**United StatesSecurities and Exchange Commission****Washington, D.C. 20429**

**FORM 10-Q**

**x****                             ****Quarterly report under Section 13or 15(d) of the Securities Exchange Act of 1934.**

**For thequarterly period ended September 30, 2006.**

**o****                                ****Transition report under Section13 or 15(d) of the Securities Exchange Act of 1934 for the transition periodfrom      N/A      to      N/A.**

**Commission File Number 000-23925**

## **MID-STATEBANCSHARES****(**Exact name of registrant asspecified in its charter)

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

 

Registrant’s TelephoneNumber:    **(805) 473-7700**

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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act).  Checkone:

Large Accelerated Filer  o          AcceleratedFiler  x          Non-acceleratedFiler  o

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes  o    No  x

Numberof shares of common stock of the Company outstanding as of October 27, 2006:22,059,103 shares.

 

 

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**Mid-State Bancshares**September 30, 2006Index
|                                                                                                                                                                                    | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **PART  I - FINANCIAL INFORMATION**                                                                                                                                                |       |       |       |
| ** **                                                                                                                                                                         |       |       |       |
| Item  1 —Financial Statements (Unaudited except year end)                                                                                                                     |       |       |       |
|                                                                                                                                                                               |       |       |       |
| 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 - FinancialStatements**

**Mid-StateBancshares**ConsolidatedStatements of Financial Position(Unaudited - figures in 000’s)
| ** **                                                                                           | ** ** | **Sept. 30, 2006** | ** ** | **Dec. 31, 2005** | ** ** | **Sept. 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ASSETS                                                                                               |       |                         |       |                        |       |                         |       |
| Cash and Due From Banks                                                                              |       | $                            | 96,450     |                        | $          | 109,791                      |       | $ | 130,602 |   |
| Fed Funds Sold                                                                                       |       | 50,700                       |       | —                      |       | 32,100                       |       |
| Securities Available  For Sale                                                                       |       | 493,750                      |       | 619,332                     |       | 617,715                      |       |
| Loans Held for Sale                                                                                  |       | 12,675                       |       | 10,176                      |       | 10,391                       |       |
| Loans, net of unearned  income                                                                       |       | 1,573,970                    |       | 1,519,014                   |       | 1,497,704                    |       |
| Allowance for Loan  Losses                                                                           |       | (12,016                      | )          | (11,896                     | )          | (11,532                      | )          |
| Net Loans                                                                                            |       | 1,561,954                    |       | 1,507,118                   |       | 1,486,172                    |       |
| Premises and Equipment,  Net                                                                         |       | 32,344                       |       | 24,772                      |       | 24,635                       |       |
| Accrued Interest  Receivable                                                                         |       | 14,080                       |       | 13,947                      |       | 13,935                       |       |
| Goodwill                                                                                             |       | 47,840                       |       | 47,840                      |       | 47,840                       |       |
| Core Deposit  Intangibles, net                                                                       |       | 5,829                        |       | 6,483                       |       | 6,701                        |       |
| Senior Housing Crime  Prevention Foundation Investment                                               |       | 30,000                       |       | 30,000                      |       | 30,000                       |       |
| Other Assets                                                                                         |       | 21,642                       |       | 22,040                      |       | 22,282                       |       |
| Total Assets                                                                                         |       | $                            | 2,367,264  |                        | $          | 2,391,499                    |       | $ | 2,422,373 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                           |       |                         |       |                        |       |                         |       |
| Non-interest Bearing  Demand                                                                         |       | $                            | 533,961    |                        | $          | 567,782                      |       | $ | 589,601 |   |
| NOW Accounts, Money  Market and Savings Deposits                                                     |       | 1,000,933                    |       | 1,067,486                   |       | 1,088,091                    |       |
| Time Deposits Under  $100                                                                            |       | 253,101                      |       | 232,275                     |       | 232,062                      |       |
| Time Deposits $100 or  more                                                                          |       | 231,496                      |       | 202,063                     |       | 196,208                      |       |
| Total Deposits                                                                                       |       | 2,019,491                    |       | 2,069,606                   |       | 2,105,962                    |       |
| Other Borrowings                                                                                     |       | 48,595                       |       | 25,903                      |       | 23,680                       |       |
| Allowance for Losses  —Unfunded Commitments                                                     |       | 1,975                        |       | 1,761                       |       | 1,839                        |       |
| Accrued Interest  Payable and Other Liabilities                                                      |       | 22,610                       |       | 21,667                      |       | 19,206                       |       |
| Total  Liabilities                                                                                   |       | 2,092,671                    |       | 2,118,937                   |       | 2,150,687                    |       |
| Shareholders’ Equity:                                                                           |       |                         |       |                        |       |                         |       |
| Common Stock and  Surplus (Shares outstanding of 22,050, 22,520 and 22,623 respectively)             |       | 29,471                       |       | 42,343                      |       | 45,384                       |       |
| Retained Earnings                                                                                    |       | 244,390                      |       | 229,824                     |       | 224,349                      |       |
| Accumulated Other  Comprehensive Income net of tax provision of $488, $264, and $1,302  respectively |       | 732                          |       | 395                         |       | 1,953                        |       |
| Total Equity                                                                                         |       | 274,593                      |       | 272,562                     |       | 271,686                      |       |
| Total Liabilities and Equity                                                                         |       | $                            | 2,367,264  |                        | $          | 2,391,499                    |       | $ | 2,422,373 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

3

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**Mid-StateBancshares**ConsolidatedStatements of Income(Unaudited - figures in 000’s except earnings per share data)
| ** **                                                              | ** ** | **Three Month Period** | ** ** | **Nine Month Period** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **Ended Sept. 30,**    | ** ** | **Ended Sept. 30,**   | ** ** |
| ** **                                                              | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest Income:                                                        |       |                             |       |                            |       |   |   |   |   |
| Interest and fees on loans                                              |       | $                                | 31,474     |                            | $          | 26,780 |   | $ | 90,647 |   | $ | 76,533 |   |
| Interest on investment securities -                                     |       |                             |       |                            |       |   |   |   |   |
| U.S. Treasury securities                                                |       | 158                              |       | 189                             |       | 558 |   | 494 |   |
| U.S. Government agencies and corporations                               |       | 1,370                            |       | 1,562                           |       | 4,474 |   | 4,569 |   |
| Obligations of states and political sub-divisions  and other securities |       | 3,640                            |       | 3,936                           |       | 11,164 |   | 11,661 |   |
| Interest on fed funds sold and other                                    |       | 581                              |       | 456                             |       | 1,145 |   | 802 |   |
| Total Interest Income                                                   |       | 37,223                           |       | 32,923                          |       | 107,988 |   | 94,059 |   |
| Interest  Expense:                                                      |       |                             |       |                            |       |   |   |   |   |
| Interest on NOW, money market and savings                               |       | 2,143                            |       | 1,391                           |       | 5,302 |   | 3,321 |   |
| Interest on time deposits less than $100                                |       | 2,437                            |       | 1,452                           |       | 6,360 |   | 3,726 |   |
| Interest on time deposits of $100 or more                               |       | 2,383                            |       | 1,247                           |       | 6,034 |   | 3,030 |   |
| Interest other                                                          |       | 509                              |       | 234                             |       | 1,620 |   | 654 |   |
| Total Interest Expense                                                  |       | 7,472                            |       | 4,324                           |       | 19,316 |   | 10,731 |   |
| Net Interest  Income before provision                                   |       | 29,751                           |       | 28,599                          |       | 88,672 |   | 83,328 |   |
| Provision  (Benefit) for loan losses                                    |       | —                           |       | —                          |       | —- |   | — |   |
| Net Interest  Income after provision                                    |       | 29,751                           |       | 28,599                          |       | 88,672 |   | 83,328 |   |
| Other Operating  Income:                                                |       |                             |       |                            |       |   |   |   |   |
| Service charges and fees                                                |       | 2,551                            |       | 2,374                           |       | 7,600 |   | 7,094 |   |
| Commissions, fees and other service charges                             |       | 2,250                            |       | 2,238                           |       | 6,743 |   | 6,497 |   |
| Gain on sale of securities                                              |       | 100                              |       | —                          |       | (42 | ) | 88 |   |
| Gain on sale of loans held for sale                                     |       | 217                              |       | 179                             |       | 322 |   | 417 |   |
| Other non-interest income                                               |       | 349                              |       | 480                             |       | 1,783 |   | 1,948 |   |
| Total Other Operating Income                                            |       | 5,467                            |       | 5,271                           |       | 16,406 |   | 16,044 |   |
| Other Operating  Expense:                                               |       |                             |       |                            |       |   |   |   |   |
| Salaries and employee benefits                                          |       | 11,954                           |       | 11,105                          |       | 36,634 |   | 32,761 |   |
| Occupancy and furniture                                                 |       | 3,380                            |       | 3,105                           |       | 9,734 |   | 9,146 |   |
| Other operating expenses                                                |       | 5,942                            |       | 5,263                           |       | 17,459 |   | 15,112 |   |
| Total Other Operating Expense                                           |       | 21,276                           |       | 19,473                          |       | 63,827 |   | 57,019 |   |
| Income Before  Taxes                                                    |       | 13,942                           |       | 14,397                          |       | 41,251 |   | 42,353 |   |
| Provision for  income taxes                                             |       | 5,085                            |       | 4,905                           |       | 14,697 |   | 14,259 |   |
| Net Income                                                              |       | $                                | 8,857      |                            | $          | 9,492 |   | $ | 26,554 |   | $ | 28,094 |   |
| Earnings per  share:                                                    |       |                             |       |                            |       |   |   |   |   |
| – basic                                                            |       | $                                | 0.40       |                            | $          | 0.42 |   | $ | 1.19 |   | $ | 1.23 |   |
| – diluted                                                          |       | $                                | 0.39       |                            | $          | 0.41 |   | $ | 1.17 |   | $ | 1.20 |   |
| Dividends per  share                                                    |       | $                                | 0.18       |                            | $          | 0.16 |   | $ | 0.54 |   | $ | 0.48 |   |
| Average shares  used in earnings per share calculations:                |       |                             |       |                            |       |   |   |   |   |
| – basic                                                            |       | 22,055                           |       | 22,709                          |       | 22,247 |   | 22,869 |   |
| – diluted                                                          |       | 22,501                           |       | 23,231                          |       | 22,720 |   | 23,388 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

4

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**Mid-StateBancshares**ConsolidatedStatements of Comprehensive Income(Unaudited - figures in 000’s)
| ** **                                                             | ** ** | **Three Month Period** | ** ** | **Nine Month Period** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **Ended Sept. 30,**    | ** ** | **Ended Sept. 30,**   | ** ** |
| ** **                                                             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Income                                                             |       | $                                | 8,857      |                            | $          | 9,492 |   | $ | 26,554 |   | $ | 28,094 |   |
| Other  Comprehensive Income Before Taxes:                              |       |                             |       |                            |       |   |   |   |   |
| Unrealized gains  (losses) on securities available for sale:           |       |                             |       |                            |       |   |   |   |   |
| Unrealized  holding gains (losses) arising during period               |       | 7,007                            |       | (5,288                          | )          | 520 |   | (8,090 | ) |
| Reclassification  adjustment for (gains) losses included in net income |       | (100                             | )          | —                          |       | 42 |   | (88 | ) |
| Other  comprehensive income (loss), before tax                         |       | 6,907                            |       | (5,288                          | )          | 562 |   | (8,178 | ) |
| Income tax expense  (benefit) related to items in comprehensive income |       | 2,763                            |       | (2,115                          | )          | 225 |   | (3,271 | ) |
| Other  Comprehensive Income (Loss), Net of Taxes                       |       | 4,144                            |       | (3,173                          | )          | 337 |   | (4,907 | ) |
| Comprehensive Income                                                   |       | $                                | 13,001     |                            | $          | 6,319 |   | $ | 26,891 |   | $ | 23,187 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

5

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**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                                                                             |       | —             |       | —      |       | (11,988      | )          | —                 |       | (11,988    | )          |
| Exercise of stock options                                                                 |       | 138,795            |       | 1,922       |       | —       |       | —                 |       | 1,922      |       |
| Tax Benefit from exercise of options                                                      |       | —             |       | 724         |       | —       |       | —                 |       | 724        |       |
| Net income                                                                                |       | —             |       | —      |       | 26,554       |       | —                 |       | 26,554     |       |
| Change in net unrealized gain on available for sale  securities, net of taxes of $225     |       | —             |       | —      |       | —       |       | 337                    |       | 337        |       |
| Common stock issued under employee plans and related  tax benefits                        |       | —             |       | 1,403       |       | —       |       | —                 |       | 1,403      |       |
| Stock repurchased                                                                         |       | (608,876           | )          | (16,921     | )          | —       |       | —                 |       | (16,921    | )          |
|                                                                                      |       |               |       |        |       |         |       |                   |       |       |       |
| BALANCE, Sept.  30, 2006                                                                  |       | 22,050,353         |       | $           | 29,471     |         | $          | 244,390                | ** ** | $          | 732        |   | $ | 274,593 |   |
|                                                                                      |       |               |       |        |       |         | ** ** |                   |       |       |       |
| BALANCE, December  31, 2004                                                               |       | 23,099,159         |       | $           | 61,439     |         | $          | 206,328                |       | $          | 6,860      |   | $ | 274,627 |   |
| Cash dividend                                                                             |       | —             |       | —      |       | (10,941      | )          | —                 |       | (10,941    | )          |
| Exercise of stock options                                                                 |       | 246,880            |       | 3,660       |       | —       |       | —                 |       | 3,660      |       |
| Tax Benefit from exercise of options                                                      |       | —             |       | —      |       | 868          |       | —                 |       | 868        |       |
| Net income                                                                                |       | —             |       | —      |       | 28,094       |       | —                 |       | 28,094     |       |
| Change in net unrealized gain on available for sale  securities, net of taxes of ($3,271) |       | —             |       | —      |       | —       |       | (4,907                 | )          | (4,907     | )          |
| Stock repurchased                                                                         |       | (723,192           | )          | (19,715     | )          | —       |       | —                 |       | (19,715    | )          |
|                                                                                      |       |               |       |        |       |         |       |                   |       |       |       |
| BALANCE, Sept. 30, 2005                                                                   |       | 22,622,847         |       | $           | 45,384     |         | $          | 224,349                |       | $          | 1,953      |   | $ | 271,686 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

6

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**Mid-StateBancshares**ConsolidatedStatements of Cash Flows(Unaudited - figures in 000’s)
| ** **                                                                         | ** ** | **Nine Month Period** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **Ended Sept. 30,**   | ** ** |
| ** **                                                                         | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| OPERATING  ACTIVITIES                                                              |       |                            |       |   |   |
| Net Income                                                                         |       | $                               | 26,554     |   | $ | 28,094 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                            |       |   |   |
| Provision for credit losses                                                        |       | —                          |       | — |   |
| Depreciation and amortization                                                      |       | 3,920                           |       | 4,044 |   |
| Net amortization of prem./discounts-investments                                    |       | 2,080                           |       | 2,799 |   |
| Gain on sale of loans held for sale                                                |       | (322                            | )          | (417 | ) |
| Net (increase)decrease in loans held for sale                                      |       | (2,178                          | )          | 3,016 |   |
| Loss (gain) on sale of securities, net                                             |       | 42                              |       | (88 | ) |
| Change in deferred loan fees                                                       |       | 230                             |       | (340 | ) |
| Share based compensation                                                           |       | 1,403                           |       | — |   |
| Tax benefit for equity awards                                                      |       | (178                            | )          | — |   |
| Changes in assets and liabilities:                                                 |       |                            |       |   |   |
| Accrued interest  receivable                                                       |       | (133                            | )          | (2,017 | ) |
| Core deposit  intangible                                                           |       | 654                             |       | 1,031 |   |
| Other assets,  net                                                                 |       | 173                             |       | 69 |   |
| Other liabilities, net                                                             |       | 1,157                           |       | 1,580 |   |
| Net cash  provided by operating activities                                         |       | 33,402                          |       | 37,771 |   |
| INVESTING  ACTIVITIES                                                              |       |                            |       |   |   |
| Proceeds from  sales and maturities of investments                                 |       | 162,255                         |       | 125,265 |   |
| Purchases of  investments                                                          |       | (38,233                         | )          | (139,052 | ) |
| Increase in  loans                                                                 |       | (55,065                         | )          | (77,737 | ) |
| Purchases of  premises and equipment, net                                          |       | (11,492                         | )          | (3,733 | ) |
| Net cash  provided by (used in) investing activities                               |       | 57,465                          |       | (95,257 | ) |
| FINANCING  ACTIVITIES                                                              |       |                            |       |   |   |
| (Decrease)  increase in deposits                                                   |       | (50,115                         | )          | 111,417 |   |
| Increase in  other borrowings                                                      |       | 22,692                          |       | 17,098 |   |
| Exercise of  stock options and related tax benefit                                 |       | 2,824                           |       | 3,660 |   |
| Cash dividends  paid                                                               |       | (11,988                         | )          | (10,941 | ) |
| Repurchase of  company stock                                                       |       | (16,921                         | )          | (19,715 | ) |
| Net cash (used  in) provided by financing activities                               |       | (53,508                         | )          | 101,519 |   |
| (Decrease)  increase in cash and cash equivalents                                  |       | 37,359                          |       | 44,033 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 109,791                         |       | 118,669 |   |
| Cash and cash  equivalents, end of period                                          |       | $                               | 147,150    |   | $ | 162,702 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                            |       |   |   |
| Cash paid during  the period for interest                                          |       | $                               | 18,982     |   | $ | 9,782 |   |
| Cash paid during  the period for taxes on income                                   |       | 14,000                          |       | 14,457 |   |
| Supplemental  disclosure of non-cash investing activities:                         |       |                            |       |   |   |
| Transfer of security  investment to other assets                                   |       | —                          |       | 30,000 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

7

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

**Note A - Basis OfPresentation And 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 significantinter-company transactions have been eliminated in consolidation.  These consolidated financial statementsshould be read in conjunction with the Form 10-K Annual Report for the yearended December 31, 2005 of Mid-State Bancshares.  A summary of the Company’s significantaccounting policies is set forth in the Notes to Consolidated FinancialStatements 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 and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  In the opinion of management, all adjustmentsincluding normal recurring accruals considered necessary for a fairpresentation have been included. Operating results for the interim periods presented are not necessarilyindicative of the results that may be expected for any other interim period orfor the year as a whole.

**Note B - EarningsPer 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 pershare data.
| ** **                                | ** ** | **Three Month Period Ended** | ** ** | **Three Month Period Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **Sept. 30, 2006**                | ** ** | **Sept. 30, 2005**                | ** ** |
| ** **                                | ** ** | **Net Income**                         | ** ** | **Shares**                                  | ** ** | **EPS** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Net Income as  reported                   |       | $                                           | 8,857      |                                        |       |   |   |   | $ | 9,492 |   |   |   |   |   |
|                                      |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share:                |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Income available  to  Common Shareholders |       | $                                           | 8,857      |                                        | 22,055     |   | $ | 0.40 |   | $ | 9,492 |   | 22,709 |   | $        0.42 |   |
|                                      |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:           |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Stock Options and Restricted Shares       |       |                                        |       | 446                                         |       |   |   |   |   | 522 |   |   |   |
|                                      |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted Earnings  Per Share:              |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Income available to  Common Shareholders  |       | $                                           | 8,857      |                                        | 22,501     |   | $ | 0.39 |   | $ | 9,492 |   | 23,231 |   | $ | 0.41 |   |
|                                           |            |                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

8

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** **
| ** **                                | ** ** | **Nine Month Period Ended** | ** ** | **Nine Month Period Ended** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **Sept. 30, 2006**               | ** ** | **Sept. 30, 2005**               | ** ** |
| ** **                                | ** ** | **Net Income**                        | ** ** | **Shares**                                 | ** ** | **EPS** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **EPS** | ** ** |
| Net Income as  reported                   |       | $                                          | 26,554     |                                       |       |   |   |   | $ | 28,094 |   |   |   |   |   |
|                                      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic Earnings  Per Share:                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Income available to  Common Shareholders  |       | $                                          | 26,554     |                                       | 22,247     |   | $ | 1.19 |   | $ | 28,094 |   | 22,869 |   | $ | 1.23 |   |
|                                      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities:           |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Stock Options and Restricted Shares       |       |                                       |       | 473                                        |       |   |   |   |   | 519 |   |   |   |
|                                      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Diluted Earnings  Per Share:              |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Income available  to  Common Shareholders |       | $                                          | 26,554     |                                       | 22,720     |   | $ | 1.17 |   | $ | 28,094 |   | 23,388 |   | $ | 1.20 |   |

 

**Note C — RecentAccounting Pronouncements**

In June2004, the Emerging Issues Task Force of the Financial Accounting StandardsBoard (FASB) issued guidance on its Issue No. 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”  The guidance made recommendations regardingunrealized losses on available-for-sale debt and equity securities accountedfor under Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debtand 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 in annual financial statements forfiscal years ending after December 15, 2003, for investments accounted forunder Statements 115 and 124.  OnSeptember 30, 2004, the FASB Board directed the issuance of FASB Staff Position(FSP) EITF Issue 03-1-a, “Implementation Guidance for the Application ofParagraph 16 of EITF Issue No. 03-1.” The proposed FSP would provide implementation guidance with respect todebt securities that are impaired solely due to interest rates and/or sectorspreads and analyzed for other-than-temporary impairment under paragraph 16 of issue03-1.  The FASB asked constituents tocomment on whether the application guidance with respect to “minor impairments”should also be applied to securities analyzed for impairment under paragraphs10-15 of Issue 03-1.  At the June 29,2005 meeting, the Board decided not to provide additional guidance on themeaning of other-than-temporary impairment and directed the staff to finalizeproposed FASB Staff Position (FSP) EITF 03-1-a, “Implementation Guidance forthe Application of Paragraph 16 of EITF Issue No. 03-1.” The final FSP,retitled as FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment andIts Application 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”;

9

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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; and

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

At the September 7, 2005 meeting, the Board directed the staff toconsider transition guidance for the proposed FSP.  At the September 14, 2005 meeting, the Boarddecided 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.  Inaddition, the Board decided that (1) transition would be applied prospectivelyand (2) the effective date would be reporting periods beginning after December15, 2005.  Adoption of EITF Issue 03-1-adid not have a material impact on the Company’s results of operations or itsfinancial position.

The FASB issued arevision to SFAS No. 123, “Accounting for Stock-Based Compensation” in December2004.  The revised Statement is SFAS No.123(R) (revised 2004), “Share-Based Payment” and it supersedes APB Opinion No.25, “Accounting for Stock Issued to Employees,” and its related implementationguidance.  It is effective for theCompany as of January 1, 2006.  TheStatement requires that the Company measure the cost of employee servicesreceived in exchange for an award of equity instruments (share based paymentawards) based on the grant date fair value of the award and the estimatednumber of awards that are expected to vest. The cost will be recognized over the period during which an employee isrequired to provide service in exchange for the award — usually the vestingperiod.  Compensation cost for awardsthat vest would not be reversed if the awards expire without beingexercised.  The Company previouslyapplied APB Opinion No. 25, in accounting for its share based paymentawards.  Accordingly, no compensationexpense was recognized for grants of these types of awards prior to 2006.  Pro forma disclosures of net income andearnings per share were disclosed in Note 15 of the Company’s Annual Report onForm 10K.  The Company adopted therevised Statement for the first quarter of 2006.  The impact of adopting the accountingtreatment was to reduce earnings by approximately $419 thousand, after-tax, forthe three months ended September 30, 2006. For the Nine Months ended September 30, 2006, earnings were reduced byapproximately $1.2 million, after-tax.

FASB issued SFASNo. 154, “*Accounting Changes and Error Corrections”* on June 1, 2005, a replacement ofAPB No. 20 and SFAS No. 3.  The Statementapplies to all voluntary changes in accounting principle, and changes therequirements for accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable.  APB No. 20 previously required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of the change the cumulative effect of changing to the newaccounting principle.  SFAS No. 154improves financial reporting because its requirements enhance the consistencyof financial information between periods. SFAS No. 154 is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005.  Adoption of the Statement did not have amaterial effect on the Company’s consolidated financial statements.

FASB issued SFASNo. 155, “*Accounting for Certain Hybrid Instruments,*”on February 16, 2006 as an amendment of FASB Statements No. 133 and 140.  The standard allows financial instrumentsthat have embedded derivatives to be accounted for as a whole (eliminating theneed to bifurcate the derivative from its host) if the holder elects to accountfor the whole instrument on a fair value basis. The standard also: a) clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of Statement 133; 

10

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b) establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orthat are hybrid financial instruments that contain an embedded derivativerequiring bifurcation; c) clarifies that concentrations of credit risk in theform of subordination are not embedded derivatives; and d) amends Statement 140to eliminate the prohibition on a qualifying special-purpose entity fromholding a derivative financial instrument that pertains to a beneficialinterest other than another derivative financial instrument.  The Company expects to adopt the Statementfor the first quarter of 2007 and expects it will not have a material effect onits consolidated financial statements.

The FASB issuedSFAS No. 156, “*Accounting for Servicing ofFinancial Assets”* on March 17, 2006 as an amendment to SFAS No.140.  The standard will simplify theaccounting for servicing assets and liabilities, such as those common withmortgage securitization activities. Specifically, the new Standard addresses the recognition and measurementof separately recognized servicing assets and liabilities and provides anapproach to simplify efforts to obtain hedge-like (offset) accounting.  The standard also clarifies when an obligationto service financial assets should be separately recognized as a servicingasset or a servicing liability, requires that a separately recognized servicingasset or servicing liability be initially measured at fair value, ifpracticable, permits an entity with a separately recognized servicing asset orservicing liability to choose either the amortization method or fair valuemethod for subsequent measurement.  SFASNo. 156 permits a servicer that uses derivative financial instruments to offsetrisks on servicing to report both the derivative financial instrument andrelated servicing asset or liability by using a consistent measurementattribute — 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.

On July 13, 2006the FASB released Financial Interpretation Number (FIN) 48, “*Accounting for Uncertainty in Income Taxes-an interpretation of FASBStatement 109”.*  TheInterpretation provides definitive guidance and disclosure requirements relatedto income tax uncertainties.  FIN 48prescribes a comprehensive model for how a company should recognize, measure,present, and disclose in its financial statements uncertain tax positions thatthe company has taken or expects to take on a tax return.  Under the Interpretation, the financialstatements will reflect expected future tax consequences of such positionspresuming the taxing authorities’ full knowledge of the position and allrelevant facts, but without considering time values.  The Interpretation also revises disclosurerequirements to include a tabular roll-forward of any unrecognized taxbenefits.  The Interpretation iseffective for annual periods beginning after December 15, 2006.  The Company does not expect it will have amaterial effect on its consolidated financial statements.

The FASB issuedStatement of Financial Accounting Standards No. 157, “*Fair Value Measurements”*(FAS 157)*,*onSeptember 15, 2006, which defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles (GAAP) andexpands disclosures about fair value measurement.  FAS 157 will apply whenever another standardrequires (or permits) assets or liabilities to be measured at fair value. Thestandard does not expand the use of fair value to any new circumstances.  FAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years.  The Companydoes not expect it will have a material effect on its consolidated financialstatements.

On September 29,2006, the FASB issued Statement of Financial Accounting Standards No. 158, “*Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans”*(FAS158). This Statement requires employers to recognize the over funded or underfunded status of a single-employer defined benefit postretirement plan as anasset or liability in its statement of financial position and recognize anychanges in that status in comprehensive income in the year in which itoccurs.  It also requires that employersmeasure the funded status of a plan as of the date of its year-end statement offinancial position.  The Statement doesnot change how plans are accounted for and reported in the incomestatement.  For publicly tradedcompanies, FAS158 is

11

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effective forfiscal years ending after December 15, 2006. The Company does not expect that it will have a material effect on itsconsolidated financial statements.

**Note D — Core DepositIntangibles, Net**

The following is asummary of the Company’s core deposit intangibles.
| ** **                                      | ** ** | **Sept. 30, 2006** | ** ** | **Sept. 30, 2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Gross**                    | ** ** | **Accumulated**              | ** ** | **Net Carrying** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| **($ in 000’s, unaudited)** | ** ** | **Amount**                   | ** ** | **Amortization**             | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Core Deposit  Intangible                        |       | $                            | 11,597     |                         | ($5,768    | ) | $ | 5,829 |   | $ | 11,597 |   | ($4,896 | ) | $ | 6,701 |   |
|                                                 |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                      | ** ** | **Dec. 31, 2005** | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Gross**              | ** ** | **Accumulated**  | ** ** | **Net Carrying** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **($ in 000’s, unaudited)** | ** ** | **Amount**             | ** ** | **Amortization** | ** ** | **Amount** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Core Deposit  Intangible                        |       | $                      | 11,597     |             | ($5,114    | ) | $ | 6,483 |   |   |   |   |   |   |   |
|                                                 |            |                        |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

*AggregateAmortization Expense of Core Deposit Intangibles:*
| ** **                                      | ** ** | **Three Month Period**                                                                                                                                           | ** ** | **Nine Month Period**                                                                                                                                                        | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Ended Sept. 30,**                                                                                                                                              | ** ** | **Ended Sept. 30,**                                                                                                                                                          | ** ** |
| **($ in 000’s, unaudited)** | ** ** | **              2006             ** | ** ** | **               2005              ** | ** ** | **               2006              ** | ** ** | **               2005              ** | ** ** |
| Amortization of  Core Deposit Intangible        |       | $                                                                                                                                                                          | 218        |                                                                                                                                                                                   | $          | 344 |   | $ | 654 |   | $ | 1,031 |   |
|                                                 |            |                                                                                                                                                                            |            |                                                                                                                                                                                        |            |  |  |  |  |  |  |  |  |

 

The amortizationexpense for core deposit intangibles is included within other operatingexpenses on the consolidated 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 projectedamortization expense for core deposit intangibles, assuming no further  acquisitions or dispositions or changes inamortization rates, is approximately $872 thousand per year over the next sixyears.

**Note E — StockBased 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 2005Plan provides for the grant of stock options, stock appreciation rights,restricted shares, restricted share units, performance based cash only awards,or any combination thereof.  It replacedthe 1996 Stock Option Plan which was limited in scope to the issuance of StockOptions.  Shares available for issuance underthe 1996 Plan are now included in the 2005 Plan, resulting in 930,961 sharescurrently being available to be issued (4.22% of current and issued outstandingcommon stock) as of September 30, 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. 123(R), “Share BasedPayment.”  This standard

12

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requires that allshare-based compensation awards be measured at fair value at the date of grantand expensed over their vesting or service periods.  The impact of adopting the new accountingtreatment was to reduce income before tax and net income by approximately $490and $419 thousand, respectively, for the three months ended September 30,2006.  On a per share basis, thisamounted to two cents per share on both a basic and diluted basis.  For the nine months ended September 30, 2006,the impact was to reduce income before tax and net income by approximately $1.4million and $1.2 million, respectively. This amounted to approximately five cents per share on both a basic anddiluted basis.

Prior to 2006, theCompany accounted for stock options under the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25 and provided proforma net income andproforma earnings per share disclosures for employee stock option grants as ifthe fair-value-based method, defined in SFAS No. 123(R) had been applied.  A summary of the proforma disclosure as ofSeptember 30, 2005 was as follows:
| ** **                                                                                                                         | ** ** | **Three Month Period** | ** ** | **Nine Month Period** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                         | ** ** | **Ended Sept. 30,**    | ** ** | **Ended Sept. 30,**   | ** ** |
| **($ in 000’s except per share amounts)**                                                       | ** ** | **2005**                         | ** ** | **2005**                        | ** ** |
| Net income, as  reported                                                                                                           |       | $                                | 9,492      |                            | $          | 28,094 |   |
| Deduct: Total  stock-based compensation expense determined under the fair value based method  for all awards, net of related taxes |       | (609                             | )          | (1,769                          | )          |
|                                                                                                                               |       |                             |       |                            |       |
| Proforma net  income                                                                                                               |       | $                                | 8,883      |                            | $          | 26,325 |   |
|                                                                                                                               |       |                             |       |                            |       |
| Basic income per  share, as reported                                                                                               |       | $                                | 0.42       |                            | $          | 1.23 |   |
| Proforma basic  income per share                                                                                                   |       | $                                | 0.39       |                            | $          | 1.15 |   |
|                                                                                                                               |       |                             |       |                            |       |
| Diluted income  per share, as reported                                                                                             |       | $                                | 0.41       |                            | $          | 1.20 |   |
| Proforma diluted income  per share                                                                                                 |       | $                                | 0.38       |                            | $          | 1.13 |   |

 

In determining thepro forma disclosures in the previous table, the fair value of options grantedwas estimated on the date of grant using the Black-Scholes option pricing modeland appropriate assumptions.  For optionsgranted during 2006, the weighted average grant date fair values were based onthe following assumptions:

·                  Risk FreeInterest Rate = 4.6%

·                  Dividend Yield =2.5%

·                  Stock PriceVolatility = 34.9%

·                  Weighted Avg.Expected Lives of Option Grants = 8.5 years

Option awards aregranted with an exercise price equal to the market price of the Company’scommon stock on the date of grant.  Whileoptions are exercisable and expire as determined by the Board of Directors,they generally become exercisable over a five year period vesting 20% eachyear, 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.  Risk free rates of interest were applied inthe model as of the grant date based on data provided by the Federal ReserveBank 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 theCompany’s stock price applied in the model was based on historical informationfrom 1998 (when the Company was first listed on NASDAQ) through March 31,2006.  The expected average life appliedin the model was estimated from historical information from 1998 through March31, 2006 and was calculated by major employee groups.  

13

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Compensation costis recognized using a straight-line method over the vesting or service periodand is net of estimated forfeitures.

The followingtables show 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 from  Jan. 1 to Sept. 30, 2006   |       | 77,503                           |       | $            | 29.00      |                  | $          | 29.0 — $29.00 |   |
|                                     |       |                             |       |         |       |                  |       |
| Exercised from  Jan. 1 to Sept. 30, 2006 |       | (138,795                         | )          | $            | 13.85      |                  | $          | 5.375 — $25.79 |   |
|                                     |       |                             |       |         |       |                  |       |
| Forfeited from  Jan. 1 to Sept. 30, 2006 |       | (9,262                           | )          | $            | 18.22      |                  | $          | 15.50 — $24.64 |   |
|                                     |       |                             |       |         |       |                  |       |
| Outstanding at  Sept. 30, 2006           |       | 1,930,404                        |       | $            | 19.98      |                  | $          | 2.125 — $30.61 |   |
|                                     |       |                             |       |         |       |                  |       |
| Exercisable at  Sept. 30, 2006           |       | 1,272,661                        |       | $            | 17.26      |                  | $          | 2.125 — $30.61 |   |
|                                     |       |                             |       |         |       |                  |       |
| Range of Expiration  Dates               |       | 8/12/2008 to 2/16/2016 |       |         |       |

 

 
| ** **                                  | ** ** | **Total**       | ** ** | **Weighted Average**  | ** ** | **Weighted Average** | ** ** | **Weighted Average** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|-----------------|------------|----------------------------|------------|---------------------------|------------|---------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **Amount**      | ** ** | **Remaining**              | ** ** | **Exercise**              | ** ** | **Amount**                | ** ** | **Exercise** | ** ** |
| **Range of Exercise Prices** | ** ** | **Outstanding** | ** ** | **Contractual Years** | ** ** | **Price**                 | ** ** | **Exercisable**           | ** ** | **Price**    | ** ** |
| $9.183 - $12.244                            |       | 12,000          |       | 3.5                        |       | $                         | 12.125     |                      | 12,000     |         | $          | 12.125 |   |
| $12.245 - $15.305                           |       | 415,418         |       | 3.0                        |       | $                         | 14.532     |                      | 415,418    |         | $          | 14.532 |   |
| $15.306 - $18.366                           |       | 785,075         |       | 4.2                        |       | $                         | 16.903     |                      | 670,902    |         | $          | 16.877 |   |
| $18.367 - $21.427                           |       | 10,000          |       | 5.9                        |       | $                         | 19.590     |                      | 7,600      |         | $          | 19.568 |   |
| $21.428 - $24.488                           |       | 72,400          |       | 7.5                        |       | $                         | 22.792     |                      | 28,200     |         | $          | 22.761 |   |
| $24.489 - $27.549                           |       | 318,637         |       | 7.8                        |       | $                         | 25.882     |                      | 90,673     |         | $          | 25.488 |   |
| $27.550 - $30.610                           |       | 316,874         |       | 8.6                        |       | $                         | 28.486     |                      | 47,868     |         | $          | 28.320 |   |
|                                        |       |            |       |                       |       |                      |       |                      |       |         |       |
| Total                                       |       | 1,930,404       |       | 5.4                        |       | $                         | 19.981     |                      | 1,272,661  |         | $          | 17.257 |   |

 

The weightedaverage fair value of grants issued in the first three quarters of 2006 was$10.45 per option share.  The weightedaverage fair value of all grants outstanding as of September 30, 2006 was $6.98per option share. The aggregate intrinsic value for vested options exercisableat September 30, 2006 was $12.9 million and the aggregate intrinsic value ofunvested options not yet exercisable at September 30, 2006 was $1.7 million.

The Company issued26,229 restricted stock shares during the second quarter and 2,500 restrictedstock shares during the third quarter of 2006. These restricted shares will vest three years from the date of grant andvesting is

14

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subject tocontinued employment at the Company through the vesting date.  Holders of restricted shares will have theright to receive dividends and vote the shares, but may not sell, assign,transfer, pledge or otherwise encumber the stock until after the shares arefully vested.  The aggregate intrinsicvalue of these awards was $771 thousand as of September 30, 2006.  A summary of restricted shares outstanding isas follows:
| ** **                               | ** ** | ** **         | ** ** | **Aggregate**                 | ** ** |
|------------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Number of** | ** ** | **Average**                   | ** ** |
| ** **                               | ** ** | **Restricted**     | ** ** | **Intrinsic**                 | ** ** |
| ** **                               | ** ** | **Shares**         | ** ** | **Value Per Share** | ** ** |
| Outstanding at  December 31, 2005        |       | 0                  |       | —                        |       |
|                                     |       |               |       |                          |       |
| Granted from  Jan. 1 to Sept. 30, 2006   |       | 28,729             |       | $                             | 29.09      |   |
|                                     |       |               |       |                          |       |
| Vested from Jan.  1 to Sept. 30, 2006    |       | 0                  |       | —                        |       |
|                                     |       |               |       |                          |       |
| Forfeited from  Jan. 1 to Sept. 30, 2006 |       | (559               | )          | $                             | 28.53      |   |
|                                     |       |               |       |                          |       |
| Outstanding at Sept.  30, 2006           |       | 28,170             |       | $                             | 29.10      |   |

 

Compensationexpense on restricted stock shares is accounted for using the straight-line methodover the vesting or service period and is net of estimated forfeitures.  The amount recognized was $66 thousand and$123 thousand, pre-tax, for the three months and nine months ended September30, 2006, respectively.

Unamortizedcompensation expense at September 30, 2006 amounted to approximately $4.0million related to stock options outstanding and $0.7 million on restrictedstock awards.  The expense associatedwith stock options is expected to be recognized over a weighted average life of1.50 years, assuming an estimated 5% forfeiture rate.  The expense associated with restricted stockawards is expected to be recognized over a weighted average life of 1.27 years,assuming an estimated 2% forfeiture rate.

**Note F — SeniorHousing Crime Prevention Foundation Investment**

During the secondquarter of 2005, the Company made an investment of $30.0 million in a securityof a U.S. government agency.  Thatsecurity was then exchanged for an interest bearing investment in the SeniorHousing Crime Prevention Foundation Investment Corporation (SHCPF-I) with theU.S. government agency security held in safekeeping reflecting ownership bySHCPF-I and the pledge of that security in favor of Mid-State Bank &Trust.  The investment provides fundingfor the Senior Housing Crime Prevention Foundation in its efforts to preventelder abuse in nursing homes throughout the Company’s service area.  This investment is displayed separatelywithin the Company’s Consolidated Statements of Financial Position.

15

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**Note G —Reportable Business Segments**

Below is a summarystatement of income for the three months and nine months ended September 30,2006 and 2005 for each reportable business segment.

Three Months Ended Sept.30,
| ** **                                                       | ** ** | **Community Banking** | ** ** | **Mid Coast Land  Company** | ** ** | **Trust Services** | ** ** | **Mid-State Bancshares** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| **(unaudited — dollars in 000’s)** | ** ** | **2006**                   | ** ** | **2005**                              | ** ** | **2006**                | ** ** | **2005**                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest Income                                                  |       | $                          | 37,223     |                                  | $          | 32,923                  |       | $                             | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 37,223 |   | $ | 32,923 |   |
| Interest Expense                                                 |       | 7,472                      |       | 4,324                                 |       | —                  |       | —                        |       | — |   | — |   | 7,472 |   | 4,324 |   |
| Net Interest Income                                              |       | 29,751                     |       | 28,599                                |       | —                  |       | —                        |       | — |   | — |   | 29,751 |   | 28,599 |   |
| Provision for  Loan Losses                                       |       | —                     |       | —                                |       | —                  |       | —                        |       | — |   | — |   | — |   | — |   |
| Non-interest  Income                                             |       | 5,020                      |       | 4,749                                 |       | 58                      |       | 179                           |       | 389 |   | 343 |   | 5,467 |   | 5,271 |   |
| Non-interest  Expense                                            |       | 20,968                     |       | 19,229                                |       | 4                       |       | 3                             |       | 304 |   | 241 |   | 21,276 |   | 19,473 |   |
| Pre-Tax Income                                                   |       | $                          | 13,803     |                                  | $          | 14,119                  |       | $                             | 54         |   | $ | 176 |   | $ | 85 |   | $ | 102 |   | $ | 13,942 |   | $ | 14,397 |   |

 

NineMonths Ended Sept. 30,
| ** **                                                       | ** ** | **Community Banking** | ** ** | **Mid Coast Land  Company** | ** ** | **Trust Services** | ** ** | **Mid-State Bancshares** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| **(unaudited — dollars in 000’s)** | ** ** | **2006**                   | ** ** | **2005**                              | ** ** | **2006**                | ** ** | **2005**                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest Income                                                  |       | $                          | 107,988    |                                  | $          | 94,059                  |       | $                             | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 107,988 |   | $ | 94,059 |   |
| Interest Expense                                                 |       | 19,316                     |       | 10,731                                |       | —                  |       | —                        |       | — |   | — |   | 19,316 |   | 10,731 |   |
| Net Interest  Income                                             |       | 88,672                     |       | 83,328                                |       | —                  |       | —                        |       | — |   | — |   | 88,672 |   | 83,328 |   |
| Provision for  Loan Losses                                       |       | —                     |       | —                                |       | —                  |       | —                        |       | — |   | — |   | — |   | — |   |
| Non-interest  Income                                             |       | 15,047                     |       | 14,603                                |       | 263                     |       | 529                           |       | 1,096 |   | 912 |   | 16,406 |   | 16,044 |   |
| Non-interest  Expense                                            |       | 62,879                     |       | 56,321                                |       | 16                      |       | 9                             |       | 932 |   | 689 |   | 63,827 |   | 57,019 |   |
| Pre-Tax Income                                                   |       | $                          | 40,840     |                                  | $          | 41,610                  |       | $                             | 247        |   | $ | 520 |   | $ | 164 |   | $ | 223 |   | $ | 41,251 |   | $ | 42,353 |   |

 

The description ofhow the Company determines its reportable business segments is discussed inNote 18 to the consolidated financial statements in its Annual Report on Form10-K.  There have been no significantchanges to the organization or internal reporting of the Company’s businesssegments since that time.

**Note H —Guarantees**

The Company hasguarantees outstanding under performance standby letter of creditaccommodations made to its customers in the ordinary course of businesstotaling $39.1 million at September 30, 2006, down from $52.0 million one yearearlier.

Letters of creditare issued in connection with agreements made by customers tocounterparties.  Terms of these lettersof credit are generally for one year and may or may not be collateralized byreceivables or other assets.  If thecustomer fails to comply with the agreement, the counterparty may enforce theletter of credit as a remedy.  Creditrisk arises from the possibility that the customer may not be able to repay theCompany.  The notional amount of theletter of credit accommodations represents the maximum amount of future cashpayments.

16

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Many of thecommitments are expected to expire without being drawn upon.  Accordingly, the total outstanding commitmentamount does not necessarily represent future cash requirements.  The Company does not anticipate anysignificant losses as a result of these transactions.  Provision has been made for losses which maybe sustained in the fulfillment of, or from an inability to fulfill, anycommitments.  The provision at September30, 2006 was $2.0 million, compared to $1.8 million one year earlier, and isreflected on the Consolidated Statements of Financial Position as Allowance forLosses — Unfunded Commitments.

**Note I — MergerAgreement**

On November 1,2006, the Company and VIB Corp entered into an agreement and plan of mergerpursuant to which Mid-State Bancshares will be merged into VIB Corp andMid-State Bank & Trust will be merged into VIB Corp’s subsidiary bank,Rabobank, National Association (“Rabobank”).  The boards of directors of the Company and VIBCorp have approved the transaction. Subject to the terms and conditions of the merger agreement, at theclosing the Company’s common stock shareholders will receive $37.00 in cash foreach share of the Company’s common stock that they own.  The merger is subject to customary closingconditions, including the approval of the Company’s shareholders and bankingregulators.  Once all approvals arereceived, the merger is expected to close in the second quarter of 2007.

The mergeragreement includes terms and conditions which affect the conduct of the Company’sbusiness until the merger is completed or the agreement is terminated.  Among other items, it generally requires theCompany to carry on business in its ordinary course consistent with pastpractice and in accordance with sound banking practices, and to observe in allmaterial respects its legal and contractual obligations.  The merger agreement generally restricts the abilityof the Company to make material changes in any aspect of the conduct of itsbusiness without the consent of Rabobank, including significant capitalexpenditures, new material lines of business, the disposition of assets or theincurring of obligations outside the ordinary course of business.  The Company is in compliance with itsobligations under the merger agreement.

In connection withthe merger, James W. Lokey, President and Chief Executive Officer of Mid-StateBancshares and Carrol R. Pruett, Chairman of the Board of Mid-State Bancshares,have agreed to become directors of Rabobank, National Association at theclosing of the transaction.

**Item 2 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

The following ismanagement’s discussion and analysis of the major factors that influenced ourfinancial performance for the three months and nine months ended September 30,2006.  This analysis should be read inconjunction with our 2005 Annual Report as filed on Form 10-K and with theunaudited financial statements and notes as set forth in this report.  Unless the context requires otherwise, theterms “Company,” “us,” “we,” and “our” refers to Mid-State Bancshares on aconsolidated 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.  Theseforward-looking statements relate to, among other things, our currentexpectations regarding future operating results, net interest margin, strengthof the local economy, our loan mix, cost of deposits and the recovery ofunrealized losses in the investment portfolio and allowance for creditlosses.  These forward looking statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, performance or achievements to be materially different fromany future results, performance or achievements expressed or implied by suchforward-looking statements.  Such factorsinclude, among others, those concerning: (i) the Company’s strategies,

17

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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 nonperforming loans; (iv) the Company’s beliefsand expectations concerning future operating results; (v) the growth of itsloan portfolio, changes in its loan mix and changes in its net interest margin;and (vi) the strength of the economy and the increasing levels of competitionin its service area.  Additionalinformation on these and other factors that could affect financial results maybe found in the Company’s 2005 Annual Report as filed on form 10-K, included in“Item 1A. Risk Factors.”  When relying onforward-looking statements to make decisions with respect to our Company,investors and others are cautioned to consider these and other risks anduncertainties.  We disclaim anyobligation to update any such factors or to publicly announce the results ofany revisions to any of the forward-looking statements contained herein toreflect future events or developments.

***CriticalAccounting Policies and Estimates***   This “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” as well as disclosures includedelsewhere in this Form 10-Q, are based upon the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of these financial statementsrequire Management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues, expenses and related disclosure ofcontingencies.  A summary of the moresignificant accounting policies of the Company can be found in Note 1 to thefinancial statements which is included in Item 8 of the Company’s Annual Reporton Form 10-K and in the Management’s Discussion and Analysis included in Item 7of that same report entitled “Critical Accounting Policies and Estimates.”

***MergerAgreement***   OnNovember 1, 2006, the Company and VIB Corp entered into an agreement and planof merger pursuant to which Mid-State Bancshares will be merged into VIB Corpand Mid-State Bank & Trust will be merged into VIB Corp’s subsidiary bank,Rabobank, National Association (“Rabobank”). Subject to the terms and conditions of the merger agreement, at theclosing the Company’s common stock shareholders will receive $37.00 in cash foreach share of the Company’s common stock that they own.  The merger is subject to customary closingconditions, including the approval of the Company’s shareholders and bankingregulators.  Once all approvals arereceived, the merger is expected to close in the second quarter of 2007.

18

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***SelectedFinancial Data - Summary***   The following table provides certainselected consolidated financial data as of and for the three and nine monthsending September 30, 2006 and 2005 (unaudited in 000’s, except per share data).
| ** **                                                         | ** ** | **At or for the 3 months ended** | ** ** | **At or for the 9 months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(In 000’s, except per share data** | ** ** | **Sept. 30, 2006**                                   | ** ** | **Sept. 30, 2005**                                   | ** ** | **Sept. 30, 2006** | ** ** | **Sept. 30, 2005** | ** ** |
| Interest Income                                                    |       | $                                                              | 37,223     |                                                           | $          | 32,923 |   | $ | 107,988 |   | $ | 94,059 |   |
| Interest Expense                                                   |       | 7,472                                                          |       | 4,324                                                          |       | 19,316 |   | 10,731 |   |
| Net Interest Income                                                |       | 29,751                                                         |       | 28,599                                                         |       | 88,672 |   | 83,328 |   |
| Provision for Loan  Losses                                         |       | —                                                         |       | —                                                         |       | — |   | — |   |
| Net Interest Income  after provision for loan losses               |       | 29,751                                                         |       | 28,599                                                         |       | 88,672 |   | 83,328 |   |
| Non-interest income                                                |       | 5,467                                                          |       | 5,271                                                          |       | 16,406 |   | 16,044 |   |
| Non-interest expense                                               |       | 21,276                                                         |       | 19,473                                                         |       | 63,827 |   | 57,019 |   |
| Income before income  taxes                                        |       | 13,942                                                         |       | 14,397                                                         |       | 41,251 |   | 42,353 |   |
| Provision for income  taxes                                        |       | 5,085                                                          |       | 4,905                                                          |       | 14,697 |   | 14,259 |   |
| Net Income                                                         |       | $                                                              | 8,857      |                                                           | $          | 9,492 |   | $ | 26,554 |   | $ | 28,094 |   |
|                                                               |       |                                                           |       |                                                           |       |   |   |   |   |
| **Per share:**                                                     |       |                                                           |       |                                                           |       |   |   |   |   |
| Net Income - basic                                                 |       | $                                                              | 0.40       |                                                           | $          | 0.42 |   | $ | 1.19 |   | $ | 1.23 |   |
| Net Income - diluted                                               |       | $                                                              | 0.39       |                                                           | $          | 0.41 |   | $ | 1.17 |   | $ | 1.20 |   |
| Weighted average shares  used in Basic E.P.S. calculation          |       | 22,055                                                         |       | 22,709                                                         |       | 22,247 |   | 22,869 |   |
| Weighted average shares  used in Diluted E.P.S. calculation        |       | 22,501                                                         |       | 23,231                                                         |       | 22,720 |   | 23,388 |   |
| Cash dividends                                                     |       | $                                                              | 0.18       |                                                           | $          | 0.16 |   | $ | 0.54 |   | $ | 0.48 |   |
| Book value at  period-end                                          |       |                                                           |       |                                                           |       | $ | 12.45 |   | $ | 12.01 |   |
| Tangible book value at  period end                                 |       |                                                           |       |                                                           |       | $ | 10.02 |   | $ | 9.60 |   |
| Ending Shares                                                      |       |                                                           |       |                                                           |       | 22,050 |   | 22,623 |   |
|                                                               |       |                                                           |       |                                                           |       |   |   |   |   |
| **Financial Ratios**                                               |       |                                                           |       |                                                           |       |   |   |   |   |
| Return on assets  (annualized)                                     |       | 1.50                                                           | %          | 1.57                                                           | %          | 1.51 | % | 1.60 | % |
| Return on tangible  assets (annualized)                            |       | 1.53                                                           | %          | 1.60                                                           | %          | 1.54 | % | 1.64 | % |
| Return on equity  (annualized)                                     |       | 12.91                                                          | %          | 13.65                                                          | %          | 12.95 | % | 13.62 | % |
| Return on tangible  equity (annualized)                            |       | 16.09                                                          | %          | 17.03                                                          | %          | 16.12 | % | 17.01 | % |
| Net interest margin                                                |       | 5.60                                                           | %          | 5.22                                                           | %          | 5.61 | % | 5.27 | % |
| Net interest margin  (taxable equivalent yield)                    |       | 6.04                                                           | %          | 5.63                                                           | %          | 6.02 | % | 5.69 | % |
| Net loan (recoveries) losses  to avg. loans                        |       | (0.04                                                          | %)         | 0.49                                                           | %          | (0.01 | %) | 0.21 | % |
| Efficiency ratio                                                   |       | 60.4                                                           | %          | 57.5                                                           | %          | 60.7 | % | 57.4 | % |
|                                                               |       |                                                           |       |                                                           |       |   |   |   |   |
| **Period Averages**                                                |       |                                                           |       |                                                           |       |   |   |   |   |
| Total Assets                                                       |       | $                                                              | 2,348,298  |                                                           | $          | 2,401,998 |   | $ | 2,356,728 |   | $ | 2,349,750 |   |
| Total Tangible Assets                                              |       | 2,294,536                                                      |       | 2,347,308                                                      |       | 2,302,749 |   | 2,294,719 |   |
| Total Loans (includes  loans held for sale)                        |       | 1,565,655                                                      |       | 1,517,357                                                      |       | 1,548,919 |   | 1,470,976 |   |
| Total Earning Assets                                               |       | 2,108,389                                                      |       | 2,172,310                                                      |       | 2,115,075 |   | 2,113,833 |   |
| Total Deposits                                                     |       | 2,004,911                                                      |       | 2,082,464                                                      |       | 2,011,479 |   | 2,032,504 |   |
| Common Equity                                                      |       | 272,156                                                        |       | 275,854                                                        |       | 274,160 |   | 275,846 |   |
| Common Tangible Equity                                             |       | 218,393                                                        |       | 221,164                                                        |       | 220,180 |   | 220,815 |   |

 

19

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| **(In 000’s, except per share data)** | ** ** | **Sept. 30, 2006** | ** ** | **Sept. 30, 2005** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Balance  Sheet - At Period-End**                                  |       |                         |       |                         |       |
| Cash and due  from banks                                            |       | $                            | 96,450     |                         | $          | 130,602 |   |
| Investments and  Fed Funds Sold                                     |       | 544,450                      |       | 649,815                      |       |
| Loans held for  sale                                                |       | 12,675                       |       | 10,391                       |       |
| Loans, net of  deferred fees, before allowance for loan losses      |       | 1,573,970                    |       | 1,497,704                    |       |
| Allowance for  Loan Losses                                          |       | (12,016                      | )          | (11,532                      | )          |
| Goodwill and  core deposit intangibles                              |       | 53,669                       |       | 54,541                       |       |
| Other assets                                                        |       | 98,066                       |       | 90,852                       |       |
| Total Assets                                                        |       | $                            | 2,367,264  |                         | $          | 2,422,373 |   |
| Non-interest  bearing deposits                                      |       | $                            | 533,961    |                         | $          | 589,601 |   |
| Interest bearing  deposits                                          |       | 1,485,530                    |       | 1,516,361                    |       |
| Other borrowings                                                    |       | 48,595                       |       | 23,680                       |       |
| Allowance for  losses - unfunded commitments                        |       | 1,975                        |       | 1,839                        |       |
| Other  liabilities                                                  |       | 22,610                       |       | 19,206                       |       |
| Shareholders’  equity                                          |       | 274,593                      |       | 271,686                      |       |
| Total Liabilities and Shareholders’ equity                     |       | $                            | 2,367,264  |                         | $          | 2,422,373 |   |
| **Asset  Quality & Capital - At Period-End**                    |       |                         |       |                         |       |
| Nonaccrual loans                                                    |       | $                            | 205        |                         | $          | 8,323 |   |
| Loans past due  90 days or more                                     |       | —                       |       | —                       |       |
| Other real  estate owned                                            |       | —                       |       | —                       |       |
| Total  nonperforming assets                                         |       | $                            | 205        |                         | $          | 8,323 |   |
|                                                                |       |                         |       |                         |       |
| Allowance for  losses to loans, gross (1)                           |       | 0.9                          | %          | 0.9                          | %          |
| Nonaccrual loans  to total loans, gross                             |       | 0.0                          | %          | 0.6                          | %          |
| Nonperforming  assets to total assets                               |       | 0.0                          | %          | 0.3                          | %          |
| Allowance for  losses to nonperforming loans (1)                    |       | 6824.9                       | %          | 160.7                        | %          |
|                                                                |       |                         |       |                         |       |
| Equity to  average assets (leverage ratio)                          |       | 9.6                          | %          | 9.2                          | %          |
| Tier One capital  to risk-adjusted assets                           |       | 11.3                         | %          | 11.5                         | %          |
| Total capital to  risk-adjusted assets                              |       | 12.0                         | %          | 12.2                         | %          |

----

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

***PerformanceSummary*  **TheCompany posted net income of $8.9 million for the three months ended September30, 2006 compared to $9.5 million in the like 2005 period.  On a per share basis, diluted earnings pershare were $0.39 in the 2006 period compared to $0.41 in the same quarter of2005.  These earnings represent anannualized return on assets (R.O.A.) of 1.50% in the 2006 period compared to1.57% in the same quarter of 2005.  Theannualized return on equity was 12.91% for the third quarter of 2006 comparedto 13.65% in the third quarter of 2005. For the nine month period ended September 30, 2006, the Company postednet income of $26.6 million compared to $28.1 million in the like 2005 period.  On a per share basis, diluted earnings pershare were $1.17 in the 2006 period compared to $1.20 in the year earlierperiod.  These results represented aR.O.A. of 1.51% in the 2006 period compared to 1.60% in the 2005 period.  The annualized return on equity was 12.95%for the first three quarters of 2006 compared to 13.62% in the year earlierperiod.  Results in 2006 were influencedby increases in non-interest expense of $1.8 million and $6.8 million for thethree month and nine month periods of 2006, respectively, compared to 2005.  These higher costs related primarily tostaffing increases for growth and

20

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regulatorycompliance, benefit cost increases, and continuing increased professional feesfor compliance with Sarbanes-Oxley and regulatory requirements.  The increase was also partly due tocompensation expense recognized with the adoption of SFAS No. 123(R), “Share-BasedPayments”.  As discussed above, SFAS No.123(R) requires that the Company measure the cost of employee services receivedin exchange for an award of equity instruments and recognize the cost over theperiod during which the employee is required to provide service.  The adoption of the new statement aloneresulted in an after-tax charge to earnings of approximately $419 thousand, or$0.02 per share in the third quarter of 2006 and $1.2 million for the ninemonth period, or $0.05 per share.

The Company’sleverage capital ratio was 9.6% at September 30, 2006, up from 9.2% one yearearlier.  This ratio is substantiallyabove regulatory requirements for “well capitalized” banks.

***NetInterest Income***  The following table delineates the impacts of changes in the volume ofearning assets, changes in the volume of interest bearing liabilities, andchanges in interest rates on net interest income for the three month periodsended September 30, 2006 and 2005.

 
| ** **                              | ** ** | **3 months ended** | ** ** | **3 months ended** | ** ** | **2006 Compared to 2005** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | **Sept. 30, 2006** | ** ** | **Sept. 30, 2005** | ** ** | **Composition of Change**      | ** ** |
| ** **                              | ** ** | ** **                   | ** ** | **Interest**                 | ** ** | **Average**                              | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Average**                  | ** ** | **Income /**            | ** ** | **Yield /**                         | ** ** | **Average** | ** ** | **Income /** | ** ** | **Yield /** | ** ** | **Change Due To:** | ** ** | **Total** | ** ** |
| **($ in 000’s)**         | ** ** | **Balance**                  | ** ** | **Expense**                  | ** ** | **Rate**                                 | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| EARNING ASSETS                          |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                   |       | $                            | 1,565,655  |                         | $          | 31,474                                   |       | 7.98 | % | $ | 1,517,358 |   | $ | 26,780 |   | 7.00 | % | $ | 912 |   | $ | 3,782 |   | $ | 4,694 |   |
| Investment Securities                   |       | 497,382                      |       | 5,168                        |       | 4.12                                     | %          | 601,206 |   | 5,687 |   | 3.75 | % | (1,030 | ) | 511 |   | (519 | ) |
| Fed Funds, Other                        |       | 45,353                       |       | 581                          |       | 5.08                                     | %          | 53,746 |   | 456 |   | 3.37 | % | (89 | ) | 214 |   | 125 |   |
| TOTAL EARNING ASSETS                    |       | 2,108,390                    |       | 37,223                       |       | 7.00                                     | %          | 2,172,310 |   | 32,923 |   | 6.01 | % | (207 | ) | 4,507 |   | 4,300 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INTEREST BEARING LIABILITIES:           |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW, Savings, and Money Market Accounts |       | 998,103                      |       | 2,143                        |       | 0.85                                     | %          | 1,085,979 |   | 1,391 |   | 0.51 | % | (151 | ) | 903 |   | 752 |   |
| Time Deposits                           |       | 478,868                      |       | 4,820                        |       | 3.99                                     | %          | 419,204 |   | 2,699 |   | 2.55 | % | 492 |   | 1,629 |   | 2,121 |   |
| Interest Bearing Deposits               |       | 1,476,971                    |       | 6,963                        |       | 1.87                                     | %          | 1,505,183 |   | 4,090 |   | 1.08 | % | 342 |   | 2,531 |   | 2,873 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                        |       | 48,358                       |       | 509                          |       | 4.18                                     | %          | 24,035 |   | 234 |   | 3.86 | % | 246 |   | 29 |   | 275 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL INTEREST BEARING  LIABILITIES     |       | 1,525,329                    |       | 7,472                        |       | 1.94                                     | %          | 1,529,218 |   | 4,324 |   | 1.12 | % | 588 |   | 2,560 |   | 3,148 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NET  INTEREST INCOME                    |       | $                            | 2,108,390  |                         | $          | 29,751                                   |       | 5.60 | % | $ | 2,172,310 |   | $ | 28,599 |   | 5.22 | % | $ | (795 | ) | $ | 1,948 |   | $ | 1,152 |   |

 

Mid-State’sannualized yield on interest earning assets was 7.00% for the three monthsended September 30, 2006 (7.45% on a taxable equivalent basis) compared to6.01% in the like 2005 period (6.42% on a taxable equivalent basis).  The increase in yield is related to thegeneral increase in interest rates.  ThePrime Rate, to which many of the Bank’s loans are tied, averaged 8.25% in thethird quarter of 2006 compared to 6.42% in the like period of 2005. Annualizedinterest expense as a percent of interest bearing liabilities also increasedfrom 1.12% in the third quarter of 2005 to 1.94% in the comparable 2006 period.

Overall, Mid-State’sannualized net interest income, expressed as a percent of earning assets,increased from 5.22% for the third quarter of 2005 (5.63% on a taxableequivalent basis) to 5.60% in the comparable 2006 period (6.04% on a taxableequivalent basis).  Annualized netinterest income as a percent of average total assets increased from4.72% in the three months ended September 30, 2005 (5.09% taxable equivalent)to 5.03% in the comparable 2006 period (5.42% taxable equivalent).  Both the impact of the increase in generalinterest rates and the increase in volume of loans, which are higher yieldingassets, contributed to the $1.2 million increase in net interest income.  The Company has altered the mix of itsearning asset base in favor of more loans, resulting in 

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fewer investmentsecurities held.  Steps taken in thisdirection have included the restructuring of the commercial banking division,focused promotions of certain small business and consumer loan products, andretention of certain jumbo, residential, adjustable rate mortgages.  The mix improved across the comparable threemonth periods with loans averaging 74.3% of earning assets for 2006 compared to69.8% in the like 2005 period.   Earningassets averaged $63.9 million lower for the three months ended September 30,2006 compared to the like 2005 period ($2,108.4 million compared to $2,172.3million).  Average interest bearingdeposits in this same time-frame were down $28.2 million, ($1,477.0 millioncompared to $1,505.2 million).  Thefunding of the loan growth came primarily from an increase in other borrowings,predominantly Federal Home Loan Bank advances, which increased, on average,$24.3 million across the comparable periods.

The followingtable delineates the impacts of changes in the volume of earning assets,changes in the volume of interest bearing liabilities, and changes in interestrates on net interest income for the nine month period ended September 30, 2006and 2005.
| ** **                              | ** ** | **9 months ended** | ** ** | **9 months ended** | ** ** | **2006 Compared to 2005** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **                              | ** ** | **Sept. 30, 2006** | ** ** | **Sept. 30, 2005** | ** ** | **Composition of Change**      | ** ** |
| ** **                              | ** ** | ** **                   | ** ** | **Interest**                 | ** ** | **Average**                              | ** ** | ** ** | ** ** | **Interest** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Average**                  | ** ** | **Income /**            | ** ** | **Yield /**                         | ** ** | **Average** | ** ** | **Income /** | ** ** | **Yield /** | ** ** | **Change Due To:** | ** ** | **Total** | ** ** |
| **($ in 000’s)**         | ** ** | **Balance**                  | ** ** | **Expense**                  | ** ** | **Rate**                                 | ** ** | **Balance** | ** ** | **Expense** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| EARNING ASSETS:                         |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                   |       | $                            | 1,548,919  |                         | $          | 90,647                                   |       | 7.82 | % | $ | 1,470,976 |   | $ | 76,533 |   | 6.96 | % | $ | 4,308 |   | $ | 9,806 |   | $ | 14,114 |   |
| Investment Securities                   |       | 534,407                      |       | 16,196                       |       | 4.05                                     | %          | 607,543 |   | 16,724 |   | 3.68 | % | (2,115 | ) | 1,587 |   | (528 | ) |
| Fed Funds, Other                        |       | 31,749                       |       | 1,145                        |       | 4.82                                     | %          | 35,314 |   | 802 |   | 3.04 | % | (105 | ) | 448 |   | 343 |   |
| TOTAL  EARNING ASSETS                   |       | 2,115,075                    |       | 107,988                      |       | 6.83                                     | %          | 2,113,833 |   | 94,059 |   | 5.95 | % | 2,089 |   | 11,840 |   | 13,929 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| INTEREST BEARING LIABILITIES:           |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW, Savings, and Money Market Accounts |       | 1,027,849                    |       | 5,302                        |       | 0.69                                     | %          | 1,079,365 |   | 3,321 |   | 0.41 | % | (212 | ) | 2,193 |   | 1,981 |   |
| Time Deposits                           |       | 457,873                      |       | 12,394                       |       | 3.62                                     | %          | 408,499 |   | 6,756 |   | 2.21 | % | 1,077 |   | 4,561 |   | 5,638 |   |
| Interest Bearing Deposits               |       | 1,485,722                    |       | 17,696                       |       | 1.59                                     | %          | 1,487,864 |   | 10,077 |   | 0.91 | % | 864 |   | 6,755 |   | 7,619 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Borrowings                        |       | 49,816                       |       | 1,620                        |       | 4.35                                     | %          | 22,801 |   | 654 |   | 3.83 | % | 827 |   | 139 |   | 966 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL INTEREST BEARING  LIABILITIES     |       | 1,535,538                    |       | 19,316                       |       | 1.68                                     | %          | 1,510,665 |   | 10,731 |   | 0.95 | % | 1,691 |   | 6,894 |   | 8,585 |   |
|                                    |       |                         |       |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| NET  INTEREST INCOME                    |       | $                            | 2,115,075  |                         | $          | 88,672                                   |       | 5.61 | % | $ | 2,113,833 |   | $ | 83,328 |   | 5.27 | % | $ | 398 |   | $ | 4,946 |   | $ | 5,344 |   |

 

Mid-State’sannualized yield on interest earning assets was 6.83% for the nine months endedSeptember 30, 2006 (7.24% on a taxable equivalent basis) compared to 5.95% inthe like 2005 period (6.37% on a taxable equivalent basis).  The increase in yield is related to thegeneral increase in interest rates.  ThePrime Rate, to which many of the Bank’s loans are tied, averaged 7.86% in thefirst nine months of 2006 compared to 5.93% in the like period of 2005.Annualized interest expense as a percent of interest bearing liabilities alsoincreased from 0.95% in the first three quarters of 2005 to 1.68% in thecomparable 2006 period.

Overall, Mid-State’sannualized net interest income, expressed as a percent of earning assets,increased from 5.27% for the nine months ended September 30, 2005 (5.69% on ataxable equivalent basis) to 5.61% in the comparable 2006 period (6.02% on ataxable equivalent basis).  Annualizednet interest income as a percent of average total assets increased from4.74% in the nine months ended September 30, 2005 (5.12% taxable equivalent) to5.03% in the comparable 2006 period (5.40% taxable equivalent).  Both the impact of the increase in generalinterest rates and the increase in volume of earning assets contributed to the$5.3 million increase in net interest income. As mentioned above, the Company has altered the mix of its earning assetbase in favor of more loans, resulting in fewer investment securitiesheld.  Steps taken in this direction haveincluded the restructuring of the commercial banking division, focusedpromotions of certain small business and consumer loan products,

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and retention ofcertain jumbo, residential, adjustable rate mortgages.  The mix did improve across the comparablenine month periods with loans averaging 73.2% of earning assets for 2006compared to 69.6% in the like 2005 period.  Earning assets averaged $1.2 million higher for the nine months endedSeptember 30, 2006 compared to the like 2005 period ($2,115.1 million comparedto $2,113.8 million).  Average interestbearing deposits in this same time-frame were down $2.1 million, ($1,485.7million compared to $1,487.9 million). The funding of the earning asset growth also came from an increase inother borrowings which increased, on average, $27.0 million across thecomparable periods.

The Company’s netinterest margin, which had generally been increasing in the rising rateenvironment of 2005, has flattened out in 2006 in the wake of intense depositcompetition.  This has translated torelatively flat net interest income for the Company in recent quarters.  Average loans in the third quarter of 2006were 0.3% ahead of the second quarter of this year while average total depositsincreased by 0.3% over the same period. Securing deposits or other borrowings at a reasonable cost to fund loangrowth has become more challenging.  TheCompany began implementing promotions during the third quarter to bolsterdeposit growth which resulted in higher total deposits of more than $33 millionat September 30, 2006 compared to June 30, 2006 balances.  The Company plans to continue thesepromotions for the balance of the year.

***Provisionand Allowance for Loan Losses***   For the three month and nine month periodsended September 30, the Company did not make a provision for loan losses ineither the 2006 or 2005 periods.  It did,however, provide an additional $95 thousand for losses on unfunded commitmentsduring the third quarter of 2006. Management believes that the allowance for loan losses and allowance forlosses - unfunded commitments, which collectively stand at 0.9% of total loansat September 30, 2006, are adequate to cover inherent losses in theportfolio.  Management has determinedthat the specific reserves calculated and required for its nonperforming loansand the general loan loss reserve are sufficient to offset potential lossesthat exceed the supporting collateral arising from less than full recovery ofthe loans.  In determining thesereserves, the Company has considered economic factors that may impactcollectibility even though specific reserves have not yet had to be assigned.  These economic factors include, but are notlimited to, cyclical changes in business activity, changing patterns oftourism, changing markets for agricultural products, changing patterns ofretail and real estate sales activity, real estate pricing, rising interestrates and others.

Nonperformingloans consist of loans on nonaccrual and loans past due 90 days or more butstill accruing interest.  The $14.0million of collective allowances for credit losses is approximately 6,825% ofthe level of nonperforming loans at September 30, 2006 compared to 161% oneyear earlier.  The large increase incoverage from one year earlier is the result of a large drop in the level ofnonperforming loans.  The reduction innonperforming loans was due primarily to the payoff of one large relationshiptotaling $7.2 million, of which $1.4 million was repaid in the second quarterof 2006 and $5.8 million was repaid during the fourth quarter of 2005.  Reserves, however, which were freed up withthese improvements, were absorbed to cover additional losses inherent in theCompany’s real estate construction and land development loans, commercial andresidential real estate loans and agricultural loans.  These sectors are now believed to have amodestly higher level of loss inherent in them compared to Management’s viewearlier in the year, due particularly to a softening real estate market andweather related issues experienced by certain of the Company’s agriculturalcustomers.

Nonperformingloans were $0.2 million at September 30, 2006 compared to $8.3 million one yearearlier and $2.5 million at December 31, 2005. Management is not aware of any loans as of September 30, 2006 that wouldhave a significant impact on nonperforming loans 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 nonperforming at some futuredate.

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Specific reserveshave been established for potential losses inherent in all of the Company’s impairedloans and Management believes the balance is adequate at the present time.  These specific reserves are included in theCompany’s overall allowance for loan losses described above.  The Company has not held any other realestate owned (property acquired through loan foreclosure) over the last twelvemonths.  A combination of loan payoffsand improvements in the underlying credit quality of certain borrowers has alsoled to a drop in internally classified assets over this period.  Internally classified assets are loans orleases that have been classified as special mention, substandard or doubtfulbased upon specific review.  Theimproving trend in nonperforming loans, improvements in the level of internallyclassified assets, net recoveries from the Company’s on-going collectionefforts and the positive local economic conditions have improved the Company’sasset quality and contributed to the Company’s decision to make no provisionfor loan losses during the quarter or the first nine months of the year.

Changes in theallowances for losses for the periods ended September 30, 2006, and 2005 are asfollows:
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **Sept. 30,**               | ** ** | **Sept. 30,**              | ** ** |
| **($ in 000’s)**                                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Balance at  beginning of period:                                                                    |       |                             |       |                            |       |   |   |   |   |
| Allowance for  loan losses                                                                          |       | $                                | 11,855     |                            | $          | 13,403 |   | $ | 11,896 |   | $ | 13,799 |   |
| Allowance for  losses-unfunded commitments                                                          |       | 1,880                            |       | 1,759                           |       | 1,761 |   | 1,783 |   |
| Total allowances  for losses at beginning of period                                                 |       | 13,735                           |       | 15,162                          |       | 13,657 |   | 15,582 |   |
| Additions  (reductions) to the allowance for losses — unfunded commitments charged to  expense |       | 95                               |       | 80                              |       | 214 |   | 56 |   |
| Additions to the  allowance for loan losses charged to provision                                    |       | —                           |       | —                          |       | — |   | — |   |
| Loans charged  off                                                                                  |       | (45                              | )          | (2,310                          | )          | (334 | ) | (3,004 | ) |
| Recoveries of  loans previously charged-off                                                         |       | 206                              |       | 439                             |       | 454 |   | 737 |   |
| Total allowances  for losses-end of quarter                                                         |       | $                                | 13,991     |                            | $          | 13,371 |   | $ | 13,991 |   | $ | 13,371 |   |
|                                                                                                |       |                             |       |                            |       |   |   |   |   |
| Allowance for  loan losses                                                                          |       | $                                | 12,016     |                            | $          | 11,532 |   | $ | 12,016 |   | $ | 11,532 |   |
| Allowance for  losses-unfunded commitments                                                          |       | 1,975                            |       | 1,839                           |       | 1,975 |   | 1,839 |   |
| Total allowances  for losses-end of quarter                                                         |       | $                                | 13,991     |                            | $          | 13,371 |   | $ | 13,991 |   | $ | 13,371 |   |
|                                                                                                |       |                             |       |                            |       |   |   |   |   |
| Allowances for  losses to loans, gross                                                              |       | 0.9                              | %          | 0.9                             | %          | 0.9 | % | 0.9 | % |
| Allowances for  losses to nonperforming loans                                                       |       | 6824.9                           | %          | 160.7                           | %          | 6824.9 | % | 160.7 | % |
| Nonaccrual loans  to total loans, gross                                                             |       | 0.0                              | %          | 0.6                             | %          | 0.0 | % | 0.6 | % |
| Nonperforming assets to  total assets                                                               |       | 0.0                              | %          | 0.3                             | %          | 0.0 | % | 0.3 | % |

 

At September 30, 2006,the recorded investments in loans, which have been identified as impairedtotaled $205,000.  Of this amount,$149,000 related to loans with no valuation allowance and $56,000 related toloans with a corresponding valuation allowance of $12,000.  Impaired loans totaled $8,391,000 atSeptember 30, 2005, of which $7,096,000 related to loans with no valuationallowance and $1,295,000 related to loans with a corresponding valuationallowance of $446,000.  The valuationallowance for impaired loans is included within the general allowance shownabove and netted against loans on the consolidated statements of financialposition.  For the quarter endedSeptember 30, 2006, the average recorded investment in impaired loans was$424,000

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compared to $6,537,000 inthe 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.

***Non-interestIncome***  Non-interest income for the third quarter of 2006 was $5.5 million,compared to $5.3 million earned in the 2005 period.  For the full 9 months, non-interest incomewas $16.4 million in 2006 compared to $16.0 million in 2005.  The Company benefited from increases inservice charges and fees, which included higher debit card and NSF fees in the2006 periods compared to the like 2005 periods. These were partially offset by declines in net gains on sale ofsecurities and sale of loans.

***Non-interestExpense***   Staffexpense was $12.0 million in the third quarter of 2006 compared to $11.1million in the like 2005 period.  For thenine months year-to-date, salaries and benefits totaled $36.6 million in 2006compared to $32.8 million in 2005. Approximately $490 thousand (pre-tax) of the increase for the quarterand $1.4 million (pre-tax) of the increase for the 9 months year-to-daterelated to the adoption of SFAS 123(R) and the expensing of share based paymentawards previously discussed.  We nowexpect the accounting change will reduce earnings by approximately $1.7 millionafter-tax in 2006.  An additional $315thousand of the increase across the two quarters, and $1.6 million across thetwo nine month periods, represents higher salary expense relating to acombination of hiring additional personnel to staff up for the Westlake villagebranch location which was opened during the quarter, increasing staff forcompliance purposes (especially as it relates to Bank Secrecy Act and USAPatriot Act provisions) and regular salary increases across the Company.  Benefit costs also increased $45 thousand and$856 thousand in comparing the three month and nine month periods endingSeptember 30, respectively, primarily for increased group insurance costs andincentive programs.

Occupancy andfurniture expense increased $275 thousand from $3.1 million in the 2005 periodto $3.4 million in the third quarter of 2006. Year-to-date, these expenses were up $588 thousand to $9.7 million in2006.  Modest increases in rental expenseand maintenance expense accounted for the increase.

Other operatingexpense increased $678 thousand from $5.3 million in the third quarter of 2005to $5.9 million in the comparable 2006 period. For the nine months ended September 30, the increase was $2.3 million to$17.5 million in 2006 compared to $15.1 million in 2005.  These changes were primarily the result ofincreases in accounting, auditing, and professional services of $337 thousandacross the comparable quarters and $1.2 million between the nine monthyear-to-date periods.  Management expectsaccounting, auditing and professional services to continue at higher expenselevels in view of the continuing costs of compliance with Sarbanes-Oxleylegislation and the Bank Secrecy Act.

***Provisionfor Income Taxes***  The provision for income taxes in 2006 was 36.5% and 35.6% of pre-taxincome for the three months and nine months ended September 30, 2006,respectively.  This compares to 34.1% inthe third quarter of 2005 and 33.7% for the nine month period.  The primary reason for the increase in theeffective tax rate year over year has been the fact that compensation costsassociated with incentive stock options are now recognized against income,along with all other share based awards, in accordance with SFAS123(R), asdescribed in Note E to these financial statements.  This additional book expense, however, doesnot generate a tax deduction for the Company and, thus creates a higher effectivetax rate against book income.  If, in thefuture, there are disqualifying dispositions of the shares issued in theexercise of those incentive stock options, the Company will receive a taxdeduction and show a benefit in it’s effective tax rate in that period.  While the normal combined federal and statestatutory tax rate is 42% for Mid-State Bancshares, the tax-exempt incomegenerated by its municipal bond portfolio is the primary reason that theeffective rate has been lower in both 2006 and 2005.

***BalanceSheet***   Totalassets at September 30, 2006 totaled $2.367 billion, compared to the level oneyear earlier of $2.422 billion.  Totaldeposits declined 4.1% to $2.019 billion from $2.106 billion one yearearlier.  Time

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deposits under$100 thousand increased from $232.1 million one year earlier to $253.1 millionat period end and time deposits over $100 thousand increased by $35.3million.  Management believes that thehigher relative levels of time deposits with balances over $100 thousand is notthe result of any change in pricing methodology on its part, but rather,reflects greater depositor sensitivity to today’s rising interest rate levelswith funds from other deposit categories flowing into this category.  Non-interest Bearing Demand also decreasedfrom $589.6 million one year earlier to $534.0 million in the currentyear.  All other core deposit categoriesof NOW, Money Market and Savings decreased to $1.001 billion from $1.088billion one year earlier.  Loan activityover the last year has increased, with net loans increasing by $75.8 millionfrom $1.486 billion to $1.562 billion at period-end.  Loans held for sale (single family, mortgageoriginations) increased to $12.7 million from $10.4 million one year earlier.  Stockholders’ equity increased by $2.9million when comparing September, 2006 over September, 2005 (see below underCapital Resources for a recap of the components of this change).

TheCompany’s mix of earning assets has improved in recent quarters with loans nowaveraging 74.3% of average earning assets in the third quarter of 2006 comparedto 69.8% in the comparable 2005 period. These higher yielding assets relative to investments and fed funds soldhelped contribute to the Company’s higher net interest margin from one yearearlier.  Going forward, however, theimpact of competitive pricing on new loans resulting from increased competitionfrom other local community banks, continued intense competition from the majorbanks, and the expanded influence of “conduit” financing (the making of loansat attractive rates to borrowers which are pooled together, packaged and soldby Wall Street firms as commercial mortgage backed securities to investors) inthe Bank’s trade area by non-banks may lead to additional pressure on the yieldfrom 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. Management also believes that with increased interest rates and moreintense pricing pressure affecting competition, the growth rates enjoyed in thereal estate sector of the loan portfolio are likely to slow.  Therefore, additional emphasis in 2006 isbeing placed on growing the Company’s commercial and industrial loans.  Displayed below is a summary of loansoutstanding by type as of September 30, 2006 and 2005 (excludes loans held forsale).
| ** **                          | ** ** | **Sept. 30,** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| **($ in 000’s)**     | ** ** | **2006**           | ** ** | **2005** | ** ** |
| Construction and  development loans |       | $                  | 287,865    |   | $ | 269,483 |   |
| Real estate  loans                  |       | 850,657            |       | 790,588 |   |
| Home equity  credit lines           |       | 158,824            |       | 185,761 |   |
| Installment  loans                  |       | 18,800             |       | 17,906 |   |
| Cash reserve                        |       | 2,861              |       | 3,406 |   |
| Agricultural  production            |       | 36,593             |       | 29,810 |   |
| Commercial,  other                  |       | 222,066            |       | 204,402 |   |
|                                |       | 1,577,666          |       | 1,501,356 |   |
| Less allowance  for loan losses     |       | (12,016            | )          | (11,532 | ) |
| Less deferred  loan fees, net       |       | (3,696             | )          | (3,652 | ) |
| Total loan  portfolio               |       | $                  | 1,561,954  |   | $ | 1,486,172 |   |

 

Mid-StateBancshares’ loan to deposit ratio of 77.9% at September 30, 2006 is up from the71.1% ratio one year earlier but down slightly from the 78.7% at June 30,2006.  There is internal liquidity tofund increases in this ratio through liquidation of Mid-State’s $493.8 millioninvestment portfolio which is categorized entirely as available for sale.  The Company can also fund additional loangrowth through the accumulation of additional deposits or through additionalborrowings, such as from the Federal Home Loan Bank.  The Bank’s internal policy is to maintain itsloan to deposit ratio between 60% and 80%.

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***InvestmentSecurities and Fed Funds Sold***   Of the $493.8 million portfolio at September30, 2006, approximately 4% is invested in U.S. treasury securities, 24% isinvested in U.S. government agency obligations, 71% is invested in municipaland corporate securities and 1% is invested in mortgage-backed securities.  On a combined basis, eighty-one percent ofall investment securities and fed funds sold mature within five years.  Approximately 33% of the total portfoliomatures 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.  The actual time of repayment may be shorterdue to prepayments made on the underlying collateral.

A summary of investmentsecurities owned at September 30, 2006 is as follows:
| ** **                                               | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|------------|------------|
| **($ in 000’s)**                          | ** ** | **Cost**   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Market** | ** ** |
| **Securities Available For Sale**         | ** ** | **Basis**  | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| U.S. Treasury  securities                                |       | $          | 16,767     |           | $          | —         |       | $          | (116       | ) | $ | 16,651 |   |
| Securities of  U.S. government agencies and corporations |       | 120,983    |       | 47             |       | (921           | )          | 120,109    |       |
| Mortgage backed  securities                              |       | 6,629      |       | 148            |       | (122           | )          | 6,655      |       |
| Obligations of  states and political subdivisions        |       | 333,297    |       | 3,482          |       | (1,239         | )          | 335,540    |       |
| Other investments                                        |       | 14,854     |       | 4              |       | (63            | )          | 14,795     |       |
| Total                                                    |       | $          | 492,530    |           | $          | 3,681          |       | $          | (2,461     | ) | $ | 493,750 |   |

 

December 31, 2005
| ** **                                               | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|------------|------------|
| **($ 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 investment category andlength of time that individual securities have been in a continuous unrealizedloss position at September 30, 2006.
| ** **                                               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Market**                             | ** ** | **Unrealized**                       | ** ** | **Market** | ** ** | **Unrealized** | ** ** | **Market** | ** ** | **Unrealized** | ** ** |
| **($ in 000’s)**                          | ** ** | **Value**                              | ** ** | **Losses**                           | ** ** | **Value**  | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| U.S. Treasury  securities                                |       | $                                      | 5,021      |                                 | $          | (1         | )          | $ | 11,630 |   | $ | (115 | ) | $ | 16,651 |   | $ | (116 | ) |
| Securities of  U.S. government agencies and corporations |       | 10,018                                 |       | (4                                   | )          | 105,041    |       | (917 | ) | 115,059 |   | (921 | ) |
| Mortgage backed  securities                              |       | —                                 |       | —                               |       | 2,986      |       | (122 | ) | 2,986 |   | (122 | ) |
| Obligations of  states and political subdivisions        |       | 4,715                                  |       | (4                                   | )          | 112,392    |       | (1,235 | ) | 117,107 |   | (1,239 | ) |
| Other  investments                                       |       | —                                 |       | —                               |       | 3,942      |       | (63 | ) | 3,942 |   | (63 | ) |
| Total                                                    |       | $                                      | 19,754     |                                 | $          | (9         | )          | $ | 235,991 |   | $ | (2,452 | ) | $ | 255,745 |   | $ | (2,461 | ) |

 

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All of theunrealized losses identified in the table above are primarily attributable tochanges in general interest rate levels and are not considered to be other thana temporary impairment.  The unrealizedlosses are not the result of any deteriorating financial conditions or nearterm prospects of the underlying issuers and Management believes that it hasthe intent and ability to retain these investment securities to allow for theeventual recovery in market value.

***CapitalResources***   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 doesnot have an expiration date.  There were84,794 shares of the Company’s common stock repurchased in the third quarter of2006 at an average price of $26.99 per share. For the nine months ended September 30, 2006, there were 608,876 sharesrepurchased at an average price of $27.79 per share.  As of September 30, 2006, the Company canrepurchase up to 207,799 additional shares under the June 2005authorization.  For the three months andnine months ended September 30, 2005, 213,635 and 723,192 shares wererepurchased, respectively, at an average price of $29.02 and $27.26,respectively.  Due to negotiation of themerger agreement discussed in Note I to these financial statements, the stockrepurchase program was suspended.

In other matters concerning capital, the Board ofDirectors declared quarterly dividends of $0.18 per share in each of the firstthree quarters of 2006 compared to $0.16 declared in each of the first threequarters of 2005.

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

In January of 2006, the Company added $25.0 million ofadditional borrowings from the Federal Home Loan Bank (FHLB) in the form of afive year fixed rate credit advance at 4.75%. The borrowing reflects the Company’s on-going desire to diversify itsfunding sources at a reasonable cost, allowing it to create a profitable spreadfor the income statement.

The Company hasadequate liquidity at the present time. Its loan to deposit ratio at September 30, 2006 was 77.9% versus 71.1%one year earlier and compared to its targeted internal policy ratio of 60% to80%.  The Company’s internally calculatedliquidity ratio stands at 25.3% at September 30, 2006, which is above itsminimum policy of 15% and below the 32.2% level of September 30, 2005.  Management is not aware of any future capitalexpenditures or other significant demands or commitments which would severelyimpair liquidity.

***ContractualObligations***  As of September 30, 2006, the Company had the following contractualobligations.  Long term debt representsfixed rate borrowings that the Company has obtained from the FHLB of SanFrancisco.
| ** **         | ** ** | **One Year** | ** ** | **Over One to** | ** ** | **Over Three to** | ** ** | **Over**            | ** ** | ** ** | ** ** |
|--------------------|------------|-------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------|------------|------------|------------|
| ** **         | ** ** | **Or Less**  | ** ** | **Three Years**      | ** ** | **Five Years**         | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| Long Term Debt     |       | $                 | —     |                      | $          | 20,000                      |       | $                   | 27,000     |       | $          | — |   | $ | 47,000 |   |
| Operating Leases   |       | 2,125             |       | 3,774                     |       | 3,202                       |       | 2,624               |       | 11,725     |       |
| Total  Obligations |       | $                 | 2,125      |                      | $          | 23,774                      |       | $                   | 30,202     |       | $          | 2,624 |   | $ | 58,725 |   |

 

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***OffBalance Sheet Transactions and Other Related Transactions***   Off-balance sheet arrangements are anycontractual arrangements 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 the ordinary course of business, theCompany has entered into off-balance sheet financial instruments consisting ofcommitments to extend credit, commercial letters of credit, and standby lettersof credit.

The Company is contingently liable for letterof credit accommodations made to its customers in the ordinary course ofbusiness totaling $39.1 million at September 30, 2006, down from $52.0 millionone year earlier.  Additionally, theCompany has undisbursed loan commitments, also made in the ordinary course ofbusiness, totaling $699.7 million, which was up from the $645.3 millionoutstanding one year earlier.  TheCompany has an allowance for losses-unfunded commitments totaling $1,975,000and $1,839,000 at September, 2006 and 2005, respectively, to cover lossesinherent in its letter of credit accommodations and undisbursed loancommitments.

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

The Company does makeloans and leases to related parties (directors and officers) in the ordinarycourse of business on substantially the same terms, including interest ratesand collateral, as those prevailing at the time for comparable transactionswith persons of similar creditworthiness, and in the opinion of Management,have not involved more than the normal risk of repayment or presented any otherunfavorable features.  These loans andleases, including unfunded commitments, totaled $33.9 million and $12.7 millionat September 30, 2006 and 2005, respectively.

In the ordinary course ofbusiness, the Company is a party to various operating leases.  For a more detailed discussion of thesefinancial instruments, refer to Note 6 of the Company’s consolidated financialstatements contained in Item 8 of Part II of the Company’s December 31, 2005Annual Report on Form 10K.

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**Item 3 -Quantitative and Qualitative Disclosures About Market Risk**

The Companyexpects its risk exposure to changes in interest rates to remain manageable andwell within acceptable policy ranges.  Areview as of September 30, 2006 of the potential changes in the Company’s netinterest income over a 12 month time horizon showed that it could fluctuateunder extreme alternative rate scenarios from between +4.0% and —6.7% of thebase case (rates unchanged) of $133.8 million. The Company’s policy is to maintain a structure of assets andliabilities which are such that net interest income will not vary more thanplus or minus 15% of the base forecast over the next 12 months.  Management expects that its exposure to interestrate risk is manageable and it will continue to strive for an optimal trade-offbetween risk and earnings.

The followingtable presents a summary of the Company’s net interest income forecasted forthe coming 12 months under alternative interest rate scenarios.

|                                       | ** ** | **Change From Base** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| Rates Down Very  Significantly        |       | -6.7                           | %          |
| (Prime down to 5.25%  over 10 months) |       |                           |       |
|                                  |       |                           |       |
| Rates Down  Significantly             |       | -4.0                           | %          |
| (Prime down to 6.25%  over 11 months) |       |                           |       |
|                                  |       |                           |       |
| Rates Down Slightly                   |       | -1.8                           | %          |
| (Prime down to 7.25%  over 11 months) |       |                           |       |
|                                  |       |                           |       |
| Base Case - Rates  Unchanged          |       | —                         |       |
| (Prime unchanged at  8.25%)           |       |                           |       |
|                                  |       |                           |       |
| Rates Up Slightly                     |       | +1.1                           | %          |
| (Prime up to 9.25% over  11 months)   |       |                           |       |
|                                  |       |                           |       |
| Rates Up Significantly                |       | +1.8                           | %          |
| (Prime up to 10.25%  over 11 months)  |       |                           |       |
|                                  |       |                           |       |
| Rates Up Very  Significantly          |       | +4.0                           | %          |
| (Prime up to 11.25% over 10 months)   |       |                           |       |

 

Net interestincome under the above scenarios is influenced by the characteristics of theCompany’s assets and liabilities.  In thecase of NOW, savings and money market deposits (total $1.001 billion) interestis based on rates set generally at the discretion of management ranging from0.25% to 2.00%.  In a downward rateenvironment, there is a limit to how far these deposit instruments can bere-priced and this behavior is similar to that of fixed rate instruments.  In an upward rate environment, the magnitudeand timing of changes in rates on these deposits is assumed to be morereflective of variable rate instruments.

It is important to note that the above table is asummary of several forecasts 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 estimatesand assumptions include, but are not limited to - competitors’ behavior,economic conditions both locally and nationally, actions taken by the FederalReserve Board, customer behavior, and management’s responses.  Changes that vary significantly from theassumptions and estimates may have significant effects on the Company’s netinterest income.  Therefore the resultsof this analysis should not be relied upon as indicative of actual futureresults.  Historically, the Company hasbeen able to manage its Net Interest Income in a fairly narrow range reflectingthe Company’s relative insensitivity to interest rate changes.  The impact of prepayment behavior onmortgages, real estate loans, mortgage backed securities, securities with callfeatures, etc. is not considered material to the sensitivity analysis. Over 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 margin in 2005 of 5.32% is in the middle of this rangeby historical standards, coming off the higher levels

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experienced in 2001 of 6.06% and the low in 2004 of4.95%.  Recent increases in interestrates (e.g. – seventeen 25 basis point increases in the Federal Funds Rate andPrime Rate) which began at the end of June 2004 have led to an improving netinterest margin for the Company to 5.61% for the first nine months of2006.  The net interest margin under theforecasted alternative scenarios ranges from 5.67% to 6.31%.  Management believes this range of scenariosis reasonable given current interest rate levels, but no assurances can begiven that actual future experience will fall within this range, especially ifcore deposit growth is not as great as envisioned in the forecast of 4.2%.  Indeed, during the first three quarters of2006, the net interest margin has been relatively flat at 5.61% in the firsttwo calendar quarters and 5.60% in the third quarter. There was a small declinein total deposits led mostly by a drop in core deposits such as checking,savings and money market accounts through the early months of 2006 coupled withgrowth in the loan portfolio. Securing deposits at a reasonable cost to fundloan growth has been more challenging in 2006. The Company has promotions planned through the balance of the year tobolster deposit growth.

The impact ofcompetitive pricing on new loans resulting from increased competition fromother local community banks, continued intense competition from the majorbanks, and the expanded influence of “conduit” financing in the Company’s tradearea by non-banks (the making of loans at attractive rates to borrowers whichare pooled together, packaged and sold by Wall Street firms as commercialmortgage backed securities to investors) partially offset the benefit receivedfrom the higher prime rate this year. While the upward movement in the Prime Rate is generally positive forthe Company’s net interest margin, the influences of competitive pricing andthe refinancing of existing loans at lower rates can, and has to some extent,offset these benefits.  Additionally, theCompany’s discretionary priced liabilities such as NOW, Savings and MoneyMarket accounts have come under increasing pressure to have their pricingincreased in the current rate environment. In many cases, customers have moved funds from these lower payinginstruments to time deposits carrying higher rates of interest.  Moreover, existing time deposits are alsorolling over at ever higher interest rate levels further contributing todownward pressure on the net interest margin. And, further exacerbating the above issues, core deposits have actuallydeclined so far in 2006, making the Company more reliant on higher costingfunding sources such as time deposits and other borrowings.  While the Company’s margin has generallyimproved since the Federal Reserve began raising short term rates in 2004,there can be no guarantee that this will continue and in fact, Managementbelieves it will tend to stabilize near current levels.

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

**Item 4 - Controlsand Procedures**

As of the end ofthe period covered by this report, Management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedureswith respect to the information generated for use in this QuarterlyReport.  The evaluation was based in partupon reports and certifications provided by a number of executives.  Based upon, and as of the date of that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the disclosure controls and procedures were effective to providereasonable assurances that information required to be disclosed in the reportsthe Company files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within time periods specified inthe SEC’s rules and forms.

There was nochange in the Company’s internal controls over financial reporting during thequarter ended September 30, 2006 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

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In designing andevaluating disclosure controls and procedures, the Company’s Managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable, not absolute, assurances of achievingthe desired control objectives and Management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

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**PART II - OTHERINFORMATION**

**Item 1 - LegalProceedings**

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

**Item 1A. — RiskFactors**

Therewere no material changes during the third quarter of 2006 in the risk factorsdisclosed in the Company’s December 31, 2005 Annual Report on Form 10K.

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

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’s commonstock.  This authorization does not havean expiration date.  There were 84,794shares of the Company’s common stock repurchased in the third quarter of 2006at an average price of $26.99 per share. All of these shares were purchased in open market transactions.  As of September 30, 2006, the Company canrepurchase up to 207,799 additional shares under the June 2005 authorization.

Thefollowing table provides the information with respect to the purchases madeunder the publicly announced stock repurchase programs during the quarter endedSeptember 30, 2006.  All of these shareswere purchased in open market transactions or in block purchases or inprivately negotiated transactions in compliance with Securities and ExchangeCommission (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)** | ** ** |
| July  2006        |       | 84,794                    |       | $                      | 26.99      |                                     | 207,799    |                                           | $          | 5,608,495 |   |
| Aug.  2006        |       | —                    |       | $                      | —     |                                     | 207,799    |                                           | $          | 5,625,119 |   |
| Sept.  2006       |       | —                    |       | $                      | —     |                                     | 207,799    |                                           | $          | 5,685,381 |   |
| Totals            |       | 84,794                    |       | $                      | 26.99      |                                     | 207,799    |                                           | $          | 5,685,381 |   |

 

(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 - DefaultsUpon Senior Securities**

Notapplicable.

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

No matters weresubmitted to shareholders during this quarter.

**Item 5 - OtherInformation**

None.

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**Item 6 - Exhibits**

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

 

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**SIGNATURES**

Pursuant to therequirement of the Securities and Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        | Mid-State Bancshares |
|------------------------|----------------------|
|                   |                 |
|                   |                 |
|                   |                 |
|                   |                 |
|                   |                 |
| Date: November 8, 2006 | By:                  | /s/ JAMES W.  LOKEY |
|                   |                 | JAMES W. LOKEY |
|                   |                 | President and |
|                   |                 | Chief Executive Officer |
|                   |                 | (Principal Executive Officer) |
|                   |                 |   |
|                   |                 |   |
|                   |                 |   |
|                   |                 |   |
| Date: November 8, 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** | ** ** | ** **                                                                | ** ** |
|------------------|------------|-----------------|------------|---------------------------------------------------------------------------|------------|
|             | 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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