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, 2011


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 Yes o 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 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.


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

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

o Yes þ No

As of May 13, 2011, 1,330,338 shares of Common Stock were outstanding.

TABLE OF CONTENTS


Part I. Financial Information

Item 1. Financial Statements			3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10

Item 4. Controls and Procedures			30

Part II. Other Information			31

Item 1. Legal Proceedings			31

Item 1A. Risk Factors			31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31

Item 3. Defaults Upon Senior Securities			31

Item 4. (Removed and Reserved)			31

Item 5. Other Information			31

Item 6. Exhibits			31

SIGNATURES			32

EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. Financial Information


Item 1.		Financial Statements

MERCHANTS & MARINE BANCORP, INC., AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)			(Audited)
	March 31, 2011			December 31, 2010
ASSETS
Cash and due from banks	$	44,467,280			20,010,142
Federal funds sold		97,000			3,147,000
Securities:
Available-for-sale, at fair value		178,873,975			116,333,500
Held-to-maturity, at amortized cost		96,136,578			112,981,596
Non-marketable equity securities		900,060			900,060
Loans, less allowance for loan losses of $3,268,217 and $3,268,217, respectively		215,348,812			216,470,346
Property and equipment, net of depreciation		15,490,942			15,727,476
Other real estate owned		2,799,723			2,275,723
Accrued income		2,967,097			2,401,057
Other assets		13,186,256			13,148,056

Total assets	$	570,267,723			503,394,956


LIABILITIES
Deposits:
Non-interest bearing demand	$	166,424,470			79,614,176
Interest bearing savings, demand and other time deposits		327,784,665			348,586,934

Total deposits		494,209,135			428,201,110
Federal funds purchased and securities sold under agreements to repurchase		14,253,773			13,729,528
Accrued expense and other liabilities		9,092,322			9,113,767

Total liabilities		517,555,230			451,044,405


STOCKHOLDERS’ EQUITY
Common stock — $2.50 par value per share, 1,330,560 shares authorized, 1,330,338 shares issued and outstanding		3,325,845			3,325,845
Surplus		14,500,000			14,500,000
Retained earnings		39,803,111			39,013,928
Accumulated other comprehensive income (loss)		(4,916,463	)		(4,489,222	)

Total stockholders’ equity		52,712,493			52,350,551

Total liabilities and stockholders’ equity	$	570,267,723			503,394,956

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended
	March 31,
	2011		2010
Interest income
Interest and fees on loans	$	3,336,172		3,483,863
Interest on investment securities:
Taxable		1,609,243		1,240,640
Exempt from federal and state income tax		211,661		148,518
Interest on federal funds sold		26,884		18,338
Other interest income		186		95,945

Total interest income		5,184,146		4,987,304


Interest expense
Interest on deposits		903,769		994,429
Interest on federal funds purchased and securities sold under agreements to repurchase		6,003		7,151

Total interest expense		909,772		1,001,580


Net interest income		4,274,374		3,985,724
Provision for loan losses		241,624		131,864

Net interest income after provision for loan losses		4,032,750		3,853,860


Non-interest income
Service charges on deposit accounts		1,095,616		1,003,492
Miscellaneous		358,948		563,605

Total non-interest income		1,454,564		1,567,097


Non-interest expense
Salaries and employee benefits		1,679,440		2,120,075
Premises		667,569		751,482
Services and fees expense		416,784		508,912
Miscellaneous		1,241,874		1,026,901

Total non-interest expense		4,005,667		4,407,370


Income before income taxes		1,481,647		1,013,587
Provision for income taxes		359,879		245,770

Net income	$	1,121,768		767,817


Net income per common share	$	0.84		0.58

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended
	March 31,
	2011			2010

Net income	$	1,121,768			767,817

Other comprehensive income, net of tax:
Unrealized holding gain (loss) arising during period		(427,241	)		(58,200	)


Comprehensive income	$	694,527			709,617

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


										Accumulated
	Common Stock									Other
	Shares						Retained			Comprehensive
	Issued		Amount		Surplus		Earnings			Income (Loss)
Balance December 31, 2010		1,330,338	$	3,325,845		14,500,000		39,013,928			(4,489,222	)

Net income		—		—		—		1,121,768			—

Cash dividends, $.25 per share		—		—		—		(332,585	)		—

Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $220,092		—		—		—		—			(427,241	)


Balance, March 31, 2011		1,330,338	$	3,325,845		14,500,000		39,803,111			(4,916,463	)

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,121,768			767,817
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		314,741			359,870
Provision for loan losses		241,624			131,864
Amortization of securities premium/discount		60,364			9,719
Loss on sale of securities		13,750			—
(Increase) decrease in accrued income		(566,040	)		128,289
Reinvested earnings on securities		(838	)		—
Decrease in interest payable		(53,675	)		(66,381	)
Other, net		613,224			567,643

Net cash provided by operating activities		1,744,918			1,898,821


CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold and securities purchased under agreements to resell		3,050,000			13,900,000
Proceeds from sales and maturities of securities available-for-sale		15,486,250			16,000,000
Purchase of securities available-for-sale		(78,679,050	)		(10,185,000	)
Proceeds from maturities of securities held to maturity		17,055,000			25,583,333
Purchase of securities held-to-maturity		(278,267	)		(40,109,393	)
Net (increase) decrease in loans		355,910			(6,279,193	)
Purchase of property and equipment		(78,207	)		(42,696	)

Net cash used by investing activities		(43,088,364	)		(1,132,949	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		66,008,025			75,410,201
Net increase in federal funds purchased and securities sold under agreements to repurchase		524,245			2,027,771
Dividends paid		(731,686	)		(731,686	)

Net cash provided by financing activities		65,800,584			76,706,286


Net increase in cash and due from banks		24,457,138			77,472,158
Cash and due from banks, beginning		20,010,142			14,451,113

Cash and due from banks, ending	$	44,467,280			91,923,271

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of and for the Three Months Ended March 31, 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements:

The accompanying unaudited condensed consolidated 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 2010 Annual Report on Form 10-K.

Certain reclassifications have been made to the 2010 consolidated financial statements to conform to the 2011 presentation.

December 31, 2010 Balance Sheet Presentation.

The condensed consolidated balance sheet at December 31, 2010 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.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

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.

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


	March 31, 2011				December 31, 2010
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and federal funds sold		44,467		44,467		23,157		23,157
Securities:
Available-for-sale		178,874		178,874		116,334		116,334
Held-to-maturity		96,137		97,773		112,982		114,389
Non-marketable		900		900		900		900
Loans, net of allowance		215,349		214,629		216,470		216,162

Financial liabilities:
Deposits		494,209		492,998		428,201		428,195
Federal funds purchased and securities sold under agreements to repurchase		14,254		14,254		13,730		13,730

3. DEFINED BENEFIT PENSION PLAN

The Company has a non-contributory pension plan covering all employees who qualify under length of service and other requirements. The plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service and average earnings for the five consecutive plan years, which produce the highest average. The following table presents information regarding the plan’s net periodic benefit cost for the periods presented (in thousands):


	Three Months Ended March 31,
	2011			2010
Net periodic benefit cost (income):
Service cost	$	95			101
Interest cost		150			151
Expected return on plan assets		(181	)		(165	)
Amortization (gain) loss		65			68

Net periodic pension expense	$	129			155

4. SUBSEQUENT EVENTS

The Company has evaluated subsequent events through May 10, 2011, the date of issuance of the condensed consolidated financial statements. No material subsequent events have occurred since March 31, 2011 that required recognition or disclosure in the condensed consolidated financial statements.


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

Forward-looking Statements

This Quarterly Report contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of Merchants & Marine Bancorp, Inc. (the “Company”). Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modification or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan”, “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include, those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 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, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and (ix) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies.

Formation of Holding Company

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

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. Banker magazine 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 70^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 Securities and Exchange Commission (the “SEC”), the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”). At March 31, 2011, the Company’s assets totaled $570 million and it employed 129 persons on a full-time equivalent basis.

Hurricane Katrina hit the Mississippi 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.

Earnings Highlights

The Company’s net income for the first quarter of 2011 was $1,122,000, a 46.1% increase, when compared to $768,000 for the first quarter of 2010 and $768,000 for the first quarter of 2009. The following discussions, tables and the accompanying financial statements presented outline the change in earnings from the first quarters of 2011, 2010 and 2009. Return on average assets was 0.8%, 0.6% and 0.7%, for first quarters of 2011, 2010 and 2009, respectively. Return on average equity was 8.6%, 6.0% and 6.3%, in the first quarters of 2011, 2010 and 2009, respectively. Earnings per share were $0.84 in the first quarter of 2011, compared to $0.58 in the first quarters of 2010 and 2009.

Earning Assets

A detailed comparison of the Company’s average earning assets for the first quarters of 2011, 2010 and 2009 is presented in Table 1 of this report. The Company’s earning assets include loans, investments, Federal Reserve balances and federal funds sold. Average earning assets for the first quarter of 2011 totaled $531,076,000 compared to $426,197,000 in 2010 and $398,505,000 in 2009. Average net loans decreased by $7,550,000 in the first quarter of 2011, compared to an increase of $9,113,000 for the first quarter of 2010 and a decrease of $245,000 in first quarter of 2009. Average securities increased by $82,878,000 and $13,416,000 in the first quarters of 2011 and 2010, respectively, compared to a decrease of $5,560,000 for the first quarter of 2009. Average federal funds sold decreased by $6,199,000 or 84.7% and $27,921,000 or 79.2% in the first quarters 2011 and 2010, respectively, compared to a decrease of $7,580,000 or 17.7%, in the first quarter of 2009. Other earning assets consist of balances maintained in a Federal Reserve excess balance account. The average balance for the first quarter of 2011 totaled $53,734,000 compared to $33,084,000 for the first quarter of 2010.

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 margin, on a tax equivalent basis, was 3.0%, 3.3% and 3.5% in the first quarters of 2011, 2010 and 2009, respectively. The decreases in 2011 and 2010 are attributable to the decrease in rates of return on interest earning assets. Tax equivalent net interest income increased in the first quarter of 2011 and 2010 by 9.9% and 0.8% and decreased in 2009 by 7.9%.

Average net loans increased by 3.6% and 4.5% in the first quarters of 2011 and 2010, compared to a decrease of 0.1% in the first quarter of 2009. Loan interest income decreased by 4.2%, in the first quarter of 2011, compared to an increase of 0.4% in the first quarter of 2010 and a decrease of 10.9% in the same period of 2009. Loan yields fell by 49, 27 and 82 basis points in the first quarters of 2011, 2010 and 2009, respectively. Yields on average taxable securities, in the first quarters of 2011, 2010 and 2009, equaled 2.8%, 3.2% and 4.4%, respectively. Interest earned on average taxable securities increased by 29.5% in the first quarter of 2011 compared to declines of 24.4% and 16.2% in the first quarters of 2010 and 2009, due to higher volumes. Income on average tax-exempt securities increased 42.0% and 82.9% in the first quarters of 2011 and 2010 due to increased volumes. Yields and income on average tax-exempt securities remained relatively unchanged in the first quarter of 2011 compared to the same period in 2010 and 2009. The average volume of all securities in the first quarters of 2011 and 2010, increased by 47.8% and 8.4%, respectively, compared to a decrease in 2009 of 3.4%. Total securities income increased by 30.8% in 2011 compared to a decrease of 19.3% in 2010 as a result of higher volumes. The average balance of federal funds sold decreased in the first quarters of 2011, 2010 and 2009 by 84.7%, 79.2% and 17.7%. Income from federal funds sold decreased by 75.0%, 88.9% and 130.5% in the first quarters of 2011, 2010 and 2009, respectively. This decrease is a result of lower volumes and yields.

Total average interest bearing liabilities increased by 18.1% and 22.4%, in the first quarters of 2011 and 2010 compared to a decrease of 5.7% in the first quarter of 2009. Rates paid on these funds decreased 26, 70 and 78 basis points in the first quarter of 2011, 2010 and 2009, respectively. The decrease in rates paid on these funds resulted in a decrease in interest expense of $94,000, $349,000 and $710,000 for the first quarters of 2011, 2010 and 2009. Interest bearing checking, money market fund, and savings average balances increased by 22.3% and 41.7% for the first quarters of 2011 and 2010 and decreased by 11.8% in the first quarter of 2009. The increases in 2011 and 2010 were a result of gaining public fund customers and the decrease in 2009 was primarily a result of losing a public fund depository customer that was subject to bid. Average time deposit balances increased by 6.2% in the first quarter of 2011 and decreased by 4.0% in the first quarter of 2010, compared to an increase of 11.9% in the first quarter of 2009. The average rate paid on these funds was 1.5%, 2.0% and 3.2% for the first quarters of 2011, 2010 and 2009. Interest expense on time deposits decreased by 19.8%, 39.7% and 15.6% in the first quarters of 2011, 2010 and 2009, because of lower rates paid. Average federal funds purchased and securities sold under agreements to repurchase in the first quarter of 2011 increased by 36.5% and decreased by 18.6% and 32.2% in the first quarters of 2010 and 2009. Interest rates paid on these funds decreased by 10, 4 and 250 basis points for the first quarters of 2011, 2010 and 2009. Table 1 and 2 provide more information on the Company’s net interest income and rate and volume variances.

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

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

Average loans, net of unearned income, as a percentage of average earning assets, was 41.4%, 54.0% and 45.7%, for the first quarters of 2011, 2010 and 2009, respectively. The average loan to deposit ratio was 43.6%, 52.2% and 54.3% at the end of the first quarters of 2011, 2010 and 2009, respectively. Average net loans increased by 3.6% and 4.5% in the first quarters of 2011 and 2010 and decreased by 0.1% in the first quarter of 2009. Loan interest income decreased by 4.2% at first quarter-end 2011 and increased by 0.4% at first quarter-end 2010 compared to a decrease of 10.9% in the same period of 2009.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $136,680,000 at first quarter-end 2009 to $149,492,000 at first quarter-end 2010 to $162,297,000 at first quarter-end 2011. Commercial and industrial loans totaled $24,467,000, $26,386,000 and $27,648,000 at first quarter-end 2011, 2010, and 2009, respectively. Consumer loans totaled $27,822,000 at first quarter-end 2011 and $33,939,000 at first quarter-end 2010, compared to $35,527,000 at first quarter-end 2009. Other loans at first quarter-end 2011 decreased slightly when compared to the same period in 2010.

Allowance for Loan Losses

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

The allowance to total loans was 1.5% at first quarter-end 2011 and 1.4% at first quarter-end 2010, compared to 1.5% at first quarter-end 2009.

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

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.

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 fair market value of the underlying 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 $8,219,000, $4,425,000 and $2,115,000, at first quarter-end 2011, 2010, and 2009, respectively. Non-performing assets, as a percentage of total loans, were 3.8% at the first quarter-end 2011, 2.0% at the first quarter-end 2010 and 1.0% at first quarter-end 2009. Non-accrual loans and accruing loans over 90 days past due totaled $5,419,000 or 2.5% of total loans, $2,278,000 or 1.0% of total loans and $1,879,000, or 0.9% of total loans, at first quarter-end 2011, 2010, and 2009, respectively. Other real estate totaled $2,800,000 or 1.3% of total loans, $2,147,000 or 1.0% of total loans and $236,000 or 0.1% of total loans at first quarter-end 2011, 2010 and 2009. The increase in non-performing assets is a result of declining economic conditions which include high unemployment, declines in real estate value, and other factors. 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 and had book values totaling $275,910,000, $186,796,000 and $148,528,000, for the first quarter-end 2011, 2010 and 2009, respectively. The large increase in securities in 2011 and 2010 is a result of increases in deposits resulting from gaining additional public fund customers.

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 inter-market 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 Codification 320 Investment 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 $(2,345,000), $157,000 and $4,000 were included in stockholders’ equity at first quarter-end 2011, 2010, and 2009, 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. A portion of the Company’s investment portfolio is pledged as collateral against public deposits, treasury tax and loan on securities sold under agreements to repurchase.

Yields on average taxable securities in the first quarters of 2011 and 2010 equaled 2.8% and 3.2%, compared to 4.4% in the first quarter of 2009. Interest earned on average taxable securities increased by 29.5% in the first quarter of 2011, compared to a decline of 24.4% and 16.2% in the first quarters of 2010 and 2009. The increase in 2011 is due to higher volumes, and the decreases in 2010 and 2009 are due to lower yields. Income increased on average tax-exempt securities by 42.0% and 82.9% in the first quarters of 2011 and 2010 due to higher volumes. Yields and income on average tax-exempt securities remained relatively unchanged in the first quarter of 2009 compared to the same period of 2008. The average volume of all securities increased by 47.8% and income increased by 30.9% in the first quarter of 2011, compared to an increase of 8.4% in volume and a decrease of 19.3% in income in the first quarter of 2010, compared to a decrease of 3.4% in volume and 15.9% in income in the first quarter of 2009, 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 2011, 2010 and 2009 by 84.8%, 79.2% and 17.7%, respectively. Income from these funds decreased by 75.0%, 88.9% and 130.5% in the first quarters of 2011, 2010 and 2009, 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 quarters of 2011 and 2010 are a result of excess funds being placed in a Federal Reserve Excess Balance account shown as other interest earning assets in Table 1.

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 23.9% and 8.9% at first quarter-end 2011 and 2010 and decreased by 4.2% at first quarter-end 2009, respectively. 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, excess 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 represents 2.9%, 2.6% and 3.5% of total average deposits for the years 2011, 2010 and 2009, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

Off Balance Sheet Arrangements

As of March 31, 2011, the Company had unfunded loan commitments outstanding of $19,029,000 and outstanding standby letters of credit of $830,000. 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, 2010, the plan was underfunded by $2,457,000, compared to an underfunded amount of $1,907,000 at year-end 2009. The underfunded status is the result of the poor market conditions in 2008 and the resulting effect on the performance of the plan’s investment assets. Management is monitoring the funded status of its defined benefit plan closely and has begun to contribute additional funding to the plan during 2011. See Notes to Financial Statements — Note 3.

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 20.7% at quarter-end 2011, 20.8% at quarter-end 2010 and 21.4% at quarter-end 2009. Tier 1 risk-based was 19.5% at quarter-end 2011, 19.7% at quarter-end 2010 and 20.1% at quarter-end 2009. The leverage ratio at quarter-end 2011, 2010 and 2009 was 9.7%, 11.0% and 11.5%, 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 first quarter-end 2011, 2010 and 2009 was 9.3%, 9.7% and 10.9%, 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 9.2% in the first quarter of 2011, 6.2% in the first quarter of 2010 and decreased by 12.2% in the first quarter of 2009. These fees are generated from customer accounts and are affected by the number of accounts, and the balances of accounts subject to service charges. The Company updated its pricing structure during the first quarter of 2011 and this change is reflected in the increase in service charge income. Miscellaneous income for the first quarter of 2011 decreased 36.4% compared to an increase of 14.5% at first quarter of 2010 and decreased by 21.0% for the first quarter of 2009. The decrease in 2011 is due to a gain recognized on real estate owned in the first quarter of 2010 of $116,000.

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.

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.

Salaries and employee benefits expense decreased in the first quarter of 2011 by 20.8% and increased in the first quarters of 2010 and 2009 by 3.3% and 11.4%, respectively. The decrease in 2011 is due to a reduction in the number of full time equivalent employees, a lower defined benefit pension expense, and the number of payrolls recognized during 2011 verses 2010. The increase in 2009 is attributed to increases in employee raises and an increase in the defined benefit pension plan expense. Premise expense decreased by 11.2% in the first quarter of 2011 and increased by 2.9% and 15.5%, in the first quarters 2010 and 2009, respectively. The decrease in 2011 is attributed to a reduction in property taxes on the main branch and depreciation expense overall. 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 21.0% and 7.9% in the first quarters of 2011 and 2010 and decreased by 14.9% when comparing the first quarter of 2009 to the same period in 2008. The increase in 2011 is due to merchant fees absorbed on behalf of a public fund deposit customer. The increase in the first quarter of 2010 is primarily 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 $360,000, $246,000 and $336,000 for the first quarter-ended 2011, 2010 and 2009, 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 quarter ended March 31, 2011, 2010 and 2009:


	2011							2010							2009
			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	$	219,836	$	3,336		6.07	%	$	212,286	$	3,484		6.56	%	$	203,173		$	3,469		6.83	%
Securities held to maturity:
Taxable		82,148		507		2.47	%		125,344		1,061		3.39	%		103,744			1,252		4.83	%
Exempt from Federal income tax		27,097		213		3.14	%		19,267		150		3.11	%		9,465			82		3.47	%
Securities available for sale:
Taxable		147,144		1,101		2.99	%		28,900		181		2.51	%		46,886			391		3.34	%
Other interest earning assets		53,734		27		0.20	%		33,084		16		0.19	%		—			—		0.00	%
Federal funds sold and securities purchased under agreements to resell		1,117		—		0.00	%		7,316		2		0.11	%		35,237			18		0.20	%


Total interest-earning assets	$	531,076	$	5,184		3.90	%	$	426,197	$	4,894		4.59	%	$	398,505		$	5,212		5.23	%
Non interest-earning assets:
Cash and due from banks		17,011							18,496							18,069
Bank premises and equipment		15,632							16,659							17,765
Other assets		15,931							15,198							13,742
Allowance for possible loan losses																(3,093	)


Total assets	$	579,650						$	476,550						$	444,988

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,
	2011 Compared to 2010									2010 Compared to 2009
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net

Interest income on:
Loans	$	7,550			(148	)	$	7,402		$	9,113		$	(27	)	$	9,086
Investment securities:
Taxable		(43,196	)		(554	)		(43,750	)		21,600			(144	)		21,456
Exempt from Federal income tax		7,830			63			7,893			9,802			(36	)		9,766
Securities available for sale:
Taxable		118,244			920			119,164			(17,986	)		(83	)		(18,069	)
Other interest earning assets		20,650			11			20,661			33,084			16			33,100
Federal funds sold and securities purchased under agreements to resell		(6,199	)		(2	)		(6,201	)		(27,921	)		(9	)		(27,930	)


Total	$	104,879		$	290		$	105,169		$	27,692		$	(283	)	$	27,409


Interest expense on:
Int DDA’s & Savings deposits	$	56,214		$	12		$	56,226		$	74,112		$	(30	)	$	74,082
Time deposits		6,680			(105	)		6,575			(4,487	)		(117	)		(4,604	)
Federal funds purchased, and securities sold under agreements to repurchase		3,925			(1	)		3,924			(2,454	)		(4	)		(2,458	)


Total	$	66,819		$	(94	)	$	66,725		$	67,171		$	(151	)	$	67,020


Changes in net interest income-tax equivalent	$	38,060		$	384		$	38,444		$	(39,479	)	$	(132	)	$	(39,611	)

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.


	March 31,
	2011		2010		2009

Securities available for sale
U. S. Treasury and other U. S. Government agencies	$	178,749	$	27,268	$	56,245
Obligations of states and political subdivisions		—		—		—
Mortgage-backed securities		—		—		—
Other securities		125		153		72


Total securities available for sale	$	178,874	$	27,421	$	56,317


Investment securities
U. S. Treasury and other U. S. Government agencies	$	66,610	$	136,205	$	82,009
Obligations of states and political subdivisions		29,526		22,270		9,602
Mortgage-backed securities		—		—		—
Other securities		900		900		600


Total investment securities		97,036		159,375		92,211


Total securities available for sale and investment securities	$	275,910	$	186,796	$	148,528

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, 2011:


	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	$	—		0.00	%	$	10,010		1.38	%	$	168,739		3.05	%	$	—		0.00	%	$	178,749
Other securities		125		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		125


Total securities available for sale	$	125		0.00	%	$	10,010		1.38	%	$	168,739		3.05	%	$	—		0.00	%	$	178,874


Investment securities
U.S. Treasury and other U.S. Government agencies	$	2,000		3.05	%	$	42,506		2.31	%	$	22,104		2.30	%	$	—		0.00	%	$	66,610
Obligations of states and political subdivisions		1,036		4.66	%		14,124		4.08	%		10,341		4.24	%		4,025		5.92	%		29,526
Other securities		900		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		900

Total investment securities	$	3,936		3.50	%	$	56,630		2.87	%	$	32,445		2.99	%	$	4,025		5.92	%	$	97,036


Total securities available for sale and investment securities	$	4,061		3.50	%	$	66,640		2.78	%	$	201,184		3.04	%	$	4,025		5.92	%	$	275,910

At March 31, 2011, the Company held investment securities issued by the State of Mississippi with an aggregate carrying amount of $27.9 million and a market value of $28.6 million. The yield on obligations of states and and political subdivisions has been calculated on a fully tax equivalent basis.

TABLE 5
SECURITIES ANALYSIS


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	MARCH 31, 2011									MARCH 31, 2011
			GROSS		GROSS							GROSS		GROSS
			UNREALIZED		UNREALIZED							UNREALIZED		UNREALIZED
	AMORTIZED COST		GAINS		LOSSES			FAIR VALUE		AMORTIZED COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	182,355	$	99	$	(3,705	)	$	178,749	$	66,610	$	971	$	—		$	67,581
STATE AND MUNICIPAL SECURITIES		—		—		—			—		29,526		793		(128	)		30,191

OTHER SECURITIES		72		53		—			125		900		—		—			900


TOTAL	$	182,427	$	152	$	(3,705	)	$	178,874	$	97,036	$	1,764	$	(128	)	$	98,672


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	MARCH 31, 2010									MARCH 31, 2010
			GROSS		GROSS							GROSS		GROSS
			UNREALIZED		UNREALIZED							UNREALIZED		UNREALIZED
	AMORTIZED COST		GAINS		LOSSES			FAIR VALUE		AMORTIZED COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	27,111	$	194	$	(37	)	$	27,268	$	136,205	$	684	$	(511	)	$	136,378
STATE AND MUNICIPAL SECURITIES		—		—		—			—		22,270		581		(98	)		22,753

OTHER SECURITIES		72		81		—			153		900		—		—			900


TOTAL	$	27,183	$	275	$	(37	)	$	27,421	$	159,375	$	1,265	$	(609	)	$	160,031


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	MARCH 31, 2009									MARCH 31, 2009
			GROSS		GROSS							GROSS		GROSS
			UNREALIZED		UNREALIZED							UNREALIZED		UNREALIZED
	AMORTIZED COST		GAINS		LOSSES			FAIR VALUE		AMORTIZED COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	56,239	$	200	$	(215	)	$	56,224	$	82,009	$	1,552	$	—		$	83,561
STATE AND MUNICIPAL SECURITIES		—		—		—			—		9,602		276		(20	)		9,858

OTHER SECURITIES		72		22		—		$	94		600		—		—			600


TOTAL	$	56,311	$	222	$	(215	)	$	56,318	$	92,211	$	1,828	$	(20	)	$	94,019

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:


	2011		2010		2009

Commercial & Industrial	$	24,467	$	26,386	$	27,648
Real Estate		162,297		149,492		136,680
Consumer Loans		27,822		33,939		35,527
Other Loans		4,014		6,629		5,486


Total Loans	$	218,600	$	216,446	$	205,341

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

The following table shows the amount of loans outstanding as of March 31, 2011 (excluding those in non-accrual status ) based on the scheduled repayments of principal:


Remaining Maturity Fixed Rate
3 months or less	$	24,134
Over 3 months through 12 months		31,394
Over 1 year through 5 years		148,340
Over 5 years		6,015

Over 1 year but variable rate		3,298


Total Loans	$	213,181

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,
	2011		2010		2009

Beginning Balance	$	3,268	$	3,100	$	3,100
Charge Offs:
Commercial & Industrial		—		43		9
Real Estate		195		30		16
Consumer		157		230		117
Other		—		—		—

Total Charge Offs		352		303		142

Recoveries:
Commercial & Industrial		—		17		5
Real Estate		2		17		—
Consumer		108		137		63
Other

Total Recoveries		110		171		68

Net Charge Offs		242		132		74
Provision for Possible Losses		242		132		74


Ending Balance	$	3,268	$	3,100	$	3,100


Total Loans Outstanding	$	218,600	$	216,446	$	205,341

Average daily loans	$	219,836	$	212,286	$	203,173


	2011			2010			2009
Percentages:
Allowance for loan losses to end of quarter total loans		1.49	%		1.43	%		1.51	%
Allowance for loan losses to average loans		1.49	%		1.46	%		1.53	%
Allowance for loan losses to nonperforming assets		39.76	%		70.06	%		146.57	%
Net charge offs to average loans		0.110	%		0.062	%		0.036	%

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,
	2011					2010					2009
	% Gross			Loan Loss		% Gross			Loan Loss		% Gross			Loan Loss
	Loans			Allowance		Loans			Allowance		Loans			Allowance
	Outstanding			Allocation		Outstanding			Allocation		Outstanding			Allocation

Commercial & Industrial		1.80		$	59		7.06		$	219		7.68		$	238
Real Estate		81.66			2,669		61.81			1,916		28.90			896
Consumer		12.29			402		22.52			698		23.23			720
Other		4.25			139		8.61			267		24.39			756
Unallocated		—			—		—			—		15.81			490

		100	%	$	3,268		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.


	2011			2010			2009
Non-accrual Loans & Accruing Loans Past Due 90 Days or more	$	5,419		$	2,278		$	1,879
Other Real Estate		2,800			2,147			236

	$	8,219		$	4,425		$	2,115

Nonperforming Assets as % of Total Loans		3.76	%		2.04	%		1.03	%
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans		2.48	%		1.05	%		0.92	%

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,
	2011		2010		2009

Non-interest bearing deposits	$	82,365	$	47,993	$	84,525
Interest-bearing deposits		308,209		251,995		177,883
Interest-bearing time deposits		113,708		107,028		111,515


Total	$	504,282	$	407,016	$	373,923

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, 2011 are summarized in the following table:


Time remaining until maturity
3 months or less	$	16,382
Over 3 through 12 months		43,375
Over 12 months		9,101


Total	$	68,858

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

2011
Federal funds purchased and securities sold under agreements to repurchase	$	14,254	$	14,670		0.16	%	$	14,254

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


*		on daily average balance

TABLE 14
INTEREST SENSITIVITY
(Dollars in Thousands)

The following table reflects the interest sensitivity of the Company over various periods as of March 31, 2011, 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	$	26,286		$	31,461		$	151,570		$	6,015		$	215,332
Investment securities		1,232			2,704			56,630			36,470			97,036
Securities available for sale		125			—			10,010			168,739			178,874
Other interest earning assets		35,589			—			—			—			35,589
Federal funds sold and securities purchased under agreements to resell		97			—			—			—			97


Total interest-earning assets		63,329			34,165			218,210			211,224			526,928
Non-interest-earning assets											50,303			50,303


Total assets	$	63,329		$	34,165		$	218,210		$	261,527		$	577,231


Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits	$	27,540		$	88,741		$	189,722		$	—		$	306,003
Time deposits		25,092			70,162			17,640			—			112,894
Federal funds purchased, and securities sold under agreements to repurchase		14,254			—			—			—			14,254


Total interest-bearing liabilities		66,886			158,903			207,362			—			433,151
Non-interest-bearing deposits		12,902			37,947			25,045			—			75,894
Other liabilities		—			—			—			16,122			16,122
Stockholders’ equity		—			—			—			52,064			52,064


Total liabilities and stockholders’ equity	$	79,788		$	196,850		$	232,407		$	68,186		$	577,231


Interest sensitive gap	$	(16,459	)	$	(162,685	)	$	(14,197	)	$	193,341
Cumulative interest sensitive gap	$	(16,459	)	$	(179,144	)	$	(193,341	)	$	0
Cumulative interest sensitive gap as a percent of total assets		-2.85	%		-31.04	%		-33.49	%		0.00	%

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

The following table presents, as of March 31, 2011, significant fixed and determinable contractual obligations to third parties by payment date:


	PAYMENTS DUE IN
	ONE YEAR OR		ONE TO		THREE TO		OVER FIVE
	LESS		THREE YEARS		FIVE YEARS		YEARS		TOTAL

Deposits without a stated maturity	$	175,673	$	106,931	$	99,293	$	—	$	381,897
Consumer certificates of deposit		95,254		13,088		4,552		—		112,894
Federal funds borrowed & repurchase agreements		14,254		—		—		—		14,254
Operating leases										—
Purchase obligations		—		—		—		—		—

COMMITMENTS

The following table details the amounts and expected maturities of significant commitments as of March 31, 2011:


	ONE YEAR OR		ONE TO		THREE TO		OVER FIVE
	LESS		THREE YEARS		FIVE YEARS		YEARS		TOTAL

Commitments to extend credit:
Commercial	$	10,214	$	126	$	2	$	—	$	10,342
Residential real estate		3,241						—		3,241
Revolving home equity and credit card lines		247		683		134		—		1,064
Other		4,382						—		4,382
Standby letters of credit		830						—		830


Item 4.		Controls and Procedures

Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the 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, 2011 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 1A.		Risk Factors

There were no material changes to the Company’s risk factors as previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.


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. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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 16, 2011	By:	/s/ Royce Cumbest
		Royce Cumbest, Chairman of the Board
		President and Chief Executive Officer


Date: May 16, 2011	By:	/s/ Elise Bourgeois
		Elise Bourgeois, Senior Vice President,
		Cashier and Chief Financial Officer

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Merchants & Marine Bancorp, Inc. 10-Q