UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004
Commission File number 1-11826

MIDSOUTH BANCORP, INC.

102 Versailles Boulevard, Lafayette, LA 70501
(Address of principal executive offices)

Registrant’s telephone number, including area code: (337) 237-8343

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No      

Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K   X  

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.) Yes       No   X  

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was $64.5 million. As of February 28, 2005, there were outstanding 4,454,256 shares of MidSouth Bancorp, Inc. common stock, $.10 par value, which stock is the only class of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2004, are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

MIDSOUTH BANCORP, INC.

2004 Annual Report on Form 10-K

TABLE OF CONTENTS

PART I

ITEM 1 — Business.

The Company

     MidSouth Bancorp, Inc. (“MidSouth”) is a Louisiana corporation registered as a bank holding company under the Bank Holding Company Act of 1956. Its operations are conducted primarily through two wholly owned bank subsidiaries (the “Banks”), MidSouth Bank, N.A. (“MidSouth Bank”), chartered in February 1985, and Lamar Bank (“Lamar”), acquired in October 2004. MidSouth had previously offered consumer financing through a third subsidiary, Financial Services of the South, Inc. (the “Finance Company”). The Finance Company completed the liquidation of its loan portfolio in 2004 and is currently inactive.

The Banks

     MidSouth Bank is a national banking association domiciled in Lafayette, Louisiana. Lamar is a state-chartered bank domiciled in Beaumont, Texas. The Banks provide a broad range of commercial and retail community banking services primarily to professional, commercial and industrial customers in their market areas. These services include, but are not limited to, interest bearing and non-interest bearing checking accounts, investment accounts, cash management services, electronic banking services, credit card and secured and unsecured loan products. The Banks are U.S. government depositories and are members of the Pulse network which provides its customers with automatic teller machine services through the Pulse and Cirrus networks. Membership in the Community Cash Network provides MidSouth Bank customers with additional access throughout the Greater New Orleans area with no surcharge. MidSouth Bank operates the twenty locations and Lamar operates the five locations described below under “Item 2 — Properties.”

Employees

     As of December 31, 2004, the Banks employed approximately 300 full-time equivalent employees and the Finance Company had no employees. MidSouth has no employees who are not also employees of the Banks. Through the Banks, employees receive employee benefits, which include an employee stock ownership plan, a 401-K plan and life, health and disability insurance plans. MidSouth’s directors, officers, and employees are important to the success of the Company and play a key role in business development by actively participating in the communities served by the Company. MidSouth considers the relationships of the Banks with their employees to be very good.

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Competition

     The Banks face keen competition in their market areas from both traditional and non-traditional financial services providers, such as commercial banks, savings banks, credit unions, finance companies, mortgage companies, leasing companies, insurance companies, money market mutual funds, brokerage houses and retail stores that provide credit facilities. Several of the financial services competitors in MidSouth’s market areas are substantially larger and have far greater resources, however, MidSouth has effectively competed by building long term customer relationships and customer loyalty through a continued focus on quality customer service enhanced by current technology and effective delivery systems.

Other factors, including economic, legislative and technological changes, also impact MidSouth’s competitive environment. MidSouth’s management continually evaluates competitive challenges in the financial services industry and develops appropriate responses consistent with its overall market strategy.

Competitive and legislative pressures have recently increased consolidation activity within the financial services industry. Many of MidSouth’s competitors have been actively expanding through acquisition. MidSouth’s acquisition of Lamar in October 2004 afforded the opportunity to realize a long-term strategic goal of expanding along the I-10 corridor into the Texas market. Although its primary focus is to grow in existing markets with new branches, MidSouth remains open to growth opportunities through acquisitions that would build shareholder value.

Supervision and Regulation — Bank Holding Companies

Participants in the financial services industry are subject to varying degrees of regulation and government supervision. The following section summaries contain important aspects of the supervision and regulation of banks and bank holding companies. The current system of laws and regulations can change over time and we cannot predict whether these changes will be favorable or unfavorable to MidSouth or the Banks.

General. As a bank holding company, MidSouth is subject to the Bank Holding Company Act of 1956 (the “Act”) and to supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Act requires MidSouth to file periodic reports with the Federal Reserve Board and subjects MidSouth to regulation and examination by the Federal Reserve Board. The Act also requires MidSouth to obtain the prior approval of the Federal Reserve Board for acquisitions of substantially all of the assets of any bank or bank holding company or more than 5% of the voting shares of any bank or bank holding company. The Act prohibits MidSouth from engaging in any business other than banking or bank-related activities specifically allowed by the Federal Reserve Board, including the modifications to the Act brought about by the enactment of the Graham-Leach-Bliley Act (“GLB”) of 1999.

Gramm-Leach-Bliley Act. This financial services reform legislation (1) permits commercial banks to affiliate with investment banks, 2) permits companies that own commercial banks to engage in any type of financial activity, and 3) allows subsidiaries of banks to engage in a broad range of financial activities beyond those permitted for banks themselves. As a result, banks, securities firms, and insurance companies will be able to combine much more readily.

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Under provisions of GLB, two new types of regulated entities are authorized to engage in a broad range of financial activities much more extensive that those of standard holding companies. A “financial holding company” can engage in all newly-authorized activities and is simply a bank holding company whose depository institutions are well-capitalized, well-managed, and has a CRA rating of “satisfactory” or better. A “financial subsidiary” is a direct subsidiary of a bank that satisfies the same conditions as a ‘financial holding company”plus several more. The “financial subsidiary” can engage in most of the newly-authorized activities, which are defined as securities, insurance, merchant banking/equity investment, “financial in nature,” and “complementary” activities.

GLB also defines the concept of “functional supervision” meaning similar activities should be regulated by the same regulator, with the Federal Reserve Board serving as an “umbrella” supervisory authority over bank and financial holding companies.

While GLB created new opportunities for MidSouth to offer expanded services to its customer base in the future, MidSouth has not yet determined the nature of the expanded services or when the services will be offered.

Support of Subsidiary Banks by Holding Companies. Under current Federal Reserve Board policy, the Company is expected to act as a source of financial strength for the Banks and to commit resources to support the Banks in circumstances where it might not do so absent such policy. In addition, any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority of payment.

Limitations on Acquisitions of Bank Holding Companies. As a general proposition, other companies seeking to acquire control of a bank holding company such as the Company would require the approval of the Federal Reserve Board under the Act. In addition, individuals or groups of individuals seeking to acquire control of a bank holding company would need to file a prior notice with the Federal Reserve Board (which the Federal Reserve Board may disapprove under certain circumstances) under the Change in Bank Control Act. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control may exist under the Change in Bank Control Act if the individual or company acquires 10% or more of any class of voting securities of the bank holding company.

Sarbanes-Oxley Act of 2002. Signed into law on July 30, 2002, the Sarbanes-Oxley Act of 2002 (“SOX”) addresses many aspects of corporate governance and financial accounting and disclosure. Primarily, it provides a framework for the oversight of public company auditing and for insuring the independence of auditors and audit committees. Under SOX, audit committees are responsible for the appointment, compensation and oversight of the work of external and internal auditors. SOX also provides for enhanced and accelerated financial disclosures, establishes certification requirements for a company’s chief executive and chief financial officers and imposes new restrictions on and accelerated reporting of certain insider trading activities. Significant penalties for fraud and other violations are included in SOX.

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Section 404 of SOX requires a company to include in its annual report a statement of management’s responsibility to establish and maintain adequate internal control over financial reporting and management’s conclusion on the effectiveness of internal controls at year-end. Additionally, independent auditors are required to attest to and report on management’s evaluation of internal controls over financial reporting. Due to a recent extension granted to non-accelerated filers, MidSouth currently would not be required to comply with Section 404 requirements until December 2006, unless the market value of its public float exceeds $75 million at June 30, 2005.

Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. MidSouth and the Banks are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide the law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA Patriot Act, enacted in 2001. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.

Capital Adequacy Requirements. The Federal Reserve Board and the Office of the Comptroller of Currency require that the MidSouth and the Banks meet certain minimum ratios of capital to assets in order to conduct their activities. Two measures of regulatory capital are used in calculating these ratios — Tier 1 Capital and Total Capital. Tier 1 Capital generally includes common equity, retained earnings, a limited amount of qualifying preferred stock, and qualifying minority interests in consolidated subsidiaries, reduced by goodwill and certain other intangible assets, such as core deposit intangibles, and certain other assets. Total Capital generally consists of Tier 1 Capital plus the allowance for loan losses, preferred stock that did not qualify as Tier 1 Capital, certain types of subordinated debt and a limited amount of other items.

     The Tier 1 Capital ratio and the Total Capital ratio are calculated against an asset total weighted for risk. Certain assets, such as cash and U.S. Treasury securities, have a zero risk weighting. Others, such as commercial and consumer loans, often have a 100% risk weighting. Assets also include amounts that represent the potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These potential assets are assigned to risk categories in the same manner as funded assets. The total assets in each category are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the capital calculations. The leverage ratio also provides a measure of the adequacy of Tier 1 Capital, but assets are not risk-weighted for this calculation. Assets deducted from regulatory capital, such as goodwill and other intangible assets, are also excluded from the asset base used to calculate capital ratios. The minimum capital ratios for both the Company and the Bank are generally 8% for Total Capital, 4% for Tier

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1 Capital and 4% for leverage.

At December 31, 2004, the MidSouth’s ratios of Tier 1 and total capital to risk-weighted assets were 12.08% and 12.96%, respectively. MidSouth’s leverage ratio (Tier 1 capital to total average adjusted assets) was 8.73% at December 31, 2004. All three regulatory capital ratios exceeded regulatory minimums at December 31, 2004.

Supervision and Regulation

General. As a national banking association, MidSouth Bank is supervised and regulated by the Office of the Comptroller of the Currency (its primary regulatory authority), the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”). Under Section 23A of the Federal Reserve Act, the Bank is restricted in its ability to extend credit to or make investments in MidSouth and other affiliates as that term is defined in that act. National banks are required by the National Bank Act to adhere to branch banking laws applicable to state banks in the states in which they are located and are limited as to powers, locations and other matters of applicable federal law.

As a state-chartered bank, Lamar is supervised and regulated by the Texas Department of Banking and the FDIC. The Texas Constitution, as amended in 1986, provides that a Texas-chartered state bank has the same rights and privileges that are or may be granted to national banks domiciled in Texas. Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the Texas Banking Department and the FDIC.

Capital Adequacy Requirements. National and state banks are subject to regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on a bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, a bank must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

To be eligible to be classified as “well-capitalized,” the Banks must generally maintain a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and a leverage ratio of 5% or more. If an institution fails to remain well-capitalized, it will be subject to a series of restrictions that increase as the capital condition worsens. For instance, federal law generally prohibits a depository institution from making any capital distribution, including the payment of a dividend, or paying any management fee to its holding company, if the depository institution would be undercapitalized as a result. Undercapitalized depository institutions may not accept brokered deposits absent a waiver from the Federal Deposit Insurance Corporation (FDIC), are subject to growth limitations, and must submit a capital restoration plan that is guaranteed by the institution’s parent holding company. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.

As of December 31, 2004, the most recent notification from the FDIC categorized the

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MidSouth Bank and Lamar as “well capitalized” under the regulatory framework for prompt corrective action. All three regulatory capital ratios for the Banks exceeded these minimums at December 31, 2004.

Deposit Insurance. MidSouth Bank is a member of the FDIC, and its deposits are insured by the FDIC up to the amount permitted by law. MidSouth Bank is thus subject to FDIC deposit insurance premium assessments. The FDIC uses a risk-based assessment system that assigns insured depository institutions to different premium categories based primarily on each institution’s capital position and its overall risk rating as determined by its primary regulator. Annual premium rates currently range from none for institutions that are judged to pose the least risk to the insurance fund to 27 cents per $100 of assessable deposits for the most risky institutions, but the FDIC is authorized to set the top rate as high as 31 cents. Under the premium structure currently in effect and based on its current capital position and regulatory risk rating, the Bank pays no deposit insurance premium.

Community Reinvestment Act. MidSouth Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA), and the related regulations issued by federal banking agencies. The CRA states that all banks have a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods. The CRA also charges a bank’s primary federal regulator, in connection with the examination of the institution or the evaluation of certain regulatory applications filed by the institution, with the responsibility to assess the institution’s record in fulfilling its obligations under the CRA. The regulatory agency’s assessment of the institution’s record is made available to the public. MidSouth Bank received a satisfactory rating following its most recent CRA examination.

Consumer Regulation. Activities of the Banks are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include provisions that:

	•	govern the Banks’ disclosures of credit terms to consumer borrowers;
	•	limit the interest and other charges collected or contracted for by the Banks;
	•	require the Banks to provide information to enable the public and public officials to determine whether it is fulfilling its obligation to help meet the housing needs of the community it serves;
	•	prohibit the Banks from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to extend credit;
	•	require that the Banks safeguard the personal nonpublic information of its customers, provide annual notices to consumers regarding the usage and sharing of such information, and limit disclosure of such information to third parties except under specific circumstances; and
	•	govern the manner in which the Banks may collect consumer debts.
		The deposit operations of the Banks are also subject to laws and regulations that:
	•	require the Banks to adequately disclose the interest rates and other terms of consumer deposit accounts;
	•	impose a duty on the Banks to maintain the confidentiality of consumer financial records and prescribe procedures for complying with administrative subpoenas of financial records; and

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•

govern automatic deposits to and withdrawals from deposit accounts with the Banks and the rights and liabilities of customers who use automated teller machines and other electronic banking services.

Governmental Policies

The operations of financial institutions may be affected by the policies of various regulatory authorities. In particular, bank holding companies and their subsidiaries are affected by the credit policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement its objectives are open market operations in United States Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. These policies have significant effects on the overall growth and profitability of the loan, investment and deposit portfolios. The general effects of such policies upon future operations cannot be accurately predicted.

Available Information

MidSouth files annual, quarterly and current reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC Internet site’s address is http://www.sec.gov. The Company maintains a corporate website at www.midsouthbank.com. We provide public access free of charge to our annual reports on Form 10-K for the last five years, and our most recent quarterly report on Form 10-Q under the Corporate Relations section of our corporate website.

ITEM 2 — Properties.

     MidSouth leases its principal executive and administrative offices and principal MidSouth Bank facility in Lafayette, Louisiana under a twenty-year lease expiring December 31, 2011. MidSouth Bank has six other banking offices in Lafayette, Louisiana, three in New Iberia and one banking office in each of Breaux Bridge, Cecilia, Jeanerette, Opelousas, Morgan City, Jennings, Lake Charles, and Sulphur, Louisiana. Thirteen of these offices are owned and five are leased. MidSouth Bank also leases space for two limited service banking offices in Thibodaux and Houma, Louisiana. In 2004, property was purchased in Houma to begin construction of a full service banking office to be completed in 2005. Management continues to review possible sights for a full service banking office in Thibodaux. Additionally in 2004, property was purchased for another Lafayette branch to be located on a major retail thoroughfare. Plans were also made to construct an office in the Town Square of the traditional neighborhood of River Ranch, which will bring the number of offices in MidSouth Bank’s home market to nine.

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Lamar operates three full service banking offices in Beaumont, Texas, including its headquarters located at 555 N. Dowlen Road in Beaumont, two of which are owned and one is leased. Additional full service banking offices are located in Vidor and College Station, and a loan production office is located in Conroe. The College Station and Conroe offices are leased facilities. Management is currently reviewing possible sites to add full service banking offices in the College Station, Conroe and north Houston areas.

ITEM 3 — Legal Proceedings.

     The Banks have been named as a defendant in various legal actions arising from normal business activities in which damages of various amounts are claimed. While the amount, if any, of ultimate liability with respect to such matters cannot be currently determined, management believes, after consulting with legal counsel, that any such liability will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

ITEM 4 — Submission of Matters to a Vote of Security Holders.

     No matters were submitted to a vote of MidSouth’s security holders in the fourth quarter of 2004.

Item 4A — Executive Officers of the Registrant

C. R. Cloutier, 57 — President, Chief Executive Officer and Director of MidSouth and MidSouth Bank since 1984.

Karen L. Hail, 51 – Named Senior Executive Vice President and Chief Operations Officer of MidSouth Bank in 2002 and Director of MidSouth Bank, and Secretary and Treasurer and Director of MidSouth since 1984.

Donald R. Landry, 48 – Senior Vice President and Senior Loan Officer of MidSouth Bank since 1995 and named Executive Vice President in 2002.

Jennifer S. Fontenot, 50 — Senior Vice President since 1995 and named Chief Information Officer of MidSouth Bank in 2002.

Dwight Utz, 51 — Senior Vice President of Retail Banking since 2001; prior to his employment at MidSouth Bank, Mr. Utz was a Corporate Vice President for PNC Bank Corporation in Pittsburgh, Pennsylvania from 1973 to 2000.

Teri S. Stelly, 45 — Senior Vice President and Controller of MidSouth since 1998 and named Chief Financial Officer of MidSouth Bank in 2002.

Christopher J. Levanti, 38 – Joined MidSouth as Senior Vice President of Credit Administration in 2002; prior to his employment at MidSouth Bank, Mr. Levanti was Senior Credit Manager at First Data Merchant Services in Melville, New York from 2000 to 2002.

Gregory King, 49 — Joined MidSouth as Vice President and Loan Review Officer in 2003; promoted to Senior Vice President of Risk Management in 2004; prior to his employment with MidSouth Bank, Mr. King was Executive Vice President and Chief

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Operating Officer at LBA Savings Bank in Lafayette, Louisiana from 1997 to 2003. Prior to that position, Mr. King was employed as a national bank examiner.

     All executive officers of the Company are appointed for one year terms expiring at the first meeting of the Board of Directors after the annual shareholders meeting next succeeding his or her election and until his or her successor is elected and qualified.

PART II

     ITEM 5 — Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     As of February 28, 2005, there were 753 common shareholders of record. MidSouth’s Common Stock trades on the American Stock Exchange under the symbol “MSL.” The high and low sales prices for the past eight quarters are provided in the Selected Quarterly Financial Data tables included with this filing under Item 7 and is incorporated herein by reference.

     Cash dividends totaling $1,112,360 were declared to common stockholders during 2004. The quarterly dividend of $.06 per share was paid for each quarter of 2004 and a special dividend of $.06 per share was paid in addition to the $.06 per share for the fourth quarter of 2004. It is the intention of the Board of Directors of MidSouth to continue paying quarterly dividends on the common stock at a rate of $.06 per share. Cash dividends totaling $992,648 were declared to common stockholders during 2003. The quarterly dividend was increased from $.05 per share to $.06 per share beginning in the third quarter of 2003 and a special dividend of $.10 per share was paid in addition to the $.06 per share for the fourth quarter of 2003. Restrictions on the Company’s ability to pay dividends are described in Item 7 below under the heading “Liquidity — Dividends” and in Note 13 to the Company’s consolidated financial statements.

The following table provides information with respect to purchases made by or on behalf of MidSouth or any “affiliated purchaser,” as defined in Securities Exchange Act Rule 10b-8(a)(3), of equity securities during the fourth quarter ended December 31, 2004. In addition to the repurchases detailed below, a total of 6,576 shares were added to Treasury Stock through a five-for-four stock split paid on November 30, 2004.

1 — Under a share repurchase program approved by MidSouth’s Board of Directors on November 13, 2002, MidSouth can repurchase up to 5% of its common stock outstanding through open market or privately negotiated transactions. The repurchase program does not have an expiration date.

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ITEM 6

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ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

MidSouth Bancorp, Inc. (“MidSouth”) is a multi-bank holding company that conducts substantially all of its business through its wholly-owned subsidiary banks (the “Banks”), MidSouth Bank, N. A., headquartered in Lafayette, Louisiana and Lamar Bank, headquartered in Beaumont, Texas. A third subsidiary, Financial Services of the South, Inc. (the “Finance Company”) completed the liquidation its loan portfolio in 2004 and is inactive. Following is management’s discussion of factors that management believes are among those necessary for an understanding of MidSouth’s financial statements. The discussion should be read in conjunction with MidSouth’s consolidated financial statements and the notes thereto presented herein.

Forward Looking Statements

The Private Securities Litigation Act of 1995 provides a safe harbor for disclosure of information about a company’s anticipated future financial performance. This act protects a company from unwarranted litigation if actual results differ from management expectations. This management’s discussion and analysis reflects management’s current views and estimates of future economic circumstances, industry conditions, MidSouth’s performance and financial results based on reasonable assumptions. A number of factors and uncertainties could cause actual results to differ materially from the anticipated results and expectations expressed in the discussion. These factors and uncertainties include, but are not limited to:

• changes in interest rates and market prices that could affect the net interest margin, asset valuation, and expense levels;

• changes in local economic and business conditions that could adversely affect customers and their ability to repay borrowings under agreed upon terms and/or adversely affect the value of the underlying collateral related to the borrowings;

• increased competition for deposits and loans which could affect rates and terms;

• changes in the levels of prepayments received on loans and investment securities that adversely affect the yield and value of the earning assets;

• a deviation in actual experience from the underlying assumptions used to determine and establish the Allowance for Loan Losses (“ALL”);

• changes in the availability of funds resulting from reduced liquidity or increased costs;

• the timing and impact of future acquisitions, the success or failure of integrating operations, and the ability to capitalize on growth opportunities upon entering new markets;

• the ability to acquire, operate and maintain effective and efficient operating systems;

• increased asset levels and changes in the composition of assets which would impact capital levels and regulatory capital ratios;

• loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;

• changes in government regulations applicable to financial holding companies and banking;

• and acts of terrorism, weather, or other events beyond MidSouth’s control.

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Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. MidSouth’s significant accounting policies are described in the notes to the consolidated financial statements included in this report. MidSouth’s most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If the financial condition of its borrowers were to deteriorate, resulting in an impairment of their ability to make payments, MidSouth’s estimates would be updated and additional provisions for loan losses may be required. See “ – Asset Quality – Allowance for Loan Losses.” Another of MidSouth’s critical accounting policies relates to its goodwill and intangible assets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized, but is evaluated for impairment annually. If the fair value of an asset exceeds the carrying amount of the asset, no charge to goodwill is made. If the carrying amount exceeds the fair value of the asset, goodwill will be adjusted through a charge to earnings.

Recent Transactions

On October 1, 2004, MidSouth completed a merger with Lamar Bancshares, Inc. of Beaumont, Texas to merge the two holding companies. The banks held by the two holding companies, MidSouth Bank and Lamar Bank, will continue to operate as separate subsidiaries under MidSouth Bancorp, Inc. At December 31, 2004, Lamar Bank had assets of $125 million and six banking offices serving southwest Texas and Lafayette-based MidSouth Bank had assets of $497 million and twenty banking offices serving the southwest Louisiana market.

On November 30, 2004, MidSouth paid a five-for-four (25%) stock split on its common stock to holders of record as of October 29, 2004. On January 4, 2005, MidSouth paid its regular quarterly dividend of $.06 per share and an additional $.06 Special Dividend to its common stockholders of record as of December 15, 2004.

Results of Operations

MidSouth’s net income for the year ended December 31, 2004 totaled $7.0 million compared to $6.3 million for the year ended December 31, 2003. Basic earnings per share were $1.70 and $1.60 for the years ended December 31, 2004 and 2003, respectively. Diluted earnings per share were $1.63 for the year ended December 2004, which is a 7% increase over the $1.53 per share earned for the year ended December 2003. In year-to-date comparison, net income increased primarily due to a $2.5 million or 13% increase in net interest income combined with a $1.6 million or 21% increase in non-interest income, primarily in service charge revenues and insufficient funds fees on deposit accounts. The increases in net interest income and non-interest income were partially offset by increased provisions to the Allowance for Loan Losses (“ALL”) of $441,480 and increased non-interest expenses totaling $2.9 million, primarily in salaries and employee benefits, occupancy expenses and marketing costs.

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MidSouth’s total consolidated assets increased $177.2 million or 41% from $432.9 million at December 31, 2003 to $610.1 million at December 31, 2004. Of the $177.2 million in growth, $127.8 million represented the fair value of assets acquired and liabilities assumed through a merger with Lamar Bancshares, Inc. on October 1, 2004. Loans acquired through the Lamar merger totaled $81.4 million and deposits totaled $97.2 million. Net of the growth associated with the Lamar merger, MidSouth added $49.1 million in assets, primarily through deposit growth within existing markets. The deposit growth resulted primarily from a deposit campaign held by MidSouth Bank beginning in the first quarter of 2004. The campaign introduced MidSouth Bank’s new Platinum Money Market account for both retail and commercial customers.

Loans, net of Allowance for Loan Losses (“ALL”), increased $124.6 million or 48%, from $261.9 million at December 31, 2003 to $386.5 million at December 31, 2004, of which $81.4 million was acquired through the Lamar merger. The remaining $43.2 million in loan growth resulted primarily from commercial and real estate credits funded by MidSouth Bank. Nonperforming loans, including loans past due 90 days and over, as a percentage of total loans decreased from .51% or $1.3 million at December of 2003 to .25% or $.9 million at December of 2004. Other nonperforming assets, including other real estate owned and other foreclosed assets, increased $.5 million to $.7 million due to nonperforming assets acquired with the Lamar merger. Net charge-offs for 2004 were $885,000 or .30% of average loans compared to $651,000 or .27% a year earlier. MidSouth provided $991,480 for loan losses in 2004 compared to $550,000 in 2003 to bring the ALL as a percentage of total loans to 1.00% at year-end 2004 compared to 1.07% at year-end 2003. Sustained loan growth throughout 2004 and loan concentrations in the commercial real estate and oil and gas loan portfolios supported the increase in provisions.

MidSouth’s leverage ratio was 8.73% at December 31, 2004, compared to 8.85% at December 31, 2003. Return on average common equity was 18.73% for 2004 compared to 20.90% for 2003. The return on average common equity for 2004 was affected by the issuance of stock in connection with the Lamar merger. Return on average assets was 1.39% compared to 1.56% for the same periods, respectively.

EARNINGS ANALYSIS
Net Interest Income

The primary source of earnings for MidSouth is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and other liabilities. Changes in the volume and mix of earning assets and interest-bearing liabilities combined with changes in market rates of interest greatly affect net interest income. MidSouth’s net interest margin on a taxable equivalent basis, which is net interest income as a percentage of average earning assets, was 4.96%, 5.46%, and 5.38% for the years ended December 31, 2004, 2003, and 2002, respectively. The 50 basis point decline in MidSouth’s net interest margin in 2004 resulted primarily from a 75 basis point decrease in loan yields as explained in the following paragraph. Tables 1 and 2 analyze the changes in net interest income for each of the
three year periods ended December 31, 2004.

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Table 1
Consolidated Average Balances, Interest and Rates
Taxable-equivalent basis (2)
(in thousands)

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Table 2
Changes in Taxable-Equivalent Net Interest Income
(in thousands)

NOTE: Changes due to both volume and rate have generally been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts to the changes in each.

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Net interest income (on a taxable-equivalent basis) increased $2.6 million for 2004 over 2003 and $2.2 million for 2003 over 2002. Net interest income improved in 2004 primarily due to a $90.3 million or 24% increase in the average volume of earning assets, of which $26 million was attributed to the Lamar merger. In 2003, the increase in net interest income resulted primarily from a significant decline in interest expense. Volume increases in earning assets significantly offset the impact of declining yields on earning assets in 2004 to net an increase in interest income of $3.7 million. Volume increases in earning assets in 2003 matched the effect of declining rates, resulting in a minimal improvement in interest income of $192,000 for 2003. The average yield on loans in 2004 was 7.46%, down 75 basis points from 8.21% in 2003 and down 110 basis points from 8.56% in 2002. Market competition, a slowing economy, and changes in the New York prime lending (“Prime”) rate impacted MidSouth’s loan yields over the past three years. However, during the third and fourth quarters of 2004, the Prime rate increased 125 basis points to 5.25%, positively impacting loan yields on MidSouth’s $107.2 million in variable rate loans. Average loans as a percentage of average earnings assets remained relatively constant at 65% for 2003 and 2004 after a decrease from 66% in 2002. Improved loan demand and increased loan participations in 2004 resulted in volume increases, which boosted interest income from loans, including loan fees, by $2.5 million from 2003 to 2004 versus $.7 million from 2002 to 2003.

In the investment portfolio over the past three years, MidSouth continually faced the challenge of investing excess cash flows in investment securities that yielded reasonable returns without taking on too much risk. The average volume of investment securities was $154.1 million in 2004, an increase of $28.3 million primarily due to the addition of Lamar Bank’s $21.1 million investment portfolio. Additional purchases were made in the portfolio with cash flows from MidSouth Bank’s deposit campaign. In 2003, the average volume of investment securities increased $20.8 million primarily due to the investment of $26.9 million in average deposits added in the third quarter of 2003 from a public fund contract. The public fund deposits were invested primarily in government agency securities due to soft loan demand during the third quarter of 2003. Average taxable equivalent yields on investment securities decreased to 4.07% in 2004, down 5 basis points from 4.12% in 2003 and down 126 basis points from 5.33% in 2002. The increase in volume during 2004 offset the minimal decline in yield to result in an increase of $1.1 million in interest income on investment securities in 2004. The decrease in yields during 2003 offset the increase in volume and resulted in a decrease in interest income on investment securities of $418,000 in 2003. High prepayment speeds on mortgage-backed securities in 2003 also contributed to the decreased interest income in 2003.

MidSouth maintained its core non-interest bearing deposit base at 23% of average total deposits in 2004. The interest-bearing deposit mix continued to improve in 2004, with 52% in NOW, money market, and savings deposits and 25% in certificates of deposit, primarily due to the introduction of MidSouth’s Platinum Money Market accounts. In 2003, the core non-interest bearing deposit base was 25% of average total deposits and the mix of average total interest-bearing deposits was 46% NOW, money market and savings deposits and 29% certificates of deposit. These two categories of interest-bearing deposits were 40% and 34% of average total

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deposits, respectively, in 2002, and the core non-interest bearing deposit base was 25% of average total deposits. Increased volume in interest-bearing deposits combined with a higher rate offered on the Platinum Money Market accounts increased interest expense by $.9 million in 2004. The volume increase in interest-bearing deposits in 2003 was offset by a significant rate decrease, resulting in a $2 million decrease in interest expense. The volume increase in 2003 resulted from the approximately $27 million in public funds money deposited in July of 2003. MidSouth will bid on renewal of the deposit contract prior to expiration on June 30, 2005.

On September 20, 2004, MidSouth completed a second issuance of junior subordinated debentures in the amount of $8,248,000. The $8.2 million in debentures carry a floating rate equal to the 3-month LIBOR plus 2.50%, adjustable and payable quarterly. The rate at December 31, 2004 was 5.01%. The debentures mature on September 20, 2034 and, under certain circumstances, are subject to repayment on September 20, 2009 or thereafter. Previously, in February 2001, MidSouth issued $7,217,000 of junior subordinated debentures. The $7.2 million in debentures carry a fixed interest rate of 10.20% and mature on February 22, 2031 and, under certain circumstances, are subject to repayment on February 22, 2011 or thereafter. In September 2003, the note payable at the Finance Company was paid out with cash flows from payments received on existing credits. The note payable averaged $.3 million in 2003 at a rate of 5.21% compared to $.9 million in 2002 at a rate of 6.24%.

Non-Interest Income

Excluding Securities Transactions. Service charges and fees on deposit accounts represent the primary source of non-interest income for MidSouth. Income from service charges and fees on deposit accounts (including insufficient funds fees) increased $1.7 million in 2004 and $.6 million in 2003. Of the $1.7 million increase in 2004, $530,331 represents non-interest income from Lamar Bank for the fourth quarter of 2004. The remaining $1.2 million increase in 2004 and $.6 million increase in 2003 resulted primarily from an increase in the number of transaction accounts and the volume of insufficient funds checks processed by MidSouth. The number of active transaction accounts increased from 28,795 in 2002, to 31,221 in 2003 and to 33,410 in 2004. The service charge structures on transaction accounts have not changed over the past three years and are on the lower end of fees charged by competitors in MidSouth’s markets. The insufficient funds fee was increased on November 1, 2004 from $22.00 to $23.47 per NSF item, still well below competitors NSF charges in MidSouth’s markets.

Non-interest income resulting from other charges and fees decreased $27,287 in 2004 as compared to an increase of $274,761 in 2003. Refinancing activity declined in 2004 and decreased income from a third party mortgage program by $88,868 after increasing $160,188 in 2003. Income from third party investment advisory services decreased $106,408 in 2004 compared to an increase of $79,886 in 2003 due primarily to the introduction of a new investment product and increased transaction volume during 2003. Increased income from MidSouth’s Visa Debit Card and ATM services of $185,522 offset the decreases in income from the mortgage program and investment advisory services in 2004. Income from Visa Debit Card and ATM services also increased $123,594 in 2003. The increases for 2003 and 2004 are due to increased card activity and the elimination of a third party processor. Income from MidSouth’s

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Visa Merchant program decreased $242,845 in 2004 due to MidSouth outsourcing the program to First Data Corporation in the third quarter of 2003. Increases in other miscellaneous non-interest income categories offset most of the decrease in Visa Merchant income for 2004.

Securities Transactions. MidSouth had net gains on sales of securities totaling $132,450 in 2004, $98,025 in 2003, and $156,259 in 2002. Gains on sales of securities for 2004 resulted almost entirely from the sale of a correspondent bank’s common stock in July of 2004. MidSouth no longer utilized any services with the bank and therefore liquidated its stock position. Sales of available-for-sale securities totaling $6.5 million in 2003 and $3.4 million in 2002 allowed MidSouth to improve the overall yield on the securities sold as they neared maturity.

Non-interest Expense

Total non-interest expense increased 16% or $2.9 million from 2003 to 2004 and 5% or $.9 million from 2002 to 2003. Of the $2.9 million increase in non-interest expenses in 2004, $1.5 million represents operating expenses of Lamar Bank for the fourth quarter of 2004. MidSouth’s growth and expansion over the past three years resulted in increases primarily in salaries and employee benefits, occupancy expenses and marketing expenses. These increases reflect MidSouth’s long-term investment in staff development, system upgrades, and market development.

Salaries and employee benefits increased $1.6 million or 18% in 2004, primarily due an increase in full-time equivalent (“FTE”) employees from 216 in 2003 to 300, including 67 from the addition of Lamar Bank’s staff on October 1, 2004. Net of the addition of Lamar Bank’s staff, salary expense increases occurred primarily in lending, call center, retail travel team and administrative staffing and in incentive compensation costs based on MidSouth’s strong earnings for 2004. New positions included additional staff in the call center and retail operations to support MidSouth’s retail stores and enhance customer service.

In 2003, MidSouth continued a focus on strengthening risk management and work-flow processes that had begun in 2002. Salaries and employee benefits increased $546,001 or 7% as FTE employees increased from 212 in 2002 to 216 in 2003. The increase was primarily in credit administration and risk management salaries and incentive compensation based on MidSouth’s strong earnings for 2003. A senior level manager position was added late in 2002 and additional loan processor and collections positions during 2003. Additionally, MidSouth upgraded the loan review position to a senior level risk management position in the second quarter of 2003.

Occupancy expenses increased $432,894 or 11% in 2004 and $172,904 or 5% in 2003. Of the $432,894 increase in 2004, $231,537 represented occupancy expenses incurred by Lamar Bank in the fourth quarter of 2004. Of the remaining $201,357, increases were recorded primarily in property taxes, lease expense and auto expense. Lease expense increased primarily due to additional leased space at MidSouth’s headquarters in Lafayette and to minimal increases in rental rates for MidSouth Bank’s Pinhook location and Super One Foods in-store locations. Auto expense increased primarily due to increased gasoline and mileage costs and auto allowances

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granted during 2004. The 5% increase in 2003 resulted primarily from increases in leasehold depreciation and maintenance expenses, data processing software and hardware depreciation and property taxes. Data processing software and hardware depreciation increased in 2003 due to a $.5 million system upgrade in August 2003. Premises and equipment additions and leasehold improvements totaled approximately $3.7 million, $1.2 million and $1.7 million for the years 2004, 2003 and 2002, respectively. Additions and improvements during 2004 included the purchase of two pieces of property totaling $1.1 million to build new locations in Houma and Lafayette, a new building for the Moss Street location which totaled approximately $1 million, and renovations at MidSouth Bank’s Breaux Bridge location, which houses the data processing center, of approximately $345,000.

Total other non-interest expense increased $885,601 or 16% in 2004 and $169,591 or 3% in 2003. Of the $885,601 increase, $565,796 represented other non-interest expenses incurred by Lamar Bank in the fourth quarter of 2004. Of the remaining $319,805, increases were recorded primarily in legal and professional fees and marketing expenses. The increase in legal and professional fees included additional costs associated with various legal proceedings in the ordinary course of business and increases in accounting and comptroller fees. Marketing expenses increased due to costs associated with a deposit campaign, retail marketing promotions, and the introduction of a new advertising campaign. Additionally, MidSouth Bank continued to sponsor several trade shows within its markets. Other increases were noted in directors’ fees, printing & supplies, and postage. The increase in 2003 resulted primarily from an increase of $229,521 in marketing and community reinvestment expenses. The increase in marketing costs occurred in advertising and sponsorship costs associated with several trade shows within MidSouth’s market areas and from a radio advertising campaign.

Income Taxes

MidSouth’s tax expense increased by $147,955 in 2004 and $866,123 in 2003 and approximated 26% of income before taxes in 2004, compared to 27% in 2003. Increased interest income on non-taxable municipal securities reduced 2004 and 2003 taxes from the expected statutory rate of 34%. Interest income on non-taxable municipal securities also lowered the effective tax rate for 2002 to approximately 24%. Notes 1 and 10 to MidSouth’s Consolidated Financial Statements provide additional information regarding MidSouth’s income tax considerations.

BALANCE SHEET ANALYSIS

Securities

Total investment securities increased $27.1 million, from $141.6 million in 2003 to $168.7 million in 2004. The increase resulted primarily from the addition of Lamar Bank’s investment portfolio, which totaled $21.1 million at the closing of the merger on October 1, 2004. Additional purchases were made to invest cash flows from a deposit campaign held during the first and second quarters of 2004. Average duration of the portfolio was 2.45 years as of December 31, 2004 and the average taxable-equivalent yield was 4.07%. Cash flows from deposits and from maturities and paydowns within the portfolio were reinvested primarily in

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municipal securities and government agency securities and mortgage-backed securities. A decline in the market value of securities available-for-sale is included in the net change in 2004. Unrealized net gains in the securities available-for-sale portfolio were $372,402 at December 31, 2004, compared to unrealized net gains of $891,374 at December 31, 2003. These amounts result from interest rate fluctuations and do not represent permanent adjustments of value. Moreover, classification of securities as available-for-sale does not necessarily indicate that the securities will be sold prior to maturity.

At December 31, 2004, approximately 23% of MidSouth’s securities available-for-sale portfolio represented mortgage-backed securities and collateralized mortgage obligations (“CMO’s”). MidSouth monitors the risks due to changes in interest rates on mortgage-backed pools by monthly reviews of prepayment speeds, duration, and purchase yields as compared to current market yields on each security. CMO’s totaled $1.9 million and represented pools which each had a book value of less than 10% of stockholders’ equity at December 31, 2004. All CMO’s held by MidSouth are AAA rated and not considered “high-risk” securities under the Federal Financial Institutions Examination Council (“FFIEC”) tests. MidSouth does not own any “high-risk” securities as defined by the FFIEC. An additional 26% of the available-for-sale portfolio consisted of U. S. Agency securities, while municipal and other securities represented 39% and 12% of the portfolio, respectively. A detailed credit analysis on each municipal offering is reviewed prior to purchase by an investment advisory firm. In addition, MidSouth limits the amount of securities of any one municipality purchased and the amount purchased within specific geographic regions to reduce the risk of loss within the non-taxable municipal securities portfolio. The held-to-maturity portfolio consisted of $22.2 million in non-taxable and $.6 million in taxable municipal securities.

Loan Portfolio

Net of $81.4 million acquired through the Lamar merger, loan growth continued to be solid in 2004, with an increase of $43.2 million, following $34.9 million added to the portfolio during 2003. MidSouth’s loan portfolio totaled $386.5 million at December 31, 2004 compared to $261.9 million at December 31, 2003. For the past two years, MidSouth’s lenders met or exceeded aggressive goals with double-digit loan growth. A successful customer development program and an increase in loan participation opportunities, improved by the new Texas market, contributed to the loan growth. Of the $43.2 million growth in 2004 in MidSouth Bank’s portfolio, $16.7 million was in the real estate portfolio, including construction loans. The commercial loan portfolio increased $27.3 million, including lease loans. The real estate loan growth in 2004 and 2003 consisted of both commercial and consumer credits that call for ten to fifteen year amortization terms with rates fixed primarily for three and up to five years. The short-term structure of these credits allows management greater flexibility in controlling interest rate risk. The $81.4 million acquired through the Lamar merger consisted of 45% real estate loans, including construction loans, 42% consumer loans, and 13% in commercial and all other loans. MidSouth’s combined loan portfolio consisted of approximately 59% in fixed rate loans, with the majority maturing within three years. Approximately 41% of the portfolio earns a variable rate of interest, with 28% adjusting to changes in the Prime rate and another 13% adjusting on a scheduled repricing date. The mix of variable and fixed rate loans provides some

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protection to changes in market rates of interest.

LOAN PORTFOLIO
LOAN MATURITIES AND SENSITIVITY TO INTEREST RATES
for the Year Ended December 31, 2004

(dollars in thousands)

MidSouth has maintained its credit policy and underwriting procedures and has not relaxed these procedures to stimulate loan growth. Completed loan applications, credit bureau reports, financial statements and a committee approval process remain a part of credit decisions. Documentation of the loan decision process is required on each credit application, whether approved or denied, to insure thorough and consistent procedures.

Asset Quality

Credit Risk Management. MidSouth manages its credit risk by observing written, board approved policies which govern all underwriting activities. The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent

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reviews performed by the loan review officer and other validations performed by the internal audit department. Bank concentrations are monitored and reported to the Board of Directors quarterly whereby individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity are evaluated for each major standard industry classification segment. At December 31, 2004, MidSouth Bank had two industry segment concentrations that aggregate more than 10% of its loan portfolio. Both the oil and gas segment and the commercial real estate segment of the loan portfolio represented approximately $31 million out of MidSouth Bank’s total $307 million portfolio.

Nonperforming Assets. Table 3 contains information about MidSouth’s nonperforming assets, including loans past due 90 days or more and still accruing.

Table 3 — Nonperforming Assets and Loans Past Due 90 Days or More

Nonperforming assets, including loans past due 90 days or more and still accruing, totaled $1,688,060 at December 31, 2004, $1,549,411 at December 31, 2003 and $1,749,135 at December 31, 2002. Although nonperforming assets increased $138,649 from year-end 2003 to year-end 2004, nonperforming loans and loans past due 90 days or more and still accruing actually decreased $370,807. The increase resulted from the addition of one property held by Lamar Bank as other real estate owned totaling $331,577 and other assets repossessed totaling $236,843. Continued reductions in the volume of loans past due over 90 days and still accruing and the decrease in nonaccrual loans is the result of improved administration efforts and strengthened collection initiatives.

Consumer and commercial loans are placed on nonaccrual when principal or interest is 90 days past due, or sooner if the full collectibility of principal or interest is doubtful except if the

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underlying collateral fully supports both the principal and accrued interest and the loan is in the process of collection. Policies provide that retail (consumer) loans that become 120 days delinquent be routinely charged off. Loans classified for regulatory purposes but not included in Table 3 do not represent material amounts that management has serious doubts as to the ability of the borrower to comply with loan repayment terms.

Allowance for Loan Losses. Provisions totaling $991,480, $550,000, and $1,398,250 for the years 2004, 2003 and 2002, respectively, were considered necessary by management to bring the allowance to a level sufficient to cover probable losses in the loan portfolio. Table 4 analyzes activity in the allowance for 2004 and 2003.

TABLE 4 — Summary of Loan Loss Experience
(in thousands)

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Refer to “Balance Sheet Analysis — Asset Quality — Allowance for Loan Losses” for a description of the factors which influence management’s judgment in determining the amount of the provisions to the allowance.

The allowance is comprised of specific reserves assigned to each impaired loan for which probable loss has been identified as well as general reserves to maintain the allowance at an acceptable level for other loans in the portfolio where historical loss experience is available that indicates certain probable losses may exist. Factors contributing to the assignment of specific reserves include an evaluation of the financial capacity of the borrower, changes in the value of underlying collateral, local and national economic conditions, and overall trends in the loan portfolio and concentrations of credit.

Quarterly evaluations of the allowance are performed in accordance with generally accepted accounting principles and the guidelines contained in Banking Circular 201 of the Office of the Comptroller of the Currency. Factors considered in determining provisions include estimated losses in significant credits; known deterioration in concentrations of credit; historical loss experience; trends in nonperforming assets; volume, maturity and composition of the loan portfolio; off balance sheet credit risk; lending policies and control systems; national and local economic conditions; the experience, ability and depth of lending management and the results of examinations of the loan portfolio by regulatory agencies and others. The processes by which management determines the appropriate level of the allowance, and the corresponding provision for possible credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates.

Funding Sources

Deposits. As of December 31, 2004, total deposits increased $156.0 million to $530.4 million, up from $374.4 million at December 31, 2003. Of the $156 million in deposit growth, $97.2 resulted from the Lamar merger. At December 31, 2004, Lamar Bank’s deposit portfolio had

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increased to $99.2 million with 20% in non-interest bearing transaction accounts, 45% in interest bearing transaction accounts and 35% in certificates of deposit (“CD’s”). Contributing to the change in total deposits for 2004 was approximately $50 million in deposits resulting from a deposit campaign held by MidSouth Bank during the months of March, April, and May of 2004. The campaign introduced the new Platinum Money Market accounts for retail and commercial customers, which represented approximately $34 million of the $50 million in new deposits resulting from the campaign. The campaign was designed to continue MidSouth’s focus on building core deposits, defined as all deposits other than CD’s of $100,000 or more. Core deposits increased to 90% of total deposits at year-end 2004 as compared to 88% of total deposits at year-end 2003. Included in core deposits, non-interest bearing deposits represented 24% of total deposits at December 31, 2004 versus 26% of total deposits at December 31, 2003. CD’s of $100,000 or more totaled $51.3 million at December 31, 2004, an increase of $7.9 million from the $43.4 million reported at year-end 2003, and total CD’s increased $27.1 million primarily due to the addition of Lamar Bank’s CD portfolio. Strategically, to manage the margin and core deposit balances, MidSouth typically offers low to mid-market rates of CD’s and has no brokered deposits. Additional information on MidSouth’s deposits appears in Note 7 to MidSouth’s Consolidated Financial Statements.

Borrowed Funds. As of December 31, 2004, MidSouth had no notes payable, but did have overnight funds in the amount of $8.5 million borrowed through a correspondent bank. At year-end December 31, 2003, MidSouth had a short-term advance of $7.5 million and overnight funds of $5.6 million borrowed from the FHLB.

On September 20, 2004, MidSouth completed a second issuance of junior subordinated debentures in the amount of $8,248,000. The $8.2 million in debentures carry a floating rate equal to the 3-month LIBOR plus 2.50%, adjustable and payable quarterly. The rate at December 31, 2004 was 5.01%. The debentures mature on September 20, 2034 and, under certain circumstances, are subject to repayment on September 20, 2009 or thereafter. Previously, in February 2001, MidSouth issued $7,217,000 of junior subordinated debentures. The $7.2 million in debentures carry a fixed interest rate of 10.20% and mature on February 22, 2031 and, under certain circumstances, are subject to repayment on February 22, 2011 or thereafter. These debentures qualify as Tier 1 capital and are presented in the Consolidated Statements of Condition as “Junior Subordinated Debentures.” Additional information regarding long-term debt is provided in Note 8 to MidSouth’s Consolidated Financial Statements.

The ESOP note held by the Bank totaled $65,314 at December 31, 2004. The ESOP obligation constitutes a reduction of MidSouth’s stockholders’ equity because the primary source of loan repayment is contributions by the Bank to the ESOP; however, the loan is not guaranteed by MidSouth Bank or MidSouth. The ESOP note is eliminated from total loans and long-term debt as an intercompany balance in MidSouth’s December 31, 2004 and 2003 consolidated financial statements.

Capital. MidSouth and the Banks are required to maintain certain minimum capital levels. Risk-based capital requirements are intended to make regulatory capital more sensitive to the risk profile of an institution’s assets. At December 31, 2004, MidSouth and the Banks were in

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compliance with statutory minimum capital requirements. Minimum capital requirements include a total risk-based capital ratio of 8.0%, with Tier 1 capital not less than 4.0%, and a leverage ratio (Tier 1 to total average adjusted assets) of 4.0% based upon the regulators latest composite rating of the institution. As of December 31, 2004, MidSouth’s Tier 1 capital to average adjusted assets (the “leverage ratio”) was 8.73% as compared to 8.85% at December 31, 2003. Tier 1 capital to risk weighted assets was 12.08% and 12.82% for 2004 and 2003, respectively. Total capital to risk weighted assets was 12.96% and 13.78%, respectively, for the same periods. For regulatory purposes, Tier 1 Capital includes $15,465,000 of junior subordinated debentures issued by MidSouth. For financial reporting purposes, these funds are included as a liability under generally accepted accounting principles. MidSouth Bank’s leverage ratio was 8.01% at December 31, 2004 compared to 8.31% at December 31, 2003, and Lamar Bank’s leverage ratio at December 31, 2004 was 12.24%.

The Federal Deposit Insurance Corporation Improvement Act of 1991 established a capital-based supervisory system for all insured depository institutions that imposes increasing restrictions on the institution as its capital deteriorates. The Banks are both classified as “well capitalized” as of December 31, 2004. No significant restrictions are placed on the Banks as a result of this classification.

As discussed under the heading “Balance Sheet Analysis — Securities,” $579,302 in unrealized gains on securities available-for-sale less a deferred tax liability of $206,900 was recorded as an addition to stockholders’ equity as of December 31, 2004. As of December 31, 2003, $1,363,021 in unrealized gains on securities available-for-sale, less a deferred tax liability of $471,647, was recorded as an addition to stockholders’ equity. While the net unrealized gain or loss on securities available for sale is required to be reported as a separate component of stockholders’ equity, it does not affect operating results or regulatory capital ratios. The net unrealized gains reported for December 31, 2004 and 2003 did, however, affect MidSouth’s equity to assets ratio for financial reporting purposes. The ratio of equity to assets was 7.97% at December 31, 2004 and 7.45% at December 31, 2003.

Interest Rate Sensitivity. Interest rate sensitivity is the sensitivity of net interest income and economic value of equity to changes in market rates of interest. The initial step in the process of monitoring MidSouth’s interest rate sensitivity involves the preparation of a basic gap analysis of earning assets and interest-bearing liabilities. The analysis presents differences in the repricing and maturity characteristics of earning assets and interest-bearing liabilities for selected time periods.

During 2004, MidSouth Bank utilized the Sendero model of asset and liability management. The Sendero model uses basic gap data and additional information regarding rates and prepayment characteristics to construct a gap analysis that factors in repricing characteristics and cash flows from payments received on loans and mortgage-backed securities. Lamar Bank used a Sheshunoff model to prepare a December 31, 2004 gap analysis. A consolidated gap analysis is presented in Table 5. The cumulative gap at one year is approximately $80.5 million, or 13.20% of total assets at December 31, 2004, which is within internal policy guidelines of + or – 15% of total assets.

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Table 5
Interest Rate Sensitivity and Gap Analysis Table
December 31, 2004
(in thousands)

Net Interest Income at Risk

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With the exception of NOW, money market and savings deposits, the table presents interest-bearing liabilities on a contractual basis. While NOW, money market and savings deposits are contractually due on demand, historically, MidSouth has experienced stability in these deposits despite changes in market rates. Presentation of these deposits in the table, therefore, reflects delayed repricing throughout the time horizon.

The Sendero model also uses the gap analysis data in Table 5 and additional information regarding rates and payment characteristics to perform three simulation tests. The tests use market data to perform rate shock, rate cycle and rate forecast simulations to measure the impact of changes in interest rates, the yield curve and interest rate forecasts on net interest income and economic value of equity. Results of the simulations at December 31, 2004 were within policy guidelines. Table 5 includes a schedule of the estimated percentage changes in net interest income due to changes in interest rates of –100, +100, +200, and +300 basis points as determined through the rate shock analysis. The results of the simulations are reviewed quarterly and discussed at MidSouth’s Funds Management committee meetings.

MidSouth does not invest in derivatives and has none in its securities portfolio.

Liquidity

Bank Liquidity. Liquidity is the availability of funds to meet contractual obligations as they become due and to fund operations. The Banks’ primary liquidity needs involve its ability to accommodate customers’ demands for deposit withdrawals as well as their requests for credit. Liquidity is deemed adequate when sufficient cash to meet these needs can be promptly raised at a reasonable cost to the Banks.

Liquidity is provided primarily by three sources: a stable base of funding sources, an adequate level of assets that can be readily converted into cash, and borrowing lines with correspondent banks. MidSouth’s core deposits are its most stable and important source of funding. Further, the low variability of the core deposit base lessens the need for liquidity. Cash deposits at other banks, federal funds sold and principal payments received on loans and mortgage-backed securities provide additional primary sources of asset liquidity for the Banks. A minimum of $30 million in projected cash flows from securities during 2005 provides an additional source of liquidity. MidSouth also has significant borrowing capacity with the FHLB of Dallas, Texas and borrowing lines with other correspondent banks.

Parent Company Liquidity. At the parent company level, cash is needed primarily to meet interest payments on the junior subordinated debentures and pay dividends on common stock. The parent company issued $8,248,000 in junior subordinated debentures in September 2004 and $7,217,000 in February 2001, the terms of which are described in Note 8 to MidSouth’s Consolidated Financial Statements. Dividends from MidSouth Bank totaling $3,650,000 and $1,500,000 provided additional liquidity for the parent company in 2004 and 2003, respectively. As of January 1, 2005, the Banks had the ability to pay dividends to the parent company of approximately $8 million without prior approval from its primary regulator. As a publicly traded

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company, MidSouth also has the ability to issue additional trust preferred and other securities instruments to provide funds as needed for operations and future growth of the company.

Dividends. The primary source of cash dividends on MidSouth’s common stock is dividends from the Banks. The Banks have the ability to declare dividends to the parent company without prior approval of primary regulators. However, the Banks’ ability to pay dividends would be prohibited if the result would cause the Banks’ regulatory capital to fall below minimum requirements.

Cash dividends totaling $1,112,360 and $992,648 were declared to common stockholders during 2004 and 2003, respectively. It is the intention of the Board of Directors of MidSouth to continue to pay quarterly dividends on the common stock at the rate of $.06 per share. A Special Dividend of $.06 per share was paid in addition to the regular $.06 per share dividend for the fourth quarter of 2004 to shareholders of record on December 15, 2004.

Impact of Inflation and Changing Prices

The consolidated financial statements of MidSouth and notes thereto, presented herein, have been prepared in accordance with Generally Accepted Accounting Principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of MidSouth’s operations. Unlike most industrial companies, nearly all the assets and liabilities of MidSouth are financial. As a result, interest rates have a greater impact on MidSouth’s performance than do the effects of general levels of inflation.

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Contractural Obligations

The table below shows all significant contractural obligations of the Company at December 31, 2004, according to payments due by period.

CONTRACTUAL OBLIGATIONS

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SUMMARY OF
AVERAGE DEPOSITS
(in thousands)

MATURITY SCHEDULE
TIME DEPOSITS OF
$100,000 OR MORE
(in thousands)

SUMMARY OF RETURN
ON EQUITY AND ASSETS

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COMPOSITION OF LOANS

COMPOSITION OF INVESTMENT SECURITIES

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SECURITIES PORTFOLIO
MATURITIES AND AVERAGE TAXABLE EQUIVALENT YIELDS
for the Year Ended December 31, 2004
(dollars in thousands)