UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10Q

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

For the quarterly period ended June 30, 2006

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

For the transition period from                      to                     

MIDSOUTH BANCORP, INC.

(Exact name of registrant as specified in its charter)

Louisiana		72 –1020809
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

102 Versailles Boulevard, Lafayette, Louisiana 70501
(Address of principal executive offices, including zip code)

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

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 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 þ  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) YES o  NO þ

As of July 31, 2006, there were 5,007,509 shares of the registrant’s Common Stock, par value $.10 per share, outstanding.

 

 

INDEX TO FORM 10-Q REPORT

		Page
PART 1 - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Consolidated Statements of Condition as of June 30, 2006 and December 31, 2005			3
Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2006 and 2005			4
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2006 and 2005			5
Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2006			6
Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005			7
Notes to Unaudited Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosures about Market Risk			24
Item 4. Controls and Procedures			24
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 1.A. Risk Factors			25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3. Defaults upon Senior Securities			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Item 5. Other Information			25
Item 6. Exhibits and Reports on Form 8-K			26
Signatures			27
Computation of earnings per share
Certification Pursuant to Rules 13(a)-14(a)
Certification Pursuant to Rules 13(a)-14(a)
Certification Pursuant to Section 906
Certification Pursuant to Section 906

MIDSOUTH BANCORP, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2006				2005
		(unaudited)				(audited)
ASSETS
Cash and due from banks		$	24,411,519			$	25,973,101
Interest bearing deposits in banks			58,305				323,901
Federal funds sold			9,600,000				26,140,000
Total cash and cash equivalents			34,069,824				52,437,002
Securities available-for-sale, at fair value (cost of $192,780,258 at June 30, 2006 and $140,993,091 at December 31, 2005)			188,344,583				139,428,403
Securities held-to-maturity (estimated fair value of $17,784,402 at June 30, 2006 and $20,151,389 at December 31, 2005)			17,518,755				19,611,230
Loans, net of allowance for loan losses of $4,887,254 at June 30, 2006 and $4,354,530 at December 31, 2005			484,588,434				438,439,219
Other investments			2,351,527				2,011,403
Bank premises and equipment, net			28,572,430				23,606,039
Accrued interest receivable			5,251,136				4,919,294
Goodwill			9,271,432				9,271,432
Intangibles			820,652				985,264
Cash surrender value of life insurance			3,990,628				3,794,510
Other assets			5,068,491				4,310,625
Total assets		$	779,847,892			$	698,814,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	186,291,862			$	177,946,159
Interest bearing			517,812,410				446,991,941
Total deposits			704,104,272				624,938,100
Securities sold under repurchase agreements and federal funds purchased			2,796,538				1,731,797
Accrued interest payable			1,005,647				936,584
Junior subordinated debenture			15,465,000				15,465,000
Other liabilities			1,658,966				2,557,372
Total liabilities			725,030,423				645,628,853
Commitments and contingencies			—				—
Stockholders’ Equity:
Common stock, $.10 par value- 10,000,000 shares authorized, 5,070,310 and 5,006,471 issued and 4,998,216 and 4,951,719 outstanding at June 30, 2006 and December 31, 2005, respectively			507,031				500,647
Surplus			42,716,910				41,910,122
Unearned ESOP shares			(307,858	)			(47,194	)
Accumulated other comprehensive income			(2,927,546	)			(1,032,694	)
Treasury stock - 72,094 at June 30, 2006 and 54,752 shares at December 31, 2005, at cost			(1,713,948	)			(1,229,213	)
Retained earnings			16,542,880				13,083,900
Total stockholders’ equity			54,817,469				53,185,568
Total liabilities and stockholders’ equity		$	779,847,892			$	698,814,421

See notes to unaudited consolidated financial statements.

MIDSOUTH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
INTEREST INCOME:
Loans, including fees		$	10,318,152			$	7,822,002			$	19,282,516			$	14,989,363
Securities
Taxable			1,220,104				798,944				2,137,445				1,546,971
Nontaxable			843,063				651,690				1,566,777				1,308,171
Federal funds sold			294,694				41,383				700,586				92,783
Other interest income			15,118				18,507				39,120				32,887
TOTAL			12,691,131				9,332,526				23,726,444				17,970,175
INTEREST EXPENSE:
Deposits			4,031,515				2,137,430				7,335,428				4,014,668
Securities sold under repurchase agreements, federal funds purchased and advances			28,883				40,880				48,915				101,531
Long term debt			335,452				297,224				649,601				571,717
TOTAL			4,395,850				2,475,534				8,033,944				4,687,916
NET INTEREST INCOME			8,295,281				6,856,992				15,692,500				13,282,259
PROVISION FOR LOAN LOSSES			300,000				65,737				620,000				379,737
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			7,995,281				6,791,255				15,072,500				12,902,522
OTHER OPERATING INCOME:
Service charges on deposits			2,173,817				2,198,366				4,100,415				4,326,080
Gains on securities, net			—				—				—				385
Credit life insurance			45,536				40,417				88,874				80,966
Other charges and fees			852,301				931,558				1,724,964				2,185,452
TOTAL OTHER INCOME			3,071,654				3,170,341				5,914,253				6,592,883
OTHER EXPENSES:
Salaries and employee benefits			3,936,764				3,304,873				7,722,515				6,507,625
Occupancy expense			1,623,753				1,329,118				3,110,208				2,584,610
Other			2,508,582				2,552,806				4,732,522				5,047,845
TOTAL OTHER EXPENSES			8,069,099				7,186,797				15,565,245				14,140,080
INCOME BEFORE INCOME TAXES			2,997,836				2,774,799				5,421,508				5,355,325
PROVISION FOR INCOME TAXES			762,082				734,546				1,367,234				1,391,649
NET EARNINGS		$	2,235,754			$	2,040,253			$	4,054,274			$	3,963,676
EARNINGS PER SHARE
Basic		$	0.45			$	0.42			$	0.82			$	0.81
Diluted		$	0.44			$	0.40			$	0.80			$	0.78

See notes to unaudited consolidated financial statements.

MidSouth Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 2006 and 2005

		Three Months				Three Months				Six Months				Six Months
		Ended				Ended				Ended				Ended
		June 30, 2006				June 30, 2005				June 30, 2006				June 30, 2005
Net Income		$	2,235,754			$	2,040,253			$	4,054,274			$	3,963,676
Other comprehensive income (loss):
Unrealized gain(loss) on securities available-for-sale, net:
Unrealized holding gains (losses) arising during the year net of income tax (benefit) of ($701,764), $328,810, ($976,136), and ($219,626) respectively			(1,362,247	)			638,279				(1,894,852	)			(426,333	)
Less reclassification adjustment for gains included in net income net of income tax of -0-, -0-, -0-, and $131, respectively			—				—				—				(254	)
Total other comprehensive income (loss)			(1,362,247	)			638,279				(1,894,852	)			(426,587	)
Total comprehensive income		$	873,507			$	2,678,532			$	2,159,422			$	3,537,089

MIDSOUTH BANCORP, INC. AND SUBSIDIARIES

																		UNREALIZED
																		GAINS (LOSSES)
		COMMON STOCK												ESOP				ON SECURITIES				TREASURY				RETAINED
		SHARES				AMOUNT				SURPLUS				OBLIGATION				AFS, NET				STOCK				EARNINGS				TOTAL
Balance — January 1, 2006			5,006,471			$	500,647			$	41,910,122				($47,194	)			($1,032,694	)			($1,229,213	)		$	13,083,900			$	53,185,568
Dividends on common stock, $.06 per share																											(595,294	)			(595,294	)
Exercise of stock options			63,839				6,384				277,016																				283,400
Tax benefit resulting from exercise of stock options											491,439																				491,439
Purchase of treasury stock																							(484,735	)							(484,735	)
Net earnings																											4,054,274				4,054,274
Increase in ESOP obligation, net of repayments															(260,664	)															(260,664	)
Excess of market value over book value of ESOP shares released, net adjustment											25,000																				25,000
Stock Option expense											13,333																				13,333
Net change in unrealized gains( losses) on securities available-for-sale, net of taxes																			(1,894,852	)											(1,894,852	)
Balance — June 30, 2006			5,070,310			$	507,031			$	42,716,910				($307,858	)			($2,927,546	)			($1,713,948	)		$	16,542,880			$	54,817,469

MIDSOUTH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

		June 30,				June 30,
		2006				2005
Cash flows from operating activities:
Net earnings		$	4,054,274			$	3,963,676
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,331,188				1,089,562
Provision for loan losses			620,000				379,737
Deferred income taxes (benefit)			(2,640	)			137,868
Amortization of premiums on securities, net			365,067				489,389
Gain on sale of securities, net			—				385
Change in accrued interest receivable			(331,842	)			(299,624	)
Change in accrued interest payable			69,063				39,824
Other, net			(104,852	)			784,711
Net cash provided by operating activities			6,000,258				6,585,528
Cash flows from investing activities, net of effect of acquisitions:
Proceeds from sales of securities available-for-sale			—				9,099,585
Proceeds from maturities and calls of securities held-to-maturity			2,099,650				920,000
Proceeds from maturities and calls of securities available-for-sale			13,802,944				18,284,749
Purchases of securities available-for-sale			(65,962,354	)			(17,780,705	)
Purchases of other investments			(340,350	)			—
Loan originations, net of repayments			(47,120,831	)			(23,915,940	)
Purchases of premises and equipment			(6,132,967	)			(2,743,467	)
Proceeds from sales of other real estate owned			147,450				455,726
Net cash used in investing activities			(103,506,458	)			(15,680,052	)
Cash flows from financing activities, net of effect of acquisitions:
Change in deposits			79,166,172				28,339,605
Change in repurchase agreements			1,064,741				(1,558,279	)
Change in federal funds purchased			—				(8,500,000	)
Proceeds from FHLB advances			—				5,000,000
Repayment of FHLB advances			—				(5,000,000	)
Purchase of treasury stock			(484,735	)			(280,822	)
Payment of dividends on common stock			(890,556	)			(801,225	)
Proceeds from exercise of stock options			283,400				110,252
Net cash provided by financing activities			79,139,022				17,309,531
Net (decrease) increase in cash and cash equivalents			(18,367,178	)			8,215,007
Cash and cash equivalents, beginning of quarter			52,437,002				17,396,850
Cash and cash equivalents, end of quarter		$	34,069,824			$	25,611,857

See notes to unaudited consolidated financial statements.

MIDSOUTH BANCORP, INC. AND SUBSIDIARIES

1.		Basis of Presentation
		The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company and its subsidiaries as of June 30, 2006 and the results of their operations and their cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2005 Annual Report and Form 10K.
		The results of operations for the six month period ended June 30, 2006 are not necessarily indicative of the results to be expected for the entire year.
		Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
		Stock Compensation – In December 2004, the FASB revised SFAS No. 123 (“SFAS No. 123 (R)”). SFAS 123 (R), Share-Based Payment, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS No. 123 (R) is effective for periods beginning after December 15, 2005. The Company adopted the provisions of SFAS No. 123 (R) on January 1, 2006. For the three and six month period ended June 30, 2006, the required compensation expense totaled $13,333. Prior period pro forma disclosure if provided in the table below:

		Three Months				Six Months
		Ended				Ended
		June 30, 2005				June 30, 2005
Net earnings available to common stockholders (in thousands):
As reported		$	2,040			$	3,964
Deduct total stock based compensation determined under fair value method			(15	)			(30	)
Pro forma		$	2,025			$	3,934
Basic earnings per share:
As reported		$	0.42			$	0.81
Pro forma		$	0.41			$	0.80
Diluted earnings per share:
As reported		$	0.40			$	0.78
Pro forma		$	0.40			$	0.77

Recent Accounting Pronouncements - In November 2005, FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” was issued. The FSP addressed the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and provides guidance on proper disclosures regarding unrealized losses that have not been recognized as other-than-temporary impairments. The adoption of the FSP did not have an effect on earnings or stockholders’ equity for the quarter ended June 30, 2006.

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155 Accounting for Certain Hybrid Financial Instruments – an amendment of SFAS No. 133 and 140. This statement provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contact in accordance with the requirements of SFAS 133. The effective date of this standard is for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company currently has no derivatives and therefore, SFAS No. 155 has no impact on the Company’s current financial position or results of operations.

2.		Allowance for Loan Losses
		A summary of the activity in the allowance for loan losses is as follows (in thousands)

		Six Months Ended
		June 30,
(in thousands)		2006				2005
Balance at beginning of period		$	4,355			$	3,851
Provision for loan losses			620				380
Recoveries			222				119
Loans charged off			(310	)			(310	)
Balance at end of period		$	4,887			$	4,040

3.		Declaration of Dividends
		On May 17, 2006, the Company declared a $.06 per share quarterly cash dividend for holders of record on June 12, 2006.

Part 1. Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS

MidSouth Bancorp, Inc. (“the Company”) is a two-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. The Company recently announced a name change for the Texas subsidiary from Lamar Bank to MidSouth Bank. The name change is expected to be executed during the fourth quarter of 2006. Following is management’s discussion of factors that management believes are among those necessary for an understanding of the Company’s financial statements. The discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented herein and with the financial statements, the notes thereto and related Management’s Discussion & Analysis in the Company’s 10-K for the year ended December 31, 2005.

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, the Company’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 the Company’s control.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s significant accounting policies are described in the notes to the consolidated financial statements included in Form 10-K for the year ended December 31, 2005. The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (“GAAP”) and general banking practices. The Company’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, the Company’s estimates would be updated and additional provisions for loan losses may be required. See “Asset Quality”. Another of the Company’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.

Results of Operations

Second quarter 2006 earnings totaled $2,235,754, an increase of $195,501 from the $2,040,253 earned in the second quarter of 2006. Basic earnings per share were $.45 for the quarter ended June 30, 2006, compared to $.42 per share reported for the second quarter of 2005. Diluted earnings per share were $.44 for the second quarter of 2006 compared to $.40 per share for the second quarter of 2005.

Earnings increased in the second quarter of 2006 in comparison to the second quarter of 2005 primarily due to the increase in net interest income of $1.4 million which resulted from a 22.3% increase in average earning assets coupled with a 75 basis point improvement in the average yield on earning assets.

Return on average equity was 16.48% for the second quarter of 2006 compared to 16.26% for the second quarter of 2005. The leverage capital ratio was 8.32% at June 30, 2006 compared to 9.15% at June 30, 2005.

Net interest income totaled $8,295,281 for the second quarter of 2006, up 21.0% from the $6,856,992 reported for the second quarter of 2005. Net interest income increased primarily due to

a $126.4 million or 22.3% increase in the average volume of earning assets, including a 16.0% increase in average loan volume in quarterly comparison. The impact of increased interest income earnings from the higher volume of earning assets was partially offset by a $94.7 million or 22.8% increase in the volume of interest-bearing deposits coupled with a 110 basis point increase in the average cost of interest-bearing deposits from 2.07% in the second quarter of 2005 to 3.17% in the second quarter of 2006.

For the first six months of 2006, the Company earned $4,054,274, a 2.3% increase over the $3,963,676 reported for the first six months of 2005. Basic earnings per share were $.82 for the first half of 2006 versus $.81 per share for the first half of 2005. Diluted earnings per share were $.80 versus $.78, respectively. The first six months of 2005 included a $631,000 pre-tax special distribution of proceeds to the Company from the merger of Pulse EFT Association and Discover Financial Services, Inc. Additionally, the first six months of 2005 included a $102,000 pre-tax write-down of a branch facility. Excluding the $349,000 after-tax effect of these non-recurring transactions, the Company’s year-to-date earnings for 2006 improved by $439,000, or 12%, over 2005.

Total consolidated assets increased $81.0 million or 11.6%, from $698.8 million at December 31, 2005 to $779.8 million at June 30, 2006. Total loans grew $46.7 million or 10.5%, from $442.8 million at December 31, 2005 to $489.5 million at June 30, 2006, primarily in commercial, construction, and real estate credits. Total deposits grew $79.2 million or 12.7%, from $624.9 million at December 31, 2005 to $704.1 million at June 30, 2006. Of the $79.2 million growth in deposits, $70.8 million was in interest bearing deposits, primarily in Platinum money market and checking accounts. The Platinum money market and checking accounts offer competitive rates of interest that adjust to changes in market rates. Additionally, the core non-interest bearing deposits have continued to grow and approximate 26.5% of total deposits at June 30, 2006. The strong deposit growth in the second quarter of 2006 is attributed to new retail branch offices and to increased government and corporate spending due to rebuilding efforts in the Company’s markets.

Nonperforming assets, including loans 90 days or more past due, totaled $2.7 million at June 30, 2006 compared to $2.3 million at June 30, 2005 and $3.4 million at December 31, 2005. The increase of $.4 million in the second quarter of 2006 as compared to the second quarter of 2005 resulted primarily from an increase in loans past due 90 days and over, partially offset by decreases in nonaccrual loans, other real estate owned and other foreclosed assets in quarterly comparison. Included in the loans past due 90 days and over is approximately $1.6 million in government-guaranteed loans, which are expected to be paid in full or returned to a current status within the next quarter.

As a percentage of total assets, nonperforming assets decreased to .35% at June 30, 2006, down from ..36% at June 30, 2005 and down from .49% at December 31, 2005. Charge-off volume decreased with net charge-offs to total loans at .02% compared to .05% and .11% for the same periods, respectively.

Earnings Analysis

Net Interest Income

The primary source of earnings for the Company is the difference between interest earned on loans and investments (earning assets) and interest paid on deposits and other liabilities (interest-bearing 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.

The Company’s net interest margin on a taxable-equivalent basis, which is net income as a percentage of average earning assets, was 5.00% at June 30, 2006, down 4 basis points from 5.04% at June 30, 2005. Tables 1 through 4 following this discussion analyze the changes in taxable-equivalent net interest income for the two quarters ended and two six months periods ended June 30, 2006 and 2005.

Average earning assets increased $126.4 million or 22.3%, from $566.5 million in June 2005 to $692.9 million in June 2006. The average yield on earning assets improved 75 basis points, from 6.80% at June 30, 2005 to 7.55% at June 30, 2006, but the mix of average earning assets shifted from 70.9% in average loans to total average earning assets in the second quarter of 2005 to 67.3% in the second quarter of 2006. The shift occurred as strong deposit growth exceeded loan funding and excess deposit dollars were invested in short term investments and federal funds sold.

The impact of the change in asset mix was offset by an increase in loan yields of 107 basis points, from 7.81% for the quarter ended June 30, 2005 to 8.88% for the quarter ended June 30, 2006, and a 42 basis point increase in the average taxable-equivalent yield on investment securities, from 4.36% to 4.78%, respectively. The average volume of investment securities increased $43.5 million, from $159.1 million at June 30, 2005 to $202.6 million at June 30, 2006. The average volume of federal funds sold increased $18.3 million, from $5.7 million in June 2005 to $24.0 million at June 2006, primarily due to strong deposit growth.

The Company’s strong core deposit mix reflected improvement in the average volume of non-interest bearing deposits from $132.3 million or 24.2% of average total deposits at June 30, 2005 to $175.2 million or 25.6% of average total deposits at June 30, 2006. The average volume of NOW, Money Market and Savings deposits increased $86.6 million from $302.2 million, or 55.2% of average total deposits at June 30, 2005 to $388.8 million or 56.8% of average total deposits at June 30, 2006. The average volume of Certificates of Deposit (“CD’s”) increased $8.1 million, from $112.8 million at June 30, 2005 to $120.9 million at June 30, 2006 and represented 20.6% of total deposits at June 30, 2005 compared to 17.6% at June 30, 2006. Most of the Company’s deposit growth was in its Platinum Money Market and Platinum Checking accounts, which offer a competitive yield that adjusts weekly to market rates and support the Company’s retail strategy of developing long-term banking relationships with depositors. The competitive yield on the Platinum accounts contributed greatly to the 110 basis point increase in the average rate paid on total interest-bearing deposits between the two quarters compared. The average yield on all interest-bearing deposits increased from 2.07% at June 30, 2005 to 3.17% at June 30, 2006.

The average rate paid on the Company’s junior subordinated debentures increased 99 basis points from second quarter 2005 to second quarter 2006 due to increases in the floating rate paid on the $8.2 million of such debentures issued in the third quarter of 2004 to partially fund the Lamar acquisition. The debentures carry a floating rate equal to the 3-month LIBOR plus 2.50%, adjustable and payable quarterly. The rate at June 30, 2006 was 7.91%. The debentures mature on September 20, 2034 and, under certain circumstances, are subject to repayment on September 20, 2009 or thereafter. In February 2001, the Company issued $7,217,000 of junior subordinated debentures. The debentures carry a fixed interest rate of 10.20% and mature on February 22, 2031.

The impact of the changes in yield and volume of the earning assets and interest-bearing liabilities discussed above resulted in an increase of $1.5 million to taxable-equivalent net interest income from June 30, 2005 to June 30, 2006.

Net interest income, on a taxable-equivalent basis, increased $2.5 million for the six-month period ended June 30, 2006, from $13.8 million at June 30, 2005 to $16.3 million at June 30, 2006. During the same period, average earning assets increased $109.8 million or 19.5%, from $561.9 million in 2005 to $671.7 million in 2006. The average yield on earning assets improved 68 basis points in six-month comparison, from 6.64% at June 30, 2005 to 7.32% at June 30, 2006. The volume of total interest-bearing liabilities increased $71.2 million or 16.3%, from $436.0 million for the six months ended June 30, 2005 to $507.2 million for the six months ended June 30, 2006. The average yield on total interest-bearing liabilities increased 102 basis points in the same period, from 2.17% to 3.19%.

The impact of the changes in yield and volume of the earning assets and interest-bearing liabilities for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 resulted in an increase of $2.5 million to taxable-equivalent net interest income.

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

		Three Months Ended												Three Months Ended
		June 30, 2006												June 30, 2005
		Average								Average				Average								Average
		Volume				Interest				Yield/Rate				Volume				Interest				Yield/Rate
ASSETS
Interest Bearing Deposits		$	338			$	4				4.89	%		$	82			$	1				2.51	%
Investment Securities (1)
Taxable			107,640				1,216				4.52	%			81,732				798				3.92	%
Tax Exempt (2)			92,611				1,190				5.14	%			74,785				916				4.90	%
Equity Securities			2,343				15				2.58	%			2,592				19				2.86	%
Total Investments			202,594				2,421				4.78	%			159,109				1,733				4.36	%
Federal Funds Sold and Securities Purchased Under Agreements to Resell			23,983				295				4.93	%			5,733				41				2.90	%
Loans (3)
Commercial and Real Estate			370,362				8,344				9.04	%			313,102				6,009				7.70	%
Installment			95,592				1,974				8.28	%			88,479				1,813				8.22	%
Total Loans			465,954				10,318				8.88	%			401,581				7,822				7.81	%
Total Earning Assets			692,869				13,038				7.55	%			566,505				9,597				6.80	%
Allowance for Loan Losses			(4,600	)											(4,042	)
Nonearning Assets			73,025												60,632
Total Assets		$	761,294											$	623,095
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW, Money Market, and Savings		$	388,789			$	3,004				3.10	%		$	302,249			$	1,464				1.94	%
Time Deposits			120,943				1,028				3.41	%			112,785				673				2.39	%
Total Interest Bearing Deposits			509,732				4,032				3.17	%			415,034				2,137				2.07	%
Federal Funds Purchased, Securities Sold Under Agreements to Repurchase			2,724				29				4.25	%			5,040				34				2.73	%
Junior Subordinated Debentures			15,465				335				8.70	%			15,465				297				7.71	%
Federal Home Loan Bank Advances			—				—				—				915				7				2.87	%
Total Interest Bearing Liabilities			527,921				4,396				3.34	%			436,454				2,475				2.28	%
Demand Deposits			175,163												132,313
Other Liabilities			3,802												4,014
Stockholders’ Equity			54,408												50,314
Total Liabilites and Stockholders’ Equity		$	761,294											$	623,095
NET TAXABLE-EQUIVALENT INTEREST INCOME AND SPREAD						$	8,642				4.21	%						$	7,122				4.52	%
NET TAXABLE-EQUIVALENT YIELD ON EARNING ASSETS											5.00	%											5.04	%

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

		Three Months Ended
		June 30, 2006 compared to June 30, 2005
		Total				Change
		Increase				Attributable to
		(Decrease)				Volume				Rates
Taxable-equivalent interest earned on:
Interest Bearing Deposits		$	3			$	3			$	0
Investment Securities
Taxable			418				329				89
Tax Exempt			274				227				47
Equity Securities			(4	)			(2	)			(2	)
Federal Funds Sold and Securities Purchased Under Agreement to Resell			254				208				46
Loans, including fees			2,496				1,347				1,149
TOTAL			3,441				2,112				1,329
Interest Paid On:
Interest Bearing Deposits			1,895				568				1,327
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase			(5	)			(20	)			15
Federal Home Loan Bank Advances			(7	)			(7	)			—
Junior Subordinated Debentures			38				—				38
TOTAL			1,921				541				1,380
Taxable-equivalent net interest income		$	1,520			$	1,571				($51	)

NOTE:

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

Table 3 — Consolidated Average Balances, Interest and Rates
Taxable-equivalent basis (2)
(in thousands)

		Six Months Ended												Six Months Ended
		June 30, 2006												June 30, 2005
		Average								Average				Average								Average
		Volume				Interest				Yield/Rate				Volume				Interest				Yield/Rate
ASSETS
Interest Bearing Deposits		$	342			$	9				5.34	%		$	53			$	1				3.27	%
Investment Securities (1)
Taxable			96,528				2,128				4.41	%			80,937				1,546				3.85	%
Tax Exempt (2)			87,151				2,209				5.07	%			75,165				1,840				4.90	%
Equity Securities			2,185				39				3.58	%			2,603				33				2.55	%
Total Investments			185,864				4,376				4.71	%			158,705				3,419				4.31	%
Federal Funds Sold and Securities Purchased Under Agreements to Resell			30,629				701				4.61	%			7,235				93				2.59	%
Loans (3)
Commercial and Real Estate			359,801				15,333				8.59	%			310,605				11,539				7.49	%
Installment			95,043				3,950				8.38	%			85,267				3,450				8.16	%
Total Loans			454,844				19,283				8.55	%			395,872				14,989				7.64	%
Total Earning Assets			671,679				24,369				7.32	%			561,865				18,502				6.64	%
Allowance for Loan Losses			(4,480	)											(3,931	)
Nonearning Assets			72,149												61,527
Total Assets		$	739,348											$	619,461
LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW, Money Market, and Savings		$	368,388			$	5,339				2.92	%		$	295,266			$	2,692				1.84	%
Certificates of Deposits			120,970				1,996				3.33	%			117,311				1,323				2.27	%
Total Interest Bearing Deposits			489,358				7,335				3.02	%			412,577				4,015				1.96	%
Federal Funds Purchased, Securities Sold Under Agreements to Repurchase			2,383				49				4.14	%			6,106				76				2.51	%
Junior Subordinated Debentures			15,465				650				8.47	%			15,465				571				7.45	%
Federal Home Loan Bank Advances			—				—				—				1,869				26				2.76	%
Total Interest Bearing Liabilities			507,206				8,034				3.19	%			436,017				4,688				2.17	%
Demand Deposits			174,392												129,498
Other Liabilities			3,691												4,077
Stockholders’ Equity			54,059												49,869
Total Liabilites and Stockholders’ Equity		$	739,348											$	619,461
NET TAXABLE-EQUIVALENT INTEREST INCOME AND SPREAD						$	16,335				4.12	%						$	13,814				4.47	%
NET TAXABLE-EQUIVALENT YIELD ON EARNING ASSETS											4.90	%											4.96	%

Table 4 — Changes in Taxable-Equivalent Net Interest Income
(in thousands)

		Six Months Ended
		June 30, 2006 compared to June 30, 2005
		Total				Change
		Increase				Attributable to
		(Decrease)				Volume				Rates
Taxable-equivalent interest earned on:
Interest Bearing Deposits		$	8			$	8			$	0
Investment Securities
Taxable			582				512				70
Tax Exempt			369				302				67
Equity Securities			6				(3	)			9
Federal Funds Sold and Securities Purchased Under Agreement to Resell			608				491				117
Loans, including fees			4,294				2,380				1,914
TOTAL			5,867				3,690				2,177
Interest Paid On:
Interest Bearing Deposits			3,320				851				2,469
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase			(27	)			(61	)			34
Federal Home Loan Bank Advances			(26	)			(26	)			—
Notes Payable
Junior Subordinated Debentures			79				—				79
TOTAL			3,346				764				2,582
Taxable-equivalent net interest income		$	2,521			$	2,926				($405	)

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

Non-interest Income
Excluding Securities Transactions

The Company’s primary source of non-interest income is services charges and fees on deposit accounts, which include insufficient funds (“NSF”) fees. Income from Service charges on deposit accounts decreased from June 2005 to June 2006 in three and six months comparison by $24,549 and $225,665 respectively. The decrease resulted primarily due a decrease in NSF fees attributed to higher average balances in demand deposit accounts and lower NSF activity.

Income from other charges and fees decreased $79,257 for the three months ended June 30, 2006 as compared to June 30, 2005 primarily due to the $99,000 PULSE distribution included in 2005 and a $65,983 decrease in third-party mortgage origination fees. Quarterly decreases recorded in the other non-interest income categories were partially offset by a $137,430 increase in debit card and ATM fee income. For the six months ended June 30, 2006, income from other charges and fees decreased $460,488 as compared to the six months ended June 30, 2005, primarily due to the $631,000 special distribution from Pulse included in 2005 income. Additionally, income from third-party mortgage originations decreased $82,647. The decreases were partially offset by an increase of $263,320 in debit card and ATM fee income in six months comparison.

Securities Transactions

The Company recorded no gains or losses on sales of securities for the first six months of 2006. During the first six months of 2005, both MidSouth Bank and Lamar Bank sold mutual funds held in the securities portfolios. MidSouth Bank sold a $1.0 million mutual fund at a loss of $30,706 and Lamar Bank sold $8.3 million in a GNMA mutual fund for a gain of $31,091.

Non-interest Expense

Non-interest expense increased $882,302 in quarterly comparison and $1,425,165 in year-to-date comparison, primarily in salaries and employee benefit costs and occupancy expenses related to the new retail branches added in 2006. Salaries and benefit costs increased $631,891 in quarter-to-date comparison and $1,214,890 in year-to-date comparison due to the addition of 44 full-time equivalent employees, from 305 at June 30, 2005 to 349 at June 30, 2006. Occupancy expenses increased $294,635 and $525,598 in quarterly and six months comparison, respectively, due to the added branches. Other expenses decreased $44,224 and $315,323 for the same periods, respectively, primarily due to quarterly and year-to-date decreases of $85,022 and $172,543, respectively, in amortization of intangibles.

Analysis of Statement of Condition

Consolidated assets totaled $779.8 million at June 30, 2006, up $81.0 million from $698.8 million at December 31, 2005. The increase resulted primarily from growth in deposits of $79.2 million of which $8.3 million was in non-interest bearing balances. As stated under “Results of Operations,” the deposit growth is attributed to new retail branch offices and to increased

government and corporate spending due to rebuilding efforts in the Company’s markets. Additionally, the competitive market rates paid on the Company’s Platinum accounts have contributed to deposit growth.

Cash flows from the increase in deposits funded $46.7 million in loan growth for the first half of 2006. Loan growth was below projections, but is expected to improve with recent hires, new retail branches and good loan demand in the Company’s markets. The loan growth occurred primarily in the Company’s commercial portfolio, with increases also noted in construction loans and commercial real estate loans. The remaining cash flows from the deposit growth and a $16.5 million decrease in federal funds sold funded a $48.9 million increase in investment securities available-for-sale during the six months ended June 30, 2006. The Company invested primarily in tax-free municipal securities and in short-term agencies that offered some yield improvement over the rate earned on federal funds sold. The Company ended the second quarter of 2006 with a federal funds sold position of $9.6 million at June 30, 2006.

Bank premises and equipment increased $5.0 million for the first six months of 2006 and reflects the Company’s continued branch expansion.

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 their 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. The Banks’ core deposits are their 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, principal payments received on loans and mortgage-backed securities, and maturities of investment securities provide additional primary sources of asset liquidity for the Banks. The Banks also have significant borrowing capacity with the FHLB of Dallas, Texas and borrowing lines with other correspondent banks.

At the parent company level, cash is needed primarily to meet interest payments on the junior subordinated debentures and pay dividends on common stock. An $8.2 million issuance of junior subordinated debentures was completed on September 20, 2004, the proceeds of which were partially used to fund the Lamar Bancshares merger. The parent company previously issued $7.2 million in junior subordinated debentures in February 2001. Dividends from the Banks primarily provide liquidity for the parent company. As a publicly traded company, the parent company also has the ability to issue additional trust preferred and other securities instruments to provide funds as needed for operations and future growth.

Capital

The Company 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 June 30, 2006, the Company and the Banks were in compliance with statutory minimum capital requirements and were classified as “well capitalized”. 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. The Company’s leverage ratio was 8.32%, Tier 1 capital to risk-weighted assets was 10.92% and total capital to risk-weighted assets was 11.77% at the end of the second quarter of 2006.

Asset Quality

Credit Risk Management

The Company 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 reviews performed by the loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Audit Committee of the Board of Directors. Additionally, 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.

Nonperforming Assets and Loans Past Due 90 Days and Over

The following table summarizes the Company’s nonperforming assets and loans past due 90 days and over for the quarters ending June 30, 2006 and 2005 and for the year-ended December 31, 2005.

		Period Ended								%				Year Ended
		Jun. 30,								Chg				Dec. 31,
		2006				2005								2005
Nonaccrual loans		$	543			$	1,892				-71.3	%		$	660
Loans past due 90 Days and over			2,104				128				1543.8	%			2,511
Total nonperforming loans			2,647				2,020				31.0	%			3,171
Other real estate owned			32				98				-67.3	%			98
Other foreclosed assets			25				156				-84.0	%			176
Total nonperforming assets		$	2,704			$	2,274				18.9	%		$	3,445
Nonperforming assets to total assets			0.35	%			0.36	%			-3.7	%			0.49	%

		Period Ended								%				Year Ended
		Jun. 30,								Chg				Dec. 31,
		2006				2005								2005
Nonperforming assets to total loans + OREO + other foreclosed assets			0.55	%			0.55	%			-0.3	%			0.78	%
ALL to nonperforming assets			180.73	%			177.62	%			1.8	%			126.42	%
ALL to nonperforming loans			184.62	%			199.95	%			-7.7	%			137.34	%
ALL to total loans			1.00	%			0.99	%			1.4	%			0.98	%
Year-to-date charge-offs		$	310			$	310				0.0	%		$	702
Year-to-date recoveries			223				119				87.4	%			226
Year-to-date net charge-offs		$	87			$	191				-54.5	%		$	476
Net YTD charge-offs to total loans			0.02	%			0.05	%			-57.1	%			0.11	%