**UNITEDSTATES**

**SECURITIESAND 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, 2006.**                                      |
| ** ** |
| **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**                            | ** ** | **77-0442667**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of          |       | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)           |       |                                  |
|                                      |       |                                  |
| **1026  Grand Ave. Arroyo Grande, CA**    | ** ** | **93420-0580**                        |
| (Address of  Principal Executive Offices) |       | (Zip Code)                            |

 

Registrant’sTelephone Number:     **(805) 473-7700**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or suchshorter 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 ý   No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act). Check one:

| Large Accelerated Filer |   | o |   | Accelerated  Filer |   | ý |   | Non-accelerated Filer |   | o |
|-------------------------|--------|---|--------|--------------------|--------|--------|--------|-----------------------|--------|---|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o   Noý

 

Number of shares ofcommon stock of the Company outstanding as of April 30, 2006:  22,309,024 shares.

 

 

----

 

**Mid-StateBancshares**

March 31, 2006

Index

 
| **PART  I - FINANCIAL INFORMATION** |                                                                                                      |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                |                                                                                                      |
|                                | Item 1  –Financial Statements (Unaudited)                                                            |   |
|                                |                                                                                                      |   |
|                                |                                                                                                      | Consolidated  Statements of Financial Position |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated  Statements of Income |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated  Statements of Comprehensive Income |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated  Statements of Changes in Capital Accounts |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Consolidated  Statements of Cash Flows |   |
|                                |                                                                                                      |   |   |
|                                |                                                                                                      | Notes  to Consolidated Financial Statements |   |
|                                |                                                                                                      |   |
|                                | Item 2  –Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   |
|                                |                                                                                                      |   |
|                                | Item 3  –Quantitative and Qualitative Disclosures About Market Risk                                  |   |
|                                |                                                                                                      |   |
|                                | Item 4  –Controls and Procedures                                                                     |   |
|                                |                                                                                                      |
| **PART II - OTHER  INFORMATION**    |                                                                                                      |
|                                |                                                                                                      |
|                                | Item 1 –Legal  Proceedings                                                                           |   |
|                                |                                                                                                      |   |
|                                | Item  1A. – Risk Factors                                                                             |   |
|                                |                                                                                                      |   |
|                                | Item 2 –Unregistered  Sales of Equity Securities and Use of Proceeds                                 |   |
|                                |                                                                                                      |   |
|                                | Item 3  –Defaults Upon Senior Securities                                                             |   |
|                                |                                                                                                      |   |
|                                | Item 4  –Submission of Matters to a Vote of Security Holders                                         |   |
|                                |                                                                                                      |   |
|                                | Item 5 –Other  Information                                                                           |   |
|                                |                                                                                                      |   |
|                                | Item  6 –Exhibits                                                                                    |   |
|                                |                                                                                                      |   |
|                                | Signatures                                                                                                |   |
|                                |                                                                                                      |   |
|                                | EX-31 Certifications                                                                                      |   |
|                                |                                                                                                      |   |
|                                | EX-32 Certification Pursuant to 18 U.S.C. Sec. 1350                                                       |   |

 

2

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**PART I - FINANCIAL INFORMATION**

**Item 1 - Financial Statements**

 

**Mid-StateBancshares**

ConsolidatedStatements of Financial Position

(Unaudited -figures in 000’s)

 
| **ASSETS**                                                                                                         | ** ** | **Mar. 31, 2006** | ** ** | **Dec. 31, 2005** | ** ** | **Mar. 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Cash and Due  From Banks                                                                                           |       | $                           | 113,461    |                        | $          | 109,791                     |       | $ | 127,861 |   |
| Fed Funds Sold                                                                                                     |       | 28,260                      |       | —                      |       | 4,000                       |       |
| Securities  Available For Sale                                                                                     |       | 561,931                     |       | 619,332                     |       | 624,634                     |       |
| Loans Held for  Sale                                                                                               |       | 8,683                       |       | 10,176                      |       | 9,927                       |       |
| Loans, net of  unearned income                                                                                     |       | 1,546,323                   |       | 1,519,014                   |       | 1,456,091                   |       |
| Allowance for  Loan Losses                                                                                         |       | (11,931                     | )          | (11,896                     | )          | (13,630                     | )          |
| Net Loans                                                                                                          |       | 1,534,392                   |       | 1,507,118                   |       | 1,442,461                   |       |
|                                                                                                               |       |                        |       |                        |       |                        |       |
| Premises and  Equipment, Net                                                                                       |       | 24,858                      |       | 24,772                      |       | 24,525                      |       |
| Accrued Interest  Receivable                                                                                       |       | 14,232                      |       | 13,947                      |       | 13,044                      |       |
| Goodwill                                                                                                           |       | 47,840                      |       | 47,840                      |       | 47,840                      |       |
| Core Deposit  Intangibles, net                                                                                     |       | 6,265                       |       | 6,483                       |       | 7,388                       |       |
| Senior Housing  Crime Prevention Foundation Investment                                                             |       | 30,000                      |       | 30,000                      |       | —                      |       |
| Other Assets                                                                                                       |       | 23,519                      |       | 22,040                      |       | 20,501                      |       |
| ***Total  Assets***                                                                                                |       | $                           | 2,393,441  |                        | $          | 2,391,499                   |       | $ | 2,322,181 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                         |       |                        |       |                        |       |                        |       |
| Non Interest  Bearing Demand                                                                                       |       | $                           | 535,538    |                        | $          | 567,782                     |       | $ | 526,597 |   |
| NOW Accounts,  Money Market and Savings Deposits                                                                   |       | 1,064,833                   |       | 1,067,486                   |       | 1,076,531                   |       |
| Time Deposits  Under $100                                                                                          |       | 239,470                     |       | 232,275                     |       | 229,080                     |       |
| Time Deposits  $100 or more                                                                                        |       | 211,071                     |       | 202,063                     |       | 173,124                     |       |
| *Total  Deposits*                                                                                                  |       | 2,050,912                   |       | 2,069,606                   |       | 2,005,332                   |       |
| Other Borrowings                                                                                                   |       | 47,159                      |       | 25,903                      |       | 23,621                      |       |
| Allowance for  Losses – Unfunded Commitments                                                                  |       | 1,696                       |       | 1,761                       |       | 1,624                       |       |
| Accrued Interest  Payable and Other Liabilities                                                                    |       | 22,366                      |       | 21,667                      |       | 21,228                      |       |
| *Total  Liabilities*                                                                                               | * *   | 2,122,133                   |       | 2,118,937                   |       | 2,051,805                   |       |
| Commitments and  Contingencies                                                                                     |       |                        |       |                        |       |                        |       |
| Shareholders’  Equity:                                                                                        |       |                        |       |                        |       |                        |       |
| Common Stock and  Surplus (Shares outstanding of 22,378, 22,520 and 22,949 respectively)                           |       | 37,455                      |       | 42,343                      |       | 56,805                      |       |
| Retained  Earnings                                                                                                 |       | 235,138                     |       | 229,824                     |       | 211,924                     |       |
| Accumulated  Other Comprehensive Income net of tax (benefit)/provision of ($1,120), $264,  and $1,098 respectively |       | (1,285                      | )          | 395                         |       | 1,647                       |       |
| *Total  Equity*                                                                                                    |       | 271,308                     |       | 272,562                     |       | 270,376                     |       |
| ***Total  Liabilities and Equity***                                                                                |       | $                           | 2,393,441  |                        | $          | 2,391,499                   |       | $ | 2,322,181 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

3

----

 

**Mid-StateBancshares**

ConsolidatedStatements of Income

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

 
| ** **                                                              | ** ** | **Three Month Period** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **Ended March 31,**    | ** ** |
| ** **                                                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Interest  Income:**                                                   |       |                             |       |   |   |
| Interest and  fees on loans                                             |       | $                                | 28,749     |   | $ | 23,941 |   |
| Interest on  investment securities -                                    |       |                             |       |   |   |
| U.S. Treasury  securities                                               |       | 191                              |       | 111 |   |
| U.S. Government  agencies and corporations                              |       | 1,662                            |       | 1,573 |   |
| Obligations of  states and political sub-divisions and other securities |       | 3,785                            |       | 3,730 |   |
| Interest on fed  funds sold                                             |       | 348                              |       | 127 |   |
| **Total  Interest Income**                                              |       | 34,735                           |       | 29,482 |   |
| **Interest  Expense:**                                                  |       |                             |       |   |   |
| Interest on NOW,  money market and savings                              |       | 1,396                            |       | 724 |   |
| Interest on time  deposits less than $100                               |       | 1,740                            |       | 1,023 |   |
| Interest on time  deposits of $100 or more                              |       | 1,666                            |       | 781 |   |
| Interest other                                                          |       | 464                              |       | 185 |   |
| **Total  Interest Expense**                                             |       | 5,266                            |       | 2,713 |   |
| **Net  Interest Income before provision for loan losses**               |       | 29,469                           |       | 26,769 |   |
| Provision for  loan losses                                              |       | —                           |       | — |   |
| **Net  Interest Income after provision for loan losses**                |       | 29,469                           |       | 26,769 |   |
| **Other  Operating Income:**                                            |       |                             |       |   |   |
| Service charges  and fees                                               |       | 2,487                            |       | 2,345 |   |
| Commissions,  fees and other service charges                            |       | 2,157                            |       | 2,169 |   |
| Net (loss) gain  on sale of securities                                  |       | (171                             | )          | 8 |   |
| Net (loss) gain  on sale of loans held for sale                         |       | (31                              | )          | 99 |   |
| Other  non-interest income                                              |       | 538                              |       | 774 |   |
| **Total  Other Operating Income**                                       |       | 4,980                            |       | 5,395 |   |
| **Other  Operating Expense:**                                           |       |                             |       |   |   |
| Salaries and  employee benefits                                         |       | 12,081                           |       | 10,988 |   |
| Occupancy and  furniture                                                |       | 3,162                            |       | 2,952 |   |
| Other operating  expenses                                               |       | 5,719                            |       | 4,395 |   |
| **Total  Other Operating Expense**                                      |       | 20,962                           |       | 18,335 |   |
| **Income  Before Taxes**                                                |       | 13,487                           |       | 13,829 |   |
| Provision for  income taxes                                             |       | 4,713                            |       | 4,739 |   |
| **Net Income**                                                          |       | $                                | 8,774      |   | $ | 9,090 |   |
| **Earnings  per share:**                                                |       |                             |       |   |   |
| **– basic**                                                        |       | $                                | 0.39       |   | $ | 0.39 |   |
| **–  diluted**                                                     |       | $                                | 0.38       |   | $ | 0.39 |   |
| **Dividends  per share**                                                |       | $                                | 0.18       |   | $ | 0.16 |   |
| **Average  shares used in earnings per share calculations:**            |       |                             |       |   |   |
| **– basic**                                                        |       | 22,444                           |       | 23,019 |   |
| **–  diluted**                                                     |       | 22,951                           |       | 23,557 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

4

----

 

**Mid-StateBancshares**

ConsolidatedStatements of Comprehensive Income

(Unaudited -figures in 000’s)

 
| ** **                                                               | ** ** | **Three Month Period** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **Ended Mar. 31,**     | ** ** |
| ** **                                                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Net  Income**                                                          |       | $                                | 8,774      |   | $ | 9,090 |   |
| **Other  Comprehensive Income Before Taxes:**                            |       |                             |       |   |   |
| Unrealized  (losses) gains on securities available for sale:             |       |                             |       |   |   |
| Unrealized  holding losses arising during period                         |       | (2,971                           | )          | (8,680 | ) |
| Reclassification  adjustment for losses (gains) included in net income   |       | 171                              |       | (8 | ) |
| Other  comprehensive (loss) income, before tax                           |       | (2,800                           | )          | (8,688 | ) |
| Income tax  (benefit) provision related to items in comprehensive income |       | (1,120                           | )          | (3,475 | ) |
| **Other  Comprehensive (Loss) Income, Net of Taxes**                     |       | (1,680                           | )          | (5,213 | ) |
| **Comprehensive  Income**                                                |       | $                                | 7,094      |   | $ | 3,877 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

5

----

 

**Mid-StateBancshares**

ConsolidatedStatements of Changes in Capital Accounts

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

 
| ** **                                                                                | ** ** | ** **         | ** ** | ** **  | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                | ** ** | ** **         | ** ** | ** **  | ** ** | ** **   | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **Number of** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **Shares**         | ** ** | **Stock**   | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
|                                                                                      |       |               |       |        |       |         |       |                   |       |       |       |
| BALANCE,  December 31, 2005                                                               |       | 22,520,434         |       | $           | 42,343     |         | $          | 229,824                |       | $          | 395        |   | $ | 272,562 |   |
| Cash dividend                                                                             |       | —             |       | —      |       | (4,028       | )          | —                 |       | (4,028     | )          |
| Exercise of  stock options                                                                |       | 73,395             |       | 821         |       | —       |       | —                 |       | 821        |       |
| Tax Benefit from  exercise of options                                                     |       | —             |       | —      |       | 568          |       | —                 |       | 568        |       |
| Net income                                                                                |       | —             |       | —      |       | 8,774        |       | —                 |       | 8,774      |       |
| Change in net  unrealized gain on available for sale securities, net of taxes of ($1,120) |       | —             |       | —      |       | —       |       | (1,680                 | )          | (1,680     | )          |
| Common stock  issued under employee plans and related tax benefits                        |       | —             |       | 441         |       | —       |       | —                 |       | 441        |       |
| Stock  repurchased                                                                        |       | (215,831           | )          | (6,150      | )          | —       |       | —                 |       | (6,150     | )          |
| **BALANCE,  March 31, 2006**                                                              | ** ** | **22,377,998**     | ** ** | **$**       | **37,455** | ** **   | **$**      | **235,138**            | ** ** | **$**      | **(1,285** | **)** | **$** | **271,308** |   |
|                                                                                      |       |               |       |        |       |         |       |                   |       |       |       |
| BALANCE,  December 31, 2004                                                               |       | 23,099,159         |       | $           | 61,439     |         | $          | 206,328                |       | $          | 6,860      |   | $ | 274,627 |   |
| Cash dividend                                                                             |       | —             |       | —      |       | (3,672       | )          | —                 |       | (3,672     | )          |
| Exercise of  stock options                                                                |       | 43,162             |       | 653         |       | —       |       | —                 |       | 653        |       |
| Tax Benefit from  exercise of options                                                     |       | —             |       | —      |       | 178          |       | —                 |       | 178        |       |
| Net income                                                                                |       | —             |       | —      |       | 9,090        |       | —                 |       | 9,090      |       |
| Change in net  unrealized gain on available for sale securities, net of taxes of ($3,475) |       | —             |       | —      |       | —       |       | (5,213                 | )          | (5,213     | )          |
| Stock  repurchased                                                                        |       | (193,770           | )          | (5,287      | )          | —       |       | —                 |       | (5,287     | )          |
| BALANCE, March  31, 2005                                                                  |       | 22,948,551         |       | $           | 56,805     |         | $          | 211,924                |       | $          | 1,647      |   | $ | 270,376 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

6

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**Mid-StateBancshares**

ConsolidatedStatements of Cash Flows

(Unaudited -figures in 000’s)

 
| ** **                                                                                                      | ** ** | **Three Month Period** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                      | ** ** | **Ended Mar. 31,**     | ** ** |
| ** **                                                                                                      | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **OPERATING  ACTIVITIES**                                                                                       |       |                             |       |   |   |
| Net Income                                                                                                      |       | $                                | 8,774      |   | $ | 9,090 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: Provision  for credit losses |       | —                           |       | — |   |
| Depreciation and  amortization                                                                                  |       | 1,236                            |       | 1,414 |   |
| Net amortization  of prem./discounts-investments                                                                |       | 960                              |       | 947 |   |
| Loss (gain) on  sale of loans held for sale                                                                     |       | 31                               |       | (99 | ) |
| Net decrease in  loans held for sale                                                                            |       | 1,462                            |       | 3,160 |   |
| Change in  deferred loan fees                                                                                   |       | 737                              |       | (23 | ) |
| Share based  compensation                                                                                       |       | 441                              |       | — |   |
| Tax provision  for equity awards                                                                                |       | (44                              | )          | — |   |
| Changes in  assets and liabilities:                                                                             |       |                             |       |   |   |
| Accrued interest  receivable                                                                                    |       | (285                             | )          | (1,126 | ) |
| Core deposit  intangible                                                                                        |       | 218                              |       | 344 |   |
| Other assets,  net                                                                                              |       | (359                             | )          | 2,054 |   |
| Other  liabilities, net                                                                                         |       | 635                              |       | 2,519 |   |
| Net cash  provided by operating activities                                                                      |       | 13,806                           |       | 18,280 |   |
| **INVESTING  ACTIVITIES**                                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from  sales and maturities of investments                                                              |       | 74,847                           |       | 47,101 |   |
| Purchases of  investments                                                                                       |       | (21,206                          | )          | (36,552 | ) |
| Net increase in  loans                                                                                          |       | (28,011                          | )          | (34,343 | ) |
| Proceeds from  sale of other real estate owned                                                                  |       | —                           |       | — |   |
| Purchases of  premises and equipment, net                                                                       |       | (1,323                           | )          | (993 | ) |
| Net cash used in  investing activities                                                                          |       | 24,307                           |       | (24,787 | ) |
| **FINANCING  ACTIVITIES**                                                                                       |       |                             |       |   |   |
| Net (decrease) increase  in deposits                                                                            |       | (18,694                          | )          | 10,787 |   |
| Increase in  short-term borrowings                                                                              |       | 21,256                           |       | 17,039 |   |
| Exercise of  stock options                                                                                      |       | 1,433                            |       | 832 |   |
| Cash dividends  paid                                                                                            |       | (4,028                           | )          | (3,672 | ) |
| Repurchase of  company stock                                                                                    |       | (6,150                           | )          | (5,287 | ) |
| Net cash (used  in) provided by financing activities                                                            |       | (6,183                           | )          | 19,699 |   |
| Increase in cash  and cash equivalents                                                                          |       | 31,930                           |       | 13,192 |   |
| Cash and cash  equivalents, beginning of period                                                                 |       | 109,791                          |       | 118,669 |   |
| Cash and cash  equivalents, end of period                                                                       |       | $                                | 141,721    |   | $ | 131,861 |   |
| Supplemental disclosure of cash flow information:                                                               |       |                             |       |   |   |
| Cash paid during  the period for interest                                                                       |       | $                                | 5,128      |   | $ | 2,545 |   |
| Cash paid during  the period for taxes on income                                                                |       | 1,400                            |       | 2,457 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

7

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**Mid-StateBancshares**

Notes toConsolidated Financial Statements

(Information withrespect to interim periods is unaudited)

 

**NOTE A - BASIS OF PRESENTATIONAND MANAGEMENT REPRESENTATION**

 

The accompanyingconsolidated financial statements include the accounts of Mid-State Bancsharesand its wholly owned subsidiary Mid-State Bank & Trust and the Bank’ssubsidiaries, MSB Properties and Mid-Coast Land Company (collectively the “Company,”“Bank” or “Mid-State”). All significant inter-company transactions have beeneliminated in consolidation. These consolidated financial statements should beread in conjunction with the Form 10-K Annual Report for the year endedDecember 31, 2005 of Mid-State Bancshares. A summary of the Company’ssignificant accounting policies is set forth in the Notes to ConsolidatedFinancial Statements contained therein.

 

These consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States on a basis consistent withthe accounting policies reflected in the audited consolidated financialstatements included in the Annual Report on Form 10-K for the year endedDecember 31, 2005. They do not, however, include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. In the opinion of management, alladjustments including normal recurring accruals considered necessary for a fairpresentation 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 areconciliation of net income and shares outstanding to the income and number ofshares used to compute Earnings Per Share (“EPS”). Figures are in thousands,except earnings per share data.

 
| ** **                               | ** ** | **Three Month Period Ended** | ** ** | **Three Month Period Ended** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **Mar. 31, 2006**                 | ** ** | **Mar. 31, 2005**                 | ** ** |
| ** **                               | ** ** | **Net Income**                         | ** ** | **Shares**                                  | ** ** | **EPS** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Net Income as  reported                  |       | $                                           | 8,774      |                                        |       |   |   |   | $ | 9,090 |   |   |   |   |   |
|                                     |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share:               |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Income available  to Common Shareholders |       | $                                           | 8,774      |                                        | 22,444     |   | $ | 0.39 |   | $ | 9,090 |   | 23,019 |   | $ | 0.39 |   |
|                                     |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:          |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Stock Options                            |       |                                        |       | 507                                         |       |   |   |   |   | 538 |   |   |   |
|                                     |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted Earnings  Per Share:             |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Income available  to Common Shareholders |       | $                                           | 8,774      |                                        | 22,951     |   | $ | 0.38 |   | $ | 9,090 |   | 23,557 |   | $ | 0.39 |   |

 

8

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#### **NOTE C – RECENTACCOUNTING PRONOUNCEMENTS**

#### ** **

In June 2004, the Emerging Issues Task Force of the FinancialAccounting Standards Board (FASB) issued guidance on its Issue No. 03-1, “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.”  The guidance made recommendationsregarding unrealized losses on available-for-sale debt and equity securitiesaccounted for under Statement of Financial Accounting Standards (SFAS) No. 115,“Accounting for Certain Investments inDebt and Equity Securities,” and No. 124, “Accounting for Certain Investments Held by Not-for-ProfitOrganizations.”  The guidance forevaluating whether an investment is other-than-temporarily impaired was to beapplied in other-than-temporary impairment evaluations made in reportingperiods beginning after June 15, 2004. The disclosures were to be effective inannual financial statements for fiscal years ending after December 15, 2003,for investments accounted for under Statements 115 and 124. On September 30,2004, the FASB Board directed the issuance of FASB Staff Position (FSP) EITFIssue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 ofEITF Issue No. 03-1.”  The proposed FSPwould provide implementation guidance with respect to debt securities that areimpaired solely due to interest rates and/or sector spreads and analyzed forother-than-temporary impairment under paragraph 16 of issue 03-1. The FASBasked constituents to comment on whether the application guidance with respectto “minor impairments” should also be applied to securities analyzed forimpairment under paragraphs 10-15 of Issue 03-1. At the June 29, 2005 meeting,the Board decided not to provide additional guidance on the meaning ofother-than-temporary impairment and directed the staff to finalize proposedFASB Staff Position (FSP) EITF 03-1-a, “Implementation Guidance for theApplication of Paragraph 16 of EITF Issue No. 03-1.” The final FSP, retitled asFSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments,” would:

 

1.               Replace the guidance in paragraphs 10–18 ofEITF Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments,” and refer to existing other-than-temporaryimpairment guidance—for example, FASB Statement No. 115, *Accounting for Certain Investments in Debt and EquitySecurities,* APB Opinion No. 18, *TheEquity Method of Accounting for Investments in Common Stock,* and SECStaff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable EquitySecurities”

 

2.               Supersede Issue 03-1 and EITF Topic No. D-44,“Recognition of Other-Than-Temporary Impairment upon the Planned Sale of aSecurity Whose Cost Exceeds Fair Value”

 

3.               Codify the guidance set forth in Topic D-44and clarify that an investor should recognize an impairment loss no later thanwhen the impairment is deemed other than temporary, even if a decision to sellhas not been made

 

4.               Be effective for other-than-temporaryimpairment analyses conducted in periods beginning after September 15, 2005.

 

Atthe September 7, 2005 meeting, the Board directed the staff to considertransition guidance for the proposed FSP. At the September 14, 2005 meeting,the Board decided to retain the paragraph in the proposed FSP pertaining to theaccounting for debt securities subsequent to an other-than-temporary impairmentand add a footnote to clarify that the proposed FSP does not address when adebt security should be designated as nonaccrual or how to subsequently reportincome on a nonaccrual debt security. In addition, the Board decided that (1)transition would be applied prospectively and (2) the effective date would bereporting periods beginning after December 15, 2005. Adoption of EITF Issue03-1-a did not have a material impact on the Company’s results of operationsand its financial position.

 

9

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The FASB issued arevision to SFAS No. 123, “Accounting for Stock-Based Compensation” in December2004. The revised Statement is SFAS No. 123R (revised 2004), “Share-BasedPayment” and it supercedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and its related implementation guidance. It is effective for theCompany as of January 1, 2006. The Statement requires that the Company measuresthe cost of employee services received in exchange for an award of equityinstruments (share based payment awards) based on the grant date fair value ofthe award and the estimated number of awards that are expected to vest. Thecost will be recognized over the period during which an employee is required toprovide service in exchange for the award – usually the vesting period. Compensationcost for awards that vest would not be reversed if the awards expire withoutbeing exercised. The Company previously applied APB Opinion No. 25, inaccounting for its Plan. Accordingly, no compensation expense was recognizedfor grants under the Plan prior to 2006. Pro forma disclosures of net incomeand earnings per share were disclosed in Note 15 of the Company’s Annual Reporton Form 10K. The Company adopted the revised Statement for the first quarter of2006. The impact of adopting the accounting treatment was to reduce earnings byapproximately $397 thousand, after-tax, for the three months ended March 31,2006.

 

FASB issued SFAS No. 154,“*Accounting Changes and Error Corrections”* on June 1, 2005, a replacement ofAPB No. 20 and SFAS No. 3. The Statement applies to all voluntary changes inaccounting principle, and changes the requirements for accounting for andreporting of a change in accounting principle. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable. APB No. 20previously required that most voluntary changes in accounting principle berecognized by including in net income of the period of the change thecumulative effect of changing to the new accounting principle. SFAS No. 154improves financial reporting because its requirements enhance the consistencyof financial information between periods. SFAS No. 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. Adoption of the Statement did not have a materialeffect on the Company’s consolidated financial statements.

 

FASB issued SFAS No. 155,“*Accounting for Certain Hybrid Instruments,*”on February 16, 2006 as an amendment of FASB Statements No. 133 and 140. Thestandard allows financial instruments that have embedded derivatives to beaccounted for as a whole (eliminating the need to bifurcate the derivative fromits host) if the holder elects to account for the whole instrument on a fairvalue basis. The standard also a) clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of Statement 133, b)establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiring bifurcation,c) clarifies that concentrations of credit risk in the form of subordinationare not embedded derivatives, and d) amends Statement 140 to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. The Company expects to adopt theStatement for the first quarter of 2007 and expects it will not have a materialeffect on its consolidated financial statements.

 

TheFASB issued SFAS No. 156, *Accounting forServicing of Financial Assets* on March 17, 2006 as an amendment to SFASNo. 140. The standard will simplify the accounting for servicing assets andliabilities, such as those common with mortgage securitization activities. Specifically,the new Standard addresses the recognition and measurement of separatelyrecognized servicing assets and liabilities and provides an approach tosimplify efforts to obtain hedge-like (offset) accounting. The standard also clarifieswhen an obligation to service financial assets should be separately recognizedas a servicing asset or a servicing liability, requires that a separatelyrecognized servicing asset or servicing liability be initially measured at fairvalue, if practicable, permits an entity with a separately recognized servicingasset or servicing liability to choose either the amortization method or fairvalue method for subsequent measurement. SFAS No. 156 permits a servicer that

 

10

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usesderivative financial instruments to offset risks on servicing to report boththe derivative financial instrument and related servicing asset or liability byusing a consistent measurement attribute – fair value. The Companyexpects to adopt the Statement for the first quarter of 2007 and expects itwill not have a material effect on its consolidated financial statements.

 

**NOTE D – CORE DEPOSITINTANGIBLES, NET**

 

The following is asummary of the Company’s core deposit intangibles. Figures are in thousands(unaudited).

 
| ** **               | ** ** | **Mar. 31, 2006** | ** ** | **Mar. 31, 2005** | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Gross**                   | ** ** | **Accumulated**             | ** ** | **Net Carrying** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **               | ** ** | **Amount**                  | ** ** | **Amortization**            | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                     |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Core Deposit  Intangible |       | $                           | 11,597     |                        | $          | (5,332 | ) | $ | 6,265 |   | $ | 11,597 |   | $ | (4,209 | ) | $ | 7,388 |   |
|                          |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **               | ** ** | **Dec. 31, 2005** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Gross**                   | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **               | ** ** | **Amount**                  | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                     |       |                        |       |   |   |   |   |
| Core Deposit  Intangible |       | $                           | 11,597     |   | $ | (5,114 | ) | $ | 6,483 |   |
|                          |            |                             |            |  |  |  |  |  |  |  |

 

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

 
| ** **                               | ** ** | **Three Month Period** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Ended March 31,**    | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Amortization of  Core Deposit Intangible |       | $                                | 218        |   | $ | 344 |   |
|                                          |            |                                  |            |  |  |  |  |

 

The amortization expensefor core deposit intangibles is included within other operating expenses on theconsolidated statements of income. Based on a review of the Company’s coredeposit intangible at September 30, 2005 in relation to the core depositsretained to which the intangible relates, it was determined that a downwardadjustment in the amortization rate was appropriate under generally acceptedaccounting principles. The projected amortization  expense for  core depositintangibles,  assuming no further  acquisitions or dispositions or changes inamortization rates, is approximately $872 thousand per year over the next fiveyears.

 

**NOTE E – STOCK BASED COMPENSATION**

 

On May 17, 2005,shareholders of the Company approved a new equity based compensation plan, theMid-State Bancshares 2005 Equity Based Compensation Plan (the “2005 Plan”)which reserves an additional 1,000,000 common shares for issuance in accordancewith the terms of the Plan. The 2005 Plan provides for the grant of stockoptions, stock appreciation rights, restricted shares, restricted share units,performance based cash only awards, or any combination thereof. It replaced the1996 Stock Option Plan which was limited in scope to the

 

11

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issuance of StockOptions. Shares available for issuance under the 1996 Plan are now included inthe 2005 Plan, resulting in 953,931 shares currently being available to beissued (4.26% of current and issued outstanding common stock) as of March 31,2006.

 

Through December31, 2005, the Company accounted for its stock-based compensation in accordancewith SFAS No. 123, “Accounting for Stock Based Compensation.”  SFAS No. 123 allowed stock options to bevalued using the intrinsic value method in accordance with APB No. 25, “Accountingfor Stock Issued to Employees.” Effective January 1, 2006, the Company adopted SFAS No. 123R, “ShareBased Payment.”  This standard requiresthat all share-based compensation awards be measured at fair value at the dateof grant and expensed over their vesting or service periods. The impact ofadopting the new accounting treatment was to reduce earnings by approximately$397 thousand, after-tax for the three months ended March 31, 2006. On a pershare basis, this amounted to two cents per share on both a basic and dilutedbasis. Prior to 2006, the Company accounted for stock options under theprovisions of Accounting Principles Board (“APB”) Opinion No. 25 and providedproforma net income and proforma earnings per share disclosures for employeestock option grants as if the fair-value-based method, defined in SFAS No. 123Rhad been applied. A summary of the proforma disclosure as of March 31, 2005 wasas follows:

 
| ** **                                                                                                                  | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net Income, as  reported                                                                                                    |       | $                                                          | 9,090      |   |
| Stock based  compensation expense determined under the fair value based method for all  awards,  net of related tax effects |       | (579                                                       | )          |
| ProForma Net  Income                                                                                                        |       | $                                                          | 8,511      |   |
|                                                                                                                        |       |                                                       |       |   |
| Basic income per  share, as reported                                                                                        |       | $                                                          | 0.39       |   |
| ProForma basic  income per share                                                                                            |       | $                                                          | 0.37       |   |
|                                                                                                                        |       |                                                       |       |   |
| Diluted income  per share, as reported                                                                                      |       | $                                                          | 0.39       |   |
| ProForma diluted  income per share                                                                                          |       | $                                                          | 0.36       |   |

 

 

Option awards aregranted with an exercise price equal to the market price of the Company’scommon stock on the date of grant. While options are exercisable and expire asdetermined by the Board of Directors, they generally become exercisable over afive year period vesting 20% each year, and have a term of ten years. Forpurposes of determining the fair value of stock option awards, the Company usesthe Black-Scholes option pricing model applied on a grant by grant basis. Riskfree rates of interest were applied in the model as of the grant date based ondata provided by the Federal Reserve Bank on its H.15 release. The dividendyield applied in the model was the dividend yield of the Company at time ofgrant. The expected volatility of the Company’s stock price applied in themodel was 34.9% based on the historical period of 1998 (when the Company wasfirst listed on NASDAQ) through March 31, 2006. The expected average lifeapplied in the model was based on the historical period of 1998 through March31, 2006 and was calculated by major employee groups which generally rangedfrom 5.18 years to 8.73 years. The above assumptions were not materiallydifferent from the global assumptions used in prior periods for estimating fairvalues on a pro forma basis. Compensation cost is recognized using astraight-line method over the vesting or service period.

 

The followingtable shows a summary of stock option activity:

 
| ** **                             | ** ** | ** **                 | ** ** | **Weighted** | ** ** | ** **            | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------|------------|-----------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | **Average**  | ** ** | ** **            | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | **Exercise** | ** ** | **Per Share**    | ** ** |
| ** **                             | ** ** | **Options**                | ** ** | **Price**    | ** ** | **Price Ranges** | ** ** |
| **Outstanding  at December 31, 2005**  | ** ** | **2,000,958**              | ** ** | **$**        | **19.20**  | ** **            | **$**      | **5.375 – $30.61** | ** ** |
| **Granted  during Q1-2006**            | ** ** | **77,503**                 | ** ** | **$**        | **29.00**  | ** **            | **$**      | **29.00 – $29.00** | ** ** |
| **Exercised  during Q1-06**            | ** ** | **(73,395**                | **)**      | **$**        | **11.19**  | ** **            | **$**      | **5.375 – $24.64** | ** ** |
| **Forfeited  during Q1-06**            | ** ** | **(4,062**                 | **)**      | **$**        | **18.49**  | ** **            | **$**      | **15.50 – $24.64** | ** ** |
| **Outstanding  at March 31, 2006**     | ** ** | **2,001,004**              | ** ** | **$**        | **19.87**  | ** **            | **$**      | **12.125 – $30.61** | ** ** |
| **Exercisable  at March 31, 2006**     | ** ** | **1,308,661**              | ** ** | **$**        | **17.12**  | ** **            | **$**      | **12.125 – $30.61** | ** ** |
| **Range  of Expiration Dates**         | ** ** | **8/12/2008 to 2/15/2016** |       |         |       |                  |       |
| **Shares  Available for Future Grant** | ** ** | **953,931**                |       |         |       |                  |       |

 

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| ** **                      | ** ** | **Total**       | ** ** | **Weighted Average**  | ** ** | **Weighted Average** | ** ** | ** **      | ** ** | **Weighted Average** | ** ** |
|---------------------------------|------------|-----------------|------------|----------------------------|------------|---------------------------|------------|-----------------|------------|---------------------------|------------|
| **Range of Exercise** | ** ** | **Amount**      | ** ** | **Remaining**              | ** ** | **Exercise**              | ** ** | **Amount**      | ** ** | **Exercise**              | ** ** |
| **Prices**                      | ** ** | **Outstanding** | ** ** | **Contractual Years** | ** ** | **Price**                 | ** ** | **Exercisable** | ** ** | **Price**                 | ** ** |
|                            |       |            |       |                       |       |                      |       |            |       |                      |       |
| $9.183   - $12.244    |       | 12,000          |       | 4.0                        |       | $                         | 12.125     |            | 12,000     |                      | $          | 12.125 |   |
| $12.245 - $15.305               |       | 449,743         |       | 3.5                        |       | $                         | 14.537     |            | 448,543    |                      | $          | 14.538 |   |
| $15.306 - $18.366               |       | 809,750         |       | 4.8                        |       | $                         | 16.892     |            | 686,177    |                      | $          | 16.865 |   |
| $18.367 - $21.427               |       | 12,000          |       | 6.6                        |       | $                         | 19.658     |            | 6,400      |                      | $          | 19.616 |   |
| $21.428 - $24.488               |       | 73,200          |       | 8.0                        |       | $                         | 22.796     |            | 14,800     |                      | $          | 22.883 |   |
| $24.489 - $27.549               |       | 327,437         |       | 8.3                        |       | $                         | 25.877     |            | 96,873     |                      | $          | 25.481 |   |
| $27.550 - $30.610               |       | 316,874         |       | 9.1                        |       | $                         | 28.486     |            | 43,868     |                      | $          | 28.145 |   |
|                            |       |            |       |                       |       |                      |       |            |       |                      |       |
| Total                           |       | 2,001,004       |       | 5.9                        |       | $                         | 19.873     |            | 1,308,661  |                      | $          | 17.121 |   |

 

The weightedaverage fair value of grants issued in the first quarter of 2006 was $10.45. Theweighted average fair value of all grants outstanding as of March 31, 2006 was$6.89. The aggregate intrinsic value for vested options exercisable atMarch 31, 2006 was $16,112,798 and the aggregate intrinsic value ofunvested options not yet exercisable at March 31, 2006 was $3,050,953.Unamortized compensation expense at March 31, 2006 amounted to approximately$5.2 million using an estimated 5% forfeiture rate and is expected to berecognized over a weighted average life of 1.75 years.

 

The Company plansto issue restricted shares during the second quarter of 2006. The vesting onthese restricted shares will be three years from the date of grant and issubject to continued employment at the Company through the vesting date. Holdersof restricted shares will have the right to receive dividends and vote theshares, but may not sell, assign, transfer, pledge or otherwise encumber the stock.

 

13

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**NOTE F –SENIOR HOUSING CRIME PREVENTION FOUNDATION INVESTMENT**

 

During the secondquarter of 2005, the Company made an investment in the amount of $30.0 millionin a security of a U.S. government agency. That security was exchanged for aninterest bearing investment in the Senior Housing Crime Prevention FoundationInvestment Corporation (SHCPF-I) with the U.S. government agency held insafekeeping reflecting ownership by SHCPF-I and the pledge of that Security infavor of Mid-State Bank & Trust. The investment provides funding for theSenior Housing Crime Prevention Foundation in its efforts to prevent elderabuse in nursing homes throughout the Company’s service area. This investmentis displayed separately within the Company’s Consolidated Statements ofFinancial Position.

 

**NOTE G – REPORTABLE BUSINESSSEGMENTS**

 

Below is a summarystatement of income for the three months March 31, 2006 and 2005 for eachreportable business segment.

 
| **(unaudited —**           | ** ** | **Community Banking** | ** ** | **Mid Coast Land   Company** | ** ** | **Trust Services** | ** ** | **Mid-State Bancshares** | ** ** |
|--------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| **dollars in 000’s)** | ** ** | **2006**                   | ** ** | **2005**                                    | ** ** | **2006**                | ** ** | **2005**                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                       |       |                                        |       |                    |       |                          |       |   |   |   |   |   |   |   |   |
| Interest Income                      |       | $                          | 34,735     |                                        | $          | 29,482                  |       | $                             | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 34,735 |   | $ | 29,482 |   |
| Interest Expense                     |       | 5,266                      |       | 2,713                                       |       | —                  |       | —                        |       | — |   | — |   | 5,266 |   | 2,713 |   |
| Net Interest  Income                 |       | 29,469                     |       | 26,769                                      |       | —                  |       | —                        |       | — |   | — |   | 29,469 |   | 26,769 |   |
| Provision for  Loan Losses           |       | —                     |       | —                                      |       | —                  |       | —                        |       | — |   | — |   | — |   | — |   |
| Non Interest  Income                 |       | 4,439                      |       | 5,082                                       |       | 204                     |       | 14                            |       | 337 |   | 299 |   | 4,980 |   | 5,395 |   |
| Non Interest  Expense                |       | 20,683                     |       | 18,117                                      |       | 5                       |       | 3                             |       | 274 |   | 215 |   | 20,962 |   | 18,335 |   |
| Pre-Tax Income                       |       | $                          | 13,225     |                                        | $          | 13,734                  |       | $                             | 199        |   | $ | 11 |   | $ | 63 |   | $ | 84 |   | $ | 13,487 |   | $ | 13,829 |   |

 

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**NOTE H –GUARANTEES**

 

The Company hasguarantees outstanding under performance standby letter of creditaccommodations made to its customers in the ordinary course of businesstotaling $38.7 million at March 31, 2006, down from $46.5 million one yearearlier.

 

Letters of creditare issued in connection with agreements made by customers to counterparties.Terms of these letters of credit are generally for one year and may or may notbe collateralized by receivables or other assets. If the customer fails tocomply with the agreement, the counterparty may enforce the letter of credit asa remedy. Credit risk arises from the possibility that the customer may not beable to repay the Company. The notional amount of the letter of credit accommodationsrepresents the maximum amount of future cash payments.

 

Many of thecommitments are expected to expire without being drawn upon. Accordingly, thetotal outstanding commitment amount does not necessarily represent future cashrequirements. The Company does not anticipate any significant losses as aresult of these transactions. Provision has been made for losses which may besustained in the fulfillment of, or from an inability to fulfill, anycommitments. The provision at March 31, 2006 was $1.7 million, compared to $1.6million one year earlier, and is reflected on the Consolidated Statements ofFinancial Position as Allowance for Losses – Unfunded Commitments.

 

**Item 2 - Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following is management’s discussion and analysisof the major factors that influenced our financial performance for the threemonths ended March 31, 2006. This analysis should be read in conjunction withour 2005 Annual Report as filed on Form 10-K and with the unaudited financialstatements and notes as set forth in this report. *Unless thecontext requires otherwise, the terms “Company,” “us,” “we,” and “our” refersto Mid-State Bancshares on a consolidated basis.*

 

Certain statements contained in this Quarterly Report of Form10-Q (“Report”), including, without limitation, statements containing the words“estimate,” “believes,” “anticipates,” “intends,” “may,” “expects,” “could,”and words of similar import, constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934. These forward-looking statements relate to,among other things, our current expectations regarding future operatingresults, net interest margin, strength of the local economy, the recovery ofunrealized losses in the investment portfolio and allowance

 

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forcredit losses. These forward looking statements involve known and unknownrisks, uncertainties and other factors that may cause our actual results,performance or achievements to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Such factors include, among others, those concerning (i) theCompany’s strategies, objectives and plans for expansion of its operations,products and services, and growth of its portfolio of loans, investments anddeposits, (ii) the Company’s beliefs and expectations regarding actions thatmay be taken by regulatory authorities having oversight of its operation andinterest rates, (iii) the Company’s beliefs as to the adequacy of its existingand anticipated allowances for loan and real estate losses and its expectationsabout the loss potential in its non-performing loans, (iv) the Company’sbeliefs and expectations concerning future operating results, (v) the growth ofits loan portfolio and its net interest margin and (vi) the strength of theeconomy and the increasing levels of competition in its service area.Additional information on these and other factors that could affect financialresults may be found in the Company’s 2005 Annual Report as filed on form 10-K,including in “Item 1A. Risk Factors.” When relying on forward-looking statements to make decisions withrespect to our Company, investors and others are cautioned to consider theseand other risks and uncertainties. We disclaim any obligation to update anysuch factors or to publicly announce the results of any revisions to any of theforward-looking statements contained herein to reflect future events ordevelopments.

 

***CriticalAccounting Policies and Estimates***This “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” aswell as, disclosures included elsewhere in this Form 10-Q, are based upon theCompany’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements require Management tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses and related 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 Accounting Policiesand Estimates.”

 

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***SelectedFinancial Data - Summary***. The following table providescertain selected consolidated financial data as of and for the three monthsending March 31, 2006 and 2005(unaudited in 000’s, except per share data).

 
| ** **                                                          | ** ** | **At or for the 3 months ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(In 000’s, except per share data)** | ** ** | **Mar. 31 2006**                                     | ** ** | **Mar. 31, 2005** | ** ** |
|                                                                |       |                                                           |       |   |   |
| Interest Income                                                     |       | $                                                              | 34,735     |   | $ | 29,482 |   |
| Interest Expense                                                    |       | 5,266                                                          |       | 2,713 |   |
| Net Interest  Income                                                |       | 29,469                                                         |       | 26,769 |   |
| Provision for  Loan Losses                                          |       | —                                                         |       | — |   |
| Net Interest  Income after provision for loan losses                |       | 29,469                                                         |       | 26,769 |   |
| Non-interest  income                                                |       | 4,980                                                          |       | 5,395 |   |
| Non-interest  expense                                               |       | 20,962                                                         |       | 18,335 |   |
| Income before  income taxes                                         |       | 13,487                                                         |       | 13,829 |   |
| Provision for  income taxes                                         |       | 4,713                                                          |       | 4,739 |   |
| Net Income                                                          |       | $                                                              | 8,774      |   | $ | 9,090 |   |
|                                                                |       |                                                           |       |   |   |
| **Per  share:**                                                     |       |                                                           |       |   |   |
|                                                                |       |                                                           |       |   |   |
| Net Income -  basic                                                 |       | $                                                              | 0.39       |   | $ | 0.39 |   |
| Net Income -  diluted                                               |       | $                                                              | 0.38       |   | $ | 0.39 |   |
| Weighted average  shares used in Basic E.P.S. calculation           |       | 22,444                                                         |       | 23,019 |   |
| Weighted average  shares used in Diluted E.P.S. calculation         |       | 22,951                                                         |       | 23,557 |   |
| Cash dividends                                                      |       | $                                                              | 0.18       |   | $ | 0.16 |   |
| Book value at  period-end                                           |       | $                                                              | 12.12      |   | $ | 11.78 |   |
| Tangible book  value at period end                                  |       | $                                                              | 9.71       |   | $ | 9.38 |   |
| Ending Shares                                                       |       | 22,378                                                         |       | 22,949 |   |
|                                                                |       |                                                           |       |   |   |
| **Financial  Ratios**                                               |       |                                                           |       |   |   |
| Return on assets  (annualized)                                      |       | 1.50                                                           | %          | 1.60 | % |
| Return on  tangible assets (annualized)                             |       | 1.53                                                           | %          | 1.64 | % |
| Return on equity  (annualized)                                      |       | 12.77                                                          | %          | 13.33 | % |
| Return on  tangible equity (annualized)                             |       | 15.85                                                          | %          | 16.66 | % |
| Net interest  margin                                                |       | 5.61                                                           | %          | 5.22 | % |
| Net interest  margin (taxable equivalent yield)                     |       | 6.02                                                           | %          | 5.65 | % |
| Net loan losses  (recoveries) to avg. loans                         |       | (0.01                                                          | )%         | 0.05 | % |
| Efficiency ratio                                                    |       | 60.8                                                           | %          | 57.0 | % |
|                                                                |       |                                                           |       |   |   |
| **Period  Averages**                                                |       |                                                           |       |   |   |
| Total Assets                                                        |       | $                                                              | 2,375,086  |   | $ | 2,306,314 |   |
| Total Tangible Assets                                               |       | 2,320,887                                                      |       | 2,250,937 |   |
| Total Loans  (includes loans held for sale)                         |       | 1,520,000                                                      |       | 1,434,150 |   |
| Total Earning  Assets                                               |       | 2,129,477                                                      |       | 2,079,604 |   |
| Total Deposits                                                      |       | 2,031,355                                                      |       | 1,991,356 |   |
| Common Equity                                                       |       | 278,693                                                        |       | 276,592 |   |
| Common Tangible  Equity                                             |       | 224,494                                                        |       | 221,215 |   |

 

17

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| **(In 000’s, except per share data)** | ** ** | **Mar. 31,2006** | ** ** | **Mar. 31, 2005** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|
| **Balance Sheet - At Period-End**                                   |       |                  |       |                        |       |
| Cash and due from banks                                             |       | $                     | 113,461    |                        | $          | 127,861 |   |
| Investments and Fed Funds Sold                                      |       | 590,191               |       | 628,634                     |       |
| Loans held for sale                                                 |       | 8,683                 |       | 9,927                       |       |
| Loans, net of deferred fees, before  allowance for loan losses      |       | 1,546,323             |       | 1,456,091                   |       |
| Allowance for Loan Losses                                           |       | (11,931               | )          | (13,630                     | )          |
| Goodwill and core deposit intangibles                               |       | 54,105                |       | 55,228                      |       |
| Other assets                                                        |       | 92,609                |       | 58,070                      |       |
| Total Assets                                                        |       | $                     | 2,393,441  |                        | $          | 2,322,181 |   |
|                                                                |       |                  |       |                        |       |
| Non-interest bearing deposits                                       |       | $                     | 535,538    |                        | $          | 526,597 |   |
| Interest bearing deposits                                           |       | 1,515,374             |       | 1,478,735                   |       |
| Other borrowings                                                    |       | 47,159                |       | 23,621                      |       |
| Allowance for losses - unfunded commitments                         |       | 1,696                 |       | 1,624                       |       |
| Other liabilities                                                   |       | 22,366                |       | 21,228                      |       |
| Shareholders’ equity                                           |       | 271,308               |       | 270,376                     |       |
| Total Liabilities and Shareholders’ equity                     |       | $                     | 2,393,441  |                        | $          | 2,322,181 |   |
|                                                                |       |                  |       |                        |       |
| **Asset Quality & Capital - At Period-End**                     |       |                  |       |                        |       |
| Non-accrual loans                                                   |       | $                     | 1,701      |                        | $          | 5,828 |   |
| Loans past due 90 days or more                                      |       | —                |       | —                      |       |
| Other real estate owned                                             |       | —                |       | —                      |       |
| Total non performing assets                                         |       | $                     | 1,701      |                        | $          | 5,828 |   |
|                                                                |       |                  |       |                        |       |
| Allowance for losses to loans, gross (1)                            |       | 0.9                   | %          | 1.0                         | %          |
| Non-accrual loans to total loans, gross                             |       | 0.1                   | %          | 0.4                         | %          |
| Non performing assets to total assets                               |       | 0.1                   | %          | 0.3                         | %          |
| Allowance for losses to non performing  loans (1)                   |       | 801.1                 | %          | 261.7                       | %          |
|                                                                |       |                  |       |                        |       |
| Equity to average assets (leverage ratio)                           |       | 9.4                   | %          | 9.5                         | %          |
| Tier One capital to risk-adjusted assets                            |       | 11.4                  | %          | 11.9                        | %          |
| Total capital to risk-adjusted assets                               |       | 12.2                  | %          | 12.8                        | %          |

 

----

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

 

***Performance Summary.***TheCompany posted net income of $8.8 million for the three months ended March 31,2006 compared to $9.1 million in the like 2005 period. On a per share basis, dilutedearnings per share were $0.38 in the 2006 period compared to $0.39 in the samequarter of 2005. These earnings represent an annualized return on assets(R.O.A.) of 1.50% in the 2006 period compared to 1.60% in the same quarter of2005. The annualized return on equity was 12.77% for the first quarter of 2006compared to 13.33% in the first quarter of 2005. In a quarter over quarteranalysis, our increase in net interest income was offset by a decrease innon-interest income and an increase in non-interest expense. Non-interestexpense for the quarter was impacted by the adoption of SFAS No. 123R,“Share-Based Payment” discussed above. SFAS No. 123R requires that the Companymeasures the cost of employee services received in exchange for an award of equityinstruments and recognizes the cost over the period during which the employeeis required to provide

 

18

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service. The adoption of thenew statement resulted in an after-tax charge to earnings of approximately $397thousand, or $0.02 per share.

 

The Company’s leverage capital ratio was 9.4% at March 31, 2006compared to 9.5% one year earlier. The growth in shareholders’ equity has beenbelow the growth of the assets of the Company because the payment of dividendsand the repurchase of common stock has exceeded the retention of the Company’snet income over the past twelve months. This ratio is still substantially aboveregulatory requirements for “well capitalized” banks.

 

***Net Interest Income.***Thefollowing table delineates the impacts of changes in the volume of earningassets, changes in the volume of interest bearing liabilities, and changes ininterest rates on net interest income for the three month periods ended March31, 2006 and 2005.

 
| ** **                          | ** ** | **3 months ended** | ** ** | **3 months ended** | ** ** | ** **                                                                | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Mar. 31,  2006**      | ** ** | **Mar. 31,  2005**      | ** ** | **2006 Compared to 2005  Composition of Change** | ** ** |
| ** **                          | ** ** | ** **                   | ** ** | **Interest**                 | ** ** | **Average**                                                               | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Average**                  | ** ** | **Income /**            | ** ** | **Yield /**                                                          | ** ** | **Average** | ** ** | **Income /** | ** ** | **Yield /** | ** ** | **Change Due To:** | ** ** | **Total** | ** ** |
| **Dollars in 000’s** | ** ** | **Balance**                  | ** ** | **Expense**                  | ** ** | **Rate**                                                                  | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| *EARNING ASSETS:*                   |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                               |       | $                            | 1,520,000  |                         | $          | 28,749                                                                    |       | 7.67 | % | $ | 1,434,150 |   | $ | 23,941 |   | 6.77 | % | $ | 1,528 |   | $ | 3,280 |   | $ | 4,808 |   |
| Investment Securities               |       | 577,460                      |       | 5,638                        |       | 3.96                                                                      | %          | 624,637 |   | 5,414 |   | 3.52 | % | (435 | ) | 659 |   | 224 |   |
| Fed Funds, Other                    |       | 32,017                       |       | 348                          |       | 4.41                                                                      | %          | 20,817 |   | 127 |   | 2.47 | % | 95 |   | 126 |   | 221 |   |
| *TOTAL EARNING ASSETS*              |       | 2,129,477                    |       | 34,735                       |       | 6.62                                                                      | %          | 2,079,604 |   | 29,482 |   | 5.75 | % | 1,188 |   | 4,065 |   | 5,253 |   |
|                                |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *INTEREST BEARING LIABILITIES:*     |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW, Savings, and                   |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money Market Accounts               |       | 1,061,857                    |       | 1,396                        |       | 0.53                                                                      | %          | 1,078,426 |   | 724 |   | 0.27 | % | (16 | ) | 688 |   | 672 |   |
| Time Deposits                       |       | 438,749                      |       | 3,406                        |       | 3.15                                                                      | %          | 398,743 |   | 1,804 |   | 1.83 | % | 246 |   | 1,356 |   | 1,602 |   |
| Interest Bearing Deposits           |       | 1,500,606                    |       | 4,802                        |       | 1.30                                                                      | %          | 1,477,169 |   | 2,528 |   | 0.69 | % | 230 |   | 2,044 |   | 2,274 |   |
|                                |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                    |       | 43,702                       |       | 464                          |       | 4.31                                                                      | %          | 19,590 |   | 185 |   | 3.83 | % | 242 |   | 37 |   | 279 |   |
|                                |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *TOTAL INTEREST BEARING*LIABILITIES |       | 1,544,308                    |       | 5,266                        |       | 1.38                                                                      | %          | 1,496,759 |   | 2,713 |   | 0.74 | % | 472 |   | 2,081 |   | 2,553 |   |
|                                |       |                         |       |                         |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *NET INTEREST INCOME*               |       | $                            | 2,129,477  |                         | $          | 29,469                                                                    |       | 5.61 | % | $ | 2,079,604 |   | $ | 26,769 |   | 5.22 | % | $ | 716 |   | $ | 1,984 |   | $ | 2,700 |   |

 

Mid-State’s year-to-date annualized yield on interest earning assetswas 6.62% for the first three months of 2006 (7.02% on a taxable equivalentbasis) compared to 5.75% in the like 2005 period (6.18% on a taxable equivalentbasis). The increase in yield is related to the general increase in interestrates. The Prime Rate, to which many of the Bank’s loans are tied, averaged7.43% in the first three months of 2006 compared to 5.44% in the like period of2005. Annualized interest expense as a percent of interest bearing liabilitiesalso increased from 0.74% in the first three months of 2005 to 1.38% in thecomparable 2006 period.

 

Overall, Mid-State’s annualized net interest income, expressed as apercent of earning assets, increased from 5.22% for the first three monthperiod of 2005 (5.65% on a taxable equivalent basis) to 5.61% in the comparable2006 period (6.02% on a taxable equivalent basis). Annualized net interestincome as a percent of average total assets increased from 4.71% in thefirst three month period of 2005 (5.09% taxable equivalent) to 5.03% in thecomparable 2006 period (5.40% taxable equivalent). Both the impact of theincrease in general interest rates and the increase in volume of earning assetscontributed to the $2.7 million increase in net interest income. The Companyhas altered the mix of its earning asset base in favor of more loans, resultingin fewer investment securities held. Steps taken in this direction haveincluded the restructuring of the commercial banking division, focusedpromotions of certain consumer loan products, and retention of certain jumboresidential adjustable rate mortgages. The mix did improve across thecomparable three month periods with loans averaging 71.4% of earning assets for2006 compared to 69.0% in the like 2005 period. Earning assets averaged $49.9 million higher

 

19

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for the three months endedMarch 31, 2006 compared to the like 2005 period ($2,129.5 million compared to$2,079.6 million). 

 

Average interest bearingdeposits in this same time-frame were up $23.4 million, ($1,500.6 millioncompared to $1,477.2 million). The balance of the funding in earning assetgrowth came from increases in non interest bearing demand deposits and otherborrowings.

 

***Provision and Allowance for Loan Losses.***Forthe three month period ended March 31st, the Company did not make a provisionfor loan losses in either the 2006 or 2005 periods. Management believes thatthe allowance for loan losses and allowance for losses - unfunded commitments,which collectively stand at 0.9% of total loans at March 31, 2006, are adequateto cover inherent losses in the portfolio. Management has determined that theallocated and unallocated components of the reserve as calculated and requiredfor its non performing loans and the general loan loss reserve are sufficientto offset potential losses arising from less than full recovery of the loansfrom the supporting collateral. The Company believes the unallocated portion ofthe reserve is necessary as a result of the losses inherent in those loanswhere economic factors may have a negative affect on their collectibility eventhough specific reserves have not yet had to be allocated. These economicfactors include, but are not limited to, cyclical changes in business activity,changing patterns of tourism, changing markets for agricultural products,changing patterns of retail sales activity, residential and commercial realestate price trends, the “housing bubble” discussed in many economicpublications, and others. Non performing loans consist of loans on non-accrualand loans past due 90 days or more but still accruing. The $13.6 million ofcollective allowances for credit losses is approximately 801% of the level ofnon performing loans at March 31, 2006 compared to 262% one year earlier.

 

Non performing loans were $1.7 million at March 31, 2006 compared to$5.8 million one year earlier and $2.5 million at December 31, 2005. Managementis not aware of any other loans as of March 31, 2006 for which known creditproblems of the borrower would cause serious doubts as to the ability of suchborrower to comply with its present loan repayment terms, or any known eventsthat would result in the loan being designated as non-performing at somefutures date.

 

Specific reserves have been established for potential losses inherentin all of the Company’s impaired loans and Management believes the balance isadequate at the present time. Moreover, there are additional unallocatedreserves available to absorb other losses which are inherent in the portfolioas of March 31, 2006. The Company has not held any other real estate owned(property acquired through loan foreclosure) over the last twelve months. Acombination of loan payoffs and improvements in the underlying credit qualityof certain borrowers has also led to a drop in internally classified assetsover this period. The improving trend in non performing loans, improvements inthe level of internally classified assets, net recoveries from the Company’son-going collection efforts and the positive local economic conditions haveimproved the Company’s asset quality and contributed to the Company’s decisionto make no provision for loan losses during the quarter.

 

Changes in the allowances for losses (in thousands) for the periodsended March 31, 2006, and 2005 are as follows:

 

20

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| ** **                                                                                                    | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                    | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                    | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Balance at beginning of period:                                                                               |       |                             |       |   |   |
| Allowance for loan losses                                                                                     |       | $                                | 11,896     |   | $ | 13,799 |   |
| Allowance  for losses-unfunded commitments                                                                    |       | 1,761                            |       | 1,783 |   |
| Total allowances for losses at beginning of  period                                                           |       | 13,657                           |       | 15,582 |   |
| Additions (reductions) to the allowance for  losses – unfunded commitments (credited) charged to expense |       | (65                              | )          | (159 | ) |
| (Reductions) additions to the allowance for  loan losses (credited) charged to provision                      |       | —                           |       | — |   |
| Loans charged off                                                                                             |       | (120                             | )          | (310 | ) |
| Recoveries of loans previously charged-off                                                                    |       | 155                              |       | 141 |   |
| Total allowances for losses-end of quarter                                                                    |       | $                                | 13,627     |   | $ | 15,254 |   |
|                                                                                                          |       |                             |       |   |   |
| Allowance for loan losses                                                                                     |       | $                                | 11,931     |   | $ | 13,630 |   |
| Allowance for losses-unfunded commitments                                                                     |       | 1,696                            |       | 1,624 |   |
| Total  allowances for losses-end of quarter                                                                   |       | $                                | 13,627     |   | $ | 15,254 |   |
|                                                                                                          |       |                             |       |   |   |
| Allowances for losses to loans, gross                                                                         |       | 0.9                              | %          | 1.0 | % |
| Allowances for losses to non performing  loans                                                                |       | 801.1                            | %          | 261.7 | % |
| Non-accrual loans to total loans, gross                                                                       |       | 0.1                              | %          | 0.4 | % |
| Non performing assets to total assets                                                                         |       | 0.1                              | %          | 0.3 | % |

 

At March 31, 2006,the recorded investments in loans, which have been identified as impairedtotaled $1,762,000. Of this amount, $115,000 related to loans with no valuationallowance and $1,647,000 related to loans with a corresponding valuationallowance of $1,462,000. Impaired loans totaled $5,903,000 at March 31, 2005,of which $1,201,000 related to loans with no valuation allowance and $4,702,000related to loans with a corresponding valuation allowance of $2,205,000. Thevaluation allowance for impaired loans is included within the general allowanceshown above and netted against loans on the consolidated statements offinancial position.

 

21

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For the quarterended March 31, 2006, the average recorded investment in impaired loans was$2,054,000 compared to $9,397,000 in the 2005 period. A loan is identified asimpaired when it is probable that interest and principal will not be collectedaccording to the contractual terms of the loan agreement. Because thisdefinition is very similar to that used by bank regulators to determine onwhich loans interest should not be accrued, the Company expects that mostimpaired loans will be on non-accrual status.

 

***Non-interest Income.***Non-interestincome for the first quarter of 2006 was $5.0 million, down from the $5.4million earned in the 2005 period. The 2005 results were bolstered by a $330thousand gain on a life insurance policy which did not recur in 2006.Additionally, net gains and losses on sale of securities and loans held forsale resulted in a $309 thousand net decline in non interest income across thecomparable periods. These declines were partially offset by increases inservice charges and fees, primarily the result of increased NSF fees.

 

***Non-interest Expense.***Totalnon-interest expense for the first quarter increased from $18.3 million in theprior year to $21.0 million in the 2006 period. Salaries and benefits expenseaccounted for $1.1 million of this increase having increased from $11.0 millionin the 2005 period to $12.1 million in 2006. $441 thousand of this increaserelated to the adoption of SFAS 123R and the expensing of share based paymentawards previously discussed. Based on the first quarter, we now expect theaccounting change will reduce earnings by approximately $1.6 million after-taxin 2006. Additional increases in salary expense totaled $140 thousand betweenthe two first quarter periods of 2006 versus 2005. The balance of the increaserelates to various benefit cost increases, the largest items being $195thousand for increased incentive accruals and $181 thousand for increased groupinsurance costs. The Company has already filled most of the positionsassociated with the planned opening of its Westlake Village branch office andcommercial banking office, but it could see some additional minor increases insalaries and benefits as those units come on stream later this Spring.

 

Occupancy and furniture expense increased approximately $210 thousandfrom $3.0 million in the 2005 period to $3.2 million in the first quarter of2006. Modest increases in rental expense and maintenance expense accounted forthe increase.

 

Other operating expense increased $1.3 million from $4.4 million in thefirst quarter of 2005 to $5.7 million in the comparable 2006 period. The changewas the result of increases in accruals for accounting, auditing andprofessional services of  $779 thousand,a $140 thousand increase in advertising and promotional expenditures, a $218thousand increase in data processing related expenditures for internet bankingand debit card/ATM expenses, and a $107 thousand increase in general officeexpense. Management expects accounting, auditing and professional services tocontinue at higher expense levels in view of the continuing costs of compliancewith Sarbanes Oxley legislation and the Bank Secrecy Act.

 

***Provision for Income Taxes.***Theprovision for income taxes in the first quarter of 2006 was 34.9% of pre-taxincome compared to 34.3% in the 2005 period. The primary reason for theincrease in the tax provision rate was the treatment related to not booking atax benefit at this time on $337 thousand of the compensation cost associatedwith incentive stock option expense. Some benefit associated with this cost maybe realized in future periods as these incentive stock options are exercisedand the underlying stock sold. A tax benefit was realized in the provisioncalculation associated with the $104 thousand of non qualified stock optionexpense. While the normal combined federal and state statutory tax rate is 42%for Mid-State Bancshares, the tax-exempt income generated by its municipal bondportfolio is the primary reason that the effective rate is lower.

 

***Balance Sheet.***Totalassets at March 31, 2006 totaled $2.393 billion, up 3.1% from the level oneyear earlier of $2.322 billion. Total deposits also rose 2.3% to $2.051billion, up from $2.005 billion one year earlier. Time Deposits under $100thousand increased from $229.1 million one year earlier to $239.5 million atperiod end and Time Deposits over $100 thousand increased by $37.9 million. Managementbelieves that the higher relative

 

22

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levels of time deposits withbalances over $100 thousand is not the result of any change in pricingmethodology on its part, but rather, reflects greater depositor sensitivity totoday’s rising interest rate levels with funds from other deposit categoriesflowing into this category. Non Interest Bearing Demand increased from $526.6million one year earlier to $535.5 million in the current year. All other coredeposit categories of NOW, Money Market and Savings decreased slightly to$1.065 billion from $1.077 billion one year earlier. Loan activity over thelast year has increased, with net loans increasing by $92 million from $1.442billion to $1.534 billion at period-end. Loans held for sale (single family,mortgage originations) decreased slightly to $8.7 million from $9.9 million oneyear earlier. Stockholders’ equity increased by $1.0 million when comparingMarch, 2006 over March, 2005 (see below under Capital Resources for a recap ofthe components of this change).

 

The Company’s mix of earning assets has improved in recent quarterswith loans now averaging 71.4% of average earning assets in the first quarterof 2006 compared to 69.0% in the comparable 2005 period. These higher yieldingassets relative to investments and fed funds sold helped contribute to theCompany’s higher net interest margin from one year earlier. Going forwardhowever, the impact of competitive pricing on new loans resulting fromincreased competition from other local community banks, continued intensecompetition from the major banks, and the expanded influence of “conduit”financing (the making of loans at attractive rates to borrowers which arepooled together, packaged and sold by Wall Street firms as commercial mortgagebacked securities to investors) in the Bank’s trade area by non-banks couldlead to additional pressure on the yield from the loan portfolio. This couldcontribute to a possible drag on the net interest margin in future periods,notwithstanding the benefit to the Bank of having half of the portfolio tied toPrime in a rising rate environment. Displayed below is a summary of loansoutstanding by type as of March 31, 2006 and 2005 (excludes loans held forsale).

 
| ** **                            | ** ** | **March 31,** | ** **    |
|---------------------------------------|------------|--------------------|---------------|
| **(dollars in 000’s)** | ** ** | **2006**           | ** **    | **2005** | ** ** |
| Construction and development loans    | ** ** | **$**              | **282,512**   |   | $ | 246,700 |   |
| Real estate loans                     | ** ** | **829,622**        |          | 754,959 |   |
| Home equity credit lines              | ** ** | **175,627**        |          | 172,699 |   |
| Installment loans                     | ** ** | **18,050**         |          | 18,249 |   |
| Cash reserve                          | ** ** | **3,384**          |          | 3,393 |   |
| Agricultural production               | ** ** | **37,108**         |          | 41,030 |   |
| Commercial, other                     | ** ** | **204,224**        |          | 223,029 |   |
| ** **                            |       | **1,550,527**      |          | 1,460,059 |   |
| Less allowance for loan losses        | ** ** | **(11,931**        | )             | (13,630 | ) |
| Less deferred loan fees, net          | ** ** | **(4,204**         | )             | (3,968 | ) |
| *TOTAL LOAN PORTFOLIO*                | ** ** | **$**              | **1,534,392** |   | $ | 1,442,461 |   |

 

Mid-State Bancshares’ loan to deposit ratio of 75.6% at March 31, 2006is up from the 72.8% ratio one year earlier. There is ample internal liquidityto fund increases in this ratio through liquidation of Mid-State’s $561.9million investment portfolio which is categorized entirely as available forsale, as well as through the accumulation of additional deposits or ofadditional borrowings, such as from the Federal Home Loan Bank. The Bank’sinternal policy for its loan to deposit ratio is to maintain it in the 60% to80% range and significant increases in this ratio in the future are unlikely.

 

***Investment Securities and FedFunds Sold.***Of the $561.9 million portfolio at March 31,2006, 8% is invested in U.S. treasury securities, 26% is invested in U.S. governmentagency obligations, 65% is invested in municipal and corporate securities and2% is invested in mortgage-backed securities. On a combined basis, sixty

 

23

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eight percent of allinvestment securities and fed funds sold mature within five years.Approximately 26% of the total portfolio matures in less than one year. TheCompany’s investment in mortgage-backed securities consist of investments inFNMA and FHLMC pools which have contractual maturities of up to 15 years. Theactual time of repayment may be shorter due to prepayments made on theunderlying collateral.

 

A summary of investment securities owned is as follows:

 

### **March31, 2006**

 
| ** **                                               | ** ** | ** **  | ** **  | **Gross**      | ** ** | **Gross**      | ** ** | ** **  | ** ** |
|----------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|-------------|------------|
| **(amounts in 000’s)**                    | ** ** | **Cost**    | ** **  | **Unrealized** | ** ** | **Unrealized** | ** ** | **Market**  | ** ** |
| **Securities Available For Sale**         | ** ** | **Basis**   | ** **  | **Gains**      | ** ** | **Losses**     | ** ** | **Value**   | ** ** |
| U.S. Treasury securities                                 | ** ** | **$**       | **42,795**  | ** **     | **$**      | **1**          | ** ** | **$**       | **(285**   | **)** | **$** | **42,511** | ** ** |
| Securities of U.S. government agencies and  corporations | ** ** | **148,598** | ** **  | **94**         | ** ** | **(1,764**     | **)**      | **146,928** | ** ** |
| Mortgage backed securities                               | ** ** | **8,630**   | ** **  | **228**        | ** ** | **(179**       | **)**      | **8,679**   | ** ** |
| Obligations of states and political  subdivisions        | ** ** | **347,400** | ** **  | **3,004**      | ** ** | **(3,159**     | **)**      | **347,245** | ** ** |
| Other investments                                        | ** ** | **16,650**  | ** **  | **10**         | ** ** | **(92**        | **)**      | **16,568**  | ** ** |
| ***TOTAL***                                              | ** ** | **$**       | **564,073** | ** **     | **$**      | **3,337**      | ** ** | **$**       | **(5,479** | **)** | **$** | **561,931** | ** ** |

 

December 31, 2005

 
| ** **                                               | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|------------|------------|
| **(amounts in 000’s)**                    | ** ** | **Cost**   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Market** | ** ** |
| **Securities Available For Sale**         | ** ** | **Basis**  | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| U.S. Treasury securities                                 |       | $          | 22,868     |           | $          | —         |       | $          | (222       | ) | $ | 22,646 |   |
| Securities of U.S. government agencies and  corporations |       | 216,218    |       | 171            |       | (1,802         | )          | 214,587    |       |
| Mortgage backed securities                               |       | 8,672      |       | 313            |       | (46            | )          | 8,939      |       |
| Obligations of states and political  subdivisions        |       | 354,356    |       | 4,342          |       | (2,047         | )          | 356,651    |       |
| Other investments                                        |       | 16,559     |       | 22             |       | (72            | )          | 16,509     |       |
| *TOTAL*                                                  |       | $          | 618,673    |           | $          | 4,848          |       | $          | (4,189     | ) | $ | 619,332 |   |

 

The following table shows those investments with grossunrealized losses and their market value aggregated by

 

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investment category and length of time that individualsecurities have been in a continuous unrealized loss position at March 31,2006.

 
| ** **                                               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Market**                             | ** ** | **Unrealized**                       | ** ** | **Market** | ** ** | **Unrealized** | ** ** | **Market** | ** ** | **Unrealized** | ** ** |
| **(amounts in 000’s)**                    | ** ** | **Value**                              | ** ** | **Losses**                           | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Treasury securities                                 |       | $                                      | 30,609     |                                 | $          | (179       | )          | $ | 11,901 |   | $ | (106 | ) | $ | 42,510 |   | $ | (285 | ) |
|                                                     |       |                                   |       |                                 |       |       |       |   |   |   |   |   |   |
| Securities of U.S. government agencies and  corporations |       | 85,741                                 |       | (1,174                               | )          | 56,080     |       | (590 | ) | 141,821 |   | (1,764 | ) |
| Mortgage backed securities                               |       | 2,396                                  |       | (129                                 | )          | 558        |       | (50 | ) | 2,954 |   | (179 | ) |
| Obligations of states and political  subdivisions        |       | 152,976                                |       | (2,260                               | )          | 31,755     |       | (899 | ) | 184,731 |   | (3,159 | ) |
| Other investments                                        |       | 1,962                                  |       | (36                                  | )          | 1,952      |       | (56 | ) | 3,914 |   | (92 | ) |
| *TOTAL*                                                  |       | $                                      | 273,684    |                                 | $          | (3,778     | )          | $ | 102,246 |   | $ | (1,701 | ) | $ | 375,930 |   | $ | (5,479 | ) |

 

All of the unrealized losses identified in the table above areprimarily attributable to changes in general interest rate levels and are notconsidered to be other than a temporary impairment. The unrealized losses arenot the result of any deteriorating financial conditions or near term prospectsof the underlying issuers and Management believes that it has the intent andability to retain these investment securities to allow for the eventualrecovery in market value.

 

***Capital Resources.***OnJune 15, 2005 the Board authorized the repurchase of up to five percent of itsoutstanding shares, or up to 1,141,373 additional shares of the Company’scommon stock. This authorization does not have an expiration date. There were215,831 shares of the Company’s common stock repurchased in the first quarterof 2006 at an average price of $28.50 per share. As of March 31, 2006, theCompany is continuing the program and can repurchase up to 600,844 additionalshares under the June 2005 authorization. For the three months ended March 31,2005, 193,770 shares were repurchased, respectively, at an average price of$27.29. Effective in the middle of the second quarter of 2006, the Board ofDirectors has authorized an increase in the number of shares repurchased on adaily basis to approximately 5,000 shares per day.

 

In other matters concerning capital, the Board ofDirectors declared a quarterly dividend of $0.18 per share in the first quarterof 2006 compared to $0.16 declared in the first quarter of 2005. The Companybegan paying this new higher rate with the fourth quarter 2005 dividend.

 

***Liquidity.***Thefocus of the Company’s liquidity management is to ensure its ability to meetcash requirements. Sources of liquidity include cash, due from bank balances(net of Federal Reserve requirements to maintain reserves against depositliabilities), fed funds sold, investment securities (net of pledgingrequirements), loan repayments, deposits and fed funds borrowing lines. Typicaldemands on liquidity are deposit run-off from demand deposits and savingsaccounts, maturing time deposits, which are not renewed, and anticipatedfunding under credit commitments to customers.

 

In January of 2006, the Company added $25.0 million of additionalborrowings from the Federal Home Loan Bank (FHLB) in the form of a five yearfixed rate credit advance at 4.75%. The borrowing reflects the Company’son-going desire to diversify its funding sources at a reasonable cost, allowingit to create a profitable spread for the income statement.

 

The Company has adequate liquidity at the present time. Its loan todeposit ratio at March 31, 2006 was 75.6% versus 72.8% one year earliercompared to its targeted

 

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internal policy ratio of 60% to80%. The Company’s internally calculated liquidity ratio stands at 28.0% atMarch 31, 2006, which is above its minimum policy of 15% and below the 32.8%level of March 31, 2005. Management is not aware of any future capitalexpenditures or other significant demands or commitments which would severelyimpair liquidity.

 

***Contractual Obligations.***Asof March 31, 2006, the Company had the following contractual obligations. Longterm debt represents fixed rate borrowings that the Company has obtained fromthe FHLB of San Francisco.

 
| ** **        | ** ** | **One Year** | ** ** | **Over One to** | ** ** | **Over Three to** | ** ** | **Over**            | ** ** | ** ** | ** ** |
|-------------------|------------|-------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------|------------|------------|------------|
| ** **        | ** ** | **Or Less**  | ** ** | **Three Years**      | ** ** | **Five Years**         | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| Long Term Debt    |       | $                 | —     |                      | $          | 20,000                      |       | $                   | 25,000     |       | $          | 2,000 |   | $ | 47,000 |   |
|              |       |              |       |                      |       |                        |       |                |       |       |       |
| Operating Leases  |       | 2,293             |       | 4,212                     |       | 3,620                       |       | 4,128               |       | 14,253     |       |
|              |       |              |       |                      |       |                        |       |                |       |       |       |
| Total Obligations |       | $                 | 2,293      |                      | $          | 24,212                      |       | $                   | 28,620     |       | $          | 6,128 |   | $ | 61,253 |   |

 

***OffBalance Sheet Transactions and Other Related Transactions.***Off-balance sheet arrangements areany contractual arrangement to which an unconsolidated entity is a party, underwhich the Company has: 1) any obligation under a guarantee contract; 2) aretained or contingent interest in assets transferred to an unconsolidatedentity or similar arrangement that serves as credit, liquidity or market risksupport to that entity for such assets; 3) any obligation under certainderivative instruments; or 4) any obligation under a material variable interestheld by the Company in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to the Company, or engages inleasing, hedging or research and development services with the Company. In theordinary course of business, the Company has entered into off-balance sheetfinancial instruments consisting of commitments to extend credit, commercial lettersof credit, and standby letters of credit.

*** ***

***The Company is contingently liable for letter of creditaccommodations made to its customers in the ordinary course of businesstotaling $38.7 million at March 31, 2006, down from $46.5 million one year earlier.Additionally, the Company has undisbursed loan commitments, also made in theordinary course of business, totaling $680.8 million, which was up from the$602.7 million outstanding one year earlier. The Company has an allowance forlosses-unfunded commitments totaling $1,696,000 and $1,624,000 at March, 2006and 2005, respectively, to cover losses inherent in its letter of creditaccommodations and undisbursed loan commitments.***

*** ***

There are no Special Purpose Entity (“SPE”) trusts,corporations, or other legal entities established by Mid-State which resideoff-balance sheet. There are no other off-balance sheet items other than theaforementioned items related to letter of credit accommodations andun-disbursed loan commitments.

 

The Company does make loans and leases to relatedparties (directors and officers) in the ordinary course of business onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with persons of similar creditworthiness,and in the opinion of Management, have not involved more than the normal riskof repayment or presented any other unfavorable features. These loans andleases totaled $14.2 million and $9.6 million at March 31, 2006 and 2005,respectively.

 

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In the ordinarycourse of business, the Company is a party to various operating leases. For afuller discussion of these financial instruments, refer to Note 6 of theCompany’s consolidated financial statements contained in Item 8 of Part II ofthe Company’s December 31, 2005 Annual Report on Form 10K.

 

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**Item 3 - Quantitative andQualitative Disclosures About Market Risk**

 

The Company expects its risk exposure to changes in interest rates toremain manageable and well within acceptable policy ranges. A recent review asof March 31, 2006 of the potential changes in the Company’s net interest incomeover a 12 month time horizon showed that it could fluctuate under extremealternative rate scenarios from between +3.1% and –8.2% of the base case (ratesunchanged) of $136.4 million. The Company’s policy is to maintain a structureof assets and liabilities which are such that net interest income will not varymore than plus or minus 15% of the base forecast over the next 12 months.Management expects that its exposure to interest rate risk is manageable and itwill continue to strive for an optimal trade-off between risk and earnings.

 

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

 

| ** **                           | ** ** | **Change  From Base** |
|--------------------------------------|------------|-----------------------|
| Rates Down Very Significantly        |       | -8.2%                 |
| (Prime down to 4.75% over 11 months) |       |                  |
| Rates Down Significantly             |       | -4.2%                 |
| (Prime down to 5.75% over 11 months) |       |                  |
| Rates Down Slightly                  |       | -1.8%                 |
| (Prime down to 6.75% over 11 months) |       |                  |
| Base Case - Rates Unchanged          |       | —                |
| (Prime unchanged at 7.75%)           |       |                  |
| Rates Up Slightly                    |       | +0.1%                 |
| (Prime up to 8.75% over 11 months)   |       |                  |
| Rates Up Significantly               |       | +0.2%                 |
| (Prime up to 9.75% over 11 months)   |       |                  |
| Rates Up Very Significantly          |       | +3.1%                 |
| (Prime up to 10.75% over 11 months)  |       |                  |

 

Net interest income under the above scenarios is influenced by thecharacteristics of the Company’s assets and liabilities. In the case of NOW,savings and money market deposits (total $1.065 billion) interest is based onrates set at the discretion of management ranging from 0.25% to 1.50%. In adownward rate environment, there is a limit to how far these depositinstruments can be re-priced and this behavior is similar to that of fixed rateinstruments. In an upward rate environment, the magnitude and timing of changesin rates on these deposits is assumed to be more reflective of variable rateinstruments.

 

It is important to note that the above table is a summary of severalforecasts and actual results may vary. The forecasts are based on estimates andassumptions of management that may turn out to be different and may change overtime. Factors affecting these estimates and assumptions include, but are notlimited to - competitors’ behavior, economic conditions both locally andnationally, actions taken by the Federal Reserve Board, customer behavior, andmanagement’s responses. Changes that vary significantly from the assumptions andestimates may have significant effects on the Company’s net interest income.Therefore the results of this analysis should not be relied upon as indicativeof actual future results. Historically, the Company has been able to manage itsNet Interest Income in a fairly narrow range reflecting the Company’s relativeinsensitivity 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 thelast 5 calendar years (2001 – 2005), the Company’s net interest margin (whichis net interest income divided by average earning assets of the Bank) hadranged from a low of 4.95% to a high of 6.06% (not taxable equivalent). TheCompany’s net interest

 

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margin in 2005 of 5.32% is inthe middle of this range by historical standards, coming off the higher levelsexperienced in 2001 of 6.06% and the low in 2004 of 4.95%. Recent increases ininterest rates (e.g. – fifteen 25 basis point increases in the Federal FundsRate and Prime Rate) which began at the end of June 2004 have led to animproving net interest margin for the Company to 5.61% in the first quarter of2006. The net interest margin under the forecasted alternative scenarios rangesfrom 5.33% to 5.98%. Management believes this range of scenarios is reasonablegiven current interest rate levels, but no assurances can be given that actualfuture experience will fall within this range.

 

The impact of competitive pricing on new loans resulting from increasedcompetition from other local community banks, continued intense competitionfrom the major banks, and the expanded influence of “conduit” financing in theCompany’s trade area by non-banks (the making of loans at attractive rates toborrowers which are pooled together, packaged and sold by Wall Street firms ascommercial mortgage backed securities to investors) partially offset thebenefit received from the higher prime rate during the quarter. While theupward movement in the Prime Rate is generally positive for the Company’s netinterest margin, the influences of competitive pricing and the refinancing ofexisting loans at lower rates can, and has to some extent, offset thesebenefits. Additionally, the Company’s discretionary priced liabilities such asNOW, Savings and Money Market accounts will likely come under increasingpressure to have their pricing increased in the current rate environment.Moreover, time deposits also are rolling over at ever higher interest ratelevels further contributing to downward pressure on the net interest margin.While the Company’s margin has generally improved over the past severalcalendar quarters, there can be no guarantee that this will continue and infact, Management believes it will tend to stabilize near current levels.

 

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

 

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

#### ** **

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

 

There was no change in the Company’s internal controls over financialreporting during the quarter ended March 31, 2006 that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlsover financial reporting.

 

In designing and evaluating disclosure controls and procedures, the Company’sManagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurances ofachieving the desired control objectives and Management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

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PART II -OTHER INFORMATION

 

**Item 1 -Legal Proceedings**

 

Mid-State isnot a party to any material legal proceeding.

 

**Item 1A. –Risk Factors**

 

There were nomaterial changes during the first quarter of 2006 in the risk factors disclosedin the Company’s December 31, 2005 Annual Report on Form 10K.

 

**Item 2 - Unregistered Sale of Equity Securities and Use of Proceeds**

 

On June 15, 2005 the Board authorized the repurchase of up to fivepercent of its outstanding shares, or up to 1,141,373 additional shares of theCompany’s common stock. This authorization does not have an expiration date.There were 215,831 shares of the Company’s common stock repurchased in thefirst quarter of 2006 at an average price of $28.50 per share. All of theseshares were purchased in open market transactions. As of March 31, 2006, theCompany is continuing the program and can repurchase up to 600,844 additionalshares under the June 2005 authorization. Effective in the middle of the secondquarter of 2006, the Board of Directors has authorized an increase in thenumber of shares repurchased on a daily basis to approximately 5,000 shares perday.

 

The followingtable provides the information with respect to the purchases made under thepublicly announced stock repurchase programs during the quarter ended March 31,2006. All of these shares were purchased in open market transactions or inblock purchases or in privately negotiated transactions in compliance withSecurities and Exchange Commission (SEC) rules.

 
| ** **        | ** ** | **Total**                 | ** ** | **Average Price** | ** ** | **Remaining Shares**                | ** ** | **Dollar Value of Shares**      | ** ** |
|-------------------|------------|---------------------------|------------|------------------------|------------|------------------------------------------|------------|------------------------------------------------|------------|
| ** **        | ** ** | **Number of**        | ** ** | **Paid**               | ** ** | **That May be Purchased** | ** ** | **That May be Purchased**       | ** ** |
| **Month of** | ** ** | **Shares Purchased** | ** ** | **Per Share**     | ** ** | **Under the Authorization**    | ** ** | **Under the Authorization (1)** | ** ** |
|              |       |                      |       |                   |       |                                     |       |                                           |       |
| January 2006      |       | 69,009                    |       | $                      | 27.92      |                                     | 747,666    |                                           | $          | 20,919,695 |   |
| February 2006     |       | 76,799                    |       | $                      | 28.45      |                                     | 670,867    |                                           | $          | 19,300,844 |   |
| March 2006        |       | 70,023                    |       | $                      | 29.11      |                                     | 600,844    |                                           | $          | 17,682,839 |   |
|              |       |                      |       |                   |       |                                     |       |                                           |       |
| Totals            |       | 215,831                   |       | $                      | 28.50      |                                     | 600,844    |                                           | $          | 17,682,839 |   |

 

----

(1) Value is based on the closing price of the Company’s stock at month-endmultiplied by the number of shares that may be purchased under theauthorization.

 

**Item 3 -Defaults Upon Senior Securities**

 

Not applicable.

 

30

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

 

There were no items presented to the security holders during the firstquarter of 2006.

 

**Item 5 -Other Information**

 

None.

 

**Item 6 -Exhibits**

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

 

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SIGNATURES

 

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

 
|              |   | Mid-State Bancshares |
|-------------------|--------|----------------------|
|              |   |                 |
|              |   |                 |
| Date: May 9, 2006 |   | By:                  | /s/ JAMES W. LOKEY |   |
|              |   |                 |   | JAMES W. LOKEY |
|              |   |                 |   | President and |
|              |   |                 |   | Chief Executive Officer |
|              |   |                 |   | (Principal Executive Officer) |
|              |   |                 |   |   |
|              |   |                 |   |   |
| Date: May 9, 2006 |   | By:                  | /s/ JAMES G. STATHOS |   |
|              |   |                 |   | JAMES G. STATHOS |
|              |   |                 |   | Executive Vice President and |
|              |   |                 |   | Chief Financial Officer |
|              |   |                 |   | (Principal Accounting Officer) |
|                   |        |                      |  |  |  |

 

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## **EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                           | ** ** | **Page No.** |
|-----------------|------------|---------------------------------------------------------------------------|------------|--------------|
| 31.1            |       | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |       | 29.          |
| 31.2            |       | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |       | 30.          |
| 32              |       | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |       | 31.          |

 

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