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MID-STATE BANCSHARES
10-Q, 2000-11-13
STATE COMMERCIAL BANKS

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United States
Securities and Exchange Commission
Washington, D.C. 20429

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FORM 10-Q

/x/	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2000.

/ /	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.

Commission File Number 000-23925

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

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)

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

    As of November 7, 2000, the aggregate market value of the common stock held by non-affiliates of the Company was: $300,095,969.

    Number of shares of common stock of the Company outstanding as of November 7, 2000: 11,006,995 shares.

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Mid-State Bancshares
September 30, 2000
Index

				Page
PART I—FINANCIAL INFORMATION
		Item 1—Financial Statements
		Consolidated Statements of Financial Position as of September 30, 2000,      December 31, 1999, and September 30, 1999.		3
		Consolidated Statements of Income for the three month and nine month      periods ended September 30, 2000 and September 30, 1999		4
		Consolidated Statements of Comprehensive Income for the three month and      nine month periods ended September 30, 2000 and September 30, 1999		5
		Consolidated Statements of Cash Flows for the nine month period ended      September 30, 2000 and September 30, 1999		6
		Notes to Consolidated Financial Statements		7
		Item 2—Management's Discussion and Analysis of Financial Condition and      Results of Operations		8
		Item 3—Quantitative and Qualitative Disclosure About Market Risk		12
PART II—OTHER INFORMATION
		Item 1—Legal Proceedings		14
		Item 2—Changes in Securities and Use of Proceeds		14
		Item 3—Defaults Upon Senior Securities		14
		Item 4—Submission of Matters to a Vote of Security Holders		14
		Item 5—Other Information		14
		Item 6—Exhibits and Reports on Form 8-K		14

2

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PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

Mid-State Bancshares

Consolidated Statements of Financial Position

(Interim Periods Unaudited—figures in 000's)

				September 30, 2000			December 31, 1999			September 30, 1999
ASSETS
Cash and Due From Banks				$	78,590		$	56,080		$	51,923
Fed Funds Sold					—			17,500			14,000
Investment Securities:
	Available For Sale				378,330			433,898			516,799
	Held-to-Maturity (Market value of $27,748, $31,075 and $33,152, respectively)				27,856			31,383			33,241
Loans, net of unearned income					884,621			768,814			722,740
Allowance for Loan Losses					(13,093	)		(13,105	)		(14,194	)
Net Loans					871,528			755,709			708,546
Premises and Equipment, Net					27,888			29,282			30,136
Accrued Interest Receivable					11,863			12,014			12,534
Investments in Real Estate, Net					231			1,517			2,270
Other Real Estate Owned, Net					682			—			17
Other Assets					19,651			17,835			17,586
		Total Assets		$	1,416,619		$	1,355,218		$	1,387,052
LIABILITIES AND EQUITY
Non-Interest Bearing Demand				$	256,729		$	230,271		$	241,762
NOW Accounts, Money Market and Savings Deposits					614,375			611,119			619,221
Time Deposits Under $100					227,376			227,546			232,940
Time Deposits $100 or more					124,970			99,518			109,955
		Total Deposits			1,223,450			1,168,454			1,203,878
Other Borrowings					9,042			15,357			9,465
Accrued Interest Payable and Other Liabilities					15,674			11,076			16,339
		Total Liabilities			1,248,166			1,194,887			1,229,682
Shareholders' Equity:
Common Stock and Surplus (Shares Outstanding of 11,006, 11,287 and 11,285, respectively)					51,734			59,681			59,661
Retained Earnings					118,996			104,357			99,186
Accumulated Other Comprehensive Loss, Net					(2,277	)		(3,707	)		(1,477	)
		Total Equity			168,453			160,331			157,370
		Total Liabilities and Equity		$	1,416,619		$	1,355,218		$	1,387,052

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Mid-State Bancshares

Consolidated Statements of Income

(Unaudited—figures in 000's except earnings per share data)

					Three Month Period Ended September 30,						Nine Month Period Ended September 30,
					2000			1999			2000			1999
Interest Income:
	Interest and fees on loans				$	22,189		$	16,931		$	62,973		$	49,463
	Interest on investment securities—taxable					4,040			6,355			13,028			19,552
	Interest on investment securities—tax exempt					1,410			1,247			4,160			2,892
	Interest on fed funds sold, other					623			819			1,139			2,230
			Total Interest Income			28,262			25,352			81,300			74,137
Interest Expense:
	Interest on NOW, money market and savings					2,369			2,495			7,066			7,326
	Interest on time deposits less than $100					2,999			2,572			8,529			8,103
	Interest on time deposits of $100 or more					1,627			1,385			4,251			4,016
	Interest on mortgages, other					127			74			372			214
			Total Interest Expense			7,122			6,526			20,218			19,659
Net Interest Income before provision						21,140			18,826			61,082			54,478
Less: Provision for loan losses						300			20			400			50
Net Interest Income after provision						20,840			18,806			60,682			54,428
Other operating income:
	Service charges and fees					1,717			1,667			5,227			4,945
	Other non-interest income					2,836			2,800			8,193			8,149
			Total other operating income			4,553			4,467			13,420			13,094
Other operating expense:
	Salaries and employee benefits					8,321			7,394			24,183			22,401
	Occupancy and furniture					2,145			2,131			6,347			6,227
	Merger related charges					—			2,930			—			2,930
	Other operating expenses					4,258			4,344			12,540			12,363
			Total other operating expense			14,724			16,799			43,070			43,921
Income before taxes						10,669			6,474			31,032			23,601
Provision for income taxes						3,672			2,758			10,831			8,300
Net Income					$	6,997		$	3,716		$	20,201		$	15,301
Earnings per share—basic					$	0.63		$	0.33		$	1.81		$	1.36
—diluted					$	0.62		$	0.33		$	1.77		$	1.35

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Mid-State Bancshares

Consolidated Statements of Comprehensive Income

(Unaudited—figures in 000's)

			Three Month Period Ended September 30,						Nine Month Period Ended September 30,
			2000			1999			2000			1999
Net Income			$	6,997		$	3,716		$	20,201		$	15,301
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during period				2,773			(570	)		2,379			(9,772	)
Reclassification adjustment for losses included in net income				1			1			5			1
Other comprehensive income (loss), before tax				2,774			(571	)		2,384			(9,773	)
Income tax provision (benefit) related to items in comprehensive income				l,109			(230	)		954			(3,913	)
Other Comprehensive Income (Loss), Net of Taxes				1,665			(341	)		1,430			(5,860	)
Comprehensive Income			$	8,662		$	3,375		$	21,631		$	9,441

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Mid-State Bancshares

Consolidated Statements of Cash Flows

(Unaudited—figures in 000's)

					Nine Month Period Ended September 30,
					2000			1999
OPERATING ACTIVITIES
	Net income				$	20,201		$	15,301
	Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for loan losses					400			50
	Provision for loss on other real estate owned					76			60
	Gain on sale of other real estate owned					(64	)		(148	)
	Reversal of provision in investments in real estate					(262	)		—
	Depreciation and amortization					2,947			2,865
	Net amortization of premiums and discounts on investments					975			2,046
	Amortization of deferred loan fees					818			1,297
	Changes in assets and liabilities:
			Accrued interest receivable			151			(1,043	)
			Other assets, net of change in deferred tax			(2,770	)		899
			Accrued interest payable and other liabilities			4,598			7,066
	Net cash provided by operating activities					27,070			28,393
INVESTING ACTIVITIES
	Net cash from proceeds of investments in real estate					1,548			4,499
	Net cash from proceeds of other real estate owned					313			330
	Proceeds from sales and maturities of investments					106,137			162,129
	Purchases of investments					(45,633	)		(197,819	)
	Increase in loans					(118,044	)		(48,853	)
	Purchases of premises and equipment, net					(1,553	)		(398	)
	Net cash used in investing activities					(57,232	)		(80,112	)
FINANCING ACTIVITIES
	Increase (decrease) in deposits					54,996			(20,601	)
	(Decrease) increase in other borrowings					(6,315	)		4,983
	Exercise of stock options					297			1,329
	Cash dividends paid					(5,562	)		(4,002	)
	Repurchase of common stock					(8,244	)		(489	)
	Net cash provided by (used in) financing activities					35,172			(18,780	)
	Increase (decrease) in cash and cash equivalents					5,010			(70,499	)
	Cash and cash equivalents, beginning of period					73,580			136,422
	Cash and cash equivalents, end of period				$	78,590		$	65,923
Supplemental disclosure of cash flow information:
	Cash paid during the period for interest				$	20,064		$	19,686
	Cash paid during the period for taxes on income					9,250			8,215
	Transfers from loans to other real estate owned					1,007			—

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Mid-State Bancshares

Notes to Consolidated 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 accounts of Mid-State Bancshares and its wholly owned subsidiary Mid-State Bank which includes the Bank and the Bank's subsidiaries, MSB Properties and Mid Coast Land Company (collectively the "Company," "Bank" or "Mid-State"). All significant intercompany transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the Form 10-K Annual Report for the year ended December 31, 1999 of Mid-State Bancshares. A summary of the Company's significant accounting policies is set forth in the Notes to Consolidated Financial Statements contained therein.

    These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States on a basis consistent with the accounting policies reflected in the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 1999. They do not, however, include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments including normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for 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 outstanding to the income and number of shares used to compute Earnings Per Share ("EPS"). Figures are in thousands, except earnings per share data (unaudited).

			Three Month Period Ended September 30, 2000								Three Month Period Ended September 30, 1999
			Earnings			Shares		EPS			Earnings			Shares		EPS
Net Income as reported			$	6,997							$	3,716
Basic Earnings Per Share:
	Income available to Common Shareholders		$	6,997		11,025		$	0.63		$	3,716		11,237		$	0.33
Effect of dilutive securities:
	Stock Options					234								132
Diluted Earnings Per Share:
	Income available to Common Shareholders		$	6,997		11,259		$	0.62		$	3,716		11,369		$	0.33

			Nine Month Period Ended September 30, 2000								Nine Month Period Ended September 30, 1999
			Earnings			Shares		EPS			Earnings			Shares		EPS
Net Income as reported			$	20,201							$	15,301
Basic Earnings Per Share:
	Income available to Common Shareholders		$	20,201		11,169		$	1.81		$	15,301		11,212		$	1.36
Effect of dilutive securities:
	Stock Options					233								132
Diluted Earnings Per Share:
	Income available to Common Shareholders		$	20,201		11,402		$	1.77		$	15,301		11,344		$	1.35

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Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

    Selected Financial Data—Summary.  The following table provides certain selected financial data as of and for the three and nine month periods ended September 30, 2000 and 1999 (unaudited).

			Quarter Ended						Year-to-Date
Consolidated Financial Data—Mid-State Bancshares			Sept. 30, 2000			Sept. 30, 1999			Sept. 30, 2000			Sept. 30, 1999
			(Unaudited)
			(In thousands, except per share data)
Interest Income (not taxable equivalent)			$	28,262		$	25,352		$	81,300		$	74,137
Interest Expense				7,122			6,526			20,218			19,659
Net Interest Income				21,140			18,826			61,082			54,478
Provision for Loan Losses				300			20			400			50
Net Interest Income after provision for loan losses				20,840			18,806			60,682			54,428
Non-interest income				4,553			4,467			13,420			13,094
Non-interest expense—operating				14,724			13,869			43,070			40,991
Non-interest expense—merger charges				—			2,930			—			2,930
Income before income taxes				10,669			6,474			31,032			23,601
Provision for income taxes				3,672			2,758			10,831			8,300
Net Income			$	6,997		$	3,716		$	20,201		$	15,301
Per share:
Net Income—basic			$	0.63		$	0.33		$	1.81		$	1.36
Net Income—diluted			$	0.62		$	0.33		$	1.77		$	1.35
Weighted average shares used in Basic E.P.S. calculation				11,025			11,237			11,169			11,212
Weighted average shares used in Diluted E.P.S. calculation				11,259			11,369			11,402			11,344
Cash dividends				0.18			0.14			0.50			0.35
Book value at period-end										15.31			13.94
Ending Shares										11,006			11,285
Financial Ratios
Return on assets				1.99	%		1.04	%		1.96	%		1.47	%
Return on equity				16.71	%		9.46	%		16.43	%		13.26	%
Net interest margin (not taxable equivalent)				6.52	%		5.79	%		6.44	%		5.75	%
Net interest margin (taxable equivalent yield)				6.81	%		6.05	%		6.73	%		5.95	%
Net loan losses to avg. loans				0.10	%		0.02	%		0.07	%		0.06	%
Efficiency ratio (includes impact of merger charges)				57.3	%		72.1	%		57.8	%		65.0	%
Period Averages
Total Assets			$	1,399,558		$	1,411,129		$	1,378,169		$	1,389,103
Total Loans				859,978			678,562			832,588			669,502
Total Earning Assets				1,289,273			1,288,942			1,267,054			1,266,889
Total Deposits				1,213,469			1,246,389			1,198,199			1,221,072
Common Equity				166,575			155,917			164,283			154,230

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Balance Sheet—At Period-End
Cash and due from banks									$	78,590		$	51,923
Investments and Fed Funds Sold										406,186			564,040
Loans, net of deferred fees, before allowance for loan losses										884,621			722,740
Allowance for Loan Losses										(13,093	)		(14,194	)
Other assets										60,315			62,543
	Total Assets								$	1,416,619		$	1,387,052
Non-interest bearing deposits									$	256,729		$	241,762
Interest bearing deposits										966,721			962,116
Other borrowings										9,042			9,465
Other liabilities										15,674			16,339
Shareholders' equity										168,453			157,370
	Total Liabilities and Shareholders' equity								$	1,416,619		$	1,387,052
Asset Quality & Capital—At Period-End
Non-accrual loans									$	5,351		$	1,541
Loans past due 90 days or more										416			5,679
Other real estate owned										682			17
Total non performing assets									$	6,449		$	7,237
Loan loss allowance to loans, gross										1.5	%		2.0	%
Non-accrual loans to total loans, gross										0.6	%		0.2	%
Non performing assets to total assets										0.5	%		0.5	%
Allowance for loan losses to non performing loans										227.0	%		196.6	%
Equity to average assets (leverage ratio)										12.1	%		11.2	%
Tier One capital to risk-adjusted assets										15.5	%		16.3	%
Total capital to risk-adjusted assets										16.7	%		17.6	%

    Performance Summary.  The Company posted net income of $7.0 million for the three months ended September 30, 2000 compared to $3.7 million in the like 1999 period. These earnings represent an annualized return on assets of 1.99% and 1.04%, respectively, for the comparable periods. The annualized return on equity was 16.71% for the third quarter of 2000 compared to 9.46% in the third quarter of 1999. On a per share basis, diluted earnings were $0.62 in the 2000 period compared to $0.33 in the like quarter of 1999.

    For the nine months year-to-date, the Company posted net income of $20.2 million in 2000 compared to $15.3 million in the like 1999 period. These earnings represent an annualized return on assets of 1.96% and 1.47%, respectively, for the comparable periods. The annualized return on equity was 16.43% for the first nine months of 2000 compared to 13.26% in the nine month period ended September 30, 1999. On a per share basis, diluted earnings were $1.77 in the 2000 period compared to $1.35 in 1999.

    Net Interest Income.  Mid-State's annualized yield on interest earning assets was 8.57% for the first nine months of 2000 (8.86% on a taxable equivalent basis) and 8.72% (9.01% on a taxable equivalent basis) for the third quarter of 2000. This compares to 7.82% in the nine month 1999 period (8.03% on a taxable equivalent basis) and 7.80% in the third quarter of 1999 (8.06% on a taxable equivalent

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basis). This increase in yield is related to a change in mix of earning assets (average loans represented 65.7% of earning assets in the first nine months of 2000 compared to 52.8% one year earlier) and to the rise in interest rates when comparing the two periods. The Prime Rate, to which many of the Bank's loans are tied, averaged 9.18% in the first nine months of 2000 compared to 7.87% in the 1999 period. Conversely, annualized interest expense as a percent of earning assets remained comparable to the prior year. In the first nine months of 1999, annualized interest expense represented 2.07% of earning assets compared to 2.13% in this year's first nine month period. Similarly, the annualized interest expense in the third quarter of this year was 2.20% compared to 2.01% in the like quarter of 1999. Overall, Mid-State's annualized net interest income, expressed as a percent of earning assets, improved from 5.75% for the nine month period of 1999 (5.95% on a taxable equivalent basis) to 6.44% in the comparable 2000 period (6.73% on a taxable equivalent basis). For the third quarter of 2000 compared to the third quarter of 1999, net interest income, expressed as a percent of earning assets, improved from 5.79% (6.05% taxable equivalent) to 6.52% (6.81% taxable equivalent).

    Average earning assets for the nine months ended September 30, 2000 were comparable to the like 1999 period ($1,267.1 million compared to $1,266.9 million). Average deposits in this same time-frame were down $22.9 million, ($1,198.2 million compared to $1,221.1 million), reflecting a conscious decision to reduce dependence on certain high cost brokered deposits acquired through the Bank's recent merger with City Commerce Bank. In comparing third quarter 2000 to third quarter 1999, average earning assets increased slightly from $1,288.9 million one year ago to $1,289.3 million and average deposits declined $32.9 million from $1,246.4 million one year ago to $1,213.5 million.

    Provision and Allowance for Loan Losses.  The Bank made a provision to the allowance for loan losses of $400 thousand in the first nine months of 2000. The Bank provided $50 thousand in the comparable 1999 period. Management continues to believe that the allowance, which stands at 1.5% of total loans at September 30, 2000, down from 2.0% one year earlier, is adequate to cover future losses. The $13.1 million allowance is about 203% of the level of non performing assets which stand at $6.4 million compared to $7.2 million one year earlier. Non performing assets consist of loans on non-accrual, accruing loans 90 days or more past due and Other Real Estate Owned. Other Real Estate Owned reflects property acquired through foreclosure which had secured Bank loans on which the borrower defaulted. While continuing efforts are made to improve overall asset quality, Management is unable to estimate with certainty, how and under what terms, problem assets will be resolved.

    Changes in the allowance for loan losses for the periods ended September 30, 2000 and 1999 are as follows (in thousands):

			3 Months Ended Sept. 30,						9 Months Ended Sept. 30,
			2000			1999			2000			1999
Balance at beginning of period			$	13,000		$	14,211		$	13,105		$	14,441
Provision for loan losses				300			20			400			50
Loans charged off				(369	)		(286	)		(943	)		(1,196	)
Recoveries of loans previously charged-off				162			249			531			899
Balance at end of period			$	13,093		$	14,194		$	13,093		$	14,194

    At September 30, 2000, the recorded investments in loans which have been identified as impaired totaled $5,519,000, all of which were tied to corresponding valuation allowances totaling $1,238,000. Impaired loans totaled $10,085,000 at September 30, 1999, all of which were tied to corresponding valuation allowances totaling $1,872,000. The valuation allowance for impaired loans is included within the general allowance shown above and netted against loans on the consolidated statements of financial position. For the quarter ended September 30, 2000, the average recorded investment in impaired loans was $6,306,000, which was comparable to the 1999 period. A loan is identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. Because this definition is very similar to that used by bank regulators to determine on

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which loans interest should not be accrued, the Bank expects that most impaired loans will be on non-accrual status.

    Non-interest Income.  Non-interest income for the first nine months of 2000 was $13.4 million, up from $13.1 million earned in the same 1999 period, an increase of 2.5%. The increase was related to improved service charge income of some $282 thousand over the comparable periods, increases in the Company's merchant mastercard income of about $790 thousand, and the reversal of a reserve on investments in real estate of $267 thousand. While these three areas recorded increases two other areas showed decreases and served to partially offset these gains. Income from mortgage origination and loan servicing was off some $260 thousand from the levels in the first nine months of 1999 and there was a reduction in recoveries of interest amounts associated with loans previously charged-off of $699 thousand.

    Non-interest Expense.  Non-interest expense for the first nine months of 2000 was $43.1 million compared to $43.9 million in the first nine months of 1999. Increases in salaries and employee benefits of $1.8 million and increases in occupancy costs of $120 thousand offset by a reduction in non recurring merger charges of $2.9 million accounted for the overall decrease in the 2000 period.

    Provision for Income Taxes.  The year-to-date provision for income taxes was $10.8 million, compared to $8.3 million for the same period in 1999. The effective tax rate in 2000 was 34.9% compared to 35.2% in 1999. The effective tax rate in 2000 is somewhat lower than the prior year's nine month period due to an increase in tax exempt income recognized by the Company during 2000. While the normal combined federal and state statutory tax rate is 42% for Mid-State Bancshares, the tax exempt income generated by its municipal bond portfolio is the primary reason that the effective rate is lower.

    Balance Sheet.  Total assets at September 30, 2000 totaled $1,416.6 million, up 2.1% from the level one year earlier of $1,387.1 million. The mix of these assets has changed considerably from one year earlier. Net loans have increased from $708.5 million at the end of September, 1999 to $871.5 million in 2000. Investments and fed funds sold were significantly lower, having declined from $564.0 million one year earlier to $406.2 million this year. Other non-earning asset categories declined when comparing 2000 to 1999.

    Total asset growth was funded through a $19.5 million increase in deposits and a $11.1 million increase in stockholders' equity when comparing 2000 over 1999. The stockholders' equity increase was primarily due to the retention of earnings over the intervening 12 month period which was partially offset by an unrealized loss on available for sale securities over the same time period and the stock repurchase program. There was a modest decrease in other borrowing and liabilities of $1.1 million, comparing the quarter-end periods.

    Mid-State's loan to deposit ratio of 72.3% at September 30, 2000 is up significantly from the 60.0% ratio one year earlier. There is ample internal liquidity to fund improvements in this ratio through Mid-State's investment portfolio which has approximately 93% of its investments categorized as available for sale.

    Investment Securities.  Of the $406.2 million portfolio noted above, 15% is invested in U.S. Treasury securities, 25% is invested in U.S. Government agency obligations, 57% is invested in securities issued by states and political subdivisions in the U.S. and 3% is invested in mortgage-backed securities and other securities. Over eighty percent of all investment securities mature prior to December 31, 2005. Approximately 30% of these securities mature in less than one year. The Bank's investment in mortgage-backed securities consist of investments in FNMA and FHLMC pools which have contractual maturities of up to 17 years. The actual time of repayment may be shorter due to prepayments made on the underlying collateral.

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    Capital Resources.  Total stockholders' equity increased from $157.4 million at September 30, 1999 to $168.5 million at September 30, 2000. Net income over this 12 month time period was $26.9 million less cash dividends of $7.1 million less a $0.8 million increase in unrealized losses on available for sale securities plus $0.3 million in stock options exercised less $8.2 million of stock repurchased, collectively accounted for the $11.1 million increase. Capital continues to be strong with Mid-State Bancshare's ratio of tier one equity capital to average assets ("leverage ratio") at 12.1% up from 11.2% one year earlier. Mid-State's ratios of tier one capital and total capital to risk-adjusted assets declined, principally because of the change in asset mix away from investment securities with lower risk weightings into loans with their 100% risk weightings. The Tier One ratio went from 16.3% one year earlier to 15.5% at September 30, 2000. The Total Capital ratio went from 17.6% one year earlier to 16.7% at September 30, 2000. Mid-State substantially exceeds the standards to be considered well capitalized which are 6.0% for the ratio of tier one capital to risk weighted assets, 10.0% for the ratio of total capital to risk weighted assets, and 5.0% for the ratio of tier one capital to total assets.

    Liquidity.  Management is not aware of any future capital expenditures or other significant demands or commitments which would severely impair liquidity.

    Disclosures Concerning Year 2000 Issues—Year 2000 Readiness Disclosure.  No major concerns exist at this point. The Company completed development of contingency plans in preparation for the Y2K event during 1999. While these plans were not needed, they have served as a catalyst to update and complete the Company's disaster recovery plans.

    Important Factors Relating to Forward-Looking Statements.  The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. All of the statements contained in this Quarterly Report on Form 10-Q which are not identified as historical should be considered forward-looking. In connection with certain forward-looking statements contained in this Quarterly Report on Form 10-Q and those that may be made in the future by or on behalf of the Company which are identified as forward-looking, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. Such factors include, but are not limited to, the real estate market, the availability of loans at acceptable prices, the general level of economic activity both locally and nationally, interest rates, the actions by the Company's regulatory agencies, and actions by competitors of the Company. Accordingly, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be realized or that actual results will not be significantly higher or lower. The forward-looking statements have not been audited by, examined by or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information contained herein. The inclusion of the forward-looking statements contained in this Quarterly Report on Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be achieved. In light of the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.

Item 3—Quantitative and Qualitative Disclosure About Market Risk

    The Bank's risk exposure to changes in interest rates is minimal. A recent review of the potential changes in the Bank's net interest income over a 12 month time horizon showed that it could fluctuate under very extreme alternative rate scenarios from between +1.7% and -6.4% of the base case (rates unchanged) of $86.0 million. The Bank's policy is to maintain a structure of assets and liabilities which

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are such that net interest income will not vary more than plus or minus 15% of the base forecast over the next 12 months. Management feels that its exposure to interest rate risk is manageable and it will continue to strive for an optimal trade-off between risk and earnings.

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

    Net interest income under the above scenarios is influenced by the characteristics of the Bank's assets and liabilities. In the case of N.O.W., savings and money market deposits (total $614.4 million) interest is based on rates set at the discretion of Management ranging from 0.50% to 2.37%. In a downward rate environment, there is a limit to how far these deposit instruments can be re-priced and this behavior is similar to that of fixed rate instruments. In an upward rate environment, the magnitude and timing of changes in rates on these deposits is assumed to be more reflective of variable rate instruments. These characteristics are the main reasons that a 4% decline in Prime decreases net interest income by 6.4% while a 4% increase in Prime increases net interest income just 1.7%. In an upward rate environment, the magnitude and timing of changes in rates on these deposits is assumed to be more reflective of variable rate instruments.

    It is important to note that the above table is a summary of several forecasts and actual results may vary. The forecasts are based on estimates and assumptions of Management that may turn out to be different and may change over time. Factors affecting these estimates and assumptions include, but are not limited to—competitors' behavior, economic conditions both locally and nationally, actions taken by the Federal Reserve Board, customer behavior, and Management's responses. Historically, the Bank has been able to manage its Net Interest Income in a fairly narrow range reflecting the Bank's relative insensitivity to interest rate changes. The impact of prepayment behavior on mortgages, real estate loans, mortgage backed securities, securities with call features, etc. is not considered material to the sensitivity analysis. Over the last 5 years, and excluding the first nine months of 2000, the Bank's net interest margin (which is net interest income divided by average earning assets of the Bank) has ranged from a low of 5.71% to a high of 6.09% (not taxable equivalent). The Bank's net interest margin in the first nine months of 6.44% is high by historical standards and relates to both the higher level of interest rates and the change in mix of earning assets (the Bank now has a larger portion in loans vis-i-vis Investment Securities). The net interest margin under the alternative scenarios ranges from 5.94% to 6.45%. Management feels this range of scenarios, while high by historical standards, is consistent with current experience, but no assurances can be given that actual future experience will fall within this range.

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

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PART II—OTHER INFORMATION

Item 1—Legal Proceedings

    Mid-State is not a party to any material legal proceeding.

Item 2—Changes in Securities and Use of Proceeds

    There were no material changes in securities and uses of proceeds during the period covered by this report.

Item 3—Defaults Upon Senior Securities

    Not applicable.

Item 4—Submission of Matters to a Vote of Security Holders

    No matters were submitted to the Shareholders for a vote during the third quarter of 2000.

Item 5—Other Information

    Not applicable.

Item 6—Exhibits and Reports on Form 8-K

A)

Exhibits

Exhibit No.		Exhibit
27		Financial Data Schedule (for SEC use only)

B)

Reports on Form 8-K

The Company filed two reports on Form 8-K during the first nine months of 2000. On February 8, 2000, the Company filed one report on Form 8-K concerning the appointment of Mr. James W. Lokey as President and Chief Executive Officer of Mid-State Bank, the Company's wholly owned subsidiary, effective March 1, 2000. Mr. Carrol R. Pruett, former Mid-State Bank President continues as Chairman of the Board of Mid-State Bank and Mid-State Bancshares, as well as, President and Chief Executive Officer of Mid-State Bancshares.

The Company filed its second report on Form 8-K on March 21, 2000. This report reflected the Company's announcement that the Board of Directors had authorized a stock repurchase program for up to five percent (5%) of its outstanding shares. Based on the outstanding shares at that time, the buyback may result in the purchase of up to approximately 565,000 shares of stock. The repurchases will be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions in compliance with the Securities and Exchange Commission (SEC) rules. The program began in April 2000 and is expected to be effective for one year.

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SIGNATURES

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

		MID-STATE BANCSHARES (registrant)
Date: November 7, 2000		By:		/s/ CARROL R. PRUETT    CARROL R. PRUETT Chairman and Chief Executive Officer
Date: November 7, 2000		By:		/s/ JAMES G. STATHOS    JAMES G. STATHOS Executive Vice President and Chief Financial Officer

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Mid-State Bancshares September 30, 2000 Index
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
SIGNATURES

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