Merchants & Marine Bancorp (MNMB) 10-Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20429

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 endedJune 30, 2008

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)

(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 Yes     o 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. (Check one):

Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     þ No

     As of June 30, 2008, 1,330,338 shares of Common Stock were outstanding.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
	Item 1. Financial Statements.
PART I—FINANCIAL INFORMATION
	Item 1. Financial Statements.
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4T. Controls and Procedures
Part II. Other Information
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other information
	Item 6. Exhibits
SIGNATURES
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MERCHANTS & MARINE BANCORP, INC.
CONDENSED BALANCE SHEETS

	(Unaudited)			(Audited)
	June 30, 2008			December 31, 2007
ASSETS:
Cash and due from banks (non-interest bearing)	$	28,533,214		$	20,268,465
Federal funds sold		22,194,000			26,477,000
Securities:
Available for sale, at market value		26,909,355			38,975,101
Held to maturity, at amortized cost		173,622,293			143,792,190
Non-marketable equity securities		600,060			600,060
Loans, less allowance for loan losses $3,100,000 and $3,100,000, respectively		193,456,374			200,812,432
Property and equipment, net		15,918,716			14,890,181
Other real estate owned		129,554			406,606
Accrued income		3,303,673			3,322,522
Other assets		11,721,152			9,988,159
TOTAL ASSETS	$	476,388,391		$	459,532,716
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits:
Non-interest bearing demand	$	275,267,889		$	124,829,897
Interest bearing demand, savings, money market, and other time		128,198,621			258,592,773
Total deposits		403,466,510			383,422,670
Federal funds purchased and securities sold under agreements to repurchase		15,224,351			21,018,486
Accrued expenses and other liabilities		7,630,077			6,650,911
Total liabilities		426,320,938			411,092,067
Stockholders’ Equity:
Common stock — $2.50 par value, 1,330,338 shares authorized and outstanding		3,325,845			3,325,845
Surplus		14,500,000			14,500,000
Retained earnings		32,920,162			31,123,789
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale		(139,821	)		29,748
Unrealized loss on defined benefit pension plan		(538,733	)		(538,733	)
Total stockholders’ equity		50,067,453			48,440,649
TOTAL LIABILITES AND STOCKHOLDERS’ EQUITY	$	476,388,391		$	459,532,716

See notes to condensed financial statements.

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

	Three Months Ended				Six Months Ended
	June 30				June 30
	2008		2007		2008		2007
Interest Income:
Interest and fees on loans	$	3,635,842		3,848,711	$	7,527,784		7,918,920
Interest on investment securities:
Taxable		2,100,962		2,778,296		4,067,372		5,224,149
Exempt from federal income tax		71,758		86,487		150,622		165,403
Interest on federal funds sold		220,912		360,753		547,247		770,897
Total interest income		6,029,474		7,074,247		12,293,025		14,079,369
Interest Expense:
Interest on deposits		1,710,739		2,203,227		3,634,017		4,201,816
Interest on federal funds purchased and securities sold under agreements to repurchase		89,017		185,846		229,389		294,707
Total interest expense		1,799,756		2,389,073		3,863,406		4,496,523
Net interest income		4,229,718		4,685,174		8,429,619		9,582,846
Provision for loan losses		123,569		216,056		72,363		216,499
Net interest income after provision for loan losses		4,106,149		4,469,118		8,357,256		9,366,347
Non-Interest Income:
Service charges		1,039,445		1,044,967		2,115,309		2,049,713
Miscellaneous		851,212		500,557		1,451,770		978,579
Total non-interest income		1,890,657		1,545,524		3,567,079		3,028,292
Non-Interest Expense:
Salaries and employee benefits		1,646,425		1,562,579		3,489,189		3,234,441
Premises		700,345		577,885		1,360,430		1,255,528
Miscellaneous		1,936,672		1,390,275		3,450,052		2,910,592
Total non-interest expense		4,283,442		3,530,739		8,299,671		7,400,561
Income before income taxes		1,713,364		2,483,903		3,624,664		4,994,078
Provision for income taxes		658,939		897,939		1,150,878		1,691,878
NET INCOME	$	1,054,425		1,585,964	$	2,473,786		3,302,200
NET INCOME PER COMMON SHARE	$	0.79		1.19	$	1.86		2.48

See notes to condensed financial statements.

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

	Three Months Ended						Six Months Ended
	June 30						June 30
	2008			2007			2008			2007
Net income	$	1,054,425			1,585,964		$	2,473,786			3,302,200
Other comprehensive income, net of tax:
Unrealized holding losses arising during period		(188,811	)		(45,337	)		(169,569	)		(67,810	)
Comprehensive income	$	865,614			1,540,627		$	2,304,217			3,234,390

See notes to condensed financial statements.

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

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	2,473,786		$	3,302,200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		576,492			398,168
Provision for loan losses		56,701			216,499
Write-down of other real estate owned		33,552			33,694
Net premium amortization (discount accretion)		15,841			(154,370	)
Reinvested earnings on securities		(61,649	)		(684,597	)
(Increase) decrease in accrued income receivable		18,849			(223,208	)
Increase in interest payable		185,556			357,314
Noncash charitable contribution		310,000			—
(Gain) loss on disposition of property and equipment		(356,283	)		25,938
Gain on disposition of securities		(117,392	)		—
Net change in other assets and liabilities		(465,171	)		(644,571	)
Net Cash Provided by Operating Activities		2,670,282			2,627,067
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Federal funds sold		4,283,000			6,950,000
Purchase of securities available for sale		(26,079,750	)		(68,178,548	)
Proceeds from maturities of securities available for sale		38,045,413			80,000,000
Purchase of securities held to maturity		(89,937,077	)		(63,012,321	)
Proceeds from maturities of securities held to maturity		60,113,333			24,645,000
Net (increase) decrease in loans		7,542,857			(4,215,230	)
Purchase of property and equipment		(1,698,744	)		(1,840,723	)
Proceeds from sale of property and equipment		140,000			1,062
Net Cash Used in Investing Activities		(7,590,968	)		(25,650,760	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		20,043,840			8,029,518
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		(5,794,135	)		16,492,877
Dividends paid to stockholders		(1,064,270	)		(1,064,270	)
Net Cash Provided by Financing Activities		13,185,435			23,458,125
Net Increase in Cash and Due from Banks		8,264,749			434,432
Cash and Due From Banks, Beginning		20,268,465			33,266,273
Cash and Due From Banks, Ending	$	28,533,214		$	33,700,705

See notes to condensed financial statements.

MERCHANTS & MARINE BANCORP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As of and For the Six Months Ended June 30, 2008

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Interim Financial Statements.

The accompanying unaudited condensed fianancial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Rule 10-01 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 Bank’s 2007 Annual Report to Shareholders.

December 31, 2007 Balance Sheet Presentation.

The condensed balance sheet at December 31, 2007 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 of Merchants & Marine Bancorp, Inc., a Mississippi bank holding company. At the completion of the exchange, the Bank bacame a wholly-owned subsidiary of the holding company.

The 2008 financial information presented in these financial statements includes the consolidated data of both the bank and the holding company. The 2007 information presented includes only the bank, since the holding company did not exist during 2007.

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. 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, without limitation, the Company’s ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Company’s business; and 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.

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. Merchants & Marine 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. The U.S. Banker Magazine rated the Bank as one of the top 200 community Banks, ranked by a three year average of return on equity. The Company is subject to regulation, supervision, and examination by the Mississippi Department of Banking and Consumer Finance and the FDIC. However, such regulation, supervision and

examination are for the protection of consumers, the deposit insurance fund administered by the FDIC, and the banking system and not for the protection of investors or other stakeholders.

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 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. Management completed a comprehensive post-storm review of the Company’s loan portfolio, including contacting customers, reviewing insurance coverage, analyzing collateral values, and assessing customers’ repayment sources and abilities. Management increased the Company’s Allowance for Loan Losses (“ALL”) by $700,000 since the storm, a decision based on banking industry studies that show unanticipated losses from a disaster like Katrina will occur often a year or more after the event. Management feels it has made a proper loan loss reserve adjustment and will continue to monitor its adequacy, as is customary. The slow down in the economy also has had its impact on housing and business growth, and is considered as a factor in determining the ALL. The Company has also 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 and in the last two quarters of 2007, and continuing into the first two quarters of 2008, as businesses and homes have been rebuilt, these deposit dollars have begun to be utilized for recovery purposes and a leveling effect in deposits growth has occurred.

Earnings Highlights

The Company’s net income for the second quarter of 2008 was $1,054,000, a decrease of 33.5% from $1,586,000 for the second quarter of 2007. Year-to-date net income at June 30, 2008 was $2,474,000, compared to $3,302,000 for the same period of 2007, a decrease of 25.1%. The following discussions, tables, and the accompanying financial statements outline the change in earnings from the first two quarters of 2008, 2007 and 2006. Return on average assets for the first two quarters of 2008 was 1.0%, compared to 1.3% for the same period of 2007, and 1.4% for the same period 2006. Return on average equity was 10.0%, 14.9%, and 16.9% in the first two quarters of 2008, 2007, and 2006, respectively. Year to date earnings per share in the first six months of 2008, 2007 and 2006 were $1.86, $2.48, and $2.55, respectively.

Earning Assets

Table 1 of this report shows the composition of the Company’s average assets, including average interest-earning assets. The Company’s interest-earning assets include loans, investments, and federal funds sold. Average earning assets for the first two quarters of 2008 totaled $422,628,000, compared to $451,144,000 for the same period in 2007, and $450,604,000 for the same period in 2006. The decrease in average earning assets in 2008 is a result of decreases in deposits, which makes fewer funds available for loans and investments. Average net loans decreased by $1,693,000, compared to an increase of $26,119,000, or 14.8%, in the first two quarters of 2007 and an increase of $12,285,000, or 7.5%, in the first two quarters of 2006. Average securities decreased by $39,663,000, or 18.1%, and $32,651,000, or 12.9%, at second quarter-end June 30, 2008 and 2007, respectively, compared to an increase of $141,607,000, or 128.6%, at second quarter-end 2006. Average federal funds sold 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 and decreased by $7,663,000, or 25.3%, at second quarter-end 2006. A detailed comparison of the Company’s average interest-earning assets for the first two quarters of 2008, 2007, and 2006 is presented in Table 1 of this report.

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 3.5%, 3.7% and 3.6% for the second quarter of 2008, 2007, and 2006, respectively. Tax equivalent net interest income decreased by 10.1% in the first two quarters of 2008, compared to increases of 4.8% and 39.6% in the first two quarters of 2007 and 2006, respectively. The decrease in tax equivalent net interest income is attributed to decreases in interest earning assets.

Average net loans decreased by 0.8% in the first two quarters of 2008, compared to increases of 14.8%, and 7.5% in the first two quarters of 2007 and 2006, respectively. In the first two quarters of 2008, loan interest income decreased by 4.9%, compared to increases of 26.6% in the first six months of 2007 and 10.9% in the first six months of 2006. Loan yields were 7.5%, 7.8% and 7.1% in the first two quarters of 2008, 2007, and 2006, 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 earned on taxable securities remained constant over the past two years. Yields on tax-exempt securities increased by 17 basis points as maturing securities were reinvested in higher earning rate securities. The average volume of all securities decreased by 18.2% and 12.9% in the first two quarters of 2008 and 2007, respectively, and increased by 128.6% in the first two quarters of 2006. The decrease in volumes of securities is directly related to decrease in deposits during the same time frame. Total securities income decreased by 21.8% and 0.3% in the first two quarters of 2008 and 2007, respectively, and increased 178.9% in the first two quarters of 2006. The decreases in 2008 and 2007 are attributed to lower volumes and the 2006 increase is due to increased volumes and increased rates earned. The average balance of federal funds sold increased by $12,840,000 at second quarter-end 2008, compared to an increase of $7,072,000, or 31.3%, at second quarter-end 2007, and a decrease of 25.3% at second quarter end 2006. Income from these funds decreased by 29.1% in the first two quarters of 2008, compared to an increase of 51.5% in the first two quarters of 2007. The decrease in 2008 income is due lower rates earned. The increase of 51.5% in the first two quarters of 2007 was a result of increased rates earned.

The Company experienced an unusual growth in deposits following Hurricane Katrina. As customers have begun to rebuild and settle, deposits have leveled off, and the Company has seen the deposit mix shift from non-interest-bearing accounts to interest bearing accounts. Total deposits have decreased by 8.9% from second quarter-end 2006 to the same period in 2008, while interest-bearing deposits have increased by 8.1% over the same period. A slowdown in the local economy, as well as customers rebuilding homes and businesses, have had a material affect on the Company’s deposits. Total average interest-bearing liabilities increased by 10.2% and 25.9% in the first two quarters of 2007 and 2006, respectively, compared to a decrease of 1.3% in the first two quarters of 2008. Rates paid on these funds decreased by 52 basis points in the first two quarters of 2008, which resulted in a decrease in interest expense for the period of 17.9%. Rates paid on these funds increased by 75 basis points in the first two quarters of 2007 compared to the same period of 2006. Increases in rates paid along with increased volumes resulted in an increase in interest expense of 46.1% in the first two quarters of 2007, compared to 2006, and an increase of 105.9% in the first two quarters of 2006, compared to 2005. Interest-bearing

checking, money market funds, and savings accounts average balances decreased by 10.0% for the second quarter of 2008, compared to increases of 11.7% and 25.6% for the second quarter of 2007 and 2006, respectively. Interest expense decreased by 33.7% in the first two quarters of 2008, compared to increases of 51.5% and 114.0% for the first two quarters of 2007 and 2006, respectively. Average time deposit balances increased by 14.8%, 9.0%, and 20.2% in the first two quarters of 2008, 2007, and 2006, respectively. The average rate paid on these funds was 4.1%, 4.9%, and 3.7% for the first two quarters of 2008, 2007, and 2006, respectively. Interest expense on time deposits decreased by 5.0% in the first two quarters of 2008, compared to increases of 44.8% and 92.9% in the first two quarters of 2007 and 2006, respectively. Even though balances of these funds increased in the first two quarters of 2008, the interest expense decreased as a result of lower rates paid. Average federal funds purchased and securities sold under agreements to repurchase increased by 19.7%, 0.5%, and 66.1% for the first two quarters of 2008, 2007, and 2006, respectively. 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.

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.

Average loans, net of unearned income, as a percentage of average earning assets, was 47.5%, 44.9%, and 39.1%, for first two quarters of 2008, 2007, and 2006, respectively. The average loan-to-deposit ratio was 50.4, 46.1%, and 40.3% at June 30, 2008, 2007 and 2006, respectively. Average net loans 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%, when comparing second quarter-end 2007 to 2006, and increased by $12,285,000, or 7.5 at June 30, 2006 compared to the prior year period.

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. The Company considers itself the premier provider of financial services to low and moderate-income customers in Jackson and George Counties.

Following two years of growth, total loans have decreased in each category at June 30, 2008 compared to June 30, 2007. Commercial and industrial loans decreased by $3,717,000 at second quarter-end 2008, compared to a decrease of $8,863,000 at second quarter-end 2007. Real estate loans decreased by $240,000 at second quarter-end 2008 compared to second quarter-end 2007. Consumer loans decreased from $41,000,000 at second quarter-end 2007 to $39,458,000 at second quarter-end 2008. See Tables 6 and 7 for a comparison of the loan portfolio’s composition and maturity breakdown.

Allowance for Loan Losses

Historical losses, trends and management’s opinion of the adequacy of the 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 1.6% at second quarter-end 2008, 1.5% at second quarter-end 2007, and 1.7% at second quarter-end 2006.

The Company immediately charges off any loan when it is determined to be uncollectible. However, experience shows that certain losses exist in the portfolio that have not been 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 $72,000, $216,000, and $165,000 the first two quarters of 2008, 2007, and 2006, respectively. The decrease in the provision for 2008, is a result of increased recoveries of loans charged-off in prior years.

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.

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.

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 Companying 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 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.

After Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005, management increased the ALL. Management believes the reserve is adequate at this time, based on a review of the portfolio and discussions with regulatory officials.

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 $822,000, $999,000, and $1,001,000 at June 30, 2008, 2007, and 2006, respectively. Non-performing assets, as a percentage of total loans, were 0.4% at June 30, 2008, 0.5% at June 30, 2007, and 0.6% at June 30, 2006. Non-accrual loans and accruing loans over 90 days past due totaled $692,000 or 0.4% of total loans, $798,000, or 0.4% of total loans, $752,000, or 0.4% of total loans, at June 30, 2008, 2007, and 2006, respectively. Other real estate totaled $130,000, or 0.1% of total loans, at June 30, 2008, $201,000, or 0.1% of total loans, at June 30, 2007, and $249,000, or 0.1% of total loans, at June 30, 2006. See Table 10 for additional information concerning the Company’s non-performing assets.

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 $201,132,000, $230,889,000, and $249,518,000, for the second quarter-end 2008, 2007, and 2006, respectively. As previously mentioned the large variation in the dollar volume of securities carried is due to fluctuations deposits following Hurricane Katrina. Management has reason to believe that many of these funds will be short-term in nature and has offset these deposits with short-term Treasury securities.

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 Financial Accounting Standards Board 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 $140,000, $95,000, and $383,000 were included in stockholders’ equity at second quarter-end 2008, 2007 and 2006, respectively. Unrealized gains of $30,000 were included in stockholders’ equity at year-end 2007. 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 taxable securities remained constant over the past two years. Yields on tax-exempt securities increased by 17 basis points as maturing securities were reinvested in higher earning rate securities. The average volume of all securities decreased by 18.2% and 12.9% in the first two quarters of 2008 and 2007, respectively, and increased by 128.6% in the first two quarters of 2006, when compared to the same prior year period. The decrease in volumes of securities is directly related to decrease in deposits during the same time frame. Total securities income decreased by 21.8% and 0.3% in the first two quarters of 2008 and 2007, respectively, and increased 178.9% in the first two quarters of 2006. The decreases in 2008 and 2007 are attributed to lower volumes and the 2006 increase is due to increased volumes and increased rates earned. The average balance of federal funds sold increased by $12,840,000 at second quarter-end 2008, and $7,072,000, or 31.3%, at second quarter-end 2007, and decreased by 25.3% at second quarter end 2006. Income from these funds decreased by 29.1% in the first two quarters of 2008, compared to an increase of 51.5% in the first two quarters of 2007. The decrease in 2008 income is due lower rates earned. The increase of 51.5% in the first two quarters of 2007 was a result of increase rates earned. The Federal Reserve began raising short term rates in 2004 and continued this trend through July of 2006. Rates remained unchanged until August of 2007, when the Federal Open Market Committee began reducing rates, with seven reductions from that time to the end of the second quarter of 2008.

See Tables 3, 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 for the second quarter-end 2008 decreased by $41,067,000, or 9.3%, when compared to 2007, and increased by $2,052,000, or 0.5%, when compared to second quarter-end 2006. As mentioned previously, the Company experienced a large growth in deposits after Hurricane Katrina, but as people have rebuilt homes and businesses, deposits have decreased. Management feels that deposit fluctuations have begun to level off. The slowdown in the local economy has also had an impact on deposit growth. 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 5.3%, 4.1%, and 4.1% of total average deposits for the second quarter-end 2008, 2007 and 2006, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

Off-Balance Sheet Arrangements

As of June 30, 2008, the Company had unfunded loan commitments outstanding of $17,103,000 and outstanding standby letters of credit of $192,000. 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.

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 21.4%, 19.2%, and 18.9% at second quarter-end 2008, 2007, and 2006, respectively. The Tier 1 risk-based capital ratio was 20.1% at second quarter-end 2008, compared to 17.9% at second quarter-end 2007, and 17.6% at second quarter-end 2006. The leverage ratio was 10.5%, 9.0%, and 8.1% at second quarter-end 2008, 2007, 2006, 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 2008, 2007, and 2006 was 10.5%, 8.8%, and 8.1%, 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 increased in the first two quarters of 2008 and 2007 by 3.1% and 15.2%, respectively, and decreased in the first two quarters of 2006 by 15.3%, compared to the same period of 2005. 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 2008 increased by 48.4% when compared to second quarter-end 2007, due to the gain from sale of a piece of the Company’s property.

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 2008 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.

Salary and employee benefits expense increased in the first two quarters of 2008 by 7.9% compared to an increase of 6.4% for the same period of 2006. The increases are attributed to increases in staffing levels, employee raises, and health insurance premiums. Occupancy and equipment expense increased by 8.3% and 29.6% in the first two quarters of 2008 and 2007, respectively. The increase in 2007 is attributed to the depreciation of the new main office, which began in 2007. Miscellaneous expenses increased by 18.5% when comparing second quarter-end 2008 to quarter-end 2007, and increased by 2.5% when comparing second quarter-end 2007 to 2006. The increase in 2008 is related to a charitable donation of a piece of the Company’s property.

Income Taxes

Income tax expense totaled $1,151,000, $1,692,000, and $1,475,000 for the second quarter-end 2008, 2007, and 2006, respectively.

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, 2008, 2007, and 2006:

	2008								2007								2006
				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	$	200,741		$	7,527		7.50	%	$	202,434		$	7,920		7.82	%	$	176,315		$	6,253		7.09	%
Securities held to maturity:
Taxable		150,254			3,671		4.89	%		124,467			3,027		4.86	%		96,710			2,140		4.43	%
Exempt from Federal income tax		8,610			151		3.51	%		8,259			138		3.34	%		8,307			128		3.08	%
Securities available for sale:
Taxable		20,501			387		3.78	%		86,302			2,220		5.14	%		146,662			3,132		4.27	%
Federal funds sold and securities purchased under agreements to resell		42,522			547		2.57	%		29,682			771		5.20	%		22,610			509		4.50	%
Total interest-earning assets	$	422,628		$	12,283		5.81	%	$	451,144		$	14,076		6.24	%	$	450,604		$	12,162		5.40	%
Non interest-earning assets:
Cash and due from banks		27,183								32,255								31,347
Bank premises and equipment		15,203								13,630								8,669
Other assets		14,311								13,529								13,267
Allowance for possible loan losses		(3,094	)							(3,093	)							(3,055	)
Total assets	$	476,231							$	507,465							$	500,832

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

	2008							2007							2006
			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	$	182,318	$	1,610		1.77	%	$	202,607	$	2,429		2.40	%	$	181,363	$	1,603		1.77	%
Time deposits		99,917		2,024		4.05	%		87,040		2,131		4.90	%		79,841		1,472		3.69	%
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings		21,462		229		2.13	%		17,937		148		1.65	%		17,845		148		1.66	%
Total interest-bearing liabilities	$	303,697	$	3,863		2.54	%	$	307,584	$	4,708		3.06	%	$	279,049	$	3,223		2.31	%
Noninterest-bearing liabilities:
Deposits		116,239							149,894							176,285
Other liabilities		6,670							5,767							5,608
Total liabilities		426,606							463,245							460,942
Stockholder’s equity		49,625							44,220							39,890
Total liabilities and stockholders’ equity	$	476,231						$	507,465						$	500,832
Net interest income/ margin-tax equivalent			$	8,420		3.54	%			$	9,368		3.69	%			$	8,939		3.57	%
Tax equivalent adjustment:
Loans				104							120							43
Investment securities				151							166							44
Securities available for sale
Other
Total tax equivalent adjustment				255							286							87
Net interest income			$	8,165						$	9,082						$	8,852

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, 2008
	2008 Compared to 2007									2007 Compared to 2006
	Increase(Decrease) Due To									Increase(Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
Interest income on:
Loans	$	(1,693	)	$	(393	)	$	(2,086	)	$	26,119		$	1,667		$	27,786
Investment securities:
Taxable		25,787			644			26,431			27,757			887			28,644
Exempt from Federal income tax		351			13			364			(48	)		10			(38	)
Securities available for sale:
Taxable		(65,801	)		(1,833	)		(67,634	)		(60,360	)		(912	)		(61,272	)
Federal funds sold and securities purchased under agreements to resell		12,840			(224	)		12,616			7,072			262			7,334
Total	$	(28,516	)	$	(1,793	)	$	(30,309	)	$	540		$	1,914			2,454
Interest expense on:
Savings deposits	$	(20,289	)	$	(819	)	$	(21,108	)	$	21,244		$	826		$	22,070
Time deposits		12,877			(107	)		12,770			7,199			659			7,858
Federal funds purchased, and securities sold under agreements to repurchase		3,525			81			3,606			92			—			92
Total	$	(3,887	)	$	(845	)	$	(4,732	)	$	28,535		$	1,485		$	30,020
Changes in net interest income-tax equivalent	$	(24,629	)	$	(948	)	$	(25,577	)	$	(27,995	)	$	429		$	(27,566	)

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.

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,
	2008		2007		2006
Securities available for sale
U. S. Treasury and other U. S. Government agencies	$	26,773	$	74,236	$	134,881
Obligations of states and political subdivisions		—		—		—
Mortgage-backed securities		—		—		—
Other securities		137		—		—
Total securities available for sale	$	26,910	$	74,236	$	134,881
Investment securities
U. S. Treasury and other U. S. Government agencies	$	165,590	$	145,272	$	104,558
Obligations of states and political subdivisions		8,033		10,781		9,479
Mortgage-backed securities		—		—		—
Other securities		600		600		600
Total investment securities	$	174,223	$	156,653	$	114,637
Total securities available for sale and investment securities	$	201,133	$	230,889	$	249,518

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, 2008:

	Maturing
						After					After 5 Yrs
	Within					1 Yr But					But Within
	1 Year					Within 5 Yrs					10 Yrs							After 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	$	7,993		2.58	%	$	16,806		3.19	%		1,974		4.55	%		—		0.00	%	$	26,773
Other securities		137		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		137
Total securities available for sale	$	8,130		2.58	%	$	16,806		3.19	%		—		4.55	%		—		0.00	%	$	26,910
Investment securities
U.S. Treasury and other U.S. Government agencies	$	3,999		4.55	%	$	108,736		4.70	%	$	52,855		4.88	%		—		0.00	%	$	165,590
Obligations of states and political subdivisions		1,299		4.52	%		3,230		5.19	%		3,504		5.49	%		—		0.00	%		8,033
Other securities		600					—					—					—					600
Total investment securities	$	5,898		4.10	%	$	111,966		5.01	%	$	56,359		5.58	%		—		0.00	%	$	174,223
Total securities available for sale and investment securities	$	14,028		3.36	%	$	128,772		4.17	%	$	56,359		4.81	%		—		0.00	%	$	201,133

At June 30, 2008, the Company held investment securities issued by Municipalities of the State of Mississippi with an aggregate carrying amount of $8.0 million and a market value of $8.1 million. The yield on obligations of states and political subdivisions has been calculated on a fully tax equivalent basis.

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

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2008									JUNE 30, 2008
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			FAIR		AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		LOSSES			VALUE		COST		GAINS		LOSSES			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			FAIR		AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		LOSSES			VALUE		COST		GAINS		LOSSES			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

	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2006									JUNE 30, 2006
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED			FAIR		AMORTIZED		UNREALIZED		UNREALIZED			FAIR
	COST		GAINS		LOSSES			VALUE		COST		GAINS		LOSSES			VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	135,461	$	—	$	(580	)	$	134,881	$	104,558	$	2	$	(2,005	)	$	102,555
STATE AND MUNICIPAL SECURITIES		—		—		—			—		9,479		—		(248	)		9,231
OTHER SECURITIES		—		—		—			—		—		—		—			—
TOTAL	$	135,461	$	—	$	(580	)	$	134,881	$	114,037	$	2	$	(2,253	)	$	111,786

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:

	2008		2007		2006
Commercial & Industrial	$	28,840	$	32,557	$	41,420
Real Estate		122,868		123,108		105,260
Consumer Loans		39,458		41,000		36,311
Other Loans		5,390		6,476		580
Total Loans	$	196,556	$	203,141	$	183,571

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

The following table shows the amount of loans outstanding as of June 30, 2008 (excluding
those in non-accrual status ) based on the scheduled repayments of principal:

Remaining Maturity Fixed Rate
3 months or less	$	25,726
Over 3 months through 12 months		34,178
Over 1 year through 5 years		127,178
Over 5 years		8,821
Over 1 year but variable rate		—
Total Loans	$	195,903

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,
	2008		2007		2006
Beginning Balance	$	3,100	$	3,100	$	3,000
Charge Offs:
Commercial & Industrial		69		43		—
Real Estate		2		9		—
Consumer		304		342		346
Other		—		—		—
Total Charge Offs		375		394		346
Recoveries:
Commercial & Industrial		33		58		8
Real Estate		152		—		—
Consumer		118		120		273
Other		—		—		—
Total Recoveries		303		178		281
Net Charge Offs		72		216		65
Provision for Possible Losses		72		216		165
Ending Balance	$	3,100	$	3,100	$	3,100
Total Loans Outstanding	$	196,556	$	203,141	$	183,571
Average daily loans	$	200,741	$	202,434	$	176,315

	2008		2007		2006
Percentages:
Allowance for loan losses to end of quarter total loans		1.6		1.5		1.7
Allowance for loan losses to average loans		1.5		1.5		1.8
Allowance for loan losses to nonperforming assets		377.1		310.3		309.7
Net charge offs to average loans		0.04		0.11		0.04

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,
	2008					2007					2006
	% Gross			Loan Loss		% Gross			Loan Loss		% Gross			Loan Loss
	Loans			Allowance		Loans			Allowance		Loans			Allowance
	Outstanding			Allocation		Outstanding			Allocation		Outstanding			Allocation
Commercial & Industrial		5.55			172		16.03		$	497		22.56		$	601
Real Estate		13.03			404		60.60			1,879		57.34			1,778
Consumer		47.39			1,469		20.18			626		19.78			613
Other		22.58			700		3.19			98		0.32			108
Unallocated		11.45			355
		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 second quarter of the years indicated.

	June 30,
	2008			2007			2006
Non-accrual Loans & Accruing Loans Past Due 90 Days or more	$	692		$	798		$	752
Other Real Estate		130			201			249
	$	822		$	999		$	1,001
Nonperforming Assets as % of Total Loans		0.42	%		0.49	%		0.55	%
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans		0.35	%		0.39	%		0.41	%

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,
	2008		2007		2006
Non-interest bearing deposits	$	116,239	$	149,894	$	176,285
Interest-bearing deposits		182,318		202,607		181,363
Interest-bearing time deposits		99,917		87,040		79,841
Total	$	398,474	$	439,541	$	437,489

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, 2008 are summarized in the following table:

Time remaining until maturity
3 months or less	$	10,597
Over 3 through 6 months		10,346
Over 6 through 12 months		26,430
Over 12 months		6,227
Total	$	53,600

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
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
2006 Federal funds purchased and securities sold under agreements to repurchase	$	12,551	$	17,845		1.66	%	$	15,407

TABLE 14
INTEREST SENSITIVITY
(Dollars in Thousands)

The following table reflects the interest sensitivity of the Company over various periods as of June 30, 2008 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	$	26,379		$	34,178		$	127,178		$	8,821			$	196,556
Investment securities		2,000			3,898			111,966			56,359				174,223
Securities available for sale		137			7,993			16,806			1,974				26,910
Federal funds sold and securities purchased under agreements to resell		22,194													22,194
Total interest-earning assets	$	50,710		$	46,069		$	255,950		$	67,154			$	419,883
Noninterest-earning assets											56,590		��		56,590
Total assets	$	50,710		$	46,069		$	255,950		$	123,744			$	476,473
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits	$	64,642		$	31,447		$	78,618		$	—			$	174,707
Time deposits		22,361			63,012			15,188			—				100,561
Federal funds purchased, and securities sold under agreements to repurchase		15,224													15,224
Total interest-bearing liabilities	$	102,227		$	94,459		$	93,806		$	—			$	290,492
Noninterest-bearing deposits		26,922						85,893			15,384				128,199
Other liabilities											7,813				7,813
Stockholders’ equity											49,969				49,969
Total liabilities and stockholders’ equity	$	129,148		$	94,459		$	179,699		$	73,166			$	476,473
Interest sensitive gap	$	(78,438	)	$	(48,390	)	$	76,251		$	50,578
Cumulative interest sensitive gap	$	(78,438	)	$	(126,829	)	$	(50,578	)	$	—
Cumulative interest sensitive gap as a percent of total assets		-16.46	%		-26.62	%		-10.62	%		0.00	%

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

The following table presents, as of June 30, 2008, significant fixed and determinable contractual obligations to third parties by payment date:

	PAYMENTS DUE IN
			ONE TO		THREE TO		OVER
	ONE YEAR		THREE		FIVE		FIVE
	OR LESS		YEARS		YEARS		YEARS		TOTAL
Deposits without a stated maturity	$	123,011	$	21,203	$	143,308	$	15,384	$	302,906
Consumer certificates of deposit		85,373		15,188		—		—		100,561
Federal funds borrowed & repurchase agreements		15,224		—		—		—		15,224
Operating leases										—
Purchase obligations		—		—		—		—		—

COMMITMENTS

The following table details the amounts and expected maturities of significant commitments as of June 30, 2008:

			ONE TO		THREE TO		OVER
	ONE YEAR		THREE		FIVE		FIVE
	OR LESS		YEARS		YEARS		YEARS		TOTAL
Commitments to extend credit:
Commercial	$	9,810	$	—	$	—	$	—	$	9,810
Residential real estate		29		2		—		—		31
Revolving home equity and credit card lines		348		—		—		—		348
Other		6,914		—		—		—		6,914
Standby letters of credit		192		—		—		—		192

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the Company’s operation, the Company is not subject to foreign currency exchange or commodity price risk.

Interest rate risk management is an integral part of the financial success of the Company. 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.

In addition to using traditional gap tables, the Company uses an earnings forecast model that simulates multiple interest rate scenarios and the effects on the Company’s net interest margin. 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 asset sensitive, which means that in a rising rate environment, the Company’s net interest margin will increase.

There have been no material changes in reported market risks during the three months ended June 30, 2008.

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 June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 Matters to a Vote of Security Holders

(a)	The Company’s annual meeting of shareholders was held on April 3, 2008 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 2011:

	Votes For		Votes Withheld		Broker Non-Votes
Lynda J. Gautier		899,665		3,776		-0-
John F. Grafe		878,653		5,444		-0-
Gerald J. St. Pé		880,017		4,080		-0-

(c) Other matters voted upon and the results of the voting were as follows:

     At the annual meeting, the shareholders also voted to approve the Agreement and Plan of Share Exchange, dated as of February 5, 2008, between Merchants & Marine Bank and the Company, pursuant to which the shareholders of Merchants & Marine Bank exchanged their shares of Merchants & Marine Bank common stock for shares of Company common stock. The shareholders voted 841,098 in the affirmative and 61,914 against the proposal with no abstentions and 768 broker non-votes.

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 created by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. 350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

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, 2008	By:	/s/ Royce Cumbest
		Royce Cumbest, Chairman of the Board
		President and Chief Executive Officer
Date: August 14, 2008	By:	/s/ S. M. Dickson
		S. M. Dickson, Executive Vice President
		(Principal Financial and Accounting Officer)