Merchants & Marine Bancorp (MNMB) 10-Q 2010 Q1 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 March 31, 2010

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 May 17, 2010, 1,330,338 shares of Common Stock were outstanding.

TABLE OF CONTENTS

Part 1: Financial Information
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 4T. 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. (Removed and Reserved)	32
Item 5. Other Information	32
Item 6. Exhibits	32
SIGNATURES	33
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

2

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)
	March 31, 2010			December 31, 2009
ASSETS:
Cash and due from banks (non-interest bearing)	$	91,923,271			14,451,113
Federal funds sold		2,550,000			16,450,000
Securities:
Available for sale, at market value		27,421,471			33,325,635
Held to maturity, at amortized cost		158,474,843			143,957,199
Non-marketable equity securities		900,060			900,060
Loans, less allowance for loan losses of $3,100,000 and $3,100,000, respectively		213,307,732			207,113,223
Property and equipment, net		16,461,544			16,778,718
Other real estate owned		2,147,111			2,194,611
Accrued income		2,371,350			2,499,639
Other assets		12,934,083			12,803,687
TOTAL ASSETS	$	528,491,465			450,473,885
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits:
Non-interest bearing demand	$	74,513,030			77,614,260
Interest bearing demand, savings, money market, and other time		383,765,183			305,253,753
Total deposits		458,278,213			382,868,013
Federal funds purchased and securities sold under agreements to repurchase		10,461,403			8,433,632
Accrued expenses and other liabilities		8,368,750			8,187,322
Total liabilities		477,108,366			399,488,967
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		36,016,904			35,560,524
Accumulated other comprehensive income:
Unrealized gain on securities available for sale		157,084			215,284
Unrealized gain (loss) on defined benefit pension plan		(2,616,734	)		(2,616,735	)
Total stockholders’ equity		51,383,099			50,984,918
TOTAL LIABILITES AND STOCKHOLDERS’ EQUITY	$	528,491,465			450,473,885

See notes to unaudited condensed consolidated financial statements.

3

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

	Three Months Ended
	March 31,
	2010		2009
Interest Income:
Interest and fees on loans	$	3,483,863		3,469,300
Interest on investment securities:
Taxable		1,229,332		1,643,910
Exempt from federal income tax		162,274		81,656
Interest on federal funds sold		18,338		17,574
Total interest income		4,893,807		5,212,440
Interest Expense:
Interest on deposits		994,429		1,342,791
Interest on federal funds purchased and securities sold under agreements to repurchase		7,151		9,645
Total interest expense		1,001,580		1,352,436
Net interest income		3,892,227		3,860,004
Provision for loan losses		131,864		74,390
Net interest income after provision for loan losses		3,760,363		3,785,614
Non-Interest Income:
Service charges		1,003,492		945,244
Miscellaneous		543,089		474,301
Total non-interest income		1,546,581		1,419,545
Non-Interest Expense:
Salaries and employee benefits		2,120,075		2,052,143
Premises		784,494		762,040
Miscellaneous		1,388,788		1,286,749
Total non-interest expense		4,293,357		4,100,932
Income before income taxes		1,013,587		1,104,227
Provision for income taxes		245,770		335,737
NET INCOME	$	767,817		768,490
NET INCOME PER COMMON SHARE	$	0.58		0.58

See notes to unaudited condensed consolidated financial statements.

4

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

	Three Months Ended
	March 31,
	2010			2009
Net income	$	767,817			768,490
Other comprehensive income, net of tax:
Unrealized holding losses arising during period		(58,200	)		(211,308	)
Comprehensive income	$	709,617			557,182

See notes to unaudited consolidated financial statements.

5

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Three Months Ended
	March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	767,817			768,490
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		359,870			354,877
Provision for loan losses		131,864			74,390
Net premium amortization (discount accretion)		9,719			(34,590	)
Decrease in accrued income receivable		128,289			371,363
(Decrease) in interest payable		(66,381	)		(132,824	)
Net change in other assets and liabilities		235,058			343,998
Net cash provided by operating activities		1,566,236			1,745,704
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold		13,900,000			(43,286,000	)
Purchase of securities available for sale		(10,185,000	)		(40,255,375	)
Proceeds from maturities of securities available for sale		16,000,000			13,875,000
Purchase of securities held to maturity		(40,109,393	)		(9,696,028	)
Proceeds from maturities of securities held to maturity		25,583,333			64,612,593
Net (increase) decrease in loans		(6,279,193	)		(3,895,295	)
Purchase of property and equipment		(42,696	)		(244,594	)
Net cash (used) by investing activities		(1,132,949	)		(18,889,699	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		75,410,201			12,680,229
Net increase in federal funds purchased and securities sold under agreements to repurchase		2,027,771			4,747,728
Dividends paid to stockholders		(399,101	)		(731,686	)
Net cash provided by financing activities		77,038,871			16,696,271
Net increase (decrease) in cash and due from banks		77,472,158			(447,724	)
Cash and due from banks, beginning		14,451,113			18,065,881
Cash and due from banks, ending	$	91,923,271			17,618,157

See notes to unaudited condensed consolidated financial statements.

6

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

As of and For the Three Months Ended March 31, 2010

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements.

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles 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 2009 Annual Report to Shareholders.

December 31, 2009 Balance Sheet Presentation.

The condensed balance sheet at December 31, 2009 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. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Federal Funds Sold:

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities:

Fair values for investment securities are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Loans:

Fair value for loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities.

Deposits:

The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

7

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
As of and For the Three Months Ended March 31, 2010

2. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The estimated fair values of the Company’s financial instruments were as follows (in thousands):

	March 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and federal funds sold	$	94,473		94,473	$	30,901		30,901
Securities:
Available-for-sale		27,421		27,421		33,326		33,326
Held-to-maturity		158,475		159,131		143,957		145,326
Non-marketable		900		900		900		900
Loans, net of allowance		213,308		212,232		207,113		206,563
Financial liabilities
Deposits		458,278		459,052		382,868		382,586
Federal funds purchased and securities sold under agreements to repurchase		10,461		10,461		8,434		8,434

3.SUBSEQUENT EVENTS

The Company assessed events occurring subsequent to March 31, 2010 for potential recognition and disclosure in the consolidated financial statements. No events have occurred that would require adjustment to or disclosure in the consolidate financial statements.

8

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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, 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; (ix) possible negative effects from the sizable oil spill off the coast of Louisiana in late April 2010; and (x) 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.

9

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 66^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. At March 31, 2010, the Company’s assets totaled $528 million and it employed 143 persons on a full-time equivalent basis.

Hurricane Katrina hit the Gulf Coast on August 29, 2005. Katrina’s wide spread devastation will be felt for years to come. Some of the challenges still 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, and continuing through the first quarter of 2010, as businesses and homes have been rebuilt, these deposit dollars have begun to be utilized for recovery purposes and core deposits growth has leveled off. However, the Company has recently experienced a significant growth in deposits, during the first quarter of 2010, due to public depository funds.

In late April 2010, an oil drilling platform exploded and sank in the Gulf of Mexico off the coast of Louisiana causing a sizeable oil spill. We are uncertain at this time of the future impact of the oil spill, if any, on our financial condition or results of operations but will continue to monitor and take appropriate steps to respond to the situation.

Earnings Highlights

The Company’s net income for the first quarters of 2010 and 2009 was $768,000, a decrease of 45.9% when compared to the first quarter of 2008. The Company’s net income for the first quarter of 2008 was $1,419,000, a 1.7% decrease when compared to $1,716,000 for the first quarter of 2007. The following discussions, tables, and the accompanying financial statements presented outline the change in earnings from the first quarter of 2009, 2008 and 2007. Return on average assets was 0.6%, 0.7% and 1.2%, for first quarter-end 2010, 2009 and 2008, respectively. Return on average equity was 6.0%, 6.3% and 11.5%, in the first quarter of 2010, 2009 and 2008, respectively. Earnings per share were $0.58 in the first quarters of 2010 and 2009, compared to $1.07 in the first quarter of 2008.

Earning Assets

A detailed comparison of the Company’s average earning assets for the first quarters of 2010, 2009 and 2008 is presented in Table 1 of this report. The Company’s earning assets include loans, investments, and federal funds sold. Average earning assets for the first quarter of 2010 totaled $393,113,000 compared to $398,505,000 in 2009, and compared to $411,890,000 at quarter-end 2008. Average net loans increased by $9,113,000 in the first quarter of 2010 and decreased by $245,000 and $877,000 in first quarter of 2009 and 2008, respectively. Average securities increased by $13,116,000 in the first quarter of 2010 and decreased by $5,560,000 and $42,068,000 in the first quarters of 2009 and 2008, respectively. Average federal funds sold decreased by $27,921,000, or 79.2% and $7,580,000, or 17.7% in the first quarters 2010 and 2009, compared to an increase of $10,710,000, or 33.4%, in the first quarter of 2008, respectively.

10

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 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 bank’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 interest margin, on a tax equivalent basis, was 3.3%, 3.5% and 3.6% in the first quarters of 2010, 2009 and 2008, respectively. The decreases in 2010, 2009 and 2008 are attributable to the decrease in volumes and rates of return on interest earning assets. Tax equivalent net interest income increased in the first quarter of 2010 by 0.4% and decreased in 2009 and 2008 by 7.9% and 14.9%, respectively.

Average net loans increased by 4.5% in the first quarter of 2010 and decreased by 0.1% and 0.4% in the first quarter of 2009 and 2008, respectively. Loan interest income increased by 0.4% in the first quarter of 2010 and decreased by 10.9% and 4.4% in the same period of 2009 and 2008, respectively. Loan yields dropped by 27, 82 and 32 basis points, in the first quarters of 2010, 2009 and 2008, respectively. Yields on average taxable securities in the first quarters of 2010 and 2009 equaled 3.2% and 4.4%, respectively, compared to 4.9% in the first quarter of 2008. Interest earned on average taxable securities declined by 24.4%, 16.2% and 19.9% in the first quarters of 2010, 2009 and 2008, due to decreased yields. Income on average tax-exempt securities increased 82.9% in the first quarter of 2010 due to increased volumes. Yields and income on average tax-exempt securities remained relatively unchanged in the first quarter of 2009 compared to the same period 2008. The average volume of all securities in the first quarter of 2010 increased by 8.4% and decreased in 2009 and 2008 by 3.4% and 20.3%, respectively, and total securities income decreased by 19.3% in 2010 as a result of lower rates earned. The average balance of federal funds sold decreased in the first quarter of 2010 and 2009 by 79.2% and 17.7% compared to an increase of 33.4% for the first quarter of 2008 when compared to the same period of 2007. Income from these funds decreased by 88.9% and 130.5% in the first quarter of 2010 and 2009, respectively, as a result of the decrease volumes.

Total average interest bearing liabilities increased by 22.4% in the first quarter of 2010, compared to a decrease of 5.7% in the first quarter of 2009, and an increase of 27.0% in the first quarter of 2008. Rates paid on these funds decreased 70, 78 and 77 basis points in the first quarter of 2010, 2009 and 2008, respectively. The decrease in rates paid on these funds and the decreased volumes resulted in a decrease in interest expense of $349,000 and $710,000 for the first quarter of 2010 and 2009, respectively. The increase in volumes was offset by the decrease in rates paid resulted in a decrease of $44,000 for the first quarter of 2008. Interest bearing checking, money market fund, and savings average balances increased by 41.7% for the first quarter of 2010 and decreased by 11.8% in the first quarter of 2009. The increase in 2010 is a result of gaining a public fund depository customer and the decrease in 2009 was primarily a result of losing a public fund depository customer that was subject to bid. Interest bearing checking, money market fund’s and savings accounts average balances increased by 37.1% for the first quarter of 2008. Average time deposit balances decreased by 4.0% in the first quarter of 2010 and increased by 11.9%, and 10.4%, in the first quarters of 2009 and 2008, respectively. The average rate paid on these funds was 2.0% and 3.2% for the first quarters of 2010 and 2009, respectively, compared to 4.3% for the first quarter of 2008. Interest expense on time deposits decreased by 39.7% and 15.6% in the first quarters of 2010 and 2009, respectively, because of lower rates paid. Interest expense increased by 10.7%, in the first quarter of 2008 as a result of increased rates paid and increases in volumes. Average federal funds purchased and securities sold under agreements to repurchase decreased by 18.6% and 32.2% in the first quarters of 2010 and 2009 compared to an increase of 28.7% in the first quarter of 2008. Interest rates paid on these funds decreased by 4 and 250 basis points for the first quarters of 2010 and 2009, while rates remained constant at 2.9%, in the first quarter of 2008. Interest expense decreased by 25.8% and 92.9% in the first quarters of 2010 and 2009, respectively, due to lower rates and volumes, compared to an increase in the first quarter of 2008 by 28.4% as a result of higher volumes. Tables 1 and 2 provide more information on the Company’s net interest income and rate and volume variances.

11

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 Bank’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

The largest component 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 54.0%, 45.7% and 49.4% for the first quarters of 2010, 2009 and 2008, respectively. The average loan to deposit ratio was 52.2% and 54.3% at the end of the first quarters 2010 and 2009, respectively, and 52.1% at end of the first quarter of 2008. Average net loans increased by 4.5% in the first quarter of 2010 and decreased by 0.1% and 0.4% in the first quarters of 2009 and 2008, respectively, and loan interest income increased by 0.4% in the first quarter of 2010 and decreased by 10.9% and 4.4% in the first quarter of 2009 and 2008, respectively.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $124,679,000 at first quarter-end 2008 and $136,680,000 at first quarter-end 2009 to $149,492,000 at first quarter-end 2010. Commercial and industrial loans and loans to municipal and local governments totaled $26,386,000, $27,648,000 and $31,804,000 at first quarter-end 2010, 2009 and 2008, respectively. Consumer loans totaled $33,939,000 at first quarter-end 2010, compared to $35,527,000 at first quarter-end 2009 and $40,067,000 at first quarter-end 2008. Other loans at first quarter-end 2010 increased slightly when compared to the same period in 2009.

12

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 1.4% at first quarter-end 2010 and 1.5% at first quarter-end 2009, and 2008.

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 have not been identified. The allowance is allocated to absorb losses on all loans and is not restricted to any one group of loans. The Company’s management has determined that the balance of the allowance for loan losses is adequate to cover potential future losses. 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 with accounting principles generally accepted in the United States and with 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.

The Company’s management assesses the adequacy of the ALL prior to the end of each calendar 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.

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 historical loss rates of the category of consumer credit (e.g., automobile, residential mortgage, home equity) and not on the results of individual loan reviews.

13

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 bank regulatory agencies as part of their usual examination process. Management estimates losses on impaired loans based on estimated cash flows, or the loan 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 bank expansion.

Total non-performing assets totaled $4,425,000, $2,115,000 and $842,000, at first quarter-end 2010, 2009 and 2008, respectively. Non-performing assets, as a percentage of total loans, were 2.0% at the first quarter-end 2010, 1.0% at first quarter-end 2009 and 0.4% at first quarter-end 2008. Non-accrual loans and accruing loans over 90 days past due totaled $2,278,000 or 1.0% of total loans, $1,879,000, or 0.9% of total loans, and $713,000, or 0.04% of total loans, at first quarter-end 2010, 2009, and 2008, respectively. Other real estate totaled $2,147,000 or 1.0% of total loans, $236,000 or 0.1% of total loans, and $129,000, or 0.05% of total loans, at first quarter-end 2010, 2009 and 2008, respectively. The increase in non-performing assets was due to foreclosure on a large customer in the fourth quarter of 2009. See Table 10 for additional information concerning the Company’s non-performing assets.

14

Securities Available for Sale and Investment Securities

The Company’s securities portfolio is another large component of the Company’s earning assets and had book values totaling $186,796,000, $148,528,000 and $167,954,000 for the first quarter-end 2010, 2009 and 2008, respectively. The large increase in securities in 2010 is a result of increases in deposits resulting from gaining a public fund depository customer.

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 affording 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 Accounting Standards Certification 320, 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 gains, net of taxes, of $157,000, $4,000 and $49,000 were included in stockholders’ equity at first quarter-end 2010, 2009 and 2008, 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 on average taxable securities in the first quarter of 2010 and 2009 equaled 3.2% and 4.4%, compared to 4.9% in the first quarter of 2008. Interest earned on average taxable securities declined by 24.4%, 16.2% and 19.9% in the first quarters of 2010, 2009 and 2008, due to decreased yields. Income increased on average tax-exempt securities by 82.9% in the first quarter of 2010 due to higher volumes but yields decreased by 36 basis points compared to first quarter-end 2009. Yields and income on average tax-exempt securities remained relatively unchanged in the first quarter of 2009 compared to the same period 2008. The average volume of all securities increased by 8.4% and income decreased by 19.3% in the first quarter of 2010, compared to decreases of 3.4% and 20.3% in the first quarters of 2009 and 2008, respectively, and total securities income decreased by 15.4% as a result of lower volumes and lower rates earned in 2009. The average balance of federal funds sold decreased in the first quarters of 2010 and 2009 by 79.2% and 17.7%, respectively, compared to an increase of 33.4% for the first quarter of 2008. Income from these funds decreased by 88.9% and 130.5% in the first quarters of 2010 and 2009, respectively, as a result of the decrease volumes and the 285 basis points drop in rates earned in 2009. The decrease in volumes in the first quarter of 2010 is a result of the excess funds being placed in a Federal Reserve Excess Balance account.

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

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 increased by 8.9% at first quarter-end 2010 and decreased by 4.2%, and 10.5% at first quarter-end 2009 and 2008, respectively. See Tables 11 and 12 for more information about the Company’s deposits and maturity distribution.

15

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 and to an inventory of readily marketable government securities.

Average federal funds purchased and securities sold under agreement to repurchase represent 2.6%, 3.5% and 4.9% of total average deposits for the years 2010, 2009, and 2008, respectively, at first quarter-end. See Table 13 for more information concerning the Company’s short-term borrowings.

Off Balance Sheet Arrangements

As of March 31, 2010, the Company had unfunded loan commitments outstanding of $12,429,000 and outstanding standby letters of credit of $258,000. 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 notes to the 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 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 substantially all of its employees, as well as former employees, who have retired from the Company; consequently, the Company is contractually obligated to pay these benefits to its retired employees. As of December 31, 2009, the plan was underfunded by $1,907,000, compared to an underfunded amount of $1,832,000 at year-end 2008. The underfunded status is the result of poor market conditions and the performance of the plan’s investment assets. Management is monitoring the funded status of its defined benefit plan closely and is prepared to contribute additional funding to the plan if deemed necessary. See Notes to Financial Statements — Note 8.

16

Risk-Based Capital/Stockholders’ Equity

The Company has always placed 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 20.8% at March 31, 2010, 21.4% at March 31, 2009, and 19.1% at March 31, 2008. Tier 1 risk-based was 19.7% at March 31, 2010, 20.1% at March 31, 2009, and 19.1% at March 31, 2008. The leverage ratio at March 31, 2010 was 11.0%, 11.5% at March 31, 2009 and 10.1% at March 31, 2008.

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 first quarter-end 2010, 2009 and 2008 was 9.7%, 10.9% and 10.1%, respectively.

Non-Interest Income

Non-interest income includes service charges on deposit accounts, safe-deposit box rent, check cashing fees, commissions, charges and other fees. Service charges on deposit accounts income increased by 6.2% in the first quarter of 2010 and decreased by 12.2% in the first quarter 2009, compared to an increase of 7.1% in the first quarter of 2008. These fees are generated from customer accounts and are affected by the number of accounts, and the balances of accounts subject to service charges. Miscellaneous income for the first quarter of 2010 increased by 14.5% and decreased by 21.0% for the first quarter of 2009, compared to an increase of 25.7% for the first quarter of 2008.

With deposit related costs constantly increasing, the Company continues to analyze means to increase non-interest income and continues to seek new sources for additional fee income.

17

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.

Salary and employee benefits expense increased in the first quarters of 2010 and 2009 by 3.3% and 11.4%, respectively, compared to an increase of 10.2% in the first quarter of 2008. The increase in 2009 is attributed to increases in employee raises and an increase in the defined benefit pension plan expense. Occupancy and equipment expense increased by 2.9% and 15.5% in the first quarters 2010 and 2009, respectively, compared to a decrease of 2.7% in the first quarter 2008. The large increase in 2009 is attributable to the depreciation of several of the Company’s branches that have been remodeled. Miscellaneous expenses increased by 7.9% in the first quarter of 2010 and decreased by 14.9% when comparing first quarter-end 2009 to 2008. The main reason for the increase in the first quarter of 2010 is due to an increase in FDIC insurance assessments. The FDIC began increasing deposit premiums in 2009 in order to replenish its reserve funds.

Income Taxes

Income tax expense totaled $246,000, $336,000 and $492,000, for the first quarter-ended 2010, 2009 and 2008, respectively.

18

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 quarter ended March 31, 2010, 2009, and 2008:

	2010							2009								2008
			Interest		Average						Interest		Average						Interest		Average
	Average		Income/		Yield/			Average			Income/		Yield/			Average			Income/		Yield/
	Balance		Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate
Assets
Interest-earning assets:
Loans, net of unearned income	$	212,286	$	3,484		6.56	%	$	203,173		$	3,469		6.83	%	$	203,418		$	3,892		7.65	%
Securities held to maturity:
Taxable		125,344		1,061		3.39	%		103,744			1,252		4.83	%		138,448			1,749		5.05	%
Exempt from Federal income tax		19,267		150		3.11	%		9,465			82		3.47	%		9,049			79		3.49	%
Securities available for sale:																				��
Taxable		28,900		181		2.51	%		46,886			391		3.34	%		18,158			211		4.65	%
Federal funds sold and securities purchased under agreements to resell		7,316		2		0.11	%		35,237			18		0.20	%		42,817			326		3.05	%
Total interest-earning assets	$	393,113	$	4,878		4.96	%	$	398,505		$	5,212		5.23	%	$	411,890		$	6,257		6.08	%
Non interest-earning assets:
Cash and due from banks		51,580							18,069								27,664
Bank premises and equipment		16,659							17,765								14,954
Other assets		15,198							13,742								14,061
Allowance for possible loan losses									(3,093	)							(3,101	)
Total assets	$	476,550						$	444,988							$	465,468

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 March 31,
	2010 Compared to 2009									2009 Compared to 2008
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
Interest income on:
Loans	$	9,113			(27	)	$	9,086		$	(245	)	$	(423	)	$	(668	)
Investment securities:
Taxable		21,600			(144	)		21,456			(34,704	)		(497	)		(35,201	)
Exempt from Federal income tax		9,802			(36	)		9,766			416			3			419
Securities available for sale:
Taxable		(17,986	)		(83	)		(18,069	)		28,728			180			28,908
Federal funds sold and securities purchased under agreements to resell		(27,921	)		(9	)		(27,930	)		(7,580	)		(308	)		(7,888	)
Total	$	(5,392	)	$	(299	)	$	(5,691	)	$	(13,385	)	$	(1,045	)	$	(14,430	)
Interest expense on:
DDA & Savings	$	74,112		$	(30	)	$	74,082		$	(23,804	)	$	(396	)	$	(24,200	)
Time deposits		(4,487	)		(117	)		(4,604	)		11,943			(184	)		11,759
Federal funds purchased, and securities sold under agreements to repurchase		(2,454	)		(4	)		(2,458	)		(6,282	)		(130	)		(6,412	)
Total	$	67,171		$	(151	)	$	67,020		$	(18,143	)	$	(710	)	$	(18,853	)
Changes in net interest income-tax equivalent	$	(72,563	)	$	(148	)	$	(72,711	)	$	4,758		$	(335	)	$	4,423

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.

	March 31,
	2010		2009		2008
Securities available for sale
U. S. Treasury and other U. S. Government agencies	$	27,268	$	56,245	$	8,992
Obligations of states and political subdivisions		—		—		—
Mortgage-backed securities		—		—		—
Other securities		153		72		72
Total securities available for sale	$	27,421	$	56,317	$	9,064
Investment securities
U. S. Treasury and other U. S. Government agencies	$	136,205	$	82,009	$	149,590
Obligations of states and political subdivisions		22,270		9,602		8,700
Mortgage-backed securities		—		—		—
Other securities		900		600		600
Total investment securities		159,375		92,211		158,890
Total securities available for sale and investment securities	$	186,796	$	148,528	$	167,954

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 March 31, 2010:

	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	$	7,045		1.27	%	$	12,593		2.19	%	$	7,630		3.43	%	$	—		0.00	%	$	27,268
Other securities		153		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		153
Total securities available for sale	$	7,198		1.27	%	$	12,593		2.19	%	$	7,630		3.43	%	$	—		0.00	%	$	27,421
Investment securities
U.S. Treasury and other U.S. Government agencies	$	4,992		5.02	%	$	85,111		3.13	%	$	38,387		3.43	%	$	7,715		3.06	%	$	136,205
Obligations of states and political subdivisions		673		4.97	%		11,443		4.18	%		7,879		4.36	%		2,275		6.21	%		22,270
Other securities		900		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		900
Total investment securities	$	6,565		4.98	%	$	96,554		3.25	%	$	46,266		3.56	%	$	9,990		4.88	%	$	159,375
Total securities available for sale and investment securities	$	13,763		3.11	%	$	109,147		3.10	%	$	53,896		3.45	%	$	9,990		4.88	%	$	186,796

At March 31, 2010, the Company held investment securities issued by the State of Mississippi with an aggregate carrying amount of $22.3 million and a market value of $22.8 million. The yield on obligations of states and and political subdivisions has been calculated on a fully tax equivalent basis.

22

TABLE 5
SECURITIES ANALYSIS

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	MARCH 31, 2010									MARCH 31, 2010
			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	$	27,111,485	$	193,872	$	(37,090	)	$	27,268,267	$	136,204,554	$	683,800	$	(510,584	)	$	136,377,770
STATE AND MUNICIPAL SECURITIES		—		—		—			—		22,270,290		581,475		(98,344	)		22,753,421
OTHER SECURITIES		71,979		81,224		—			153,203		900,000		—		—			900,000
TOTAL	$	27,183,464	$	275,096	$	(37,090	)	$	27,421,470	$	159,374,844	$	1,265,275	$	(608,928	)	$	160,031,191

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	MARCH 31, 2009									MARCH 31, 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	$	56,238,991	$	199,650	$	(214,728	)	$	56,223,913	$	82,008,699	$	1,551,688	$	—		$	83,560,387
STATE AND MUNICIPAL SECURITIES		—		—		—			—		9,601,849		275,870		(19,570	)		9,858,149
OTHER SECURITIES		71,979		21,596		—			93,575		600,000		—		—			600,000
TOTAL	$	56,310,970	$	221,246	$	(214,728	)	$	56,317,488	$	92,210,548	$	1,827,558	$	(19,570	)	$	94,018,536
	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	MARCH 31, 2008									MARCH 31, 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	$	8,991,690	$	40,850	$	—		$	9,032,540	$	149,591,870	$	2,967,324	$	(12,440	)	$	152,546,754
STATE AND MUNICIPAL SECURITIES		—		—		—			—		8,699,992		140,415		(5,666	)		8,834,741
OTHER SECURITIES		71,979		33,377		—			105,356		600,000		—		—			600,000
TOTAL	$	9,063,669	$	74,227	$	—		$	9,137,896	$	158,891,862	$	3,107,739	$	(18,106	)	$	161,981,495

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TABLE 6
LOAN PORTFOLIO
(Dollars in Thousands)

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

	2010		2009		2008
Commercial & Industrial	$	26,386	$	27,648	$	31,804
Real Estate		149,492		136,680		124,679
Consumer Loans		33,939		35,527		40,067
Other Loans		6,629		5,486		6,528
Total Loans	$	216,446	$	205,341	$	203,078

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

The following table shows the amount of loans outstanding as of March 31, 2010 (excluding those in non-accrual status ) based on the scheduled repayments of principal:

Remaining Maturity Fixed Rate
3 months or less	$	21,393
Over 3 months through 12 months		32,768
Over 1 year through 5 years		154,012
Over 5 years		5,999
Over 1 year but variable rate		—
Total Loans	$	214,172

24

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 March 31,
	2010		2009		2008
Beginning Balance	$	3,100	$	3,100	$	3,100
Charge Offs:
Commercial & Industrial		43		9		13
Real Estate		30		16		2
Consumer		230		117		165
Other		—		—		—
Total Charge Offs		303		142		180
Recoveries:
Commercial & Industrial		17		5		13
Real Estate		17		—		146
Consumer		137		63		72
Other
Total Recoveries		171		68		231
Net Charge Offs		132		74		(51	)
Provision for Possible Losses		132		74		(51	)
Ending Balance	$	3,100	$	3,100	$	3,100
Total Loans Outstanding	$	216,446	$	205,341	$	203,078
Average daily loans	$	212,286	$	203,173	$	203,418

Percentages:	2010			2009			2008
Allowance for loan losses to end of quarter total loans		1.43	%		1.51	%		1.53	%
Allowance for loan losses to average loans		1.46	%		1.53	%		1.52	%
Allowance for loan losses to nonperforming assets		70.06	%		146.57	%		368.17	%
Net charge offs to average loans		0.062	%		0.036	%		-0.025	%

25

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.

						March 31,
	2010					2009					2008
	% Gross			Loan Loss		% Gross			Loan Loss		% Gross			Loan Loss
	Loans			Allowance		Loans			Allowance		Loans			Allowance
	Outstanding			Allocation		Outstanding			Allocation		Outstanding			Allocation
Commercial & Industrial		7.06		$	219		7.68		$	238		15.7		$	485
Real Estate		61.81			1,916		28.9			896		61.4			1,903
Consumer		22.52			698		23.23			720		19.7			612
Other		8.61			267		24.39			756		3.2			100
Unallocated		—			—		15.81			490		—			—
		100	%	$	3,100		100	%	$	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 first quarter of the years indicated.

	2010			2009			2008
Non-accrual Loans & Accruing Loans Past Due 90 Days or more	$	2,278		$	1,879		$	713
Other Real Estate		2,147			236			129
	$	4,425		$	2,115		$	842
Nonperforming Assets as % of Total Loans		2.04	%		1.03	%		0.41	%
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans		1.05	%		0.92	%		0.35	%

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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 March 31,
	2010		2009		2008
Non-interest bearing deposits	$	47,993	$	84,525	$	89,073
Interest-bearing deposits		251,995		177,883		201,687
Interest-bearing time deposits		107,028		111,515		99,572
Total	$	407,016	$	373,923	$	390,332

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 March 31, 2010 are summarized in the following table:

Time remaining until maturity
3 months or less	$	18,575
Over 3 through 6 months		14,359
Over 6 through 12 months		18,866
Over 12 months		6,642
Total	$	58,442

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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 March 31, for each of the last three years and the corresponding interest rates:

			Daily		Average			Maximum
	March		Average		Interest			Month-End
	Balance		Balance		Rate*			Balance
2010
Federal funds purchased and securities sold under agreements to repurchase	$	10,641	$	10,745		0.26	%	$	10,641
2009
Federal funds purchased and securities sold under agreements to repurchase	$	15,665	$	13,199		0.30	%	$	15,665
2008
Federal funds purchased and securities sold under agreements to repurchase	$	36,225	$	19,481		2.87	%	$	36,225

* on daily average balance

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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 March 31, 2010, 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	$	21,393		$	32,768		$	154,012		$	5,999		$	214,172
Investment securities		2,995			3,570			96,554			56,256			159,375
Securities available for sale		153			7,045			12,593			7,630			27,421
Federal funds sold and securities purchased under agreements to resell		2,550			—			—			—			2,550
Total interest-earning assets		27,091			43,383			263,159			69,885			403,518
Non-interest-earning assets											125,173			125,173
Total assets	$	27,091		$	43,383		$	263,159		$	195,058		$	528,691
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits	$	25,572		$	82,399		$	176,162		$	—		$	284,133
Time deposits		24,689			58,942			16,001			—			99,632
Federal funds purchased, and securities sold under agreements to repurchase		10,641			—			—			—			10,641
Total interest-bearing liabilities		60,902			141,341			192,163			—			394,406
Non-interest-bearing deposits		12,729			37,439			24,710			—			74,878
Other liabilities											8,477			8,477
Stockholders’ equity											50,930			50,930
Total liabilities and stockholders’ equity	$	73,631		$	178,780		$	216,873		$	59,407		$	528,691
Interest sensitive gap	$	(46,540	)	$	(135,397	)	$	46,286		$	135,651
Cumulative interest sensitive gap	$	(46,540	)	$	(181,937	)	$	(135,651	)	$	(0	)
Cumulative interest sensitive gap as a percent of total assets		-8.80	%		-34.41	%		-25.66	%		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 March 31, 2010, 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	$	165,145	$	100,523		$	93,343	$	—	$	359,011
Consumer certificates of deposit		83,631		11,383			4,618		—		99,632
Federal funds borrowed & repurchase agreements		10,641		—			—		—		10,641
Operating leases											—
Purchase obligations		—		—			—		—		—

COMMITMENTS

The following table details the amounts and expected maturities of significant commitments as of March 31, 2010:

			ONE TO
	ONE YEAR		THREE		THREE TO		OVER FIVE
	OR LESS		YEARS		FIVE YEARS		YEARS		TOTAL
Commitments to extend credit:
Commercial	$	5,222	$	349	$	36	$	—	$	5,607
Residential real estate		407		—		—		—		407
Revolving home equity and credit card lines		20		138		867		—		1,025
Other		5,390		—		—		—		5,390
Standby letters of credit		258		—		—		—		258

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Item 4T. 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 March 31, 2010 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 1A. Risk Factors

The following risk factor supplements the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2009:

The recent oil spill in the Gulf of Mexico could negatively affect our local economics and property values in our markets, which could have an adverse effect on our business or results of operations.

In late April 2010, an oil drilling platform exploded and sank in the Gulf of Mexico off the coast of Louisiana. A sizeable oil spill has now developed in the Gulf of Mexico and additional oil continues to leak daily from the well. Containment efforts are underway, but the oil spill may impact the coast of Mississippi. The oil spill could have a direct negative impact on the condition and value of beachfront and coastal properties and numerous industries within our market area and could have a material adverse effect on our financial condition and results of operations.

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

None

Item 3: Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5: Other Information

None

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. 350, 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. 350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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: May 17, 2010	By:	/s/ Royce Cumbest
		Royce Cumbest, Chairman of the Board
		President and Chief Executive Officer
Date: May 17, 2010	By:	/s/ Elise Bourgeois
		Elise Bourgeois, Chief Financial Officer
		Principal Financial and Accounting Officer

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