** **

**United States**

**Securities and Exchange Commission**

**Washington, D.C. 20429**

 

**FORM 10-Q**

 

**ý****   Quarterly report under Section 13 or15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March31, 2005.**

** **

**o****   Transition report under Section 13 or15(d) of the Securities Exchange Act of 1934 for the transition period from               N/A               to               N/A               .**

 

Commission File Number **000-23925**

 

**MID-STATE BANCSHARES**

**(**Exact name of registrant as specified in its charter)

 

| **California**                            | ** ** | **77-0442667**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of          |       | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)           |       |                                  |
|                                      |       |                                  |
| **1026  Grand Ave. Arroyo Grande, CA**    | ** ** | **93420-0580**                        |
| (Address of  Principal Executive Offices) |       | (Zip Code)                            |

 

Registrant’s Telephone Number:     **(805) 473-7700**

 

 

Check whether the Company(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes **ý**   No   o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).   Yes **ý**  No   o

 

 

Number of shares ofcommon stock of the Company outstanding as of  May 4, 2005: 22,904,839 shares.

 

 

----

 

**Mid-StateBancshares**

March 31, 2005

Index

 
|                               |                                                    |                                                                                        |
|------------------------------------|---------------------------------------------------------|---------------------------------------------------------------------------------------------|
| **PART I - FINANCIAL INFORMATION** |                                                    |
|                               |                                                    |                                                                                        |
|                               | Item 1 —                                           | Financial Statements (Unaudited)                                                            |   |
|                               |                                                    |                                                                                        |
|                               | Consolidated  Statements of Financial Position          |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Consolidated Statements of Income                       |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Consolidated  Statements of Comprehensive Income        |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Consolidated Statements  of Changes in Capital Accounts |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Consolidated Statements of Cash Flows                   |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Notes to Consolidated Financial Statements              |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Item 2 —                                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                               |                                                    |                                                                                        |
|                               | Item 3 —                                           | Quantitative  and Qualitative Disclosure About Market Risk                                  |   |
|                               |                                                    |                                                                                        |
|                               | Item 4 —                                           | Controls and  Procedures                                                                    |   |
|                               |                                                    |                                                                                        |
| **PART II - OTHER INFORMATION**    |                                                    |
|                               |                                                    |                                                                                        |
|                               | Item 1 —                                           | Legal Proceedings                                                                           |   |
|                               |                                                    |                                                                                        |
|                               | Item 2 —                                           | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
|                               |                                                    |                                                                                        |
|                               | Item 3 —                                           | Defaults Upon Senior  Securities                                                            |   |
|                               |                                                    |                                                                                        |
|                               | Item 4 —                                           | Submission of  Matters to a Vote of Security Holders                                        |   |
|                               |                                                    |                                                                                        |
|                               | tem 5 —                                            | Other Information                                                                           |   |
|                               |                                                    |                                                                                        |
|                               | Item 6 —                                           | Exhibits                                                                                    |   |
|                               |                                                    |                                                                                        |
|                               | Signatures                                              |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | Certifications                                          |                                                                                        |
|                               |                                                    |                                                                                        |
|                               | EX-32  Certification Pursuant to 18 U.S.C. Sec. 1350    |                                                                                        |
|                                    |                                                         |                                                                                             |  |  |

 

2

----

 

**PART I****- FINANCIAL INFORMATION**

**Item 1****- Financial Statements**

**Mid-StateBancshares**

Consolidated Statements of Financial Position

(Unaudited -figures in 000’s)

 
| **ASSETS**                                                                                        | ** ** | **March 31, 2005** | ** ** | **Dec. 31, 2004** | ** ** | **March 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| Cash and Due  From Banks                                                                          |       | $                  | 127,861    |              | $          | 112,669            |       | $ | 123,672 |   |
| Fed Funds Sold                                                                                    |       | 4,000              |       | 6,000             |       | —             |       |
| Securities  Available For Sale                                                                    |       | 624,634            |       | 644,817           |       | 749,708            |       |
| Loans Held for  Sale                                                                              |       | 9,927              |       | 12,988            |       | 10,712             |       |
| Loans, net of  unearned income                                                                    |       | 1,456,091          |       | 1,421,894         |       | 1,240,325          |       |
| Allowance for  Loan Losses                                                                        |       | (13,630            | )          | (13,799           | )          | (16,584            | )          |
| Net Loans                                                                                         |       | 1,442,461          |       | 1,408,095         |       | 1,223,741          |       |
|                                                                                              |       |               |       |              |       |               |       |
| Premises and  Equipment, Net                                                                      |       | 24,525             |       | 24,946            |       | 25,733             |       |
| Accrued Interest  Receivable                                                                      |       | 13,044             |       | 11,918            |       | 13,649             |       |
| Other Real  Estate Owned                                                                          |       | —             |       | —            |       | 3,428              |       |
| Goodwill                                                                                          |       | 47,840             |       | 47,840            |       | 47,840             |       |
| Core Deposit  Intangibles, net                                                                    |       | 7,388              |       | 7,732             |       | 8,763              |       |
| Other Assets                                                                                      |       | 20,501             |       | 19,082            |       | 11,421             |       |
| ***Total  Assets***                                                                               |       | $                  | 2,322,181  |              | $          | 2,296,087          |       | $ | 2,218,667 |   |
| *** ***                                                                                      |       |               |       |              |       |               |       |   |   |   |
| **LIABILITIES  AND EQUITY**                                                                       |       |               |       |              |       |               |       |
| Non Interest  Bearing Demand                                                                      |       | $                  | 526,597    |              | $          | 517,139            |       | $ | 480,652 |   |
| NOW Accounts,  Money Market and Savings Deposits                                                  |       | 1,076,531          |       | 1,083,139         |       | 1,031,023          |       |
| Time Deposits  Under $100                                                                         |       | 229,080            |       | 227,972           |       | 240,423            |       |
| Time Deposits  $100 or more                                                                       |       | 173,124            |       | 166,295           |       | 164,462            |       |
| *Total  Deposits*                                                                                 |       | 2,005,332          |       | 1,994,545         |       | 1,916,560          |       |
| Other Borrowings                                                                                  |       | 23,621             |       | 6,582             |       | 4,886              |       |
| Allowance for  Losses —  Unfunded Commitments                                                |       | 1,624              |       | 1,783             |       | 1,867              |       |
| Accrued Interest  Payable and  Other Liabilities                                                  |       | 21,228             |       | 18,550            |       | 17,072             |       |
| *Total  Liabilities*                                                                              |       | 2,051,805          |       | 2,021,460         |       | 1,940,385          |       |
| Commitments and  Contingencies                                                                    |       |               |       |              |       |               |       |
|                                                                                              |       |               |       |              |       |               |       |
| Shareholders’  Equity:                                                                       |       |               |       |              |       |               |       |
| Common Stock and  Surplus (Shares  outstanding of 22,949, 23,099 and  23,586, respectively)       |       | 56,805             |       | 61,439            |       | 75,673             |       |
| Retained  Earnings                                                                                |       | 211,924            |       | 206,328           |       | 189,135            |       |
| Accumulated  Other Comprehensive Income  net of taxes of $1,098, $4,573 and $8,983,  respectively |       | 1,647              |       | 6,860             |       | 13,474             |       |
| *Total  Equity*                                                                                   |       | 270,376            |       | 274,627           |       | 278,282            |       |
| ***Total  Liabilities and Equity***                                                               |       | $                  | 2,322,181  |              | $          | 2,296,087          |       | $ | 2,218,667 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

3

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**Mid-StateBancshares**

Consolidated Statements of Income

(Unaudited -figures in 000’s except earnings per share data)

 
| ** **                                                             | ** ** | **Three Month Period** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **Ended March 31,**    | ** ** |
| ** **                                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **Interest  Income:**                                                  |       |                   |       |   |   |
| Interest and  fees on loans                                            |       | $                      | 23,941     |   | $ | 19,718 |   |
| Interest on  investment securities -                                   |       |                   |       |   |   |
| U.S. Treasury  securities                                              |       | 111                    |       | 416 |   |
| U.S. Government  agencies and corporations                             |       | 1,573                  |       | 2,331 |   |
| Obligations of  states and political Subdivisions and other securities |       | 3,730                  |       | 3,686 |   |
| Interest on fed  funds sold and other                                  |       | 127                    |       | 86 |   |
| **Total  Interest Income**                                             |       | 29,482                 |       | 26,237 |   |
| **Interest  Expense:**                                                 |       |                   |       |   |   |
| Interest on NOW,  money market and savings                             |       | 724                    |       | 592 |   |
| Interest on time  deposits less than $100                              |       | 1,023                  |       | 899 |   |
| Interest on time  deposits of $100 or more                             |       | 781                    |       | 504 |   |
| Interest other                                                         |       | 185                    |       | 81 |   |
| **Total  Interest Expense**                                            |       | 2,713                  |       | 2,076 |   |
| **Net  Interest Income before provision**                              |       | 26,769                 |       | 24,161 |   |
| Less: Provision  for loan losses                                       |       | —                 |       | — |   |
| **Net  Interest Income after provision**                               |       | 26,769                 |       | 24,161 |   |
| **Other  Operating Income:**                                           |       |                   |       |   |   |
| Service charges  and fees                                              |       | 2,345                  |       | 2,553 |   |
| Commissions,  fees and other service charges                           |       | 2,169                  |       | 3,150 |   |
| Gains on sale of  securities                                           |       | 8                      |       | 373 |   |
| Gain on sale of  loans held for sale                                   |       | 99                     |       | 145 |   |
| Other  non-interest income                                             |       | 774                    |       | 779 |   |
| **Total  Other Operating Income**                                      |       | 5,395                  |       | 7,000 |   |
| **Other  Operating Expense:**                                          |       |                   |       |   |   |
| Salaries and  employee benefits                                        |       | 10,988                 |       | 10,717 |   |
| Occupancy and  furniture                                               |       | 2,952                  |       | 3,112 |   |
| Other operating  expenses                                              |       | 4,395                  |       | 5,865 |   |
| **Total  Other Operating Expense**                                     |       | 18,335                 |       | 19,694 |   |
| **Income  Before Taxes**                                               |       | 13,829                 |       | 11,467 |   |
| Provision for  income taxes                                            |       | 4,739                  |       | 3,802 |   |
| **Net  Income**                                                        |       | $                      | 9,090      |   | $ | 7,665 |   |
| **Earnings  per share:**                                               |       |                   |       |   |   |
| **— basic**                                                       |       | $                      | 0.39       |   | $ | 0.33 |   |
| **—  diluted**                                                    |       | $                      | 0.39       |   | $ | 0.32 |   |
| **Dividends  per share**                                               |       | $                      | 0.16       |   | $ | 0.14 |   |
| **Average  shares used in earnings per share calculations:**           |       |                   |       |   |   |
| **— basic**                                                       |       | 23,019                 |       | 23,570 |   |
| **—  diluted**                                                    |       | 23,557                 |       | 24,045 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

4

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**Mid-StateBancshares**

Consolidated Statements of Comprehensive Income

(Unaudited -figures in 000’s)

 
| ** **                                                            | ** ** | **Three Month Period** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **Ended March 31,**    | ** ** |
| ** **                                                            | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **Net  Income**                                                       |       | $                      | 9,090      |   | $ | 7,665 |   |
|                                                                  |       |                   |       |   |   |
| **Other  Comprehensive Income Before Taxes:**                         |       |                   |       |   |   |
| Unrealized  (losses) gains on securities available for sale:          |       |                   |       |   |   |
| Unrealized  holding (losses) gains arising during period              |       | (8,680                 | )          | 2,353 |   |
| Reclassification  adjustment for net (gains) included in net income   |       | (8                     | )          | (373 | ) |
| Other  comprehensive (loss) income, before tax                        |       | (8,688                 | )          | 1,980 |   |
| Income tax  (credit) expense related to items in comprehensive income |       | (3,475                 | )          | 783 |   |
| **Other  Comprehensive (Loss) Income, Net of Taxes**                  |       | (5,213                 | )          | 1,197 |   |
| **Total  Comprehensive Income**                                       |       | $                      | 3,877      |   | $ | 8,862 |   |

** **

The accompanying notes are an integral part of these consolidatedstatements.

*** ***

***5***

----

*** ***

**Mid-StateBancshares**

Consolidated Statements of Changes in Capital Accounts

(Unaudited -figures in 000’s except share amounts)

*** ***

*** ***

*** ***
| ** **                                                                                | ** ** | ** **     | ** ** | ** **  | ** ** | ** **    | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------|------------|---------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                | ** ** | ** **     | ** ** | ** **  | ** ** | ** **    | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **Number of**  | ** ** | **Capital** | ** ** | **Undivided** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **Shares**     | ** ** | **Stock**   | ** ** | **Profits**   | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                      |       |           |       |        |       |          |       |              |       |       |       |
| BALANCE, December  31, 2004                                                               |       | 23,099,159     |       | $           | 61,439     |          | $          | 206,328           |       | $          | 6,860      |   | $ | 274,627 |   |
| Cash dividend                                                                             |       | —         |       | —      |       | (3,672        | )          | —            |       | (3,672     | )          |
| Exercise of  stock options                                                                |       | 43,162         |       | 653         |       | —        |       | —            |       | 653        |       |
| Tax Benefit from  exercise of options                                                     |       | —         |       | —      |       | 178           |       | —            |       | 178        |       |
| Net income                                                                                |       | —         |       | —      |       | 9,090         |       | —            |       | 9,090      |       |
| Change in net  unrealized gain on available for sale securities, net of taxes of ($3,475) |       | —         |       | —      |       | —        |       | (5,213            | )          | (5,213     | )          |
| Stock  repurchased                                                                        |       | (193,770       | )          | (5,287      | )          | —        |       | —            |       | (5,287     | )          |
|                                                                                      |       |           |       |        |       |          |       |              |       |       |       |
| **BALANCE,  March 31, 2005**                                                              | ** ** | **22,948,551** | ** ** | **$**       | **56,805** | ** **    | **$**      | **211,924**       | ** ** | **$**      | **1,647**  | ** ** | **$** | **270,376** | ** ** |
|                                                                                      |       |           |       |        |       |          |       |              |       |       |       |
| BALANCE,  December 31, 2003                                                               |       | 23,567,478     |       | $           | 75,506     |          | $          | 184,771           |       | $          | 12,277     |   | $ | 272,554 |   |
| Cash dividend                                                                             |       | —         |       | —      |       | (3,301        | )          | —            |       | (3,301     | )          |
| Exercise of  stock options                                                                |       | 19,592         |       | 190         |       | —        |       | —            |       | 190        |       |
| Tax Benefit from  exercise of options                                                     |       | —         |       | —      |       | —        |       | —            |       | —     |       |
| Net income                                                                                |       | —         |       | —      |       | 7,665         |       | —            |       | 7,665      |       |
| Change in net  unrealized gain on available for sale securities, net of taxes of $783     |       | —         |       | —      |       | —        |       | 1,197             |       | 1,197      |       |
| Stock  repurchased                                                                        |       | (862           | )          | (23         | )          | —        |       | —            |       | (23        | )          |
|                                                                                      |       |           |       |        |       |          |       |              |       |       |       |
| BALANCE, March  31, 2004                                                                  |       | 23,586,208     |       | $           | 75,673     |          | $          | 189,135           |       | $          | 13,474     |   | $ | 278,282 |   |

 

6

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**Mid-State Bancshares**

Consolidated Statements of Cash Flows

(Unaudited - figuresin 000’s)

 
| ** **                                                                         | ** ** | **Three Month Period** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **Ended March 31,**    | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| **OPERATING  ACTIVITIES**                                                          |       |                   |       |   |   |
| Net Income                                                                         |       | $                      | 9,090      |   | $ | 7,665 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Provision for  credit losses                                                       |       | —                 |       | — |   |
| Depreciation and  amortization                                                     |       | 1,414                  |       | 1,159 |   |
| Net amortization  of prem./discounts-investments                                   |       | 947                    |       | 1,046 |   |
| Gain on sale of  loans held for sale                                               |       | (99                    | )          | (145 | ) |
| Net decrease  (increase) in loans held for sale                                    |       | 3,160                  |       | 2,843 |   |
| Change in  deferred loan fees                                                      |       | (23                    | )          | (381 | ) |
| Changes in  assets and liabilities:                                                |       |                   |       |   |   |
| Accrued interest  receivable                                                       |       | (1,126                 | )          | (1,475 | ) |
| Core deposit  intangible                                                           |       | 344                    |       | 344 |   |
| Other assets,  net                                                                 |       | 2,054                  |       | (482 | ) |
| Other  liabilities                                                                 |       | 2,519                  |       | 2,719 |   |
| Net cash  provided by operating activities                                         |       | 18,280                 |       | 13,293 |   |
| **INVESTING  ACTIVITIES**                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Proceeds from  sales and maturities of investments                                 |       | 47,101                 |       | 27,136 |   |
| Purchases of  investments                                                          |       | (36,552                | )          | (1,216 | ) |
| (Increase)  Decrease in loans                                                      |       | (34,343                | )          | (84,491 | ) |
| Receipt from  investments in real estate                                           |       | —                 |       | — |   |
| Purchases of  premises and equipment, net                                          |       | (993                   | )          | (567 | ) |
| Net cash (used  in) investing activities                                           |       | (24,787                | )          | (59,138 | ) |
| **FINANCING  ACTIVITIES**                                                          |       |                   |       |   |   |
| Increase in  deposits                                                              |       | 10,787                 |       | 4,129 |   |
| Decrease in  short-term borrowings                                                 |       | 17,039                 |       | (2,741 | ) |
| Exercise of  stock options                                                         |       | 832                    |       | 190 |   |
| Cash dividends  paid                                                               |       | (3,672                 | )          | (3,301 | ) |
| Retirement of  company stock                                                       |       | (5,287                 | )          | (23 | ) |
| Net cash (used  in) provided by financing activities                               |       | 19,699                 |       | (1,746 | ) |
|                                                                               |       |                   |       |   |   |
| (Decrease)  increase in cash and cash equivalents                                  |       | 13,192                 |       | (47,591 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 118,669                |       | 171,263 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash  equivalents, end of period                                          |       | $                      | 131,861    |   | $ | 123,672 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                   |       |   |   |
| Cash paid during  the period for interest                                          |       | $                      | 2,545      |   | $ | 2,355 |   |
| Cash paid during  the period for taxes on income                                   |       | 2,457                  |       | — |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

7

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**Mid-StateBancshares**

Notes to Consolidated Financial Statements

(Information with respectto interim periods is unaudited)

 

**NOTE A — BASIS OF PRESENTATION AND MANAGEMENTREPRESENTATION**

 

The accompanyingconsolidated financial statements include the accounts of Mid-State Bancshares andits wholly owned subsidiary Mid-State Bank & Trust and the Bank’ssubsidiaries, MSB Properties and Mid-Coast Land Company (collectively the “Company,”“Bank” or “Mid-State”).  All significantinter-company transactions have been eliminated in consolidation.  These consolidated financial statementsshould be read in conjunction with the Form 10-K Annual Report for the yearended December 31, 2004 of Mid-State Bancshares.  A summary of the Company’s significantaccounting policies is set forth in the Notes to Consolidated FinancialStatements contained therein.

 

These consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Stateson a basis consistent with the accounting policies reflected in the auditedconsolidated financial statements included in the Annual Report on Form 10-Kfor the year ended December 31, 2004. They do not, however, include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments including normal recurring accrualsconsidered necessary for a fair presentation have been included.  Operating results for the interim periodspresented are not necessarily indicative of the results that may be expectedfor any other interim period or for the year as a whole.

 

 

**NOTE B — EARNINGS PER SHARE**

 

The following is a reconciliation of net income and shares outstandingto the income and number of shares used to compute Earnings Per Share (“EPS”).  Figures are in thousands, except earnings pershare data.

 
| ** **                                    | ** ** | **Three Month Period Ended** | ** ** | **Three Month Period Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **March 31, 2005**           | ** ** | **March 31, 2004**           | ** ** |
| ** **                                    | ** ** | **Net Income**               | ** ** | **Shares**                   | ** ** | **EPS** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Net Income as  reported                       |       | $                            | 9,090      |                         |       |   |   |   | $ | 7,665 |   |   |   |   |   |
|                                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share:                    |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Income available  to Common Shareholders |       | $                            | 9,090      |                         | 23,019     |   | $ |  0.39 |   | $ | 7,665 |   | 23,570 |   | $ | 0.33 |   |
|                                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:               |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Stock Options                                 |       |                         |       | 538                          |       |   |   |   |   | 475 |   |   |   |
|                                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Diluted Earnings  Per Share:                  |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Income available  to Common Shareholders |       | $                            | 9,090      |                         | 23,557     |   | $ | 0.39 |   | $ | 7,665 |   | 24,045 |   | $ | 0.32 |   |
|                                               |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

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#### **NOTE C — RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2003, the Accounting Standards Executive Committee (AcSEC)of the American Institute of Certified Public Accountants (AICPA) issuedStatement of Position (SOP) 03-3, “Accounting for Certain Loans or DebtSecurities Acquired in a Transfer.”  TheSOP is effective for loans acquired in fiscal years beginning after December15, 2004, with early adoption encouraged. The SOP addresses accounting for differences between contractual cashflows and cash flows expected to be collected from an Investor’s initialinvestment in loans or debt securities acquired in a transfer if thosedifferences are attributable, at least in part, to credit quality.  The adoption of SOP 03-3 is not expected tohave a material impact on the Company’s results of operations and financialposition.

 

In June 2004, the Emerging Issues Task Force of the FinancialAccounting Standards Board (FASB) issued guidance on its Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.”  The guidance maderecommendations regarding unrealized losses on available-for-sale debt andequity securities accounted for under Statement of Financial AccountingStandards (SFAS) No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” and No. 124, “Accounting for Certain Investments Held byNot-for-Profit Organizations.” The guidance for evaluating whether an investment isother-than-temporarily impaired was to be applied in other-than-temporaryimpairment evaluations made in reporting periods beginning after June 15,2004.  The disclosures were to be effectivein annual financial statements for fiscal years ending after December 15, 2003,for investments accounted for under Statements 115 and 124.  On September 30, 2004, the FASB Boarddirected the issuance of FASB Staff Position (FSP) EITF Issue 03-1-a, “ImplementationGuidance for the Application of Paragraph 16 of EITF Issue No. 03-1.”  The proposed FSP would provide implementationguidance with respect to debt securities that are impaired solely due tointerest rates and/or sector spreads and analyzed for other-than-temporaryimpairment under paragraph 16 of issue Issue 03-1.  The FASB asked constituents to comment onwhether the application guidance with respect to “minor impairments” shouldalso be applied to securities analyzed for impairment under paragraphs 10-15 ofIssue 03-1.  Based on comment lettersreceived, the FASB decided to delay the effective date for the measurement andrecognition guidance contained in paragraphs 10 - 20 of Issue 03-1 as itfurther considers whether application guidance is necessary for all securitiesanalyzed for impairment.  The delay ofthe effective date for paragraphs 10 - 20 of Issue 03-1 will be supersededconcurrent with the final issuance of FSP EITF Issue 03-1-a.  The adoption of EITF Issue No. 03-1 is notexpected to have a material impact on the Company’s results of operations andfinancial position.

 

The FASB issued a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation” in December 2004.  Therevised Statement is SFAS No. 123R (revised 2004), “Share-Based Payment” and itwill supercede APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and its related implementation guidance. It is to be effective for the Company as of the beginning of the first annualreporting period that begins after June 15, 2005.  The Statement requires that the Companymeasures the cost of employee services received in exchange for an award ofequity instruments (share based payment awards) based on the grant date fairvalue of the award and the estimated number of awards that are expected tovest.  The cost will be recognized overthe period during which an employee is required to provide service in exchangefor the award - usually the vesting period. Compensation cost for awards that vest would not be reversed if theawards expire without being exercised. The Company currently applies APB Opinion No. 25, in accounting for itsPlan.  Accordingly, no compensationexpense has been recognized for grants under the Plan.  Pro forma disclosures of net income andearnings per share are however disclosed in Note 15 of the Company’s AnnualReport on Form 10K.  The Company expectsto adopt the revised Statement for the first quarter of 2006 and expects itwill have a material effect on its Consolidated Statements of Income,Comprehensive Income and Changes in Capital Accounts.

 

9

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**NOTE D — CORE DEPOSIT INTANGIBLES, NET**

 

The following is a summary of the Company’s core depositintangibles.  Figures are in thousands(unaudited).

 
| ** **               | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|--------------------------|------------|--------------------|------------|--------------------|------------|
| ** **               | ** ** | **Gross**          | ** ** | **Accumulated**    | ** ** | **Net Carrying** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **               | ** ** | **Amount**         | ** ** | **Amortization**   | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                     |       |               |       |               |       |   |   |   |   |   |   |   |   |
| Core Deposit  Intangible |       | $                  | 11,596     |               | $          | (4,208 | ) | $ | 7,388 |   | $ | 11,596 |   | $ | (2,833 | ) | $ | 8,763 |   |
|                          |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                     |   | **Dec. 31,  2004** |       |
|--------------------------|--------|--------------------|------------|
|                     |   | **Gross**          | ** ** | **Accumulated** | ** ** | **Net  Carrying** |   |
|                     |   | **Amount**         | ** ** | **Amortization** | ** ** | **Amount** |   |
|                     |   |               |       |   |   |   |   |
| Core Deposit  Intangible |   | $                  | 11,596     |   | $ | (3,864 | ) | $ | 7,732 |   |
|                          |        |                    |            |  |  |  |  |  |  |  |

 

 

Aggregate AmortizationExpense of Core Deposit Intangibles ($ in 000’s):

 
|                                    |   |   |   | **Three  Month Period** |       |
|-----------------------------------------|--------|--------|--------|-------------------------|------------|
|                                    |   |   |   | **Ended  March 31,**    |       |
|                                    |   |   |   | **2005**                | ** ** | **2004** |   |
| Amortization of Core Deposit Intangible |   | $      | 344    |                    | $          | 344 |   |
|                                         |        |        |        |                         |            |  |  |  |  |

 

The amortization expense for core deposit intangibles is includedwithin other operating expenses on the consolidated statements of income.  The projected amortization  expense  for core deposit intangibles, assuming no further  acquisitionsor dispositions or changes in amortization rates, is approximately $1.4 millionper year over the next five years.

 

 

**NOTE E — STOCK OPTIONS**

 

At March 31, 2005, theCompany had one stock option plan which is described more fully in Note 15 inthe Company’s 2004 Annual Report on Form 10-K. The Company accounts for stock options using the intrinsic value methodunder the provisions of Accounting Principles Board (“APB”) Opinion No. 25 andprovides proforma net income and proforma earnings per share disclosures foremployee stock option grants as if the fair-value-based method, defined in SFASNo. 123, “Accounting for Stock-Based Compensation,” had been applied.  Had the Company determined compensation costbased on the fair value at the grant date for its stock options under SFAS No.123, the Company’s net income would have been reduced to the pro forma amountsindicated below for the three months ended March 31.  The assumptions utilized in calculating thestock-based compensation expense determined under the intrinsic value basedmethod were generally the same at March 31, 2005 and 2004 as they were at year-end.

 

10

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| **(dollars in 000’s except per share amounts)**                                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income, as  reported                                                                                                                               |       | $        | 9,090      |     | $          | 7,665 |   |
| Deduct: Total  stock-based compensation expense determined under the intrinsic value based  method for all awards, net of related taxes of 419 and 329 |       | (579     | )          | (454     | )          |
|                                                                                                                                                   |       |     |       |     |       |
| Proforma net  income                                                                                                                                   |       | $        | 8,511      |     | $          | 7,211 |   |
|                                                                                                                                                   |       |     |       |     |       |
| Basic income per  share, as reported                                                                                                                   |       | $        | 0.39       |     | $          | 0.33 |   |
| Proforma basic  income per share                                                                                                                       |       | $        | 0.37       |     | $          | 0.31 |   |
|                                                                                                                                                   |       |     |       |     |       |
| Diluted income  per share, as reported                                                                                                                 |       | $        | 0.39       |     | $          | 0.32 |   |
| Proforma diluted  income per share                                                                                                                     |       | $        | 0.36       |     | $          | 0.30 |   |

 

**NOTE F —SECURITIES**

 

The following table shows those investments with grossunrealized losses and their market value aggregated by investment category andlength of time that individual securities have been in a continuous unrealizedloss position at March 31, 2005.

 
| ** **                                               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                               | ** ** | **Market**              | ** ** | **Unrealized**        | ** ** | **Market** | ** ** | **Unrealized** | ** ** | **Market** | ** ** | **Unrealized** | ** ** |
| **(amounts in 000’s)**                              | ** ** | **Value**               | ** ** | **Losses**            | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Treasury  securities                                |       | $                       | 15,362     |                  | $          | (226       | )          | $ | — |   | $ | — |   | $ | 15,362 |   | $ | (226 | ) |
| Securities of  U.S. government agencies and corporations |       | 152,845                 |       | (1,920                | )          | —     |       | — |   | 152,845 |   | (1,920 | ) |
| Mortgage backed  securities                              |       | 1,921                   |       | (62                   | )          | 1,152      |       | (45 | ) | 3,073 |   | (107 | ) |
| Obligations of  states and political subdivisions        |       | 136,402                 |       | (1,635                | )          | 14,098     |       | (587 | ) | 150,500 |   | (2,222 | ) |
| Other  investments                                       |       | 5,922                   |       | (87                   | )          | —     |       | — |   | 5,922 |   | (87 | ) |
| *TOTAL*                                                  |       | $                       | 312,452    |                  | $          | (3,930     | )          | $ | 15,250 |   | $ | (632 | ) | $ | 327,702 |   | $ | (4,562 | ) |
|                                                          |            |                         |            |                       |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

All of the unrealized losses identified in the table above areprimarily attributable to changes in general interest rate levels and are notconsidered to be other than temporary impairment.  The unrealized losses are not the result ofany deteriorating financial conditions or near term prospects of the underlyingissuers and Management believes that it has the intent and ability to retainthese investment securities to allow for the eventual recovery in market value.

 

11

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**Item 2 — Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

        Thefollowing is management’s discussion and analysis of the major factors thatinfluenced our financial performance for the three months ended March 31, 2005.  This analysis should be read in conjunctionwith our 2004 Annual Report as filed on Form 10-K and with the unauditedfinancial statements and notes as set forth in this report.  *Unless the contextrequires otherwise, the terms “Company,” “us,” “we,” and “our” refers toMid-State Bancshares on a consolidated basis.*

 

                Certain statementscontained in this Quarterly Report of Form 10-Q (“Report”), including, withoutlimitation, statements containing the words “estimate,” “believes,” “anticipates,”“intends,” “may,” “expects,” “could,” and words of similar import, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934.  These forward-looking statements relate to,among other things, our current expectations regarding future operatingresults, net interest margin, strength of the local economy, and allowance forcredit losses.  Such forward lookingstatements involve known and unknown risks, uncertainties and other factorsthat may cause our actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements. Such factors include, among others, the following: general economic andbusiness conditions in those areas in which we operate, demographic changes,competition, natural disasters, growth in loans and deposits, fluctuations ininterest rates, changes in business strategy or development plans, changes ingovernmental regulation, credit quality, the availability of capital to fund theexpansion of our business, economic, political and global changes arising fromthe war on terrorism, the conflict with Iraq and its aftermath, and otherfactors referenced in our 2004 Annual Report as filed on form 10-K, includingin “Item 1. Business - Factors That May Affect Future Results of Operations.”  When relying on forward-looking statements tomake decisions with respect to our Company, investors and others are cautionedto consider these and other risks and uncertainties.  We disclaim any obligation to update any suchfactors or to publicly announce the results of any revisions to any of theforward-looking statements contained herein to reflect future events ordevelopments.

 

                Thisdiscussion should be read in conjunction with our financial statements,including the notes thereto, appearing elsewhere in this report.

 

***Critical Accounting Policies and Estimates    ***This “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” as well as, disclosuresincluded elsewhere in this Form 10-Q, are based upon the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these financial statementsrequire Management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues, expenses and related disclosure ofcontingencies.  A summary of the moresignificant accounting policies of the Company can be found in Footnote One tothe financial statements which is included in Item 8 of the Company’s AnnualReport on Form 10-K and in the Management’s Discussion and Analysis included inItem 7 of that same report entitled “Critical Accounting Policies andEstimates.”

 

12

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                ***Selected Financial Data — Summary***.    The following table provides certainselected consolidated financial data as of and for the three months ending March31, 2005 and 2004 (unaudited in 000’s, except per share data).

 
| ** **                                                    | ** ** | **Year-to-Date**  | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|
| **(In thousands)**                                            | ** ** | **Mar. 31, 2005** | ** ** | **Mar. 31, 2004** | ** ** |
|                                                          |       |              |       |   |   |
| Interest Income (not taxable equivalent)                      |       | $                 | 29,482     |   | $ | 26,237 |   |
| Interest Expense                                              |       | 2,713             |       | 2,076 |   |
| Net Interest Income                                           |       | 26,769            |       | 24,161 |   |
| Provision for Loan Losses                                     |       | —            |       | — |   |
| Net Interest Income after provision for loan losses           |       | 26,769            |       | 24,161 |   |
| Non-interest income                                           |       | 5,395             |       | 7,000 |   |
| Non-interest expense                                          |       | 18,335            |       | 19,694 |   |
| Income before income taxes                                    |       | 13,829            |       | 11,467 |   |
| Provision for income taxes                                    |       | 4,739             |       | 3,802 |   |
| Net Income                                                    |       | $                 | 9,090      |   | $ | 7,665 |   |
|                                                          |       |              |       |   |   |
| **Per share:**                                                |       |              |       |   |   |
| Net Income - basic                                            |       | $                 | 0.39       |   | $ | 0.33 |   |
| Net Income - diluted                                          |       | $                 | 0.39       |   | $ | 0.32 |   |
| Weighted average shares used in Basic E.P.S. calculation      |       | 23,019            |       | 23,570 |   |
| Weighted average shares used in Diluted E.P.S. calculation    |       | 23,557            |       | 24,045 |   |
| Cash dividends                                                |       | $                 | 0.16       |   | $ | 0.14 |   |
| Book value at period-end                                      |       | $                 | 11.78      |   | $ | 11.80 |   |
| Tangible book value at period end                             |       | $                 | 9.38       |   | $ | 9.40 |   |
| Ending Shares                                                 |       | 22,949            |       | 23,586 |   |
|                                                          |       |              |       |   |   |
| **Financial Ratios**                                          |       |              |       |   |   |
| Return on assets                                              |       | 1.60              | %          | 1.40 | % |
| Return on tangible assets                                     |       | 1.64              | %          | 1.44 | % |
| Return on equity                                              |       | 13.33             | %          | 11.09 | % |
| Return on tangible equity                                     |       | 16.66             | %          | 13.93 | % |
| Net interest margin (not taxable equivalent)                  |       | 5.22              | %          | 4.88 | % |
| Net interest margin (taxable equivalent yield)                |       | 5.65              | %          | 5.30 | % |
| Net loan losses (recoveries) to average loans                 |       | 0.05              | %          | (0.04 | )% |
| Efficiency ratio                                              |       | 57.0              | %          | 63.2 | % |
|                                                          |       |              |       |   |   |
| **Period Averages**                                           |       |              |       |   |   |
| Total Assets                                                  |       | $                 | 2,306,314  |   | $ | 2,199,365 |   |
| Total Tangible Assets                                         |       | 2,250,937         |       | 2,142,613 |   |
| Total Loans (includes loans held for sale)                    |       | 1,434,150         |       | 1,189,945 |   |
| Total Earning Assets                                          |       | 2,079,604         |       | 1,993,070 |   |
| Total Deposits                                                |       | 1,991,356         |       | 1,899,475 |   |
| Common Equity                                                 |       | 276,592           |       | 278,047 |   |
| Common Tangible Equity                                        |       | 221,215           |       | 221,295 |   |
|                                                          |       |              |       |   |   |
| **Balance Sheet - At Period-End**                             |       |              |       |   |   |
| Cash and due from banks                                       |       | $                 | 127,861    |   | $ | 123,672 |   |
| Investments and Fed Funds Sold                                |       | 628,634           |       | 749,708 |   |
| Loans held for sale                                           |       | 9,927             |       | 10,712 |   |
| Loans, net of deferred fees, before allowance for loan losses |       | 1,456,091         |       | 1,240,325 |   |
| Allowance for Loan Losses                                     |       | (13,630           | )          | (16,584 | ) |
| Goodwill and other intangibles                                |       | 55,228            |       | 56,603 |   |
| Other assets                                                  |       | 58,070            |       | 54,231 |   |
| Total Assets                                                  |       | $                 | 2,322,181  |   | $ | 2,218,667 |   |

 

13

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| ** **                                       | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| Non-interest bearing deposits                    |       | $                  | 526,597    |               | $          | 480,652 |   |
| Interest bearing deposits                        |       | 1,478,735          |       | 1,435,908          |       |
| Other borrowings                                 |       | 23,621             |       | 4,886              |       |
| Allowance for losses - unfunded commitments      |       | 1,624              |       | 1,867              |       |
| Other liabilities                                |       | 21,228             |       | 17,072             |       |
| Shareholders’ equity                        |       | 270,376            |       | 278,282            |       |
| Total Liabilities and Shareholders’ equity  |       | $                  | 2,322,181  |               | $          | 2,218,667 |   |
|                                             |       |               |       |               |       |
| **Asset Quality & Capital - At Period-End**  |       |               |       |               |       |
| Non-accrual loans                                |       | $                  | 5,828      |               | $          | 12,220 |   |
| Loans past due 90 days or more                   |       | —             |       | —             |       |
| Other real estate owned                          |       | —             |       | 3,428              |       |
| Total non performing assets                      |       | $                  | 5,828      |               | $          | 15,648 |   |
|                                             |       |               |       |               |       |
| Allowance for losses to loans, gross (1)         |       | 1.0                | %          | 1.5                | %          |
| Non-accrual loans to total loans, gross          |       | 0.4                | %          | 1.0                | %          |
| Non performing assets to total assets            |       | 0.3                | %          | 0.7                | %          |
| Allowance for losses to non performing loans (1) |       | 261.7              | %          | 151.0              | %          |
|                                             |       |               |       |               |       |
| Equity to average assets (leverage ratio)        |       | 9.5                | %          | 9.7                | %          |
| Tier One capital to risk-adjusted assets         |       | 11.9               | %          | 13.6               | %          |
| Total capital to risk-adjusted assets            |       | 12.8               | %          | 14.8               | %          |

----

(1) Includes allowance for loan losses and allowance for losses -unfunded commitments

 

**        *Performance Summary.* **The Company posted net income of $9.1million for the three months ended March 31, 2005 compared to $7.7 million inthe like 2004 period.  On a per sharebasis, diluted earnings per share were $0.39 in the 2005 period compared to$0.32 in the same quarter of 2004.  Theseearnings represent an annualized return on assets of 1.60% and 1.40%,respectively.  The annualized return onequity was 13.33% for the first quarter of 2005 compared to 11.09% in the firstquarter of 2004.  The increase in theCompany’s return on assets and return on equity in the comparable periods isprimarily attributable to an increase in its net interest margin (the ratio ofits net interest income to average earning assets) of 34 basis points acrossthe two periods. The Company’s leverage ratio was 9.5% at March 31, 2005compared to 9.7% one year earlier reflecting the fact that the combination of theCompany’s on-going stock repurchase program and regular cash dividends morethan offset the net income earned over the intervening 12 months.

 

***        NetInterest Income.***  The following table delineates the impacts ofchanges in the volume of earning assets, changes in the volume of interestbearing liabilities, and changes in interest rates on net interest income forthe three month periods ended March 31, 2005 and 2004.

 
| **Dollars in 000’s**                       | ** ** | **3 Months Ended  March 31,****2005** | ** ** | **3 Months Ended  March 31,  2004** | ** ** | **Composition of Change  2005 Compared to 2004** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                            | ** ** | **Interest**                        | ** ** | **Average**                                      | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Average**                           | ** ** | **Income /**                        | ** ** | **Yield /**                                      | ** ** | **Average** | ** ** | **Income /** | ** ** | **Yield /** | ** ** | **Change Due To:** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **Balance**                           | ** ** | **Expense**                         | ** ** | **Rate**                                         | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| *EARNING ASSETS:*                               |       |                                  |       |                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                           |       | $                                     | 1,434,150  |                                | $          | 23,941                                           |       | 6.77 | % | $ | 1,189,945 |   | $ | 19,718 |   | 6.66 | % | $ | 4,045 |   | $ | 178 |   | $ | 4,223 |   |
| Investment Securities                           |       | 624,637                               |       | 5,414                               |       | 3.52                                             | %          | 765,112 |   | 6,433 |   | 3.38 | % | (1,194 | ) | 175 |   | (1,019 | ) |
| Fed Funds, Other                                |       | 20,817                                |       | 127                                 |       | 2.47                                             | %          | 38,013 |   | 86 |   | 0.91 | % | (72 | ) | 113 |   | 41 |   |
| *TOTAL EARNING ASSETS*                          |       | 2,079,604                             |       | 29,482                              |       | 5.75                                             | %          | 1,993,070 |   | 26,237 |   | 5.29 | % | 2,779 |   | 466 |   | 3,245 |   |
|                                            |       |                                  |       |                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *INTEREST BEARING* * LIABILITIES:*    |       |                                  |       |                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW, Savings, and* *Money Market  Accounts |       | 1,078,426                             |       | 724                                 |       | 0.27                                             | %          | 1,022,716 |   | 592 |   | 0.23 | % | 35 |   | 97 |   | 132 |   |
| Time Deposits                                   |       | 398,743                               |       | 1,804                               |       | 1.83                                             | %          | 399,276 |   | 1,403 |   | 1.41 | % | (2 | ) | 403 |   | 401 |   |
| Interest Bearing Deposits                       |       | 1,477,169                             |       | 2,528                               |       | 0.69                                             | %          | 1,421,992 |   | 1,995 |   | 0.56 | % | 33 |   | 500 |   | 533 |   |
|                                            |       |                                  |       |                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                                |       | 19,590                                |       | 185                                 |       | 3.83                                             | %          | 5,274 |   | 81 |   | 6.18 | % | 177 |   | (73 | ) | 104 |   |
|                                            |       |                                  |       |                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *TOTAL INTEREST BEARING*LIABILITIES             |       | 1,496,759                             |       | 2,713                               |       | 0.74                                             | %          | 1,427,266 |   | 2,076 |   | 0.59 | % | 210 |   | 427 |   | 637 |   |
|                                            |       |                                  |       |                                |       |                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *NET INTEREST INCOME*                           |       | $                                     | 2,079,604  |                                | $          | 26,769                                           |       | 5.22 | % | $ | 1,993,070 |   | $ | 24,161 |   | 4.88 | % | $ | 2,569 |   | $ | 39 |   | $ | 2,608 |   |
|                                                 |            |                                       |            |                                     |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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Mid-State’s annualized yield on interest earning assets was 5.75% forthe first quarter of 2005 (6.18% on a taxable equivalent basis) compared to 5.29%in the like 2004 period (5.72% on a taxable equivalent basis).  The Prime Rate, to which many of the Bank’sloans are tied, averaged 5.44% in the first quarter of 2005 compared to 4.00%in the like 2004 period.  Annualizedinterest expense as a percent of interest bearing liabilities also increasedfrom 0.59% in the three months ended March 2004 to 0.74% in the comparable 2005period.  The higher overall cost of thetime deposit portfolio in response to the general rise in rates was the primaryreason for this increase.  Overall,Mid-State’s annualized Net Interest Income, expressed as a percent of earningassets, increased from 4.88% for the three month period of 2004 (5.30% on a taxableequivalent basis) to 5.22% in the comparable 2005 period (5.65% on a taxableequivalent basis).  Annualized NetInterest Income as a percent of average total assets increased from 4.42%in the first quarter of 2004 (4.80% taxable equivalent) to 4.71% in thecomparable 2005 period (5.09% taxable equivalent).  Both the impact of the increase in netinterest margin and the increase in volume of earning assets (loan growth morethan offset a decline in investment securities) contributed to the $2.6 millionincrease in net interest income. However, as the table above illustrates, the majority of the improvementis volume related.  The Company hasimproved its net interest margin (and consequently its return on assets andreturn on equity) by altering the mix of its earning asset base in favor ofmore loans, resulting in fewer investment securities and lower fed funds sold.  Steps taken in this direction have includedthe restructuring of the commercial banking division, focused promotions ofcertain consumer loan products, retention of certain jumbo residentialadjustable rate mortgages and the purchase of residential adjustable mortgages.  The mix did improve across the comparable quarterswith loans averaging 69.0% of earning assets in the first quarter of 2005compared to 59.7% in the like 2004 period.

 

     Average earnings assets forthe three months ended March 31, 2005 increased $86.5 million from the like2004 period ($2,079.6 million compared to $1,993.1 million).  Average interest bearing deposits in thissame time-frame were up $55.2 million, ($1,477.2 million compared to $1,422.0million).  The balance of the funding inearning asset growth came from modest increases in non interest bearing demanddeposits and other borrowings.

 

     ***Provisionand Allowance for Loan Losses.*** Mid-State did not make a provision for loan losses in either the firstquarter of 2005 or 2004.  Managementbelieves that the allowance for loan losses and allowance for losses - unfundedcommitments, which collectively stand at 1.0% of total loans at March 31, 2005,are adequate to cover inherent losses in the portfolio.  Management has determined that the allocatedand unallocated components of the reserve as calculated and required for itsnon performing loans and the general loan loss reserve, are sufficient tooffset potential losses arising from less than full recovery of the loans fromthe supporting collateral.  Nonperforming loans consist of loans on non-accrual and accruing loans 90 days ormore past due.  The $15.3 million ofcollective allowances for credit losses is approximately 262% of the level ofnon performing loans compared to 151% one year earlier.  Non performing loans were $5.8 million at March31, 2005 compared to $12.2 million one year earlier.  These non-performing loans, which in recent quartershave been centered primarily in one loan secured by real estate (originallytotaling $8.5 million), were reduced dramatically in the first quarter as aresult of the receipt of $4.6 million in principal reductions on that one loan.  Management has specific reserves for thisloss and other potential losses inherent in its impaired loans that it believesare adequate at the present time.  Additionally,the Bank carried Other Real Estate Owned in the amount of $3.4 million one yearearlier compared

 

15

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to none at March 31, 2005.  TheOther Real Estate Owned was liquidated in the second quarter of 2004.  A combination of loan payoffs andimprovements in the underlying credit quality of certain borrowers led to a dramaticdrop in internally classified assets over this period also.

 

The improving trend in non performing loans,improvements in the level of internally classified assets, net recoveries fromthe Company’s on-going collection efforts and the improved local economicconditions have significantly improved the Company’s asset quality.  These factors continue to lead Management tobelieve that it is not necessary to make any further charges to expense forprovisions to the allowance for loan losses at this time.

 

     Changes in the allowance forloan losses (in thousands) for the periods ended March 31, 2005 and 2004 are asfollows:

 
| ** **                                                                                                | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                                                | ** ** | **2005**      | ** ** | **2004** | ** ** |
| Balance at  beginning of period:                                                                          |       |          |       |   |   |
| Allowance for  loan losses                                                                                |       | $             | 13,799     |   | $ | 16,063 |   |
| Allowance for  losses-unfunded commitments                                                                |       | 1,783         |       | 1,941 |   |
| Total allowances  for losses at beginning of period                                                       |       | 15,582        |       | 18,004 |   |
|                                                                                                      |       |          |       |   |   |
| (Reductions)  additions to the allowance for losses - unfunded commitments (credited)  charged to expense |       | (159          | )          | (74 | ) |
| Additions to the  allowance for loan losses charged to provision                                          |       | —        |       | — |   |
| Loans charged  off                                                                                        |       | (310          | )          | (343 | ) |
| Recoveries of  loans previously charged-off                                                               |       | 141           |       | 864 |   |
| Total allowances  for losses-end of quarter                                                               |       | $             | 15,254     |   | $ | 18,451 |   |
|                                                                                                      |       |          |       |   |   |
| Allowance for  loan losses                                                                                |       | $             | 13,630     |   | $ | 16,584 |   |
| Allowance for  losses-unfunded commitments                                                                |       | 1,624         |       | 1,867 |   |
| Total allowances  for losses-end of quarter                                                               |       | $             | 15,254     |   | $ | 18,451 |   |

 

At March 31, 2005, therecorded investments in loans, which have been identified as impaired totaled $5,903,000.   Of this amount, $1,201,000 related to loanswith no valuation allowance and $4,702,000 related to loans with acorresponding valuation allowance of $2,205,000.  Impaired loans totaled $12,306,000 at March31, 2004, of which $2,223,000 related to loans with no valuation allowance and$10,083,000 related to loans with a corresponding valuation allowance of$2,340,000.  The valuation allowance forimpaired loans is included within the general allowance shown above and nettedagainst loans on the consolidated statements of financial position.  For the quarter ended March 31, 2005, theaverage recorded investment in impaired loans was $9,397,000 compared to$17,369,000 in the 2004 period.  A loanis identified as impaired when it is probable that interest and principal willnot be collected according to the contractual terms of the loan agreement.  Because this definition is very similar tothat used by bank regulators to determine on which loans interest should not beaccrued, the Bank expects that most impaired loans will be on non-accrualstatus.

 

     ***Non-interestIncome.***  Non-interestincome for the first quarter of 2005 was $5.4 million, down from the $7.0million earned in the 2004 period.  Therewas a decrease of $1.4 million in merchant processing income as a result ofoutsourcing that activity late in 2004. In outsourcing this activity, the Bank now receives a check, net ofexpenses, which is realized into non interest income — the net effect on total earningsis about the same, but has the effect of reducing both non interest income andnon interest expense.  There was also a decreasein service

 

16

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charges and fees of approximately $208 thousand over the comparableperiods, primarily as a result of a reduction in account analysis chargescollected (account analysis customers kept larger balances in the 2005 firstquarter compared to the like 2004 period and the earnings credit rate washigher in 2005 compared to the 2004 period thus yielding lower account analysisservice charges). The gain on sale of securities declined from $373 thousand inthe first quarter of 2004 to $8 thousand in the comparable 2005 period.  The gain in 2004 related to a tender offer ona corporate bond held by the Bank which was accepted.

 

     ***Non-interestExpense.***  Non-interestexpense for the first quarter of 2005 decreased $1.4 million to $18.3 millionfrom the $19.7 million in the like 2004 period. This decrease was the result of increases in salaries and benefits ofapproximately $271 thousand being offset by decreases in occupancy andfurniture expense of $160 thousand and a decrease in other operating expensesof $1.5 million.

 

     The increase in salaries in the 2005period were $231 thousand of the increase in salaries and benefits, a 3.1%increase from the 2004 period.  Theremaining $40 thousand increase was all in benefits, especially workerscompensation cost increases.

 

     The decrease in occupancyand furniture expense across the comparable quarters noted above was primarilyattributable to a decrease in maintenance and utility expenses.

 

     The decrease in otherexpense across the comparable quarters noted above was primarily attributableto the outsourcing of merchant processing activity late in 2004 which reducednon interest expense by $1.2 million.  Professionalservices charges and general office expense declines accounted for the majorityof the balance of the decline in other operating expense across the comparablequarters.

 

***     Provision for Income Taxes.*** The provision for income taxes increased modestly from $3.8 million inthe 2004 period to $4.7 million in the current year.  The Company’s consolidated tax rate wasapproximately 34.3% in the 2005 period, virtually identical to the 33.2% levelin 2004.   While the normal combinedfederal and state statutory tax rate is 42% for Mid-State Bancshares, thetax-exempt income generated by its municipal bond portfolio is the primaryreason that the effective rate is lower.

 

     ***BalanceSheet.***  Total assets at March31, 2005 totaled $2.322 billion, up 4.7% from the level one year earlier of $2.219billion.  Total deposits also rose 4.6%to $2.005 billion, up from $1.917 billion one year earlier.  Time Deposits under $100 thousand decreasedfrom $240.4 million one year earlier to $229.1 million at period end and TimeDeposits over $100 thousand increased by $8.7 million.  Non Interest Bearing Demand increased from$480.7 million a year ago to $526.6 million in the current year.  All other core deposit categories of NOW,Money Market and Savings increased to $1.077 billion from $1.031 billion oneyear earlier.  Loan activity over thelast year has increased, with net loans increasing by $219 million from $1.224billion to $1.443 billion at period-end. Loans held for sale (single family, mortgage originations) decreased slightlyto $9.9 million from $10.7 million one year earlier.  Stockholders’ equity decreased by $7.9million when comparing March, 2005 over March, 2004 (see below under CapitalResources for a recap of the components of this change).

 

     Mid-State Bancshares’ loanto deposit ratio of 72.6% at March 31, 2005 is up from the 64.7% ratio one yearearlier.  There is ample internalliquidity to fund increases in this ratio through liquidation of Mid-State’s $624.6million investment portfolio which is categorized entirely as available forsale.

 

     ***InvestmentSecurities and Fed Funds Sold.*** Of the $624.6 million portfolio at March 31, 2005, 4% is invested inU.S. treasury securities, 31% is invested in U.S. government agencyobligations, 64% is invested in municipal and corporate securities and 1% isinvested in mortgage-backed securities. Sixty-one percent of all investment securities and fed funds soldcombined mature within five years. Approximately 21% of the total

 

17

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portfolio matures in less than one year.  The Bank’s investment in mortgage-backedsecurities consist of investments in FNMA and FHLMC pools which have contractualmaturities of up to 15 years.  The actualtime of repayment may be shorter due to prepayments made on the underlyingcollateral.

 

     A summary of investmentsecurities owned is as follows:

 
| **March  31, 2005**                                      | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **  | ** ** |
|----------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|-------------|------------|
| ** **                                               | ** ** | ** **  | ** **  | **Gross**      | ** ** | **Gross**      | ** ** | ** **  | ** ** |
| **(amounts in 000’s)**                              | ** ** | **Cost**    | ** **  | **Unrealized** | ** ** | **Unrealized** | ** ** | **Market**  | ** ** |
| **Securities Available For Sale**                        | ** ** | **Basis**   | ** **  | **Gains**      | ** ** | **Losses**     | ** ** | **Value**   | ** ** |
| U.S. Treasury  securities                                | ** ** | **$**       | **26,049**  | ** **     | **$**      | **—**     | ** ** | **$**       | **(226**   | **)** | **$** | **25,823** | ** ** |
| Securities of  U.S. government agencies and corporations |       | **194,831** |        | **375**        |       | **(1,920**     | **)**      | **193,286** |       |
| Mortgage backed  securities                              | ** ** | **8,786**   | ** **  | **391**        | ** ** | **(107**       | **)**      | **9,070**   | ** ** |
| Obligations of  states and political subdivisions        |       | **376,147** |        | **6,479**      |       | **(2,222**     | **)**      | **380,404** |       |
| Other  investments                                       | ** ** | **16,076**  | ** **  | **62**         | ** ** | **(87**        | **)**      | **16,051**  | ** ** |
| ***TOTAL***                                              | ** ** | **$**       | **621,889** | ** **     | **$**      | **7,307**      | ** ** | **$**       | **(4,562** | **)** | **$** | **624,634** | ** ** |
|                                                     |       |        |        |           |       |           |       |        |       |
| **December  31, 2004**                                   | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **  | ** ** |
| ** **                                               | ** ** | **Gross**   | ** **  | **Gross**      | ** ** | ** **     | ** ** | ** **  | ** ** |
| **(amounts  in 000’s)**                             | ** ** | **Cost**    | ** **  | **Unrealized** | ** ** | **Unrealized** | ** ** | **Market**  | ** ** |
| **Securities  Available For Sale**                       | ** ** | **Basis**   | ** **  | **Gains**      | ** ** | **Losses**     | ** ** | **Value**   | ** ** |
| U.S. Treasury  securities                                |       | $           | 25,630      |           | $          | 5              |       | $           | (148       | ) | $ | 25,487 |   |
| Securities of  U.S. government agencies and corporations |       | 217,028     |        | 796            |       | (1,170         | )          | 216,654     |       |
| Mortgage backed  securities                              |       | 8,824       |        | 650            |       | (57            | )          | 9,417       |       |
| Obligations of  states and political subdivisions        |       | 365,821     |        | 11,604         |       | (387           | )          | 377,038     |       |
| Other  investments                                       |       | 16,081      |        | 141            |       | (1             | )          | 16,221      |       |
| *TOTAL*                                                  |       | $           | 633,384     |           | $          | 13,196         |       | $           | (1,763     | ) | $ | 644,817 |   |

 

The following table shows those investments with grossunrealized losses and their market value aggregated by investment category andlength of time that individual securities have been in a continuous unrealizedloss position at March 31, 2005.

 
| ** **                                               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                               | ** ** | **Market**              | ** ** | **Unrealized**        | ** ** | **Market** | ** ** | **Unrealized** | ** ** | **Market** | ** ** | **Unrealized** | ** ** |
| **(amounts in 000’s)**                              | ** ** | **Value**               | ** ** | **Losses**            | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Treasury  securities                                |       | $                       | 15,362     |                  | $          | (226       | )          | $ | — |   | $ | — |   | $ | 15,362 |   | $ | (226 | ) |
| Securities of  U.S. government agencies and corporations |       | 152,845                 |       | (1,920                | )          | —     |       | — |   | 152,845 |   | (1,920 | ) |
| Mortgage backed  securities                              |       | 1,921                   |       | (62                   | )          | 1,152      |       | (45 | ) | 3,073 |   | (107 | ) |
| Obligations of  states and political subdivisions        |       | 136,402                 |       | (1,635                | )          | 14,098     |       | (587 | ) | 150,500 |   | (2,222 | ) |
| Other  investments                                       |       | 5,922                   |       | (87                   | )          | —     |       | — |   | 5,922 |   | (87 | ) |
| *TOTAL*                                                  |       | $                       | 312,452    |                  | $          | (3,930     | )          | $ | 15,250 |   | $ | (632 | ) | $ | 327,702 |   | $ | (4,562 | ) |

 

All of the unrealized losses identified in the table above areprimarily attributable to changes in general interest rate levels and are notconsidered to be other than temporary impairment.  The unrealized losses are not the result ofany deteriorating financial conditions or near term prospects of the underlyingissuers and Management

 

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believes that it has the intent and ability to retain these investmentsecurities to allow for the eventual recovery in market value.

 

     ***CapitalResources.***  In early 2004,the Board authorized the repurchase of up to 1,178,352 additional shares of theCompany’s common stock.  Thisauthorization does not have an expiration date. There were 193,770 shares of the Company’s common stock repurchased inthe first quarter of 2005 at an average price of $27.29 per share compared to862 shares repurchased in the first quarter of 2004 at an average price of$26.52 per share.  As of March 31, 2005,the Company is continuing the program and can repurchase up to 326,587additional shares under the January 2004 authorization.

 

The Board of Directors declared a cash dividend during the firstquarter of $0.16 per share compared to $0.14 per share one year earlier.

 

     ***Liquidity.***  The focus of the Company’s liquiditymanagement is to ensure its ability to meet cash requirements.  Sources of liquidity include cash, due frombank balances (net of Federal Reserve requirements to maintain reserves againstdeposit liabilities), fed funds sold, investment securities (net of pledgingrequirements), loan repayments, deposits and fed funds borrowing lines.  Typical demands on liquidity are depositrun-off from demand deposits and savings accounts, maturing time deposits, whichare not renewed, and anticipated funding under credit commitments to customers.

 

     The Bank has adequateliquidity at the present time.  Its loanto deposit ratio at March 31, 2005 was 72.6% versus 64.7% one yearearlier.  The Bank normally strives for aloan to deposit ratio in the 65% to 75% range. The Bank’s internally calculated liquidity ratio stands at 32.8% at March31, 2005, which is above its minimum policy of 15% and below the 41.6% level ofMarch 31, 2004.  Management is not awareof any future capital expenditures or other significant demands or commitmentswhich would severely impair liquidity.

 

     ***ReportableBusiness Segments.***  Belowis a summary statement of income for the three months ended March 31, 2005 and2004 for each reportable business segment.

 
| ** **                                   | ** ** | **Community Banking** | ** ** | **Mid Coast Land Company** | ** ** | **Trust Services** | ** ** | **Mid-State Bancshares** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|----------------------------|------------|--------------------|------------|--------------------------|------------|
| **(unaudited — dollars in 000’s)** | ** ** | **2005**              | ** ** | **2004**                   | ** ** | **2005**           | ** ** | **2004**                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                  |       |                       |       |               |       |                     |       |   |   |   |   |   |   |   |   |
| Interest Income                              |       | $                     | 29,482     |                       | $          | 26,237             |       | $                        | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 29,482 |   | $ | 26,237 |   |
| Interest Expense                             |       | 2,713                 |       | 2,076                      |       | —             |       | —                   |       | — |   | — |   | 2,713 |   | 2,076 |   |
| Net Interest  Income                         |       | 26,769                |       | 24,161                     |       | —             |       | —                   |       | — |   | — |   | 26,769 |   | 24,161 |   |
| Provision for  Loan Losses                   |       | —                |       | —                     |       | —             |       | —                   |       | — |   | — |   | — |   | — |   |
| Non Interest  Income                         |       | 5,082                 |       | 6,578                      |       | 14                 |       | 207                      |       | 299 |   | 215 |   | 5,395 |   | 7,000 |   |
| Non Interest  Expense                        |       | 18,117                |       | 19,473                     |       | 3                  |       | 18                       |       | 215 |   | 203 |   | 18,335 |   | 19,694 |   |
| Pre-Tax Income                               |       | $                     | 13,734     |                       | $          | 11,266             |       | $                        | 11         |   | $ | 189 |   | $ | 84 |   | $ | 12 |   | $ | 13,829 |   | $ | 11,467 |   |

 

***     Off BalanceSheet Transactions and Other Related Transactions.  ***Off-balance sheetarrangements are any contractual arrangement to which an unconsolidated entityis a party, under which the Company has: 1) any obligation under a guaranteecontract; 2) a retained or contingent interest in assets transferred to anunconsolidated entity or similar arrangement that serves as credit, liquidityor market risk support to that entity for such assets; 3) any obligation undercertain derivative instruments; or 4) any obligation under a material variableinterest held by the Company in an unconsolidated entity that providesfinancing, liquidity, market risk or credit risk support to the Company, orengages in leasing, hedging or research and development services with theCompany.  In the ordinary course ofbusiness, the Company has entered into off-balance sheet financial instrumentsconsisting of commitments to extend credit, commercial letters of credit, andstandby letters of credit.

 

19

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***The Company is contingently liable for letter of creditaccommodations made to its customers in the ordinary course of businesstotaling $46.5 million at March 31, 2005, up from $27.9 million one yearearlier.  Additionally, the Company hasundisbursed loan commitments, also made in the ordinary course of business,totaling $602.7 million, which was up from the $558.9 million outstanding oneyear earlier.  The Company has anallowance for losses-unfunded commitments totaling $1,624,000 and $1,867,000 atMarch 31, 2005 and 2004, respectively, to cover losses inherent in its letterof credit accommodations and undisbursed loan commitments.***

 

     There are no Special Purpose Entity (“SPE”)trusts, corporations, or other legal entities established by Mid-State whichreside off-balance sheet.  There are noother off-balance sheet items other than the aforementioned items related toletter of credit accommodations and un-disbursed loan commitments.

 

     The Company does make loans and leases torelated parties (directors and officers) in the ordinary course of business atprevailing rates and terms.  These loansand leases totaled $9.6 million and $2.6 million at March 31, 2005 and 2004, respectively.

 

     In the ordinary course of business, theBank is a party to various operating leases. For a fuller discussion of these financial instruments, refer to Note 6of the Company’s consolidated financial statements contained in Item 8 of PartII of the Company’s December 31, 2004 Annual Report on Form 10K.

**Item 3 — Quantitative and Qualitative Disclosure AboutMarket Risk**

 

The Bank expects its risk exposure to changes in interest rates toremain manageable and well within acceptable policy ranges.  A recent review as of March 31, 2005 of thepotential changes in the Bank’s net interest income over a 12 month timehorizon showed that it could fluctuate under extreme alternative rate scenariosfrom between +2.2% and -5.3% of the base case (rates unchanged) of $112.5million.  The Bank’s policy is tomaintain a structure of assets and liabilities which are such that net interestincome will not vary more than plus or minus 15% of the base forecast over thenext 12 months.  Management expects thatits exposure to interest rate risk is manageable and it will continue to strivefor an optimal trade-off between risk and earnings.

 

The following table presents a summary of the Bank’s net interestincome forecasted for the coming 12 months under alternative interest ratescenarios.

| ** **                           | ** ** | **Change From Base** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| Rates Down Very  Significant         |       | -5.3                 | %          |
| (Prime down to  4.00% over 6 months) |       |                 |       |
| Rates Down  Significant              |       | -4.1                 | %          |
| (Prime down to  4.25% over 7 months) |       |                 |       |
| Rates Down  Modestly                 |       | -2.1                 | %          |
| (Prime down to  5.00% over 7 months) |       |                 |       |
| Base Case -  Rates Unchanged         |       | —               |       |
| (Prime unchanged  at 5.75%)          |       |                 |       |
| Rates Up  Modestly                   |       | +2.2                 | %          |
| (Prime up to  6.75% over 10 months)  |       |                 |       |
| Rates Up  Aggressive                 |       | +2.2                 | %          |
| (Prime up to  7.75% over 10 months)  |       |                 |       |
| Rates Up Very  Aggressive            |       | +1.9                 | %          |
| (Prime up to  8.75% over 10 months)  |       |                 |       |

 

20

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Net interest income under the above scenarios is influenced by thecharacteristics of the Bank’s assets and liabilities.  In the case of N.O.W., savings and moneymarket deposits (total $1.077 billion) interest is based on rates set at the discretionof management ranging from 0.15% to 0.85%. In a downward rate environment, there is a limit to how far thesedeposit instruments can be re-priced and this behavior is similar to that offixed rate instruments.  In an upwardrate environment, the magnitude and timing of changes in rates on thesedeposits is assumed to be more reflective of variable rate instruments.

 

It is important to note that the above table is a summary of severalforecasts and actual results may vary. The forecasts are based on estimates and assumptions of management thatmay turn out to be different and may change over time.  Factors affecting these estimates andassumptions include, but are not limited to - competitors’ behavior, economicconditions both locally and nationally, actions taken by the Federal ReserveBoard, customer behavior, and management’s responses.  Changes that vary significantly from theassumptions and estimates may have significant effects on the Bank’s netinterest income.  Therefore the resultsof this analysis should not be relied upon as indicative of actual futureresults.  Historically, the Bank has beenable to manage its Net Interest Income in a fairly narrow range reflecting theBank’s relative insensitivity to interest rate changes.  The impact of prepayment behavior onmortgages, real estate loans, mortgage backed securities, securities with callfeatures, etc. is not considered material to the sensitivity analysis.  Over the last 5 calendar years (2000 - 2004),the Bank’s net interest margin (which is net interest income divided by averageearning assets of the Bank) had ranged from a low of 4.95% to a high of 6.44%(not taxable equivalent).  The Bank’s netinterest margin in 2004 of 4.95% is at the low end of this range by historicalstandards, coming off the higher levels experienced in 2000 of 6.44%.  Recent increases in interest rates (e.g. - seven25 basis point increases in the Federal Funds Rate and Prime Rate) which beganat the end of June 2004 have led to an improving net interest margin for theBank to 5.22% in the first quarter of this year.  The net interest margin under the forecastedalternative scenarios ranges from 4.86% to 5.24%.  Management believes this range of scenarios,while at the lower end of historical standards, is conservative given current interestrate levels, but no assurances can be given that actual future experience willfall within this range.

 

The Bank’s exposure with respect to interest rate derivatives, exchangerate fluctuations, and/or commodity price movements is nil.  The Bank does not own any instruments withinthese markets.

#### **Item 4 — Controls and Procedures**

 

As of the end of the period covered by this report, Management,including the Company’s Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures with respect to the information generatedfor use in this Quarterly Report.  Theevaluation was based in part upon reports and affidavits provided by a numberof executives.  Based upon, and as of thedate of that evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that the disclosure controls and procedures wereeffective to provide reasonable assurances that information required to bedisclosed in the reports the Company files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported withintime periods specified in the SEC’s rules and forms.

 

There was no change in the Company’s internal controls over financialreporting during the quarter ended March 31, 2005 that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlsover financial reporting.

 

In designing and evaluating disclosure controls and procedures, theCompany’s Management recognized that any controls and procedures, no matter howwell designed and operated, can provide only reasonable, not absolute,assurances of achieving the desired control objectives and Management necessarilywas required to apply its judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

 

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PART II - OTHER INFORMATION

 

**Item 1 — LegalProceedings**

 

                Mid-Stateis not a party to any material legal proceeding.

 

**Item 2 — Unregistered Sale of Equity Securities and Useof Proceeds**

 

                OnJanuary 21, 2004 the Board authorized the repurchase of up to 1,178,352additional shares of the Company’s common stock.  This authorization does not have anexpiration date.  There were 193,770shares of the Company’s common stock repurchased in the first quarter of 2005at an average price of $27.29 per share. All of these shares were purchased in open market transactions.  As of March 31, 2005, the Company iscontinuing the program and can repurchase up to 326,587 additional shares underthe January 2004 authorization.

 

The following table provides the information with respect to thepurchases made under the publicly announced stock repurchase program during thefirst quarter ended March 31, 2005.  Allof these shares were purchased in open market transactions.

 

                
| ** **    | ** ** | **Total**            | ** ** | **Average Price** | ** ** | **Remaining Shares**        | ** ** | **Dollar Value of Shares**      | ** ** |
|---------------|------------|----------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **    | ** ** | **Number of**        | ** ** | **Paid**          | ** ** | **That May be Purchased**   | ** ** | **That May be Purchased**       | ** ** |
| **Month of**  | ** ** | **Shares Purchased** | ** ** | **Per Share**     | ** ** | **Under the Authorization** | ** ** | **Under the Authorization (1)** | ** ** |
|          |       |                 |       |              |       |                        |       |                            |       |
| January 2005  |       | 62,439               |       | $                 | 26.91      |                        | 457,918    |                            | $          | 12,917,867 |   |
| February 2005 |       | 73,299               |       | $                 | 27.58      |                        | 384,619    |                            | $          | 10,180,865 |   |
| March 2005    |       | 58,032               |       | $                 | 27.32      |                        | 326,587    |                            | $          | 8,687,214 |   |
|          |       |                 |       |              |       |                        |       |                            |       |
| Totals        |       | 193,770              |       | $                 | 27.29      |                        | 326,587    |                            | $          | 8,687,214 |   |

 

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(1)Value is based on the closing price of the Company’s stock multiplied by thenumber of shares that may be purchased under the authorization.

 

 

**Item 3 — DefaultsUpon Senior Securities**

 

                Not applicable.

 

 

**Item 4 — Submission of Matters to a Vote of SecurityHolders**

 

There were no items presented to the security holdersduring the first quarter of 2005.

 

**Item 5 — OtherInformation**

 

                None.

 

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**Item 6 — Exhibits**

 
|       | A)               | Exhibits   |
|------------|------------------|------------|
|       |             |       |
| ** ** | **Exhibit  No.** | ** ** | **Exhibit** |
|       |             |       |   |
|       | 31.1             |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|       | 31.2             |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|       | 32               |       | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|            |                  |            |  |  |

 

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SIGNATURES

 

Pursuant to the requirement of the Securities and Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|              | Mid-State Bancshares |
|-------------------|----------------------|
|              |                 |   |   |   |
|              |                 |   |   |   |
|              |                 |   |   |   |
|              |                 |   |   |   |
| Date: May 4, 2005 |                 | By: | /s/ JAMES W. LOKEY |
|              |                 |   | JAMES W. LOKEY |
|              |                 |   | President and |
|              |                 |   | Chief Executive Officer |
|              |                 |   | (Principal Executive Officer) |
|              |                 |   |   |
|              |                 |   |   |
|              |                 |   |   |
|              |                 |   |   |
| Date: May 4, 2005 |                 | By: | /s/ JAMES G. STATHOS |
|              |                 |   | JAMES G. STATHOS |
|              |                 |   | Executive Vice  President and |
|              |                 |   | Chief Financial Officer |
|              |                 |   | (Principal Accounting Officer) |

 

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## **EXHIBIT INDEX**

## ** **

 
| **Exhibit No.** | ** ** | **Description**                                                           | ** ** | ** ** |
|-----------------|------------|---------------------------------------------------------------------------|------------|------------|
| 31.1            |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |       |       |
| 31.2            |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |       |       |
| 32              |       | Certification pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002. |       |       |

 

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