UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 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). 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.


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 August 12, 2011, 1,330,338 shares of Common Stock were outstanding.

TABLE OF CONTENTS



Part I. Financial Information			3

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			31

Part II. Other Information			32

Item 1. Legal Proceedings			32

Item 1A. Risk Factors			32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32

Item 3. Defaults Upon Senior Securities			32

Item 4. (Removed and Reserved)			32

Item 5. Other Information			32

Item 6. Exhibits			32

SIGNATURES			33

EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I. Financial Information


Item 1.		Financial Statements

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


	(Unaudited)			(Audited)
	June 30, 2011			December 31, 2010
ASSETS:
Cash and due from banks	$	29,703,412			20,010,142
Federal funds sold		97,000			3,147,000
Securities:
Available for sale, at market value		153,925,747			116,333,500
Held to maturity, at amortized cost		97,231,989			112,981,596
Non-marketable equity securities		900,060			900,060
Loans, less allowance for loan losses of $3,131,205 and $3,268,217, respectively		217,980,590			216,470,346
Property and equipment, net of depreciation		15,296,331			15,727,476
Other real estate owned		2,748,923			2,275,723
Accrued income		2,583,669			2,401,057
Other assets		13,433,227			13,148,056


TOTAL ASSETS	$	533,900,948			503,394,956


LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits:
Non-interest bearing demand	$	80,687,003			79,614,176
Interest bearing demand, savings, money market, and other time		377,523,260			348,586,934

Total deposits		458,210,263			428,201,110
Federal funds purchased and securities sold under agreements to repurchase		9,183,433			13,729,528
Accrued expenses and other liabilities		10,476,146			9,113,767

Total liabilities		477,869,842			451,044,405


Stockholders’ Equity:
Common stock — $2.50 par value; 5,000,000 shares authorized; 1,330,338 shares issued and outstanding		3,325,845			3,325,845
Surplus		14,500,000			14,500,000
Retained earnings		40,376,733			39,013,928
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale		399,770			(1,917,980	)
Unrealized (loss) on defined benefit pension plan		(2,571,242	)		(2,571,242	)

Total stockholders’ equity		56,031,106			52,350,551


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	533,900,948			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				Six Months Ended
	June 30				June 30
	2011		2010		2011		2010
Interest Income:
Interest and fees on loans	$	3,468,473	$	3,604,110	$	6,804,645	$	7,087,973
Interest on investment securities:
Taxable		1,657,048		1,315,797		3,266,291		2,545,129
Exempt from federal income tax		273,645		151,458		485,306		313,732
Interest on federal funds sold		10,613		20,878		37,683		39,216

Total interest income		5,409,779		5,092,243		10,593,925		9,986,050


Interest Expense:
Interest on deposits		805,393		920,712		1,709,162		1,915,141
Interest on federal funds purchased and securities sold under agreements to repurchase		5,776		4,873		11,779		12,024

Total interest expense		811,169		925,585		1,720,941		1,927,165


Net interest income		4,598,610		4,166,658		8,872,984		8,058,885
Provision for loan losses		1,066,653		244,242		1,308,277		376,106

Net interest income after provision for loan losses		3,531,957		3,922,416		7,564,707		7,682,779


Non-Interest Income:
Service charges		1,172,639		1,142,825		2,268,255		2,146,317
Miscellaneous		439,425		652,273		798,373		1,195,362

Total non-interest income		1,612,064		1,795,098		3,066,628		3,341,679


Non-Interest Expense:
Salaries and employee benefits		1,717,757		1,801,648		3,397,197		3,921,723
Premises		743,690		758,246		1,411,259		1,542,740
Miscellaneous		1,190,713		1,495,403		2,849,371		2,884,191

Total non-interest expense		3,652,160		4,055,297		7,657,827		8,348,654


Income before income taxes		1,491,861		1,662,217		2,973,508		2,675,804

Provision for income taxes		519,138		506,589		879,017		752,359


NET INCOME	$	972,723	$	1,155,628	$	2,094,491	$	1,923,445


NET INCOME PER COMMON SHARE	$	0.73	$	0.87	$	1.57	$	1.45

See accompanying notes to condensed consolidated financial statements.

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


	Three Months Ended				Six Months Ended
	June 30				June 30
	2011		2010		2011		2010

Net income	$	972,723	$	1,155,628	$	2,094,491	$	1,923,445

Other comprehensive income, net of tax:

Unrealized holding gains arising during period		2,744,991		78,203		2,317,750		20,003


Comprehensive income	$	3,717,714	$	1,233,831	$	4,412,241	$	1,943,448

See accompanying notes to condensed consolidated financial statements.

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


	For the Six Months Ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	2,094,491		$	1,923,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		628,798			716,075
Provision for loan losses		1,308,277			376,106
Net premium amortization		110,250			38,415
Reinvested earnings on securities		—			(869	)
(Increase) Decrease in accrued income receivable		(182,612	)		215,723
(Decrease) in interest payable		(28,713	)		(60,089	)
(Gain) on disposition of property and equipment		(6,200	)		(90,870	)
(Gain) on sale of securities		(196,079	)		(230,761	)
Net change in other assets and liabilities		244,513			960,526


Net Cash Provided by Operating Activities		3,972,725			3,847,701


CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Federal funds sold		3,050,000			6,380,000
Purchase of securities available for sale		(115,552,300	)		(51,930,830	)
Proceeds from sales and maturities of securities available for sale		81,696,169			37,232,500
Purchase of securities held to maturity		(4,753,937	)		(99,159,221	)
Proceeds from maturities of securities held to maturity		20,365,000			82,720,000
Net (increase) in loans		(3,317,521	)		(6,448,492	)
Purchase of property and equipment		(197,654	)		(92,239	)
Proceeds from sale of property and equipment		32,000			543,180


Net Cash (Used) in Investing Activities		(18,678,243	)		(30,755,102	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		30,009,153			47,730,433
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		(4,546,095	)		2,322,760
Dividends paid to stockholders		(1,064,270	)		(1,064,270	)


Net Cash Provided by Financing Activities		24,398,788			48,988,923


Net Increase in Cash and Due from Banks		9,693,270			22,081,522

Cash and Due From Banks, Beginning		20,010,142			14,451,113


Cash and Due From Banks, Ending	$	29,703,412		$	36,532,635

See accompanying notes to condensed consolidated financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)


										Accumulated
										Other
	Common Stock						Retained			Comprehensive
	Shares 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		—		—		—		2,094,491			—

Cash dividends, $.55 per share		—		—		—		(731,686	)		—

Changes in unrealized gain (loss) on securities available-for-sale, net of taxes of $1,193,992		—		—		—		—			2,317,750


Balance, June 30, 2011		1,330,338	$	3,325,845		14,500,000		40,376,733			(2,171,472	)

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 and Six Months Ended June 30, 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.

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.

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.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
As of and for the Three and Six Months Ended June 30, 2011

2. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

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


	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and federal funds sold	$	28,862		28,862	$	23,157		23,157
Securities:
Available-for-sale		153,926		153,926		116,334		116,334
Held-to-maturity		97,232		99,314		112,982		114,389
Non-marketable		900		900		900		900

Loans, net of allowance		217,981		221,276		216,470		216,162

Financial liabilities
Deposits		458,210		458,270		428,201		428,195
Federal funds purchased and securities sold under agreements to repurchase		9,183		9,183		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						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Net periodic benefit cost (income):
Service cost	$	95			101		$	190			202
Interest cost		150			151			300			302
Expected return on plan assets		(181	)		(165	)		(362	)		(330	)
Amortization (gain)/loss		65			68			130			136

Net periodic pension expense:	$	129			155		$	258			310

4. SUBSEQUENT EVENTS

We have evaluated subsequent events through August 10, 2011, the date of issuance of the condensed consolidated financial statements. On August 3, 2011, Merchants & Marine Bank entered into a Purchase and Assumption Agreement to acquire approximately $55 million of assets and certain liabilities of the branch offices of Heritage First Bank located in Crossville and Gulf Shores, Alabama. The agreement is subject to applicable regulatory approvals and is expected to close during the fourth quarter of 2011.


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 71st consecutive quarter indicating that the 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 June 30, 2011, the Company’s assets totaled $534 million and it employed 125 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 second quarter of 2011 was $973,000, a decrease of 15.8% from $1,156,000 for the second quarter of 2010. Year-to-date net income at June 30, 2011 was $2,094,000, compared to $1,923,000 for the same period of 2010, an increase of 8.9%. The following discussions, tables, and the accompanying financial statements outline the change in earnings from the first two quarters of 2011, 2010 and 2009. Return on average assets for the first two quarters of 2011 was 0.7%, compared to 0.8% for the same period of 2010, and 0.7% for the same period of 2009. Return on average equity was 8.0%, 7.5% and 6.4% in the first two quarters of 2011, 2010 and 2009, respectively. Year to date earnings per share in the first six months of 2011, 2010 and 2009 were $1.57, $1.45 and $1.19, respectively.

Earning Assets

A detailed comparison of the Company’s average earning assets for the second quarter 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 two quarters of 2011 totaled $522,357,000 compared to $446,624,000 in 2010 and $404,456,000 for the same period in 2009. The increase in average earning assets in 2011 is a result of increases in deposits. Average net loans increased by $6,458,000, $8,031,000 and $4,715,000 in the first two quarters of 2011, 2010 and 2009, respectively. Average securities increased by $74,118,000 and $30,030,000, in the first two quarters of 2011 and 2010, respectively, compared to a decrease of $18,901,000, for the first two quarters of 2009. The average balance of federal funds sold decreased by $7,285,000, $30,647,000 and $3,986,000 for the first two quarters of 2011, 2010 and 2009, respectively. Other earning assets consist of balances maintained in a Federal Reserve excess balance account. The average balance for the first two quarters of 2011 totaled $37,196,000 compared to $34,754,000 for the first two quarters 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 3.2%, 3.2% and 3.3% for the second quarter of 2011, 2010 and 2009, respectively. The decreases in 2011 and 2010 are attributable to the decreases in rates of return on interest earning assets compared to 2009. Tax equivalent net interest income increased in the first two quarters of 2011 and 2010 by 12.2% and 5.9% and decreased in the first two quarters of 2009 by 13.1%.

Average net loans increased by 3.0%, 3.9% and 2.3% in the first two quarters of 2011, 2010 and 2009, respectively. In the first two quarters of 2011, loan interest income decreased by 2.7%, compared to an increase of 0.8% in 2010 and a decrease of 7.8% in 2009. Loan yields were 6.2%, 6.6% and 6.8% in the first two quarters of 2011, 2010 and 2009, respectively. The changes in loan yields are related to market conditions. Loan yields respond to many factors, including cuts in the prime interest rate, Federal Reserve rate reductions and competition. Yields on average held-to-maturity taxable securities equaled 2.4% in the first two quarters of 2011, compared to 3.2% in the first two quarters of 2010 and 4.5% in the first two quarters of 2009, due to decreased interest earnings. Yields on tax-exempt securities decreased by 2 basis points as maturing securities were reinvested in lower earning rate securities. The average volume of all securities increased by 38.9% and 18.7% in the first two quarters of 2011 and 2010, compared to a decrease of 10.5% in the first two quarters of 2009. The increase in volumes of securities is directly related to increases in deposits during the first two quarters of 2011 and 2010. Total securities income increased by 29.5% in the first two quarters of 2011, compared to decreases of 8.6% and 24.7% in the first two quarters of 2010 and 2009, respectively. The average balance of federal funds sold decreased by $7,285,000, $30,647,000 and $3,986,000 for the second quarters of 2011, 2010 and 2009, respectively. Income from these funds decreased by 94.2%, 86.1% and 93.4%, in the first two quarters of 2011, 2010 and 2009, respectively. The decrease in the first two quarters of 2011 and 2010 is attributable to reinvesting a large portion of excess funds into a Federal Reserve excess balance account, shown as other earning assets in Table 1. The decrease in 2009 income was due to lower rates earned.

Total average interest bearing liabilities increased 22.7% and 19.7% in the first two quarters of 2011 and 2010, compared to a decrease of 1.7% in 2009. Rates paid on these funds decreased by 36, 71 and 75 basis points in the first two quarters of 2011, 2010 and 2009, respectively. The decrease in the rates paid on these funds resulted in a decrease in interest expense of $353,000, $753,000 and $1,183,000 for the first two quarters of 2011, 2010 and 2009, respectively. Interest-bearing checking, money market funds and savings accounts average balances increased by 31.0% and 36.2% in the second quarter of 2011 and 2010 and decreased by 3.9% for the second quarter of 2009. Interest expense on these funds decreased 18.7%, 11.0% and 8.3% in the first two quarters of 2011, 2010 and 2009, respectively. Average time deposit balances increased by 3.9% in the first two quarters of 2011 and decreased by 2.4% in 2010 compared to an increase of 10.3% in the first two quarters of 2009. The average rate paid on these funds was 1.5%, 1.9% and 3.0% for the first two quarters of 2011, 2010 and 2009, respectively. Interest expense on time deposits decreased 18.2%, 38.1% and 17.7% in the first two quarters of 2011, 2010 and 2009, respectively. Average federal funds purchased and securities sold under agreements to repurchase increased 27.2% for the first two quarters of 2011, compared to decreases of 16.0% and 38.0% in the first two quarters of 2010 and 2009, respectively. Interest expense remained the same in the first two quarters of 2011 compared to 2010 and decreased by 45.4% or 12 basis points, in the first two quarters of 2010 compared to 2009, due to lower rates paid and volumes. 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. 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 42.1%, 47.8% and 50.8%, for the first two quarters of 2011, 2010 and 2009, respectively. The average loan-to-deposit ratio was 44.6%, 50.2% and 54.2% at June 30, 2011, 2010 and 2009, respectively. Average net loans increased by $6,458,000, $8,031,000 and $4,715,000 at second quarter-end 2011, 2010 and 2009, respectively.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $141,329,000 at second quarter-end 2009, to $152,181,000 at second quarter-end 2010, to $164,276,000 at second quarter-end 2011. Real estate loans increased $12,095,000, $10,852,000 and $18,461,000 at second quarter-end 2011, 2010 and 2009, respectively. Commercial and industrial loans and loans to municipal and local governments totaled $25,870,000, $26,297,000 and $26,962,000 at the second quarter-end 2011, 2010 and 2009, respectively. Consumer loans decreased from $37,835,000 and $32,245,000 at second quarter-end 2009 and 2010, respectively, to $27,494,000 at second quarter-end 2011. 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 allowance for loan losses (ALL) determine the allocations made to the loan loss reserve. Management considers the following factors in determining the adequacy of the allowance: (1) periodic reviews of individual credits, (2) gross and net charge-offs, (3) loan portfolio growth, (4) historical levels of the allowance to total loans, (5) the value of collateral securing loans, (6) the level of past due and non-accruing loans and (7) current and future economic conditions and their potential impact on the loan portfolio.

The allowance to total loans was 1.4% at second quarter-end 2011 and 2010 compared to 1.5% at second 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 are yet to be identified. The allowance is allocated to absorb losses on all loans and is not restricted to any one group of loans. Company management has determined that the balance of the ALL is adequate to cover potential future losses. The provision for loan losses totaled $1,308,000, $376,000 and $135,000 for the first two quarters of 2011, 2010 and 2009, respectively. The increase in the loan loss provision for second quarter-end 2011 was due to the write down of a few large commercial customers. If economic conditions deteriorate beyond management’s current expectations, an increase to the provision for loan losses may be necessary. See Tables 8 and 9 for a detailed analysis of the Company’s allowance for loan losses.

Critical Accounting Policies

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

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

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

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

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

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

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

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

Asset Quality

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

Total non-performing assets totaled $7,983,000, $4,175,000 and $2,940,000 at June 30, 2011, 2010 and 2009, respectively. Non-performing assets, as a percentage of total loans, were 3.7% at June 30, 2011, 2.0% at June 30, 2010, and 1.5% at June 30, 2009. Non-accrual loans and accruing loans over 90 days past due totaled $5,234,000, or 2.4% of total loans, $2,477,000, or 1.1% of total loans, and $2,839,000, or 1.4% of total loans, at June 30, 2011, 2010 and 2009, respectively. Other real estate totaled $2,749,000, or 1.3% of total loans, at June 30, 2011, $1,698,000, or 0.8% of total loans, at June 30, 2010 and $101,000, or 0.1% of total loans, at June 30, 2009. 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 $252,058,000, $209,544,000 and $166,512,000, for the second quarter-end 2011, 2010 and 2009, respectively. The large increases in securities in 2011 and 2010 are a result of increases in deposits resulting from gaining public fund depository 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 $400,000 and $235,000 were included in stockholders’ equity at second quarter-end 2011 and 2010, compared to an unrealized loss of $48,000 in 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 and securities sold under agreements to repurchase.

Yields earned on average taxable securities equaled 2.4% in the second quarter of 2011 and 3.2% in the second quarter of 2010 compared to 4.5% in the second quarter of 2009. Income increased on average tax-exempt securities by 35.0%, 73.5% and 19.9% in the first two quarters of 2011, 2010 and 2009 due to higher volumes. The average volume of all securities increased by 38.9% and 18.7% in the first two quarters of 2011 and 2010, compared to a decrease of 20.6% in the first two quarters of 2009. The increase in volumes of securities is directly related to an increase in public deposits during the period. Total securities income increased 29.5% in the first two quarters of 2011, compared to decreases of 8.6% and 24.7% in the first two quarters of 2010 and 2009, respectively. The decreases are attributed to lower yields. The average balance of federal funds sold decreased by $7,285,000 at second quarter-end 2011, $30,647,000, or 79.5%, at second quarter-end 2010 and $3,986,000, or 9.4%, at second quarter-end 2009. Income from these funds decreased by 94.2%, 86.1% and 93.4%, in the first two quarters of 2011, 2010 and 2009, respectively. As mentioned earlier, the large decrease in federal funds sold during the first two quarters of 2011 and 2010 was due to a reinvestment of excess funds into a Federal Reserve excess balance account. The decrease in 2009 income was due to lower rates earned.

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 increased by $67,986,000, or 16.0% for the second quarter-end 2011 and $46,297,000, or 12.2%, for second quarter-end 2010, compared to a decrease of $19,670,000, or 4.9%, for second quarter-end 2009, respectively. The increases in 2011 and 2010 are due to new public deposit customers. 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 2.8%, 2.6% and 3.5% of total average deposits for the second quarter-end 2011, 2010 and 2009, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

Off-Balance Sheet Arrangements

As of June 30, 2011, the Company had unfunded loan commitments outstanding of $31,156,000 and outstanding standby letters of credit of $805,000. 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 standby 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.

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 20.6%, 20.4% and 21.1% at second quarter-end 2011, 2010 and 2009, respectively. The Tier 1 risk-based capital ratio was 19.5% at second quarter-end 2011, 19.2% at second quarter-end 2010 and 19.8% at second quarter-end 2009. The leverage ratio was 10.0%, 10.8% and 11.5% at second quarter-end 2011, 2010 and 2009, 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 2011, 2010 and 2009 was 10.5%, 10.4% and 10.9%, 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 2011 and 2010 by 5.7% and 9.0%, compared to a decrease in the first two quarters of 2009 by 6.9%. The Company updated its pricing structure during the first quarter of 2011 and this change is reflected in the increase in service charge income. The increase in 2010 is attributed to the increase in the number of accounts, and the balances of accounts subject to service charges. Miscellaneous income at second quarter-end 2011 decreased by 33.2% compared to an increase of 8.2% at second quarter-end 2010. The increase in 2010 is due to recognized gains on sales of available for sale securities. The decrease in 2011 is due to merchant fees absorbed on behalf of a public fund deposit customer.

With deposit related costs constantly increasing, the Company continues to analyze means to increase non-interest 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 decreased 13.4% for the first two quarters of 2011, compared to increases of 1.2% and 11.1% for the first two quarters of 2010 and 2009, respectively. The decrease in 2011 is due to a reduction in the number of full time equivalent employees and a lower defined benefit pension expense. The increase in 2009 is attributed to increases in employee raises and an increase in the defined benefit pension plan expense. Occupancy and equipment expense decreased by 8.5% and 1.2% in the first two quarters of 2011 and 2010, compared to an increase of 14.9% in the first two quarters of 2009. 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 1.2% and 12.9% at second quarter-end 2011 and 2010, compared to a decrease of 26.1% at second quarter-end 2009. The main reason for the increase in the first two quarters of 2010 is due to an increase in FDIC insurance assessments and consultant fees. The FDIC began increasing deposit premiums in 2009 in order to replenish its reserve funds. The decrease in 2009 was due to a change in the computation of director’s deferred compensation and a reduction in professional fees.

Income Taxes

Income tax expense totaled $879,000, $752,000 and $836,000 for the second quarter-end 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 two quarters ended June 30, 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	$	219,945		$	6,805		6.19	%	$	213,487		$	6,994		6.55	%	$	205,456		$	6,940		6.76	%
Securities held to maturity:
Taxable		75,490			915		2.42	%		138,635			2,184		3.15	%		97,109			2,203		4.54	%
Exempt from Federal income tax		27,332			424		3.10	%		20,360			314		3.08	%		10,999			181		3.29	%
Securities available for sale:
Taxable		161,790			2,413		2.98	%		31,499			400		2.54	%		52,356			787		3.01	%
Other interest earning assets		37,196			37		0.20	%		34,754			35		0.20	%		—			—		0.00	%
Federal funds sold and securities purchased under agreements to resell		604			—		0.00	%		7,889			5		0.13	%		38,536			36		0.19	%


Total interest-earning assets	$	522,357		$	10,594		4.06	%	$	446,624		$	9,932		4.45	%	$	404,456		$	10,147		5.02	%
Non interest-earning assets:
Cash and due from banks		17,617								17,386								17,186
Bank premises and equipment		15,545								16,499								17,682
Other assets		16,458								18,165								13,860
Allowance for possible loan losses		(3,229	)							(3,090	)							(3,090	)


Total assets	$	568,748							$	495,584							$	450,094

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


	2011							2010							2009
			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	$	312,482	$	719		0.46	%	$	238,590	$	884		0.74	%	$	175,126	$	993		1.13	%
Time deposits		111,725		843		1.51	%		107,568		1,031		1.92	%		110,222		1,665		3.02	%
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings		14,216		12		0.17	%		11,176		12		0.21	%		13,298		22		0.33	%


Total interest-bearing liabilities	$	438,423	$	1,574		0.72	%	$	357,334	$	1,927		1.08	%	$	298,646	$	2,680		1.79	%

Noninterest-bearing liabilities:
Deposits		68,880							78,943							93,456
Other liabilities		8,973							8,162							8,606

Total liabilities		516,276							444,439							400,708
Stockholder’s equity		52,472							51,145							49,386


Total liabilities and stockholders’ equity	$	568,748						$	495,584						$	450,094


Net interest income/ margin-tax equivalent			$	9,020		3.17	%			$	8,005		3.23	%			$	7,467		3.32	%

Tax equivalent adjustment:
Loans				61							81							99
Investment securities				424							314							181
Securities available for sale
Other

Total tax equivalent adjustment				485							395							280

Net interest income			$	8,535						$	7,610						$	7,187

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, 2011
	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	$	6,458		$	(189	)	$	6,269		$	8,031		$	54		$	8,085
Investment securities:
Taxable		(63,145	)		(1,269	)		(64,414	)		41,526			(19	)		41,507
Exempt from Federal income tax		6,972			110			7,082			9,361			133			9,494
Securities available for sale:
Taxable		130,291			2,013			132,304			(20,857	)		(387	)		(21,244	)
Other interest earning assets		2,442			2			2,444			34,754			35			34,789
Federal funds sold and securities purchased under agreements to resell		(7,285	)		(5	)		(7,290	)		(30,647	)		(31	)		(30,678	)


Total	$	75,733		$	662		$	76,395		$	42,168		$	(215	)		41,953


Interest expense on:
Int DDA’s & Savings deposits	$	73,892		$	(165	)	$	73,727		$	63,464		$	(109	)	$	63,355
Time deposits		4,157			(188	)		3,969			(2,654	)		(634	)		(3,288	)
Federal funds purchased, and securities sold under agreements to repurchase		3,040			—			3,040			(2,122	)		(10	)		(2,132	)


Total	$	81,089		$	(353	)	$	80,736		$	58,688		$	(753	)	$	57,935


Changes in net interest income-tax equivalent	$	(5,356	)	$	1,015		$	(4,341	)	$	(16,520	)	$	538		$	(15,982	)

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,
	2011		2010		2009

Securities available for sale
U. S. Treasury and other U. S. Government agencies	$	153,784	$	48,162	$	55,732
Obligations of states and political subdivisions		—		—		—
Mortgage-backed securities		—		—		—
Other securities		142		119		105


Total securities available for sale	$	153,926	$	48,281	$	55,837

Investment securities
U. S. Treasury and other U. S. Government agencies	$	63,563	$	133,313	$	92,962
Obligations of states and political subdivisions		33,669		27,050		16,813
Mortgage-backed securities		—		—		—
Other securities		900		900		900


Total investment securities	$	98,132	$	161,263	$	110,675


Total securities available for sale and investment securities	$	252,058	$	209,544	$	166,512

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, 2011:


	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	$	1,429		3.00	%	$	—		0.00	%	$	152,355		3.02	%	$	—		0.00	%	$	153,784
Other securities		142		0.66	%		—		0.00	%		—		0.00	%		—		0.00	%		142


Total securities available for sale	$	1,571		1.83	%	$	—		0.00	%	$	152,355		3.02	%		—		0.00	%	$	153,926


Investment securities
U.S. Treasury and other U.S. Government agencies	$	3,000		2.43	%	$	38,506		2.18	%	$	22,057		2.30	%		—		0.00	%	$	63,563
Obligations of states and political subdivisions		1,310		4.01	%		15,486		4.03	%		12,781		4.15	%		4,092		5.84	%		33,669
Other securities		900		0.00	%		—		0.00	%		—		0.00	%		—		0.00	%		900


Total investment securities	$	5,210		3.18	%	$	53,992		3.00	%	$	34,838		3.05	%		4,092		5.84	%	$	98,132


Total securities available for sale and investment securities	$	6,781		3.13	%	$	53,992		3.00	%	$	187,193		3.02	%	$	4,092		5.84	%	$	252,058

At June 30, 2011, the Bank held investment securities issued by the State of Mississippi with an aggregate carrying amount of $32.1 million and a market value of $33.3 million. The yield on obligations of states and and political subdivisions has been calculated on a fully tax equivalent basis.

TABLE 5


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2011									JUNE 30, 2011
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED							UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		AMORTIZED COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	153,248	$	774	$	(238	)	$	153,784	$	63,563	$	894	$	—		$	64,457
STATE AND MUNICIPAL SECURITIES		—		—		—			—		33,669		1,201		(13	)		34,857

OTHER SECURITIES		72		—		70			142		900		—		—			900


TOTAL	$	153,320	$	774	$	(168	)	$	153,926	$	98,132	$	2,095	$	(13	)	$	100,214


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2010									JUNE 30, 2010
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED							UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		AMORTIZED COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	47,853	$	309	$	—		$	48,162	$	133,313	$	1,982	$	—		$	135,295
STATE AND MUNICIPAL SECURITIES		—		—		—			—		27,050		635		(84	)		27,601

OTHER SECURITIES		72		—		47			119		900		—		—			900


TOTAL	$	47,925	$	309	$	47		$	48,281	$	161,263	$	2,617	$	(84	)	$	163,796


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	JUNE 30, 2009									JUNE 30, 2009
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED							UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		AMORTIZED COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	55,837	$	200	$	(305	)	$	55,732	$	92,962	$	1,236	$	(413	)	$	93,785
STATE AND MUNICIPAL SECURITIES		—		—		—			—		16,813		269		(140	)		16,942

OTHER SECURITIES		72		—		33			105		—		—		—			—


TOTAL	$	55,909	$	200	$	(272	)	$	55,837	$	109,775	$	1,505	$	(553	)	$	110,727

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:


	2011		2010		2009

Commercial & Industrial	$	25,870	$	26,297	$	26,962
Real Estate		164,276		152,181		141,329
Consumer Loans		27,494		32,245		37,835
Other Loans		3,472		5,645		4,540


Total Loans	$	221,112	$	216,368	$	210,666

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

The following table shows the amount of loans outstanding as of June 30, 2011 (excluding those in non-accrual status ) based on the scheduled repayments of principal:


Remaining Maturity Fixed Rate
3 months or less	$	25,839
Over 3 months through 12 months		35,355
Over 1 year through 5 years		143,097
Over 5 years		7,722

Over 1 year but variable rate		3,985


Total Loans	$	215,998

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,
	2011		2010		2009

Beginning Balance	$	3,268	$	3,100	$	3,100

Charge Offs:
Commercial & Industrial		—		118		23
Real Estate		1,310		30		16
Consumer		318		479		238
Other		—		—		—

Total Charge Offs		1,628		627		277

Recoveries:
Commercial & Industrial		—		24		5
Real Estate		4		19		—
Consumer		179		241		137
Other		—		—		—

Total Recoveries		183		284		142

Net Charge Offs		1,445		343		135
Provision for Possible Losses		1,308		376		135


Ending Balance	$	3,131	$	3,133	$	3,100


Total Loans Outstanding	$	221,112	$	216,368	$	210,666

Average daily loans	$	219,945	$	213,487	$	205,456


Percentages:	2011		2010		2009
Allowance for loan losses to end of quarter total loans		1.4		1.4		1.5
Allowance for loan losses to average loans		1.4		1.5		1.5
Allowance for loan losses to nonperforming assets		39.2		75.0		105.4
Net charge offs to average loans		0.66		0.16		0.07

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,
	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		4.85		$	152		5.94		$	184		7.00		$	217
Real Estate		80.10			2,508		65.19			2,021		27.90			865
Consumer		12.42			389		23.81			738		48.87			1,515
Other		2.62			82		6.13			190		1.94			60
Unallocated		0.00			—		0.00			—		14.29			443

		100	%	$	3,131		100	%	$	3,133		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,
	2011			2010			2009
Non-accrual Loans & Accruing Loans Past Due 90 Days or more	$	5,234		$	2,477		$	2,839
Other Real Estate		2,749			1,698			101

	$	7,983		$	4,175		$	2,940


Nonperforming Assets as % of Total Loans		3.70	%		1.95	%		1.50	%
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans		2.37	%		1.14	%		1.35	%

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,
	2011		2010		2009

Non-interest bearing deposits	$	68,880	$	78,943	$	93,456
Interest-bearing deposits		312,482		238,590		175,126
Interest-bearing time deposits		111,725		107,568		110,222


Total	$	493,087	$	425,101	$	378,804

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, 2011 are summarized in the following table:


Time remaining until maturity
3 months or less	$	16,311
Over 3 through 12 months		38,457
Over 12 months		5,838


Total	$	60,606

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

2011
Federal funds purchased and securities sold under agreements to repurchase	$	9,183	$	14,216		0.17	%	$	9,183

2010
Federal funds purchased and securities sold under agreements to repurchase	$	10,756	$	11,176		0.21	%	$	10,756

2009
Federal funds purchased and securities sold under agreements to repurchase	$	12,091	$	13,928		0.33	%	$	12,091

TABLE 14
INTEREST SENSITIVITY
(Dollars in Thousands)

The following table reflects the interest sensitivity of the Company over various periods as of June 30, 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	$	30,916		$	35,355		$	147,082		$	7,722		$	221,075
Investment securities		2,900			2,310			53,992			38,930			98,132
Securities available for sale		1,571			—			152,355			—			153,926
Other interest earnings assets		18,415			—			—			—			18,066
Federal funds sold and securities purchased under agreements to resell		97			—			—			—			97


Total interest-earning assets	$	53,899		$	37,665		$	353,429		$	46,652		$	491,645
Noninterest-earning assets											42,194			42,194


Total assets	$	53,899		$	37,665		$	353,429		$	88,846		$	533,839


Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits	$	33,477		$	106,417		$	133,441		$	—		$	273,335
Time deposits		26,819			62,619			14,750			—			104,188
Federal funds purchased, and securities sold under agreements to repurchase		9,183			—			—			—			9,183


Total interest-bearing liabilities	$	69,479		$	169,036		$	148,191		$	—		$	386,706
Noninterest-bearing deposits		18,202			36,420			26,065						80,687
Other liabilities		—			—			—			10,477			10,477
Stockholders’ equity		—			—			—			55,969			55,969


Total liabilities and stockholders’ equity	$	87,681		$	205,456		$	174,256		$	66,446		$	533,839


Interest sensitive gap	$	(33,782	)	$	(167,791	)	$	179,173		$	22,400
Cumulative interest sensitive gap	$	(33,782	)	$	(201,573	)	$	(22,400	)	$	—
Cumulative interest sensitive gap as a percent of total assets		-6.33	%		-37.76	%		-4.20	%		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, 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	$	204,029	$	95,548	$	54,445	$	—	$	354,022
Consumer certificates of deposit		89,438		10,265		4,485		—		104,188
Federal funds borrowed & repurchase agreements		9,183		—		—		—		9,183
Operating leases		—		—		—		—		—
Purchase obligations		—		—		—				—

COMMITMENTS

The following table details the amounts and expected maturities of significant commitments as of June 30, 2011:


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

Commitments to extend credit:
Commercial	$	13,786	$	396	$	11	$	—	$	14,193
Residential real estate		16		—		—		—		16
Revolving home equity and credit card lines		17		139		406		—		562
Other		16,385		—		—		—		16,385
Standby letters of credit		805		—		—		—		805


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.

Changes in Internal Controls — There were no changes in the Company’s internal control over financial reporting for the quarter ended June 30, 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 changes to the Company’s risk factors as previously disclosed in Part I, Item IA 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.

	101			Interactive Data File

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 12, 2011	By:	/s/ Royce Cumbest
		Royce Cumbest, Chairman of the Board
		President and Chief Executive Officer

Date: August 12, 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