MidSouth Bancorp, Inc. ("the Company") is a bank holding company headquartered in Lafayette, Louisiana that conducts substantially all of its business through its wholly-owned subsidiary bank MidSouth Bank, N.A ("the Bank"). MidSouth Bank, N.A. offers complete banking services to commercial and retail customers in south Louisiana and southeast Texas with 35 locations and more than 170 ATMs. The Company is community oriented and focuses primarily on offering commercial and consumer loan and deposit services to individuals, small businesses, and middle market businesses.

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 and Analysis in the Company's 10-K for the year ended December 31, 2008.

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 that 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 and accounting principles, policies, and guidelines 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, 2008. 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 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. The Company annually evaluates its goodwill for impairment as of December 31st of each year. Given the current instability of the economic environment, the Company's common stock traded below its stated book value during the first quarter of 2009, which was deemed a triggering event for interim analysis. Accordingly, the Company engaged a third party to assist management in assessing the current fair value of its common stock and performed a goodwill impairment analysis as of March 31, 2009. Upon review and analysis of the factors influencing value and utilizing the market value and investment value approaches, the Company determined the fair value of the common stock to be greater than stated and tangible book value, and therefore no impairment of the goodwill was recorded at the Company. During the second quarter of 2009, the Company's goodwill was not evaluated for impairment due to no triggering events having occurred during the quarter.

Compliance with accounting for stock-based compensation requires that management make assumptions including stock price volatility and employee turnover that are utilized to measure compensation expense. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions. The Company recognized stock option expense of $16,702 for the grant-date fair value of stock options vested in the six months ended June 30, 2009. The Company did not grant any new stock options in the first half of 2009.

If the economic environment causes further instability in the market, it is reasonably possible that the methodology of the assessment of potential loan losses, goodwill impairment, and other fair value measurements could change in the near-term or could result in impairment going forward.

Results of Operations

Earnings Analysis

The Company reported net income available to common shareholders of $446,000 for the second quarter ended June 30, 2009, a decrease of $972,000 from net income available to common shareholders of $1,418,000 reported for the second quarter of 2008. Diluted earnings per share for the second quarter of 2009 were $0.07 per share, a decrease of 66.7% from the $0.21 per share for the second quarter of 2008. Beginning the first quarter of 2009, the Company recorded dividends on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock") issued to the U. S. Department of the Treasury on January 9, 2009 under the Capital Purchase Plan. Dividends recorded on the Series A Preferred Stock totaled $299,000 for the second quarter of 2009 and $576,000 for the six months ended June 30, 2009.

For the six months ended June 30, 2009, net income available to common shareholders totaled $1,402,000, a 46.4% decrease from earnings of $2,617,000 for the first six months of 2008. Of the $1,215,000 decrease, $576,000 is related to dividends on the Series A Preferred Stock. Diluted earnings per share were $0.21 for the first six months of 2009, compared to $0.39 for the first six months of 2008.

Second quarter 2009 earnings were impacted by a $2.1 million provision recorded for loan losses, compared to $855,000 in the second quarter of 2008 and $1.0 million recorded in the first quarter of 2009. Deterioration in the performance of a $5.7 million national participation credit in the Company's Baton Rouge market prompted a $1.1 million charge-off on the credit in the second quarter of 2009 and an increase of $200,000 in specific reserves allocated to the credit within the Allowance for Loan Losses ("ALL"). The remainder of the $2.1 million provision covered approximately $430,000 in charged-off loans associated with another Baton Rouge credit relationship and $333,000 in other credits charged-off in the second quarter of 2009. During the second quarter of 2009, the Company made management changes in the Baton Rouge market to strengthen credit underwriting and the monitoring of existing loans within that market.

Quarterly revenues for the Company, defined as net interest income and non-interest income, increased $137,000, or 1.0%, for the second quarter of 2009 compared to the second quarter of 2008. The slight improvement in revenues resulted primarily from a $1,414,000 decrease in interest expense on deposits and borrowings, which was mostly offset by a $1,331,000 decrease in interest income on earning assets. Non-interest income increased $54,000 due to a $138,000 increase in ATM/debit card income that was partially offset by decreases in mortgage banking fees and income from a third party investment advisory firm. Non-interest expense increased $39,000 in prior year quarterly comparison, as expense reductions in several categories offset a $649,000 increase in FDIC premiums. During the second quarter of 2009, the Company accrued $421,000 for a special assessment as required by the FDIC and also incurred an increase in the regular assessment rate.

Second quarter 2009 results were positively impacted by $197,000 in tax benefit compared to $277,000 in tax provisions recorded for the second quarter of 2008. The $197,000 in quarterly tax benefit resulted from lower pretax profits combined with sustained tax exempt income levels and certain federal tax credits.

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.

Net interest income totaled $9,922,000 for the second quarter of 2009, an increase of 0.8%, or $83,000, from the $9,839,000 reported for the second quarter of 2008. The improvement in net interest income resulted primarily from a decrease of $1.4 million in interest expense which offset a decrease of $1.3 million in interest income. The impact to interest income of a $32.4 million increase in the average volume of loans, from $563.6 million at June 30, 2008 to $596.0 million at June 30, 2009, was partially offset by a 106 basis point reduction in the average yield on loans in quarterly comparison. The average yields on loans declined from 7.99% in the second quarter of 2008 to 6.93% in the second quarter of 2009 as New York Prime ("Prime") fell 175 basis points, from 5.00% to 3.25% during the same period. The average volume of investment securities, including federal funds sold and other interest-earning assets, decreased $50.5 million in quarterly comparison, while the taxable-equivalent yield increased 20 basis points, from 4.08% to 4.28%. The volume decrease occurred primarily in federal funds sold and other interest-earning assets as deposits declined during the second half of 2008, following an influx of commercial money market deposits in the first quarter of 2008.

The decrease in interest expense in quarterly comparison resulted from a 71 basis point decrease in the average rate paid on interest-bearing liabilities combined with a $51.8 million decrease in the average volume of interest-bearing liabilities in quarterly comparison. The decrease in interest-bearing liabilities was primarily in commercial platinum money market deposits and certificates of deposit, partially offset by an increase in the average volume of repurchase agreements. The volume and rate decreases associated with interest-bearing liabilities, partially offset by the $32.3 million increase in the average volume of loans, primarily contributed to a 14 basis point improvement in the taxable-equivalent net interest margin, from 4.78% for the second quarter of 2008 to 4.92% for the second quarter of 2009.

In year-to-date comparison, net interest income increased $935,000 as interest expense decreased $3,784,000, offsetting a $2,849,000 decline in interest income. Interest expense decreased primarily due to a 108 basis point reduction in the average rate paid on interest-bearing liabilities, from 2.75% at June 30, 2008 to 1.67% at June 30, 2009. Additionally, the average volume of interest-bearing liabilities decreased $30.3 million in year-to-date comparison. Interest income on average earning assets decreased primarily as the result of a 127 basis point decline in the average yield earned on loans, from 8.24% at June 30, 2008 to 6.97% at June 30, 2009. An average volume increase of $32.0 million in loans partially offset the impact of lower yields. As a result, the taxable-equivalent net interest margin improved 20 basis points, from 4.83% for the six months ended June 30, 2008 to 5.03% for the six months ended June 30, 2009.

The average rate paid on the Company's junior subordinated debentures decreased 72 basis points from second quarter of 2008 to second quarter of 2009 on the $8.2 million of such debentures issued in the fourth quarter of 2004. The debentures carry a floating rate equal to the 3-month LIBOR plus 2.50%, adjustable and payable quarterly. The rate at June 30, 2009 was 3.11%. 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 $7.2 million of junior subordinated debentures. The debentures carry a fixed interest rate of 10.20% and mature on February 22, 2031.

Table 1
Consolidated Average Balances, Interest and Rates
(in thousands)
                                                     Three Months Ended June 30,
                                          2009                                         2008
                         Average                       Average        Average                       Average
                         Volume        Interest      Yield/Rate       Volume        Interest      Yield/Rate
Assets
Investment
securities1
Taxable                 $  93,010     $    1,001            4.30 %   $  95,039     $    1,044            4.39 %
Tax exempt2               115,933          1,554            5.36 %     106,791          1,458            5.46 %
Other investments           4,404             29            2.63 %       4,283             32            2.99 %
Total investments         213,347          2,584            4.84 %     206,113          2,534            4.92 %
Federal funds              25,826             18            0.28 %      64,536            334            2.05 %
Loans
Commercial and real
estate                    486,222          7,936            6.55 %     451,181          8,753            7.80 %
Installment               109,733          2,358            8.62 %     112,462          2,449            8.76 %
Total loans3              595,955         10,294            6.93 %     563,643         11,202            7.99 %
Time deposits in
other banks                10,144             56            2.21 %      29,174            185            2.55 %
Total earning assets      845,272         12,952            6.15 %     863,466         14,255            6.64 %
Allowance for loan
losses                     (7,593 )                                     (5,767 )
Nonearning assets          89,199                                       88,306
Total assets            $ 926,878                                    $ 946,005

Liabilities and
stockholders' equity
NOW, money market,
and savings             $ 435,659     $    1,162            1.07 %   $ 493,266     $    2,026            1.65 %
Time deposits             139,444            877            2.52 %     143,845          1,505            4.21 %
Total interest
bearing deposits          575,103          2,039            1.42 %     637,111          3,531            2.23 %
Federal funds
purchased and
securities sold under
repurchase agreements      44,093            273            2.45 %      33,907            167            1.95 %
Junior subordinated
debentures                 15,465            262            6.70 %      15,465            290            7.42 %
Total interest
bearing liabilities       634,661          2,574            1.63 %     686,483          3,988            2.34 %

Demand deposits           190,097                                      183,674
Other liabilities           5,891                                        5,027
Stockholders' equity       96,229                                       70,821
Total liabilities and
stockholders' equity    $ 926,878                                    $ 946,005

Net interest income
and net interest
spread                                $   10,378            4.52 %                 $   10,267            4.30 %
Net yield on interest
earning assets                                              4.92 %                                       4.78 %

1 Securities classified as available-for-sale are included in average balances. Interest income figures reflect interest earned on such securities.

2 Interest income of $456,000 for 2009 and $429,000 for 2008 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a 34% tax rate.

3 Interest income includes loan fees of $744,000 for 2009 and $975,000 for 2008. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.

Table 2
Consolidated Average Balances, Interest and Rates
(in thousands)
                                                      Six Months Ended June 30,
                                          2009                                         2008
                         Average                       Average        Average                       Average
                         Volume        Interest      Yield/Rate       Volume        Interest      Yield/Rate
Assets
Investment
securities4
Taxable                 $  97,369     $    2,148            4.41 %   $  86,932     $    2,002            4.61 %
Tax exempt5               117,868          3,167            5.37 %     107,862          2,933            5.44 %
Other investments           4,357             62            2.85 %       3,988             63            3.16 %
Total investments         219,594          5,377            4.90 %     198,782          4,998            5.03 %
Federal funds              13,774             19            0.27 %      51,753            608            2.32 %
Loans
Commercial and real
estate                    487,253         15,973            6.61 %     453,808         18,172            8.05 %
Installment               111,101          4,719            8.57 %     112,591          5,036            8.99 %
Total loans6              598,354         20,692            6.97 %     566,399         23,208            8.24 %
Time deposits in
other banks                 9,610            131            2.75 %      14,780            187            2.54 %
Total earning assets      841,332         26,219            6.28 %     831,714         29,001            7.01 %
Allowance for loan
losses                     (7,505 )                                     (5,649 )
Nonearning assets          90,662                                       89,017
Total assets            $ 924,489                                    $ 915,082

Liabilities and
stockholders' equity
NOW, money market,
and savings             $ 428,838     $    2,267            1.07 %   $ 471,984     $    4,955            2.11 %
Time deposits             141,741          1,947            2.77 %     142,459          3,053            4.31 %
Total interest
bearing deposits          570,579          4,214            1.49 %     614,443          8,008            2.62 %
Federal funds
purchased and
securities sold under
repurchase agreements      37,533            477            2.56 %      29,977            377            2.49 %
FHLB advances                   -              -               -           907             18            3.93 %
Federal Reserve Bank
discount window             9,326             23            0.50 %           -              -               -
Total borrowings           46,859            500            2.12 %      30,884            395            2.53 %
Junior subordinated
debentures                 15,465            528            6.79 %      15,465            623            7.97 %
Total interest
bearing liabilities       632,903          5,242            1.67 %     660,792          9,026            2.75 %

Demand deposits           191,203                                      178,891
Other liabilities           5,336                                        5,038
Stockholders' equity       95,047                                       70,361
Total liabilities and
stockholders' equity    $ 924,489                                    $ 915,082

Net interest income
and net interest
spread                                $   20,977            4.61 %                 $   19,975            4.26 %
Net yield on interest
earning assets                                              5.03 %                                       4.83 %

4 Securities classified as available-for-sale are included in average balances. Interest income figures reflect interest earned on such securities.

5 Interest income of $929,000 for 2009 and $862,000 for 2008 is added to interest earned on tax-exempt obligations to reflect tax equivalent yields using a 34% tax rate.
6 Interest income includes loan fees of $1,542,000 for 2009 and $1,903,000 for 2008. Nonaccrual loans are included in average balances and income on such loans is recognized on a cash basis.

Table 3
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
                                                                      Three Months Ended
                                                            June 30, 2009 compared to June 30, 2008
                                                          Total                        Change
                                                        Increase                   Attributable To
                                                       (Decrease)            Volume             Rates
Taxable-equivalent earned on:
Investment securities
Taxable                                              $           (43 )     $      (22 )     $          (21 )
Tax exempt                                                        96              123                  (27 )
Other investments                                                 (3 )              1                   (4 )
Federal funds sold                                              (316 )           (129 )               (187 )
Loans, including fees                                           (908 )            617               (1,525 )
Time deposits in other banks                                    (129 )           (108 )                (21 )
Total                                                         (1,303 )            482               (1,785 )

Interest paid on:
Interest bearing deposits                                     (1,492 )           (319 )             (1,173 )
Federal funds purchased and securities sold under
repurchase agreements                                            106               57                   49
Junior subordinated debentures                                   (28 )              -                  (28 )
Total                                                         (1,414 )           (262 )             (1,152 )

Taxable-equivalent net interest income               $           111       $      744       $         (633 )

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 4
Changes in Taxable-Equivalent Net Interest Income
(in thousands)
                                                                      Six Months Ended
                                                          June 30, 2009 compared to June 30, 2008
                                                         Total                       Change
                                                        Increase                 Attributable To
                                                       (Decrease)            Volume            Rates
Taxable-equivalent earned on:
Investment securities
Taxable                                              $          146       $        233       $      (87 )
Tax exempt                                                      234                269              (35 )
Other investments                                                (1 )                5               (6 )
Federal funds sold                                             (589 )             (266 )           (323 )
Loans, including fees                                        (2,516 )            1,252           (3,768 )
Time deposits in other banks                                    (56 )              (69 )             13
Total                                                        (2,782 )            1,424           (4,206 )

Interest paid on:
Interest bearing deposits                                    (3,794 )             (536 )         (3,258 )
Federal funds purchased and securities sold under
repurchase agreements                                           100                 88               12
FHLB advances                                                   (18 )              (18 )              -
Federal Reserve Bank discount window                             23                 23                -
Junior subordinated debentures                                  (95 )                -              (95 )
Total                                                        (3,784 )             (443 )         (3,341 )

Taxable-equivalent net interest income               $        1,002       $      1,867       $     (865 )

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

Non-interest income for the second quarter of 2009 totaled $3,858,000 or 1.4% above the $3,804,000 earned in the second quarter of 2008. For the six months ended June 30, 2009, non-interest income totaled $7,388,000 or $4,000 less than the $7,392,000 reported for the six months ended June 30, 2008. A $138,000 increase in ATM and debit card fee income offset decreases of $54,000 in income from a third party investment advisory firm and $23,000 in mortgage processing fees in prior-year quarterly comparison.

In year-to-date comparison, a $305,000 increase in ATM and debit card fee income offset decreases of $86,000 in income from the third-party investment advisory . . .