##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20429
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-53198
 Merchants & Marine Bancorp, Inc.
 
 Mississippi
    
    26-2498567(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3118 Pascagoula Street, Pascagoula, Mississippi
    
    39567(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




---



TABLE OF CONTENTS  PART IFINANCIAL INFORMATIONItem 1. Financial Statements.Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other informationItem 6. ExhibitsSIGNATURESEX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32.1 Section 906 Certification of the CEOEX-32.2 Section 906 Certification of the CFO    Table of Contents  
 PART IFINANCIAL INFORMATION
 
 Item 1. Financial Statements.




---



##### Table of Contents



CONDENSED BALANCE SHEETS
 (Unaudited)
    
    
    (Audited)March 31, 2008
    
    
    December 31, 2007ASSETS:Cash and due from banks (non-interest bearing)
    
    $
    28,505,060
    
    
    
    20,268,465Federal funds sold
    
    
    64,953,000
    
    
    
    26,477,000Securities:Available for sale, at market value
    
    
    9,137,896
    
    
    
    38,975,101Held to maturity, at amortized cost
    
    
    158,290,203
    
    
    
    143,792,190Non-marketable equity securities
    
    
    600,060
    
    
    
    600,060Loans, less allowance for loan losses $3,100,000
and $3,100,000, respectively
    
    
    199,935,110
    
    
    
    200,812,432Property and equipment, net
    
    
    15,183,168
    
    
    
    14,890,181Other real estate owned
    
    
    129,554
    
    
    
    406,606Accrued income
    
    
    3,194,316
    
    
    
    3,322,522Other assets
    
    
    9,905,319
    
    
    
    9,988,159TOTAL ASSETS
    
    $
    489,833,686
    
    
    
    459,532,716LIABILITIES AND STOCKHOLDERS EQUITY:Deposits:Non-interest bearing demand
    
    $
    129,185,481
    
    
    
    124,829,897Interest bearing demand, savings, money
market, and
other time
    
    
    269,026,704
    
    
    
    258,592,773Total deposits
    
    
    398,212,185
    
    
    
    383,422,670Federal funds purchased and securities sold under
agreements to repurchase
    
    
    36,224,867
    
    
    
    21,018,486Accrued expenses and other liabilities
    
    
    5,862,210
    
    
    
    6,650,911Total liabilities
    
    
    440,299,262
    
    
    
    411,092,067Stockholders Equity:Common stock  $2.50 par value, 1,330,560 shares
authorized and outstanding
    
    
    3,325,845
    
    
    
    3,325,845Surplus
    
    
    14,500,000
    
    
    
    14,500,000Retained earnings
    
    
    32,198,322
    
    
    
    31,123,789Accumulated other comprehensive income:Unrealized
gain (loss) on securities available for sale
    
    
    48,990
    
    
    
    29,748Unrealized gain (loss) on defined benefit pension plan
    
    
    (538,733
    )
    
    
    (538,733
    )Total stockholders equity
    
    
    49,534,424
    
    
    
    48,440,649TOTAL LIABILITES AND STOCKHOLDERS EQUITY
    
    $
    489,833,686
    
    
    
    459,532,716




---



##### Table of Contents



CONDENSED STATEMENT OF INCOME
 Three Months EndedMarch 31,2008
    
    
    2007Interest Income:Interest and fees on loans
    
    $
    3,891,942
    
    
    
    4,070,209Interest on investment securities:Taxable
    
    
    1,966,410
    
    
    
    2,445,853Exempt from federal income tax
    
    
    78,864
    
    
    
    78,916Interest on federal funds sold
    
    
    326,335
    
    
    
    410,144Total interest income
    
    
    6,263,551
    
    
    
    7,005,122Interest Expense:Interest on deposits
    
    
    1,923,278
    
    
    
    1,998,589Interest on federal funds purchased
and securities sold under agreements
to repurchase
    
    
    140,372
    
    
    
    108,861Total interest expense
    
    
    2,063,650
    
    
    
    2,107,450Net interest income
    
    
    4,199,901
    
    
    
    4,897,672Provision for loan losses
    
    
    (51,206
    )
    
    
    443Net interest income
after provision for loan losses
    
    
    4,251,107
    
    
    
    4,897,229Non-Interest Income:Service charges
    
    
    1,075,864
    
    
    
    1,004,746Miscellaneous
    
    
    600,558
    
    
    
    478,022Total non-interest income
    
    
    1,676,422
    
    
    
    1,482,768Non-Interest Expense:Salaries and employee benefits
    
    
    1,842,764
    
    
    
    1,671,862Premises
    
    
    660,085
    
    
    
    677,643Miscellaneous
    
    
    1,513,380
    
    
    
    1,520,317Total non-interest expense
    
    
    4,016,229
    
    
    
    3,869,822Income before income taxes
    
    
    1,911,300
    
    
    
    2,510,175Provision for income taxes
    
    
    491,939
    
    
    
    793,939NET INCOME
    
    $
    1,419,361
    
    
    
    1,716,236NET INCOME PER COMMON SHARE
    
    $
    1.07
    
    
    
    1.29




---



##### Table of Contents



&  CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 Three Months EndedMarch 31,2008
    
    
    2007Net income
    
    $
    1,419,361
    
    
    
    1,716,236Other comprehensive income, net of tax:Unrealized holding gains (losses) arising
during period
    
    
    19,242
    
    
    
    (22,473
    )Comprehensive income
    
    $
    1,438,603
    
    
    
    1,693,763




---



##### Table of Contents



CONDENSED STATEMENT OF CASH FLOWS
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    1,419,361
    
    
    
    1,716,236Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    279,316
    
    
    
    157,738Provision for loan losses
    
    
    (51,206
    )
    
    
    443Write-down of other real estate owned
    
    
    33,552
    
    
    
    33,552Reinvested earnings on securities
    
    
    (57,983
    )
    
    
    (433,454
    )Net premium amortization (discount accretion)
    
    
    (5,776
    )
    
    
    (85,748
    )(Increase) in accrued income receivable
    
    
    128,206
    
    
    
    (160,267
    )Increase in interest payable
    
    
    (102,362
    )
    
    
    62,260(Gain) loss on disposition of assets
    
    
    (117,392
    )
    
    
    21,938Net change in other assets and liabilities
    
    
    (625,654
    )
    
    
    (152,491
    )Net Cash Provided by Operating Activities
    
    
    900,062
    
    
    
    1,160,207CASH FLOWS FROM INVESTING ACTIVITIES:Net (increase) decrease in Federal funds sold
    
    
    (38,476,000
    )
    
    
    (20,200,000
    )Purchase of securities available for sale
    
    
    
    
    
    
    (34,184,673
    )Proceeds from maturities of securities available for sale
    
    
    30,045,413
    
    
    
    23,000,000Purchase of securities held to maturity
    
    
    (57,699,250
    )
    
    
    (25,892,293
    )Proceeds from maturities of securities held to maturity
    
    
    43,203,333
    
    
    
    16,390,000Net (increase) decrease in loans
    
    
    1,172,028
    
    
    
    1,662,417Purchase of property and equipment
    
    
    (572,303
    )
    
    
    (1,333,262
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    Net Cash (Used) in investing Activities
    
    
    (22,326,779
    )
    
    
    (40,557,811
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    14,789,516
    
    
    
    33,415,753Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase
    
    
    15,206,381
    
    
    
    7,967,143Dividends paid to stockholders
    
    
    (332,585
    )
    
    
    (332,585
    )Net Cash Provided by Financing Activities
    
    
    29,663,312
    
    
    
    41,050,311Net Increase in Cash and Due from Banks
    
    
    8,236,595
    
    
    
    1,652,707Cash and Due From Banks, Beginning
    
    
    20,268,465
    
    
    
    33,266,273Cash and Due From Banks, Ending
    
    $
    28,505,060
    
    
    
    34,918,980




---



##### Table of Contents



NOTES TO CONDENSED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
 Basis of Presentation
   Interim Financial Statements.
  December 31, 2007 Balance Sheet Presentation.
  Use of Estimates.




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-looking Statements
  Formation of Holding Company
  Executive Summary




---



##### Table of Contents



Earnings Highlights
  Earning Assets




---



##### Table of Contents



Net Interest Income




---



##### Table of Contents



Interest Rate Sensitivity
    Loans




---



##### Table of Contents



Allowance for Loan Losses
    Critical Accounting Policies




---



##### Table of Contents



Asset Quality




---



##### Table of Contents



-
 Securities Available for Sale and Investment Securities




---



##### Table of Contents



Deposits
  Liquidity
  Off Balance Sheet Arrangements
   Contractual Obligations




---



##### Table of Contents



Risk-Based Capital/Stockholders Equity
    Non-Interest Income




---



##### Table of Contents



Non-Interest Expense
   Income Taxes
  Subsequent Events




---



##### Table of Contents



TABLE 1
COMPARATIVE AVERAGE BALANCES  YIELDS AND RATES
  2008
    
    
    2007
    
    
    2006Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Assets
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    RateInterest-earning assets:Loans, net of unearned
income
    
    $
    203,418
    
    
    $
    3,892
    
    
    
    7.65
    %
    
    $
    204,305
    
    
    $
    4,070
    
    
    
    7.97
    %
    
    $
    173,135
    
    
    $
    2,985
    
    
    
    6.90
    %Securities held to
maturity:Taxable
    
    
    138,448
    
    
    
    1,749
    
    
    
    5.05
    %
    
    
    112,553
    
    
    
    1,337
    
    
    
    4.75
    %
    
    
    92,091
    
    
    
    982
    
    
    
    4.27
    %Exempt from Federal
income tax
    
    
    9,049
    
    
    
    79
    
    
    
    3.49
    %
    
    
    9,871
    
    
    
    79
    
    
    
    3.20
    %
    
    
    10,550
    
    
    
    79
    
    
    
    3.00
    %Securities available
for sale:Taxable
    
    
    18,158
    
    
    
    211
    
    
    
    4.65
    %
    
    
    85,299
    
    
    
    1,109
    
    
    
    5.20
    %
    
    
    147,148
    
    
    
    1,514
    
    
    
    4.12
    %Federal funds sold
and securities purchased under agreements to resell
    
    
    42,817
    
    
    
    326
    
    
    
    3.05
    %
    
    
    32,107
    
    
    
    410
    
    
    
    5.11
    %
    
    
    27,235
    
    
    
    316
    
    
    
    4.64
    %Total interest-earning
assets
    
    $
    411,890
    
    
    $
    6,257
    
    
    
    6.08
    %
    
    $
    444,135
    
    
    $
    7,005
    
    
    
    6.31
    %
    
    $
    450,159
    
    
    $
    5,876
    
    
    
    5.22
    %Non interest-earning
assets:Cash and due from
banks
    
    
    27,664
    
    
    
    
    
    
    
    
    
    
    
    32,473
    
    
    
    
    
    
    
    
    
    
    
    31,649Bank premises and
equipment
    
    
    14,954
    
    
    
    
    
    
    
    
    
    
    
    13,164
    
    
    
    
    
    
    
    
    
    
    
    8,067Other assets
    
    
    14,061
    
    
    
    
    
    
    
    
    
    
    
    13,338
    
    
    
    
    
    
    
    
    
    
    
    12,420Allowance for possible
loan losses
    
    
    (3,101
    )
    
    
    
    
    
    
    
    
    
    
    (3,100
    )
    
    
    
    
    
    
    
    
    
    
    (3,034
    )Total assets
    
    $
    465,468
    
    
    
    
    
    
    
    
    
    
    $
    500,010
    
    
    
    
    
    
    
    
    
    
    $
    499,261




---



##### Table of Contents



TABLE 1 (continued)
COMPARATIVE AVERAGE BALANCES  YIELDS AND RATES (continued)
 2008
    
    
    2007
    
    
    2006Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Liabilities
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    RateInterest-bearing
liabilities:INT DDA, MMF & Savings
    
    $
    201,687
    
    
    $
    860
    
    
    
    1.71
    %
    
    $
    147,148
    
    
    $
    1,038
    
    
    
    2.82
    %
    
    $
    149,513
    
    
    $
    669
    
    
    
    1.79
    %Time deposits
    
    
    99,572
    
    
    
    1,063
    
    
    
    4.27
    %
    
    
    90,219
    
    
    
    960
    
    
    
    4.26
    %
    
    
    77,933
    
    
    
    690
    
    
    
    3.54
    %Federal funds purchased,
securities sold under
agreements to repur-
chase and other short-
term borrowings
    
    
    19,481
    
    
    
    140
    
    
    
    2.87
    %
    
    
    15,136
    
    
    
    109
    
    
    
    2.88
    %
    
    
    18,751
    
    
    
    70
    
    
    
    1.49
    %Total interest-bearing
liabilities
    
    $
    320,740
    
    
    $
    2,063
    
    
    
    2.57
    %
    
    $
    252,503
    
    
    $
    2,107
    
    
    
    3.34
    %
    
    $
    246,197
    
    
    $
    1,429
    
    
    
    2.32
    %Noninterest-bearing
liabilities:Deposits
    
    
    89,073
    
    
    
    
    
    
    
    
    
    
    
    198,669
    
    
    
    
    
    
    
    
    
    
    
    208,647Other liabilities
    
    
    6,455
    
    
    
    
    
    
    
    
    
    
    
    5,281
    
    
    
    
    
    
    
    
    
    
    
    5,219Total liabilities
    
    
    416,268
    
    
    
    
    
    
    
    
    
    
    
    456,453
    
    
    
    
    
    
    
    
    
    
    
    460,063Stockholders
equity
    
    
    49,200
    
    
    
    
    
    
    
    
    
    
    
    43,557
    
    
    
    
    
    
    
    
    
    
    
    39,198Total liabilities and
stockholders
equity
    
    $
    465,468
    
    
    
    
    
    
    
    
    
    
    $
    500,010
    
    
    
    
    
    
    
    
    
    
    $
    499,261Net interest income/
margin-tax
equivalent
    
    
    
    
    
    $
    4,194
    
    
    
    3.60
    %
    
    
    
    
    
    $
    4,898
    
    
    
    3.92
    %
    
    
    
    
    
    $
    4,447
    
    
    
    3.56
    %Tax equivalent
adjustment:Loans
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    22Investment
securities
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    27Securities available
for saleOther
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total tax equivalent
adjustment
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    49Net Interest Income
    
    
    
    
    
    $
    4,060
    
    
    
    
    
    
    
    
    
    
    $
    4,775
    
    
    
    
    
    
    
    
    
    
    $
    4,398




---



##### Table of Contents



TABLE 2  TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
  Quarter ended March 31,2008 Compared to 2007
    
    2007 Compared to 2006Increase (Decrease) Due To
    
    Increase (Decrease) Due ToVolume
    
    Rate
    
    Net
    
    Volume
    
    Rate
    
    NetInterest income on:Loans
    
    $
    (887
    )
    
    $
    (178
    )
    
    $
    (1,065
    )
    
    $
    31,170
    
    
    $
    1,085
    
    
    $
    32,255Investment securities:Taxable
    
    
    25,895
    
    
    
    412
    
    
    
    26,307
    
    
    
    20,462
    
    
    
    355
    
    
    
    20,817Exempt from Federal
income tax
    
    
    (822
    )
    
    
    
    
    
    
    (822
    )
    
    
    (679
    )
    
    
    
    
    
    
    (679
    )Securities available for
sale:Taxable
    
    
    (67,141
    )
    
    
    (898
    )
    
    
    (68,039
    )
    
    
    (61,849
    )
    
    
    (405
    )
    
    
    (62,254
    )Federal funds sold and
securities purchased
under agreements to
resell
    
    
    10,710
    
    
    
    (84
    )
    
    
    10,626
    
    
    
    4,872
    
    
    
    94
    
    
    
    4,966Total
    
    $
    (32,245
    )
    
    $
    (748
    )
    
    $
    (32,993
    )
    
    $
    (6,024
    )
    
    $
    1,129
    
    
    $
    (4,895
    )Interest expense on:Savings deposits
    
    $
    54,539
    
    
    $
    (178
    )
    
    $
    54,361
    
    
    $
    (2,365
    )
    
    $
    369
    
    
    $
    (1,996
    )Time deposits
    
    
    9,353
    
    
    
    103
    
    
    
    9,456
    
    
    
    12,286
    
    
    
    270
    
    
    
    12,556Federal funds purchased,
and securities sold
under agreements to
repurchase
    
    
    4,345
    
    
    
    31
    
    
    
    4,376
    
    
    
    (3,615
    )
    
    
    39
    
    
    
    (3,576
    )Total
    
    $
    68,237
    
    
    $
    (44
    )
    
    $
    68,193
    
    
    $
    6,306
    
    
    $
    678
    
    
    $
    6,984Changes in net interest
income-tax equivalent
    
    $
    (100,482
    )
    
    $
    (704
    )
    
    $
    (101,186
    )
    
    $
    (12,330
    )
    
    $
    451
    
    
    $
    (11,879
    )




---



##### Table of Contents



TABLE 3  SECURITIES AVAILABLE FOR SALE AND PORTFOLIO SECURITIES
  March 31,2008
    
    
    2007
    
    
    2006Securities available for saleU. S. Treasury and other U. S. Government agencies
    
    $
    8,992
    
    
    $
    97,058
    
    
    $
    170,249Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    Other securities
    
    
    72
    
    
    
    
    
    
    
    Total securities available for sale
    
    $
    9,064
    
    
    $
    97,058
    
    
    $
    170,249Investment securitiesU. S. Treasury and other U. S. Government agencies
    
    $
    149,590
    
    
    $
    116,967
    
    
    $
    96,158Obligations of states and political subdivisions
    
    
    8,700
    
    
    
    10,230
    
    
    
    10,324Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    Other securities
    
    
    600
    
    
    
    600
    
    
    
    600Total investment securities
    
    
    158,890
    
    
    
    127,797
    
    
    
    107,082Total securities available for sale and investment securities
    
    $
    167,954
    
    
    $
    224,855
    
    
    $
    277,331




---



##### Table of Contents



TABLE 4  MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
  MaturingAfter
    
    
    
    
    
    After 5 YrsWithin
    
    
    
    
    
    1 Yr But
    
    
    
    
    
    But Within1 Year
    
    
    
    
    
    Within 5 Yrs
    
    
    
    
    
    10 Yrs
    
    
    
    
    
    
    
    
    
    After 10 Yrs.CarryingAmount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    AmountSecurities
available for sale
U.S. Treasury
and other U.S.
Government
agencies
    
    $
    8,992
    
    
    
    4.52
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    8,992Other securities
    
    
    72
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    72Total securities
available
for sale
    
    $
    9,064
    
    
    
    4.52
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    9,064Investment securities
U.S. Treasury
and other U.S.
Government
agencies
    
    $
    4,994
    
    
    
    4.29
    %
    
    $
    100,235
    
    
    
    4.91
    %
    
    $
    44,361
    
    
    
    4.92
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    149,590Obligations of states
and political
subdivisions
    
    $
    1,868
    
    
    
    4.79
    %
    
    
    3,326
    
    
    
    5.22
    %
    
    
    3,506
    
    
    
    5.49
    %
    
    
    
    
    
    
    0.00
    %
    
    
    8,700Other securities
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Total investment
securities
    
    $
    7,462
    
    
    
    4.48
    %
    
    $
    103,561
    
    
    
    5.07
    %
    
    $
    47,867
    
    
    
    5.57
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    158,890Total securities
available for sale
and investment
securities
    
    $
    16,526
    
    
    
    4.50
    %
    
    $
    103,561
    
    
    
    5.07
    %
    
    $
    47,867
    
    
    
    5.57
    %
    
    $
    
    
    
    
    0.00
    %
    
    $
    167,954




---



##### Table of Contents



TABLE 5  SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY  (Dollars in Thousands)
 TABLE 5
SECURITIES ANALYSIS
 SECURITIES AVAILABLE-FOR-SALE
    
    
    SECURITIES HELD-TO-MATURITYMARCH 31, 2008
    
    
    MARCH 31, 2008GROSS
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    GROSSAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    UNREALIZED
    
    UNREALIZEDCOST
    
    GAINS
    
    LOSSES
    
    FAIR VALUE
    
    
    COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY SECURITIES
    
    $
    8,991,690
    
    
    $
    40,850
    
    
    $
    
    
    
    $
    9,032,540
    
    
    
    $
    149,591,870
    
    
    $
    2,967,324
    
    
    $
    (12,440
    )
    
    $
    152,546,754STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,699,992
    
    
    
    140,415
    
    
    
    (5,666
    )
    
    
    8,834,741OTHER SECURITIES
    
    
    71,979
    
    
    
    33,377
    
    
    
    
    
    
    
    105,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    $
    9,063,669
    
    
    $
    74,227
    
    
    $
    
    
    
    $
    9,137,896
    
    
    
    $
    158,291,862
    
    
    $
    3,107,739
    
    
    $
    (18,106
    )
    
    $
    161,381,495SECURITIES AVAILABLE-FOR-SALE
    
    
    SECURITIES HELD-TO-MATURITYMARCH 31, 2007
    
    
    MARCH 31, 2007GROSS
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    GROSSAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    UNREALIZED
    
    UNREALIZEDCOST
    
    GAINS
    
    LOSSES
    
    FAIR VALUE
    
    
    COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY SECURITIES
    
    $
    97,057,857
    
    
    $
    20,338
    
    
    $
    (95,450
    )
    
    $
    96,982,746
    
    
    
    $
    116,967,680
    
    
    $
    112,904
    
    
    $
    (483,216
    )
    
    $
    116,597,368STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,229,722
    
    
    
    5,467
    
    
    
    (134,156
    )
    
    
    10,101,033OTHER SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    $
    97,057,857
    
    
    $
    20,338
    
    
    $
    (95,450
    )
    
    $
    96,982,746
    
    
    
    $
    127,197,402
    
    
    $
    118,371
    
    
    $
    (617,372
    )
    
    $
    126,698,401SECURITIES AVAILABLE-FOR-SALE
    
    
    SECURITIES HELD-TO-MATURITYMARCH 31, 2006
    
    
    MARCH 31, 2006GROSS
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    GROSSAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    UNREALIZED
    
    UNREALIZEDCOST
    
    GAINS
    
    LOSSES
    
    FAIR VALUE
    
    
    COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY SECURITIES
    
    $
    170,248,783
    
    
    $
    144
    
    
    $
    (446,903
    )
    
    $
    169,802,024
    
    
    
    $
    96,158,495
    
    
    $
    8,304
    
    
    $
    (1,082,220
    )
    
    $
    95,084,579STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,323,813
    
    
    
    1,189
    
    
    
    (214,746
    )
    
    
    10,110,256OTHER SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    $
    170,248,783
    
    
    $
    144
    
    
    $
    (446,903
    )
    
    $
    169,802,024
    
    
    
    $
    106,482,308
    
    
    $
    9,493
    
    
    $
    (1,296,966
    )
    
    $
    358,591,637




---



##### Table of Contents



TABLE 6  LOAN PORTFOLIO
  2008
    
    2007
    
    2006Commercial & Industrial
    
    $
    31,804
    
    
    $
    33,605
    
    
    $
    81,537Real Estate
    
    
    124,679
    
    
    
    119,230
    
    
    
    30,311Consumer Loans
    
    
    40,067
    
    
    
    39,190
    
    
    
    54,895Other Loans
    
    
    6,528
    
    
    
    5,473
    
    
    
    7,772Total Loans
    
    $
    203,078
    
    
    $
    197,498
    
    
    $
    174,515
 TABLE 7  LOAN MATURITIES & INTEREST RATE SENSITIVITY
  Remaining Maturity Fixed Rate3 months or less
    
    $
    19,877Over 3 months through 12 months
    
    
    42,082Over 1 year through 5 years
    
    
    131,942Over 5 years
    
    
    8,564Over 1 year but variable rate
    
    
    Total Loans
    
    $
    202,465




---



##### Table of Contents



TABLE 8  ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
  Quarter ended March 31,2008
    
    2007
    
    2006Beginning Balance
    
    $
    3,100
    
    
    $
    3,100
    
    
    $
    3,000Charge Offs:Commercial & Industrial
    
    
    13
    
    
    
    12
    
    
    
    Real Estate
    
    
    2
    
    
    
    
    
    
    
    Consumer
    
    
    165
    
    
    
    122
    
    
    
    151Other
    
    
    
    
    
    
    
    
    
    
    Total Charge Offs
    
    
    180
    
    
    
    134
    
    
    
    151Recoveries:Commercial & Industrial
    
    
    13
    
    
    
    45
    
    
    
    4Real Estate
    
    
    146
    
    
    
    
    
    
    
    Consumer
    
    
    72
    
    
    
    88
    
    
    
    183Other
    
    
    
    
    
    
    
    
    
    
    Total Recoveries
    
    
    231
    
    
    
    133
    
    
    
    187Net Charge Offs
    
    
    (51
    )
    
    
    1
    
    
    
    (36
    )Provision for Possible Losses
    
    
    (51
    )
    
    
    1
    
    
    
    64Ending Balance
    
    $
    3,100
    
    
    $
    3,100
    
    
    $
    3,100Total Loans Outstanding
    
    $
    203,078
    
    
    $
    197,498
    
    
    $
    174,515Average daily loans
    
    $
    203,418
    
    
    $
    3,892
    
    
    $
    173,135
 Percentages:
    
    2008
    
    2007
    
    2006Allowance for loan losses to end of quarter total loans
    
    
    1.53
    %
    
    
    1.53
    %
    
    
    1.57
    %Allowance for loan losses to average loans
    
    
    1.52
    %
    
    
    1.52
    %
    
    
    1.79
    %Allowance for loan losses to nonperforming assets
    
    
    368.17
    %
    
    
    319.26
    %
    
    
    242.57
    %Net charge offs to average loans
    
    
    -0.025
    %
    
    
    0.000
    %
    
    
    -0.021
    %




---



##### Table of Contents





TABLE 9ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(Dollars in Thousands)  March 31,2008
    
    
    2007
    
    
    2006% Gross
    
    
    Loan Loss
    
    
    % Gross
    
    
    Loan Loss
    
    
    % Gross
    
    
    Loan LossLoans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    AllowanceOutstanding
    
    
    Allocation
    
    
    Outstanding
    
    
    Allocation
    
    
    Outstanding
    
    
    AllocationCommercial & Industrial
    
    
    7.68
    
    
    $
    238
    
    
    
    15.7
    
    
    $
    485
    
    
    
    17.0
    
    
    $
    527Real Estate
    
    
    28.90
    
    
    
    896
    
    
    
    61.4
    
    
    
    1,903
    
    
    
    60.4
    
    
    
    1,871Consumer
    
    
    23.23
    
    
    
    720
    
    
    
    19.7
    
    
    
    612
    
    
    
    19.8
    
    
    
    615Other
    
    
    24.39
    
    
    
    756
    
    
    
    3.2
    
    
    
    100
    
    
    
    2.8
    
    
    
    86Unallocated
    
    
    15.81
    
    
    
    490
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    $
    3,100
    
    
    
    100
    %
    
    $
    3,100
    
    
    
    100
    %
    
    $
    3,100
 TABLE 10  NONPERFORMING ASSETS
  2008
    
    2007
    
    2006Non-accrual Loans & Accruing Loans Past Due 90 Days or more
    
    $
    713
    
    
    $
    782
    
    
    $
    1,197Other Real Estate
    
    
    129
    
    
    
    189
    
    
    
    81$
    842
    
    
    $
    971
    
    
    $
    1,278Nonperforming Assets as % of Total Loans
    
    
    0.41
    %
    
    
    0.48
    %
    
    
    0.65
    %Non-accrual Loans & Loans Past Due 90 Days or More
as % of Total Loans
    
    
    0.35
    %
    
    
    0.39
    %
    
    
    0.61
    %




---



##### Table of Contents



TABLE 11  AVERAGE DEPOSITS
  Quarter ended March 31,2008
    
    2007
    
    2006Non-interest bearing deposits
    
    $
    89,073
    
    
    $
    198,669
    
    
    $
    208,647Interest-bearing deposits
    
    
    201,687
    
    
    
    147,148
    
    
    
    149,513Interest-bearing time deposits
    
    
    99,572
    
    
    
    90,219
    
    
    
    77,933Total
    
    $
    390,332
    
    
    $
    436,036
    
    
    $
    436,093
 TABLE 12  TIME DEPOSITS OF $100,000 OR MORE, MATURITY DISTRIBUTION
  Time remaining until maturity3 months or less
    
    $
    18,751Over 3 through 6 months
    
    
    8,756Over 6 through 12 months
    
    
    19,853Over 12 months
    
    
    6,531Total
    
    $
    53,891




---



##### Table of Contents



TABLE 13  SHORT-TERM BORROWINGS
  Daily
    
    Average
    
    MaximumMarch
    
    Average
    
    Interest
    
    Month-EndBalance
    
    Balance
    
    Rate*
    
    Balance2008Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    36,225
    
    
    $
    19,481
    
    
    
    2.87
    %
    
    $
    36,2252007Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    20,173
    
    
    $
    15,136
    
    
    
    2.88
    %
    
    $
    20,1732006Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    22,885
    
    
    $
    18,751
    
    
    
    1.49
    %
    
    $
    22,885
 
 *
    
    on daily average balance




---



##### Table of Contents



TABLE 14  INTEREST SENSITIVITY
  0-3
    
    
    4-12
    
    
    1-5
    
    
    Over 5Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalAssetsInterest-earning assets:Loans, net of unearned income
    
    $
    20,447
    
    
    $
    42,082
    
    
    $
    131,942
    
    
    $
    8,564
    
    
    $
    203,035Investment securities
    
    
    2,508
    
    
    
    4,953
    
    
    
    103,561
    
    
    
    47,868
    
    
    
    158,890Securities available for sale
    
    
    6,107
    
    
    
    3,031
    
    
    
    
    
    
    
    
    
    
    
    9,138Federal funds sold and securities
purchased under agreements to
resell
    
    
    64,953
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,953Total interest-earning assets
    
    
    94,015
    
    
    
    50,066
    
    
    
    235,503
    
    
    
    56,432
    
    
    
    436,016Non-interest-earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,818
    
    
    
    53,818Total assets
    
    $
    94,015
    
    
    $
    50,066
    
    
    $
    235,503
    
    
    $
    110,250
    
    
    $
    489,834Liabilities and stockholders equityInterest-bearing liabilities:Int DDAs, MMF, Savings deposits
    
    $
    62,310
    
    
    $
    30,313
    
    
    $
    75,783
    
    
    $
    
    
    
    $
    168,406Time deposits
    
    
    29,880
    
    
    
    55,232
    
    
    
    15,442
    
    
    
    
    
    
    
    100,554Federal funds purchased, and securities
sold under agreements to repurchase
    
    
    36,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,225Total interest-bearing liabilities
    
    
    128,415
    
    
    
    85,545
    
    
    
    91,225
    
    
    
    
    
    
    
    305,185Non-interest-bearing deposits
    
    
    27,143
    
    
    
    
    
    
    
    86,599
    
    
    
    15,510
    
    
    
    129,252Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,863
    
    
    
    5,863Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,534
    
    
    
    59,534Total liabilities and
stockholders equity
    
    $
    155,558
    
    
    $
    85,545
    
    
    $
    177,824
    
    
    $
    80,907
    
    
    $
    499,834Interest sensitive gap
    
    $
    (61,543
    )
    
    $
    (35,479
    )
    
    $
    57,679
    
    
    $
    29,343Cumulative interest sensitive gap
    
    $
    (61,543
    )
    
    $
    (97,022
    )
    
    $
    (39,343
    )
    
    $
    (10,000
    )Cumulative interest sensitive gap
as a percent of total assets
    
    
    -12.56
    %
    
    
    -19.81
    %
    
    
    -8.03
    %
    
    
    -2.04
    %




---



##### Table of Contents



TABLE 15  CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS
  PAYMENTS DUE INONE TO
    
    
    
    
    
    OVERONE YEAR
    
    THREE
    
    THREE TO
    
    FIVEOR LESS
    
    YEARS
    
    FIVE YEARS
    
    YEARS
    
    TOTALDeposits without a
stated maturity
    
    $
    119,766
    
    
    $
    19,486
    
    
    $
    142,896
    
    
    $
    15,510
    
    
    $
    297,658Consumer certificates
of deposit
    
    
    85,112
    
    
    
    12,336
    
    
    
    3,106
    
    
    
    
    
    
    
    100,554Federal funds borrowed
& repurchase agreements
    
    
    36,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,225Operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 COMMITMENTS
  ONE TO
    
    
    
    
    
    OVERONE YEAR
    
    THREE
    
    THREE TO
    
    FIVEOR LESS
    
    YEARS
    
    FIVE YEARS
    
    YEARS
    
    TOTALCommitments to extend
credit:Commercial
    
    $
    10,848
    
    
    $
    2,402
    
    
    $
    
    
    
    $
    
    
    
    $
    13,250Residential real estate
    
    
    2,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,153Revolving home equity
and credit card lines
    
    
    
    
    
    
    112
    
    
    
    80
    
    
    
    
    
    
    
    192Other
    
    
    5,204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,204Standby letters of credit
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
     
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in Internal Controls




---



##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other information
  
 Item 6. Exhibits
 31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. 350, as created by Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. 350, as created by Section 906 of the
Sarbanes-Oxley Act of
2002.




---



##### Table of Contents



SIGNATURES
  MERCHANTS & MARINE BANCORP, INC.Date: May 15, 2008
    By:
    /s/ Royce CumbestRoyce Cumbest, Chairman of the BoardPresident and Chief Executive OfficerDate: May 15, 2008
    By:
    /s/ S. M. DicksonS. M. Dickson, Executive Vice President(Principal Financial and Accounting Officer)