Merchants & Marine Bancorp (MNMB) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

OR

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

For the transition period from                    to                    

Commission File Number:000-53198

Merchants & Marine Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Mississippi	26-2498567
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3118 Pascagoula Street, Pascagoula, Mississippi	39567
(Address of principal executive offices)	(Zip Code)

(228) 762-3311

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark 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.þ Yeso No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filero Non-accelerated filero(Do not check if a smaller reporting company) Smaller reporting companyþ

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yesþ No

As of August 13, 2009, 1,330,338 shares of Common Stock were outstanding.

TABLE OF CONTENTS

Part I. Financial Information
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 4. Controls and Procedures	31
Part II. Other Information
Item 1. Legal Proceedings	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3. Defaults Upon Senior Securities	32
Item 4. Submission of Matter to a Vote of Security Holders	32
Item 5. Other Information	32
Item 6. Exhibits	33
SIGNATURES	34
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

Part 1. Financial Information

Item 1. Financial Statements

MERCHANTS & MARINE BANCORP, INC.

CONDENSED BALANCE SHEETS

	(Unaudited)			(Audited)
	June 30, 2009			December 31, 2008
ASSETS:
Cash and due from banks (non-interest bearing)	$	16,630,488		$	18,065,881
Federal funds sold		26,622,000			11,039,000
Securities:
Available for sale, at market value		55,836,483			30,239,874
Held to maturity, at amortized cost		109,775,599			146,509,925
Non-marketable equity securities		900,060			600,060
Loans, less allowance for loan losses of $3,100,000 and $3,100,000, respectively		207,565,919			198,382,586
Property and equipment, net of depreciation		17,466,175			17,750,116
Other real estate owned		100,657			235,659
Accrued income		2,387,566			3,086,533
Other assets		11,219,859			10,373,486
TOTAL ASSETS	$	448,504,806		$	436,283,120
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits:
Non-interest bearing demand	$	85,533,510		$	80,738,441
Interest bearing demand, savings, money market, and other time		291,683,879			286,506,672
Total deposits		377,217,389			367,245,113
Federal funds purchased and securities sold under agreements to repurchase		12,091,483			10,916,967
Accrued expenses and other liabilities		9,531,982			9,060,161
Total liabilities		398,840,854			387,222,241
Stockholders’ Equity:
Common stock — $2.50 par value; 5,000,000 shares authorized; 1,330,338 shares issued and outstanding		3,325,845			3,325,845
Surplus		14,500,000			14,500,000
Retained earnings		34,911,966			34,045,240
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale		(48,043	)		215,610
Unrealized (loss) on defined benefit pension plan		(3,025,816	)		(3,025,816	)
Total stockholders’ equity		49,663,952			49,060,879
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	448,504,806		$	436,283,120

3

MERCHANTS & MARINE BANCORP, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

	Three Months Ended				Six Months Ended
	June 30				June 30
	2009		2008		2009		2008
Interest Income:
Interest and fees on loans	$	3,471,153	$	3,635,842	$	6,940,453	$	7,527,784
Interest on investment securities:
Taxable		1,342,109		2,100,962		2,986,019		4,067,372
Exempt from federal income tax		109,001		71,758		190,657		150,622
Interest on federal funds sold		18,064		220,912		35,638		547,247
Total interest income		4,940,327		6,029,474		10,152,767		12,293,025
Interest Expense:
Interest on deposits		1,315,845		1,710,739		2,658,636		3,634,017
Interest on federal funds purchased and securities sold under agreements to repurchase		12,154		89,017		21,799		229,389
Total interest expense		1,327,999		1,799,756		2,680,435		3,863,406
Net interest income		3,612,328		4,229,718		7,472,332		8,429,619
Provision for loan losses		60,493		123,569		134,883		72,363
Net interest income after provision for loan losses		3,551,835		4,106,149		7,337,449		8,357,256
Non-Interest Income:
Service charges		1,023,620		1,039,445		1,968,864		2,115,309
Miscellaneous		629,220		851,212		1,103,521		1,451,770
Total non-interest income		1,652,840		1,890,657		3,072,385		3,567,079
Non-Interest Expense:
Salaries and employee benefits		1,822,964		1,646,425		3,875,107		3,489,189
Premises		800,597		700,345		1,562,637		1,360,430
Miscellaneous		1,268,237		1,936,672		2,554,986		3,450,052
Total non-interest expense		3,891,798		4,283,442		7,992,730		8,299,671
Income before income taxes		1,312,877		1,713,364		2,417,104		3,624,664
Provision for income taxes		500,407		658,939		836,144		1,150,878
NET INCOME	$	812,470	$	1,054,425	$	1,580,960	$	2,473,786
NET INCOME PER COMMON SHARE	$	0.61	$	0.79	$	1.19	$	1.86

4

MERCHANTS & MARINE BANCORP, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2009			2008			2009			2008
Net income	$	812,470		$	1,054,425		$	1,580,960		$	2,473,786
Other comprehensive income, net of tax:
Unrealized holding (losses) arising during period		(52,345	)		(188,811	)		(263,653	)		(169,569	)
Comprehensive income	$	760,125		$	865,614		$	1,317,307		$	2,304,217

5

MERCHANTS & MARINE BANCORP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,580,960		$	2,473,786
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		710,330			576,492
Provision for loan losses		134,883			56,701
Write-down of other real estate owned		80			33,552
Net premium amortization (discount accretion)		21,782			15,841
Reinvested earnings on securities		(40,944	)		(61,649	)
Decrease in accrued income receivable		698,967			18,849
Increase (decrease) in interest payable		(105,978	)		185,556
Noncash charitable contribution		—			310,000
(Gain) on disposition of property and equipment		(27,500	)		(356,283	)
(Gain) on disposition of securities		—			(117,392	)
Net change in other assets and liabilities		217,283			(465,171	)
Net Cash Provided by Operating Activities		3,189,863			2,670,282
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in Federal funds sold		(15,583,000	)		4,283,000
Purchase of securities available for sale		(52,262,575	)		(26,079,750	)
Proceeds from maturities of securities available for sale		26,275,000			38,045,413
Purchase of securities held to maturity		(60,207,613	)		(89,937,077	)
Proceeds from maturities of securities held to maturity		96,952,593			60,113,333
Purchase of other equity securities		(300,000	)		—
Net (increase) decrease in loans		(9,338,294	)		7,542,857
Purchase of property and equipment		(426,389	)		(1,698,744	)
Proceeds from sale of property and equipment		182,500			140,000
Net Cash (Used) in Investing Activities		(14,707,778	)		(7,590,968	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		9,972,276			20,043,840
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		1,174,516			(5,794,135	)
Dividends paid to stockholders		(1,064,270	)		(1,064,270	)
Net Cash Provided by Financing Activities		10,082,522			13,185,435
Net Increase (Decrease) in Cash and Due from Banks		(1,435,393	)		8,264,749
Cash and Due From Banks, Beginning		18,065,881			20,268,465
Cash and Due From Banks, Ending	$	16,630,488		$	28,533,214

6

MERCHANTS & MARINE BANCORP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As of and For the Six Months Ended June 30, 2009

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Interim Financial Statements.

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the financial statements and notes thereto of Merchants & Marine Bancorp, Inc.’s 2008 Annual Report to Shareholders.

December 31, 2008 Balance Sheet Presentation.

The condensed balance sheet at December 31, 2008 has been taken from the audited balance sheet at that date.

Use of Estimates.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. SHARE EXCHANGE.

At its annual meeting of shareholders, held on April 3, 2008, Merchants & Marine Bank’s shareholders approved an Agreement and Plan of Share Exchange. Pursuant to this agreement, all of the outstanding shares of the Bank’s common stock were automatically exchanged for shares in Merchants & Marine Bancorp, Inc., a Mississippi bank holding company. At the completion of the exchange, the Bank became a wholly-owned subsidiary of the holding company.

The financial information presented in these financial statements for the six months ended June 30, 2009 and the six months ended June 30, 2008 includes the consolidated data of both the bank and the holding company.

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of Merchants & Marine Bancorp, Inc. (the “Company”). Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modification or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include, those described in the Company’s Annual Report on Form 10-K for the year ended December 31 2008 and without limitation, (i) the Company’s ability to effectively execute its business plans; (ii) greater than anticipated deterioration or lack of sustained growth in the national or local economies, (iii) rapid fluctuations or unanticipated changes in interest rates; (iv) continuation of the historically low short-term interest rate environment; (v) increased competition with other financial institutions in the markets that the Company serves; (vi) continuing consolidation in the financial services industry; (vii) losses, customer bankruptcy, claims and assessments; (viii) changes in state and federal legislation, regulations or policies applicable to banks or other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy; and (ix) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies.

Formation of Holding Company

On April 24, 2008, the Company consummated its acquisition of 100% of the outstanding shares of Merchants & Marine Bank (the “Bank”) common stock pursuant to the terms of an Agreement and Plan of Share Exchange, dated as of February 5, 2008, by and between the Company and the Bank. In connection with the Share Exchange, the holders of Bank common stock exchanged their shares of Bank common stock for a like number of shares of Company common stock. Following consummation of the Share Exchange, the Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve Bank. The common stock of the Bank constitutes substantially all of the assets of the Company. The Company has no other subsidiaries and the Bank accounts for substantially all of the Company’s assets, liabilities, income and expenses.

8

Executive Summary

The Company is a one bank holding company which acquired 100% of the Bank’s common stock on April 24, 2008 and is the successor issuer to the Bank pursuant to Rule 12g-3(a) of the Securities Exchange Act of 1934, as amended. The Bank, a state-chartered institution since 1932, is a full service, federally insured Bank serving Jackson and George Counties, Mississippi. The main office of the Bank is located in Pascagoula. Branch offices are located in Moss Point, Gautier, Escatawpa, Ocean Springs, Wade, Hurley, St. Martin and Lucedale. The Bank offers commercial and individual financial services consisting of business and personal checking accounts, certificates of deposit, various forms of real estate, commercial and industrial and personal consumer financing.U.S. Bankermagazine has ranked the Bank as one of the Top 200 Community Banks in the nation and Bauer Financial has given the Bank a 5-Star rating for the 64^th consecutive quarter indicating that Merchants & Marine Bank is one of the strongest banks in the nation. The Company is subject to regulation, supervision, and examination by the Mississippi Department of Banking and Consumer Finance, the SEC, the Federal Reserve and the FDIC.

Hurricane Katrina hit the Gulf Coast on August 29, 2005. Katrina’s widespread devastation has been felt in the years since the disaster and will likely be felt for years to come. Some of the many challenges facing our service area include insurance availability and settlements, housing, building code changes, flood elevation revisions, population shifts, and business and staffing needs.

Katrina also had its effects on the Company’s financial statements. The Company experienced an unusual growth in deposits, which regulators have advised occurs after such disasters. Management believed that many of these funds would be short term in nature. Beginning in the last two quarters of 2007, throughout 2008 and continuing into the first two quarters of 2009, as businesses and homes have been rebuilt, these deposit dollars have begun to be utilized for recovery purposes and deposits growth has leveled off.

Earnings Highlights

The Company’s net income for the second quarter of 2009 was $812,000, a decrease of 22.9% from $1,054,000 for the second quarter of 2008. Year-to-date net income at June 30, 2009 was $1,581,000, compared to $2,474,000 for the same period of 2008, a decrease of 36.1%. The following discussions, tables, and the accompanying financial statements outline the change in earnings from the first two quarters of 2009, 2008 and 2007. Return on average assets for the first two quarters of 2009 was 0.7%, compared to 1.0% for the same period of 2008, and 1.3% for the same period 2007. Return on average equity was 6.4%, 10.0% and 14.9% in the first two quarters of 2009, 2008 and 2007, respectively. Year to date earnings per share in the first six months of 2009, 2008 and 2007 were $1.19, $1.86 and $2.48, respectively.

Earning Assets

A detailed comparison of the Company’s average earning assets for the second quarter of 2009, 2008, and 2007 is presented in Table 1 of this report. The Company’s interest-earning assets include loans, investments, and federal funds sold. Average earning assets for the first two quarters of 2009 totaled $404,456,000 compared to $422,628,000 in 2008 and $451,144,000 for the same period in 2007. The decrease in average earning assets in 2009 is a result of decreases in deposits, which results in fewer funds available for loans and investments. Average net loans increased by $4,715,000 in the first two quarters of 2009, compared to a decrease of $1,693,000 for the same period in 2008, and an increase of $26,119,000, or 14.8%, in the first two quarters of 2007. Average securities decreased by $18,901,000, or 10.5%, in 2009, compared to a decrease of $39,663,000, or 18.1%, and $32,651,000, or 12.9%, at second quarter-end June 30, 2008 and 2007, respectively. Average federal funds sold increased by $3,986,000, or 9.4% in 2009, compared to an increase of $12,840,000, or 43.3%, at second quarter-end 2008, and $7,072,000, or 31.3%, at second quarter-end 2007.

9

Net Interest Income

The major source of the Company’s income comes from gathering funds from deposit sources and investing them in loans and securities. Net interest income is the revenue generated from interest-earning assets less the cost of interest paid on deposits and other interest-bearing liabilities. Balancing interest rate, credit, liquidity, and capital risks, while managing its assets and liabilities to maximize income growth is the Company’s primary long-term objective.

A Company’s net interest margin is a prime indicator of its profitability. The net interest margin reflects the spread between interest-earning asset yields and interest-bearing liability costs and the percentage of interest-earning assets funded by interest-bearing liabilities. The net margin, on a tax equivalent basis, was 3.3%, 3.5% and 3.7% for the second quarter of 2009, 2008 and 2007, respectively. The decreases in 2009 and 2008 are attributable to the decreases in volumes and rates of return on interest earning assets compared to 2007. Tax equivalent net interest income decreased in the first two quarters of 2009 and 2008 by 13.1% and 10.1%, respectively, compared to an increase of 4.8% in the first two quarters of 2007. This contraction was principally a result of the actions undertaken by the Federal Open Market Committee (“FOMC”) from September 2007 to December 2008 to significantly reduce market interest rates to historically low levels.

Average net loans increased by 2.3% in the first two quarters of 2009 compared to a decrease of 0.8% in the first two quarters of 2008, and an increase of 14.8%, in the first two quarters of 2007. In the first two quarters of 2009 and 2008, loan interest income decreased by 7.8% and 4.9%, compared to an increase of 26.6% in the first six months of 2007. Loan yields were 6.8%, 7.5% and 7.8% in the first two quarters of 2009, 2008 and 2007, respectively. The changes in loan yields are related to market conditions. Loan yields respond to many factors, including cuts in the prime interest rate, Federal Reserve rate reductions, and competition. Yields on average taxable securities equaled 4.5% in the first two quarters of 2009 compared to 4.9% in both the first two quarters of 2008 and 2007, due to decreased interest earnings. Yields on tax-exempt securities decreased by 22 basis points as maturing securities were reinvested in lower earning rate securities. The average volume of all securities decreased by 10.5%, 18.2% and 12.9%, in the first two quarters of 2009, 2008 and 2007, respectively. The decrease in volumes of securities is directly related to decreases in deposits during the same periods. Total securities income decreased by 24.7%, 21.8% and 0.3% in the first two quarters of 2009, 2008 and 2007, respectively. The average balance of federal funds sold decreased by $3,986,000 for the second quarter of 2009 and increased by $12,840,000 for the second quarter of 2008 compared to an increase of $7,072,000, or 31.3%, for the second quarter of 2007. Income from these funds decreased by 93.4% and 29.1% in the first two quarters of 2009 and 2008, respectively, compared to an increase of 51.5% in the first two quarters of 2007. The decreases in 2009 and 2008 income were due to lower rates earned. The increase of 51.5% in the first two quarters of 2007 was a result of increased rates earned.

The Company is experiencing a leveling of deposits after a surge in deposits following Hurricane Katrina. Total average interest bearing liabilities decreased by 1.7% and 1.3% in the first two quarters of 2009 and 2008, respectively, compared to an increase of 10.2% in 2007. Rates paid on these funds decreased by 75 and 52 basis points in the first two quarters of 2009 and 2008, respectively, compared to an increase of 75 basis points in 2007. The decrease in the rates paid on these funds resulted in a decrease in interest expense of $1,183,000 for the first two quarters of 2009 and a decrease of $845,000 for the first two quarters of 2008. The increase in rates paid along with increased volumes resulted in an increase in interest expense of 46% in the first two quarters of 2007. Interest-bearing checking, money market funds, and savings accounts average balances decreased by 3.9% and 10.0% for the second quarter of 2009 and 2008, respectively, compared to an increase of 11.7% for the second quarter of 2007. Interest expense decreased by 38.3% and 33.7%, in the first two quarters of 2009 and 2008, respectively, compared to an increase of 51.5% for the first two quarters 2007. Average time deposit balances increased by 10.3%, 14.8% and 9.0% in the first two quarters of 2009, 2008 and 2007, respectively. The average rate paid on these funds was 3.0%, 4.1% and 4.9% for the first two quarters of 2009, 2008 and 2007, respectively. Interest expense on time deposits decreased by 17.7% and 5.0% in the first two quarters of 2009 and 2008, respectively, compared to an increase of 44.8% in the first two quarters of 2007. Even though balances of these funds increased in the first two quarters of 2009 and 2008, the interest expense decreased as a result of lower rates paid. Average federal funds purchased and securities sold under agreements to repurchase decreased by 38.0% in the first two quarters of 2009, compared to increases of 19.7%, and 0.5% for the first two quarters of 2008 and 2007, respectively. Interest expense decreased by 90.3% or 180 basis points, in the first two quarters of 2009, due to lower rates paid and volumes. Interest expense remained flat in 2007 compared to 2006, but increased by 54.7% in the first two quarters 2008, due to higher volumes and rates. Tables 1 and 2 provide more information on the Company’s net interest income and rates.

10

Interest Rate Sensitivity

Managing the interest rate risk of the Company is an integral part of its financial success. The process of interest rate risk management includes the monitoring of each component of the balance sheet and its sensitivity to interest rate changes. Management monitors the day-to-day exposure to changes in interest rates in response to loan and deposit flows and makes adjustments accordingly.

The Company uses an earnings forecast model that simulates multiple interest rate scenarios and the effects on the Company’s net margin, in addition to using traditional gap tables. The model analyzes the earnings risk by revealing the probability of reaching future income levels based on balance sheet changes caused by interest rate fluctuations. The model and traditional gap analysis indicate the Company is liability sensitive, which means that in a rising rate environment, the Company’s net interest margin will decrease. See Table 14 for a detailed analysis of the Company’s interest rate sensitivity.

The Company’s operations are not ordinarily impacted by inflationary factors. However, because the Company’s assets are largely monetary in nature its operations are subject to changes in interest rates.

Loans

One of the largest components of the Company’s earning assets is its loan portfolio. Loans are the highest yielding asset category and also contain the largest amount of risk. Meeting the credit needs of Jackson and George Counties, with special emphasis on consumer and small business loans, continues to be the primary goal of the Company.

Average loans, net of unearned income, as a percentage of average earning assets was 50.8%, 47.5% and 44.9% for the first two quarters of 2009, 2008 and 2007, respectively. The average loan-to-deposit ratio was 54.2%, 50.4% and 46.1% at June 30, 2009, 2008 and 2007, respectively. Average net loans increased by $4,715,000 or 2.3%, at June 30, 2009 compared to June 30, 2008, and decreased by $1,693,000, or 0.8%, at June 30, 2008 compared to June 30, 2007. Average net loans increased by $26,119,000, or 14.8%, at June 30, 2007 compared to June 30, 2006.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $122,868,000 at second quarter-end 2008, to $141,329,000, at second quarter-end 2009. Real estate loans decreased by $240,000 at second quarter-end 2008 compared to second quarter-end 2007. Commercial and industrial loans and loans to municipal and local governments totaled $31,502,000, $34,230,000 and $39,033,000 at the second quarter-end 2009, 2008 and 2007, respectively. Consumer loans decreased from $41,000,000 and $39,458,000 at second quarter-end 2007 and 2008, respectively, to $37,835,000 at second quarter-end 2009. See Tables 6 and 7 for a comparison of the loan portfolio’s composition and maturity breakdown.

11

Allowance for Loan Losses

Historical losses, trends and management’s opinion of the adequacy of the allowance for loan losses (ALL) determine the allocations made to the loan loss reserve. Management considers the following factors in determining the adequacy of the allowance: (1) periodic reviews of individual credits, (2) gross and net charge-offs, (3) loan portfolio growth, (4) historical levels of the allowance to total loans, (5) the value of collateral securing loans, (6) the level of past due and non-accruing loans, and (7) current and future economic conditions and their potential impact on the loan portfolio.

The allowance to total loans was 1.5% at second quarter-end 2009, 1.6% at second quarter-end 2008, and 1.5% at second quarter-end 2007.

The Company immediately charges off any loan when it is determined to be uncollectible. However, experience shows that certain losses exist in the portfolio and are yet to be identified. The allowance is allocated to absorb losses on all loans and is not restricted to any one group of loans. Company management has determined that the balance of the ALL is adequate to cover potential future losses. The provision for loan losses totaled $135,000, $72,000 and $216,000 for the first two quarters of 2009, 2008, and 2007, respectively. If economic conditions deteriorate beyond management’s current expectations, an increase to the provision for loan losses may be necessary. See Tables 8 and 9 for a detailed analysis of the Company’s allowance for loan losses.

Critical Accounting Policies

The accounting principles the Company follows and our methods of applying these principles conform to accounting principles generally accepted in the United States and general practices within the banking industry. In connection with the application of those principles to the determination of the Company’s ALL, the Company has made judgments and estimates, which have significantly impacted our financial position and results of operations.

Company management assesses the adequacy of the ALL prior to the end of each quarter. This assessment includes procedures to estimate the ALL and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions: (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience; and (2) an unallocated amount representative of inherent loss, which is not readily identifiable. Even though the ALL is composed of two components, the entire allowance is available to absorb any credit losses.

12

The Company establishes the allocated amount separately for two different risk groups: (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogenous loans (generally consumer loans). The allocation for unique loans is done primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. Each risk-rating grade is assigned an estimated loss ratio, which is determined based on the experience of management, discussions with banking regulators, historical and current economic conditions and our independent loan review process. Management estimates losses on impaired loans based on estimated cash flows at the loan’s original effective interest rate or the underlying collateral value. Estimated loss ratios are also assigned to our consumer portfolio. However, the estimated loss ratios for these homogenous loans are based on the category of consumer credit (e.g., automobile, residential mortgage, home equity) and not on the results of individual loan reviews.

The unallocated amount is particularly subjective and does not lend itself to exact mathematical calculation. The Company uses the unallocated amount to absorb inherent losses which may exist as of the balance sheet date for such matters as changes in the local or national economy, the depth or experience in the lending staff, any concentrations of credit in any particular industry group, and new banking laws or regulations. After assessing applicable factors, management evaluates the aggregate unallocated amount based on its experience.

The resulting ALL balance is then tested by comparing the balance in the allowance account to historical trends and peer information. Management then evaluates the result of the procedures performed, including the testing results, and concludes on the appropriateness of the balance of the ALL in its entirety. The Company’s independent loan reviewer and the audit committee of our board of directors review the assessment prior to the filing of quarterly financial information.

In assessing the adequacy of the ALL, the Company also relies on an ongoing loan review process. This process is undertaken to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in the overall evaluation of the risk characteristics of the entire loan portfolio. The loan review process includes the judgment of management, the input from our independent loan reviewer, who is not an employee of the Company, and reviews that may have been conducted by Company regulatory agencies as part of their usual examination process. Management estimates losses on impaired loans based on estimated cash flows or fair value of underlying collateral.

Management believes the reserve is adequate at this time, based on a review of the portfolio and discussions with regulatory officials. If economic conditions deteriorate beyond management’s current expectations for the ALL, an increase to the provision for loan losses may be necessary.

The Company does not use derivatives and therefore no allowance for such instruments is made on the Company’s financial statements.

Asset Quality

Non-performing assets include non-accruing loans that are 90 days or more past due and other real estate acquired through foreclosure or property purchased by the Company for future Company expansion.

Total non-performing assets totaled $2,940,000, $822,000 and $999,000 at June 30, 2009, 2008 and 2007, respectively. Non-performing assets, as a percentage of total loans, were 1.5% at June 30, 2009, 0.4% at June 30, 2008 and 0.5% at June 30, 2007. Non-accrual loans and accruing loans over 90 days past due totaled $2,839,000, or 1.4% of total loans, $692,000 or 0.4% of total loans, and $798,000, or 0.4% of total loans at June 30, 2009, 2008 and 2007, respectively. Other real estate totaled $101,000, or 0.1% of total loans at June 30, 2009, $130,000, or 0.1% of total loans at June 30, 2008, and $201,000, or 0.1% of total loans at June 30, 2007. See Table 10 for additional information concerning the Company’s non-performing assets.

13

Securities Available-for-Sale and Investment Securities

The Company’s securities portfolio is another large component of the Company’s earning assets. Securities had book values totaling $166,512,000, $201,132,000 and $230,889,000, for the second quarter-end 2009, 2008, and 2007, respectively. As previously mentioned, the large variation in the dollar volume of securities carried is due to fluctuations in deposits following Hurricane Katrina. Management believed many of the funds would be short term in nature, and in the last two quarters of 2007, throughout 2008 and continuing into 2009, as businesses and homes in the Company’s market have been rebuilt, these deposit dollars have begun to be utilized for recovery purposes and a leveling in deposits has occurred.

The securities portfolio is divided into two classifications: available-for-sale and held-to-maturity. The available-for-sale portion contains all securities which management believes could be subject to sale prior to their stated maturity. This category allows Company management to meet liquidity needs, as well as affords the Company the opportunity to take advantage of market shifts or anticipated changes in interest rates, yield curve changes, and intermarket spread relationships. This portion of the portfolio is also used to help manage the Company’s interest rate and credit risks in the overall balance sheet. In accordance with FASB SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” securities in the available-for-sale category are accounted for at fair market value with unrealized gains or losses excluded from earnings and reported as separate component of stockholders’ equity until realized. Unrealized losses net of taxes of $48,000, $140,000 and $95,000 were included in stockholders’ equity at second quarter-end 2009, 2008 and 2007, respectively. The held-to-maturity portion of the portfolio contains debt securities which the Company intends to hold until their contractual maturity date. These securities provide the Company with a long term, relatively stable source of income with minimal credit risk. The securities in this category are carried at their amortized costs.

Yields earned on average taxable securities equaled 4.5% in the second quarter of 2009, compared to 4.9% in both the second quarter of 2008 and 2007. Yields on tax-exempt securities decreased by 22 basis points in the second quarter of 2009 compared to the same prior year period, as maturing securities were reinvested in lower earning rate securities. The average volume of all securities decreased by 20.6%, 18.2% and 12.9%, in the first two quarters of 2009, 2008 and 2007, respectively. The decrease in volumes of securities is directly related to decrease in deposits during the same periods. Total securities income decreased by 24.7%, 21.8% and 0.3% in the first two quarters of 2009, 2008 and 2007, respectively. The decreases are attributed to lower volumes. The average balance of federal funds sold decreased by $3,986,000, or 9.4%, at second quarter-end 2009, and increased by $12,840,000, or 43.3%, at second quarter-end 2008, and $7,072,000, or 31.3%, at second quarter-end 2007. Income from these funds decreased by 93.4% and 29.1% in the first two quarters of 2009 and 2008, respectively, compared to an increase of 51.5% in the first two quarters of 2007. The decrease in 2009 and 2008 income is due lower rates earned. The increase of 51.5% in the first two quarters of 2007 was a result of an increase in rates earned.

See Tables 3, 4 and 5 for more information about the Company’s securities portfolio composition yields and maturity distributions.

14

Deposits

The Company’s primary funding source for loans and investments is its deposit base. Deposits consist of checking, savings, and certificates of deposit. The Company’s ability to maintain a strong deposit base is of utmost importance in the growth and profitability of the institution. Managing the deposit mix and pricing is designed to be flexible, so that changes in interest rate movements and liquidity needs do not conflict or have an adverse effect on the Company’s balance sheet. The Company relies on local consumer, retail, corporate and governmental agencies for its deposit base. Average total deposits decreased by $19,670,000, or 4.9%, and $41,067,000, or 9.3%, for second quarter-end 2009 and 2008, respectively. Average total deposits increased by $2,052,000, or 1.2%, when comparing second quarter- end 2007 to 2006. See Tables 11 and 12 for more information about the Company’s deposits and maturity distribution.

Liquidity

Liquidity for a financial institution can be expressed in terms of maintaining sufficient funds available to meet both expected and unanticipated obligations in a cost-effective manner. The Company closely monitors its liquidity position to ensure it has ample funds available to meet its obligations. The Company relies on maturing loans and investments, federal funds and its core deposit base to fund its day-to-day liquidity needs. By monitoring asset and liability maturities and the levels of cash on hand, the Company is able to meet expected demands for cash. The Company also has access to federal fund lines at correspondent banks to meet unexpected cash needs and an inventory of readily marketable government securities.

Average federal funds purchases and securities sold under agreement to repurchase represented 3.5%, 5.3% and 4.1% of total average deposits for the second quarter-end 2009, 2008 and 2007, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

Off-Balance Sheet Arrangements

As of June 30, 2009, the Company had unfunded loan commitments outstanding of $19,378,000 and outstanding standby letters of credit of $188,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. The Company historically has been a net seller of federal funds, and a detailed statement of cash flows can be found in the accompanying financial statements.

Contractual Obligations

The Company has certain contractual obligations that arise from its normal course of business. Each category of deposit represents an obligation to pay. While certain categories of deposits, (e.g., certificates of deposit) have a contracted expiration date, checking accounts and savings are subject to immediate withdrawal. Table 15 details the Company’s deposit and lease contractual obligations.

The Company also enters into agreements to extend loans and issues stand by letters of credit. These contractual obligations are detailed in Table 15.

The Company also has a defined benefit plan for employees. The plan is fully funded, and the Company is obligated to pay these funds to retired employees.

15

Risk-Based Capital/Stockholders’ Equity

The Company places a great emphasis on maintaining its strong capital base. The Company’s management and Board of Directors continually evaluate business decisions that may have an impact on the level of stockholders’ equity. It is their goal that the Company maintains a “well-capitalized” equity position. Based on the capital levels defined by banking regulators as part of the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, a “well-capitalized” institution is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, and a 5% leverage ratio. The Company’s solid capital base is reflected in its regulatory capital ratios. The risk-based capital ratio was 21.0%, 21.4% and 19.2% at second quarter-end 2009, 2008 and 2007, respectively. The Tier 1 risk-based capital ratio was 19.8% at second quarter-end 2009, 20.1% at second quarter-end 2008, and 17.9% at second quarter-end 2007. The leverage ratio was 11.5%, 10.5% and 9.0% at second quarter-end 2009, 2008 and 2007, respectively.

The Company’s capital ratios surpass the minimum requirements of 8.0% for the total risk-based capital ratio, 4.0% for Tier 1 risk-based capital ratio and 4.0% for the leverage ratio.

Stockholders’ equity to total assets at second quarter-end 2009, 2008 and 2007 was 10.9%, 10.5% and 8.8%, respectively.

Non-Interest Income

Non-interest income includes service charges on deposit accounts, safe-deposit box rent, check cashing fees, data processing income, commissions and charges, and other fees. Service charges on deposit accounts income decreased in the first two quarters of 2009 by 6.9%, and increased in the first two quarters of 2008 and 2007 by 3.1% and 15.2%, respectively. The increases in 2008 and 2007 are attributed to the increase in the number of accounts, and the balances of accounts subject to service charges. Miscellaneous income at second quarter-end 2009 decreased by 23.9% when compared to second quarter-end 2008, due to the gain from sale of a piece of the Company’s property recognized in 2008.

With deposit related costs constantly increasing, the Company continues to analyze means to increase non-interest income. The Company has revised its product pricing structure for 2009 and continues to seek new sources for additional fee income.

Non-Interest Expense

The Company’s goal is to enhance customer service through efficient and effective delivery of its products and services. Enhancing operational resources, while containing overhead expenses, is a top priority of the Company. While interest expense is one of the largest expenses of the Company, employees’ salaries, equipment and building expenses, legal fees, FDIC insurance, and other expenses combined make up the largest category of the Company’s expenses. Proper management of these costs is extremely important to the profitability of the Company.

16

Salary and employee benefits expense increased 11.1%, 7.9% and 6.4% for the first two quarters of 2009, 2008 and 2007, respectively. The increases are attributed to increases in staffing levels, employee raises, and health insurance premiums. Occupancy and equipment expense increased by 14.9%, 8.3% and 29.6%, in the first two quarters of 2009, 2008 and 2007, respectively. The increase in 2009 is due to the depreciation of two new branch offices. The increase in 2007 is attributed to the depreciation of the new main office, which began in 2007. Miscellaneous expenses decreased by 26.0% at second quarter-end 2009, compared to an increase of 18.5% when comparing second quarter-end 2008 to quarter-end 2007. The decrease in 2009 was due to a change in the computation of director’s deferred compensation and a reduction in professional fees. The increase in 2008 is related to a charitable donation of a piece of the Company’s property.

Although miscellaneous expenses decreased as stated above, there was a significant increase in the Company’s FDIC insurance assessment for the three and six months periods ended June 30, 2009. We believe that our expenses related to FDIC insurance will continue to increase during 2009 when compared to prior year’s comparable periods as the FDIC seeks to replenish its reserve funds. In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment is part of the FDIC’s efforts to rebuild the Deposit Insurance Fund (“DIF”). The Company accrued $198,358.50 in the second quarter of 2009 for this special one-time FDIC assessment.

Income Taxes

Income tax expense totaled $836,000, $1,151,000 and $1,692,000 for the second quarter-end 2009, 2008 and 2007, respectively.

17

TABLE 1
COMPARATIVE AVERAGE BALANCES — YIELDS AND RATES
(Dollars in Thousands)

The following table shows the major categories of interest-earning assets and interest-bearing liabilities with their corresponding average daily balances, related interest income or expense and the resulting yield or rate for the first two quarters ended June 30, 2009, 2008, and 2007:

	2009								2008								2007
				Interest		Average						Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/			Average			Income/		Yield/
Assets	Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate
Interest-earning assets:
Loans, net of unearned income	$	205,456		$	6,940		6.76	%	$	200,741		$	7,527		7.50	%	$	202,434		$	7,920		7.82	%
Securities held to maturity:
Taxable		97,109			2,203		4.54	%		150,254			3,671		4.89	%		124,467			3,027		4.86	%
Exempt from Federal income tax		10,999			181		3.29	%		8,610			151		3.51	%		8,259			138		3.34	%
Securities available for sale:
Taxable		52,356			787		3.01	%		20,501			387		3.78	%		86,302			2,220		5.14	%
Federal funds sold and securities pur- chased under agree- ments to resell		38,536			36		0.19	%		42,522			547		2.57	%		29,682			771		5.20	%
Total interest-earning assets	$	404,456		$	10,147		5.02	%	$	422,628		$	12,283		5.81	%	$	451,144		$	14,076		6.24	%
Non interest-earning assets:
Cash and due from banks		17,186								27,183								32,255
Bank premises and equipment		17,682								15,203								13,630
Other assets		13,860								14,311								13,529
Allowance for possible loan losses		(3,090	)							(3,094	)							(3,093	)
Total assets	$	450,094							$	476,231							$	507,465

18

TABLE 1 (Continued)
COMPARATIVE AVERAGE BALANCES — YIELDS AND RATES
(Dollars in Thousands)

	2009							2008							2007
			Interest		Average					Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income/		Yield/
Liabilities	Balance		Expense		Rate			Balance		Expense		Rate			Balance		Expense		Rate
Interest-bearing liabilities:
INT DDA, MMF & Savings	$	175,126	$	993		1.13	%	$	182,318	$	1,610		1.77	%	$	202,607	$	2,429		2.40	%
Time deposits		110,222		1,665		3.02	%		99,917		2,024		4.05	%		87,040		2,131		4.90	%
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings		13,298		22		0.33	%		21,462		229		2.13	%		17,937		148		1.65	%
Total interest-bearing liabilities	$	298,646	$	2,680		1.79	%	$	303,697	$	3,863		2.54	%	$	307,584	$	4,708		3.06	%
Noninterest-bearing liabilities:
Deposits		93,456							116,239							149,894
Other liabilities		8,605							6,670							5,767
Total liabilities		400,707							426,606							463,245
Stockholder’s equity		49,387							49,625							44,220
Total liabilities and stockholders’ equity	$	450,094						$	476,231						$	507,465
Net interest income/ margin-tax equivalent			$	7,467		3.32	%			$	8,420		3.54	%			$	9,368		3.69	%
Tax equivalent adjustment:
Loans				99							104							120
Investment securities				181							166							166
Securities available for sale
Other
Total tax equivalent adjustment				280							270							286
Net interest income			$	7,187						$	8,150						$	9,082

19

TABLE 2
TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
(Dollars In Thousands)

The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates.

	Quarter ended June 30, 2009
	2009 Compared to 2008									2008 Compared to 2007
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
Interest income on:
Loans	$	4,715		$	(587	)	$	4,128		$	(1,693	)	$	(393	)	$	(2,086	)
Investment securities:
Taxable		(53,145	)		(1,468	)		(54,613	)		25,787			644			26,431
Exempt from Federal income tax		2,389			30			2,419			351			13			364
Securities available for sale:
Taxable		31,855			400			32,255			(65,801	)		(1,833	)		(67,634	)
Federal funds sold and securities purchased under agreements to resell		(3,986	)		(511	)		(4,497	)		12,840			(224	)		12,616
Total	$	(18,172	)	$	(2,136	)	$	(20,308	)	$	(28,516	)	$	(1,793	)		(30,309	)
Interest expense on:
Savings deposits	$	(7,192	)	$	(617	)	$	(7,809	)	$	(20,289	)	$	(819	)	$	(21,108	)
Time deposits		10,305			(359	)		9,946			12,877			(107	)		12,770
Federal funds purchased, and securities sold under agreements to repurchase		(8,164	)		(207	)		(8,371	)		3,525			81			3,606
Total	$	(5,051	)	$	(1,183	)	$	(6,234	)	$	(3,887	)	$	(845	)	$	(4,732	)
Changes in net interest income-tax equivalent	$	(13,121	)	$	(953	)	$	(14,074	)	$	(24,629	)	$	(948	)	$	(25,577	)

The increase (decrease) due to changes in average balances reflected in the above table was calculated by applying the preceding year’s rate to the current year’s change in the average balance. The increase (decrease) due to changes in average rates was calculated by applying the current year’s change in the average rates to the current year’s average balance. Using this method of calculating increases (decreases), any increase or decrease due to both changes in average balances and rates is reflected in the changes attributable to average rate changes.

20

TABLE 3
SECURITIES AVAILABLE FOR SALE AND PORTFOLIO SECURITIES
(Dollars in Thousands)

The available for sale classification of securities, established January 1, 1994 includes all portfolio securities which management believes are subject to sale prior to their contractual maturities and are stated at the lower of amortized cost or aggregate market value. Investment securities include all portfolio securities that the Company intends to hold to maturity and are carried at amortized cost. The carrying amounts of securities available for sale and portfolio securities are presented as of the dates indicated.

	June 30,
	2009		2008		2007
Securities available for sale
U. S. Treasury and other U. S. Government agencies	$	55,732	$	26,773	$	74,236
Obligations of states and political subdivisions		—		—		—
Mortgage-backed securities		—		—		—
Other securities		105		137		—
Total securities available for sale	$	55,837	$	26,910	$	74,236
Investment securities
U. S. Treasury and other U. S. Government agencies	$	92,962	$	165,590	$	145,272
Obligations of states and political subdivisions		16,813		8,033		10,781
Mortgage-backed securities		—		—		—
Other securities		900		600		600
Total investment securities	$	110,675	$	174,223	$	156,653
Total securities available for sale and investment securities	$	166,512	$	201,133	$	230,889

21

TABLE 4
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE AND
INVESTMENT SECURITIES
(Dollars in Thousands)

The following table shows the maturities and weighted average yields of the Company’s securities available for sale and investment securities at June 30, 2009:

	Maturing
						After					After 5 Yrs
	Within					1 Yr But					But Within					After 10 Yrs.
	1 Year					Within 5 Yrs					10 Yrs										Carrying
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount
Securities available for sale
U.S. Treasury and other U.S. Government agencies	$	6,007		0.63	%	$	37,843		2.41	%		11,882		4.36	%		—		0.00	%	$	55,732
Other securities		105		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		105
Total securities available for sale	$	6,112		0.63	%	$	37,843		2.41	%		—		4.36	%		—		0.00	%	$	55,837
Investment securities
U.S. Treasury and other U.S. Government agencies	$	3,035		4.55	%	$	70,943		4.21	%	$	18,984		4.64	%		—		0.00	%	$	92,962
Obligations of states and political subdivisions		903		5.13	%		7,423		4.40	%		8,487		4.36	%		—		0.00	%		16,813
Other securities		900		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		900
Total investment securities	$	4,838		4.83	%	$	78,366		4.31	%	$	27,471		4.50	%		—		0.00	%	$	110,675
Total securities available for sale and investment securities	$	10,950		2.73	%	$	116,209		3.36	%	$	27,471		4.43	%	$	—		0.00	%	$	166,512

At June 30, 2009, the Company held investment securities issued by the State of Mississippi with an aggregate carrying amount of $16.8 million and a market value of $16.9 million. The yield on obligations of states and and political subdivisions has been calculated on a fully tax equivalent basis.

22

TABLE 5
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
(Dollars in Thousands)

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2009									JUNE 30, 2009
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED					AMORTIZED		UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	55,837	$	200	$	(305	)	$	55,732	$	92,962	$	1,236	$	(413	)	$	93,785
STATE AND MUNICIPAL SECURITIES		—		—		—			—		16,813		269		(140	)		16,942
OTHER SECURITIES		72		—		33			105		—		—		—			—
TOTAL	$	55,909	$	200	$	(272	)	$	55,837	$	109,775	$	1,505	$	(553	)	$	110,727

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2008									JUNE 30, 2008
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED					AMORTIZED		UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	27,049	$	19	$	(295	)	$	26,773	$	165,590	$	1,210	$	(1,113	)	$	165,687
STATE AND MUNICIPAL SECURITIES		—		—		—			—		8,033		73		(21	)		8,085
OTHER SECURITIES		72		—		65		$	137		—		—		—			—
TOTAL	$	27,121	$	19	$	(230	)	$	26,910	$	173,623	$	1,283	$	(1,134	)	$	173,772

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2007									JUNE 30, 2007
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED					AMORTIZED		UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	74,380	$	5	$	(149	)	$	74,236	$	145,272	$	41	$	(1,217	)	$	144,096
STATE AND MUNICIPAL SECURITIES		—		—		—			—		10,781		—		(139	)		10,642
OTHER SECURITIES		—		—		—			—		—		—		—			—
TOTAL	$	74,380	$	5	$	(149	)	$	74,236	$	156,053	$	41	$	(1,356	)	$	154,738

23

TABLE 6
LOAN PORTFOLIO
(Dollars in Thousands)

Loans outstanding at the end of the second quarter indicated are shown in the following table classified by type of loans:

	2009		2008		2007
Commercial & Industrial	$	26,962	$	28,840	$	32,557
Real Estate		141,329		122,868		123,108
Consumer Loans		37,835		39,458		41,000
Other Loans		4,540		5,390		6,476
Total Loans	$	210,666	$	196,556	$	203,141

TABLE 7
LOAN MATURITIES & INTEREST RATE SENSITIVITY
(Dollars in Thousands)

The following table shows the amount of loans outstanding as of June 30, 2009 (excluding those in non-accrual status ) based on the scheduled repayments of principal:

Remaining Maturity Fixed Rate
3 months or less	$	27,096
Over 3 months through 12 months		29,494
Over 1 year through 5 years		142,913
Over 5 years		8,363
Over 1 year but variable rate		—
Total Loans	$	207,866

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TABLE 8
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)

The following table outlines the activity for the allowance for loan losses for the past three years:

	Quarter ended June 30,
	2009		2008		2007
Beginning Balance	$	3,100	$	3,100	$	3,100
Charge Offs:
Commercial & Industrial		23		69		43
Real Estate		16		2		9
Consumer		238		304		342
Other		—		—		—
Total Charge Offs		277		375		394
Recoveries:
Commercial & Industrial		5		33		58
Real Estate		—		152		—
Consumer		137		118		120
Other		—		—		—
Total Recoveries		142		303		178
Net Charge Offs		135		72		216
Provision for Possible Losses		135		72		216
Ending Balance	$	3,100	$	3,100	$	3,100
Total Loans Outstanding	$	210,666	$	196,556	$	203,141
Average daily loans	$	205,456	$	200,741	$	202,434

Percentages:	2009		2008		2007
Allowance for loan losses to end of quarter total loans		1.5		1.6		1.5
Allowance for loan losses to average loans		1.5		1.5		1.5
Allowance for loan losses to nonperforming assets		105.4		377.1		310.3
Net charge offs to average loans		0.07		0.04		0.11

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TABLE 9
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)

The following table represents the allocation of the allowance for loan losses by loan categories and is based on an analysis of individual credits, historical losses, and other factors. This allocation is for analytical purposes only as the aggregate allowance is available to absorb losses on any and all loans.

	June 30,
	2009					2008					2007
	% Gross			Loan Loss		% Gross			Loan Loss		% Gross			Loan Loss
	Loans			Allowance		Loans			Allowance		Loans			Allowance
	Outstanding			Allocation		Outstanding			Allocation		Outstanding			Allocation
Commercial & Industrial		7.00			217		5.55		$	172		16.03		$	497
Real Estate		27.90			865		13.03			404		60.60			1,879
Consumer		48.87			1,515		47.39			1,469		20.18			626
Other		1.94			60		22.58			700		3.19			98
Unallocated		14.29			443		11.45			355
		100	%		3,100		89	%	$	3,100		100	%	$	3,100

TABLE 10
NONPERFORMING ASSETS
(Dollars in Thousands)

This table summarizes the amount of nonperforming assets at the end of the second quarter of the years indicated.

	June 30,
	2009			2008			2007
Non-accrual Loans & Accruing Loans Past Due 90 Days or more	$	2,839		$	692		$	798
Other Real Estate		101			130			201
	$	2,940		$	822		$	999
Nonperforming Assets as % of Total Loans		1.50	%		0.42	%		0.49	%
Non-accrual Loans & Loans Past Due 90 Days or Moreas % of Total Loans		1.35	%		0.35	%		0.39	%

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TABLE 11
AVERAGE DEPOSITS
(Dollars in Thousands)

The daily average amounts of deposits for the periods indicated are summarized in the following table:

	Quarter ended June 30,
	2009		2008		2007
Non-interest bearing deposits	$	93,456	$	116,239	$	149,894
Interest-bearing deposits		175,126		182,318		202,607
Interest-bearing time deposits		110,222		99,917		87,040
Total	$	378,804	$	398,474	$	439,541

TABLE 12
TIME DEPOSITS OF $100,000 OR MORE, MATURITY DISTRIBUTION
(Dollars in Thousands)

Maturities of time certificates of deposits $100,000 or more outstanding at June 30, 2009 are summarized in the following table:

Time remaining until maturity
3 months or less	$	12,809
Over 3 through 6 months		21,224
Over 6 through 12 months		19,441
Over 12 months		4,993
Total	$	58,467

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TABLE 13
SHORT-TERM BORROWINGS
(Dollars in Thousands)

The following table presents a summary of the Company’s short-term borrowings at June 30, for each of the last three years and the corresponding interest rates:

			Daily		Average			Maximum
	June		Average		Interest			Month-End
	Balance		Balance		Rate			Balance
2009
Federal funds purchased and securities sold under agreements to repurchase	$	12,091	$	13,298		0.33	%	$	12,091
2008
Federal funds purchased and securities sold under agreements to repurchase	$	15,224	$	21,462		2.13	%	$	15,224
2007
Federal funds purchased and securities sold under agreements to repurchase	$	28,698	$	17,937		1.65	%	$	28,698

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TABLE 14
INTEREST SENSITIVITY
(Dollars in Thousands)

The following table reflects the interest sensitivity of the Company over various periods as of June 30, 2009 based on contractual maturities as of that date:

	0-3			4-12			1-5			Over 5
	Months			Months			Years			Years			Total
Assets
Interest-earning assets:
Loans, net of unearned income	$	29,896		$	29,494		$	142,913		$	8,363		$	210,666
Investment securities		3,310			1,528			78,366			27,471			110,675
Securities available for sale		105			6,007			37,843			11,882			55,837
Federal funds sold and securities purchased under agreements to resell		26,622												26,622
Total interest-earning assets	$	59,933		$	37,029		$	259,122		$	47,716		$	403,800
Noninterest-earning assets											44,693			44,693
Total assets	$	59,933		$	37,029		$	259,122		$	92,409		$	448,493
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits	$	67,730		$	32,950		$	82,375		$	—		$	183,055
Time deposits		28,595			66,818			13,216			—			108,629
Federal funds purchased, and securities sold under agreements to repurchase		12,091												12,091
Total interest-bearing liabilities	$	108,416		$	99,768		$	95,591		$	—		$	303,775
Noninterest-bearing deposits		18,003						57,438			10,288			85,729
Other liabilities											9,605			9,605
Stockholders’ equity											49,384			49,384
Total liabilities and stockholders’ equity	$	126,419		$	99,768		$	153,029		$	69,277		$	448,493
Interest sensitive gap	$	(66,486	)	$	(62,739	)	$	106,093		$	23,132
Cumulative interest sensitive gap	$	(66,486	)	$	(129,225	)	$	(23,132	)	$	—
Cumulative interest sensitive gap as a percent of total assets		-14.82	%		-28.81	%		-5.16	%		0.00	%

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TABLE 15
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND
OFF-BALANCE SHEET ARRANGEMENTS
(Dollars In Thousands)

The following table presents, as of June 30, 2009, significant fixed and determinable contractual obligations to third parties by payment date:

	PAYMENTS DUE IN
			ONE TO
	ONE YEAR		THREE		THREE TO		OVER FIVE
	OR LESS		YEARS		FIVE YEARS		YEARS		TOTAL
Deposits without a stated maturity	$	118,683	$	21,203	$	143,308	$	10,288	$	293,482
Consumer certificates of deposit		95,413		8,491		4,725		—		108,629
Federal funds borrowed & repurchase agreements		12,091		—		—		—		12,091
Operating leases		—		—		—		—		—
Purchase obligations		—		—		—				—

COMMITMENTS

The following table details the amounts and expected maturities of significant commitments as of June 30, 2009:

			ONE TO
	ONE YEAR		THREE		THREE TO		OVER FIVE
	OR LESS		YEARS		FIVE YEARS		YEARS		TOTAL
Commitments to extend credit:
Commercial	$	6,930	$	1	$	—	$	—	$	6,931
Residential real estate		5,007		1		—		—		5,008
Revolving home equity and credit card lines		749		—		—		—		749
Other		6,690		—		—		—		6,690
Standby letters of credit		188		—		—		—		188

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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures— The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective to timely alert them to material information relating to the Company and its consolidated subsidiaries to be included in the Company’s Exchange Act reports.

Changes in Internal Controls— There were no changes in the Company’s internal control over financial reporting for the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matter to a Vote of Security Holders

(a) The Company’s annual meeting of shareholders was held on April 2, 2009 at Merchants & Marine Bank in Pascagoula, Mississippi.

(b) The following directors were elected at the meeting to serve until the annual meeting of shareholders in 2012:

	Votes For		Votes Withheld		Broker Non-Votes
Scott B. Lemon		837,833		12,922		-0-
Diann M. Payne		837,833		12,922		-0-
Thomas B. Van Antwerp		846,584		-0-		-0-
Julius A. (Jay) Willis, Jr., DMD		845,882		702		-0-

In addition to the foregoing directors, the following table sets forth the other members of the Board of Directors whose term of office continued after the annual meeting and the year in which is or her term expires:

	Term Expires
Royce Cumbest		2010
Frank J. Hammond, III		2010
Paul H. (Hal) Moore, Jr., M.D.		2010
Lynda J. Gautier		2011
John F. Grafe		2011
Gerald J. St. Pe’		2011

Item 5. Other Information

On August 11, 2009, because of health problems suffered by S. M. Dickson, the Company’s Executive Vice President and principal financial and accounting officer, Elise Bourgeois, the Company’s Cashier, temporarily assumed the duties and responsibilities of acting principal financial and accounting officer.

32 

Item 6. Exhibits

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

33 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MERCHANTS & MARINE BANCORP, INC.
Date: August 14, 2009	By:	/s/ Royce Cumbest
		Royce Cumbest, Chairman of the Board
		President and Chief Executive Officer
Date: August 14, 2009	By:	/s/ Elise Bourgeois
		Elise Bourgeois
		Cashier Acting Principal Financial and Accounting Officer

34 

EXHIBIT INDEX

Exhibit No.		Description
	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

35