**United States**

**Securities and Exchange Commission**

**Washington,D.C. 20429**

** **

**FORM 10-Q**

** **

| **ý** |   | **Quarterly report under Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the quarterly period ended March 31,  2003.** |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|       |
| **o**      |   | **Transition report under Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the transition period from N/A to N/A .**    |

** **

**CommissionFile Number 000-23925**

** **

**MID-STATE BANCSHARES**

**(**Exact name ofregistrant as specified in its charter)

 

| **California**                                                                   |   |                                                 |
|----------------------------------------------------------------------------------|--------|------------------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                 |   | **77-0442667**  (I.R.S. Employer Identification No.) |
|                                                                             |   |                                                 |
| **1026 Grand Ave. Arroyo Grande, CA**                                            |   | **93420-0580**                                       |
| (Address of  Principal Executive Offices)                                        |   | (Zip Code)                                           |
|                                                                             |   |                                                 |
| Issuer’s  Telephone Number:**   (805) 473-7700**             |
|                                                                             |   |                                                 |
| Securities to be  registered under Section 12(b) of the Act:**  None** |
|                                                                             |   |                                                 |
| Securities to be  registered under Section 12(g) of the Act:                     |
|                                                                             |   |                                                 |
| **Common Stock, no par value**                                                   |
| (Title of class)                                                                 |

 

Check whether the 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 90days.         Yes  ý   No  o

 

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

 

As of May 7, 2003, theaggregate market value of the common stock held by non-affiliates of theCompany was:**$432,053,805**

 

Number of shares of commonstock of the Company outstanding as of May 7, 2003: 23,464,395 shares.

 

 

----

 

**Mid-State Bancshares**

March 31, 2003

Index

 
| **PART I - FINANCIAL  INFORMATION** |                                                              |
|-------------------------------------|-------------------------------------------------------------------|
|                                |                                                              |   |
|                                | Item 1 –Financial  Statements                                |   |
|                                |
|                                |                                                              | Consolidated  Statements of Financial Position (Unaudited) |
|                                |                                                              |   |
|                                |                                                              | Consolidated  Statements of Income (Unaudited) |
|                                |                                                              |   |
|                                |                                                              | Consolidated  Statements of Comprehensive Income (Unaudited) |
|                                |                                                              |   |
|                                |                                                              | Consolidated  Statements of Cash Flows (Unaudited) |
|                                |                                                              |   |
|                                |                                                              | Notes to  Consolidated Financial Statements (Unaudited) |
|                                |
|                                | Item  2                                                           | –Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                |                                                              |   |
|                                |                                                              |
|                                | Item  3                                                           | –Quantitative  and Qualitative Disclosure About Market Risk |
|                                |                                                              |   |
|                                |                                                              |   |
|                                | Item 4                                                            | –Controls and Procedures |   |
|                                |                                                              |   |
| **PART II - OTHER INFORMATION**     |                                                              |
|                                |                                                              |   |
|                                | Item  1 –Legal Proceedings                                   |   |
|                                |                                                              |   |
|                                | Item  2 –Changes in Securities and Use of Proceeds           |   |
|                                |                                                              |   |
|                                | Item 3  –Defaults Upon Senior Securities                     |   |
|                                |                                                              |   |
|                                | Item  4 –Submission of Matters to a Vote of Security Holders |   |
|                                |                                                              |   |
|                                | Item  5 –Other Information                                   |   |
|                                |                                                              |   |
|                                | Item 6  –Exhibits and Reports on Form 8-K                    |   |
|                                |                                                              |   |
|                                | Signatures                                                        |   |
|                                |                                                              |   |
|                                | Certifications                                                    |   |
|                                |                                                              |   |
|                                | EX-99.1 Certification  Pursuant to 18 U.S.C. Sec. 1350            |   |

 

2

----

 

**PARTI - FINANCIAL INFORMATION**

**Item1 - Financial Statements**

**Mid-StateBancshares**ConsolidatedStatements of Financial Position(Interim Periods Unaudited - figures in 000’s)

 
|                                                                                      |   | **Mar. 31,  2003** |      | **Dec. 31,  2002** |   | **Mar. 31,  2002** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------|-----------|--------------------|--------|--------------------|--------|
| ASSETS                                                                                    |   |               |      |               |   |               |   |
| Cash and Due  From Banks                                                                  |   | $                  | 113,257   |               | $      | 128,036            |   | $ | 93,403 |   |
| Fed Funds Sold                                                                            |   | 69,500             |      | 16,500             |   | 90,000             |   |
| Securities  Available For Sale                                                            |   | 600,490            |      | 608,983            |   | 464,754            |   |
| Loans Held for  Sale                                                                      |   | 26,794             |      | 22,560             |   | 3,871              |   |
|                                                                                      |   |               |      |               |   |               |   |
| Loans, net of  unearned income                                                            |   | 1,095,355          |      | 1,087,551          |   | 1,144,911          |   |
| Allowance for  Loan Losses                                                                |   | (17,576            | )         | (17,370            | )      | (19,000            | )      |
| Net Loans                                                                                 |   | 1,077,779          |      | 1,070,181          |   | 1,125,911          |   |
|                                                                                      |   |               |      |               |   |               |   |
| Premises and  Equipment, Net                                                              |   | 25,181             |      | 25,342             |   | 25,617             |   |
| Accrued Interest  Receivable                                                              |   | 12,789             |      | 11,689             |   | 12,432             |   |
| Investments in  Real Estate, Net                                                          |   | 91                 |      | 239                |   | 234                |   |
| Goodwill                                                                                  |   | 33,448             |      | 33,448             |   | 33,448             |   |
| Other  Intangibles                                                                        |   | 8,841              |      | 8,816              |   | 9,185              |   |
| Other Assets                                                                              |   | 9,711              |      | 8,946              |   | 14,401             |   |
| ***Total Assets***                                                                        |   | $                  | 1,977,881 |               | $      | 1,934,740          |   | $ | 1,873,256 |   |
|                                                                                      |   |               |      |               |   |               |   |
| LIABILITIES  AND EQUITY                                                                   |   |               |      |               |   |               |   |
| Non Interest  Bearing Demand                                                              |   | $                  | 397,622   |               | $      | 390,212            |   | $ | 364,923 |   |
| NOW Accounts,  Money Market and Savings Deposits                                          |   | 903,892            |      | 863,142            |   | 809,586            |   |
| Time Deposits  Under $100                                                                 |   | 247,971            |      | 249,792            |   | 271,874            |   |
| Time Deposits  $100 or more                                                               |   | 152,662            |      | 149,801            |   | 160,300            |   |
| *Total Deposits*                                                                          |   | 1,702,147          |      | 1,652,947          |   | 1,606,683          |   |
|                                                                                      |   |               |      |               |   |               |   |
| Other Borrowings                                                                          |   | 2,382              |      | 10,973             |   | 4,790              |   |
| Allowance for  Losses – Unfunded Commitments                                         |   | 1,811              |      | 1,771              |   | 1,687              |   |
| Accrued Interest  Payable and Other Liabilities                                           |   | 15,777             |      | 14,914             |   | 23,601             |   |
| *Total Liabilities*                                                                       |   | 1,722,117          |      | 1,680,605          |   | 1,636,761          |   |
|                                                                                      |   |               |      |               |   |               |   |
| Shareholders’  Equity:                                                               |   |               |      |               |   |               |   |
| Common Stock and  Surplus (Shares Outstanding of 23,488, 23,697 and 24,094, respectively) |   | 73,978             |      | 77,588             |   | 84,810             |   |
| Retained  Earnings                                                                        |   | 168,168            |      | 163,309            |   | 147,748            |   |
| Accumulated  Other Comprehensive Income, Net                                              |   | 13,618             |      | 13,238             |   | 3,937              |   |
| *Total Equity*                                                                            |   | 255,764            |      | 254,135            |   | 236,495            |   |
| ***Total Liabilities and Equity***                                                        |   | $                  | 1,977,881 |               | $      | 1,934,740          |   | $ | 1,873,256 |   |

 

3

----

** **

**Mid-State Bancshares**ConsolidatedStatements of Income(Unaudited - figures in 000’s except earnings per share data)

 
|                                                                   |   | **Three  Month Period  Ended March 31,** |   |
|------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                   |   |                                     |
|                                                                   |   | **2003**                                 |   | **2002** |   |
| **Interest Income:**                                                   |   |                                     |   |   |   |
| Interest and  fees on loans                                            |   | $                                        | 19,753 |   | $ | 22,248 |   |
| Interest on  investment securities -                                   |   |                                     |   |   |   |
| U.S. Treasury  securities                                              |   | 205                                      |   | 404 |   |
| U.S. Government  agencies and corporations                             |   | 2,315                                    |   | 1,819 |   |
| Obligations of  states and political Subdivisions and other securities |   | 3,470                                    |   | 3,049 |   |
| Interest on fed  funds sold and other                                  |   | 122                                      |   | 336 |   |
| **Total Interest Income**                                              |   | 25,865                                   |   | 27,856 |   |
| **Interest Expense:**                                                  |   |                                     |   |   |   |
| Interest on NOW,  money market and savings                             |   | 762                                      |   | 1,230 |   |
| Interest on time  deposits less than $100                              |   | 1,344                                    |   | 2,262 |   |
| Interest on time  deposits of $100 or more                             |   | 690                                      |   | 1,229 |   |
| Interest other                                                         |   | 38                                       |   | 69 |   |
| **Total Interest Expense**                                             |   | 2,834                                    |   | 4,790 |   |
| **Net Interest Income before  provision**                              |   | 23,031                                   |   | 23,066 |   |
| Less: Provision  for loan losses                                       |   | 110                                      |   | 300 |   |
| **Net Interest Income after provision**                                |   | 22,921                                   |   | 22,766 |   |
| **Other Operating Income:**                                            |   |                                     |   |   |   |
| Service charges  and fees                                              |   | 2,253                                    |   | 2,204 |   |
| Commissions,  fees and other service charges                           |   | 3,023                                    |   | 2,866 |   |
| Gains (losses)  on sale of securities                                  |   | 2                                        |   | (2 | ) |
| Gain on sale of  loans held for sale                                   |   | 973                                      |   | 52 |   |
| Other  non-interest income                                             |   | 663                                      |   | 863 |   |
| **Total Other Operating Income**                                       |   | 6,914                                    |   | 5,983 |   |
| **Other Operating Expense:**                                           |   |                                     |   |   |   |
| Salaries and  employee benefits                                        |   | 9,649                                    |   | 9,545 |   |
| Occupancy and furniture                                                |   | 2,772                                    |   | 2,707 |   |
| Other operating  expenses                                              |   | 5,954                                    |   | 5,635 |   |
| **Total Other Operating Expense**                                      |   | 18,375                                   |   | 17,887 |   |
| **Income Before Taxes**                                                |   | 11,460                                   |   | 10,862 |   |
| Provision for  income taxes                                            |   | 4,017                                    |   | 3,962 |   |
| **Net Income**                                                         |   | $                                        | 7,443  |   | $ | 6,900 |   |
|                                                                   |   |                                     |   |   |   |
| **Earnings per share:**                                                |   |                                     |   |   |   |
| **– basic**                                                       |   | $                                        | 0.32   |   | $ | 0.29 |   |
| **– diluted**                                                     |   | $                                        | 0.30   |   | $ | 0.28 |   |
| **Dividends per share**                                                |   | $                                        | 0.11   |   | $ | 0.10 |   |
| **Average shares used in earnings per  share calculations:**           |   |                                     |   |   |   |
| **– basic**                                                       |   | 23,598                                   |   | 24,089 |   |
| **– diluted**                                                     |   | 24,638                                   |   | 24,928 |   |

 

4

----

 

**Mid-State Bancshares**ConsolidatedStatements of Comprehensive Income(Unaudited - figures in 000’s)

 
|                                                                   |   | **Three  Month Period  Ended March 31,** |   |
|------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                   |   |                                     |
|                                                                   |   | **2003**                                 |   | **2002** |   |
| **Net Income**                                                         |   | $                                        | 7,443  |   | $ | 6,900 |   |
|                                                                   |   |                                     |   |   |   |
| **Other Comprehensive Income Before  Taxes:**                          |   |                                     |   |   |   |
| Unrealized gains  (losses) on securities available for sale:           |   |                                     |   |   |   |
| Unrealized  holding gains (losses) arising during period               |   | 635                                      |   | (4,144 | ) |
| Reclassification  adjustment for (gains) losses included in net income |   | (2                                       | )      | 2 |   |
| Other  comprehensive income (loss), before tax                         |   | 633                                      |   | (4,142 | ) |
| Income tax  expense (benefit) related to items in comprehensive income |   | 253                                      |   | (1,657 | ) |
| **Other Comprehensive Income (Loss),  Net of Taxes**                   |   | 380                                      |   | (2,485 | ) |
| **Comprehensive Income**                                               |   | $                                        | 7,823  |   | $ | 4,415 |   |

 

5

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**Mid-StateBancshares**

Consolidated Statementsof Cash Flows(Unaudited - figures in 000’s)

 
|                                                                               |   | **Three  Month Period  Ended March 31,** |       |
|------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                               |   | **2003**                                 |       | **2002** | ** ** |
| **OPERATING ACTIVITIES**                                                           |   |                                     |       |   |   |
| Net Income                                                                         |   | $                                        | 7,443      |   | $ | 6,900 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                                     |       |   |   |
| Provision for  credit losses                                                       |   | 150                                      |       | 300 |   |
| Depreciation and  amortization                                                     |   | 1,081                                    |       | 985 |   |
| Net amortization  of prem./discounts-investments                                   |   | 1,038                                    |       | 847 |   |
| Gain on sale of  loans held for sale                                               |   | (973                                     | )          | (52 | ) |
| Net increase in  loans held for sale                                               |   | (3,261                                   | )          | (8,903 | ) |
| Change in  deferred loan fees                                                      |   | 158                                      |       | 151 |   |
| Changes in  assets and liabilities:                                                |   |                                     |       |   |   |
| Accrued interest  receivable                                                       |   | (1,100                                   | )          | (1,372 | ) |
| Other  intangibles, net                                                            |   | (25                                      | )          | 109 |   |
| Other assets,  net                                                                 |   | (1,018                                   | )          | 3,089 |   |
| Other  liabilities                                                                 |   | 903                                      |       | 8,055 |   |
| Net cash  provided by operating activities                                         |   | 4,396                                    |       | 10,109 |   |
| **INVESTING ACTIVITIES**                                                           |   |                                     | ** ** |   | ** ** |
| Proceeds from  sales and maturities of investments                                 |   | 53,285                                   |       | 22,176 |   |
| Purchases of  investments                                                          |   | (45,197                                  | )          | (40,574 | ) |
| (Increase)  Decrease in loans                                                      |   | (7,906                                   | )          | 9,353 |   |
| Receipt from  investments in real estate                                           |   | 148                                      |       | (1 | ) |
| Purchases of  premises and equipment, net                                          |   | (920                                     | )          | (752 | ) |
| Net cash (used  in) investing activities                                           |   | (590                                     | )          | (9,798 | ) |
| **FINANCING ACTIVITIES**                                                           |   |                                     |       |   |   |
| Increase in  deposits                                                              |   | 49,200                                   |       | 22,517 |   |
| Decrease in  short-term borrowings                                                 |   | (8,591                                   | )          | (12,924 | ) |
| Exercise of  stock options                                                         |   | 302                                      |       | 329 |   |
| Cash dividends  paid                                                               |   | (2,584                                   | )          | (2,409 | ) |
| Retirement of  company stock                                                       |   | (3,912                                   | )          | (391 | ) |
| Net cash provided  by financing activities                                         |   | 34,415                                   |       | 7,122 |   |
|                                                                               |   |                                     |       |   |   |
| Increase in cash  and cash equivalents                                             |   | 38,221                                   |       | 7,433 |   |
| Cash and cash  equivalents, beginning of period                                    |   | 144,536                                  |       | 175,970 |   |
|                                                                               |   |                                     |       |   |   |
| Cash and cash  equivalents, end of period                                          |   | $                                        | 182,757    |   | $ | 183,403 |   |
|                                                                               |   |                                     |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |   |                                     |       |   |   |
| Cash paid during  the period for interest                                          |   | $                                        | 2,798      |   | $ | 4,945 |   |
| Cash paid during  the period for taxes on income                                   |   | 7,036                                    |       | 950 |   |

 

6

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**Mid-StateBancshares**Notes toConsolidated Financial Statements(Information with respect to interim periods is unaudited)

 

**NOTE A -BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATION**

 

The accompanying consolidated financial statements include the accountsof Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank &Trust and the Bank’s subsidiaries, MSB Properties and Mid Coast Land Company(collectively the “Company,” “Bank” or “Mid-State”).  All significant inter-company transactions have been eliminatedin consolidation.  These consolidatedfinancial statements should be read in conjunction with the Form 10-K AnnualReport for the year ended December 31, 2002 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, 2002. 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 per share data.

 
|                                     |   | **Three  Month Period Ended  March 31, 2003** |   | **Three  Month Period Ended  March 31, 2002** |   |
|------------------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------|--------|
|                                     |   | **Earnings**                                  |   | **Shares**                                    |   | **EPS** |   | **Earnings** |   | **Shares** |   | **EPS** |   |
| Net Income as  reported                  |   | $                                             | 7,443  |                                          |   |   |   |   | $ | 6,900 |   |   |   |   |   |
|                                     |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share:               |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Income available  to Common Shareholders |   | $                                             | 7,443  |                                          | 23,598 |   | $ | 0.32 |   | $ | 6,900 |   | 24,089 |   | $ | 0.29 |   |
|                                     |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:          |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Stock Options                            |   |                                          |   | 1,040                                         |   |   |   |   |   | 839 |   |   |   |
|                                     |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Diluted Earnings  Per Share:             |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Income available  to                     |   |                                          |   |                                          |   |   |   |   |   |   |   |   |   |
| Common  Shareholders                     |   | $                                             | 7,443  |                                          | 24,638 |   | $ | 0.30 |   | $ | 6,900 |   | 24,928 |   | $ | 0.28 |   |

 

7

----

 

**NOTE C – RECENT ACCOUNTINGPRONOUNCEMENTS**

 

The Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 145, “Recission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections” in April of 2002.  SFAS No.145 amends existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicablility under changedconditions.  SFAS No. 145 is effectivein fiscal years beginning after May 15, 2002, with certain provisions effectivefor financial statements issued on or after May 15, 2002, with early adoption permitted.  The Company adopted the provisions effectivefor financial statements issued on or after May 15, 2002 on May 15, 2002.  The adoption of SFAS No. 145 did not have amaterial impact on its results of operations and financial position.

 

The FASB issued SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities” in June of 2002. SFAS No. 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities initiatedafter December 31, 2002, with early adoption permitted.  Management believes that the adoption ofSFAS No. 146 will not have a material impact on its results of operations andfinancial position.

 

The FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions”in July of 2002.  SFAS No. 147 addressesthe financial accounting and reporting for the acquisition of all or part of afinancial institution.  SFAS No. 147 waseffective on October 1, 2002.  TheCompany adopted SFAS No. 147 on October 1, 2002, and the adoption did not havea material impact on its results of operations and financial position.

 

In November of 2002, the FASB issued FASB Interpretation (“FIN”) No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others”.  FIN No. 45 clarifies the requirementsrelating to the guarantor’s accounting for, and disclosure of, the issuance ofcertain types of guarantees.  Thedisclosure provisions of FIN No. 45 were effective for financial statements ofperiods that end after December 15, 2002, and the required disclosures areincluded in these notes to consolidated financial statements.  The provisions for initial recognition andmeasurement are effective on a prospective basis for guarantees that are issuedor modified after December 31, 2002. Adoption did not have a material impact on its results of operations andfinancial position.

 

The FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation– Transition and Disclosure” in December of 2002.  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-BasedCompensation” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123.  SFAS No. 148 was effective for fiscal years ending after December15, 2002.  The Company adopted SFAS No.148 on December 15, 2002 and adoption did not have a material impact on its resultsof operations and financial position.

 

In January of 2003, the FASB issued FIN No. 46, “Consolidation ofVariable Interest Entities”.  FIN No. 46addresses consolidation by business enterprises of variable interest entities,which have one or both of the following characteristics:  i) the equity investment at risk is notsufficient to permit the entity to finance its activities without additionalsubordinated financial support from other parties, which is provided throughother interests that will absorb some or all of the expected losses of theentity; and ii) the equity investors lack an essential characteristic of acontrolling financial interest.  FIN No.46 was effective for all financial statements issued on or after February 1,2003.  Management believes that theadoption of FIN No. 46 will not have a material impact on the Company’s resultsof operations and financial position.

 

8

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**NOTE D –OTHER INTANGIBLE ASSETS**

 

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

 
|                                  |   | **March 31,  2003** |   | **March 31,  2002**           |    |
|---------------------------------------|--------|---------------------|--------|-------------------------------|---------|
|                                  |   | **Gross  Amount**   |   | **Accumulated  Amortization** |    | **Net  Carrying  Amount** |   | **Gross  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
|                                  |   |                |   |                          |    |   |   |   |   |   |   |   |   |
| Core Deposit  Intangible              |   | $                   | 8,870  |                          | ($1,636 | ) | $ | 7,234 |   | $ | 8,870 |   | ($565 | ) | $ | 8,305 |   |
|                                  |   |                |   |                          |    |   |   |   |   |   |   |   |   |
| Originated  Mortgage Servicing Rights |   | 2,416               |   | (809                          | )       | 1,607 |   | 1,355 |   | (475 | ) | 880 |   |
|                                  |   |                |   |                          |    |   |   |   |   |   |   |   |   |
| Total Other  Intangible Assets        |   | $                   | 11,286 |                          | ($2,445 | ) | $ | 8,841 |   | $ | 10,225 |   | ($1,040 | ) | $ | 9,185 |   |

 

 
|                                  |   | **Dec. 31,  2002** |   |
|---------------------------------------|--------|--------------------|--------|
|                                  |   | **Gross  Amount**  |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
|                                  |   |               |   |   |   |   |   |
| Core Deposit  Intangible              |   | $                  | 8,870  |   | ($1,369 | ) | $ | 7,501 |   |
|                                  |   |               |   |   |   |   |   |
| Originated  Mortgage Servicing Rights |   | 2,062              |   | (747 | ) | 1,315 |   |
| Total Other  Intangible Assets        |   | $                  | 10,932 |   | ($2,116 | ) | $ | 8,816 |   |

 

Aggregate Amortization Expense of Other IntangibleAssets ($ in 000’s):

 
|                                                  |   | **Three  Month Period  Ended March 31,** |   |
|-------------------------------------------------------|--------|------------------------------------------|--------|
|                                                  |   | **2003**                                 |   | **2002** |   |
| Amortization of  Core Deposit Intangible              |   | $                                        | 268    |   | $ | 268 |   |
|                                                  |   |                                     |   |   |   |
| Amortization of  Originated Mortgage Servicing Rights |   | 61                                       |   | 35 |   |
| Total aggregate  amortization expense                 |   | $                                        | 329    |   | $ | 303 |   |

 

The projected amortization expense for intangible assets, assuming nofurther acquisitions or dispositions, is approximately $1.3 million per yearover the next five years.

 

**NOTE E – STOCK OPTIONS**

 

At March 31, 2003, the Company had one stock option plan which isdescribed more fully in Note 15 in the Company’s 2002 Annual Report on form10-K.  The Company accounts for stockoptions using the intrinsic value method under the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25 and provides proforma net income andproforma earnings per share disclosures for employee stock option grants as ifthe fair-

 

9

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value-based method,defined in SFAS No. 123, “Accounting for Stock-Based Compensation,” had beenapplied.  Had the Company determinedcompensation cost based on the fair value at the grant date for its stock optionsunder SFAS No. 123, the Company’s net income would have been reduced to the proforma amounts indicated below for the three months ended March 31:

 
| **(dollars in 000’s except per share amounts)** |   | **2003** |   | **2002** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|
| Net  income, as reported                             |   | $        | 7,443  |     | $      | 6,900 |   |
| Deduct:  Total stock-based compensation expense |   |     |   |     |   |
| determined  under the intrinsic value based method   |   |     |   |     |   |
| for  all awards, net of related taxes                |   | (389     | )      | (356     | )      |
|                                                 |   |     |   |     |   |
| Proforma  net income                                 |   | $        | 7,054  |     | $      | 6,544 |   |
|                                                 |   |     |   |     |   |
| Basic  income per share, as reported                 |   | $        | 0.32   |     | $      | 0.29 |   |
| Proforma  basic income per share                     |   | $        | 0.30   |     | $      | 0.27 |   |
|                                                 |   |     |   |     |   |
| Diluted  income per share, as reported               |   | $        | 0.30   |     | $      | 0.28 |   |
| Proforma  diluted income per share                   |   | $        | 0.29   |     | $      | 0.26 |   |

 

10

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**Item2 - Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

***Selected Financial Data - Summary***.      Thefollowing table provides certain selected consolidated financial data as of andfor the three months ended March 31, 2003 and 2002 (unaudited).

** **
|                                                   |   | **Year-to-Date**   |   |
|--------------------------------------------------------|--------|--------------------|--------|
| **(Unaudited  – In thousands)**                   |   | **March 31, 2003** |   | **March 31, 2002** |   |
| **Consolidated Statements of Income – Condensed** |   |               |   |   |   |
| Interest Income (not taxable equivalent)               |   | $                  | 25,865 |   | $ | 27,856 |   |
| Interest Expense                                       |   | 2,834              |   | 4,790 |   |
| Net Interest Income                                    |   | 23,031             |   | 23,066 |   |
| Provision for Loan Losses                              |   | 110                |   | 300 |   |
| Net Interest Income after provision for loan losses    |   | 22,921             |   | 22,766 |   |
| Non-interest income                                    |   | 6,914              |   | 5,983 |   |
| Non-interest expense                                   |   | 18,375             |   | 17,887 |   |
| Income before income taxes                             |   | 11,460             |   | 10,862 |   |
| Provision for income taxes                             |   | 4,017              |   | 3,962 |   |
| Net Income                                             |   | $                  | 7,443  |   | $ | 6,900 |   |

 
|                                                        |   | **Year-to-Date**   |      |
|-------------------------------------------------------------|--------|--------------------|-----------|
| **(In  thousands, except per share data)**                  |   | **March 31, 2003** |      | **March 31, 2002** |   |
| Net Income – basic                                     |   | $                  | 0.32      |   | $ | 0.29 |   |
| Net Income – diluted                                   |   | $                  | 0.30      |   | $ | 0.28 |   |
| Weighted average shares used in Basic E.P.S.  calculation   |   | 23,598             |      | 24,089 |   |
| Weighted average shares used in Diluted E.P.S.  calculation |   | 24,638             |      | 24,928 |   |
| Cash dividends                                              |   | $                  | 0.11      |   | $ | 0.10 |   |
| Book value at period-end                                    |   | $                  | 10.89     |   | $ | 9.82 |   |
| Tangible book value at period end                           |   | $                  | 9.09      |   | $ | 8.05 |   |
| Ending Shares                                               |   | 23,488             |      | 24,094 |   |
|                                                        |   |               |      |   |   |
| **Financial Ratios**                                        |   |               |      |   |   |
| Return on assets                                            |   | 1.55               | %         | 1.51 | % |
| Return on tangible assets                                   |   | 1.58               | %         | 1.55 | % |
| Return on equity                                            |   | 11.84              | %         | 11.88 | % |
| Return on tangible equity                                   |   | 14.18              | %         | 14.51 | % |
| Net interest margin (not taxable equivalent)                |   | 5.29               | %         | 5.57 | % |
| Net interest margin (taxable equivalent yield)              |   | 5.69               | %         | 5.85 | % |
| Net (recoveries) loan losses to average loans               |   | (0.03              | )%        | 0.10 | % |
| Efficiency ratio                                            |   | 61.4               | %         | 61.6 | % |
|                                                        |   |               |      |   |   |
| **Period Averages**                                         |   |               |      |   |   |
| Total Assets                                                |   | $                  | 1,947,332 |   | $ | 1,849,338 |   |
| Total Tangible Assets                                       |   | 1,905,206          |      | 1,806,736 |   |
| Total Loans (includes loans held for sale)                  |   | 1,115,920          |      | 1,130,367 |   |
| Total Earning Assets                                        |   | 1,764,490          |      | 1,680,663 |   |
| Total Deposits                                              |   | 1,672,208          |      | 1,584,075 |   |
| Common Equity                                               |   | 254,950            |      | 235,523 |   |
| Common Tangible Equity                                      |   | 212,824            |      | 192,921 |   |

 

11

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** **
| **(Unaudited – In thousands)**                                |   | **March  31, 2003** |      | **March  31, 2002** | *** *** |
|--------------------------------------------------------------------|--------|---------------------|-----------|---------------------|--------------|
| **Consolidated Statements of Financial Position – Condensed** |   |                |      |                |         |
| Cash and due from banks                                            |   | $                   | 113,257   |                | $            | 93,403 |   |
| Investments and Fed Funds Sold                                     |   | 669,990             |      | 554,754             |         |
| Loans held for sale                                                |   | 26,794              |      | 3,871               |         |
| Loans, net of deferred fees, before allowance for loan  losses     |   | 1,095,355           |      | 1,144,911           |         |
| Allowance for Loan Losses                                          |   | (17,576             | )         | (19,000             | )            |
| Goodwill and other intangibles                                     |   | 42,289              |      | 42,633              |         |
| Other assets                                                       |   | 47,772              |      | 52,684              |         |
| Total Assets                                                       |   | $                   | 1,977,881 |                | $            | 1,873,256 |   |
|                                                               |   |                |      |                |         |
| Non-interest bearing deposits                                      |   | $                   | 397,622   |                | $            | 364,923 |   |
| Interest bearing deposits                                          |   | 1,304,525           |      | 1,241,760           |         |
| Other borrowings                                                   |   | 2,382               |      | 4,790               |         |
| Allowance for losses – unfunded commitments                   |   | 1,811               |      | 1,687               |         |
| Other liabilities                                                  |   | 15,777              |      | 23,601              |         |
| Shareholders’ equity                                          |   | 255,764             |      | 236,495             |         |
| Total Liabilities and Shareholders’ equity                    |   | $                   | 1,977,881 |                | $            | 1,873,256 |   |
|                                                               |   |                |      |                |         |
| **Asset Quality & Capital – At Period-End**               |   |                |      |                |         |
| Non-accrual loans                                                  |   | $                   | 16,799    |                | $            | 3,586 |   |
| Loans past due 90 days or more                                     |   | —              |      | 110                 |         |
| Other real estate owned                                            |   | —              |      | —              |         |
| Total non performing assets                                        |   | $                   | 16,799    |                | $            | 3,696 |   |
|                                                               |   |                |      |                |         |
| Allowance for losses to loans, gross (1)                           |   | 1.8                 | %         | 1.8                 | %            |
| Non-accrual loans to total loans, gross                            |   | 1.5                 | %         | 0.3                 | %            |
| Non performing assets to total assets                              |   | 0.8                 | %         | 0.2                 | %            |
| Allowance for losses to non performing loans (1)                   |   | 115.4               | %         | 559.7               | %            |
|                                                               |   |                |      |                |         |
| Equity to average assets (leverage ratio)                          |   | 10.6                | %         | 10.6                | %            |
| Tier One capital to risk-adjusted assets                           |   | 14.6                | %         | 14.0                | %            |
| Total capital to risk-adjusted assets                              |   | 15.9                | %         | 15.2                | %            |

 

----

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

 

***Performance Summary.* **The Company posted net income of $7.4million for the three months ended March 31, 2003 compared to $6.9 million inthe like 2002 period.  These earningsrepresent an annualized return on assets of 1.55% and 1.51%, respectively.  The annualized return on equity was 11.84%for the first quarter of 2003 compared to 11.88% in the first quarter of2002.  On a per share basis, dilutedearnings per share were $0.30 in the 2003 period compared to $0.28 in the likequarter of 2002.

 

***Net Interest Income.***  The following table delineates the impactsof changes 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, 2003 and 2002.

 

12

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|                                 |   |        |      | **3 Months  2003  Interest  Income/  Expense** |                       |                 |   |      |       | **3 Months  2002  Interest  Income/  Expense** |      | **Average  Yield /  Rate** |   | **2003 Compared to 2002  Composition of Change** |   |
|--------------------------------------|--------|-------------|-----------|------------------------------------------------|----------------------------|----------------------|--------|-----------|------------|------------------------------------------------|-----------|----------------------------|--------|--------------------------------------------------|--------|
|                                 |   |        |      |                                           |                       |                 |   |      |       |                                           |      |
|                                 |   |        |      |                                           | **Average  Yield /  Rate** |                 |   |      |       |                                           |      |
|                                 |   | **Average** |      |                                           |                       | **Average  Balance** |   |      |       | **Change Due To:**                             |      | **Total  Change**          |   |
| **dollars in 000’s**            |   | **Balance** |      |                                           |                       |                 |   |      | **Volume** |                                           | **Rate**  |                       |   |
| *EARNING ASSETS:*                    |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| Loans                                |   | $           | 1,115,920 |                                           | $                          | 19,753               |   | 7.18      | %          | $                                              | 1,130,367 |                       | $      | 22,248                                           |   | 7.98 | % | ($270 | ) | ($2,225 | ) | ($2,495 | ) |
| Investment Securities                |   | 605,007     |      | 5,990                                          |                       | 4.02                 | %      | 460,961   |       | 5,272                                          |      | 4.64                       | %      | 1,537                                            |   | (819 | ) | 718 |   |
| Fed Funds, Other                     |   | 43,563      |      | 122                                            |                       | 1.14                 | %      | 89,335    |       | 336                                            |      | 1.53                       | %      | (150                                             | )      | (64 | ) | (214 | ) |
| *TOTAL EARNING ASSETS*               |   | 1,764,490   |      | 25,865                                         |                       | 5.94                 | %      | 1,680,663 |       | 27,856                                         |      | 6.72                       | %      | 1,117                                            |   | (3,108 | ) | (1,991 | ) |
|                                 |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| *INTEREST BEARING LIABILITIES:*      |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| NOW, Savings, and                    |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| Money Market Accounts                |   | 883,747     |      | 762                                            |                       | 0.35                 | %      | 786,623   |       | 1,229                                          |      | 0.63                       | %      | 118                                              |   | (585 | ) | (467 | ) |
| Time Deposits                        |   | 400,305     |      | 2,034                                          |                       | 2.06                 | %      | 440,623   |       | 3,492                                          |      | 3.21                       | %      | (262                                             | )      | (1,196 | ) | (1,458 | ) |
| Interest Bearing Deposits            |   | 1,284,052   |      | 2,796                                          |                       | 0.88                 | %      | 1,227,246 |       | 4,721                                          |      | 1.56                       | %      | (144                                             | )      | (1,781 | ) | (1,925 | ) |
|                                 |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| Other Borrowings                     |   | 3,677       |      | 38                                             |                       | 4.08                 | %      | 11,311    |       | 69                                             |      | 2.47                       | %      | (63                                              | )      | 32 |   | (31 | ) |
|                                 |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| *TOTAL INTEREST BEARING LIABILITIES* |   | 1,287,729   |      | 2,834                                          |                       | 0.89                 | %      | 1,238,557 |       | 4,790                                          |      | 1.57                       | %      | (207                                             | )      | (1,749 | ) | (1,956 | ) |
|                                 |   |        |      |                                           |                       |                 |   |      |       |                                           |      |                       |   |                                             |   |   |   |   |   |
| *NET INTEREST INCOME*                |   | $           | 1,764,490 |                                           | $                          | 23,031               |   | 5.29      | %          | $                                              | 1,680,663 |                       | $      | 23,066                                           |   | 5.57 | % | $ | 1,324 |   | ($1,359 | ) | ($35 | ) |
|                                      |        |             |           |                                                |                            |                      |        |           |            |                                                |           |                            |        |                                                  |        |  |  |  |  |  |  |  |  |  |

 

Mid-State’s year-to-dateannualized yield on interest earning assets was 5.94% for the first threemonths of 2003 (6.34% on a taxable equivalent basis) compared to 6.72% in thelike 2002 period (7.01% on a taxable equivalent basis).  The decrease in yield is related to thegeneral decline in interest rates.  ThePrime Rate, to which many of the Bank’s loans are tied, averaged 4.25% in thefirst quarter of 2003 compared to 4.75% in the like period of 2002.  Annualized interest expense as a percent ofearning assets also decreased from 1.57% in the first three months of 2002 to0.89% in this year’s first three months. Overall, Mid-State’s annualized Net Interest Income, expressed as apercent of earning assets, decreased from 5.57% for the three month period of2002 (5.85% on a taxable equivalent basis) to 5.29% in the comparable 2003period (5.69% on a taxable equivalent basis). Annualized Net Interest Income as a percent of average totalassets declined from 5.06% in the first three months of 2002 (5.32% taxableequivalent) to 4.80% in the comparable 2003 period (5.15% taxableequivalent).  The impact of the declinein net interest margin by itself would have caused net interest income todecline, however, as noted in the table above, the increase in volume ofinvestment securities coupled with a decline in the volume of time deposits,tended to increase net interest income. The combination of the volume and rate considerations tended to cancelone another and net interest income was virtually identical across thecomparable periods ($23,031,000 in the first three months of 2003 compared to$23,066,000 in the like 2002 period).

 

Average earnings assetsfor the three months ended March 31, 2003 increased from the like 2002 period($1,764.5 million compared to $1,680.7 million).  Average deposits in this same time-frame were up $88.1 million,($1,672.2 million compared to $1,584.1 million).

 

***Provision and Allowance for Loan Losses.***  Mid-State made provisions for loan losses inthe first quarter of 2003 in the amount of $110 thousand, declining from $300thousand in the first quarter of 2002.

 

Management continues tobelieve that the allowances for loan losses and unfunded commitments, whichcollectively stand at 1.8% of total loans at March 31, 2003, are adequate tocover inherent losses.  The $19.4million total allowance for credit losses is approximately 115% of the level ofnon performing loans which stand at $16.8 million compared to $3.7 million oneyear earlier.  The increase in nonperforming loans is due to two

 

13

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lending relationshipssecured by real estate loans which total $14.4 million.  Management has determined that its standardreserve requirement allocated to these loans, and held in the general loan lossreserve, are sufficient to offset potential losses, if any, arising from lessthan full recovery of the loans from the supporting collateral.  Reserves associated with these loans are notreflected in the impaired loan valuation noted below because no additionalvaluation allowance is necessary pursuant to the guidance provided under SFASNo. 114.  Non performing loans consistof loans on non-accrual and accruing loans 90 days or more past due.  While continuing efforts are made to improveoverall asset quality, Management is unable to estimate with certainty, how andunder what terms, problem assets will be resolved.

 

Changes in the allowancefor loan losses (in thousands) for the periods ended March 31, 2003 and 2002are as follows:

 
|                                                |   | **March 31,** |   |
|-----------------------------------------------------|--------|---------------|--------|
|                                                |   | **2003**      |   | **2002** |   |
| Balance  at beginning of period:                    |   |          |   |   |   |
| Allowance  for loan losses                          |   | $             | 17,370 |   | $ | 18,972 |   |
| Allowance  for losses-unfunded commitments          |   | 1,771         |   | 1,687 |   |
| Total  allowances for losses at beginning of period |   | 19,141        |   | 20,659 |   |
|                                                |   |          |   |   |   |
| Additions  to the allowances charged to expense     |   | 150           |   | 300 |   |
| Loans  charged off                                  |   | (69           | )      | (450 | ) |
| Recoveries  of loans previously charged-off         |   | 165           |   | 178 |   |
| Total  allowances for losses-end of quarter         |   | $             | 19,387 |   | $ | 20,687 |   |
|                                                |   |          |   |   |   |
| Allowance  for loan losses                          |   | $             | 17,576 |   | $ | 19,000 |   |
| Allowance  for losses-unfunded commitments          |   | 1,811         |   | 1,687 |   |
| Total  allowances for losses-end of quarter         |   | $             | 19,387 |   | $ | 20,687 |   |

 

At March 31, 2003, therecorded investments in loans, which have been identified as impaired totaled$18,390,000.  Of this amount,$16,234,000 related to loans with no valuation allowance and $2,155,000 relatedto loans with a corresponding valuation allowance of $562,000.  Impaired loans totaled $6,223,000 at March31, 2002, all of which were tied to corresponding valuation allowances totaling$1,370,000.  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, 2003, theaverage recorded investment in impaired loans was $18,524,000 compared to$7,706,000 in the 2002 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-interest Income.***  Non-interest income for the first threemonths of 2003 was $6.9 million, up from $6.0 million earned in the 2002period, an increase of 15.6%.  Theincrease was related to higher service charge and commission fee income ofapproximately $206 thousand over the comparable period, an increase in theCompany’s gain on sale of loans held for sale in its mortgage banking operationof $921 thousand and a $200 thousand decrease in other income.  The increase in activity in mortgage bankingis in large part a reflection of the large level of refinance activity takingplace by consumers.  This trend, coupledwith an increased management focus on this segment of business activity, leadsManagement to believe that this source of income will continue in theforeseeable future.

 

14

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***Non-interest Expense.***  Non-interest expense for the first threemonths of 2003 was $18.3 million.  Thiscompares to $17.9 million in the comparable 2002 period.  This increase was primarily the result ofincreases in salaries and benefits of approximately $104 thousand, an increasein occupancy and furniture & equipment expense of $65 thousand, an increasein outside consulting services of $190 thousand and various other operatingexpenses are up $89 thousand.  Theincrease in salaries and benefits of $104 thousand is the result of increasesin the Company’s health care benefits which more than offset a drop in salaryexpense of $47 thousand across the comparable periods.  The increase in occupancy expense across thetwo periods of $65 thousand was primarily centered in an increase in rentalexpense on leased branch locations of $35 thousand and an increase in maintenancecharges of $47 thousand with all other categories of occupancy and furniture& equipment expenses showing a net decline.  The $190 thousand increase in outside consulting servicesrepresented the work of one vendor that is working with the Company on itssales management efforts.

 

***Provision for Income Taxes.***  The year-to-date provision for income taxeswas $4.0 million, which is virtually identical to the same period in 2002.  The effective tax rate in 2003 was 35.1%compared to 36.5% in 2002.  While thenormal combined federal and state statutory tax rate is 42% for Mid-StateBancshares, the tax exempt income generated by its municipal bond portfolio isthe primary reason that the effective rate is lower and an increase in this taxexempt income of $797 thousand across the two accounting periods is the reasonfor the drop in the effective tax rate from the 2003 period to the 2002 period.

 

***Balance Sheet.***  Total assets at March 31, 2003 totaled$1.977 billion, up 5.5% from the level one year earlier of  $1.873 billion.  This growth was fueled primarily by an increase in deposits of5.9% to $1.702 billion, up from $1.607 billion one year earlier.  The growth in deposits was centered in coredeposits.  While Time Deposits decreasedfrom $432.2 one year earlier to $400.6 million at period end, all other coredeposit categories of Demand, NOW, Money Market and Savings increased to $1.302billion from $1.175 billion one year earlier. In an ongoing effort to improve earnings, the Company continues to focusits attention on attracting lower cost core deposits and has consciously chosennot to pay the higher rates on certain more expensive Time Deposits.  Loan activity over the last year has beenslow which Management believes is due to reduced economic growth and increasedcompetition for loan business, with net loans declining $48.1 million from$1.126 billion to $1.078 billion at period-end.  Loans held for sale (single family, mortgage originations)increased by $22.9 million to $26.8 million from one year earlier.  Stockholders’ equity increased by $19.3million when comparing March, 2003 over March, 2002.

 

Mid-State Bank’s loan todeposit ratio of 64.4% at March 31, 2003 is down from the 71.3% ratio one yearearlier.  The decrease in the loan todeposit ratio is a reflection of the decline in loans coupled with an increasein deposits.  There is ample internalliquidity to fund increases in this ratio through liquidation of Mid-State’sinvestment portfolio which is categorized as available for sale.

 

***Investment Securities and Fed Funds Sold.***  Of the $670.0 million portfolio at March 31,2003, 10% is invested in overnight fed funds sold, 4% is invested in U.S.Treasury securities, 32% is invested in U.S. Government agency obligations, 50%is invested in securities issued by states and political subdivisions and 4% isinvested in mortgage-backed and other securities.  Sixty-seven percent of all investment securities and fed fundssold combined mature within five years. Approximately 23% of the total portfolio matures in less than oneyear.  The Bank’s investment inmortgage-backed securities consist of investments in FNMA and FHLMC pools whichhave contractual maturities of up to 17 years. The actual time of repayment may be shorter due to prepayments made on theunderlying collateral.

 

***Capital Resources.***  During the first quarter of 2003, theCompany has continued its stock repurchase program, repurchasing a total of232,590 shares during the quarter.  Inthe comparable 2002 period, the Company repurchased 24,481 shares.  Under the May 2002 authorization currentlyin effect from the Board of Directors, the 

 

15

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Company is authorized to repurchase up to 568,288 in additional sharesas of March 31, 2003.  The intendedeffect of the repurchase program is to improve earnings per share and thereturn on equity of the Company over time.

 

The Company declared adividend during the first quarter of $0.11 per share compared to $0.10 pershare one year earlier.

 

Total stockholders’equity increased from $236.5 million at March 31, 2002 to $255.7 million atMarch 31, 2003.  Changes instockholders’ equity over this 12 month period includes activity outlined inthe following table:

 
|                                                  |   | **Common  Stock & Surplus** |       | **Undivided  Profits** |       | **Accumulated  Comp. Income** |       | **Total**   |       |
|-------------------------------------------------------|--------|---------------------------------|------------|------------------------|------------|-------------------------------|------------|-------------|------------|
| **Ending Equity at March 31, 2002**                   |   | **84,810**                      | ** ** | **147,748**            | ** ** | **3,937**                     | ** ** | **236,495** | ** ** |
| Net Income 9 Mos 2002 (Apr. - Dec.)                   |   |                            |       | 22,955                 |       |                          |       | 22,955      |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Common Stock Repurchased 9 Mos. 2002 (Apr. - Dec.)    |   | (7,995                          | )          |                   |       |                          |       | (7,995      | )          |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Stock Options Exercised - 9 Mos. 2002 (Apr. - Dec.)   |   | 773                             |       |                   |       |                          |       | 773         |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Regular Dividends 9 Mos. 2002 (Apr. - Dec.)           |   |                            |       | (7,394                 | )          |                          |       | (7,394      | )          |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Chg. Accumulated Other Comprehensive Income (FAS 115) |   |                            |       |                   |       | 9,301                         |       | 9,301       |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| **Ending Equity at December 31, 2002**                |   | **77,588**                      | ** ** | **163,309**            | ** ** | **13,238**                    | ** ** | **254,135** | ** ** |
| Net Income 3 Mos. Y-T-D 2003                          |   |                            |       | 7,443                  |       |                          |       | 7,443       |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Common Stock Repurchased                              |   | (3,912                          | )          |                   |       |                          |       | (3,912      | )          |
| 3 Mos. Y-T-D 2003                                     |   |                            |       |                   |       |                          |       |        |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Stock Options Exercised 3 Mos Y-T-D                   |   | 302                             |       |                   |       |                          |       | 302         |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Regular Dividend Q1-2003                              |   |                            |       | (2,584                 | )          |                          |       | (2,584      | )          |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| Chg. Accumulated Other Comprehensive Income (FAS 115) |   |                            |       |                   |       | 380                           |       | 380         |       |
|                                                  |   |                            |       |                   |       |                          |       |        |       |
| **Ending Equity at March 31, 2003**                   |   | **73,978**                      | ** ** | **168,168**            | ** ** | **13,618**                    | ** ** | **255,764** | ** ** |

 

***Liquidity.***  The focus of the Company’s liquidity management is to ensure itsability to meet cash requirements. Sources of liquidity include cash, due from bank balances (net ofFederal Reserve requirements to maintain reserves against deposit liabilities),fed funds sold, investment securities (net of pledging requirements), loanrepayments, deposits and fed funds borrowing lines.  Typical demands on liquidity are deposit run-off from demanddeposits and savings accounts, maturing time deposits, which are 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, 2003 was 64.4% versus 71.3% one yearearlier.  The decrease in the loan todeposit ratio is a reflection of the decline in loans coupled

 

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with an increase indeposits.  The Bank normally strives fora loan to deposit ratio in the 65% to 75% range.  The Bank’s internally calculated liquidity ratio stands at 42.2%at March 31, 2003, which is above its minimum policy of 15% and above the 36.2%level of March 31, 2002.  Management isnot aware of any future capital expenditures or other significant demands orcommitments which would severely impair liquidity.

 

**OffBalance Sheet Transactions**. The Company is contingently liable for letter of credit accommodationsmade to its customers in the ordinary course of business totaling $36.9 millionat March 31, 2003, up from $29.7 million one year earlier.  Additionally, the Company has undisbursedloan commitments, also made in the ordinary course of business, totaling $438.3million, which was up from the $318.7 million outstanding one year earlier.

 

There are no SpecialPurpose Entity (“SPE”) trusts, corporations, or other legal entitiesestablished by Mid-State which reside off-balance sheet.  There are no other off-balance sheet itemsother than the aforementioned items related to letter of credit accommodationsand un-disbursed loan commitments.

 

***Critical Accounting Policies and Estimates***This“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” as well as, disclosures included elsewhere in this Form 10-Q, are basedupon the Company’s consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  The preparation ofthese financial statements require Management to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosure of contingencies.  Asummary of the more significant accounting policies of the Company can be foundin Footnote One to the financial statements which is included in Item 8 of theCompany’s Annual Report on Form 10-K and in the Management’s Discussion andAnalysis included in Item 7 of that same report entitled “Critical AccountingPolicies and Estimates.”

 

***Important Factors Relating to Forward-Looking Statements.***  The Private Securities Litigation Reform Actof 1995 provides a “safe harbor” for forward-looking statements so long asthose statements are identified as forward-looking and are accompanied bymeaningful cautionary statements identifying important factors that could causeactual results to differ materially from those projected in suchstatements.  All of the statementscontained in this Quarterly Report on Form 10-Q, including those in Items 2 and3, which are not identified as historical should be consideredforward-looking.  In connection withcertain forward-looking statements contained in this Quarterly Report on Form10-Q and those that may be made in the future by or on behalf of the Companywhich are identified as forward-looking, the Company notes that there arevarious factors that could cause actual results to differ materially from thoseset forth in any such forward-looking statements.  Such factors include, but are not limited to, the real estatemarket, the availability of loans at acceptable prices, the general level ofeconomic activity both locally and nationally, interest rates, the actions bythe Company’s regulatory agencies, actions by competitors of the Company andother factors referenced in the Company’s 10-K report for December 31, 2002 onfile with the Securities and Exchange Commission, included in “Item 1. BUSINESS– Factors That May Affect Future Results of Operations.”  Accordingly, there can be no assurance that theforward-looking statements contained in this Quarterly Report on Form 10-Q willbe realized or that actual results will not be significantly higher orlower.  The forward-looking statementshave not been audited by, examined by or subjected to agreed-upon procedures byindependent accountants, and no third-party has independently verified orreviewed such statements.  Readers ofthis Quarterly Report on Form 10-Q should consider these facts in evaluatingthe information contained herein.  Theinclusion of the forward-looking statements contained in this Quarterly Reporton Form 10-Q should not be regarded as a representation by the Company or anyother person that the forward-looking statements contained in this QuarterlyReport on Form 10-Q will be achieved. In light of the foregoing, readers of this Quarterly Report on Form 10-Qare cautioned not to place undue reliance on the forward-looking statementscontained herein.  The Company disclaimsany obligation to update any such factors

 

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or to publicly announce the results of any revisions to any of theforward-looking statements contained herein to reflect future events ordevelopments.

** **

**Item3 - Quantitative and Qualitative Disclosure About Market Risk**

 

The Bank expects its riskexposure to changes in interest rates to remain manageable and well withinacceptable policy ranges.  A recentreview as of March 31, 2003 of the potential changes in the Bank’s net interestincome over a 12 month time horizon showed that it could fluctuate under extremealternative rate scenarios from between +2.6% and -7.4% of the base case (ratesunchanged) of $90.7 million.  The Bank’spolicy is to maintain a structure of assets and liabilities which are such thatnet interest income will not vary more than plus or minus 15% of the baseforecast over the next 12 months. Management expects that its exposure to interest rate risk is manageableand it will continue to strive for an optimal trade-off between risk andearnings.

 

The following tablepresents a summary of the Bank’s net interest income forecasted for the coming12 months under alternative interest rate scenarios.

 

|                                                                    |   | **Change From Base** |   |
|-------------------------------------------------------------------------|--------|----------------------|--------|
| Rates  Down Very Significant  (Prime down to 2.25% over 12 months)      |   | -7.4                 | %      |
| Rates  Down Significant  (Prime down to 3.25% over 12 months)           |   | -1.5                 | %      |
| Rates  Down Modestly  (Prime down to 3.50% over 12 months)              |   | -0.6                 | %      |
| Base  Case - Rates Unchanged  (Prime unchanged at 4.25% over 12 months) |   | —               |   |
| Rates  Up Modestly  (Prime up to 5.25% over 12 months)                  |   | +0.9                 | %      |
| Rates  Up Aggressive  (Prime up to 6.25% over 12 months)                |   | +1.7                 | %      |
| Rates  Up Very Aggressive  (Prime up to 7.25% over 12 months)           |   | +2.6                 | %      |

 

Net interest income underthe above scenarios is influenced by the characteristics of the Bank’s assetsand liabilities.  In the case of N.O.W.,savings and money market deposits (total $903.9 million) interest is based onrates set at the discretion of management ranging from 0.15% to 0.62%.  In a downward rate environment, there is alimit to how far these deposit instruments can be re-priced and this behavioris similar to that of fixed rate instruments. In an upward rate environment, the magnitude and timing of changes inrates on these deposits is assumed to be more reflective of variable rateinstruments.

 

It is important to notethat the above table is a summary of several forecasts and actual results mayvary.  The forecasts are based onestimates and assumptions of management that may turn out to be different andmay change over time.  Factors affectingthese estimates and assumptions include, but are not limited to - competitors’behavior, economic conditions both locally and nationally, actions taken by theFederal Reserve Board, 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 hasbeen able to manage its Net Interest Income in a fairly narrow range reflectingthe Bank’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 (1998 –2002), the Bank’s net

 

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interest margin (which isnet interest income divided by average earning assets of the Bank) had rangedfrom a low of 5.41% to a high of 6.44% (not taxable equivalent).  The Bank’s net interest margin in 2002 of5.41% was at the low end of this range by historical standards, coming off thehigher levels experienced in 2000 of 6.44%. In the first quarter of 2003, the net interest margin fell further to5.29%.  This is a result of both thelower level of interest rates and the change in mix of earning assets (the Banknow has a smaller portion in loans vis-à-vis investment securities compared to 2000when the margin was at its widest level). The net interest margin under the forecasted alternative scenariosranges from 4.52% to 5.00%.  Managementfeels this range of scenarios, while lower than historical standards, isconsistent with current experience and interest rate levels, but no assurancescan be given that actual future experience will fall within this range.

 

The Bank’s exposure withrespect to interest rate derivatives, exchange rate fluctuations, and/orcommodity price movements is nil.  TheBank does not own any instruments within these markets.

 

#### **Item4 – Controls and Procedures**

 

(a)           Evaluationof disclosure controls and procedures:

 

Within the 90 days priorto the date of this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSecurities and Exchange Commission Filings.

 

(b)          Changesin internal controls:

 

There were no significantchanges in the Company’s internal controls or in other factors thatcouldsignificantly affect these controls subsequent to the date of theirevaluation.

 

(c)           Asset-Backedissuers:

 

Notapplicable.

 

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**PART II - OTHER INFORMATION**

 

**Item 1 -Legal Proceedings**

 

Mid-State is not aparty to any material legal proceeding.

 

**Item 2 - Changes in Securities and Use of Proceeds**

 

There were nomaterial changes in securities and uses of proceeds during the period coveredby this report.

 

**Item 3 - Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4 - Submission of Matters to a Vote of Security Holders**

 

No matters weresubmitted to the Shareholders for a vote during the first quarter of 2003.

 

**Item5 - Other Information**

 

Not applicable.

 

**Item 6 - Exhibits and Reports on Form 8-K**

 

A)                                            Exhibits

 
| **Exhibit No.** |   | **Exhibit**   |
|-----------------|--------|---------------|
|            |   |          |
| 99.1            |   | Certification |

 

B)                                              Reportson Form 8-K

 

During the first quarterof 2003, the Company filed one report under Item 5 of Form 8-K.  That report, filed on February 6, 2003reported that on January 31, 2003, the Company announced that its net incomefor the three months ended December 31, 2002 was $8.7 million and for the fullyear of 2002 net income was $29.9 million. The full text of the earnings release was attached thereto and made apart thereof.

 

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SIGNATURES

 

Pursuant to the requirementof the Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|               | Mid-State Bancshares |
|--------------------|----------------------|
|               | (registrant)         |
|               |                 |   |
|               |                 |   |
| Date: May 13, 2003 | By:                  | /s/ James W. Lokey |
|               |                 | JAMES W. LOKEY |
|               |                 | President  Chief Executive Officer |
|               |                 |   |
|               |                 |   |
|               |                 | /s/ James G. Stathos |
| Date: May 13, 2003 | By                   | JAMES G. STATHOS |
|               |                 | Executive Vice  President  Chief Financial Officer |

 

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CERTIFICATIONS

 

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

 

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

 

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

 

3.                               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 13, 2003 | /s/ James W. Lokey |                    |
|--------------------------|--------------------|-------------------------|
|                     |               | James W. Lokey          |
|                     |               | President               |
|                     |               | Chief Executive Officer |
|                          |                    |                         |  |

 

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CERTIFICATIONS

 

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

 

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

 

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

 

3.                               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 13, 2003 | /s/ James G. Stathos |                                               |
|--------------------------|----------------------|----------------------------------------------------|
|                     |                 | James G. Stathos                                   |
|                     |                 | Executive Vice  President  Chief Financial Officer |
|                          |                      |                                                    |  |

 

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## **EXHIBIT INDEX**

 
| **Exhibit No.** |   | **Description** |   | **Page No.** |
|-----------------|--------|-----------------|--------|--------------|
|            |   |            |   |         |
| 99.1            |   | Certification   |   | 25           |

 

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