | )    |   | 482   |      
|Securitiesdiscount accretion  |                      |      | 7    |      |   | (68   | )    
|Prepaid expenses               |                      |      |     |      |   | (145  | )    
|Change in valuation allowance  |                      |      |     |      |   |      |      
|Other, net                     |                      |      | (209 | )    |   | 145   |      
|                               |                      |      |      |      |   |       |      
|                               | TOTAL DEFERRED TAXES |      | $    | (497 | ) | $     | 1,960
|                               |                      |      |      |      |   |       |      

58

---

As of December 31, the deferred tax assets and liabilities are as follows:

|(dollars in 000's)                                                                           |                                | 2000 |        | 1999  |   | 1998   |       
|-------------------------------------------------------------------------------------------- | ------------------------------ | ---- | ------ | ----- | - | ------ | ------
|Assets:                                                                                      |                                |      |        |       |   |        |       
|                                                                                             | Allowance for loan losses      |      | $      | 4,832 |   | $      | 4,593 
|                                                                                             | Gain on loan workouts          |      |        | 1,372 |   |        | 1,424 
|                                                                                             | Real estate joint ventures     |      |        |      |   |        |      
|                                                                                             | Deferred compensation          |      |        | 2,055 |   |        | 1,497 
|                                                                                             | Merger-related expenses        |      |        | 43    |   |        | 680   
|                                                                                             | State income taxes             |      |        | 1,596 |   |        | 1,187 
|                                                                                             | Provisions for OREO properties |      |        |      |   |        | 155   
|                                                                                             | Capital loss carryforward      |      |        | 183   |   |        | 183   
|                                                                                             | All other, net                 |      |        | 264   |   |        | 55    
|                                                                                             |                                |      |        |       |   |        |       
|Total Assets                                                                                 |                                |      | 10,345 |       |   | 9,774  |       
|                                                                                             |                                |      |        |       |   |        |       
|Liabilities:                                                                                 |                                |      |        |       |   |        |       
|                                                                                             | Prepaid expenses               |      |        |      |   |        |      
|                                                                                             | Real estate joint ventures     |      |        | (647  | ) |        | (187  
|                                                                                             | Depreciation and amortization  |      |        | (814  | ) |        | (1,207
|                                                                                             | Securitiesdiscount accretion  |      |        | (9    | ) |        | (2    
|                                                                                             |                                |      |        |       |   |        |       
|Total Liabilities                                                                            |                                |      | (1,470 | )     |   | (1,396 | )     
|                                                                                             |                                |      |        |       |   |        |       
|Valuation Allowance                                                                          |                                |      | (183   | )     |   | (183   | )     
|                                                                                             |                                |      |        |       |   |        |       
|Net deferred tax asset before tax effect of unrealized gain on securities available for sale |                                |      | 8,692  |       |   | 8,195  |       
|Tax effect of unrealized gain (loss) on securities available for sale                        |                                |      | (804   | )     |   | 2,472  |       
|                                                                                             |                                |      |        |       |   |        |       
|DEFERRED TAX ASSET, NET                                                                      |                                | $    | 7,888  |       | $ | 10,667 |       
|                                                                                             |                                |      |        |       |   |        |       

The
valuation allowance provides for deferred taxes that are not anticipated to be offset by taxable income projected for the next 12 months. The valuation allowance is based
on estimates by management which could change in the near term.

As
of December 31, 2000, the Company has no operating loss and tax credit carryforwards for financial reporting purposes, however, a capital loss carryforward exists that is
scheduled to expire in 2002. There are also no alternative minimum tax credit carryforwards for tax purposes.

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 $135,000 and $164,000 at
December 31, 2000 and 1999, respectively. Other borrowings also include borrowings under the Treasury Tax and Loan note account of $3,980,000 and $12,263,000 at December 31, 2000 and
1999, respectively. Securities sold under agreement to repurchase, included in other borrowings, are $125,000 and $2,930,000 at December 31, 2000 and 1999, respectively. Marketable securities
with a fair market value at least equal to the amount of the borrowing under the agreement to repurchase are utilized in these transactions.

12.  Commitments and Contingencies

At
December 31, 2000 and 1999, the Company was contingently liable for letter of credit accommodations made to its customers totaling $33,168,000 and $21,546,000, respectively.
At December 31, 2000 and 1999, the Company also had undisbursed loan commitments in the amount of $359,473,000 and $369,753,000, respectively.

59

---

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 2000, 1999 and 1998, based on the weighted average number of shares outstanding each year of 22,257,000,
22,461,000 and 22,351,000, 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 to give
effect to this split.

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   
|----------------------------------------- | ------------------------------------------------------------------- | -------- | - | ----------------------------------- |  | ------
|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
|                                          |                                                                     |          |   |                                     |  |       
|1999                                      |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:                 |                                                                     |          |   |                                     |  |       
|                                          | Net Income available to Common Stockholders                         |          | $ | 22,053                              |  | 22,461
|Effect of Dilutive Securities:            |                                                                     |          |   |                                     |  |       
|                                          | Stock Options                                                       |          |   |                                     |  | 268   
|Diluted Earnings Per Share:               |                                                                     |          |   |                                     |  |       
|                                          | Net Income available to Common Stockholders and assumed conversions |          | $ | 22,053                              |  | 22,729
|                                          |                                                                     |          |   |                                     |  |       
|1998                                      |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:                 |                                                                     |          |   |                                     |  |       
|                                          | Net Income available to Common Stockholders                         |          | $ | 20,995                              |  | 22,351
|Effect of Dilutive Securities:            |                                                                     |          |   |                                     |  |       
|                                          | Stock Options                                                       |          |   |                                     |  | 196   
|Diluted Earnings Per Share:               |                                                                     |          |   |                                     |  |       
|                                          | Net Income available to Common Stockholders and assumed conversions |          | $ | 20,995                              |  | 22,547
|                                          |                                                                     |          |   |                                     |  |       

60

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14.  Capital Accounts

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. Under these restrictions, the Bank could have made cash
dividends totaling $51,353,000 at December 31, 2000. The Company declared cash dividends during 2000 of $7,543,000.

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, 2000, 1,627,526 shares are currently under option. The shares are exercisable at prices ranging from $5.38 to $18.00. During 1999,
76,266 shares were exercised and 46,008 shares were exercised in 2000.

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 (dividend per share divided by earnings per share) ranging from 14% to 27%, expected volatility of 25%, risk-free interest rates ranging from 4.23% to 6.38% and expected
lives
of five years. The Bank's net income and earnings per share for the years ended December 31, 2000, 1999 and 1998 would have been reduced to pro forma amounts indicated below:

|(dollars in 000's except per share data)           |                             | 2000        |        | 1999 |      | 1998  
|-------------------------------------------------- | --------------------------- | ----------- | ------ | ---- | ---- | ------
|Net income to common shareholders:                 |                             |             |        |      |      |       
|As reported                                        |                             | $           | 27,349 |      | $    | 22,053
|Pro forma                                          |                             | $           | 26,241 |      | $    | 21,232
|Net income per common and common share equivalent: |                             |             |        |      |      |       
|                                                   | Basic earnings per share:   |             |        |      |      |       
|                                                   |                             | As reported |        | $    | 1.23 |       
|                                                   |                             | Pro forma   |        | $    | 1.18 |       
|                                                   | Diluted earnings per share: |             |        |      |      |       
|                                                   |                             | As reported |        | $    | 1.20 |       
|                                                   |                             | Pro forma   |        | $    | 1.15 |       

A
summary of the Bank's stock options as of December 31, 2000, 1999 and 1998, and changes during the periods then ended, is presented below:

|                                   |  | 2000      |   | 1999 |       | 1998
|---------------------------------- |  | --------- | - | ---- | ----- | ----
|
|Outstanding at beginning of period |  | 1,311,934 |   | $    | 14.57 |     
|Granted                            |  | 394,000   |   |      | 14.00 |     
|Exercised/Forfeited                |  | (78,408   | ) |      | 10.77 |     
|                                   |  |           |   |      |       |     
|Outstanding at end of period       |  | 1,627,526 |   | $    | 14.61 |     
|                                   |  |           |   |      |       |     

61

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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,
2000, 1999 and 1998 were $2,185,000, $1,814,000 and $1,738,000, respectively.

A
deferred compensation plan is also in effect to provide performance oriented deferred compensation for the Company's senior management. Allocations to the participants accounts are
made at the discretion of the Board of Directors. The amount of contributions is determined by the Board of Directors as a function of net profits and prior year return on equity. In 1999, $662,000
was contributed to participants with $820,000 contributed for 2000. Prior to the merger, the Bank began a bonus incentive system in 1996 (the Incentive Reward System) for many of the Bank's employees.
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 2000, 1999 and 1998 was a charge of
$2,253,000, $1,214,000 and $504,000, 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 2000 ranging from 2.2% of their salary to as much as 15.3% of their salary.

Prior
to the merger, BSM Bancorp through its wholly owned subsidiary, Bank of Santa Maria, paid bonuses to employees amounting to $285,000 for the year ending 1998.

Also
prior to the merger, City Commerce Bank paid bonuses to employees amounting to $98,038 and $439,000, for the years 1999 and 1998, respectively.

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, 2000, the latest regulatory examinations indicated that Mid-State Bancshares and Mid-State Bank 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 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 have changed

62

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Mid-State Bancshares' and Mid-State Bank's category. The actual capital amounts and ratios as of December 31, 2000 and 1999 are also presented in the following table:

|                                           |  | Actual |         | For Capital
Adequacy Purposes |       | To be Considered
Well Capitalized
For Capital
Adequacy Purposes
|------------------------------------------ |  | ------ | ------- | ----------------------------- | ----- | ---------------------------------------------------------------
|
|Mid-State BancsharesConsolidated:         |  |        |         |                               |       |                                                                
|As of December 31, 2000:                   |  |        |         |                               |       |                                                                
|Total Capital (to Risk Weighted Assets)    |  | $      | 187,800 |                               | 16.7% |                                                                
|Tier One Capital (to Risk Weighted Assets) |  | $      | 174,520 |                               | 15.5% |                                                                
|Tier One Capital (to Average Assets)       |  | $      | 174,520 |                               | 12.3% |                                                                
|As of December 31, 1999:                   |  |        |         |                               |       |                                                                
|Total Capital (to Risk Weighted Assets)    |  | $      | 175,151 |                               | 17.2% |                                                                
|Tier One Capital (to Risk Weighted Assets) |  | $      | 162,450 |                               | 16.0% |                                                                
|Tier One Capital (to Average Assets)       |  | $      | 162,450 |                               | 11.6% |                                                                
|Mid-State BankOnly:                       |  |        |         |                               |       |                                                                
|As of December 31, 2000:                   |  |        |         |                               |       |                                                                
|Total Capital (to Risk Weighted Assets)    |  | $      | 185,409 |                               | 16.5% |                                                                
|Tier One Capital (to Risk Weighted Assets) |  | $      | 172,129 |                               | 15.3% |                                                                
|Tier One Capital (to Average Assets)       |  | $      | 172,139 |                               | 12.1% |                                                                
|As of December 31, 1999:                   |  |        |         |                               |       |                                                                
|Total Capital (to Risk Weighted Assets)    |  | $      | 175,023 |                               | 17.2% |                                                                
|Tier One Capital (to Risk Weighted Assets) |  | $      | 162,321 |                               | 16.0% |                                                                
|Tier One Capital (to Average Assets)       |  | $      | 162,321 |                               | 11.6% |                                                                

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 three reportable business segments,
Community Banking, Mid-Coast Land Company, 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. There is no major customer and the Company operates within a single geographic area.

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 the activities of the holding Company (excluding equity in earnings of subsidiaries) and certain
non-recurring items such as merger related expenses of $2.9 and $7.4 million in 1999 and 1998, respectively, and the reversal of the reserve for losses on investments in real estate
of $5.3 million in 1998. These items are not considered attributable to the assessment of performance of the business segments to which they relate.

63

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Below is a summary statement of income and certain selected financial data for each of the three years ended December 31, 2000. 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, 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 |   | All Other |  | Mid-State Bancshares
|-------------------- |  | ----------------- | ------- | ---------------------- | - | --------- |  | --------------------
|
|Interest Income      |  | $                 | 109,946 |                        | $ | 99,565    |  | $                   
|Interest Expense     |  |                   | 27,599  |                        |   | 26,071    |  |                     
|Net Interest Income  |  |                   | 82,347  |                        |   | 73,494    |  |                     
|Provision            |  |                   | 700     |                        |   | 50        |  |                     
|Non Interest Income  |  |                   | 16,950  |                        |   | 16,680    |  |                     
|Non Interest Expense |  |                   | 57,851  |                        |   | 53,614    |  |                     
|                     |  |                   |         |                        |   |           |  |                     
|Pre-Tax Income       |  | $                 | 40,746  |                        | $ | 36,510    |  | $                   
|                     |  |                   |         |                        |   |           |  |                     
|Average Assets       |  |                   |         |                        |   |           |  |                     
|(in millions)        |  | $                 | 1,387   |                        | $ | 1,385     |  | $                   

19.  Parent Company Financial Information

Condensed financial information of Mid-State Bancshares (parent only) follows:

(dollars
in 000's)

Condensed Balance Sheets

|                                     |                   | December 31,                              
|------------------------------------ | ----------------- | ------------------------------------------
|
|Cash                                 |                   | $                                         
|Investment in Mid-State Bank         |                   |                                           
|Other Assets                         |                   |                                           
|                                     |                   |                                           
|                                     | Total Assets      |                                           
|                                     |                   |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY |                   |                                           
|Dividend Payable                     |                   | $                                         
|Accrued Liabilities                  |                   |                                           
|                                     |                   |                                           
|                                     | Total Liabilities |                                           
|Shareholders' Equity                 |                   |                                           
|                                     |                   |                                           
|                                     |                   | Total Liabilities and Shareholders' Equity
|                                     |                   |                                           

64

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Condensed Income Statements

|                                    |               | December 31, |       
|----------------------------------- | ------------- | ------------ | ------
|
|Equity in earnings of subsidiaries: |               |              |       
|                                    | Undistributed |              | $     
|                                    | Dividends     |              |       
|Operating Expenses                  |               |              | (599  
|Income Tax Benefit                  |               |              | 251   
|                                    |               |              |       
|Net Income                          |               | $            | 27,349
|                                    |               |              |       

Condensed Statements of Cash Flows

|                                                                                  |                                  | December 31, |                                                    
|--------------------------------------------------------------------------------- | -------------------------------- | ------------ | ---------------------------------------------------
|
|Cash flows from operation activities:                                             |                                  |              |                                                    
|Net Income                                                                        |                                  | $            | 27,349                                             
|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) provided by financing activities
|                                                                                  |                                  |              |                                                    
|Net Increase (Decrease) in Cash                                                   |                                  |              | 1,993                                              
|Cash, beginning of year                                                           |                                  |              | 158                                                
|                                                                                  |                                  |              |                                                    
|Cash, at end of year                                                              |                                  | $            | 2,151                                              
|                                                                                  |                                  |              |                                                    

65

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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, 2000 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, 2000. 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, 2000.

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, 2000.

|                                                                    |  |                                                                                     
|------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------
|/s/CARROL R. PRUETTCarrol R. Pruett President
Chairman of the Board |  | /s/JAMES G. STATHOSJames G. Stathos Executive Vice President
Chief Financial Officer

66

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Report of Independent Public Accountants

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

We
have examined management's assertions that Mid-State Bancshares and Subsidiary maintained an effective internal control structure over financial reporting as of
December 31, 2000 included in the accompanying Management Statement.

Our
examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of
the internal control structure over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control structure and 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 structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control
structure over financial reporting to future periods are subject to the risk that the internal control structure 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 Subsidiary maintained an effective internal control structure over financial reporting as of
December 31, 2000, 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.

|                                          |  | 
|----------------------------------------- |  | 
|/s/ARTHUR ANDERSEN LLPARTHUR ANDERSEN LLP |  | 
|                                          |  | 

Orange County, California
January 19, 2001

67

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

None.

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 2001 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 2001 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 2001 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 2001 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Exhibits:

|Exhibit
Number |  | Index to Exhibits                                                                                                                                                           
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Plan of Reorganization and merger Agreement between Bancorp, the Bank and BSM Merger Company in connection with the formation of Bancorp as a holding company for the Bank 1
|2.2            |  | Agreement to Merge and Plan of Reorganization dated January 29, 1998 and amended on March 27, 1998 by and between Bancorp, Bank and Mid-State 2                             
|2.3            |  | Agreement to Merge dated April 19, 1999 by and between Mid-State Bancshares and City Commerce Bank. 3                                                                       
|3.1            |  | Articles of Incorporation, as amended 4                                                                                                                                     
|3.2            |  | Bylaws of Registrant 4                                                                                                                                                      
|4.1            |  | Specimen Certificate evidencing shares of Mid-State Bancshares Common Stock 5                                                                                               
|10.1           |  | Mid-State Bancshares 1996 Stock Option Plan, form of Stock Option Agreement and form of Substitute Stock Option Agreement 6                                                 
|10.2           |  | Deferred Compensation Plan 7                                                                                                                                                
|10.3           |  | Profit Sharing and Salary Deferral 401(k) Plan 7                                                                                                                            
|10.4           |  | Change in Control Agreement for Carrol R. Pruett 7                                                                                                                          
|10.5           |  | Change in Control Agreement for T. E. Reese 7                                                                                                                               

68

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|10.6  |  | Change in Control Agreement for James G. Stathos 7                         
|----- |  | ---------------------------------------------------------------------------
|10.7  |  | Change in Control Agreement for Steven Harding 7                           
|10.8  |  | Change in Control Agreement for Michael Gibson 7                           
|10.9  |  | Change in Control Agreement for Debbie Zimmer 7                            
|10.10 |  | Change in Control Agreement for John Arellano 7                            
|10.11 |  | Change in Control Agreement for Karen Campbe11 7                           
|10.12 |  | Change in Control Agreement for James W. Lokey 8                           
|10.13 |  | Mid-State Bancshares Stock Option Plan, as amended 9                       
|16    |  | Letter regarding change in certifying accountants 10                       
|21    |  | Subsidiary of Mid-State BancsharesMid-State Bank is the only subsidiary 11
|23.1  |  | Consent of independent public accountantsArthur Andersen LLP 12           
|23.2  |  | Consent of independent public auditorKPMG LLP 12                          

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(b) Schedules:

Not Applicable

(c) Reports on Form 8-K

During the fourth quarter of 2000, the Company did not file any Reports.

Notice
of Annual Meeting and Proxy Statement for the Bank's 2001 Annual Meeting will be mailed to shareholders subsequent to the date of filing of this Report. Copies of said
materials will be furnished to the FDIC in accordance with applicable rules and regulations.

69

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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 27, 2001
| |  |                      
| |  |                      
| |  | Dated: March 27, 2001

70

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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 27, 2001
|/s/JAMES W. LOKEYJAMES W. LOKEY           |  | Director              |  | March 27, 2001
|/s/GRACIA B. BELLOGRACIA B. BELLO         |  | Director              |  | March 27, 2001
|/s/A. J. DIANIA. J. DIANI                 |  | Director              |  | March 27, 2001
|/s/DARYL L. FLOODDARYL L. FLOOD           |  | Director              |  | March 27, 2001
|/s/TRUDI CAREYTRUDI CAREY                 |  | Director              |  | March 27, 2001
|/s/H. EDWARD HERONH. EDWARD HERON         |  | Director              |  | March 27, 2001
|/s/RAYMOND E. JONESRAYMOND E. JONES       |  | Director              |  | March 27, 2001
|/s/STEPHEN P. MAGUIRESTEPHEN P. MAGUIRE   |  | Director              |  | March 27, 2001
|/s/GREGORY R. MORRISGREGORY R. MORRIS     |  | Director              |  | March 27, 2001
|/s/WILLIAM L. SNELLINGWILLIAM L. SNELLING |  | Director              |  | March 27, 2001

71

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                  |  | 
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|2.1            |  | Plan of Reorganization and merger Agreement between Bancorp, the Bank and BSM Merger Company in connection with the formation of Bancorp as a holding company for the Bank 1 |  | 
|2.2            |  | Agreement to Merge and Plan of Reorganization dated January 29, 1998 and amended on March 27, 1998 by and between Bancorp, Bank and Mid-State 2                              |  | 
|2.3            |  | Agreement to Merge dated April 19, 1999 by and between Mid-State Bancshares and City Commerce Bank. 3                                                                        |  | 
|3.1            |  | Articles of Incorporation, as amended 4                                                                                                                                      |  | 
|3.2            |  | Bylaws of Registrant 4                                                                                                                                                       |  | 
|4.1            |  | Specimen Certificate evidencing shares of Mid-State Bancshares Common Stock 5                                                                                                |  | 
|10.1           |  | Mid-State Bancshares 1996 Stock Option Plan, form of Stock Option Agreement and form of Substitute Stock Option Agreement 6                                                  |  | 
|10.2           |  | Deferred Compensation Plan 7                                                                                                                                                 |  | 
|10.3           |  | Profit Sharing and Salary Deferral 401(k) Plan 7                                                                                                                             |  | 
|10.4           |  | Change in Control Agreement for Carrol R. Pruett 7                                                                                                                           |  | 
|10.5           |  | Change in Control Agreement for T. E. Reese 7                                                                                                                                |  | 
|10.6           |  | Change in Control Agreement for James G. Stathos 7                                                                                                                           |  | 
|10.7           |  | Change in Control Agreement for Steven Harding 7                                                                                                                             |  | 
|10.8           |  | Change in Control Agreement for Michael Gibson 7                                                                                                                             |  | 
|10.9           |  | Change in Control Agreement for Debbie Zimmer 7                                                                                                                              |  | 
|10.10          |  | Change in Control Agreement for John Arellano 7                                                                                                                              |  | 
|10.11          |  | Change in Control Agreement for Karen Campbe11 7                                                                                                                             |  | 
|10.12          |  | Change in Control Agreement for James W. Lokey 8                                                                                                                             |  | 
|10.13          |  | Mid-State Bancshares Stock Option Plan, as amended 9                                                                                                                         |  | 
|16             |  | Letter regarding change in certifying accountants 10                                                                                                                         |  | 
|21             |  | Subsidiary of Mid-State BancsharesMid-State Bank is the only subsidiary 11                                                                                                  |  | 
|23.1           |  | Consent of independent public accountantsArthur Andersen LLP 12                                                                                                             |  | 
|23.2           |  | Consent of independent public auditorKPMG LLP 12                                                                                                                            |  | 

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