Merchants & Marine Bancorp, Inc. - FORM 10-K - EX-13 - EXHIBIT 13

Attached files

file	filename
EX-21 - EXHIBIT 21 - Merchants & Marine Bancorp, Inc.	c14634exv21.htm
EX-31.1 - EXHIBIT 31.1 - Merchants & Marine Bancorp, Inc.	c14634exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - Merchants & Marine Bancorp, Inc.	c14634exv32w1.htm
EX-32.2 - EXHIBIT 32.2 - Merchants & Marine Bancorp, Inc.	c14634exv32w2.htm
10-K - FORM 10-K - Merchants & Marine Bancorp, Inc.	c14634e10vk.htm
EX-31.2 - EXHIBIT 31.2 - Merchants & Marine Bancorp, Inc.	c14634exv31w2.htm

Exhibit 13

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 “Exchange Act”). 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, Inc. has given the Bank a 5-Star rating for the 69^th 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 SEC, the Federal Reserve and the FDIC. At December 31, 2010, the Company’s assets totaled $503 million and it employed 127 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.

In late April 2010, the explosion and collapse of the Deepwater Horizon drilling rig in the deep waters of the Gulf of Mexico caused a major oil leak at the wellhead that has only recently been fully contained. While the long term impact of this accident cannot yet be determined, the spill has caused, and continues to cause, significant disruption to the Mississippi Gulf Coast’s tourism and fishing industries. In addition the U. S. Government imposed a six-month drilling moratorium on deepwater rigs through November 30, 2010 and has implemented new safety regulations for all offshore drilling operations, and the U.S. Congress is considering legislation that could impact the operations of offshore drillers. The owner of the well, BP PLC, has committed to compensate those impacted by the oil spill and has established a fund to pay claims. We are uncertain at this time of the future impact of the oil spill, if any, on our financial condition or results for the year but will continue to monitor and take appropriate steps to respond to the situation.

Earnings Highlights

The Company’s net income for 2010 was $4,916,000, an increase of 48.5% from $3,311,000 for the year 2009 and an increase of 3.9% when compared to 2008 year-end results. The increase in net income is primarily due to gains recognized on the sales of real estate owned and investment security gains. The following discussions, tables and the accompanying financial statements presented outline the change in earnings from 2010 to 2009 to 2008. Return on average assets for 2010 was 1.0% compared to 0.73% for 2009 and to 1.0% for 2008. Return on average equity was 9.4%, 6.7% and 9.4% in 2010, 2009 and 2008, respectively. Earnings per share were $3.70, $2.49 and $3.56 in 2010, 2009 and 2008, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Earning Assets

A detailed comparison of the Company’s average earning assets and non-earning assets for the years 2010, 2009 and 2008 is presented in Table 1 of this report. The Company’s earning assets include loans, investments, and federal funds sold. Average earning assets for 2010 totaled $453,000,000, an increase of 11.2%, compared to $407,522,000 for 2009 and $412,832,000 for 2008, a decrease of 1.3% and 6.5% in 2009 and 2008, respectively. Average net loans increased by $6,200,000 or 3.0% in 2010, $9,689,000 or 4.9% in 2009 and decreased by $4,158,000 or 2.0% in 2008. Average securities increased by $36,507,000 or 21.8%, in 2010 compared to decreases of $19,509,000 or 10.4% and $28,339,000 or 13.1% 2009 and 2008, respectively. Average federal funds sold decreased by $22,514,000 or 73.2% at year-end 2010, compared to increases of $4,510,000 or 17.2% and $3,844,000 or 17.2% at year-end 2009 and 2008, respectively. The decrease in 2010 is due to the Company’s excess funds being placed in an account at the Federal Reserve Bank. This account is new for 2010 and had an average balance of $25,285,000. A detailed comparison of the Company’s average earning assets for the years 2010, 2009 and 2008 is presented in Table 1 of this report.

Net Interest Income

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

A company’s net interest margin is a prime indicator of its profitability. The net interest margin reflects the spread between interest earning asset yields and interest bearing liability costs and the percentage of interest earning assets funded by interest bearing liabilities. The net margin, on a tax equivalent basis, was 3.6%, 3.7% and 4.0%, at year-end 2010, 2009 and 2008, respectively. Tax equivalent net interest income increased by 8.3% at year-end 2010 and decreased by 9.1% and 10.4% at year-end 2009 and 2008, respectively.

Average net loans increased by $6,200,000 or 3.0% and loan interest income decreased $70,000 or 0.5% at year-end 2010. Average net loans increased by $9,689,000 or 4.9% and loan interest income decreased $622,000 or 4.2% at year-end 2009. Average net loans decreased by $4,158,000, or 2.0% and loan interest income decreased $1,305,000 or 8.1% at year-end 2008. The decrease in loan income in 2010 thru 2008 is a result of lower yields. The decrease in loan volume in 2008 is result of lower volumes and rates. Yields on taxable securities decreased as market rates were lower in 2010 through 2008. Yields on tax-exempt securities decreased by 4 basis points at year-end 2010 as maturing securities were reinvested in lower rate securities. The average volume of all securities increased by 21.8% in 2010, compared to a decrease of 10.4% in 2009 when compared to 2008, and total securities income decreased by $63,000 or 1.0% due to decreased rates in 2010. The increase in securities volume in 2010 is a result of an increase in deposits. The average balance of federal funds sold decreased by $22,514,000 or 73.2% and increased by $4,510,000 or 17.2% for 2009 when compared to 2008. Yields on these funds decreased 6 basis points from year-end 2010 to 2009, resulting in income from these funds decreasing by 83.0%.

Total average deposits increased by $45,830,000 or 11.6% in 2010, compared to a decrease of $13,489,000 or 3.3% when comparing 2009 to 2008, and by $36,990,000, or 8.3% when comparing 2008 to 2007. A major reason for the large increase in deposits in 2010 was the addition of a new public fund customer. Total average interest bearing liabilities increased by 42.0% in 2010 compared to decreases of 14.9% in 2009 and 4.6% in 2008, respectively. Rates paid on these funds decreased by 95, 42 and 55 basis points in 2010, 2009 and 2008, respectively. The decrease in rates paid resulted in decreases in interest expense of 27.8%, 30.0% and 22.6% in 2010, 2009 and 2008, respectively. Average interest bearing checking, MMF, and savings accounts average balances increased by 74.8% in 2010 and decreased by 21.2% and 9.8% in 2009 and 2008, respectively. Interest expense on these deposits decreased 14.2%, 30.6% and 30.0% in 2010, 2009 and 2008, respectively. Rates paid on these funds decreased by 72 basis points in 2010. Average time deposit balances increased by 3.6% in 2010 and decreased by 0.9% and 5.1% in 2009 and 2008, respectively. The average rate paid on these funds was 1.8% in 2010, 2.9% in 2009 and 3.8% in 2008. Interest expense on time deposits decreased 36.3% in 2010, 24.9% in 2009 and 11.8% in 2008. The decreases in 2010, 2009 and 2008 were due to decreased rates. Average federal funds purchased and securities sold under agreements to repurchase increased in 2010 by 0.1% and decreased in 2009 and 2008 by 35.2% and 2.5%.Rates on these funds decreased 13, 140 and 175 basis points, in 2010, 2009 and 2008. Interest expense on these funds decreased by 40.0% in 2010, 87.7% in 2009 and 51.4% in 2008, due to lower volumes and rates paid. Tables 1 and 2 provide more information on the Company’s net interest income and rate and volume variances.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest Rate Sensitivity

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

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 47.5%, 51.2% and 48.2%, for the years 2010, 2009 and 2008, respectively. The average loan to deposit ratio was 48.9%at year-end 2010, 52.9% at year-end 2009 and 48.8% at year-end 2008. Average net loans increased by $6,200,000 or 3.0% when comparing 2010 to 2009, $9,689,000 or 4.9% when comparing 2009 to 2008, and decreased by $4,158,000, or 2.0% when comparing 2008 to 2007.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $133,001,000 at year-end 2008, to $142,787,000 at year-end 2009 and $159,589,000 at year-end 2010. Commercial and industrial loans and loans to municipal and local governments totaled $30,880,000, $31,325,000 and $29,800,000 at year-end 2010, 2009 and 2008, respectively. Consumer loans decreased to $28,222,000 and $35,535,000 in 2010 and 2009 and increased to $37,780,000 in 2008. Other loans increased to $1,069,000 in 2010, decreased by $295,000 in 2009 and increased by $106,000 in 2008 when compared to 2007. See Table 6 of this report for comparison of the loan portfolio composition.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Allowance for Loan Losses

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

The allowance to total loans was 1.5% at year-end 2010, 1.5% at year-end 2009 and 1.5% at year-end 2008.

The Company immediately charges off any loan when it is determined to be uncollectible. However, experience shows that certain losses exist in the portfolio have not been identified. The allowance is allocated to absorb losses on all loans and is not restricted to any one group of loans. Company management has determined that the balance of the allowance for loan losses is adequate to cover potential future losses. The provision for loan losses totaled $1,027,000 for year-end 2010, $781,000 for year-end 2009 and $563,000 for year-end 2008. The provision increased during 2010 due to an increase in net charge-offs and an overall increase in the allowance. 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 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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 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.

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 at year-end 2010 were $6,382,000, compared to $3,146,000 at year-end 2009 and $837,000 at year-end 2008. Non-performing assets, as a percentage of total loans, were 2.9%at year-end 2010, 1.5% at year-end 2009 and 0.4% at year-end 2008. Non-accrual loans and accruing loans over 90 days past due were$4,106,000 or 1.9%, $951,000 or 0.5% and $601,000 or 0.3%, of total loans at year-end 2010, 2009 and 2008, respectively. Other real estate totaled $2,276,000 or 1.0% at year-end 2010, $2,195,000 or 1.0% of total loans at year-end 2009 and $236,000 or 0.1% of total loans at year-end 2008. The increase in nonperforming assets is due to the weakened economy. 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 $230,216,000, $178,184,000 and $177,348,000 for the years ending 2010, 2009 and 2008, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Topic 320, Investments in Debt and Equity Securities, securities in the available for sale category are accounted for at fair market value with unrealized gains or losses excluded from earnings and reported as a separate component of stockholder’s equity until realized. Unrealized losses, net of taxes, of $1,918,000 and gains, net of taxes, of $215,000 and $216,000 were included in stockholder’s equity at year-end 2010, 2009 and 2008, respectively. The held to maturity portion of the portfolio contains debt securities which the Company intends to hold until their contractual maturity date. These securities provide the Company with a long term, relatively stable source of income with minimal credit risk. The securities in this category are carried at their amortized costs. A portion of the Company’s investment portfolio is pledged as collateral against public deposits, treasury tax and loan and securities sold under agreements to repurchase.

Yields on taxable securities decreased as market rates were lower in 2010, 2009 and 2008. Yields on tax-exempt securities decreased by 4 basis points as maturing securities were reinvested in lower rate securities. The average volume of all securities increased by $36,507,000 or 21.8% in 2010 and decreased by 10.4% in 2009 when compared to 2008, and 13.1% in 2008 when compared to 2007. Total securities income decreased by $63,000 or 1.0% due to decreased rates in 2010. The increase in securities volume was a result of an increase in total deposits for 2010. The average balance of federal funds sold decreased by $22,514,000 or 73.2% for 2010, compared to an increase of $4,510,000 or 17.2% for 2009 when compared to 2008 and increased by $3,844,000, or 17.2% for 2008 when compared to 2007. The decrease in 2010 is attributable to reinvesting a large portion of excess funds into a Federal Reserve Excess Balance account. Yields on these funds decreased 6 basis points from year-end 2010 to 2009. 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 $45,830,000 or 11.6%, compared to a decrease of $13,489,000 or 3.3% and $36,990,000 or 8.3%, in 2009 and 2008, respectively. The increase in average deposits for 2010 is due to the addition of a public fund deposit customer. 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 and to an inventory of readily marketable government securities to meet unexpected cash needs. Average federal funds purchases and securities sold under agreement to repurchase represented 2.8%, 3.2% and 4.8% of total average deposits for the years 2010, 2009 and 2008, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Off Balance Sheet Arrangements

As of December 31, 2010, the Company had unfunded loan commitments outstanding of $30,164,000 and outstanding standby letters of credit of $858,000. 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. 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 and the notes to the financial statements detail the Company’s deposit and lease contractual obligations.

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 unfunded amount of $1,907,000 and $1,832,000 at year-end 2009 and 2008. The underfunded status is the result of poor market conditions and the performance of the plan’s investment assets. Management is monitoring the funded status of its defined benefit plan closely and will begin contributing additional funding to the plan in 2011. See Notes to Financial Statements — Note 8. Employee Benefit Plans.

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 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 19.7%, 20.1% and 21.9%at year-end 2010, 2009 and 2008, respectively. The Tier 1 risk-based was 18.6% at year-end 2010, 19.1% at year-end 2009 and 20.6% at year-end 2008. The leverage ratio was 11.1%, 11.5% and 10.9% at year-end 2010, 2009 and 2008, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 3.0% for the leverage ratio. Stockholders’ equity to total assets at year-end 2010, 2009 and 2008 was 10.4%, 11.3% and 11.3%, 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 by 7.2% in 2010, compared to a decrease of 4.1% in 2009 and an increase of 1.0% in 2008. The increase in 2010 is due to an increase in the amount of non-sufficient fund charge income recognized in 2010, compared to 2009. Other service charges, commissions, fees, and non-interest income increased by 3.9%, 1.1% and 11.3%, in 2010, 2009 and 2008, respectively. Non-interest income includes gains recognized on three sales of real estate owned during 2010 in the amount of $955,600 and gains on available for sale securities in the amount of $365,400.

With deposit related costs constantly increasing, the Company has revised its fee structure in order to maintain competitive and this new pricing will go into effect during the first quarter of 2011.

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, employee’s salaries, equipment and building expenses, legal fees, FDIC insurance, and other expenses combined make up the largest category of the Company’s expenses. Proper management of these costs is extremely important to the profitability of the Company.

Salary and employee benefits expense increased 0.3%, 12.5% and 6.7% in the years 2010, 2009 and 2008, respectively. 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 6.9% in 2010 compared to an increase of $468,000 or 17.1% and $303,000 or 12.4%, at year—end 2009 and 2008, respectively. The decrease in 2010 is due to a reduction in the amount of property taxes paid for 2010. The increase in 2009 is primarily a result of increases in property taxes, insurance, and depreciation of two new branch offices. Other expenses increased by 20.2% in 2010, compared to a decrease of 26.3% in 2009 and compared to an increase of 22.5% in 2008. The increase in 2010 was due to an increase in FDIC insurance assessments and a change in the computation of director’s deferred compensation. Total non-interest expense increased by 5.1% in 2010, compared a decrease by 3.3% in 2009, compared to increases of 13.7% in 2008.

Income Taxes

Income tax expense totaled $1,548,000, $1,435,000 and $2,228,000, for the years 2010, 2009 and 2008, respectively. The Company’s effective tax rate was 23.9% in 2010, 30.2% in 2009 and 32.0% in 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 three years ended December 31, 2010, 2009 and 2008:


	2010								2009								2008
				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	$	215,128		$	14,031		6.52	%	$	208,928		$	14,101		6.75	%	$	199,239		$	14,723		7.39	%
Securities held to maturity:
Taxable		122,745			3,642		2.97	%		104,730			4,212		4.02	%		155,437			7,422		4.77	%
Exempt from Federal income tax		23,201			719		3.10	%		13,747			432		3.14	%		8,347			293		3.51	%
Securities available for sale:
Taxable		58,397			1,614		2.76	%		49,359			1,394		2.82	%		23,561			802		3.40	%
Other interest earning assets		25,285			51		0.20	%		—			—		0.00	%		—			—		0.00	%
Federal funds sold and securities pur- chased under agree- ments to resell		8,244			9		0.11	%		30,758			53		0.17	%		26,248			617		2.35	%


Total interest-earning assets	$	453,000			20,066		4.43	%	$	407,522			20,192		4.95	%	$	412,832			23,857		5.78	%
Non interest-earning assets:
Cash and due from banks		17,038								16,673								24,677
Bank premises and equipment		16,228								17,423								16,074
Other assets		18,425			48,231					14,807			—					14,947
Allowance for possible loan losses		(3,091	)							(3,056	)							(2,784	)


Total assets	$	501,600							$	453,369							$	465,746

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


	2010							2009							2008
			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’s, MMF & Savings	$	243,902		1,670		0.68	%	$	139,557		1,947		1.40	%	$	177,198		2,804		1.58	%
Time Deposits		109,505		1,916		1.75	%		105,666		3,010		2.85	%		106,594		4,008		3.76	%
Federal funds purchased, securities sold under agreements to repur- chase and other short- term borrowings		12,171		24		0.20	%		12,153		40		0.33	%		18,766		325		1.73	%


Total interest-bearing liabilities	$	365,578		3,610		0.99	%	$	257,376		4,997		1.94	%	$	302,558		7,137		2.36	%

Noninterest-bearing liabilities:
Deposits		74,924							137,296							105,603
Other liabilities		8,990							9,028							7,480


Total liabilities		449,492							403,700							415,641
Stockholder’s equity		52,108							49,669							50,105


Total liabilities and stockholders’ equity	$	501,600						$	453,369						$	465,746


Net interest income/ margin-tax equivalent			$	16,456		3.63	%			$	15,195		3.73	%			$	16,720		4.05	%

Tax equivalent adjustment:
Loans				148							185							211
Investment securities				719							432							293
Securities available for sale				—							—							—
Other

Total tax equivalent adjustment				867							617							504

Net interest income			$	17,323						$	15,812						$	17,224

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.


	Year ended December 31, 2010
	2010 Compared to 2009									2009 Compared to 2008
	Increase(Decrease) Due To									Increase(Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net

Interest income on:
Loans	$	6,200		$	(70	)	$	6,130		$	9,689		$	(622	)	$	9,067
Investment securities:
Taxable		18,015			(570	)		17,445			(50,707	)		(3,210	)		(53,917	)
Exempt from Federal income tax		9,454			287			9,741			5,400			139			5,539
Securities available for sale:
Taxable		9,038			220			9,258			25,798			592			26,390
Other interest earning assets		25,285			51						—			—			—
Federal funds sold and securities purchased under agreements to resell		(22,514	)		(44	)		(22,558	)		4,510			(564	)		3,946


Total	$	45,478		$	(126	)	$	20,016		$	(5,310	)	$	(3,665	)	$	(8,975	)


Interest expense on:
Int DDA’s & Savings deposits	$	104,345		$	(277	)	$	104,068		$	(37,641	)	$	(857	)	$	(38,498	)
Time deposits		3,839			(1,094	)		2,745			(928	)		(998	)		(1,926	)
Federal funds purchased, and securities sold under agreements to repurchase		18			(16	)		2			(6,613	)		(285	)		(6,898	)

Total	$	108,202		$	(1,387	)	$	106,815		$	(45,182	)	$	(2,140	)	$	(47,322	)


Changes in net interest income-tax equivalent	$	(62,724	)	$	1,261		$	(86,799	)	$	39,872		$	(1,525	)	$	38,347

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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The available for sale classification of securities, includes all portfolio securities which management believes may be subject to sale prior to their contractual maturities, and are stated at 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.


	DECEMBER 31,
	2010		2009		2008

Securities available for sale
U. S. Treasury and other U. S. Government agencies	$	116,217	$	33,178	$	30,239
Obligations of states and political subdivisions		—		—		—
Mortgage-backed securities		—		—		—
Other securities		117		148		—


Total securities available for sale	$	116,334	$	33,326	$	30,239

Investment securities
U. S. Treasury and other U. S. Government agencies	$	83,157	$	123,670	$	137,196
Obligations of states and political subdivisions		29,825		20,288		9,313
Mortgage-backed securities		—		—		—
Other securities		900		900		600


Total investment securities		113,882		144,858		147,109


Total securities available for sale and investment securities	$	230,216	$	178,184	$	177,348

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 December 31, 2010:


	Maturing
						After					After 5 Yrs
	Within					1 Yr But					But Within					After 10 Yrs.
	1 Year					Within 5 Yrs					10 Yrs										Carrying
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount

Securities available for sale
U.S. Treasury and other U.S. Government agencies	$	5,003		3.75	%	$	5,001		1.25	%	$	106,213		2.99	%	$	—		0.00	%	$	116,217
Other securities		117


Total securities available for sale	$	5,120		3.75	%	$	5,001		1.25	%	$	106,213		2.99	%	$	—		0.00	%	$	116,334

Investment securities
U.S. Treasury and other U.S. Government agencies	$	4,000		4.07	%	$	49,007		2.26	%	$	30,150		3.61	%	$	—		0.00	%	$	83,157
Obligations of states and political subdivisions		886		4.40	%		14,241		4.13	%		10,672		4.18	%		4,026		5.92	%		29,825
Other securities		900																				900


Total investment securities	$	5,786		4.24	%	$	63,248		3.20	%	$	40,822		3.90	%	$	4,026		5.92	%	$	113,882


Total securities available for sale and investment securities	$	10,906		3.93	%	$	68,249		2.73	%	$	147,035		3.04	%	$	4,026		5.92	%	$	230,216

At December 31, 2010, the Company held investment securities issued by the State of Mississippi with an aggregate carrying amount of $28.7 million and a market value of $28.9 million. The yield on obligations of states and political subdivisions has been calculated on a fully tax equivalent basis.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	DECEMBER 31, 2010									DECEMBER 31, 2010
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED					AMORTIZED		UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	119,168,000	$	5,000	$	(2,956,000	)	$	116,217,000	$	83,157,000	$	1,219,000	$	—		$	84,376,000
STATE AND MUNICIPAL SECURITIES		—		—		—			—		29,825,000		587,000		(399,000	)		30,013,000

OTHER SECURITIES		72,000		45,000		—			117,000		900,000		—		—			900,000


TOTAL	$	119,240,000	$	50,000	$	(2,956,000	)	$	116,334,000	$	113,882,000	$	1,806,000	$	(399,000	)	$	115,289,000


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	DECEMBER 31, 2009									DECEMBER 31, 2009
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED					AMORTIZED		UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	32,927,000	$	279,000	$	(28,000	)	$	33,178,000	$	123,670,000	$	1,043,000	$	(240,000	)	$	124,473,000
STATE AND MUNICIPAL SECURITIES		—		—		—			—		20,288,000		826,000		(41,000	)		21,073,000

OTHER SECURITIES		72,000		76,000		—			148,000		900,000		—		—			900,000


TOTAL	$	32,999,000	$	355,000	$	(28,000	)	$	33,326,000	$	144,858,000	$	1,869,000	$	(281,000	)	$	146,446,000


	SECURITIES AVAILABLE-FOR-SALE									SECURITIES HELD-TO-MATURITY
	DECEMBER 31, 2008									DECEMBER 31, 2008
			GROSS		GROSS							GROSS		GROSS
	AMORTIZED		UNREALIZED		UNREALIZED					AMORTIZED		UNREALIZED		UNREALIZED
	COST		GAINS		LOSSES			FAIR VALUE		COST		GAINS		LOSSES			FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES	$	29,841,000	$	310,000	$	—		$	30,151,000	$	137,196,000	$	2,431,000	$	—		$	139,627,000
STATE AND MUNICIPAL SECURITIES		—		—		—			—		9,314,000		196,000		(12,000	)		9,498,000

OTHER SECURITIES		72,000		16,000		—			88,000		600,000		—		—			600,000


TOTAL	$	29,913,000	$	326,000	$	—		$	30,239,000	$	147,110,000	$	2,627,000	$	(12,000	)	$	149,725,000

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 6
LOAN PORTFOLIO
(Dollars in Thousands)

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


	2010		2009		2008

Commercial, Industrial & Governmental	$	30,880	$	31,325	$	29,800
Real Estate		159,589		142,787		133,001
Consumer Loans		28,222		35,492		37,780
Other Loans		1,069		599		894


Total Loans	$	219,760	$	210,203	$	201,475

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

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


Remaining Maturity Fixed Rate
3 months or less	$	16,763
Over 3 months through 12 months		35,641
Over 1 year through 5 years		156,846
Over 5 years		6,593


Total Loans	$	215,843

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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:


	Year ended December 31,
	2010			2009			2008

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

Charge Offs:
Commercial & Industrial		147			83			78
Real Estate		336			296			68
Consumer		1,022			739			681
Other

Total Charge Offs		1,505			1,118			827

Recoveries:
Commercial & Industrial		123			54			44
Real Estate		25			—			6
Consumer		498			283			214
Other

Total Recoveries		646			337			264

Net Charge Offs		859			781			563
Provision for Possible Losses		1,027			781			563


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


Total Loans Outstanding	$	219,760		$	210,203		$	201,475

Average daily loans	$	215,128		$	208,928		$	199,239


	2010			2009			2008
Percentages:
Allowance for loan losses to end of quarter total loans		1.5	%		1.5	%		1.5	%
Allowance for loan losses to average loans		1.5	%		1.5	%		1.6	%
Allowance for loan losses to nonperforming assets		51.2	%		98.5	%		370.4	%
Net charge offs to average loans		0.4	%		0.4	%		0.3	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.


	December 31,
	2010				2009				2008
	% Gross		Loan Loss		% Gross		Loan Loss		% Gross		Loan Loss
	Loans		Allowance		Loans		Allowance		Loans		Allowance
	Outstanding		Allocation		Outstanding		Allocation		Outstanding		Allocation

Commercial & Industrial		1.80	$	59		7.09	$	220		4.95	$	153
Real Estate		81.66		2,669		61.39		1,903		13.38		415
Consumer		12.29		402		23.20		719		43.87		1,360
Other		4.25		139		7.99		248		2.04		63
Unallocated		—		—		0.33		10		35.76		1,109

		100.00	$	3,268		100.00	$	3,100		100.00	$	3,100

TABLE 10
NONPERFORMING ASSETS
(Dollars in Thousands)

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


	December 31,
	2010			2009			2008
Non-accrual Loans & Accruing Loans Past Due 90 Days or more	$	4,106		$	951		$	601
Other Real Estate		2,276			2,195			236

	$	6,382		$	3,146		$	837

Nonperforming Assets as % of Total Loans		2.9	%		1.5	%		0.4	%
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans		1.9	%		0.5	%		0.3	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 11
AVERAGE DEPOSITS
(Dollars In Thousands)

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


	YEAR ENDED DECEMBER 31,
	2010		2009		2008

Non-interest bearing deposits	$	74,924	$	77,927	$	105,603
Interest-bearing deposits		243,902		199,147		177,198
Interest-bearing time deposits		109,505		106,107		106,594


Total	$	428,331	$	383,181	$	389,395

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 December 31, 2010 are summarized in the following table:


Time remaining until maturity
3 months or less	$	12,412
Over 3 through 12 months		49,877
Over 12 months		8,345


Total	$	70,634

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 13
SHORT-TERM BORROWINGS
(Dollars in Thousands)

The following table presents a summary of the Company’s short-term borrowings at December 31, for each of the last three years and the corresponding interest rates:


			Daily		Average			Maximum
	December		Average		Interest			Month-End
	Balance		Balance		Rate*			Balance

2010
Federal funds purchased and securities sold under agreements to repurchase	$	13,730	$	12,171		0.20	%	$	13,730

2009
Federal funds purchased and securities sold under agreements to repurchase	$	8,434	$	12,153		0.33	%	$	8,434

2008
Federal funds purchased and securities sold under agreements to repurchase	$	10,917	$	18,766		1.73	%	$	10,917


*		on daily average balance

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 14
INTEREST SENSITIVITY
(Dollars In Thousands)

The following table reflects the interest sensitivity of the Company over various periods as of December 31, 2010, based on contractual maturities as of that date:


	0-3			4-12			1-5			Over 5
	Months			Months			Years			Years			Total

Assets
Interest-earning assets:
Loans, net of unearned income	$	20,639		$	35,641		$	156,846		$	6,593		$	219,719
Investment securities		3,149			2,637			63,248			44,848			113,882
Securities available for sale		5,120			—			5,001			106,213			116,334
Federal funds sold and securities purchased under agreements to resell		3,147			—			—			—			3,147


Total interest-earning assets		32,055			38,278			225,095			157,654			453,082
Noninterest-earning assets											50,314			50,314


Total assets	$	32,055		$	38,278		$	225,095		$	207,968		$	503,396


Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits	$	21,146		$	68,139		$	145,676		$	—		$	234,961
Time deposits		22,102			74,595			17,463			—			114,160
Federal funds purchased, and securities sold under agreements to repurchase		13,730			—			—			—			13,730


Total interest-bearing liabilities		56,978			142,734			163,139			—			362,851
Noninterest-bearing deposits		13,534			39,807			26,273			—			79,614
Other liabilities											9,181			9,181
Stockholders’ equity											51,750			51,750


Total liabilities and stockholders’ equity	$	70,513		$	182,541		$	189,411		$	60,931		$	503,396


Interest sensitive gap	$	(38,458	)	$	(144,263	)	$	35,684		$	147,037
Cumulative interest sensitive gap	$	(38,458	)	$	(182,721	)	$	(147,037	)	$	(0	)
Cumulative interest sensitive gap as a percent of total assets		-7.64	%		-36.30	%		-29.21	%		0.00	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following table presents, as of December 31, 2010, 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

142,626

85,975

85,974

—

314,575

Consumer certificates of deposit

96,697

14,479

2,984

—

114,160

Federal funds borrowed & repurchase agreements

13,730

—

13,730

Operating leases

—

Purchase obligations

—

COMMITMENTS

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


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

Commitments to extend credit:
Commercial	$	6,860	$	319	$	—	$	—	$	7,179
Residential real estate		2,621		—		—		—		2,621
Revolving home equity and credit card lines		3		720		—		—		723
Other		19,642		—		—		—		19,642
Standby letters of credit	$	858	$	—	$	—	$	—	$	858

PENSION EXPENSE (Net Periodic Pension Cost)


	2010			2010			2009			2009
	Annual			Quarterly			Annual			Quarterly

(1) Service cost	$	405,474		$	101,369		$	320,583		$	80,146
(2) Interest cost		601,251			150,313			587,119			146,780
(3) Expected return on assets		(659,804	)		(164,951	)		(548,938	)		(137,235	)
(4) Amortization of transition (asset) or liability		—			—			—			—
(5) Amortization of prior service cost		—			—			—			—
(6) Amortization of (gain) or loss		271,928			67,982			335,659			83,915

(7) Total	$	618,849		$	154,713		$	694,423		$	173,606

MERCHANTS & MARINE BANCORP, INC.
SUMMARY OF OPERATIONS
Quarterly Financial Data (unaudited)

Quarterly financial data are summarized below:


	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(all amounts in thousands, except per share data)
For the year ended December 31, 2010:
Interest income	$	4,894		5,092		4,974		5,199
Interest expense		1,002		926		864		818

Net interest income		3,892		4,166		4,110		4,381
Provision for loan losses		132		244		209		442

Net interest income after provision for loan losses		3,760		3,922		3,901		3,939
Non-interest income		1,657		2,064		2,398		1,439
Non-interest expense		4,403		4,324		4,213		3,676

Income before income taxes		1,014		1,662		2,086		1,702
Income taxes		246		506		636		160

Net income	$	768		1,156		1,450		1,542


Net income per common share	$	0.58		0.87		1.09		1.16


For the year ended December 31, 2009:
Interest income	$	5,212		4,940		4,988		5,023
Interest expense		1,352		1,328		1,226		1,091

Net interest income		3,860		3,612		3,762		3,932
Provision for loan losses		74		60		304		343

Net interest income after provision for loan losses		3,786		3,552		3,458		3,589
Non-interest income		1,420		1,653		1,629		1,423
Non-interest expense		4,101		3,892		3,951		3,820

Income before income taxes		1,105		1,313		1,136		1,192
Income taxes		336		500		270		329

Net income	$	769		813		866		863


Net income per common share	$	0.58		0.61		0.65		0.65


*		Certain reclassifications have been made to the quarterly data previously disclosed in order to conform to the 2010 financial statement presentation.

MERCHANTS & MARINE BANCORP, INC.
SUMMARY OF OPERATIONS
Years Ended December 31,


	2010		2009		2008		2007		2006

Interest income	$	20,158,371		20,163,187		23,864,224		27,890,994		25,198,321
Interest expense		3,609,622		4,997,092		7,137,225		9,219,867		7,014,461


Net interest income		16,548,749		15,166,095		16,726,999		18,671,127		18,183,860

Provision for loan losses		1,027,127		780,890		563,178		560,590		318,120


Net interest income after provision for loan losses		15,521,622		14,385,205		16,163,821		18,110,537		17,865,740

Non-interest income		7,558,671		6,124,791		6,992,953		6,130,556		5,613,823

Non-interest expense		16,616,635		15,763,755		16,199,124		14,246,174		13,436,503


Income before income taxes		6,463,658		4,746,241		6,957,650		9,994,919		10,043,060

Income taxes		1,548,000		1,435,000		2,228,000		3,272,000		3,187,000


Net income	$	4,915,658		3,311,241		4,729,650		6,722,919		6,856,060


Net income per common share	$	3.70		2.49		3.56		5.05		5.15


Dividends per common share	$	1.35		1.35		1.35		1.35		1.25

MERCHANTS & MARINE BANCORP, INC.
FINANCIAL HIGHLIGHTS


	IN THOUSANDS
	AS OF DECEMBER 31,
	2010		2009		2008		2007		2006

BALANCE SHEET:
Total assets end of year	$	503,395		450,474		436,283		459,533		487,719
Loans, net		216,470		207,113		198,383		200,812		196,024
Securities		230,215		178,183		177,350		183,367		203,608
Deposits		428,201		382,868		367,245		383,423		426,071
Stockholders’ equity		52,351		50,985		49,061		48,441		42,980

INCOME STATEMENT:
Interest income		20,158		20,163		23,864		27,891		25,198
Interest expense		3,609		4,997		7,137		9,220		7,014
Net interest income		16,549		15,166		16,727		18,671		18,184

Provision for possible loan losses		1,027		781		563		561		318
Net interest income after provision for possible loan losses		15,522		14,385		16,164		18,110		17,866
Non-interest income		7,559		6,125		6,993		6,131		5,614
Non-interest expense		16,617		15,764		16,199		14,246		13,437

Net income		4,916		3,311		4,730		6,723		6,856
Cash dividends declared		1,796		1,796		1,796		1,796		1,663

PER SHARE DATA:
Net income		3.70		2.49		3.56		5.05		5.15
Cash dividends		1.35		1.35		1.35		1.35		1.25
Book value		39.34		38.32		36.88		36.41		32.31

RATIOS:
Return on average equity		9.44		6.67		9.44		14.73		16.60
Return on average assets		0.97		0.72		1.01		1.35		1.38
Capital to assets		10.40		11.32		11.25		10.47		8.81
Dividends declared as percentage of income		36.53		54.24		37.97		26.71		24.25

MERCHANTS & MARINE BANCORP, INC.
FINANCIAL STATEMENTS
Pascagoula, Mississippi
Years Ended December 31, 2010 and 2009

TABLE OF CONTENTS


Independent Registered Public Accounting Firm’s Report			2
Statements of Condition			3
Statements of Income			4
Statements of Comprehensive Income			5
Statements of Changes in Stockholders’ Equity			6
Statements of Cash Flows			7
Notes to Financial Statements			9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Merchants & Marine Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Merchants & Marine Bancorp, Inc. (the “Bancorp”) and subsidiary as of December 31, 2010 and 2009, and the related statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. These financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Merchants & Marine Bancorp, Inc. and subsidiary as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

Pascagoula, Mississippi
February 14, 2011

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009


	2010			2009
ASSETS
Cash and due from banks	$	20,010,142			14,451,113
Federal funds sold		3,147,000			16,450,000
Securities:
Available-for-sale at fair value		116,333,500			33,325,635
Held-to-maturity at amortized cost		112,981,596			143,957,199
Non-marketable equity securities		900,060			900,060
Loans		219,779,834			210,256,672
Less:
Allowance for loan losses		3,268,217			3,100,000
Unearned income		41,271			43,449

Loans, net		216,470,346			207,113,223
Property and equipment, net		15,727,476			16,778,718
Other real estate owned		2,275,723			2,194,611
Accrued income		2,401,057			2,499,639
Goodwill, net		880,398			880,398
Other assets		12,267,658			11,923,289

Total assets	$	503,394,956			450,473,885


LIABILITIES
Deposits:
Non-interest bearing demand	$	79,614,176			77,614,260
Interest bearing savings, demand and other time deposits		348,586,934			305,253,753

Total deposits		428,201,110			382,868,013
Securities sold under agreements to repurchase		13,729,528			8,433,632
Accrued expense and other liabilities		9,113,767			8,187,322

Total liabilities		451,044,405			399,488,967


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		39,013,928			35,560,524
Accumulated other comprehensive income (loss)		(4,489,222	)		(2,401,451	)

Total stockholders’ equity		52,350,551			50,984,918

Total liabilities and stockholders’ equity	$	503,394,956			450,473,885

See accompanying notes to financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2010, 2009 and 2008


	2010		2009		2008
Interest income
Interest and fees on loans	$	14,030,856		14,100,737		14,722,605
Interest on investment securities:
Taxable		5,255,077		5,575,643		8,223,847
Exempt from federal and state income tax		718,925		431,597		293,049
Interest on federal funds sold		59,957		53,167		617,070
Other interest income		93,556		2,043		7,653

Total interest income		20,158,371		20,163,187		23,864,224


Interest expense
Interest on deposits		3,586,035		4,957,500		6,812,012
Interest on federal funds purchased and securities sold under agreements to repurchase		23,587		39,592		325,213

Total interest expense		3,609,622		4,997,092		7,137,225


Net interest income		16,548,749		15,166,095		16,726,999
Provision for loan losses		1,027,127		780,890		563,178

Net interest income after provision for loan losses		15,521,622		14,385,205		16,163,821


Non-interest income
Service charges on deposit accounts		4,452,383		4,155,103		4,331,617
Other service charges, commissions and fees		1,085,112		1,044,066		1,032,825
Gain on sale of other real estate owned		955,615		47,279		146,371
Gain on sale of securities		365,401		—		117,392
Other		700,160		925,622		1,511,119

Total non-interest income		7,558,671		6,172,070		7,139,324


Non-interest expense
Salaries and employee benefits		7,677,966		7,654,312		6,806,340
Occupancy expense		2,985,133		3,205,066		2,737,432
Services and fees expense		2,095,508		1,430,040		1,314,581
Other		3,858,028		3,521,616		5,487,142

Total non-interest expense		16,616,635		15,811,034		16,345,495


Income before income taxes		6,463,658		4,746,241		6,957,650
Income taxes		1,548,000		1,435,000		2,228,000

Net income	$	4,915,658		3,311,241		4,729,650


Net income per common share	$	3.70		2.49		3.56

See accompanying notes to financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2010, 2009 and 2008


	2010			2009			2008

Net income	$	4,915,658			3,311,241			4,729,650

Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available-for-sale		(2,133,264	)		(327	)		185,862
Unrealized gain (loss) on pension plan assets		45,493			409,082			(2,499,326	)


Comprehensive income	$	2,827,887			3,719,996			2,416,186

See accompanying notes to financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2010, 2009 and 2008


										Accumulated
	Common Stock									Other
	Shares						Retained			Comprehensive
	Issued		Amount		Surplus		Earnings			Income (Loss)
Balance, January 1, 2008		1,330,338	$	3,325,845		14,500,000		31,111,546			(496,742	)

Net income		—		—		—		4,729,650			—
Cash dividends, $1.35 per share		—		—		—		(1,795,956	)		—
Change in unrealized gain (loss) on securities available-for-sale, net of taxes of $95,747		—		—		—		—			185,862
Change in unrealized gain (loss) on pension plan, net of taxes of ($1,287,532)		—		—		—		—			(2,499,326	)

Balance, December 31, 2008		1,330,338		3,325,845		14,500,000		34,045,240			(2,810,206	)

Net income		—		—		—		3,311,241			—
Cash dividends, $1.35 per share		—		—		—		(1,795,957	)		—
Change in unrealized gain (loss) on securities available-for-sale, net of taxes of ($168)		—		—		—		—			(327	)
Change in unrealized gain (loss) on pension plan, net of taxes of $210,739		—		—		—		—			409,082

Balance, December 31, 2009, as originally reported		1,330,338		3,325,845		14,500,000		35,560,524			(2,401,451	)
Prior period adjustment of $333,702 (see Note 17)		—		—		—		333,702			—

Balance, December 31, 2009, as restated		1,330,338		3,325,845		14,500,000		35,894,226			(2,401,451	)

Net income		—		—		—		4,915,658			—
Cash dividends, $1.35 per share		—		—		—		(1,795,956	)		—
Change in unrealized gain (loss) on securities available-for-sale, net of taxes of ($1,098,954)		—		—		—		—			(2,133,264	)
Change in unrealized gain (loss) on pension plan, net of taxes of $23,435		—		—		—		—			45,493

Balance, December 31, 2010		1,330,338	$	3,325,845		14,500,000		39,013,928			(4,489,222	)

See accompanying notes to financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008


	2010			2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,915,658			3,311,241			4,729,650
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,395,506			1,446,905			1,214,757
Provision for loan losses		1,027,127			780,890			561,127
Writedowns on real estate owned		—			80			55,947
(Accretion) amortization of securities premium/discount		122,445			2,053			69,178
(Gain) on sale of assets		(962,365	)		(47,279	)		(356,283	)
(Gain) on sale of securities		(365,401	)		—			(117,392	)
Noncash charitable donation		—			—			310,000
Decrease in accrued income		98,582			586,894			235,989
Reinvested earnings on securities		—			—			(61,649	)
Decrease in interest payable		(108,596	)		(413,805	)		(140,185	)
Other, net		1,835,120			(2,479,986	)		(344,723	)

Net cash provided by operating activities		7,958,076			3,186,993			6,156,416


CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell		13,303,000			(5,411,000	)		15,438,000
Proceeds from sales and maturities of securities available-for-sale		100,232,140			51,065,000			43,045,413
Purchases of securities available-for-sale		(186,093,370	)		(54,156,709	)		(33,919,423	)
Proceeds from maturities of securities held-to-maturity		133,145,000			126,792,593			91,075,741
Purchases of securities held-to-maturity		(102,305,295	)		(124,236,466	)		(93,792,767	)
Purchase of non-marketable equity securities		—			(300,000	)		—
Net (increase) decrease in loans		(10,783,494	)		(11,644,680	)		1,983,719
Purchases of property and equipment		(113,037	)		(475,507	)		(4,168,409	)
Proceeds from sale of assets		1,382,972			221,400			140,000

Net cash provided (used) by investing activities		(51,232,084	)		(18,145,369	)		19,802,274


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		45,333,097			15,622,900			(16,263,799	)
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase		5,295,896			(2,483,335	)		(10,101,519	)
Dividends paid		(1,795,956	)		(1,795,957	)		(1,795,956	)

Net cash provided (used) by financing activities		48,833,037			11,343,608			(28,161,274	)


Net increase (decrease) in cash and due from banks		5,559,029			(3,614,768	)		(2,202,584	)
Cash and due from banks, beginning		14,451,113			18,065,881			20,268,465

Cash and due from banks, ending	$	20,010,142			14,451,113			18,065,881

See accompanying notes to financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008


	2010		2009		2008
Supplemental disclosures of cash flow information:

Cash paid during the year for:
Interest	$	3,718,218		5,410,897		7,277,410

Income taxes		900,000		1,680,000		2,525,000

See accompanying notes to financial statements.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations:

Merchants & Marine Bancorp, Inc. (the “Bancorp”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiary, Merchants & Marine Bank (the “Bank”). The Bancorp generates commercial, mortgage and consumer loans and receives deposits from customers located primarily in Jackson and George Counties in Mississippi. The Bancorp operates under a state bank charter and provides full banking services. As a state bank, the Bancorp is subject to regulation by the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation.

The Bancorp is locally owned and strongly community oriented. The Bancorp’s goal is to offer all the products and services of the larger banks and multi-bank holding corporations, while maintaining the personalized, local service of a community bank.

Basis of Consolidation:

The consolidated financial statements include the accounts of Merchants & Marine Bancorp, Inc. and its wholly-owned subsidiary, Merchants & Marine Bank, after elimination of all material intercompany transactions and balances.

Use of Estimates:

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

The determination of the allowance for loan losses is a material estimate that is particularly subject to significant change in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

The Bancorp’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bancorp to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Cash and Cash Equivalents:

For the purpose of presentation in the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand and amounts due from banks.

Securities:

Securities have been classified into one of three categories: trading, held-to-maturity or available-for-sale. Management determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates this classification periodically. Trading account securities are held for resale in anticipation of short-term market movements. Debt securities are classified as held-to-maturity when management has the positive intent and ability to hold the securities to maturity. Securities not classified as held-to-maturity or trading are classified as available-for-sale. The Bancorp had no trading securities during the three-year period ended December 31, 2010. Held-to-maturity securities are stated at amortized cost. Debt and equity securities available-for-sale are stated at fair value, with unrealized gains and losses, net of income taxes, reported as a separate component of stockholders’ equity until realized.

The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity over the estimated life of the security. Amortization, accretion and accrued interest are included in interest on investment securities. Realized gains and losses and declines in fair value judged to be other-than-temporary are included in net security gains (losses). Gains and losses on the sale of securities available-for-sale are determined using the specific identification method.

The Bancorp also holds non-marketable securities. These securities are restricted and do not have readily determinable fair values. These securities are carried at their acquisition cost and are accounted for by the cost method.

Loans:

Loans are stated at the amount of unpaid principal. Interest on commercial and real estate mortgage loans is accrued and credited to income based on the principal amount outstanding. Income on installment loans is credited to income based on a method that approximates the interest method. The accrual of interest on loans is discontinued once the loan reaches 90 days past due. Upon such discontinuance, all unpaid accrued interest is reversed and payments subsequently received are applied first to principal. Interest income is recorded after principal has been satisfied and as payments are received. Loans are returned to accrual status when all the principal and interest contractually due are brought current and future amounts are reasonably assured.

A loan is considered impaired when, based on current information and events, it is probable that the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis,

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans (continued):

taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. A valuation allowance is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bancorp does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements.

Allowance for Loan Losses:

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the remaining loan balance will go uncollected. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

Property and Equipment, Net:

Property and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the term of the lease or the asset’s useful life.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Other Real Estate Owned:

Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at the lower of cost or fair value less estimated selling costs at the date of foreclosure. Fair value is based primarily on independent appraisals and other relevant factors. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed and included in non-interest expense. The portion of interest costs relating to development of real estate is capitalized.

Goodwill:

Goodwill represents costs in excess of the fair value of net assets acquired in connection with purchase business combinations. The Bancorp tests its goodwill for impairment annually. If indicators of impairment were present in goodwill and undiscounted future cash flows were not expected to be sufficient to recover the asset’s carrying amount, an impairment loss would be charged to expense in the period identified. No impairment charges were recognized during the three years ended December 31, 2010.

Income Taxes:

Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of non-taxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable and pretax financial income and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred taxes on temporary differences are calculated at the currently enacted tax rates applicable to the period in which the deferred tax assets, liabilities, income or expense are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Comprehensive Income:

Comprehensive income includes net income and other comprehensive income which, in the case of the Bancorp, includes unrealized gains and losses on securities available-for-sale and the gains or losses and prior service cost or credits that arise during the period related to the Bancorp’s defined benefit pension plan but are not recognized as components of net periodic benefit cost. All items of comprehensive income are stated net of tax.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value Measurements:

On January 1, 2008, the Bancorp adopted new accounting guidance regarding fair value measurement standards, which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. The new guidance describes the three levels of inputs that may be used to measure fair value:

•		Level 1 inputs are unadjusted quoted prices in active markets for identical securities.

•		Level 2 inputs include quoted prices for similar securities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the investments. Such inputs include market interest rates, volatilities and yield curves.

•		Level 3 inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement including the reporting entity’s own assumptions in determining the fair value of the investment.

NOTE 2. SECURITIES

The amortized cost of securities and their estimated fair values are as follows (dollars in thousands):


	December 31, 2010									December 31, 2009
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available-for-sale:
US Government Agency Funds	$	119,168		5		(2,956	)		116,217		32,927		278		(27	)		33,178
Equity securities		72		45		—			117		72		76		—			148

Total	$	119,240		50		(2,956	)		116,334		32,999		354		(27	)		33,326


Held-to-maturity:
US Government Agency Funds	$	83,157		1,219		—			84,376		123,670		1,043		(240	)		124,473
State, county and municipal securities		29,825		587		(399	)		30,013		20,287		630		(64	)		20,853

Total	$	112,982		1,806		(399	)		114,389		143,957		1,673		(304	)		145,326

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 2. SECURITIES (continued)

The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale at December 31, 2010 by contractual maturity are as follows (dollars in thousands):


	Available-For-Sale				Held-To-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Amounts maturing in:
One year or less	$	72		117		4,887		4,954
After one year through five years		5,000		5,001		63,248		64,536
After five years through ten years		114,168		111,216		36,795		37,317
Greater than ten years		—		—		8,052		7,582

	$	119,240		116,334		112,982		114,389

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Proceeds from sales of avaliable-for-sale securities were approximately $38,052,000 in 2010, including a realized gain of $365,401. There were no sales of securities in 2009 or 2008.

On March 25, 2008, Visa, Inc. completed its initial public offering (“IPO”). Prior to the IPO, the Bancorp owned 2,744 shares of Visa, Inc., which had been acquired through the years by participation in the VISA network. The Bancorp did not carry these shares as an asset on its balance sheet because there was no readily determinable market value for this investment, nor did the Bancorp have a basis in it. As a result of the Bancorp’s participation in the IPO, the Bancorp received $45,413 under a mandatory partial redemption clause for 1,061 shares, plus 1,683 shares of the newly issued Visa, Inc. stock. These shares were valued at $42.80 per share, or $72,032 for the 1,683 shares received. The proceeds received by the Bancorp from the Visa IPO are included in the December 31, 2008 Consolidated Statement of Income under the caption “Other non-interest income.”

Securities with a carrying value of approximately $130,295,000 and $101,375,000, respectively, were pledged at December 31, 2010 and 2009 to secure certain deposits.

Information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows (dollars in thousands):


	Less Than 12 Months					12 Months or Greater				Total
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses

December 31, 2010:
US Government Agency Funds	$	101,212		(2,956	)		—		—		101,212		(2,956	)
State, county and municipal securities		9,786		(399	)		—		—		9,786		(399	)

Total	$	110,998		(3,355	)		—		—		110,998		(3,355	)

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 2. SECURITIES (continued)


	Less Than 12 Months					12 Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

December 31, 2009:
US Government Agency Funds	$	16,368		(247	)		979		(20	)		17,347		(267	)
State, county and municipal securities		2,065		(64	)		—		—			2,065		(64	)

Total	$	18,433		(311	)		979		(20	)		19,412		(331	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and to the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Bancorp to retain its investments in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2010, the 51 debt securities with unrealized losses have depreciated 2.93% from the Bancorp’s amortized cost basis. These securities are guaranteed by either the U.S. Government or other governments. These unrealized losses relate principally to current interest rates for similar types of securities and not credit quality. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other-than-temporary.

The Bancorp also holds non-marketable equity securities. These securities are restricted and do not have readily determinable market values. These securities are carried at their acquisition cost and are accounted for by the cost method.

The acquisition cost of these non-marketable securities as of December 31, 2010 and 2009 are as follows:


	2010		2009

Beginning balance	$	900,060		600,060
Purchases of non-marketable equity securities		—		300,000

Ending balance	$	900,060		900,060

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 3. LOANS

Loans outstanding at December 31, 2010 and 2009, by major lending classification, were as follows (in thousands):


	2010		2009

Loans secured by real estate:
Construction	$	28,111		26,933
Farmland		1,708		1,517
Revolving, open-end secured
by 1-4 family residential property		1,021		1,381
1-4 family residential properties		43,568		42,352
Multifamily (5 or more) residential properties		398		77
Nonfarm nonresidential properties		83,461		70,527
Commercial and industrial		27,210		26,743
Loans to individuals for household, family and other personal expenditures		29,544		35,535
Municipal and government		3,670		4,582
Other		1,089		610

	$	219,780		210,257

Changes in the allowance for loan losses for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):


	2010			2009			2008

Balance, January 1,	$	3,100			3,100			3,100
Recoveries		646			337			264
Loans charged off		(1,505	)		(1,118	)		(827	)
Provision for loan losses		1,027			781			563

Balance, December 31,	$	3,268			3,100			3,100

The Bancorp’s lending activities are concentrated in Jackson and George Counties in Mississippi.

At December 31, 2010 and 2009, the carrying amounts of nonaccrual loans, which are considered for impairment analysis were $3,916,546 and $950,644, respectively. When a loan is deemed impaired, the full difference between the carrying amount of the loan and the most likely estimate of the asset’s fair value less cost to sell, is charged-off. At December 31, 2010 and 2009, specifically evaluated impaired loans totaled $5,788,306 and $3,992,386, respectively. The average carrying amounts of specifically evaluated impaired loans for 2010, 2009 and 2008 were $3,486,377, $2,188,012 and $2,271,027, respectively. The Bancorp had $1,677,759, $1,130,179 and $20,258 of specific allowance related to impaired loans at December 31, 2010, 2009 and 2008, respectively. The amount of interest that would have been recorded on nonaccrual loans had the loans not been classified as nonaccrual in 2010, 2009 and 2008, was $266,909, $826,345 and $741,495, respectively. No material interest income was recognized on impaired or nonaccrual loans for the years ended December 31, 2010, 2009 and 2008.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 3. LOANS (continued)

Transfers from loans to other real estate owned amounted to approximately $468,000, $2,135,000 and $141,500 for the years ended 2010, 2009 and 2008, respectively.

NOTE 4. PROPERTY AND EQUIPMENT, NET

Property and equipment as of December 31, 2010 and 2009 are stated at cost less accumulated depreciation as follows (in thousands):


	2010			2009

Land and buildings	$	19,389			19,148
Furniture and equipment		5,179			5,104

		24,568			24,252
Accumulated depreciation		(8,841	)		(7,474	)

Net property and equipment	$	15,727			16,778

Depreciation expense for the years ended December 31, 2010, 2009 and 2008 amounted to $1,395,506, $1,446,905 and $1,214,757, respectively.

NOTE 5. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Bancorp’s deferred tax assets and liabilities as of December 31, 2010 and 2009 are as follows (in thousands):


	2010			2009
Deferred tax assets:
Provision for loan losses not currently deductible	$	890			862
Write-down of other real estate not currently deductible		224			113
Deferred compensation		1,655			1,592
Loan origination costs not currently deductible		318			329
Accrued interest on non-accrual loans		91			281
Underfunded pension		835			649
Losses on defined benefit plan assets		1,325			1,348
Unrealized gains on securities available-for-sale		988			—

Gross deferred tax asset		6,326			5,174


Deferred tax liabilities:
Book basis of fixed assets greater than tax		(2,851	)		(2,847	)
Discount accretion		(10	)		(16	)
Unrealized gains on securities available-for-sale		—			(111	)

Gross deferred tax liability		(2,861	)		(2,974	)

Net deferred tax asset	$	3,465			2,200

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 5. INCOME TAXES (continued)

The Bancorp has evaluated the need for a valuation allowance and, based on the weight of the available evidence, has determined that it is more likely than not that all deferred tax assets will be realized.

Income taxes consisted of the following components for the years ended December 31, 2010, 2009 and 2008 (in thousands):


	2010			2009			2008

Currently payable	$	1,946			1,519			2,334
Deferred		(398	)		(84	)		(106	)

Total income taxes	$	1,548			1,435			2,228

Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34% to income before taxes. The reasons for the differences for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):


	2010						2009						2008
	Amount			%			Amount			%			Amount			%
Taxes computed at statutory rate	$	2,198			34.0			1,614			34.0			2,366			34.0
Increase (decrease) in taxes resulting from:
Tax exempt life insurance income (net of expense)		(151	)		(2.3	)		(61	)		(1.3	)		(61	)		(0.9	)
Tax exempt interest income		(300	)		(4.6	)		(141	)		(3.0	)		(99	)		(1.4	)
Tax credits available		(181	)		(2.8	)		—			—			—			—
Miscellaneous permanent differences		(18	)		(0.3	)		23			0.5			22			0.3

	$	1,548			24.0			1,435			30.2			2,228			32.0

On January 1, 2008, the Bancorp adopted new accounting guidance that clarified the accounting for uncertain tax positions. The Bancorp determined that no adjustment was required to retained earnings due to the adoption of this new accounting guidance. There were no material uncertain tax positions at December 31, 2010. The Bancorp does not expect that unrecognized tax benefits will significantly increase or decrease within the next 12 months.

It is the Bancorp’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in income tax expense. As of December 31, 2010, no interest or penalties were accrued on the Bancorp’s Consolidated Balance Sheet.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 5. INCOME TAXES (continued)

The Bancorp and its subsidiary file consolidated income tax returns with federal and Mississippi taxing authorities. Its filed income tax returns are no longer subject to examination by taxing authorities for years prior to 2007.

NOTE 6. DEPOSITS

Deposit account balances at December 31, 2010 and 2009 are summarized as follows (in thousands):


	2010		2009
Non-interest bearing demand	$	79,614		77,614
Interest bearing demand		190,373		155,140
Savings		44,056		44,007
Certificates of deposit		114,158		106,107

Total deposits	$	428,201		382,868

Certificates by contractual maturity as of December 31, 2010 are as follows (in thousands):


2011	$	84,865
2012		12,149
2013		2,803
2014		1,136
2015		8,156
Thereafter		5,049

	$	114,158

Certificates of deposit in excess of $100,000 aggregated approximately $56,773,000 and $54,494,000 at December 31, 2010 and 2009, respectively. Interest expense on these certificates amounted to approximately $971,000 and $1,576,000 for the years ended December 31, 2010 and 2009, respectively.

Overdrawn demand deposits reclassified as loans totaled approximately $532,000 and $599,000 at December 31, 2010 and 2009, respectively.

NOTE 7. LINES OF CREDIT

The Bancorp has established various lines of credit with financial institutions, allowing for maximum borrowings of $25,200,000 at rates determined by the lender when borrowed. At December 31, 2010 and 2009, the Bancorp had no outstanding balance on these lines of credit.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 8. EMPLOYEE BENEFIT PLANS

The Bancorp 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. Data relative to the pension plan as of December 31, 2010, 2009 and 2008 follows (in thousands):


	December 31,
	2010			2009			2008
Reconciliation of benefit obligation:
Projected benefit obligation at beginning of period	$	10,660			9,662			8,865
Service cost		405			320			326
Interest cost		601			587			632
Actuarial (gain) loss		519			439			426
Distributions		(391	)		(348	)		(587	)

Projected benefit obligation at end of period		11,794			10,660			9,662


Reconciliation of plan assets:
Fair value of plan assets at beginning of period		8,753			7,830			10,887
Actual return (loss) on plan assets		1,082			1,355			(2,369	)
Benefit payments		(391	)		(348	)		(587	)
Expenses		(107	)		(84	)		(101	)

Fair value of plan assets at end of period		9,337			8,753			7,830


Funded status, included in other liabilities	$	(2,457	)		(1,907	)		(1,832	)


Amounts recognized in accumulated other comprehensive income (loss):
Net loss	$	3,896			3,965			4,585


Net periodic pension expense:
Service cost	$	406			320			279
Interest cost		601			587			542
Actual (gain) loss on plan assets		(660	)		(549	)		(747	)
Amortization of (gain) loss		272			336			—

Net periodic pension cost	$	619			694			74

The accumulated benefit obligation for the defined benefit plan was $11,072,217 and $9,749,511 at December 31, 2010 and 2009, respectively.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 8. EMPLOYEE BENEFIT PLANS (continued)


	2010			2009			2008
Rate assumptions:
Discount rate		5.19	%		5.77	%		6.23	%
Long term rate of investment return		7.75	%		7.75	%		7.00	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%

The investment portfolio objective is to seek a balance of investment risk and return by investing in fixed income and equities using tactical asset allocation. In addition, the portfolio seeks to meet current beneficiary liabilities while at the same time grow the principal of the portfolio through price appreciation, dividend income and interest income. The Bancorp’s Pension Plan Investment Committee, in establishing these objectives, acknowledges that any investment other than cash entails a risk of loss of principal value, but expects the evaluation of the risk to the potential return to be a significant factor in the selection of the investment assets. The Bancorp’s asset allocation targets are 30% fixed income and 70% equity, with no more than 15% of the total equity investment concentrated in international investments.

The fair values of the Bancorp’s pension plan assets at December 31, 2010 and 2009 by asset category are as follows:


	Total		Level 1		Level 2		Level 3
December 31, 2010:
Asset category:
Cash and cash equivalents	$	161,320		161,320		—		—
Equity securities:
US Companies		3,709,080		3,550,897		158,183		—
International companies		110,115		110,115		—		—
Fixed income securities:
US Government securities		61,534		—		61,534		—
Corporate bonds		95,087		—		95,087		—
Mutual funds		5,200,324		5,200,324		—		—

Total pension plan assets	$	9,337,460		9,022,656		314,804		—


	Total		Level 1		Level 2		Level 3
December 31, 2009:
Asset category:
Cash and cash equivalents	$	105,660		105,660		—		—
Equity securities:
US Companies		3,290,409		3,170,649		119,760		—
International companies		136,833		136,833		—		—
Fixed income securities:
US Government securities		54,482		—		54,482		—
Corporate bonds		94,213		—		94,213		—
Mutual funds		5,071,667		5,071,667		—		—

Total pension plan assets	$	8,753,264		8,484,809		268,455		—

On the basis of the actuarial valuation, it has been determined that a contribution in the amount of $558,330 is required for the plan year ending October 31, 2011.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 8. EMPLOYEE BENEFIT PLANS (continued)

The following benefit payments which reflect expected future service, as appropriate, are expected to be paid:


2011	$	542,922
2012		570,542
2013		665,815
2014		686,022
2015		801,867
2016-2020		4,408,028

The Bancorp also has a 401(k) retirement plan which covers all employees who have completed one year of service of 1,000 hours or more and have attained the age of 21. The employees may voluntarily contribute up to 20% of their wages to the plan on a tax-deferred basis subject to IRS limitations. The Bancorp contributes a matching fifty percent (50%) of the first six percent (6%) of employee contributions. The Bancorp’s contributions to the plan was $126,699, $122,635 and $115,068 for the years ended December 31, 2010, 2009 and 2008, respectively.

NOTE 9. REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (“FDIC”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that if undertaken, could have a direct material effect on the Bank and the financial statements.

Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 2010, the Bank meets all the capital adequacy requirements to which it is subject.

As of December 31, 2010, the Bank was well capitalized under the regulatory framework for prompt corrective action according to the most recent notification from the FDIC. To remain categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 9. REGULATORY CAPITAL (continued)

The Bank’s actual and required capital amounts and ratios as of December 31, 2010 and 2009 are as follows (in thousands):


											To be Well
											Capitalized Under the
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2010:
Total Capital (to Risk-weighted Assets)	$	58,744		19.85	%		23,669		8.00	%		29,587		10.00	%
Tier I Capital (to Risk-weighted Assets)		55,359		18.71	%		11,835		4.00	%		17,752		6.00	%
Tier I Leverage Capital		55,359		11.06	%		15,022		3.00	%		25,036		5.00	%

December 31, 2009:
Total Capital (to Risk-weighted Assets)		55,512		20.50	%		21,659		8.00	%		27,040		10.00	%
Tier I Capital (to Risk-weighted Assets)		52,127		19.25	%		10,830		4.00	%		16,244		6.00	%
Tier I Leverage Capital		52,127		11.51	%		13,574		3.00	%		22,624		5.00	%

NOTE 10. RELATED PARTIES

The Bancorp has entered into transactions with its officers, directors, significant stockholders and their affiliates. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. A summary of the 2010, 2009 and 2008 activity with respect to loans to and deposits from related parties follow (in thousands):


	2010			2009			2008
Loans:
Balance, January 1	$	2,945			2,041			1,620
New loans		704			2,713			578
Payments		(958	)		(1,809	)		(157	)

Balance, December 31	$	2,691			2,945			2,041


Deposits:
Balance, January 1	$	5,012			3,326			4,175
Net change		106			1,686			(849	)

Balance, December 31	$	5,118			5,012			3,326

During the ordinary course of business, the Bancorp may purchase goods and services from companies that have a relationship with individuals who are considered related parties to the Bancorp. Significant transactions of this type include the purchase of legal services, consulting services and outsourced internal auditing services.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 10. RELATED PARTIES (continued)

During the years ended December 31, 2010, 2009 and 2008, the Bancorp paid $238,919, $244,215 and $243,689 in fees to a law firm of which one of the partners is a member of the Bancorp’s Board of Directors.

The Bancorp’s Chairman serves as the Bancorp’s nominee to Mississippi National Banker’s Bank headquartered in Jackson, Mississippi and serves on the Board of Mississippi National Banker’s Bank. The Mississippi National Banker’s Bank acts like a cooperative, providing banking services and products to community banks throughout the State of Mississippi. The Chairman has ownership of ten (10) shares of Mississippi National Banker’s Bank stock, which is required to serve on the Board of Directors. The shares are subject to an irrevocable option to purchase granted to the Bancorp, and upon his leaving the Board of Directors of the Mississippi National Banker’s Bank, the ten (10) shares would immediately be transferred to the Bancorp. The Bancorp, a founding member of Mississippi National Banker’s Bank, owns 2,505 shares of Mississippi National Banker’s Bank stock. During the years ended December 31, 2010, 2009 and 2008, the Bancorp paid $30,670, $30,969 and $19,346, respectively, in fees to Mississippi National Banker’s Bank for correspondent services.

In January 2005, the Bancorp entered into a consulting arrangement with one of its directors. A maximum of $47,100 in consulting fees (plus expenses) may be paid under the arrangement annually. This arrangement ended on December 31, 2008. The Bancorp incurred $47,662 under this consulting arrangement during the year ended December 31, 2008.

NOTE 11. FAIR VALUE

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in thousands).


	Total		Level 1		Level 2		Level 3
Assets at December 31, 2010:
Securities available-for-sale:
U.S. Government Agency funds	$	116,217		—		116,217		—
Equity securities		117		117		—		—
Assets at December 31, 2009:
Securities available-for-sale:
US Government Agency funds	$	33,178		—		33,178		—
Equity securities		148		148		—		—

The fair values of debt securities available-for-sale are generally determined by matrix pricing, which is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

The fair values of equity securities available-for-sale are determined by quoted market prices.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 11. FAIR VALUE (continued)

The following represents assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2010 and 2009.


	Total		Level 1		Level 2		Level 3
Assets at December 31, 2010:
Impaired loans	$	4,110,547		—		—		4,110,547

Assets at December 31, 2009:
Impaired loans	$	2,862,207		—		—		2,862,207

Impaired loans are loans for which it is probable the Bancorp will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Specific allowances for impaired loans are based on the fair value of the collateral.

Nonfinancial assets and liabilities measured at fair value on a recurring basis are summarized below:


	Total		Level 1		Level 2		Level 3
Assets at December 31, 2010:
Other real estate owned	$	2,275,723		—		—		2,275,723

Assets at December 31, 2009:
Other real estate owned	$	2,194,611		—		—		2,194,611

The fair value of other real estate owned is based primarily on independent appraisals, less costs to sell. The appraisals are generally discounted based on management’s historical knowledge, changes in market conditions from the time of valuation and/or management’s expertise and knowledge of the client and client’s business.

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 remaining maturities.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 11. FAIR VALUE (continued)

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.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase:

The carrying amount is a reasonable estimate of fair value.

The estimated fair values of the Bancorp’s financial instruments are as follows at December 31, 2010 and 2009 (in thousands):


	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Value		Value
Financial assets:
Cash and federal funds sold	$	23,157		23,157		30,901		30,901
Securities:
Available-for-sale		116,334		116,334		33,326		33,326
Held-to-maturity		112,982		114,389		143,957		145,326
Non-marketable		900		900		900		900
Loans, net of allowance		216,470		—		207,113		206,563

Financial liabilities:
Deposits		428,201		—		382,868		382,586
Federal funds purchased and securities sold under agreements to repurchase		13,730		13,730		8,434		8,434

NOTE 12. CONCENTRATIONS OF CREDIT

All of the Bancorp’s loans, commitments, commercial and standby letters of credit have been granted to customers in the Bancorp’s market area. The concentrations of credit by type of loan are set forth in Note 3. Commercial and standby letters of credit were granted primarily to commercial borrowers. Regulations limit the amount of credit the Bancorp can extend to any single borrower or group of related borrowers.

NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bancorp is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which are not reflected in the accompanying financial statements until they are funded or related fees are incurred or received.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (continued)

The Bancorp’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bancorp uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support for financial instruments with credit risk. These obligations are summarized below as of December 31, 2010 and 2009 (in thousands):


	2010		2009

Commitments to extend credit	$	30,164		27,516

Standby letters of credit		858		257

Commitments to extend credit are agreements to lend to a customer as long as conditions established in the agreement have been satisfied. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments often expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Bancorp continually evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bancorp upon extension of credit, is based on management’s credit evaluation of the counterparty. Standby letters of credit are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending a loan.

The Bancorp had due from bank balances in excess of the $250,000 federal insurance limit with the following banks as of December 31, 2010 (in thousands):


Mississippi National Banker’s Bank		$	108

NOTE 14. COMMITMENTS AND CONTINGENCIES

The Bancorp is a defendant in legal actions arising from its normal business activities. Management, on advice from counsel, believes that those actions are without merit or that the ultimate liability resulting from them, if any, will not materially affect the Bancorp’s financial position.

The Bancorp acquires space for several of its ATMs under operating leases that are currently under month-to-month terms. In the past, the Bancorp has also leased buildings and land under operating leases. Lease expense under operating leases was approximately $24,000, $24,000 and $56,000 during the years ended December 31, 2010, 2009 and 2008, respectively.

Because the Bancorp’s operating leases are presently under month-to-month terms, there are no future minimum payments required under non-cancelable leases, as of December 31, 2010.

MERCHANTS & MARINE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008

NOTE 15. RECLASSIFICATION

Certain reclassifications were made to prior year financial statements in order to conform to the 2010 financial statements presentation.

NOTE 16. FORMATION OF HOLDING COMPANY

On February 5, 2008, the Bank entered into an agreement with Merchants & Marine Bancorp, Inc., a bank holding company organized under laws of the State of Mississippi. Under the agreement, all of the outstanding shares of the Bank’s common stock were exchanged for shares of the Bancorp. This Share Exchange was consummated on April 24, 2008, and the Bancorp became a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to regulation by the Mississippi Department of Banking and Consumer Finance and the Board of Governors of the Federal Reserve Bank.

NOTE 17. PRIOR PERIOD ADJUSTMENT

The Bancorp recorded certain corrections of errors in the current year, as follows:


Retained earnings at December 31, 2009, as originally presented	$	35,560,524

To correct valuation of other real estate owned		109,225

To correct valuation of bank property		224,477


Total prior period adjustment		333,702


Retained earnings at December 31, 2009, as restated	$	35,894,226

NOTE 18. SUBSEQUENT EVENTS

The Bancorp has evaluated subsequent events through February 14, 2011, the date of issuance of the financial statements. No material subsequent events have occurred since December 31, 2010 that required recognition or disclosure in the financial statements.

Merchants & Marine Bancorp, Inc. - FORM 10-K - EX-13 - EXHIBIT 13 - March 25, 2011

Attached files

Merchants & Marine Bancorp, Inc. Reports