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

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FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2001

or

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-23925

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

California

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

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

93420(Address of principal executive offices)

(Zip Code)


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

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

Common Stock
(no par value)Securities registered pursuant to Section 12(g) of the Act:

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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 ý    No o

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. ý

The
aggregate market value of the common stock held by non-affiliates of the registrant as of March 21, 2002 was $391,693,557.

The
number of shares of common stock of the registrant outstanding as of March 21, 2002 was 24,093,810.

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

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TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|ITEM 1.  |  | BUSINESS                                                                              |  | 3   
|ITEM 2.  |  | PROPERTIES                                                                            |  | 20  
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 22  
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 22  
|PART II 
|ITEM 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                 |  | 23  
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 25  
|ITEM 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 26  
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                             |  | 42  
|ITEM 8   |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 43  
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 74  
|PART III
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 75  
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  | 75  
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 75  
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 75  
|ITEM 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                       |  | 76  

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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 "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in interest rates, changes in business
strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Company's business, economic, political and global changes
arising from the terrorist attacks of September 11, 2001 and their aftermath, and other factors referenced in this report, including in "Item 1. Business-Factors that May Affect Future Results of
Operations." The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect
future events or developments.

ITEM 1. BUSINESS

Mid-State Bancshares and Mid-State Bank & Trust

Mid-State Bancshares (the Company) is the parent company to Mid-State Bank & Trust (the Bank), its 100% owned principal subsidiary. Mid-State Bancshares (formerly
BSM Bancorp) was renamed on July 10, 1998, the effective date of the merger of Bank of Santa Maria with and into Mid-State Bank & Trust. The Company is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended (BHC Act) and is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (Federal Reserve Board).

Mid-State
Bank & Trust was incorporated under the laws of the State of California and commenced operations on June 12, 1961 as a California state chartered bank. The Bank's accounts are
insured by the Federal Deposit Insurance Corporation (FDIC), but it is not a member of the Federal Reserve System. At December 31, 2001 the Company had total assets of $1.85 billion, total deposits of
$1.58 billion and total shareholders' equity of $234.6 million.

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

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

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

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

Bank Subsidiaries

The Bank operates two wholly owned subsidiariesMid-Coast Land Company and MSB Properties. Mid-Coast Land Company was founded in 1984 pursuant to
section 751.3 of the Financial Code of the State of California. Section 751.3 provided that State chartered banks were authorized to invest in a corporation that engaged in real estate activities.
Under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) which became law in December 1991, the Bank, through Mid-Coast Land Company, was required to divest itself of its real estate
development activities. That process has now been substantially completed. The holdings and results of operations of Mid-Coast Land are included
within the consolidated financial statements of the Company. For further information concerning Mid-Coast Land Company, see the Subsidiary Activity section of the Management's Discussion and Analysis
section included in Item 7. Of this Report 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
$1.7 million, $1.4 million, and $1.5 million in 2001, 2000, and 1999, respectively. For further information concerning MSB Properties, see the Subsidiary Activity portions of the Management's
Discussion and Analysis section included in Item 7 of this Report.

Acquisition of 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. City Commerce had assets totaling approximately
$150 million with branch locations in Santa Barbara, Goleta and Oxnard.

Acquisition of Americorp/American Commercial Bank

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

The
aggregate purchase price was $71.5 million, which includes (1) $31.6 million cash paid to Americorp shareholders and for other merger related expenses and (2) $39.9 million in
Mid-State Bancshares' common stock and substitute common stock options issued. The value of the 2.45 million shares issued was determined based on the average closing market price of Mid-State
Bancshares' common

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stock over the twenty consecutive trading days that Mid-State Bancshares' stock traded ending September 21, 2001. The average price of Mid-State Bancshares' stock over that period was $15.9853. The
merger was accounted for utilizing the purchase method of accounting.

Selection of New Bank President

On February 4, 2000, the Board of Directors of Mid-State Bank & Trust announced that they had selected Mr. James W. Lokey to be President and Chief Executive
Officer of Mid-State Bank & Trust. In addition, Mr. Lokey was also appointed to the Board of Directors. He became President and Chief Executive Officer of Mid-State Bancshares, the parent company, on
June 13, 2001. Mr. Carrol R. Pruett, formerly President, remains active as Chairman of the Board of Mid-State Bank & Trust and of Mid-State Bancshares.

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.

New Appointees 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 is a licensed architect, real estate broker and general contractor in the state of California since
1978. In 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.

Former
Americorp Chairman, Robert J. Lagomarsino, joined the Board of Directors of Mid-State Bancshares as part of the merger between Americorp and Mid-State Bancshares. Mr. Lagomarsino,
whose father Emil, founded American Commercial Bank, served nearly 19 years in the United States House of Representatives. He also served 12 years in the California Senate, representing Ventura and
Santa Barbara Counties. A native of Ventura, Mr. Lagomarsino served in the U.S. Navy during World War II. He is a graduate of the University of California at Santa Barbara and the Santa Clara
University School of Law. He is President of Lagomarsino Minerals and Vice President of Lagomarsino's Inc.

New Trust Department

Mid-State Bank & Trust formally opened its new Trust Department on January 2, 2001, to provide trust, investment management and estate settlement services in San
Luis Obispo, Santa Barbara, and Ventura Counties. The Trust Department offers a variety of financial and trust-related services including: trustee or successor trustee for trust accounts, estate
settlement services, guardianships and

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conservatorships for minors and adults who are no longer able to manage their own affairs. In addition, the Trust Department offers 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 also provides custody services for
customers' financial assets. Its main office is located in the Bank's San Luis Obispo branch at 75 Santa Rosa Street.

New Leasing Department

In June of 2001, Mid-State Bank & Trust opened a new leasing department to serve business customers in Ventura, Santa Barbara, and San Luis Obispo Counties. The
department is the only bank leasing department headquartered between Santa Barbara and Monterey. The Bank leases business equipment for construction, agriculture, aviation, marine, industrial and
manufacturing, transportation, medical, and warehouse uses. The Bank also leases office equipment and medium and heavy duty class trucks. Mid-State Bank & Trust offers a number of lease structures
with varying tax and accounting advantages to fit most business' needs.

Stock Repurchase Program

The Board of Directors authorized a stock repurchase program for up to five percent (5%) of its outstanding shares in March of 2000. The buyback was expected to
reduce the number of outstanding shares resulting in an improvement to the Company's earnings per share and to its return on equity. These repurchases are being made from time to time by the Company
in the open market or privately
negotiated transactions in compliance with the Securities and Exchange Commission (SEC) rules. The program began in April of 2000 and has been extended to complete the purchase of the originally
authorized 1,130,000 shares. As of December 31, 2001 the Company has repurchased a total of 1,055,438 shares and has 74,562 shares remaining to repurchase.

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, and SBA loans. Other services offered by the Bank include, but are not limited to, trust services, safe deposit boxes,
travelers cheques, notary public, merchant depository services for VISA and Mastercard, cash management, home banking, telephone voice response system and ATM's. The Bank's organization and structure
is designed to serve the banking needs of individuals and small to medium sized businesses in Santa Barbara, Ventura and San Luis Obispo counties.

Deposit and Liability Management

Deposits represent the Bank's primary source of funds. As of December 31, 2001 the Bank had approximately 35,431 non interest bearing demand deposit accounts
representing $367.4 million, or $10,369 per account. The Bank also had over 110,883 NOW, Money Market and Savings accounts amounting to $769.2 million, or about $6,937 per account. There were over
19,485 time certificates of deposit outstanding at December 31, 2001, representing $447.6 million with an average deposit balance of approximately $22,972. Of the total time certificates of deposit,
only $167.0 million represented holders who carried an amount on deposit of $100,000 or more, approximately 37% of the total.

The
Bank is not dependent on a single or a few customers for its deposits. Most deposits are obtained from individuals and small to medium sized businesses. This results in the
relatively small average balances noted above and allows the Bank to be less subject to the adverse effects of the loss of a large depositor. As

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of December 31, 2001, no individual, corporate, or public depositor accounted for more than 2% of the Bank's total deposits.

Liquidity
is the Bank's ability to meet fluctuations in deposit levels and to provide for the credit needs of its customers. The objective in liquidity management is to maintain a
balance between the sources and uses of funds. Principal sources of liquidity include interest and principal payments on loans and investments, proceeds from the maturity of investments and growth in
deposits. The Bank holds overnight Fed Funds Sold as a cushion for temporary liquidity needs. For 2001, Fed Funds Sold
averaged $59.9 million representing 3.8% of average assets. In addition, the Bank maintains Federal Funds lines of $70 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 34.1%well above the Bank's policy minimum of 15%.

Loans

The Bank's Loan to Deposit ratio stood at approximately 71.3% at year-end 2001. 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 uncollectable are charged to the allowance; subsequent recoveries are credited to the allowance. The amount in the loan loss allowance is an estimate of the losses inherent in the loan portfolio
as determined by a variety of factors considered by Management. Factors include, but are not limited to, the current economic climate, type and quality of loans in the portfolio, trends in
delinquencies, losses, non-accrual totals, diversification of the portfolio, value of available collateral and the cost of collateral liquidation.

As
of December 31, 2001, the Bank's allowance for loan losses stood at $20.7 million or 1.8% of gross loans. It also represents 562% of non-performing loans (non-accrual loans plus loans
90 days or more past due). Outside factors, not within the Bank's control, such as adverse changes in the economy, can 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 2001, the Bank experienced charge-offs, net of recoveries, of $2.2 million, or
0.22% 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 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 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, 2001, Mid-State Bank's gross loan portfolio totaled $1.2 billion. The portfolio is distributed as follows:

Construction and Land Development

18.8
%Real EstateFarmland

2.0
%Real EstateResidential

5.1
%Real EstateNon Farm, Non Residential

39.7
%Home Equity Credit Lines

6.0
%Credit Reserve

0.3
%Installment

3.1
%Agricultural Production

3.0
%Commercial, Other

22.0
%100.0
%


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

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

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 (maturity of one year or less) loans to individuals and developers with whom the Bank has established relationships, for the construction primarily of single family residences in the Bank's
market area.

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

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

Commercial Real Estate Term Loans.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-user properties) or have income derived from tenants (investment properties). The Bank's loan
policies require the principal balance of the loan to be no more than 70% of the stabilized appraised value of the underlying real estate collateral. The loans, which are typically secured by first
deeds of trust only, generally have terms of no more than ten years and are amortized over 25 to 30 years. Some of these loans have rates tied to the prime rate that adjust whenever the prime rate
changes. The remaining loans adjust every 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 reserve lines of credit. Installment loans tend to be fixed rate and longer-term (one-to-five-year maturity). The
Bank's portfolio of revolving credit plans, issued as an additional service to its clients, is minimal at just 0.3% of total loans.

Investment Securities

The Bank maintains a portfolio of investment securities to provide income and to serve as a secondary source of liquidity for its operations in conjunction with
Federal Funds Sold (see Deposit and Liability Management above). The Bank's investment policy provides for the purchase of United States Treasury Securities, United States Government Agency
Securities, Mortgage Backed Securities, Obligations of State and Political Subdivisions, and Other Securities as permitted by Federal and State regulation. As of December 31, 2001, the aggregate
carrying value of the Investment Portfolio was $451.3 million. Of this total, $41.2 million was invested in U.S. Treasury Securities, $165.8 million in U.S. Government Agencies, $3.7 million in
Mortgage Backed Securities, $225.5 million in Obligations of State and Political Subdivisions and $15.2 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, 2001, the Bank had public funds totaling approximately $42.8 million.
The Bank has made available $54.0 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 Tri-county area, according to the U.S. Bureau of the Census, is
estimated at July 2000 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

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a fairly stable tourist industry from larger metropolitan areas such as the Los Angeles/Orange County basin and the San Francisco Bay area. Real estate values throughout the Tri-counties have
steadily increased in recent years, having remained strong even through the economic slow-down experienced in 2001. 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.

Competition

The banking business in California generally, and in the Bank's primary service areas specifically, is highly competitive with respect to both loans and deposits
and is dominated by a relatively small number of major banks with many offices and operations over a wide geographic area. Among the advantages such major banks have over the Bank are their ability to
finance wide-ranging advertising campaigns and to allocate their investment assets to regions of higher yield and demand. Such banks offer certain services such as international banking which is not
offered directly by the Bank, but which can be offered indirectly by the Bank through correspondent institutions. In addition, by virtue of their greater total capitalization, such banks have
substantially higher lending limits than the Bank. (Legal lending limits to an individual customer are based upon a percentage of a bank's total capital accounts.) The Bank's secured and unsecured
lending limits at December 31, 2001, were approximately $63.8 million and $38.3 million, respectively. These levels are up from $47.0 million and $28.2 million, respectively, at December 31, 2000 in
large part due to the merger with American Commercial Bank.

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.

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

It
should also be noted that the trend toward consolidation of banking assets exhibited over the past few years in California continued in 2001. Statewide, 27 banks were merged out of
existence during the year and 16 new banks commenced operation. One of those occurred locally with Mid-State's acquisition of American Commercial Bank in Ventura. Two new banks were started in the
Bank's trade area during 2001, one in Santa Maria and another in Santa Barbara.

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Employees

At December 31, 2001, the Bank had a total of 865 employees. A number of these employees are part-time however. On a full-time equivalent basis, employees
represent 764 positions. The Bank believes that its employee relations are positive.

Effect of Governmental Policies and Legislation

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

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

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

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

11

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outstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks
or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities
that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

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

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

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

The Bank

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

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

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

12

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Capital Standards

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

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

In
addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform
risk-based capital 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, 2001
compared to
minimum applicable regulatory capital requirements and the requirement to be a "well capitalized" bank.

December 31, 2001

Company
Actual

Bank
Actual

Minimum
Capital
Requirement

Well
CapitalizedLeverage Ratio

10.2
%
10.0
%
4.0
%
5.0
%Tier One Risk-Based Ratio

13.8
%
13.5
%
4.0
%
6.0
%Total Risk-Based Ratio

15.0
%
14.8
%
8.0
%
10.0
%


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

13

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Prompt Corrective Action and Other Enforcement Mechanisms

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

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

Safety and Soundness Standards

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

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

14

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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 fourth quarter of 2001 at approximately $.0184 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.

Financial Services Modernization Legislation

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act") was signed into law. The Financial Services Modernization
Act 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 has had thus far, or will have in the near term, a material adverse effect on their operations.
However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services
Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result
of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more
financial resources than the Company and the Bank.

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. "Financial in nature" activities include: securities underwriting; securities dealing and
market making; sponsoring mutual funds and investment

15

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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 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.

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.

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.

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 require disclosure of privacy policies to consumers and, in some circumstances, 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 was optional until July 1, 2001. The Bank adopted these rules and implemented these provisions in May of 2001. These privacy provisions affect how consumer
information is transmitted through diversified financial companies and conveyed to outside vendors. Management does not believe there has been a material 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 was 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:

16

---

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. The Bank was largely unaffected by these rules as it does not
currently market insurance or annuity products.

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 were effective July 1, 2001. The Bank adopted these guidelines and implemented these
provisions in May of 2001. The implementation did not have a significant impact on the Bank's operations.

Community Reinvestment Act

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

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

Accounting Changes

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

Off Balance Sheet and Other Related Party Transactions

As noted in Footnote 12 to the financial statements, the Company is contingently liable for letter of credit accommodations made to its customers in the ordinary
course of business totaling $31.8 million at December 31, 2001, down from $33.2 million one year earlier. Additionally, the Company has undisbursed

17

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loan commitments, also made in the ordinary course of business, totaling $368.5 million, which was up from the $359.5 million outstanding one year earlier.

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

As
noted in Footnote 5 to the financial statements, the Company does make loans to related parties (directors and officers) in the ordinary course of business at prevailing rates and
terms. These loans totaled $14.3 million at the end of 2001 compared to $15.9 million one year earlier.

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, 2001, real estate served as the principal source of collateral with respect to approximately 71.6% percent of the Company's loan portfolio. A decline in current economic conditions or
rising interest rates could have an adverse effect on the demand for new loans, the ability
of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by the Bank, as well as the Company's financial condition and
results of operations in general and the market value of the Company's common stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real
estate that secures these loans, may also negatively impact the Company's financial condition.

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

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

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

Borrowers' Failure to Perform.A significant number of the Bank's borrowers and guarantors may fail to perform their
obligations as required by the terms of their loans, which could result in larger than

18

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expected losses. This risk increases when the economy is weak, as it has been recently. The Bank has adopted underwriting and credit policies, and loan monitoring procedures, including the
establishment and monitoring of allowances for credit losses. Management believes these provisions are reasonable and adequate, and should keep credit losses within expected limits by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the credit portfolio. However, these
policies and procedures may not be adequate to prevent unexpected losses that could materially and adversely affect the results of operations.

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

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

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

In
addition, the USA PATRIOT Act, which became effective December 25, 2001 as part of the war on terrorism, imposes substantial new responsibilities on banks for preventing, detecting
and reporting flows of funds to terrorist organizations. The act also directs the Treasury Department to prepare detailed regulations for these purposes, such as new recordkeeping requirements,
verification standards for customer identification and sharing information with the government. The full impact of the new law and its implementing regulations on the Company and the Bank cannot be
predicted at this time.

19

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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, 2001, the Bank owned 23 of its branch offices and
leased 16 other Bank locations. The Company believes its present facilities are adequate for its present needs.

|Owned by Bank or Subsidiary: |  | Location of Offices        |  | Encumbrance
|---------------------------- |  | -------------------------- |  | -----------
|Arroyo Grande*               |  | 991 Bennett Avenue         |  | NONE       
|Arroyo Grande                |  | 1026 Grand Avenue          |  | NONE       
|Arroyo Grande*               |  | 550 Camino Mercado         |  | NONE       
|Arroyo Grande*               |  | 398 Sunrise Terrace        |  | NONE       
|Atascadero                   |  | 6950 El Camino Real        |  | $104,147.13
|Buellton                     |  | West Highway 246 & Central |  | NONE       
|Cambria                      |  | 1070 Main Street           |  | NONE       
|Goleta Valley                |  | 5956 Calle Real            |  | NONE       
|Grover Beach                 |  | 899 Grand Avenue           |  | NONE       
|Grover Beach*                |  | 140 North Second Street    |  | NONE       
|Guadalupe                    |  | 905 Guadalupe Street       |  | NONE       
|Lompoc                       |  | 828 North "H" Street       |  | NONE       
|Los Osos                     |  | 1001 Los Osos Valley Road  |  | NONE       
|Morro Bay                    |  | 251 Harbor Street          |  | NONE       
|Nipomo                       |  | 615 West Tefft Street      |  | NONE       
|Paso Robles                  |  | 845 Spring Street          |  | NONE       
|Pismo Beach                  |  | 801 Price Street           |  | NONE       
|San Luis Obispo              |  | 75 Santa Rosa              |  | NONE       
|San Luis Obispo              |  | 2276 Broad Street          |  | NONE       
|Santa Barbara                |  | 33 East Carrillo Street    |  | NONE       
|Santa Barbara                |  | 2222 Bath Street           |  | NONE       
|Santa Maria                  |  | 720 North Broadway         |  | NONE       
|Santa Maria                  |  | 2739 Santa Maria Way       |  | NONE       
|Santa Maria                  |  | 1554 South Broadway        |  | NONE       
|Santa Maria                  |  | 519 E. Main Street         |  | NONE       
|Templeton                    |  | 1025 Las Tablas Road       |  | NONE       
|Vandenberg Village           |  | 3745 Constellation Road    |  | NONE       

20

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Leased by Bank or Subsidiary

|Arroyo Grande  |                             | 1132 West Branch Street        |  | $2,850.00 per month   
|-------------- | --------------------------- | ------------------------------ |  | ----------------------
|               | West Branch In Store Office |                                |  |                       
|Camarillo      |                             | 470 Arneill Road               |  | $6,231.68 per month   
|               | Camarillo Financial Center  |                                |  |                       
|Camarillo **   |                             | 2357 Pickwick Drive, Suite B   |  | $3,951 72 per month   
|               |                             |                                |  | Expires July, 2005    
|Camarillo **   |                             | 2245 Ventura Blvd.             |  | $5,754.47 per month   
|               |                             |                                |  | Expires May, 2002     
|Cayucos        |                             | 107 North Ocean Avenue         |  | $1,565.00 per month   
|               |                             |                                |  | Expires November, 2007
|Goleta Valley  |                             | 5340 Hollister Avenue          |  | $4,226.00 per month   
|               | Hollister Office            |                                |  |                       
|Orcutt         |                             | 1110 East Clark Avenue         |  | $11,240.00 per month  
|               |                             |                                |  | Expires October, 2010 
|Oxnard         |                             | 300 Esplanade Drive, Suite 101 |  | $12,994.15 per month  
|               | Esplanade Financial Center  |                                |  |                       
|Oxnard *       |                             | 300 Esplanade Drive, Suite 110 |  | $10,583.91 per month  
|               |                             |                                |  | Expires August, 2012  
|Oxnard         |                             | 155 "A" Street                 |  | $5,743.26 per month   
|               | Downtown Oxnard Office      |                                |  |                       
|Oxnard         |                             | 121-125 Gonzales Boulevard     |  | $6,044.12 per month   
|               | Northside Plaza Office      |                                |  |                       
|Paso Robles    |                             | 705 Golden Hill Road           |  | $8,510.00 per month   
|               | Creston Road Office         |                                |  |                       
|Pismo Beach    |                             | 865 Oak Park Boulevard         |  | $11,042.00 per month  
|               | Oak Park Office             |                                |  |                       
|Santa Barbara  |                             | 914 Carpinteria Street         |  | $10,090.29 per month  
|               | Milpas Office               |                                |  |                       
|Santa Maria*** |                             | 720 North Broadway             |  | $2,226.00 per month   
|               | North Broadway Office-Land  |                                |  |                       
|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   
|Ventura        |                             | 300 S. Mills Road              |  | $7,975.88 per month   
|               | Mills Road Financial Center |                                |  |                       
|Ventura        |                             | 304 E. Main Street             |  | $9,879.00 per month   
|               | Downtown Ventura Office     |                                |  |                       
|Ventura        |                             | 6401 E. Telephone Road         |  | $14,113.45 per month  
|               | County Center Office        |                                |  |                       

21

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

|Nipomo |              | 630 W. Tefft Street |  | $3,671.37 per month
|------ | ------------ | ------------------- |  | -------------------
|       | Ground Lease |                     |  |                    

---

ITEM 3. LEGAL PROCEEDINGS

The Company is, from time to time, subject to various pending and threatened legal actions which arise out of the normal course of its business. The Company is
not a party to any pending legal or administrative proceedings as of December 31, 2001 (other than ordinary routine litigation incidental to the Company's business) and no such proceedings are known
to be contemplated.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of 2001.

22

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PART II

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

Market Information

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

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 on NASDAQ, setting forth the approximate high and low trade prices for each quarterly period ended since January
1, 2000. All prices shown below have been adjusted to reflect the two for one stock split which became effective February 26, 2001.

Sales PricesQuarter Ended
2000Low

HighMarch 31

$
10.50

$
14.00June 30

$
13.25

$
14.00September 30

$
14.69

$
15.94December 31

$
14.50

$
18.63


Sales PricesQuarter Ended
2001Low

HighMarch 31

$
13.52

$
17.38June 30

$
13.50

$
18.32September 30

$
13.90

$
18.05December 31

$
14.10

$
17.40


Holders

As of December 31, 2001, there were approximately 3,600 holders of the Company's Common Stock. There are no other classes of common equity outstanding.

Dividends

The Company is a legal entity separate and distinct from the Bank. The Company's shareholders are entitled to receive dividends when declared by its Board of
Directors, out of funds legally available 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 1-1/4 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 1-1/4 times its current liabilities.

The
ability of the Company to pay a cash dividend depends largely on the Bank's ability to pay a cash dividend to the Company. The payment of cash dividends by the Bank is subject to
restrictions set forth in

23

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

The
following table sets forth the per share amount and month of payment for all cash dividends paid since January 1, 2000.

Payable Date

DividendJanuary 18, 2000

$0.07 per shareApril 17, 2000

$0.08 per shareJuly 17, 2000

$0.08 per shareOctober 16, 2000

$0.09 per shareJanuary 16, 2001

$0.09 per shareApril 16, 2001

$0.09 per shareJuly 16, 2001

$0.09 per shareOctober 15, 2001

$0.09 per shareJanuary 16, 2002

$0.10 per 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

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



Alternatively,
Mellon Investor Services, LLC can be contacted via the Internet atwww.mellon-investor.com.

24

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ITEM 6. SELECTED FINANCIAL DATA

Selected Consolidated Financial DataMid-State Bancshares

|(In thousands)                                   |              | 2001                                       |           | 2000      |           | 1999      |           | 1998      |           | 1997      |          
|------------------------------------------------ | ------------ | ------------------------------------------ | --------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | ---------
|Year Ended December 31:                          |              |                                            |           |           |           |           |           |           |           |           |          
|Interest Income (not taxable equivalent)         |              | $                                          | 114,002   |           | $         | 109,967   |           | $         | 99,627    |           | $        
|Interest Expense                                 |              |                                            | 26,480    |           |           | 27,599    |           |           | 26,071    |           |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Net Interest Income                              |              |                                            | 87,522    |           |           | 82,368    |           |           | 73,556    |           |          
|Provision for Loan Losses                        |              |                                            | 4,100     |           |           | 700       |           |           | 50        |           |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Net Interest Income after prov. for loan losses  |              |                                            | 83,422    |           |           | 81,668    |           |           | 73,506    |           |          
|Non-interest income                              |              |                                            | 23,254    |           |           | 17,805    |           |           | 17,465    |           |          
|Non-interest expenseoperating                   |              |                                            | 64,444    |           |           | 57,982    |           |           | 54,558    |           |          
|Non-interest expensenon recurring merger        |              |                                            | 300       |           |           |          |           |           | 2,930     |           |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Income before income taxes                       |              |                                            | 41,932    |           |           | 41,491    |           |           | 33,483    |           |          
|Provision for income taxes                       |              |                                            | 14,530    |           |           | 14,142    |           |           | 11,430    |           |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Net Income                                       |              | $                                          | 27,402    |           | $         | 27,349    |           | $         | 22,053    |           | $        
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Per share:                                       |              |                                            |           |           |           |           |           |           |           |           |          
|Net Incomebasic                                 |              | $                                          | 1.22      |           | $         | 1.23      |           | $         | 0.98      |           | $        
|Net Incomediluted                               |              | $                                          | 1.18      |           | $         | 1.20      |           | $         | 0.97      |           | $        
|Weighted average shares for Basic E.P.S. calc.   |              |                                            | 22,452    |           |           | 22,257    |           |           | 22,461    |           |          
|Weighted average shares for Diluted E.P.S. calc. |              |                                            | 23,252    |           |           | 22,722    |           |           | 22,729    |           |          
|Cash dividends                                   |              | $                                          | 0.37      |           | $         | 0.34      |           | $         | 0.25      |           | $        
|Book value at period-end                         |              | $                                          | 9.74      |           | $         | 8.05      |           | $         | 7.10      |           | $        
|Tangible book value at period-end                |              | $                                          | 7.96      |           | $         | 7.96      |           | $         | 7.02      |           | $        
|Ending Shares                                    |              |                                            | 24,089    |           |           | 22,019    |           |           | 22,574    |           |          
|Period Averages:                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Total Assets                                     |              | $                                          | 1,570,098 |           | $         | 1,389,625 |           | $         | 1,391,279 |           | $        
|Total Loans & Leases                             |              |                                            | 999,501   |           |           | 847,797   |           |           | 685,566   |           |          
|Total Earning Assets                             |              |                                            | 1,444,631 |           |           | 1,279,119 |           |           | 1,269,656 |           |          
|Total Deposits                                   |              |                                            | 1,351,256 |           |           | 1,205,826 |           |           | 1,220,340 |           |          
|Common Equity                                    |              |                                            | 195,955   |           |           | 166,402   |           |           | 155,419   |           |          
|At December 31,                                  |              |                                            |           |           |           |           |           |           |           |           |          
|Cash and cash equivalents                        |              | $                                          | 102,970   |           | $         | 88,988    |           | $         | 56,080    |           | $        
|Investments and Fed Funds Sold                   |              |                                            | 524,345   |           |           | 407,462   |           |           | 482,781   |           |          
|Loans, net of deferred fees, before allowance    |              |                                            | 1,149,712 |           |           | 919,967   |           |           | 768,814   |           |          
|Allowance for Loan & Lease Losses                |              |                                            | (20,659   | )         |           | (13,280   | )         |           | (13,105   | )         |          
|Goodwill and Other Intangibles                   |              |                                            | 42,742    |           |           | 1,771     |           |           | 1,943     |           |          
|Other assets                                     |              |                                            | 52,968    |           |           | 50,970    |           |           | 58,705    |           |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|                                                 | Total Assets |                                            | $         | 1,852,078 |           | $         | 1,455,878 |           | $         | 1,355,218 |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|Non-interest bearing deposits                    |              | $                                          | 367,370   |           | $         | 275,624   |           | $         | 230,271   |           | $        
|Interest bearing deposits                        |              |                                            | 1,216,796 |           |           | 955,538   |           |           | 938,183   |           |          
|Other borrowings                                 |              |                                            | 17,714    |           |           | 30,240    |           |           | 15,357    |           |          
|Other liabilities                                |              |                                            | 15,647    |           |           | 17,334    |           |           | 11,076    |           |          
|Shareholders' equity                             |              |                                            | 234,551   |           |           | 177,142   |           |           | 160,331   |           |          
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          
|                                                 |              | Total Liabilities and Shareholders' equity |           | $         | 1,852,078 |           | $         | 1,455,878 |           | $         | 1,355,218
|                                                 |              |                                            |           |           |           |           |           |           |           |           |          

25

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|(In thousands)   |                                              | 2001 |   | 2000  |   | 1999 |       | 1998 |   | 1997  |  
|---------------- | -------------------------------------------- | ---- | - | ----- | - | ---- | ----- | ---- | - | ----- | -
|Asset Quality    |                                              |      |   |       |   |      |       |      |   |       |  
|                 | Non-accrual loans                            |      | $ | 2,986 |   | $    | 4,510 |      | $ | 1,520 |  
|                 | Loans past due 90 days or more               |      |   | 690   |   |      | 222   |      |   | 4,199 |  
|                 | Other real estate owned                      |      |   |      |   |      |      |      |   |      |  
|                 |                                              |      |   |       |   |      |       |      |   |       |  
|                 | Total non performing assets                  |      | $ | 3,676 |   | $    | 4,732 |      | $ | 5,719 |  
|                 |                                              |      |   |       |   |      |       |      |   |       |  
|Financial Ratios |                                              |      |   |       |   |      |       |      |   |       |  
|For the year:    |                                              |      |   |       |   |      |       |      |   |       |  
|                 | Return on assets                             |      |   | 1.75  | % |      | 1.97  | %    |   | 1.59  | %
|                 | Return on equity                             |      |   | 13.98 | % |      | 16.44 | %    |   | 14.19 | %
|                 | Return on tangible equity                    |      |   | 17.88 | % |      | 16.61 | %    |   | 14.37 | %
|                 | Net interest margin (not taxable equivalent) |      |   | 6.06  | % |      | 6.44  | %    |   | 5.79  | %
|                 | Net interest margin (taxable equivalent)     |      |   | 6.36  | % |      | 6.75  | %    |   | 6.02  | %
|                 | Net loan losses (recoveries) to avg. loans   |      |   | 0.22  | % |      | 0.06  | %    |   | 0.20  | %
|                 | Efficiency ratio                             |      |   | 58.4  | % |      | 57.9  | %    |   | 63.2  | %
|At December 31:  |                                              |      |   |       |   |      |       |      |   |       |  
|                 | Equity to average assets (leverage ratio)    |      |   | 10.2  | % |      | 12.3  | %    |   | 11.6  | %
|                 | Tier One capital to risk-adjusted assets     |      |   | 13.8  | % |      | 15.5  | %    |   | 16.0  | %
|                 | Total capital to risk-adjusted assets        |      |   | 15.0  | % |      | 16.7  | %    |   | 17.2  | %
|                 | Loan loss allowance to loans, gross          |      |   | 1.8   | % |      | 1.4   | %    |   | 1.7   | %
|                 | Non-accrual loans to total loans, gross      |      |   | 0.3   | % |      | 0.5   | %    |   | 0.2   | %
|                 | Non performing assets to total assets        |      |   | 0.2   | % |      | 0.3   | %    |   | 0.4   | %
|                 | Loan loss allowance to non performing loans  |      |   | 562   | % |      | 281   | %    |   | 229   | %

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

Introduction and Business of the Company

The Company has as its single, wholly owned subsidiary, Mid-State Bank & Trust (the Bank). The Bank 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 39 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 Company. It also provides
Management's assessment of the operating trends over the past few years and certain of their expectations for 2002.

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

26

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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

2001 RESULTS AND ACCOMPLISHMENTS

Financial

The Company, on a consolidated basis, reported net income of $27.4 million in 2001 and $27.3 million in 2000 after recording earnings of $22.1 million in 1999.
The diluted Earnings Per Share (EPS) was $1.18 for 2001 compared to $1.20 in 2000 and $0.97 in 1999. Consolidated total assets at December 31, 2001 were $1.852 billion compared to $1.456 billion at
December 31, 2000, up 27.0%. Total deposits also increased from $1.231 billion as of December 31, 2000 to $1.584 billion as of December 31, 2001. Shareholders' common equity stood at $234.6 million at
year end up from its $177.1 million level one year earlier. Factors contributing to the increase in shareholders' common equity included; 1) the $39.9 million of additional equity created as a result
of the Company's acquisition of Americorp, 2) the $27.4 million of net income generated for the year, 3) a $5.2 million after-tax change in the unrealized gain
on available for sale securities, and 4) the $0.7 million received for the exercise of stock options. Partially offsetting these factors were $8.3 million in dividends paid out and $7.5 million paid
for the repurchase of common stock outstanding.

The
table below illustrates net income by subsidiary unit.

Income (Loss) by subsidiary (000's)

2001

2000

1999Bank only, pre-tax

$
41,211

$
39,441

$
32,340MSB Properties, pre-tax


844


2,166


2,175Mid Coast Land Co., pre-tax


543


483


349Parent only, pre-tax


(666
)

(599
)

(1,381
)Tax expense


14,530


14,142


11,430Consolidated Mid-State Bancshares

$
27,402

$
27,349

$
22,053


Other Events in 2001

The most significant accomplishment during the year was the successful completion of the merger of American Commercial Bank with and into Mid-State Bank & Trust
on September 28, 2001. The
integration of these two entities was complex and involved significant management effort. The goal of this merger was to attain a benefit to the stockholders of both organizations while minimizing the
disruption to customers and employees. American Commercial Bank had six branchesthree in Ventura, two in Oxnard and one in Camarillo. All six branches became new offices of Mid-State Bank
& Trust, with one of the two existing Mid-State Oxnard offices combined into the former American Commercial Bank location. Mid-State therefore now has 7 locations in Ventura County including three
full service offices in both Ventura and Oxnard along with one in Camarillo.

To
complete the merger, Mid-State Bancshares acquired 100 percent of the outstanding common stock of Americorp. The results of Americorp's operations have been included in the
consolidated financial statements since that date. Americorp was the holding company of American Commercial Bank. The aggregate purchase price was $71.5 million, which included (1) $31.6 million in
cash paid to Americorp shareholders and for other merger related expenses and (2) $39.9 million in Mid-State Bancshares' common stock and common stock options issued. The value of the 2.45 million
shares issued was determined based on the average closing market price of Mid-State Bancshares' common stock over the twenty consecutive trading days that Mid-State Bancshares' stock traded ending
September 21, 2001. The average price of Mid-State Bancshares' stock over that period was $15.9853. The merger was accounted for utilizing the purchase method of accounting.

27

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The
Board of Directors authorized a stock repurchase program for up to five percent (5%) of its outstanding shares in March of 2000. The buyback was expected to reduce the number of
outstanding shares resulting in an improvement to the Company's EPS and return on equity. These repurchases are being made from to time by the Company in the open market or privately negotiated
transactions in compliance with the Securities and Exchange Commission (SEC) rules. The program began in April of 2000 and has been extended to complete the purchase of the originally authorized
1,130,000 shares. As of December 31, 2001 the Company has repurchased a total of 1,055,438 shares and has 74,562 shares remaining to repurchase.

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 entitled each shareholder of record at the
close of 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 makes Mid-State Bancshares
stock accessible to a broader base of investors and improves its trading liquidity. The financial statements presented herein have been restated to reflect the stock split.

Mid-State
Bank formally opened its Trust Department on January 2, 2001, to provide trust, investment management and estate settlement services in San Luis Obispo, Santa Barbara, and
Ventura Counties. Concurrent with the Bank's 40th anniversary on June 12, 2001 and in recognition of this new Trust operation, the Company designed a new look to its logo and changed its
name to Mid-State Bank & Trust. As of the end of the year, the Trust Department has $15.3 million in assets under management along with another $4.6 million in custody and safekeeping accounts.
Management is encouraged by this early success and continues to actively promote its capabilities throughout the Bank's service area.

The
Company's earnings were also influenced by other unique and non-recurring items during 2001. Positively affecting earnings were 1) the recovery of interest income of $2.8 million on
a loan previously charged-off, realized during the third quarter, 2) a gain of $1.7 million on the sale of the Bank's credit card portfolio recognized in the fourth quarter, and 3) the realization of
a new State of California Natural Heritage Tax Credit (donation of 19.25 acres of land in Cambria) which created a net benefit to the shareholders of approximately $140 thousand after tax. Offsetting
some of those non recurring items were 1) an additional provision for loan losses charged to expense during the third quarter of $2.9 million to adequately reserve for potential loan losses, 2) a non
recurring charge to expense of $530 thousand incurred in the fourth quarter to cover the cost of an early retirement program offered to employees, and 3) miscellaneous non recurring charges to expense
incurred throughout the year estimated at approximately $175 thousand after taxes related to the Bank's name and logo change.

EXTERNAL FACTORS IMPACTING THE BANK

Economic Conditions

Economic conditions in 2001 were lackluster at best. Growth in the civilian labor force was nearly flat having increased from 141.5 million at the end of 2000 to
142.3 million at the end of 2001. In spite of this modest growth in the employable population, which in prior years the economy easily absorbed, the number of unemployed people grew from 5.7 million
at the start of the year to 8.3 million by the end of 2001. The economy did not support the small growth in its potential workforce and indeed saw the lay-off of existing workers, pushing the
unemployment rate to 5.8% at the end of 2001, up from 4.0% at the start of the year. Gross Domestic Product, which had risen a full 4.1% in 2000, was only able to achieve a 1.1% gain in 2001.

Policymakers
have not been oblivious to the economic trends exhibited throughout 2001. Congress, working with the President, passed major tax cuts and distributed tax rebates throughout
the year in an effort to stimulate the economy. The Federal Reserve Board, also hoping to stimulate economic activity, passed an unprecedented number of interest rate cuts throughout the year in its
closely watched Federal Funds Rate (a measure of the short term borrowing cost at commercial banks). This key rate was reduced

28

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from its target of 6.5% at the start of 2001 to just 1.75% at the close of the year. Other short-term interest rates followed suit with the Prime Rate (the rate at which commercial banks will lend to
their best customers) decreasing from 9.50% at the start of 2001 to 4.75% by the end of the year.

California
has not been immune from the economic slow-down endured throughout 2001. The Gross State Product rose just 3.4% in nominal terms during 2001 to $1.415 trillion up from $1.368
trillion in
2000 and after adjusting for inflation was virtually flat from the prior year. Similarly, the unemployment rate was 6.0% in December 2001 compared to 4.7% one year earlier.

Mid-State's
service area has been less affected by the slow-down than other parts of the State. The most comprehensive review of local economic conditions known to Management comes from
the University of California at Santa Barbara (UCSB) Economic Forecast Project. According to UCSB, the estimated Gross Product of the Tri-counties (Ventura, Santa Barbara, and San Luis Obispo) rose an
inflation adjusted 5.3% in 2001 after increasing 8.2% in 2000. UCSB places the Gross Product of the Tri-counties at $63.6 billion for 2001. All 3 counties showed positive increases in 2001 with
Ventura County showing the largest increase at 7.1%, Santa Barbara County at 2.9% and San Luis Obispo County at 2.6%. Unemployment levels in all three counties are significantly below state-wide
levels with San Luis Obispo County estimated by UCSB to be 2.8% in 2001.

On
the national level, economic indicators are beginning to improve as the year 2002 begins. Unemployment appears to be slowing, business inventories have fallen for the
11th straight month portending an inevitable increase in production, retail sales improved in January and consumer confidence appears to be improving. The State currently has certain
economic issues to deal with, such as the after-effects of the high-tech collapse on Northern California, the lingering effects of energy disruptions, and the ripple effect of the State budget
deficit. The State, however, does appear to be stabilizing overall, due to increased defense spending, a rebound in the entertainment industry and strong real estate values.

Overall,
Management believes the economic outlook for 2002 is positive. Inflation remains low. Interest rate levels are at positive levels for borrowers and fiscal policy has been
accommodating. Real estate values are increasing in the Tri-county area, durable goods manufacturers, retailers and auto dealers all report improving activity. Despite these signs, there are still
possible hurdles in 2002. The fear of terrorist attacks and the on-going impact of the war on terrorism create uncertainties which are as lingering as the devastating evil which was perpetrated on
September 11. This notwithstanding, Management believes that 2002 will witness a positive and improving level of economic activity over the course of the year. Further, it expects this improving
activity level to extend well beyond Mid-State's trade area. Indeed, Management expects that the Federal Reserve may even need to raise interest rate levels sometime beginning around the middle of the
year. These increases are not expected to be significant, however, with the Prime Rate increasing modestly to somewhere in the 5.5% range by the end of the year.

Competitive Factors

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

It
should also be noted that the trend toward consolidation of banking assets exhibited over the past few years in California continued in 2001. Statewide, 27 banks were merged out of
existence during the year and 16 new banks commenced operation. One of those occurred locally with Mid-State's acquisition of American Commercial Bank in Ventura. Two new banks were started in the
Bank's trade area during 2001, one in Santa Maria and another in Santa Barbara.

29

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ANALYSIS OF STATEMENT OF FINANCIAL POSITION

Loans

The Bank experienced an increase in net loans from $906.7 million at the end of 2000, to $1,129.1 million at the end of 2001. This represents an increase in the
loan portfolio of $222.4 million following the $151.0 million increase in 2000. Approximately $184.6 million of the $222.4 million increase in 2001 is a result of the merger with Americorp. Loans
represent approximately 61% of the Bank's assets.

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 five years earlier$46.4 million at December 31, 1997 compared to $216.0 million at year-end 2001. Real Estate loans generally trended up from $307.1 million at
the end of 1997 to nearly $445.1 million at December 31, 2000, and $538.4 million at the end of 2001. Home Equity Credit Lines have generally decreased from $74.8 million at the end of 1997 compared
to $68.5 million at the end of 2001. Consumer loans (installment, credit cards and credit reserve) have generally trended upward having reached $39.3 million at year-end 2001 (after the sale in
December of approximately $8.2 million in Credit Card receivables) compared to $35.6 million at the end of 1997. Commercial loans have grown in recent years having reached $253.2 million at December
31, 2001. Agricultural production loans have decreased from $35.5 million at the end of 1997, to $28.8 million at the end of 2000 and then increased to $34.3 at the end of 2001. 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.

CHART

30

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The
Bank's allowance for loan losses stands at $20.7 million, or 1.8% of gross loans, and represents losses inherent in the loan portfolio but not yet realized. This amount is up from
the $13.3 million at December 31, 2000. The year-end 2001 balance now represents 562% of non-performing loans which is up from 281% at the end of 2000. 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.

Allowance for Loan Losses (in 000's)

|                                                                   |                                    | 2001 |        | 2000   |   | 1999   |        | 1998 |        | 1997   |  
|------------------------------------------------------------------ | ---------------------------------- | ---- | ------ | ------ | - | ------ | ------ | ---- | ------ | ------ | -
|Balance at beginning of year                                       |                                    | $    | 13,280 |        | $ | 13,105 |        | $    | 14,441 |        | $
|Provision charged to operating expense                             |                                    |      | 4,100  |        |   | 700    |        |      | 50     |        |  
|Adjustmentsacquisition through merger                             |                                    |      | 5,464  |        |   |       |        |      |       |        |  
|Loans charged off:                                                 |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Construction and development loans |      |        |       |   |        |       |      |        | (14    | )
|                                                                   | Real estate loans                  |      |        | (3     | ) |        | (93    | )    |        | (15    | )
|                                                                   | Home equity credit lines           |      |        | (4     | ) |        | (70    | )    |        | (178   | )
|                                                                   | Installment loans                  |      |        | (275   | ) |        | (278   | )    |        | (132   | )
|                                                                   | Commercial loans                   |      |        | (2,377 | ) |        | (512   | )    |        | (1,852 | )
|                                                                   | Credit cards and related loans     |      |        | (255   | ) |        | (239   | )    |        | (331   | )
|Recoveries of loans previously charged off:                        |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | Construction and development loans |      |        | 2      |   |        | 2      |      |        | 198    |  
|                                                                   | Real estate loans                  |      |        | 147    |   |        | 14     |      |        | 180    |  
|                                                                   | Home equity credit lines           |      |        |       |   |        | 86     |      |        | 111    |  
|                                                                   | Installment loans                  |      |        | 186    |   |        | 134    |      |        | 115    |  
|                                                                   | Commercial loans                   |      |        | 309    |   |        | 330    |      |        | 425    |  
|                                                                   | Credit cards and related loans     |      |        | 85     |   |        | 101    |      |        | 107    |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|                                                                   | BALANCE AT END OF YEAR             |      | $      | 20,659 |   | $      | 13,280 |      | $      | 13,105 |  
|                                                                   |                                    |      |        |        |   |        |        |      |        |        |  
|Ratio of Net Loan Losses (Recoveries) to Average Loans Outstanding |                                    |      | 0.22   | %      |   | 0.06   | %      |      | 0.20   | %      |  

Allocation of the allowance for loan losses at December 31:(dollars in 000's)

|Balance applicable to:     |                        | 2001 |       | Percent
of
Loans |      | 2000  |   | Percent
Of
Loans |        | 1999 |       | Percent
of
Loans |       | 1998   |      | Percent
of
Loans |   | 1997  |        | Percent
Of
Loans |      
|-------------------------- | ---------------------- | ---- | ----- | ---------------- | ---- | ----- | - | ---------------- | ------ | ---- | ----- | ---------------- | ----- | ------ | ---- | ---------------- | - | ----- | ------ | ---------------- | -----
|Construction and Land Dev. |                        | $    | 1,969 |                  | 18.8 | %     | $ | 2,095            |        | 18.3 | %     | $                | 1,979 |        | 15.3 | %                | $ | 946   |        | 13.4             | %    
|Real Estate                |                        |      | 2,949 |                  | 46.8 | %     |   | 3,993            |        | 48.4 | %     |                  | 2,291 |        | 49.1 | %                |   | 3,798 |        | 42.4             | %    
|H.E.C.L.                   |                        |      | 443   |                  | 6.0  | %     |   | 390              |        | 6.0  | %     |                  | 344   |        | 6.9  | %                |   | 753   |        | 8.5              | %    
|Installment                |                        |      | 780   |                  | 3.1  | %     |   | 292              |        | 3.4  | %     |                  | 283   |        | 3.9  | %                |   | 1,092 |        | 7.0              | %    
|Credit Card and Related    |                        |      | 393   |                  | 0.3  | %     |   | 1,203            |        | 1.0  | %     |                  | 770   |        | 1.6  | %                |   | 1,170 |        | 1.8              | %    
|Commercial, Other          |                        |      | 7,298 |                  | 25.0 | %     |   | 4,607            |        | 22.9 | %     |                  | 4,448 |        | 23.2 | %                |   | 4,973 |        | 26.9             | %    
|Unallocated                |                        |      | 6,827 |                  | N/A  |       |   | 700              |        | N/A  |       |                  | 2,990 |        | N/A  |                  |   | 1,709 |        | N/A              |      
|                           |                        |      |       |                  |      |       |   |                  |        |      |       |                  |       |        |      |                  |   |       |        |                  |      
|                           | Balance at End of Year |      | $     | 20,659           |      | 100.0 | % | $                | 13,280 |      | 100.0 | %                | $     | 13,105 |      | 100.0            | % | $     | 14,441 |                  | 100.0
|                           |                        |      |       |                  |      |       |   |                  |        |      |       |                  |       |        |      |                  |   |       |        |                  |      

31

---

Non-accrual
loans within the Bank's portfolio decreased from $4.5 million as of December 31, 2000, to $3.0 million, at the end of 2001. Loans, 90 days or more past due increased from
$222 thousand at December 31, 2000, to $690 thousand at the end of 2001. Additional information on non-accrual loans, past due loans and troubled debt restructurings can be found in Footnote 5 to the
financial statements. The vast majority of the loans on non-accrual ($2.5 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 $519 thousand of loans 90 days or more past due are secured by real estate and an additional $171
thousand of commercial and industrial loans. Recoveries in 2001 of loans previously charged-off totaled $729 thousand compared to charge-offs of $2.9 million taken during the year resulting in net charge-offsof $2.2 million. This compares to net charge-offs incurred during 2000 of $525 thousand and net charge-offs of $1.4 million in 1999. The
Bank anticipates that charge-offs (actual losses) will continue during 2002. 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 reviews the adequacy of the allowance and also employs an independent third party loan review group to, among other things, review the adequacy of the allowance and make
recommendations. Management, as necessary, adjusts the allowance on a regular basis. The allowance is also examined annually by one or more of the Bank's regulatory bodies including the FDIC and DFI.

The
allowance for loan losses as a percentage of total loans has gradually decreased from 2.3% in 1997 to 1.8% in 2001, reflecting an improvement in asset quality during this period. 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, 2001, Management considered the quality of the loan portfolio acquired by acquisition and the slow-down in economic activity and continues to acknowledge the combined high
concentration of real estate loans, increases in certain higher risk activities such as construction lending, and higher levels of individually large corporate loans. These factors directly offset the
recent positive trends in non-performing loans and are the primary reason for the large increase in the unallocated portion of the allowance for loan losses ($6.8 million at the end of 2001 compared
to $0.7 million at the end of 2000).

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.

32

---

A summary of maturities and sensitivities of loans to changes in interest rates at December 31, 2001 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, 2001

3 Months
or less

Over
3 Months
through
12 Months

Due after
one year
to three
years

Due after
three years
to five
years

Due after
five years

TotalFixed rate loans

$
27,102

$
47,470

$
82,845

$
67,100

$
171,189

$
395,706Floating rate loans


581,932


10,909


56,009


95,486


6,674


751,010Sub-total


609,034


58,379


138,854


162,586


177,863


1,146,716Non accrual loans

















2,986Total Loans, gross
















$
1,149,703


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

TotalFixed rate loans

$
39,249

$
47,494

$
60,733

$
65,059

$
203,500

$
416,035Floating rate loans


430,176


4,897


10,382


46,520


7,447


499,422Sub-total


469,425


52,391


71,115


111,579


210,947


915,457Non accrual loans

















4,510Total Loans, gross
















$
919,967


Investment Portfolio

The Bank's investment portfolio primarily consists of US Treasury Notes and Bills, Federal Agency Notes, Mortgage Backed Securities and Municipal Bonds. See
Footnote No. 4 to the consolidated financial statements for a detailed composition of the investment portfolio. The Treasury and Agency portion of the portfolio increased by $66.8 million from one
year ago. The Bank decreased its holdings in the Municipal Bond portfolio from $255.2 million at the end of 2000, to $225.5 million at the end of 2001. The U.S. Treasury portion of the portfolio
decreased by $11.0 million while the Federal Agencies increased by $77.7 million from December 31, 2000 to December 31, 2001. Mortgage Back Securities decreased $0.7 million. In total, the Bank
increased its investment portfolio from $407.5 million at the end of 2000 to $451.3 million at the end of 2001, a $43.9 million increase. The acquisition of Americorp accounted for approximately $14.6
million of the increase.

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

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

33

---

compared to an unrealized gain of $1.2 million at December 31, 2000, net of related taxes. Purchases exceeded maturities and sales over the full year and the total investment portfolio thus increased
by $43.7 million from the end of 2000 to the end of 2001.

Shown
below is a summary maturity distribution of the investment portfolio, which is all classified as available for sale, by type and weighted taxable equivalent yield as of December
31, 2001. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturity
information for Mortgage Backed securities shown below is based on contractual maturities.

|(dollars in 000's)     |                            | One Year
Or Less |   | After One
Year to
Five Years |         | After Five
Years to
Ten Years |         | After
Ten Years |   | Total 
|---------------------- | -------------------------- | ---------------- | - | ---------------------------- | ------- | ----------------------------- | ------- | --------------- | - | ------
|Maturity Distribution: |                            |                  |   |                              |         |                               |         |                 |   |       
|                       | U.S. Treasury Securities   |                  | $ | 29,970                       |         | $                             | 11,214  |                 | $ |      
|                       | U.S. Government Agencies   |                  |   | 50,910                       |         |                               | 114,895 |                 |   |      
|                       | Mortgage Backed Securities |                  |   | 497                          |         |                               | 306     |                 |   | 2,276 
|                       | Municipal Bonds, Other     |                  |   | 35,057                       |         |                               | 146,593 |                 |   | 56,809
|                       |                            |                  |   |                              |         |                               |         |                 |   |       
|                       |                            | Total            |   | $                            | 116,434 |                               | $       | 273,008         |   | $     
|                       |                            |                  |   |                              |         |                               |         |                 |   |       
|                       |                            |                  |   |                              |         |                               |         |                 |   |       

|(dollars in 000's)      |                            | 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   |                  | 4.13 | %                            | 2.90 | %                             |     |                 |     |       | 3.52
|                        | U.S. Government Agencies   |                  | 4.09 | %                            | 4.95 | %                             |     |                 |     |       | 4.52
|                        | Mortgage Backed Securities |                  | 6.86 | %                            | 6.85 | %                             | 6.80 | %               | 6.34 | %     | 6.72
|                        | Municipal Bonds, Other     |                  | 6.57 | %                            | 6.30 | %                             | 7.65 | %               | 6.09 | %     | 6.65
|                        |                            |                  |      |                              |      |                               |      |                 |      |       |     
|                        |                            | Total            |      | 4.83                         | %    | 7.40                          | %    | 7.62            | %    | 6.15  | %   
|                        |                            |                  |      |                              |      |                               |      |                 |      |       |     

Other Real Estate Owned ("OREO")

The Company held no OREO at either December 31, 2001 or 2000. Moreover, the Bank did not need to liquidate any OREO holdings during the year. No OREO properties
were acquired as a result of the merger with American Commercial Bank. Future OREO activity will depend, among other things, on how many borrowers the Bank may need to foreclose on, and the strength
of the real estate market and general economic activity.

Goodwill and Other Intangibles

Goodwill totaled $33.4 million at December 31, 2001 compared to $1.3 million one year earlier. The increase is a result of the acquisition of Americorp and its
wholly owned subsidiary, American Commercial Bank of Ventura, which was completed on September 28, 2001.

In
June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and is effective for all business combinations accounted for by the purchase method
completed after June 30, 2001. SFAS No. 141 requires all business combinations be accounted for using the purchase method. The Company adopted SFAS No. 141 during the third quarter of 2001, therefore,
the merger was accounted for in accordance with SFAS No. 141.

SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. With the adoption of SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life, rather goodwill will be subject to at least an annual assessment for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, with a provision that states goodwill acquired

34

---

in a business combination for which the acquisition date is after June 30, 2001 should not be amortized. Accordingly, the goodwill generated through the merger will not be amortized. Management
adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 did not have a material impact on the Company's results of operations or financial condition. However, it should be noted that the
results of annual assessments in future years could impact the Company's results of operations or financial condition if the goodwill is considered to be impaired.

Other
intangibles total $9.3 million at December 31, 2001 compared to $424 thousand one year earlier. Of the total intangibles at December 31, 2001, $8.6 million represents the core
deposit intangible created upon the acquisition of American Commercial Bank. The core deposit intangible represents the fair value of long-term deposit relationships associated with the deposits
acquired. The core deposit intangible ($8.9 million as of the acquisition date) is being amortized over its expected useful economic life (8.25 years). Other intangibles total $721 thousand at
year-end and represent the amortized value of the Bank's originated mortgage servicing rights.

Deposits

While the Bank is competitive with major institutions in terms of its structure of interest rates on deposit products offered, Management was not overly
aggressive during 2001 in terms of pricing to attract additional deposits, a decision which reflects the Bank's strong liquidity at the present time.

As
discussed in the Income Statement Analysis, most of the Bank's deposit rates have fallen in concert with the general decline in rates. A comparison of the rates paid on the Bank's
deposit products at December 31, 2001 and 2000 is as follows:

|Selected Quoted Interest Rates |                            | 2001 |      | 2000 |      | Change |      
|------------------------------ | -------------------------- | ---- | ---- | ---- | ---- | ------ | -----
|Demand Deposits                |                            | 0    | %    | 0    | %    | 0      | %    
|NOW Account                    |                            |      |      |      |      |        |      
|                               | (50 & Betterover $10,000) |      | 0.25 | %    | 0.50 | %      | -0.25
|Money Market Deposits          |                            |      |      |      |      |        |      
|                               | (over $100,000)            |      | 1.21 | %    | 2.00 | %      | -0.79
|Passbook Savings Account       |                            | 1.00 | %    | 2.00 | %    | -1.00  | %    
|Individual Retirement          |                            |      |      |      |      |        |      
|                               | Account (2 Year term)      |      | 3.00 | %    | 5.60 | %      | -2.60
|Time Deposit                   |                            |      |      |      |      |        |      
|                               | ($100,0006 month term)    |      | 2.00 | %    | 5.75 | %      | -3.75
|Wall Street Journal Prime Rate |                            | 4.75 | %    | 9.50 | %    | -4.75  | %    

Average
deposits declined slightly for the period ending December 2000, reflecting the run-off in the latter part of 1999 and early 2000 of certain higher cost deposit balances acquired
through the merger with City Commerce Bank. Average deposits grew dramatically in 2001 reflecting growth at Mid-State Bank & Trusts' existing offices and also the acquisition of American Commercial
Bank, which had $254.0 million in deposits at the time of merger. Below is a summary of the average deposits outstanding and the average rate paid by category over the last three years.

|(dollars in 000's)          |                                 | Balance |         | 2001
Interest |   | Rate   |        | Balance |      | 2000
Interest |         | Rate      |   | Balance |        | 1999
Interest |      | Rate |        
|--------------------------- | ------------------------------- | ------- | ------- | ------------- | - | ------ | ------ | ------- | ---- | ------------- | ------- | --------- | - | ------- | ------ | ------------- | ---- | ---- | -------
|Interest Bearing Demand     |                                 | $       | 447,641 |               | $ | 3,829  |        | 0.83    | %    | $             | 423,694 |           | $ | 4,551   |        | 1.07          | %    | $    | 428,739
|Savings Accounts            |                                 |         | 207,965 |               |   | 3,893  |        | 1.87    | %    |               | 192,699 |           |   | 4,923   |        | 2.55          | %    |      | 195,128
|Time Deposits               |                                 |         | 395,633 |               |   | 18,458 |        | 4.67    | %    |               | 337,605 |           |   | 17,650  |        | 5.23          | %    |      | 346,659
|                            |                                 |         |         |               |   |        |        |         |      |               |         |           |   |         |        |               |      |      |        
|                            | Total Interest Bearing Deposits |         |         | 1,051,239     |   |        | 26,180 |         | 2.45 | %             |         | 953,998   |   |         | 27,142 |               | 2.84 | %    |        
|Non Interest Bearing Demand |                                 |         | 300,017 |               |   |       |        |        |      |               | 251,828 |           |   |        |        |              |      |      | 249,814
|                            |                                 |         |         |               |   |        |        |         |      |               |         |           |   |         |        |               |      |      |        
|                            | Total Deposits                  |         | $       | 1,351,256     |   | $      | 26,180 |         | 1.92 | %             | $       | 1,205,826 |   | $       | 27,124 |               | 2.25 | %    | $      
|                            |                                 |         |         |               |   |        |        |         |      |               |         |           |   |         |        |               |      |      |        

The majority of the Bank's time deposits (approximately 63%) have balances which are under $100,000 in size. While all time deposits are somewhat
more rate sensitive than the Bank's other deposit

35

---

categories, the smaller time deposit balances tend to be more stable and less sensitive to absolute rate levels than do time deposits of $100,000 or more. Approximately 89% of the Bank's time
deposits mature within one year and would be subject to a change in rate at that time. The following table as of December 31, 2001, 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      |  | $                    | 108,697 |                                  | $ | 80,497                       |  | $              | 55,504 |      
|$100,000 or More    |  |                      | 86,407  |                                  |   | 46,335                       |  |                | 22,797 |      
|                    |  |                      |         |                                  |   |                              |  |                |        |      
|Total Time Deposits |  | $                    | 195,104 |                                  | $ | 126,832                      |  | $              | 78,301 |      
|                    |  |                      |         |                                  |   |                              |  |                |        |      

Other Borrowings

While not a significant component of the Bank's structure, other borrowings decreased from $30.2 million, at the end of 2000 to $17.7 million at the end of 2001.
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 $17.6 million and $4.0 million at December 31, 2001 and 2000, respectively, under the US Treasury Tax and Loan note account program. No federal funds were purchased at
December 31, 2001, compared to $26.0 million purchased at December 31, 2000. No securities sold under agreement to repurchase were made at year-end 2001, while $125 thousand was borrowed at December
31, 2000. Mortgages payable were $104 thousand and $135 thousand at year-end 2001 and 2000, 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 goodwill and certain other intangibles that a bank may have) by the total assets of the bank. In the
Tier One Risk Based Capital Ratio, the numerator is the same as the leverage ratio, but the denominator is the total "risk-weighted assets" of the bank. Risk-weighted assets are determined by
segregating all the assets and off-balance sheet exposures into different risk categories and weighting them by a percentage ranging from 0% (lowest risk) to 100% (highest risk). The Total Risk Based
Capital Ratio again uses "risk-weighted assets" in the denominator, but expands the numerator to include other capital items besides equity such as a limited amount of the allowance for loan losses,
long-term capital debt, preferred stock and other instruments. Summarized below are the capital ratios at December 31, 2001 and 2000, for both Mid-State

36

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

|               |               |      |      |      |       | Mid-State Bancshares |      | Mid-State
Bank & Trust |     
|-------------- | ------------- | ---- | ---- | ---- | ----- | -------------------- | ---- | ---------------------- | ----
|
|
|Leverage Ratio |               | 4.0% |      | 5.0% |       | 10.2                 | %    | 12.3                   | %   
|Tier One       |               |      |      |      |       |                      |      |                        |     
|               | Risk Based    |      |      |      |       |                      |      |                        |     
|               | Capital Ratio |      | 4.0% |      | 6.0%  |                      | 13.8 | %                      | 15.5
|Total Risk     |               |      |      |      |       |                      |      |                        |     
|               | Based         |      |      |      |       |                      |      |                        |     
|               | Capital Ratio |      | 8.0% |      | 10.0% |                      | 15.0 | %                      | 16.7

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. Moreover, by having part of the Americorp acquisition of 2001 paid for in cash, Management was able to reduce the Leverage Ratio
approximately 2.1% from its level one year earlier.

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

|                                        |  | 2001 |   | 2000 |   | 1999 |  
|--------------------------------------- |  | ---- | - | ---- | - | ---- | -
|Dividend Payout Ratio                   |  | 30.3 | % | 27.6 | % | 25.3 | %
|Average Common Equity to Average Assets |  | 12.5 | % | 12.0 | % | 11.1 | %

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 72.6% versus 74.7% 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 34.1% at December 31, 2001, which is above its minimum policy of 15%.

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

Off Balance Sheet and Other Related Party Transactions

As noted in Footnote 12 to the financial statements, the Company is contingently liable for letter of credit accommodations made to its customers in the ordinary
course of business totaling $31.8 million
at December 31, 2001, down from $33.2 million one year earlier. Additionally, the Company has undisbursed loan commitments, also made in the ordinary course of business, totaling $368.5 million, which
was up from the $359.5 million outstanding one year earlier.

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

As
noted in Footnote 5 to the financial statements, the Company does make loans to related parties (directors and officers) in the ordinary course of business at prevailing rates and
terms. These loans totaled $14.3 million at the end of 2001 compared to $15.9 million one year earlier.

37

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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 2001 was $83.4 million, up from $82.4 million recorded in 2000 and $73.6 million in 1999. 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 2001, 2000, and 1999.

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

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

|                                        |                                    |   |           |           |   |        |         |       |      |   |           |           |   | 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 |   | $                                           | 99,627
|                                        |                                    |   |           |           |   |        |         |       |      |   |           |           |   |                                             |       
|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  | %    |   | 346,657   |           |   | 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   |   |                                             | 26,071
|                                        |                                    |   |           |           |   |        |         |       |      |   |           |           |   |                                             |       
|NET INTEREST INCOME                     |                                    | $ | 1,279,119 |           | $ | 82,368 |         | 6.44  | %    | $ | 1,269,656 |           | $ | 73,556                                      |       
|                                        |                                    |   |           |           |   |        |         |       |      |   |           |           |   |                                             |       

38

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

In
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 similar, yet slightly different dynamics. 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 $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
Bank expects its risk exposure to changes in interest rates to remain manageable and well within acceptable policy ranges. A recent review as of the end of 2001 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 +3.6% and -6.1% of the base case (rates
unchanged) of $97.4 million. The Bank's policy is to maintain a structure of assets and liabilities which are such that net interest income will not vary more than plus or minus 15% of the base
forecast over the next 12 months. Management expects that its exposure to interest rate risk is manageable and it will continue to strive for an optimal trade-off between risk and earnings.

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

Change From BaseRates Down Very Significant

-6.1
%(Prime down to 1.75% over 12 months)Rates Down Significant

-3.1
%(Prime down to 2.75% over 12 months)Rates Down Modestly

-1.3
%(Prime down to 3.75% over 12 months)Base CaseRates Unchanged

(Prime unchanged at 4.75% over 12 months)Rates Up Modestly

+1.8
%(Prime up to 5.75% over 12 months)Rates Up Aggressive

+3.6
%(Prime up to 7.00% over 12 months)Rates Up Very Aggressive

+2.2
%(Prime up to 8.00% over 12 months)


Net
interest income under the above scenarios is influenced by the characteristics of the Bank's assets and liabilities. In the case of N.O.W., savings and money market deposits (total
$769.2 million) interest is

39

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based on rates set at the discretion of management ranging from 0.25% to 1.21%. In a downward rate environment, there is a limit to how far these deposit instruments can be re-priced and this
behavior is similar to that of fixed rate instruments. In an upward rate environment, the magnitude and timing of changes in rates on these deposits is assumed to be more reflective of variable rate
instruments.

It
is important to note that the above table is a summary of several forecasts and actual results may vary. The forecasts are based on estimates and assumptions of management that may
turn out to be different and may change over time. Factors affecting these estimates and assumptions include, but are not limited tocompetitors' behavior, economic conditions both locally
and nationally, actions taken by the Federal Reserve Board, customer behavior, and management's responses. Changes that vary significantly from the assumptions and estimates may have significant
effects on the Bank's net interest income. Therefore the results of this analysis should not be relied upon as indicative of actual future results. Historically, the Bank has been able to manage its
Net Interest Income in a fairly narrow range reflecting the Bank's relative insensitivity to interest rate changes. The impact of prepayment behavior on mortgages, real estate loans, mortgage backed
securities, securities with call features, etc. is not considered material to the sensitivity analysis. Over the last 5 years, the Bank's net interest margin (which is net interest income divided by
average earning assets of the Bank) has ranged from a low of
5.77% to a high of 6.44% (not taxable equivalent). The Bank's net interest margin in 2001 of 6.06% is in the middle of this range by historical standards, coming off the higher levels experienced in
recent years. This is a result of both the lower level of interest rates and the change in mix of earning assets (the Bank now has a larger portion in loans vis-i-vis investment securities). The net
interest margin under the alternative scenarios ranges from 5.25% to 5.79%. Management feels this range of scenarios, while low by historical standards, is consistent with current experience and
interest rate levels, but no assurances can be given that actual future experience will fall within this range.

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

Provision for Loan Losses

The Company made contributions to the allowance for loan losses of $4.1 million, $700 thousand and $50 thousand in 2001, 2000 and 1999, respectively. This
reflects management's assessment of the level of inherent losses identified in the portfolio which has been supplemented by recoveries of loans previously charged off, amounting to $0.7 million, $0.7
million and $1.1 million, in 2001, 2000 and 1999, respectively. During the 3rd quarter of 2001, the effects of an economic slow-down prompted Management to re-evaluate the allowance for
loan losses. Accordingly, Management recommended and the Board of Directors authorized an additional $2.9 million provision for loans losses. The need for additional provision for loan losses in 2002
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 2001 totaled $23.3 million compared to $17.8 million in 2000 and $17.5 million in 1999. Service charges on deposit accounts increased $1.2
million to $8.1 million in 2001 versus 2000. This followed an increase of $141 thousand in 2000 over 1999. The increase in 2001 over 2000 was mostly related to increases in service charge rates,
coupled with an increase in the number of deposits accounts acquired in the American Commercial Bank merger. Commissions, fees and other service charges increased by $1.9 million in 2001 over 2000
after a $1.5 million increase in 2000. The majority of the increase in 2001 was primarily related to fee income from its Mortgage Banking activities of $1.5 million. In addition, approximately $374
thousand of the increase in 2001 was related to the Bank's Mastercard merchant fees. The balance is related to modest increases across several other fee areas. Earnings from

40

---

investments in real estate were zero in 2001 down from $331 thousand in 2000 and $830 thousand in 1999. These declines reflect the continuing divestiture of Mid-Coast Land Company. All other sources
of income increased to $4.5 million in 2001, after reaching $1.4 million in 2000 and $2.4 million in 1999. The increase in 2001 is mostly attributed to the gain on the sale of the Bank's credit card
portfolio in the amount of $1.7 million.

Management's
expectation for 2002 is that most categories of non-interest income will increase. 2001 results reflected three months of activity from the newly acquired American
Commercial Bank's assets and liabilities, whereas in 2002, Mid-State will benefit from their inclusion for the full year.

Non-Interest Expense

Total non-interest expense for 2001 was $64.7 million, which was up from $58.0 million in 2000 and $57.5 million in 1999. Non-interest expense increased primarily
due to an increase in salaries and benefits of approximately $638 thousand, an increase in occupancy expense of $868 thousand, donation of property charged to expense related to obtaining a State
Natural Heritage Tax Credit of $1.7 million, increases in advertising and stationery and supplies expenditures principally related to the Bank's name change of $549 thousand, increases in merchant
Mastercard processing charges of $765 thousand, outsourcing charges for the Company's internal audit function of $447 thousand, and an operating loss of $211 thousand.

Salaries
and employee benefits increased by $638 thousand in 2001 over 2000 after having increased by $3.0 million in 2000 over 1999. The increase in 2001 over 2000 related to an
increase in salaries of approximately $2.1 million and a decrease in employee benefits costs of $1.5 million. 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 strong performance of the Company in 2000. Management's expectation for 2002 is that salaries and benefits
will increase due to the additional staff as a result of the merger.

Occupancy
expense has increased during this period by $868 thousand to $9.3 million in 2001 compared to $8.4 million in 2000 and $8.4 million in 1999. Rental payments on leased buildings
and capital expenditures for computer equipment, ATM's and new signage due to the Bank's name change and the merger with American Commercial Bank resulted in the increase in occupancy expense. The new
equipment and signage was placed into 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. No major expenditures
are planned for 2002. Management's expectation for 2002 is that occupancy expense will increase due to of the additional locations acquired as a result of the merger2001 results reflected
three months of the new locations in Ventura, whereas in 2002, Mid-State will be impacted from their inclusion for the full year.

Merchant
processing charges have increased steadily over the three year period reflecting increased volume and customers. These charges amounted to $5.6 million in 2001, $4.9 million in
2000, and $3.9 million in 1999. Management's expectation for 2002 is that merchant processing expense will increase due to the additional activity as a result of the merger2001 results
reflected three months of the new activity in Ventura, whereas in 2002, Mid-State will be impacted from their inclusion for the full year.

Other
operating expenses increase in 2001 to $16.1 million compared to $11.9 million in 2000 and $12.3 million in 1999. These increases occurred in areas such as advertising,
amortization of intangible assets, general insurance, professional services, stationery and supplies. Management's expectation for 2002 is that these categories will increase due to the additional
activity as a result of the merger2001 results reflected three months of the new activity in Ventura, whereas in 2002, Mid-State will be impacted from their inclusion for the full year.

41

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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 and with the timing difference on deferred compensation.

SUBSIDIARY ACTIVITY

Mid-Coast Land Company

Investments in real estate shown on the Consolidated Statement of Financial Position principally represent the assets of the Bank's real estate development
subsidiary, Mid-Coast Land Company. Footnote No. 7 to the accompanying financial statements provides additional information about this wholly owned subsidiary. Mid-Coast Land Company recorded earnings
during 2001 of $315 thousand compared to earnings during 2000 of $280 thousand and $349 thousand in 1999. The gain in 2000 and 2001 was related to certain parcels sold on its San Luis Bay Estates
project.

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 $1.7 million, $1.4 million, and $1.5 million, in 2001, 2000 and 1999,
respectively. Leases are written with market terms and at market rates.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as, disclosures included elsewhere in this Form 10-K, are
based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of
these financial statements require Management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingencies. A
summary of the more significant accounting policies of the Company can be found in Footnote One to the financial statements which is included in Item 8 of this Report. Additionally, because it
involves some of the more significant judgments and estimates used in preparation of the consolidated financial statements, the reader's attention is directed to the earlier section on page 32
addressing the allowance for loan losses.

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.

42

---



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

|                                                       |  | PAGE
|------------------------------------------------------ |  | ----
|Report of Independent Public Accountants               |  | 44  
|Consolidated Statements of Financial Position          |  | 45  
|Consolidated Statements of Income                      |  | 46  
|Consolidated Statements of Comprehensive Income        |  | 47  
|Consolidated Statements of Changes in Capital Accounts |  | 48  
|Consolidated Statements of Cash Flows                  |  | 49  
|Notes to Consolidated Financial Statements             |  | 50  
|Management Statement                                   |  | 72  
|Report of Independent Public Accountants               |  | 73  

43

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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, 2001 and 2000, and the related consolidated statements of income, comprehensive income, changes in capital accounts and cash flows for the three years then ended. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

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

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

44

---

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

|                                                    |                                                                                            | December 31,                        
|--------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------
|
|Assets                                              |                                                                                            |                                     
|CASH AND DUE FROM BANKS                             |                                                                                            | $                                   
|FEDERAL FUNDS SOLD                                  |                                                                                            |                                     
|SECURITIES, net:                                    |                                                                                            |                                     
|                                                    | Securities available for sale                                                              |                                     
|                                                    | Securities held to maturity (market value of $0 and $25,845, respectively)                 |                                     
|                                                    |                                                                                            |                                     
|                                                    | Total Securities                                                                           |                                     
|                                                    |                                                                                            |                                     
|LOANS, net                                          |                                                                                            |                                     
|PREMISES AND EQUIPMENT, net                         |                                                                                            |                                     
|ACCRUED INTEREST RECEIVABLE                         |                                                                                            |                                     
|INVESTMENTS IN REAL ESTATE, net                     |                                                                                            |                                     
|GOODWILL                                            |                                                                                            |                                     
|OTHER INTANGIBLES                                   |                                                                                            |                                     
|OTHER ASSETS                                        |                                                                                            |                                     
|                                                    |                                                                                            |                                     
|                                                    |                                                                                            | TOTAL ASSETS                        
|                                                    |                                                                                            |                                     
|Liabilities                                         |                                                                                            |                                     
|DEPOSITS:                                           |                                                                                            |                                     
|                                                    | Demand deposits                                                                            |                                     
|                                                    | Savings, money market and NOW accounts                                                     |                                     
|                                                    | Time deposits$100,000 or more                                                             |                                     
|                                                    | Time depositsUnder $100,000                                                               |                                     
|                                                    |                                                                                            |                                     
|                                                    | Total Deposits                                                                             |                                     
|                                                    |                                                                                            |                                     
|OTHER BORROWINGS                                    |                                                                                            |                                     
|ACCRUED INTEREST PAYABLE & OTHER LIABILITIES        |                                                                                            |                                     
|                                                    |                                                                                            |                                     
|                                                    |                                                                                            | TOTAL LIABILITIES                   
|                                                    |                                                                                            |                                     
|Commitments and Contingencies (Note 12)             |                                                                                            |                                     
|Capital Accounts                                    |                                                                                            |                                     
|CAPITAL STOCK, NO PAR VALUE:                        |                                                                                            |                                     
|                                                    | Authorized100,000,000 shares
Outstanding24,088,633 shares in 2001 and 22,018,582 in 2000 |                                     
|UNDIVIDED PROFITS                                   |                                                                                            |                                     
|ACCUMULATED OTHER COMPREHENSIVE INCOME NET OF TAXES |                                                                                            |                                     
|                                                    |                                                                                            |                                     
|                                                    |                                                                                            | TOTAL CAPITAL ACCOUNTS              
|                                                    |                                                                                            |                                     
|                                                    |                                                                                            | TOTAL LIABILITIES & CAPITAL ACCOUNTS
|                                                    |                                                                                            |                                     

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

45

---

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

|                                                             |                                                         | Year Ended December 31, |       
|------------------------------------------------------------ | ------------------------------------------------------- | ----------------------- | ------
|
|Interest Income:                                             |                                                         |                         |       
|Interest and fees on loans and leases                        |                                                         | $                       | 92,148
|Interest on securities:                                      |                                                         |                         |       
|                                                             | U.S. Treasury securities                                |                         |       
|                                                             | U.S. Government agencies and corporations               |                         |       
|                                                             | Obligations of states and political subdivisions, other |                         |       
|Interest on federal funds sold                               |                                                         |                         | 1,970 
|                                                             |                                                         |                         |       
|                                                             | TOTAL INTEREST INCOME                                   |                         |       
|                                                             |                                                         |                         |       
|Interest Expense:                                            |                                                         |                         |       
|Interest on deposits                                         |                                                         |                         | 26,180
|Interest on mortgages payable, other                         |                                                         |                         | 300   
|                                                             |                                                         |                         |       
|                                                             | TOTAL INTEREST EXPENSE                                  |                         |       
|                                                             |                                                         |                         |       
|Net Interest Income                                          |                                                         |                         | 87,522
|Provision for loan losses                                    |                                                         |                         | 4,100 
|                                                             |                                                         |                         |       
|                                                             | NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     |                         |       
|                                                             |                                                         |                         |       
|Other Income:                                                |                                                         |                         |       
|Service charges on deposit accounts                          |                                                         |                         | 8,122 
|Commissions, fees and other service charges                  |                                                         |                         | 10,734
|Investments in real estate                                   |                                                         |                         |      
|Reversal of reserve for losses on investments in real estate |                                                         |                         |      
|Gains (losses) on sale of securities                         |                                                         |                         | 56    
|Other income                                                 |                                                         |                         | 4,342 
|                                                             |                                                         |                         |       
|                                                             | TOTAL OTHER INCOME                                      |                         |       
|                                                             |                                                         |                         |       
|Other Expenses:                                              |                                                         |                         |       
|Salaries & employee benefits                                 |                                                         |                         | 33,417
|Occupancy expenses                                           |                                                         |                         | 9,304 
|Merger related charges                                       |                                                         |                         | 300   
|Merchant processing fees                                     |                                                         |                         | 5,632 
|Other operating expenses                                     |                                                         |                         | 16,091
|                                                             |                                                         |                         |       
|                                                             | TOTAL OTHER EXPENSES                                    |                         |       
|                                                             |                                                         |                         |       
|Income before taxes                                          |                                                         |                         | 41,932
|Tax expense                                                  |                                                         |                         | 14,530
|                                                             |                                                         |                         |       
|                                                             | NET INCOME                                              |                         | $     
|                                                             |                                                         |                         |       
|Earnings per share:                                          |                                                         |                         |       
|                                                             |                                                         | Basic                  |       
|                                                             |                                                         | Diluted                |       
|                                                             |                                                         |                         |       

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

46

---

Consolidated Statements of Comprehensive Income
(amounts 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                 |                                                 |                         | 8,747
|Reclassification adjustment for (gains) losses included in net income |                                                 |                         | (56  
|                                                                      |                                                 |                         |      
|Other comprehensive income (loss), before tax                         |                                                 |                         | 8,691
|Income tax expense (benefit) related to items in comprehensive income |                                                 |                         | 3,476
|                                                                      |                                                 |                         |      
|                                                                      | OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES |                         |      
|                                                                      |                                                 |                         |      
|                                                                      | COMPREHENSIVE INCOME                            |                         | $    
|                                                                      |                                                 |                         |      

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

47

---

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

|                           |                                                                       | Number of
Shares |           | Capital
Stock |        | Undivided
Profits |   | Accumulated
Other
Comprehensive
Income (Loss) |        | Total |       
|-------------------------- | --------------------------------------------------------------------- | ---------------- | --------- | ------------- | ------ | ----------------- | - | --------------------------------------------- | ------ | ----- | ------
|BALANCE, December 31, 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 
|                           | Cash dividend                                                         |                  |          |               |        |                  |   |                                               | (8,308 | )     |       
|                           | Exercise of stock options                                             |                  | 73,446    |               |        | 714               |   |                                               |       |       |       
|                           | Shares issued in connection with merger                               |                  | 2,450,731 |               |        | 39,178            |   |                                               |       |       |       
|                           | Fair market value of stock options issued in connection with merger   |                  |          |               |        | 722               |   |                                               |       |       |       
|                           | Net income                                                            |                  |          |               |        |                  |   |                                               | 27,402 |       |       
|                           | Change in net unrealized gain (loss) on available for sale securities |                  |          |               |        |                  |   |                                               |       |       |       
|                           | Stock repurchased                                                     |                  | (454,126  | )             |        | (7,514            | ) |                                               |       |       |       
|                           |                                                                       |                  |           |               |        |                   |   |                                               |        |       |       
|BALANCE, December 31, 2001 |                                                                       | 24,088,633       |           | $             | 84,872 |                   | $ | 143,257                                       |        | $     | 6,422 
|                           |                                                                       |                  |           |               |        |                   |   |                                               |        |       |       

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

48

---

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

|                                                                                  |                                                                       | Year Ended December 31,                                      |         
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------------ | --------
|
|Operating Activities:                                                             |                                                                       |                                                              |         
|Net Income                                                                        |                                                                       | $                                                            | 27,402  
|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          |                                                              |         
|                                                                                  | (Gain) loss on sale of investments                                    |                                                              |         
|                                                                                  | 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                                         |                                                              |         
|                                                                                  | (Increase) decrease in other intangibles                              |                                                              |         
|                                                                                  | (Increase) decrease in accrued interest and other assets              |                                                              |         
|                                                                                  | (Decrease) increase in accrued interest payable and other liabilities |                                                              |         
|                                                                                  |                                                                       |                                                              |         
|                                                                                  | Net cash provided by operating activities                             |                                                              |         
|                                                                                  |                                                                       |                                                              |         
|Investing Activities:                                                             |                                                                       |                                                              |         
|Proceeds from sales and maturities of securities                                  |                                                                       |                                                              | 137,709 
|Purchases of securities                                                           |                                                                       |                                                              | (159,772
|Proceeds from sales of other real estate owned                                    |                                                                       |                                                              |        
|Net increase in loans                                                             |                                                                       |                                                              | (41,540 
|Receipts from real estate investments, net of advances                            |                                                                       |                                                              | (5      
|Cash acquired in acquisition, net of cash used                                    |                                                                       |                                                              | 45,222  
|Purchases of premises and equipment                                               |                                                                       |                                                              | (876    
|Proceeds from sales of premises and equipment                                     |                                                                       |                                                              | 15      
|                                                                                  |                                                                       |                                                              |         
|                                                                                  | Net cash used in investing activities                                 |                                                              |         
|                                                                                  |                                                                       |                                                              |         
|Financing Activities:                                                             |                                                                       |                                                              |         
|Net increase (decrease) in deposits                                               |                                                                       |                                                              | 99,006  
|Net (decrease) increase in other borrowings                                       |                                                                       |                                                              | (12,526 
|Cash dividend paid                                                                |                                                                       |                                                              | (8,308  
|Proceeds from exercise of stock options                                           |                                                                       |                                                              | 714     
|Purchase of bank stock for retirement                                             |                                                                       |                                                              | (7,514  
|                                                                                  |                                                                       |                                                              |         
|                                                                                  | Net cash provided by (used in) financing activities                   |                                                              |         
|                                                                                  |                                                                       |                                                              |         
|INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS                                    |                                                                       |                                                              | 86,982  
|CASH AND CASH EQUIVALENTS, beginning of year                                      |                                                                       |                                                              | 88,988  
|                                                                                  |                                                                       |                                                              |         
|CASH AND CASH EQUIVALENTS, end of year                                            |                                                                       | $                                                            | 175,970 
|                                                                                  |                                                                       |                                                              |         
|Supplemental disclosure of cash flow information Cash paid during the year for:   |                                                                       |                                                              |         
|                                                                                  | Interest (net of amounts capitalized)                                 |                                                              | $       
|                                                                                  | Taxes on income, net                                                  |                                                              |         
|                                                                                  | Transfers from loans to other real estate owned                       |                                                              |         
|ACQUISITIONS                                                                      |                                                                       |                                                              |         
|                                                                                  | Fair value of tangible assets acquired                                |                                                              | $       
|                                                                                  | Fair value of core deposit intangible acquired                        |                                                              |         
|                                                                                  | Goodwill created in acquisition                                       |                                                              |         
|                                                                                  | Liabilities assumed                                                   |                                                              |         
|                                                                                  |                                                                       |                                                              |         
|                                                                                  | Acquisition price                                                     |                                                              |         
|                                                                                  | Less:                                                                 |                                                              |         
|                                                                                  |                                                                       | Common stock issued                                          |         
|                                                                                  |                                                                       | Amounts payable to Americorp shareholders and other accruals |         
|                                                                                  |                                                                       |                                                              |         
|                                                                                  | Cash paid                                                             |                                                              |         
|                                                                                  | Cash acquired                                                         |                                                              |         
|                                                                                  |                                                                       |                                                              |         
|                                                                                  | Cash acquired, net of cash paid                                       |                                                              | $       
|                                                                                  |                                                                       |                                                              |         

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

49

---

Notes to Consolidated Financial Statements
December 31, 2001

1.    Summary of Significant Accounting Policies

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

Consolidation:The consolidated financial statements include the accounts of Mid-State Bancshares and its wholly
owned subsidiary, Mid-State Bank & Trust, (the "Bank") which includes Mid-State Bank'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, 2001 and 2000, 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, 2001, 2000 and 1999 and as a separate component of
the capital accounts for the years ended December 31, 2001 and 2000. Securities classified as held-to-maturity are reported on the consolidated statements of financial
position as of December 31, 2000 at their amortized cost basis.

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

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

Loans: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.

50

---

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

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

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 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. Management adopted
SFAS No. 133 on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Bank's results of operations or financial condition, other than the transfer of
the remaining Held-To-Maturity portion of the Investment Securities Portfolio to the Available for Sale portion of the Investment Securities Portfolio.

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 Bank's financial statements. The other provisions of SFAS No. 140 were effective April 1, 2001. Management adopted
the remaining provisions of SFAS No. 140 and they did not have a material impact on the Bank's results of operations or financial condition.

In
June 2001, the FASB issued SFAS No. 141,"Business Combinations"and SFAS No. 142, "Goodwill and Other Intangible Assets."SFAS No. 141
addresses financial accounting and reporting for business combinations and is effective for
all business combinations accounted for by the purchase method

51

---

completed after June 30, 2001. SFAS No. 141 requires all business combinations be accounted for using the purchase method. The Bank adopted SFAS No. 141 during the third quarter
of 2001, and the merger with Americorp, which is discussed in Note 2, is accounted for in accordance with SFAS No. 141.

SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. With the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life, rather goodwill will be subject to at least an annual assessment for impairment. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001, with a provision that states goodwill acquired in a business combination for which the acquisition date is after June 30, 2001 should not be amortized.
Accordingly, the goodwill generated through the merger with Americorp, which is discussed in Note 2, will not be amortized. Management adopted SFAS No. 142 on January 1, 2002. The
adoption of SFAS No. 142 did not have a material impact on the Company's results of operations or financial condition, other than increasing net income by $2.3 million for the year
ending December 31, 2002, assuming that goodwill would have been amortized over a useful life of 15 years. However, it should be noted that the results of annual assessments in future
years could impact the Company's results of operations or financial condition if goodwill is considered to be impaired.

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

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

RECLASSIFICATIONS:Certain items in the consolidated financial statements for 2000 and 1999 were reclassified to conform to
the 2001 presentation.

2.    Mergers

City Commerce Bank

The Company signed a definitive agreement to merge with City Commerce Bank 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.

Americorp

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

52

---

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

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

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

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

Cash and Due From Banks

$
24,406Federal Funds Sold


52,000Securities, net


14,606Loans, Net


184,579Goodwill (A)


32,232Other Intangibles (B)


8,870Deferred Tax Asset


3,641Other Assets


6,702Total Assets Acquired


327,036Total Deposits


(253,998
)Other Liabilities


(1,538
)Total Liabilities Assumed


(255,536
)Net Assets Acquired

$
71,500


---

53

---

3.    Cash Reserves

The average reserve balances required to be maintained by the Federal Reserve Bank were approximately $36.3 million and $24.5 million at
December 31, 2001 and 2000, respectively.

4.    Securities

A summary of investment securities owned is as follows:

December 31, 2001

(amounts in 000's)Securities Available For Sale

Cost
Basis

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Market
ValueU.S. Treasury securities

$
40,777

$
399

$


$
41,176Securities of U.S. government agencies and corporations


161,612


4,253


(83
)

165,782Mortgage backed securities


3,296


389





3,685Obligations of states and political subdivisions


220,672


5,067


(282
)

225,457Other investments


14,285


996


(36
)

15,245TOTAL

$
440,642

$
11,104

$
(401
)
$
451,345


December 31, 2000

(amounts in 000's)Securities Available For Sale

Cost
Basis

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Market
ValueU.S. Treasury securities

$
51,928

$
211

$
(7
)
$
52,132Securities of U.S. government agencies and corporations


85,304


857


(623
)

85,538Mortgage backed securities


4,057


5


(8
)

4,054Obligations of states and political subdivisions


231,871


2,067


(525
)

233,413Other investments


6,650


57


(22
)

6,685TOTAL

$
379,810

$
3,197

$
(1,185
)
$
381,822


Securities Held to Maturity

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Market
ValueSecurities of U.S. governmentagencies and corporations

$
2,500

$
6

$


$
2,506Mortgage backed securities


339








339Obligations of states and political subdivisions


21,801


199





22,000Other investments


1,000








1,000TOTAL

$
25,640

$
205

$


$
25,845


Securities
having an amortized cost of $85,567,000 and $73,302,000 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits and for other purposes as
required by law.

54

---

Proceeds
from calls, partial pay-downs and/or sales of securities during 2001 were $139,561,000. Gross gains of $155,000 and gross losses of $99,000 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. This action
was taken in conformance with Mid-State Bancshares' overall asset/liability and investment management policy and is permitted under SFAS No. 115,"Accounting
for Certain Investments in Debt and Equity Securities."

The
amortized cost and market value of securities at December 31, 2001 and 2000, 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.

(dollars in 000's)

Available For Sale

Held-to-MaturityDecember 31, 2001

Cost
Basis

Market
Value

Amortized
Cost

Market
ValueDue in one year or less

$
114,992

$
116,434

$


$
Due after one year to five years


266,021


273,008





Due after five years to ten years


56,818


59,085





Due after ten years


2,811


2,818





Total

$
440,642

$
451,345

$


$



Available For Sale

Held-to-MaturityDecember 31, 2000

Cost
Basis

Market
Value

Amortized
Cost

Market
ValueDue in one year or less

$
111,809

$
112,029

$
6,265

$
6,276Due after one year to five years


197,577


196,743


15,372


15,512Due after five years to ten years


68,347


70,918


4,003


4,057Due after ten years


2,078


2,132





Total

$
379,811

$
381,822

$
25,640

$
25,845


55

---

5.    Loans and Allowance for Loan Losses

The loan portfolio consists of the following:

December 31,(dollars in 000's)2001

2000Construction and development loans

$
217,241

$
168,721Real estate loans


541,187


447,464Home equity credit lines


68,541


55,619Installment loans


35,294


31,001Credit cards and related items


3,881


9,254Agricultural production


34,235


28,802Commercial, other


252,871


182,3381,153,250


923,199Less allowance for loan losses


(20,659
)

(13,280
)Less deferred loan fees, net


(3,546
)

(3,232
)TOTAL LOAN PORTFOLIO

$
1,129,044

$
906,687


At
December 31, 2001, $826,969,000 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 $2,986,000 and $4,510,000 at December 31, 2001 and 2000, respectively. If interest income on non-accrual loans had been
recorded as originally scheduled, approximately $397,000, $416,000, and $231,000 of additional interest income would have been recorded for the years ended December 31, 2001, 2000 and 1999,
respectively. Additionally, interest income which was recognized for loans on non-accrual totaled $135,000, $220,000, and $243,000, for 2001, 2000, and 1999, 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 $361,000, $10,000 and $620,000 in interest
was recognized from these loans during 2001, 2000 and 1999, respectively.

The
amount of the valuation allowance for impaired loans is determined by comparing the recorded investment in each loan with its value measured by one of three methods: (1) the
expected future cash flows discounted at the effective interest rate; (2) the loan's observable market price, if available from a secondary market; or (3) by valuing the underlying
collateral if the loan is collateral dependent. A valuation allowance is computed as any amount by which the recorded investment exceeds the value of the impaired loan. If the value of the loan, as
determined by one of the above methods, exceeds the recorded

56

---

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,(dollars in 000's)2001

2000Loans identified as impaired at year end

$
6,159

$
4,656Impaired loans for which a valuation allowance has been determined


3,080


1,048Impaired loans for which no valuation allowance was determined necessary


3,079


3,608Amount of valuation allowance


1,148


556


The
average amount of the recorded investment in impaired loans during the year ended December 31, 2001, 2000 and 1999 was approximately $8,579,000, $6,148,000 and $6,621,000,
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, 2001 and 2000. A summary of the changes in the allowance account is
as follows:

December 31,(dollars in 000's)2001

2000

1999Balance at beginning of year

$
13,280

$
13,105

$
14,441Additions to the allowance charged to expense


4,100


700


50Loans charged off


(2,914
)

(1,192
)

(2,522
)Recoveries of loans previouslycharged off


729


667


1,136AdjustmentAcquired through Merger


5,464





BALANCE AT END OF YEAR

$
20,659

$
13,280

$
13,105


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

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

December 31,(dollars in 000's)2001

2000Balance, at beginning of year

$
15,858

$
14,815Additional loans made


1,193


4,317Payments received


(2,760
)

(3,274
)BALANCE AT END OF YEAR

$
14,291

$
15,858


57

---

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)2001

2000Land

$
7,171

$
8,482Buildings


26,574


24,822Furniture and equipment


21,360


17,517Construction in progress


612


1,33055,717


52,151LessAccumulated depreciation and amortization


(29,866
)

(24,148
)TOTAL PREMISES AND EQUIPMENT

$
25,851

$
28,003


Depreciation
and amortization included in occupancy expenses was $3,968,000, $3,869,000, and $3,926,000 2001, 2000 and 1999, respectively, based on the following estimated useful lives:

Buildings

20-40 yearsFurniture and equipment

3-20 years


Total
rental expense for banking premises was $910,000, $980,000, and $1,027,000, in 2001, 2000 and 1999, respectively. As of December 31, 2001 the approximate minimum future
lease rentals payable under non-cancelable lease contracts for bank premises were as follows:

Year

(dollars in 000's)2002

$
1,7972003


1,0872004


1,0112005


9492006


833Thereafter


4,033TOTAL LEASE COMMITMENTS

$
9,710


7.    Investments in Real Estate

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.

58

---

8.    Disclosures about Fair Value of Financial Instruments

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



59

---



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

|                       |                         | 2001 |   | 2000     
|---------------------- | ----------------------- | ---- | - | ---------
|
|Financial assets:      |                         |      |   |          
|                       | Cash and due from banks |      | $ | 102,970  
|                       | Fed funds sold          |      |   | 73,000   
|                       | Investment securities   |      |   | 451,345  
|                       | Loans, net              |      |   | 1,129,044
|Financial liabilities: |                         |      |   |          
|                       | Deposits                |      |   | 1,584,166
|                       | Other borrowings        |      |   | 17,714   

9.    Deposits

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

December 31, 2001

|(dollars in 000's)                     |       | No Contractual
Maturity |         | Three Months
or Less |   | After 3 Months,
to 12 Months |         | After
One Year |         | Total  
|-------------------------------------- | ----- | ----------------------- | ------- | -------------------- | - | ---------------------------- | ------- | -------------- | ------- | -------
|Demand Deposits                        |       | $                       | 367,370 |                      | $ |                             |         | $              |        |        
|Savings, Money Market and NOW Accounts |       |                         | 769,173 |                      |   |                             |         |                |        |        
|Time Deposits$100,000 or more         |       |                         |        |                      |   | 86,411                       |         |                | 69,132  |        
|Time DepositsUnder $100,000           |       |                         |        |                      |   | 108,689                      |         |                | 136,001 |        
|                                       |       |                         |         |                      |   |                              |         |                |         |        
|                                       | Total |                         | $       | 1,136,543            |   | $                            | 195,100 |                | $       | 205,133
|                                       |       |                         |         |                      |   |                              |         |                |         |        

60

---

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
|                                       |       |                         |         |                      |   |                              |         |                |         |        

10.  Income Taxes

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

(dollars in 000's)

2001

2000

1999Federal:Current

$
9,753

$
10,208

$
6,565Deferred


1,433


(248
)

1,483Total Federal Taxes


11,186


9,960


8,048State:Current


3,388


4,431


2,905Deferred


(44
)

(249
)

477Total State Taxes


3,344


4,182


3,382TOTAL FEDERAL AND STATE TAX EXPENSE

$
14,530

$
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)

2001

2000

1999Tax expense at federal statutory tax rate

$
14,676

$
14,522

$
11,719State income tax expense


2,125


2,434


1,986Tax savings from exempt investment and loan income )


(2,245
)

(1,872
)

(1,391
)Merger related expenses








328Other, net


(26
)

(942
)

(1,212
)TOTAL TAX EXPENSE

$
14,530

$
14,142

$
11,430


61

---

The principal items giving rise to deferred taxes were:

(dollars in 000's)

2001

2000

1999Allowance for loan losses

$
(1,142
)
$
(239
)
$
358Gain on loan workouts


1,205


52


95Real estate joint ventures


(21
)

460


1,480Deferred compensation


106


(558
)

(344
)Merger related expenses





637


336State income taxes


444


(409
)

(516
)Provisions for OREO properties





155


137Capital loss carryforward


65





Depreciation


34


(393
)

482Securitiesdiscount accretion


20


7


(68
)Prepaid expenses








(145
)Accrued liabilities and other, net


189


(209
)

145Accrued compensation


489





TOTAL DEFERRED TAXES

$
1,389

$
(497
)
$
1,960


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

|(dollars in 000's)                                                                           |                                    | 2001 |        | 2000  |   | 1999   |      
|-------------------------------------------------------------------------------------------- | ---------------------------------- | ---- | ------ | ----- | - | ------ | -----
|Assets:                                                                                      |                                    |      |        |       |   |        |      
|                                                                                             | Allowance for loan losses          |      | $      | 7,939 |   | $      | 4,832
|                                                                                             | Gain on loan workouts              |      |        | 167   |   |        | 1,372
|                                                                                             | Real estate joint ventures         |      |        |      |   |        |     
|                                                                                             | Deferred compensation              |      |        | 2,410 |   |        | 2,055
|                                                                                             | Merger related expenses            |      |        | 226   |   |        | 43   
|                                                                                             | State income taxes                 |      |        | 1,166 |   |        | 1,596
|                                                                                             | Provisions for OREO properties     |      |        |      |   |        |     
|                                                                                             | Capital loss carryforward          |      |        | 248   |   |        | 183  
|                                                                                             | Accrued liabilities and Other, net |      |        | 644   |   |        | 264  
|                                                                                             | Securitiesdiscount accretion      |      |        | 11    |   |        |     
|                                                                                             | Accrued compensation               |      |        | 232   |   |        |     
|                                                                                             |                                    |      |        |       |   |        |      
|Total Assets                                                                                 |                                    |      | 13,043 |       |   | 10,345 |      
|                                                                                             |                                    |      |        |       |   |        |      
|Liabilities:                                                                                 |                                    |      |        |       |   |        |      
|                                                                                             | Real estate joint ventures         |      |        | (652  | ) |        | (647 
|                                                                                             | Depreciation and amortization      |      |        | (827  | ) |        | (814 
|                                                                                             | Securitiesdiscount accretion      |      |        |      |   |        | (9   
|                                                                                             | Mark-to-market adjustment          |      |        | (293  | ) |        |     
|                                                                                             |                                    |      |        |       |   |        |      
|Total Liabilities                                                                            |                                    |      | (1,772 | )     |   | (1,470 | )    
|                                                                                             |                                    |      |        |       |   |        |      
|Valuation Allowance                                                                          |                                    |      | (248   | )     |   | (183   | )    
|                                                                                             |                                    |      |        |       |   |        |      
|Net deferred tax asset before tax effect of unrealized gain on securities available for sale |                                    |      | 11,023 |       |   | 8,692  |      
|Tax effect of unrealized gain on securities available for sale                               |                                    |      | (4,280 | )     |   | (804   | )    
|                                                                                             |                                    |      |        |       |   |        |      
|DEFERRED TAX ASSET, NET                                                                      |                                    | $    | 6,743  |       | $ | 7,888  |      
|                                                                                             |                                    |      |        |       |   |        |      

62

---

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, 2001, 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 $104,000 and
$135,000 at December 31, 2001 and 2000, respectively. Other borrowings also include borrowings under the Treasury Tax and Loan note account of $17,609,000 and $3,980,000 at December 31,
2001 and 2000, respectively. Securities sold under agreement to repurchase, included in other borrowings, are $0 and $125,000 at December 31, 2001 and 2000, respectively.

12.  Commitments and Contingencies

At December 31, 2001 and 2000, the Company was contingently liable for letter of credit accommodations made to its customers totaling $31,787,000 and
$33,168,000, respectively. At December 31, 2001 and 2000, the Company also had undisbursed loan commitments in the amount of $368,543,000 and $359,473,000, respectively.

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 2001, 2000 and 1999, based on the weighted average number of shares outstanding each year of 22,452,000,
22,257,000, and 22,461,000, respectively. Average outstanding shares in prior years have been restated to reflect stock dividends paid to former shareholders of Mid-State Bank, as well as,
additional shares issued in connection with the mergers. Also, on January 26, 2001, the Company declared a 2 for 1 stock split. All EPS and share data has been retroactively restated taking
into account this split.

63

---

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   
|------------------------------ | ------------------------------------------------------------------- | -------- | - | ----------------------------------- |  | ------
|2001                           |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:      |                                                                     |          |   |                                     |  |       
|                               | Net Income available to Common Stockholders                         |          | $ | 27,402                              |  | 22,452
|Effect of Dilutive Securities: |                                                                     |          |   |                                     |  |       
|                               | Stock Options                                                       |          |   |                                     |  | 800   
|Diluted Earnings Per Share:    |                                                                     |          |   |                                     |  |       
|                               | Net Income available to Common Stockholders and assumed conversions |          | $ | 27,402                              |  | 23,252
|2000                           |                                                                     |          |   |                                     |  |       
|Basic Earnings Per Share:      |                                                                     |          |   |                                     |  |       
|                               | Net Income available to Common Stockholders                         |          | $ | 27,349                              |  | 22,257
|Effect of Dilutive Securities: |                                                                     |          |   |                                     |  |       
|                               | Stock Options                                                       |          |   |                                     |  | 465   
|Diluted Earnings Per Share:    |                                                                     |          |   |                                     |  |       
|                               | Net Income available to Common Stockholders and assumed conversions |          | $ | 27,349                              |  | 22,722
|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

14.  Capital Accounts

The Company declared cash dividends during 2001 of $8,308,000. The California Financial Code provides that a bank may not make a cash distribution to its
shareholders in excess of (1) the bank's undivided profits or (2) the bank's net income for its last three fiscal years less the amount of any distributions made by the bank during such
period. This latter restriction was influenced by the additional dividends paid by the Bank to the Holding Company in 2001 and 2000 of $42,666,000 which were necessary to execute the Company's common
stock repurchase plan and to complete the merger with Americorp. Due to this restriction, the Bank could have made cash dividends totaling $8,986,000 at December 31, 2001 under the California
Financial Code. The Bank has requested, and the Federal Deposit Insurance Corporation and State Department of Financial Institutions have both agreed, to allow the Bank to pay dividends in 2002 of
$20,000,000.

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

64

---

is subject to termination as determined by the Board of Directors. As of December 31, 2001, 1,871,514 shares are currently under option. The shares are exercisable at prices ranging from $5.38
to $18.00. During 2000, 46,008 shares were exercised and 73,446 shares were exercised in 2001.

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 3.83%
to 6.38% and expected lives of five years. The Bank's net income and earnings per share for the years ended December 31, 2001, 2000 and 1999 would have been reduced to pro forma amounts
indicated below:

(dollars in 000's except per share data)

2001

2000

1999Net income to common shareholders:As reported

$
27,402

$
27,349

$
22,053Pro forma

$
26,115

$
26,241

$
21,232Net income per common and common share equivalent:Basic earnings per share:As reported

$
1.22

$
1.23

$
0.98Pro forma

$
1.16

$
1.18

$
0.95Diluted earnings per share:As reported

$
1.18

$
1.20

$
0.97Pro forma

$
1.12

$
1.15

$
0.94


A
summary of the Company's stock options as of December 31, 2001, 2000 and 1999, and changes during the periods then ended, is presented below:

|                                 |  | 2001      |   | 2000 |       | 1999
|-------------------------------- |  | --------- | - | ---- | ----- | ----
|
|Outstanding at beginning of year |  | 1,627,526 |   | $    | 14.61 |     
|Granted                          |  | 420,644   |   |      | 14.06 |     
|Exercised/Forfeited              |  | (176,656  | ) |      | 12.45 |     
|                                 |  |           |   |      |       |     
|Outstanding at end of year       |  | 1,871,514 |   | $    | 14.69 |     
|                                 |  |           |   |      |       |     

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, 2001, 2000, and 1999
were $2,064,000, $2,185,000, and $1,814,000, respectively.

65

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A deferred compensation plan was in effect to provide performance oriented deferred compensation for the Company's senior executives prior to 2001. Allocations to participant's accounts
were made at the discretion of the Board of Directors. The amount of contributions was determined by the Board of Directors as a function of net profits and prior year return on equity. In 2000,
$820,000 was contributed to participants with $662,000 contributed for 1999. No contributions were made in 2001 because senior executives now participate in the Company's bonus incentive system which
began in 1996 (the Incentive Reward System). A bonus is paid to selected employees who exceed certain goals under formulas established at the start of the year. Included in employee benefits expense
for 2001, 2000 and 1999 was a charge of $1,621,000, $2,253,000 and $1,214,000, 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 2001 ranging from 0.6% of their salary to as much as 10.0% of their salary.

Prior
to the merger with City Commerce Bank, City Commerce had paid bonuses to employees amounting to $98,038, for the year 1999.

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, 2001, the latest regulatory examinations indicated that, Mid-State Bancshares and Mid-State Bank & Trust were categorized as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Mid-State Bancshares and Mid-State Bank & Trust must
maintain minimum total risk-based, Tier One risk-based and Tier One Leverage ratios as set forth in the following table. There are no conditions or events that Management
believes have changed Mid-State

66

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Bancshares' and Mid-State Bank & Trust's category. The actual capital amounts and ratios as of December 31, 2001 and 2000 are also presented in the following table:

|                                           |  |   |         |  |      |   |   |         |  | To be Considered
Well Capitalized
For Capital
Adequacy Purposes |  
|------------------------------------------ |  | - | ------- |  | ---- | - | - | ------- |  | --------------------------------------------------------------- | -
|
|
|
|
|Mid-State BancsharesConsolidated:         |  |   |         |  |      |   |   |         |  |                                                                 |  
|As of December 31, 2001:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(to Risk Weighted Assets)    |  | $ | 202,943 |  | 15.0 | % | $ | 107,940 |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 186,031 |  | 13.8 | % | $ | 53,970  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 186,031 |  | 10.2 | % | $ | 72,825  |  | 4.0                                                             | %
|As of December 31, 2000:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(To Risk Weighted Assets)    |  | $ | 187,800 |  | 16.7 | % | $ | 90,035  |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 174,520 |  | 15.5 | % | $ | 45,017  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 174,520 |  | 12.3 | % | $ | 56,893  |  | 4.0                                                             | %
|Mid-State BankOnly:                       |  |   |         |  |      |   |   |         |  |                                                                 |  
|As of December 31, 2001:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(to Risk Weighted Assets)    |  | $ | 199,116 |  | 14.8 | % | $ | 107,935 |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 182,204 |  | 13.5 | % | $ | 53,967  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 182,204 |  | 10.0 | % | $ | 72,975  |  | 4.0                                                             | %
|As of December 31, 2000:                   |  |   |         |  |      |   |   |         |  |                                                                 |  
|Total Capital
(To Risk Weighted Assets)    |  | $ | 185,409 |  | 16.5 | % | $ | 90,037  |  | 8.0                                                             | %
|Tier One Capital
(to Risk Weighted Assets) |  | $ | 172,129 |  | 15.3 | % | $ | 45,019  |  | 4.0                                                             | %
|Tier One Capital
(to Average Assets)       |  | $ | 172,129 |  | 12.1 | % | $ | 56,893  |  | 4.0                                                             | %

18.  Reportable Business Segments

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

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

67

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management and trust-related services such as trustee for trust accounts, estate settlement services, guardianships and conservatorships.

Non
reportable operating segments of the Company's operations which do not have similar characteristics to any other banking operations and do not meet the quantitative thresholds
requiring disclosure, are included in the "All Other" category. "All Other" includes the activities of the Company (excluding equity in earnings of subsidiaries) and certain non-recurring
items such as a recovery of prior periods interest on a previously charged-off note totaling $2.8 million in 2001, an additional provision for loan losses of $2.9 million in
2001 in anticipation of the negative impact on credit quality of a deterioration in economic activity, a one-time gain on the sale of the credit card portfolio of $1.7 million in
2001, one-time charges to expense in 2001 for costs of donated property, an early retirement program and the Bank's name change, and one-time merger related charges in 1999 of
$3.4 million. These items
are not considered attributable to the assessment of performance of the business segments to which they relate.

Below
is a summary statement of income and certain selected financial data for each of the three years ended December 31, 2001. 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 |   | Trust Department |  | All Other |        | Mid State Bancshares
|---------------------------- |  | ----------------- | ------- | ---------------------- | - | ---------------- |  | --------- | ------ | --------------------
|
|
|Interest Income              |  | $                 | 111,181 |                        | $ | 109,946          |  | $         | 99,565 |                     
|Interest Expense             |  |                   | 26,480  |                        |   | 27,599           |  |           | 26,071 |                     
|                             |  |                   |         |                        |   |                  |  |           |        |                     
|Net Interest Income          |  |                   | 84,701  |                        |   | 82,347           |  |           | 73,494 |                     
|Provision                    |  |                   | 1,200   |                        |   | 700              |  |           | 50     |                     
|Non Interest Income          |  |                   | 20,890  |                        |   | 16,950           |  |           | 16,680 |                     
|Non Interest Expense         |  |                   | 61,801  |                        |   | 57,851           |  |           | 53,614 |                     
|                             |  |                   |         |                        |   |                  |  |           |        |                     
|Pre-Tax Income               |  | $                 | 42,590  |                        | $ | 40,746           |  | $         | 36,510 |                     
|                             |  |                   |         |                        |   |                  |  |           |        |                     
|Average Assets
(in millions) |  | $                 | 1,564   |                        | $ | 1,387            |  | $         | 1,385  |                     

19.  Quarterly Financial Data

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

2001

|                          |          | 1st Quarter |        | 2nd Quarter |   | 3rd Quarter |      | 4th Quarter |        | Full Year
|------------------------- | -------- | ----------- | ------ | ----------- | - | ----------- | ---- | ----------- | ------ | ---------
|Interest Income           |          | $           | 27,654 |             | $ | 27,090      |      | $           | 29,902 |          
|Interest Expense          |          |             | 7,221  |             |   | 6,868       |      |             | 6,427  |          
|                          |          |             |        |             |   |             |      |             |        |          
|Net Interest Income       |          |             | 20,433 |             |   | 20,222      |      |             | 23,475 |          
|Provision for loan losses |          |             | 300    |             |   | 300         |      |             | 3,200  |          
|Non-interest income       |          |             | 5,160  |             |   | 5,434       |      |             | 5,185  |          
|Non-interest expense      |          |             | 14,747 |             |   | 16,601      |      |             | 16,548 |          
|                          |          |             |        |             |   |             |      |             |        |          
|Income before taxes       |          |             | 10,546 |             |   | 8,755       |      |             | 8,912  |          
|                          |          |             |        |             |   |             |      |             |        |          
|Net Income                |          | $           | 6,646  |             | $ | 6,678       |      | $           | 5,595  |          
|                          |          |             |        |             |   |             |      |             |        |          
|Earnings Per Share:       |          |             |        |             |   |             |      |             |        |          
|                          | Basic   |             | $      | 0.30        |   | $           | 0.31 |             | $      | 0.26     
|                          | Diluted |             | $      | 0.30        |   | $           | 0.29 |             | $      | 0.25     

68

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2000

|                          |          | 1st Quarter |        | 2nd Quarter |   | 3rd Quarter |      | 4th Quarter |        | Full Year
|------------------------- | -------- | ----------- | ------ | ----------- | - | ----------- | ---- | ----------- | ------ | ---------
|Interest Income           |          | $           | 26,285 |             | $ | 26,753      |      | $           | 28,262 |          
|Interest Expense          |          |             | 6,444  |             |   | 6,652       |      |             | 7,122  |          
|                          |          |             |        |             |   |             |      |             |        |          
|Net Interest Income       |          |             | 19,841 |             |   | 20,101      |      |             | 21,140 |          
|Provision for loan losses |          |             |       |             |   | 100         |      |             | 300    |          
|Non-interest income       |          |             | 4,375  |             |   | 4,492       |      |             | 4,553  |          
|Non-interest expense      |          |             | 14,233 |             |   | 14,113      |      |             | 14,724 |          
|                          |          |             |        |             |   |             |      |             |        |          
|Income before taxes       |          |             | 9,983  |             |   | 10,380      |      |             | 10,669 |          
|                          |          |             |        |             |   |             |      |             |        |          
|Net Income                |          | $           | 6,427  |             | $ | 6,777       |      | $           | 6,997  |          
|                          |          |             |        |             |   |             |      |             |        |          
|Earnings Per Share:       |          |             |        |             |   |             |      |             |        |          
|                          | Basic   |             | $      | 0.28        |   | $           | 0.30 |             | $      | 0.32     
|                          | Diluted |             | $      | 0.28        |   | $           | 0.30 |             | $      | 0.31     

20.  Parent Company Financial Information

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

Condensed Balance Sheets

|                                     |                                            | December 31, |        
|------------------------------------ | ------------------------------------------ | ------------ | -------
|
|ASSETS                               |                                            |              |        
|Cash                                 |                                            | $            | 3,653  
|Investment in Mid-State Bank         |                                            |              | 233,128
|Other Assets                         |                                            |              | 5      
|                                     |                                            |              |        
|                                     | Total Assets                               |              | $      
|                                     |                                            |              |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                            |              |        
|Dividend Payable                     |                                            | $            | 2,409  
|Accrued Liabilities                  |                                            |              | (174   
|                                     |                                            |              |        
|                                     | Total Liabilities                          |              |        
|Shareholders' Equity                 |                                            |              | 234,551
|                                     |                                            |              |        
|                                     | Total Liabilities and Shareholders' Equity |              | $      
|                                     |                                            |              |        

Condensed Income Statements

|                                    |               | December 31, |       
|----------------------------------- | ------------- | ------------ | ------
|
|Equity in earnings of subsidiaries: |               |              |       
|                                    | Undistributed |              | $     
|                                    | Dividends     |              |       
|Operating Expenses                  |               |              | (666  
|Income Tax Benefit                  |               |              | 280   
|                                    |               |              |       
|Net Income                          |               | $            | 27,402
|                                    |               |              |       

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Condensed Statements of Cash Flows

|                                                                                  |                                  | December 31,                              |      
|--------------------------------------------------------------------------------- | -------------------------------- | ----------------------------------------- | -----
|
|Cash flows from operation activities:                                             |                                  |                                           |      
|                                                                                  | Net Income                       |                                           | $    
|Adjustments to reconcile net income to net cash provided by operating activities: |                                  |                                           |      
|                                                                                  | Net earnings of Bank             |                                           |      
|                                                                                  |                                  | Net change in other liabilities           |      
|                                                                                  |                                  | Net change in other assets                |      
|                                                                                  |                                  |                                           |      
|                                                                                  |                                  | Net cash provided by operating activities |      
|                                                                                  |                                  |                                           |      
|Net Cash Flow from Investing Activities                                           |                                  |                                           |     
|                                                                                  |                                  |                                           |      
|Net Cash Flows from Financing Activities:                                         |                                  |                                           |      
|                                                                                  | Proceeds from stock options      |                                           |      
|                                                                                  | Payment to purchase common stock |                                           |      
|                                                                                  | Dividends paid by parent         |                                           |      
|                                                                                  | Other                            |                                           |      
|                                                                                  |                                  | Net cash used in financing activities     |      
|                                                                                  |                                  |                                           |      
|Net Increase (Decrease) in Cash                                                   |                                  |                                           | 1,502
|Cash, beginning of year                                                           |                                  |                                           | 2,151
|                                                                                  |                                  |                                           |      
|Cash, at end of year                                                              |                                  | $                                         | 3,653
|                                                                                  |                                  |                                           |      

70

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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, 2001 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, 2001. 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, 2001.

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, 2001.

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

71

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

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

We
have examined management's assertion included in the accompanyingManagement Statement, that Mid-State Bancshares and
Subsidiary maintained an effective internal control structure over financial reporting as of December 31, 2001 based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Management is responsible for maintaining effective
internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of internal control based on our examination.

Our
examination was made in accordance with attestation 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 controls, and performing such other procedures
as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

Because
of inherent limitations in any system of internal control, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the system to future
periods are subject to the risk that the system of internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In
our opinion, management's assertion that Mid-State Bancshares and Subsidiary maintained an effective internal control over financial reporting as of December 31,
2001 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 22, 2002

72

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

None.

73

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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 2002 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 2002 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 2002 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 2002 Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.

74

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

|Exhibit
Number |  | Index to Exhibits                                                                                                                      |  | Sequentially
Numbered
Pages
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------
|3.1            |  | Articles of Incorporation, as amended1                                                                                                 |  |                            
|3.2            |  | Bylaws of Registrant2                                                                                                                  |  |                            
|4.1            |  | Specimen Certificate evidencing shares of Mid-State Bancshares Common Stock3                                                           |  |                            
|10.1           |  | Mid-State Bancshares 1996 Stock Option Plan, form of Stock Option Agreement and form of Substitute Stock Option Agreement, as amended4 |  |                            
|10.2           |  | Deferred Compensation Plan, and as further amended on January 9, 2002                                                                  |  |                            
|10.3           |  | Profit Sharing and Salary Deferral 401(K) Plan5                                                                                        |  |                            
|10.4           |  | Change in Control Agreement for Carrol R. Pruett, as amended                                                                           |  |                            
|10.5           |  | Change in Control Agreement for James G. Stathos                                                                                       |  |                            
|10.6           |  | Change in Control Agreement for James W. Lokey                                                                                         |  |                            
|10.7           |  | 2001 Deferred Compensation Plan                                                                                                        |  |                            
|21             |  | Subsidiary of Mid-State BancsharesMid-State Bank is the only subsidiary                                                               |  |                            
|23.1           |  | Consent of Accountants                                                                                                                 |  |                            
|99             |  | Acknowledgement Letter regarding Arthur Andersen                                                                                       |  |                            

(b)  Schedules:

Not Applicable

(c)  Reports on Form 8-K

During
the fourth quarter of 2001, the Company did not file any Reports.

---

75

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SIGNATURES

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

|MID-STATE BANCHSARES 
|---------------------
|                     
|By:                  
|                     
|Dated: March 26, 2002
|                     
|                     
|By                   
|                     
|Dated: March 26, 2002

76

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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.

|Signature                               |  | Title                 |  | Date          
|--------------------------------------- |  | --------------------- |  | --------------
|                                        |  |                       |  |               
|/s/CARROL R. PRUETTCARROL R. PRUETT     |  | Chairman of the Board |  | March 26, 2002
|/s/JAMES W. LOKEYJAMES W. LOKEY         |  | Director              |  | March 26, 2002
|/s/GRACIA B. BELLOGRACIA B. BELLO       |  | Director              |  | March 26, 2002
|/s/A. J. DIANIA. J. DIANI               |  | Director              |  | March 26, 2002
|/s/DARYL L. FLOODDARYL L. FLOOD         |  | Director              |  | March 26, 2002
|/s/TRUDI CAREYTRUDI CAREY               |  | Director              |  | March 26, 2002
|/s/H. EDWARD HERONH. EDWARD HERON       |  | Director              |  | March 26, 2002
|/s/RAYMOND E. JONESRAYMOND E. JONES     |  | Director              |  | March 26, 2002
|/s/STEPHEN P. MAGUIRESTEPHEN P. MAGUIRE |  | Director              |  | March 26, 2002
|                                        |  |                       |  |               

77

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|/s/GREGORY R. MORRISGREGORY R. MORRIS         |  | Director |  | March 26, 2002
|--------------------------------------------- |  | -------- |  | --------------
|/s/WILLIAM L. SNELLINGWILLIAM L. SNELLING     |  | Director |  | March 26, 2002
|/s/ROBERT J. LAGOMARSINOROBERT J. LAGOMARSINO |  | Director |  | March 26, 2002

78

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                  
|-------------- |  | -------------------------------------------------------------
|10.2           |  | Deferred Compensation Plan Amendment                         
|10.4           |  | Amendment to Change in Control Agreement for Carrol R. Pruett
|10.5           |  | Change in Control Agreement for James G. Stathos             
|10.6           |  | Change in Control Agreement for James W. Lokey               
|10.7           |  | 2001 Deferred Compensation Plan                              
|23.1           |  | Consent of Accountants                                       
|99             |  | Acknowledgement Letter regarding Arthur Andersen             

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