Summary Compensation Table

*Represents the difference between the exercise price and the fair market value of each respective option on the date exercised in the year noted.

** SAR stands for “Stock Appreciation Rights” and refers to SARs payable in cash or stock, including SARs payable in cash or stock of the election of the Company or a named executive officer.

*** LT1P stands for “Long-Term Incentive Plan” and refers to any plan providing compensation intended to serve as an incentive for performance to occur over a period longer than one fiscal year, whether such performance is measured by reference to financial performance of the Company or an affiliate, the Company’s stock price, or any other measure, but excluding restricted stock, stock option and SAR Plans.

_________________________

²⁴Amounts shown as bonus payments were earned in the year indicated but not paid until the first quarter of the next fiscal year.

²⁵No executive officer received perquisites or other personal benefits in excess of the lesser of $50,000 or 10% of each officer’s total annual salary and bonus.

²⁶Includes Mid-State contribution to defined plans (qualified and non-qualified, and whether or not vested).

²⁷Includes $18,000 accrued in 2005 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

²⁸Includes $16,000 accrued in 2004 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

²⁹Includes $12,000 accrued in 2003 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³⁰Includes $18,000 accrued in 2005 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³¹Includes $16,000 accrued in 2004 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³²Includes $14,000 accrued in 2003 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³³Includes $18,000 accrued in 2005 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³⁴Includes $16,000 accrued in 2004 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³⁵Includes $14,000 accrued in 2003 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

³⁶Includes 2005 Deferred Compensation Contribution of $33,173.

³⁷Includes 2004 Deferred Compensation Contribution of $44,601.

³⁸Includes 2003 Deferred Compensation Contribution of $36,667.

³⁹Includes $14,000 accrued in 2005 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”

⁴⁰Includes $9,225 accrued in 2004 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”

⁴¹Includes $10,742 accrued in 2003 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”

⁴²Includes 2005 Deferred Compensation Contribution of $20,745.

⁴³Includes 2004 Deferred Compensation Contribution of $43,215.

⁴⁴Includes 2003 Deferred Compensation Contribution of $21,783.

⁴⁵Includes $15,936 accrued in 2005 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

⁴⁶Includes $14,859 accrued in 2004 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

⁴⁷Includes $13,650 accrued in 2003 but deferred pursuant to Mid-State’s 401(k) Plan (see “Profit Sharing 401(k) Plan”).

⁴⁸Includes 2005 Deferred Compensation Contribution of $53,885.

⁴⁹Includes 2004 Deferred Compensation Contribution of $64,078.

⁵⁰Includes 2003 Deferred Compensation Contribution of 37,154.

14

 

Stock Options. Mid-State currently has two active stock option plans, the 1996 Stock Option Plan (the “1996 Plan”) and the 2005 Equity Based Compensation Plan (the “2005 Plan”). Both plans are intended to advance our interests by encouraging stock ownership on the part of key employees and non-employee directors.

 

The 1996 Plan commenced in November 1996 and expired in May 2005. Under the 1996 Plan, there were options outstanding to purchase a total of 1,308,661 shares of common stock as of March 31, 2006. With the approval of the 2005 Plan in May of 2005, no additional grants have been made under the 1996 Plan.

 

The 2005 Plan was approved by shareholders on May 17, 2005, authorizing a maximum of 1,000,000 shares. The Company intends to use the 2005 Plan primarily to motivate senior management and senior producers that effectively influence shareholders’ value. The 2005 Plan authorizes the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock awards (“Restricted Stock”), and performance share cash only awards. Subject to Board ratification, the Compensation Committee will determine the vesting and, where applicable, the expiration date of Awards, but Awards that provide for the right to acquire stock may not remain outstanding more than ten (10) years after the grant date, and any ISO Award granted to any eligible employee owning more than 10% of the Company’s stock must be granted at 110% of the Fair Market Value of the stock. Unless the Committee determines otherwise, Awards do not vest or become exercisable until six (6) months after the date of grant.

 

Pursuant to the 2005 Plan, outstanding options and restricted stock awards were granted to directors and to key, full-time salaried officers and employees of Mid-State and its subsidiaries. As of March 31, 2006 there are 953,931 shares available for grant. The Incentive Stock Options (“ISO”) or Non-Qualified Stock Options (“NSO”) or restricted stock granted to date become exercisable in accordance with a vesting schedule established at the time of grant.

 

All options granted in the years indicated below to the named executive officers were incentive stock options and have an exercise price equal to the fair market value Mid-State’s Common Stock on the date of grant.

 

The following table furnishes certain information regarding stock options granted under the Stock Option Plan for James W. Lokey, James G. Stathos, Harry H. Sackrider, Steven L. Harding, and Eldon Shiffman.

 

 

 

 

 

 

15

 

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Options/SAR Grants In 2005

 

Individual Grants					Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
Name	Number of Securities Underlying Options/SARs Granted (#)	Percent of Total Options/ SARs Granted to Employees in 2005	Exercise or Base Price ($/Sh)51	Expiration Date	5% ($)	10% ($)
James W. Lokey	43,945	20.31%	$27.58	02/16/2015	762,222	1,931,620
James G. Stathos	18,129	8.37%	$27.58	02/16/2015	314,446	796,868
Harry H. Sackrider	14,866	6.87%	$27.58	02/16/2015	257,850	653,441
Steven L. Harding	15,000	6.93%	$27.58	02/16/2015	260,174	659,332
Eldon Shiffman	0	0	—	—	0	0

 

 

 

 

 

 

 

 

 

 

 

 

 

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⁵¹The exercise price was based on the fair market value of a share of common stock on the date of grant.

 

 

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Aggregated Option/SAR Exercises in 2005

and Option/SAR Values

 

			Number of Securities Underlying Unexercised Options/SARs at 12/31/2005			Value of Unexercised In-the-Money Options/SARs at 12/31/200552
Name	Shares Acquired on Exercise (#)	Value Realized ($)	Exercisable (#)	Unexercisable (#)		Exercisable ($)	Unexercisable ($)
James W. Lokey	114,290	1,308,906	144,517	152,440		1,532,938	792,910
James G. Stathos	0	0	101,791	62,653		952,598	324,580
Harry H. Sackrider	0	0	38,522	46,969		379,644	209,421
Steven L. Harding	0	0	15,217	25,871		158,668	68,178
Eldon Shiffman	16,582	196,504	25,418	3,000		316,249	28,950

 

 

Profit Sharing/401(k) Plan. Mid-State offers a combined Profit Sharing and 401(k) Plan to all of its eligible employees, and those of its banking subsidiary (the “Plan”). Eligible employees may participate in the Plan on the first of the month following 30 days of service. Employer contributions to the Profit Sharing and 401(k) Plan are vested on a five-year vesting schedule at 20% per year.

 

Contributions to the Profit Sharing portion of the Plan (the “Profit Sharing Plan”) are made entirely by Mid-State. Each year the Board of Directors, in its discretion, decides how much money, if any, will be contributed to the Plan depending on the amount of Mid-State’s profits for the year. Mid-State’s contribution to the Profit Sharing Plan is allocated among all eligible employees based on eligible pay. Employees must be actively employed at the end of the calendar year in order to receive the profit sharing contribution. No amounts are accrued or set aside for the account of non-employee directors. Mid-State contributed approximately $2,357,000 to the Profit Sharing Plan for the year ending December 31, 2005.

 

 

 

 

_________________________

⁵²Unexercisable stock options represent those options granted, but not yet fully vested. Exercisable stock options represent the fully vested portion. Stock options vest at the rate of 20% per year from the date of grant. Value of options has been determined by multiplying number of shares by the difference between the closing price on December 30, 2005 of $26.75 per share, and the respective exercise price per share.

 

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Under the 401(k) portion of the Plan (the “401(k) Plan”), each covered employee can make voluntary contributions to his or her account in an amount up to thirty percent (30%) of his or her base salary; such contributions vest immediately when made. Mid-State makes a contribution to the employee’s account in an amount equal to fifty percent (50%) of the employee’s contributions, up to a maximum of six percent (6%) of the employee’s salary. For the year ended December 31, 2005, Mid-State contributed approximately $628,000 to the 401(k) Plan.

 

Change in Control Agreements. Mid-State entered into “change in control” agreements with Messrs. Lokey, Sackrider, and Stathos as of January 9, 2002. Each agreement provides that, if a person who has acquired control of Mid-State terminates the officer within 36 months after such change in control other than for cause, disability or retirement (as such terms are defined in the agreement) or if, within 36 months of such a change in control, the officer terminates the agreement for good reason (as defined in the agreement), the officer will receive (i) a lump sum severance payment equal to three times his annual salary and bonus and (ii) continued benefits under all insured and self-insured employee welfare benefit plans for a period ending on the earliest of (A) three (3) years, (B) the commencement date of equivalent benefits from a new employer or (C) the officer’s normal retirement date under the terms of such plans. In general, a “change in control” includes a change in the majority of directors as a result of an election contest, an acquisition of 25% of the outstanding shares, a merger, consolidation, sale of substantially all the assets, a change in the majority of directors over a two (2) year period as well as any other transfer, voluntarily or by hostile takeover or proxy contest, operation of law or otherwise, of control of Mid-State.

 

Messrs. Harding and Shiffman also have a “change in control” agreement which are substantially identical to the ones described above except that the triggering event must occur within 24 months after a change in control and the amount of the lump sum payment is limited to two times his annual salary and bonus.

 

             Incentive Compensation Plan. The Board of Directors approved an annual Incentive Plan for the executive officers. The objective of the plan is to provide competitive compensation, warranted by performance, and aid in motivating and retaining key executives. Awards under the Plan are based on achievement of annual Bank objectives and individual objectives. Objectives are established in advance of the Plan year and approved by the Chairman, CEO, and the Compensation Committee, as well as by the Board, in conjunction with the annual budget. For purposes of calculating performance against the objectives for any year, profit (or income) is after-tax net income, as shown in the Consolidated Statement of Income for such year, as presented to the Board of Directors. Messrs. Lokey, Stathos, Sackrider, Harding and Shiffman are eligible for participation in the Plan.

 

 

 

 

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Other Compensation. We have provided and plan to continue to provide our executive officers with automobiles, which are not available to all our employees. It is impracticable to estimate the percentage of the total costs of these benefits attributable to personal use. No amount is stated for the foregoing in the compensation table on page 14, since management has concluded that the amount of any personal benefits to any executive officer and to the principal officers as a group is less than the lesser of $50,000.00 per person or ten percent (10%) of the compensation reported under “Cash Compensation” for each such person and for the group.

 

Performance Graph. The following table and graph display five (5) year comparative total return performance information for Mid-State common stock, the Russell 3000, SNL Bank Index, and the SNL Western Bank Index. The information is prepared assuming $100.00 is invested in each of the four (4) potential investments, five (5) years ago. The performance information takes into account dividends paid and the price appreciation or depreciation of the stock(s). It should be noted that historical performance information is no guarantee of future performance.

 

 

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Transactions with Management and Others. There have been no transactions, or series of similar transactions, during 2005, or any currently proposed transaction, or series of similar transactions, to which Mid-State or its wholly owned bank subsidiary was or is to be a party, in which the amount involved exceeded or will exceed $60,000.00 and in which any director (or nominee for director) of Mid-State, executive officer of Mid-State, any shareholder owning of record or beneficially 5% or more of Mid-State Stock, or any member of the immediate family of any of the foregoing persons, had, or will have, a direct or indirect material interest.

 

Indebtedness of Management. Some of the current directors and executive officers of Mid-State and the companies with which they are associated have been customers of, and have had banking transactions with Mid-State, in the ordinary course of Mid-State’s business, and Mid-State expects to continue to have such banking transactions in the future. All loans and commitments to lend included in such transactions have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons of similar creditworthiness, and in the opinion of management of Mid-State, have not involved more than the normal risk of repayment or presented any other unfavorable features.

 

Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Exchange Act requires Mid-State’s directors, executive officers and ten percent (10%) or more shareholders of Mid-State’s equity securities to file with the SEC initial reports of ownership and reports of changes of ownership of Mid-State’s equity securities. Officers, directors and ten percent (10%) or more shareholders are required by SEC regulations to furnish Mid-State with copies of all Section 16(a) forms they file. To Mid-State’s knowledge, based solely on review of the copies of such reports furnished to Mid-State and written representations that no other reports were required, during the fiscal year ended December 31, 2005 all Section 16(a) filing requirements applicable to its executive officers, directors and beneficial owners of ten percent (10%) or more of Mid-State’s equity securities appear to have been met.

 

RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS

 

Mid-State has not yet selected its independent public accountants for the fiscal year ending December 31, 2006 but intends to do so later this year.

 

PricewaterhouseCoopers, LLP (“PWC”) audited Mid-State’s financial statements for the year ended December 31, 2005 and have been Mid-State’s accountants since July 2002. It is anticipated that a representative of PWC will be present at the meeting, will have an opportunity to make a statement if they so desire, and will be available to respond to appropriate questions from shareholders regarding Mid-State’s financial statements.

 

Fees. All professional services rendered by PWC during 2005 were furnished at customary rates and terms.

 

 

 

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The following table presents fees for professional audit services rendered by PWC for the fiscal years ended December 31, 2005 and 2004.

 

	2005		2004
Audit Services:
Consolidated financial statements
quarterly reviews, and Report      on Internal Controls	$902,185		$823,000
Audit-Related Services:
Other-Professional services rendered in
connection with an acquisition or
proposed acquisition	0		0
Tax Services:
Compliance	57,875		46,000
Planning	0		13,600
Advice	23,775		47,145
Total tax service fees	81,650		106,745
Total Fees:	$983,835		$929,745

 

In the above table, in accordance with the SEC’s definitions and rules, “audit fees” are fees Mid-State paid PWC for professional services for the audit of Mid-State’s consolidated financial statements included in the Form 10-K and review of financial statements included in Form 10-Q’s, and for services that are normally provided by the accountant in connection with statutory and regulatory filings and engagements; “audit related fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of Mid-State’s financial statements; “tax fees” are fees for tax compliance, tax advice and tax planning; and “all other fees” are fees for any services not included in the first three categories.

 

For the fiscal year 2005 the Audit Committee considered and deemed the services provided by PWC compatible with maintaining the principle accountant’s independence. The Charter for the Audit Committee of the Board contains policies and procedures for pre-approval of audit and non-audit services from our independent public accountant.

 

SHAREHOLDER PROPOSALS AND NOMINATIONS

FOR THE 2007 ANNUAL MEETING

 

Proxy Statement Proposals. Under the rules of the SEC, proposals that shareholders seek to have included in the proxy statement for our next annual meeting of shareholders must be received by the Secretary of Mid-State not later than December 15, 2006.

 

 

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Other Proposals and Nominations. Our Bylaws govern the submission of nominations for director or other business proposals that a shareholder wishes to have considered at a meeting of shareholders, but which are not included in Mid-State’s proxy statement for that meeting. Nominations for director must be made in accordance with Section 2.11 of our Bylaws, which is set forth in the notice of the meeting attached to this proxy statement.

 

ADDITIONAL INFORMATION

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. We electronically file the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 11-K (Annual Report for Employees' Stock Purchase and Savings Plans), Form 8-K (Report of Unscheduled Material Events), insider trading reports (Forms 3, 4 and 5) and Form DEF 14A (Proxy Statement). We may file additional forms. The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information is available free of charge on our website: www.midstatebank.com. We post these reports to our website as soon as reasonably practicable after filing them with the SEC. None of the information on or hyperlinked from our website is incorporated into this proxy statement.

 

James G. Stathos

Secretary

 

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APPENDIX “A”

 

AUDIT COMMITTEE CHARTER

MID-STATE BANCSHARES AND MID-STATE BANK & TRUST

 

Purpose:

 

The Audit Committee of Mid-State Bancshares (the “Company”) shall:

 

•	Provide assistance to the Board of Directors (the “Board”) in fulfilling its responsibilities with respect to its oversight of:

 

a.	The integrity of the Company’s financial statements;
b.	The Company’s compliance with legal and regulatory requirements;
c.	The independent auditor’s qualifications and independence; and
d.	The performance of the Company’s internal auditor (whether an internal department or through an outsourcing relationship) and independent auditors.

 

•	Prepare the Audit Committee’s report required by the Securities and Exchange Commission (the “Commission”) rules and include it in the Company's annual proxy statement.

 

•	Conduct any investigation appropriate to fulfilling its responsibilities.

The Audit Committee will have a clear understanding with the Company’s independent auditors that they must maintain an open and transparent relationship with the Audit Committee that the ultimate accountability of the independent auditors is to the Audit Committee. The independent auditors report directly to the Audit Committee.

 

Committee Membership:

 

The Audit Committee shall consist of no fewer than three members of the Board. The members of the Audit Committee shall meet the independence and experience requirements of the Nasdaq listing standards, Section 10A(m)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and regulations of the Commission. In addition, no member of the Committee shall have participated in the preparation of the financial statements of the Company or any current subsidiary of the Company at any time during the past three years. The Committee shall review and make a determination on the independence of each of its members not less frequently than yearly.

 

 

 

A-1

 

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All members of the Committee shall be able to read and understand fundamental financial statements, including a balance sheet, income statement, and cash flow statement. At least one member of the Committee shall be an “audit committee financial expert” as defined by the Commission. The Committee shall review and make a determination on “audit committee financial expert” status not less frequently than yearly.

 

Audit Committee members shall not simultaneously serve on the audit committees of more than two other public companies without the approval of the Board. Other than in their capacity as a member of the board or any board committee, audit committee members may not accept any direct or indirect consulting, advisory or other compensatory payments from the issuer or any subsidiary. An audit committee member must not be an affiliated person of the issuer or any subsidiary apart from his or her capacity as a member of the board or any board committee.

 

The members of the Audit Committee shall be appointed by the Board on the recommendation of the Nominating Committee. Audit Committee members may be replaced by the Board at any time. The Board shall elect the Chairperson of the Audit Committee. The Chairperson will chair all regular sessions of the Audit Committee and set the agendas for Audit Committee meetings.

 

Meetings:

 

The Audit Committee shall meet as often as it determines necessary, but not less frequently than quarterly. The Audit Committee shall meet periodically with management, the internal auditors, and the independent auditor in separate executive sessions. The Audit Committee may request any officer or employee of the Company or the Company's outside counsel or independent auditor to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee. The Audit Committee will ensure that minutes of each of its meetings are prepared and distributed to the Board, and shall provide periodic summary reports to the Board. The permanent file of the minutes shall be maintained by the Company Secretary.

 

Committee Authority and Responsibilities:

 

The Audit Committee shall have the authority to appoint or replace the independent auditor. The Audit Committee shall be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The independent auditor shall report directly to the Audit Committee.

 

 

 

A-2

 

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The Audit Committee shall pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the Audit Committee prior to the completion of the audit. The Audit Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting.

 

The internal audit function shall report on a direction and accountability basis to the Audit Committee. The Audit Committee shall have oversight responsibilities over internal audit as provided in the Internal Audit Charter (EP 101-8).

 

The Audit Committee shall have the authority, to the extent it deems necessary or appropriate, to retain independent legal, accounting, or other advisors. The Company shall provide for appropriate funding, as determined by the Audit Committee, for payment of compensation (i) to the independent auditors engaged for purposes of rendering an audit report or related work or performing other audit, review or attest services; (ii) to the internal auditor and staff or, if such function is out-sourced, the firm providing the internal audit function, (iii) any advisors employed by the Audit Committee; and (iv) for any ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

 

The Audit Committee shall make regular reports to the Board. The Audit Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. The Audit Committee shall annually review the Audit Committee's own performance.

 

Financial Statement and Disclosure Matters:

 

The Audit Committee, to the extent it deems necessary or appropriate, shall:

 

•

Review and discuss with management and the independent auditor the annual audited financial statements, including disclosures made in management's discussion and analysis, and recommend to the Board whether the audited financial statements should be included in the Company's Form 10-K, and the results of the audit.

 

•	Review and discuss with management and the independent auditor the Company's quarterly financial statements prior to the filing of its Form 10-Q, including the results of the independent auditor's review of the quarterly financial statements.

 

 

 

 

 

A-3

 

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•

Discuss with management and the independent auditor significant accounting policies and financial reporting issues and judgments made in connection with the preparation of the Company's financial statements, including any significant changes in the Company's selection or application of accounting principles, any major issues as to the adequacy of the Company's internal controls and any special steps adopted in light of material control deficiencies.

 

•	Review and discuss quarterly reports from the independent auditors on:

 

a.	All critical accounting policies and practices to be used as well as any changes or proposed changes in accounting policies.
b.	All alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor.
c.	Other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences.

 

•	Discuss with management prior to their release the Company's earnings press releases, including the use of “pro forma” or “adjusted” non-GAAP information. The chairman of the committee may represent the entire committee for purposes of this discussion.

 

•	Cause a representative of the committee to attend the Company’s Disclosure Committee meetings.
•	Discuss with management and the independent auditor the effect of regulatory and accounting initiatives, any off-balance sheet structures on the Company's financial statements, and rules, policies of, and examinations by, relevant banking regulators.

 

•	Discuss with management the Company's major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company's risk assessment and risk management policies.

 

•

Discuss with the independent auditor the matters required to be discussed by statement on auditing standards no. 61 relating to the conduct of the audit, including any difficulties encountered in the course of the audit work, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management.

 

•

Review any disclosures made to the Audit Committee by the Company's CEO and CFO during their certification process for the Form 10-K and Form 10-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company's internal controls.

 

 

A-4

 

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•	Review findings reported by regulatory agencies, management’s response, and monitor corrective action on major deficiencies and cause internal audit to monitor and report to the Audit Committee the status of the corrective actions.

 

•	Review periodically (i) the reserve for loan losses and methods used in its determination; (ii) legal exposure from pending or threatened litigation; and (iii) management’s analysis of insurance coverage.

 

•	Discuss earnings press releases and financial information and earnings guidance provided to analysts and rating agencies.

 

Oversight of the Company's Relationship with the Independent Auditor:

 

Review and evaluate the lead partner of the independent auditor team.

 

Obtain and review a report from the independent auditor at least annually regarding (a) the independent auditor's internal quality-control procedures, (b) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm, (c) any steps taken to deal with any such issues, and (d) all relationships between the independent auditor and the Company. Evaluate the qualifications, performance, and independence of the independent auditor, including considering whether the auditor's quality controls are adequate and the provision of permitted non-audit services is compatible with maintaining the auditor's independence, taking into account the opinions of management and internal auditors. The Audit Committee shall present its conclusions with respect to the independent auditor to the Board.

 

Ensure the rotation of the audit partners as required by law. Consider whether, in order to assure continuing auditor independence, it is appropriate to adopt a policy of rotating the independent auditing firm on a regular basis.

 

Establish Board policies for the Company's hiring of employees or former employees of the independent auditor who participated in any capacity in the audit of the Company.

 

Meet with the independent auditor prior to the audit to discuss the proposed scope, planning and staffing of the audit.

 

Following completion of the annual audit, review separately with management and the independent auditors any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work, access to required information, or any significant changes to the planned scope of the audit.

 

Review any significant disagreement between management and the independent auditors in connection with the preparation of the financial statements.

 

 

A-5

 

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Oversight of the Company's Internal Auditor:

 

Consistent with the provision of the Internal Audit Charter (EP 101-8), the Audit Committee shall:

 

Review and approve the appointment, removal, evaluation, and compensation of the internal auditor or, if such function is out-sourced, the firm providing the internal audit function.

 

Evaluate the internal audit process for establishing the annual internal audit plan and performance of the internal audit function.

 

Review the reports to management prepared by the internal auditor and management's responses.

 

Oversee internal audit activities, including discussing with management and the internal auditor, the internal audit functions, organization, objectivity, responsibilities, annual internal audit plans, budget, and staffing.

 

Review periodic progress reports covering the annual internal audit plan.

 

Review and monitor unresolved matters related to internal audit issues and the responses by management.

 

Ensure appropriate independence of the internal auditing function.

 

Compliance Oversight Responsibilities:

 

Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees or other "whistleblowers" of concerns regarding questionable accounting or auditing matters.

 

Discuss with management and the independent auditor any correspondence with regulators or governmental agencies and any published reports that raise material issues regarding the Company's financial statements or accounting policies.

 

Discuss with the Company's Counsel legal matters that may have a material impact on the financial statements or the Company's compliance policies.

 

Approve all related party transactions to which the Company is a party. “Related party transactions” refers to those transactions the disclosure of which is required pursuant to SEC Regulation S-K, Item 404.

 

Review the appropriateness of the practices utilized to reimburse executive officers and to assure compliance with the Company’s codes of ethics and conduct.

 

 

A-6

 

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Limitation of Audit Committee's Role:

 

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company's financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations. These are the responsibilities of management and the independent auditor.

 

 

A-7

 

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APPENDIX “B”

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee (“Committee”) of the Board of Directors is composed of four independent directors. The members of the Committee are: Director Andrews (Chairman), Director Flood, Director Heron, and Director Miner. Each member is an “independent director,” as defined by the Nasdaq rules and satisfies the additional SEC requirements for independence of audit committee members. In addition, the Board of Directors has determined that George H. Andrews is and “audit committee financial expert,” as defined by the SEC rules.

 

The Committee held six (6) meetings during 2005. During the course of the year, the Committee reviewed the Audit Committee Charter which, among other things, provides the Committee with authority to (i) control the outside auditor, (ii) make hiring and termination decisions concerning the auditor, and (iii) approve all non-audit services.

 

The Committee oversees the financial reporting process for Mid-State Bancshares (“Mid-State”) on behalf of the Board of Directors. In fulfilling its oversight responsibilities, the Committee reviewed the annual financial statements to be included in the Annual Report and Form 10-K.

 

In accordance with Statements on Accounting Standards (SAS) No. 61 and No. 90, discussions were held with management and the independent auditors regarding the acceptability and the quality of the accounting principles used in the reports. These discussions included the clarity of the disclosures made therein, the underlying estimates and assumptions used in the financial reporting, and the reasonableness of the significant judgments and management decisions made in developing the financial statements. In addition, the Committee has discussed with the independent auditors their independence from Mid-State and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1.

 

The Committee has also met and discussed with management and its independent auditors, issues related to the overall scope and objectives of the audit conducted, the internal controls used by Mid-State, and the selection of Mid-State’s independent auditors.

 

Pursuant to the reviews and discussions described above, the Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

 

 

 

 

 

B-1

 

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Signed and adopted by the Audit Committee this 1^st day of March, 2006.

 

 

/s/ George H. Andrews

Committee Chairman

 

/s/ Daryl L. Flood

Committee Member

 

/s/ H. Edward Heron

Committee Member

 

/s/ Michael Miner

Committee Member

 

 

 

 

 

 

 

 

 

 

 

 

 

The material in this report is not “soliciting material,” is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference in any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this proxy statement and irrespective of any general incorporation language therein.

 

 

B-2

 

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APPENDIX “C”

REPORT OF THE COMPENSATION COMMITTEE

MID-STATE BANCSHARES AND MID-STATE BANK & TRUST

 

The goals of the Mid-State Executive Compensation Program (the “Program”) are to attract and retain higher caliber executives, provide compensation in a cost efficient manner, encourage executive ownership of Mid-State Bancshares (“Mid-State”) common stock and motivate executives to maximize returns to shareholders, both annually and over the long-term.

 

The philosophy of the Program is to provide a total reward program that supports achievement of Mid-State’s goals and objectives and provides total compensation that is competitive in relation to that provided by comparable financial institutions.

 

Compensation for Mid-State’s executive officers includes the following components:

 

•	Salary – The principal objective of the salary program is to maintain salaries that are targeted at the 75th percentile of the market for comparable positions in similarly sized financial institutions.

 

•	Annual incentives – Annual incentives are designed to reward principally for overall annual Bank performance and provide total cash compensation that is targeted at the 75th percentile of the market when warranted by performance.

 

•

Long-term incentives – The principal objective of the long-term stock-based incentive program is to align the financial interests of executives with those of shareholders, provide incentive for executive ownership of Mid-State common stock, support the achievement of long-term financial objectives, and provide for long-term incentive reward and capital accumulation opportunities.

 

•	Benefits – The principal objectives of the benefits program provided for executives are to provide attractive benefits to retain key executives and provide financial planning opportunities to facilitate tax and estate planning.

 

 

CEO Compensation

 

In setting the Chief Executive Officer’s (the “CEO”) base salary and in determining his performance bonus for fiscal 2005, the Compensation Committee (the “Committee”) has considered Mid-State’s sustained revenue and profit growth in recent years.  In addition, the Bank continues to perform in the upper quartile of the industry peer group.  The CEO significantly contributed to this success.  Based on this performance, the Committee approved a salary increase and cash bonus.  The stock option grant made to the CEO was made at the fair market value.  All of the adjustments were made in accordance with the guidelines established in the executive compensation plan. 

 

C-1

 

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It is the opinion of the Committee that the aforementioned compensation policies and structures provide the necessary discipline to properly align Mid-State’s corporate objectives and the interests of our shareholders with competitive compensation practices in an equitable manner.

 

Signed and adopted by the Compensation Committee this 9^th day of February 2006.

 

 

/s/ Gregory R. Morris

Committee Chairman

 

/s/ Stephen P. Maguire

Committee Member

 

/s/ Alan Rains

Committee Member

 

 

 

C-2

 

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1. THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE VOTED “FOR” THE PROPOSAL.		Please Mark Here for Address Change or Comments	o
		SEE REVERSE SIDE

1.

ELECTION OF DIRECTORS

FOR all nominees listed (except as marked to the contrary)

WITHHOLD AUTHORITY to vote for all nominees listed

ITEM 2. OTHER BUSINESS. To transact such other business as may properly come before the Meeting and any adjournment or adjournments thereof.

01

Trudi G. Carey

o

o

02

H. Edward Heron

03

James W. Lokey

04

Stephen P. Maguire

The undersigned hereby acknowledges receipt of the Notice of Meeting, Proxy Statement, and Annual Report that accompanies this proxy and ratifies all lawful actions taken by the above named proxies. Please mark if you will or will not attend the Annual Meeting in person.

I (We) will attend

o

will not attend

o

Withheld for the nominees you list below: (Write that nominee’s name in the space provided below.)

Choose MLinksm for fast, easy and secure 24/7 online access to your future proxy materials, investment plan statements, tax documents and more. Simply log on to Investor ServiceDirect® at www.melloninvestor.com/isd where step-by step instructions will prompt you through enrollment.

 

Signature			Signature			Date
NOTE: Please sign as name appears above. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.

/\   FOLD AND DETACH HERE   /\

Vote by Internet or Telephone or Mail
24 Hours a Day, 7 Days a Week

Internet and telephone voting is available through 11:59 PM Eastern Time
the day prior to annual meeting day.

Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner
as if you marked, signed and returned your proxy card.

Internet http://www.proxyvoting.com/mdst Use the internet to vote your proxy. Have your proxy card in hand when you access the web site.

OR

Telephone 1-866-540-5760 Use any touch-tone telephone to vote your proxy. Have your proxy card in hand when you call.

OR

Mail Mark, sign and date your proxy card and return it in the enclosed postage-paid envelope.

If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.

  You can view the Annual Report and Proxy Statement
  on the internet at www.midstatebank.com

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PROXY

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF

MID-STATE BANCSHARES

     The undersigned hereby appoints Carrol R. Pruett and James G. Stathos, and each of them, with power to act without the other and with power of substitution, as proxies and attorneys-in-fact and hereby authorizes them to represent and vote, as provided on the other side, all the shares of Mid-State Bancshares Common Stock which the undersigned is entitled to vote, and, in their discretion, to vote upon such other business as may properly come before the Annual Meeting of Shareholders of the Company to be held at The Clark Center, 487 Fair Oaks Avenue, Arroyo Grande, California, on Tuesday, May 16, 2006 at 7:30 p.m., local time, or at any adjournment or postponement thereof, with all powers which the undersigned would possess if present at the Meeting.

(Continued, and to be marked, dated and signed, on the other side)

Address Change/Comments (Mark the corresponding box on the reverse side)

Ù FOLD AND DETACH HERE Ù

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	Access your Mid-State Bancshares shareholder/stockholder account online via Investor ServiceDirect® (ISD).   Mellon Investor Services LLC, Transfer Agent for Mid-State Bancshares, now makes it easy and convenient to get current information on your shareholder account.
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	Visit us on the web at http://www.melloninvestor.com For Technical Assistance Call 1-877-978-7778 between 9am-7pm Monday-Friday Eastern Time Investor ServiceDirect® is a registered trademark of Mellon Investor Services LLC BRING THIS ADMISSION TICKET WITH YOU TO THE MEETING ON MAY 16, 2006 DO NOT MAIL. 2006 Annual Shareholders Meeting Tuesday, May 16, 2006 7:30 p.m. The Clark Center 487 Fair Oaks Avenue Arroyo Grande, California, 93420