##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 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 September 30, 2008
 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)
  (Registrants telephone number, including area code)
  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




---



TABLE OF CONTENTS  Item 1. FinancialsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4T. 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 Matter to a Vote of Security HoldersItem 5. Other informationItem 6. ExhibitsSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 Item 1. Financials
 CONDENSED BALANCE SHEETS
 (Unaudited)
    
    
    (Audited)September 30, 2008
    
    
    December 31, 2007ASSETS:Cash and due from banks (non-interest bearing)
    
    $
    20,996,037
    
    
    $
    20,268,465Federal funds sold
    
    
    9,793,000
    
    
    
    26,477,000Securities:Available for sale, at market value
    
    
    27,053,546
    
    
    
    38,975,101Held to maturity, at amortized cost
    
    
    172,695,765
    
    
    
    143,792,190Non-marketable equity securities
    
    
    600,060
    
    
    
    600,060Loans, less allowance for loan losses $3,100,000
and $3,100,000, respectively
    
    
    193,531,576
    
    
    
    200,812,432Property and equipment, net
    
    
    16,942,790
    
    
    
    14,890,181Other real estate owned
    
    
    264,554
    
    
    
    406,606Accrued income
    
    
    3,427,920
    
    
    
    3,322,522Other assets
    
    
    12,504,976
    
    
    
    9,988,159TOTAL ASSETS
    
    $
    457,810,224
    
    
    $
    459,532,716LIABILITIES AND STOCKHOLDERS EQUITY:Deposits:Non-interest bearing demand
    
    $
    88,552,271
    
    
    $
    124,829,897Interest bearing demand, savings, money market, and
other time
    
    
    296,542,264
    
    
    
    258,592,773Total deposits
    
    
    385,094,535
    
    
    
    383,422,670Federal funds purchased and securities sold under
agreements to repurchase
    
    
    13,374,883
    
    
    
    21,018,486Accrued expenses and other liabilities
    
    
    8,526,585
    
    
    
    6,650,911Total liabilities
    
    
    406,996,003
    
    
    
    411,092,067Stockholders Equity:Common stock  $2.50 par value, 1,330,338 shares
authorized and outstanding
    
    
    3,325,845
    
    
    
    3,325,845Surplus
    
    
    14,500,000
    
    
    
    14,500,000Retained earnings
    
    
    33,551,025
    
    
    
    31,123,789Accumulated other comprehensive income:Unrealized gain (loss) on securities available for sale
    
    
    (23,916
    )
    
    
    29,748Unrealized loss on defined benefit pension plan
    
    
    (538,733
    )
    
    
    (538,733
    )Total stockholders equity
    
    
    50,814,221
    
    
    
    48,440,649TOTAL LIABILITES AND STOCKHOLDERS EQUITY
    
    $
    457,810,224
    
    
    $
    459,532,716
  2




---



##### Table of Contents



CONDENSED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302008
    
    
    2007
    
    
    2008
    
    
    2007Interest Income:Interest and fees on loans
    
    $
    3,601,746
    
    
    
    4,088,762
    
    
    $
    11,129,530
    
    
    
    12,007,682Interest on investment securities:Taxable
    
    
    2,122,737
    
    
    
    2,783,554
    
    
    
    6,190,109
    
    
    
    8,007,703Exempt from federal income tax
    
    
    72,109
    
    
    
    84,309
    
    
    
    222,731
    
    
    
    249,712Interest on federal funds sold
    
    
    39,435
    
    
    
    197,268
    
    
    
    586,682
    
    
    
    968,165Total interest income
    
    
    5,836,027
    
    
    
    7,153,893
    
    
    
    18,129,052
    
    
    
    21,233,262Interest Expense:Interest on deposits
    
    
    1,598,714
    
    
    
    2,305,269
    
    
    
    5,232,731
    
    
    
    6,507,085Interest on federal funds purchased
and securities sold under agreements
to repurchase
    
    
    60,297
    
    
    
    185,307
    
    
    
    289,686
    
    
    
    480,014Total interest expense
    
    
    1,659,011
    
    
    
    2,490,576
    
    
    
    5,522,417
    
    
    
    6,987,099Net interest income
    
    
    4,177,016
    
    
    
    4,663,317
    
    
    
    12,606,635
    
    
    
    14,246,163Provision for loan losses
    
    
    172,874
    
    
    
    116,365
    
    
    
    245,237
    
    
    
    332,864Net interest income
after provision for loan losses
    
    
    4,004,142
    
    
    
    4,546,952
    
    
    
    12,361,398
    
    
    
    13,913,299Non-Interest Income:Service charges
    
    
    1,148,372
    
    
    
    1,117,020
    
    
    
    3,263,681
    
    
    
    3,166,733Miscellaneous
    
    
    500,933
    
    
    
    528,321
    
    
    
    1,952,703
    
    
    
    1,506,900Total non-interest income
    
    
    1,649,305
    
    
    
    1,645,341
    
    
    
    5,216,384
    
    
    
    4,673,633Non-Interest Expense:Salaries and employee benefits
    
    
    1,959,770
    
    
    
    1,821,014
    
    
    
    5,448,959
    
    
    
    5,055,455Premises
    
    
    704,964
    
    
    
    677,389
    
    
    
    2,065,394
    
    
    
    1,932,917Miscellaneous
    
    
    1,481,440
    
    
    
    1,272,915
    
    
    
    4,931,492
    
    
    
    4,183,507Total non-interest expense
    
    
    4,146,174
    
    
    
    3,771,318
    
    
    
    12,445,845
    
    
    
    11,171,879Income before income taxes
    
    
    1,507,273
    
    
    
    2,420,975
    
    
    
    5,131,937
    
    
    
    7,415,053Provision for income taxes
    
    
    477,308
    
    
    
    683,939
    
    
    
    1,628,186
    
    
    
    2,375,817NET INCOME
    
    $
    1,029,965
    
    
    
    1,737,036
    
    
    $
    3,503,751
    
    
    
    5,039,236NET INCOME PER COMMON SHARE
    
    $
    0.77
    
    
    
    1.31
    
    
    $
    2.63
    
    
    
    3.79
  3




---



##### Table of Contents



CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    1,029,965
    
    
    
    1,737,036
    
    
    $
    3,503,751
    
    
    
    5,039,236Other comprehensive income, net of tax:Unrealized holding losses
arising during period
    
    
    115,905
    
    
    
    119,928
    
    
    
    (53,664
    )
    
    
    52,118Comprehensive income
    
    $
    1,145,870
    
    
    
    1,856,964
    
    
    $
    3,450,087
    
    
    
    5,091,354
  4




---



##### Table of Contents



CONDENSED STATEMENTS OF CASH FLOWS   For the Nine Months Ended September 30
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    3,503,751
    
    
    $
    5,039,236Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    883,356
    
    
    
    652,655Provision for loan losses
    
    
    245,237
    
    
    
    332,864Write-down of other real estate owned
    
    
    33,552
    
    
    
    33,694Net premium amortization (discount accretion)
    
    
    53,525
    
    
    
    (182,778
    )Reinvested earnings on securities
    
    
    (61,649
    )
    
    
    (753,267
    )(Increase) in accrued income receivable
    
    
    (105,398
    )
    
    
    (1,024,869
    )Increase (decrease) in interest payable
    
    
    (72,905
    )
    
    
    383,173Noncash charitable contribution
    
    
    310,000
    
    
    
    (Gain) on disposition of property and equipment
    
    
    (356,283
    )
    
    
    (1,062
    )Gain on disposition of securities
    
    
    (117,392
    )
    
    
    Net change in other assets and liabilities
    
    
    (153,735
    )
    
    
    (633,510
    )Net Cash Provided by Operating Activities
    
    
    4,162,059
    
    
    
    3,846,136CASH FLOWS FROM INVESTING ACTIVITIES:Net decrease in Federal funds sold
    
    
    16,684,000
    
    
    
    15,501,000Purchase of securities available for sale
    
    
    (26,079,750
    )
    
    
    (74,176,548
    )Proceeds from maturities of securities available for sale
    
    
    38,045,413
    
    
    
    105,500,000Purchase of securities held to maturity
    
    
    (92,416,810
    )
    
    
    (76,997,171
    )Proceeds from maturities of securities held to maturity
    
    
    63,513,333
    
    
    
    28,760,000Net (increase) decrease in loans
    
    
    7,144,119
    
    
    
    (5,375,223
    )Purchase of property and equipment
    
    
    (3,029,682
    )
    
    
    (2,640,937
    )Proceeds from sale of property and equipment
    
    
    140,000
    
    
    
    31,500Net Cash Used in Investing Activities
    
    
    4,000,623
    
    
    
    (9,397,379
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    1,671,865
    
    
    
    9,571,678Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase
    
    
    (7,643,603
    )
    
    
    3,822,870Dividends paid to stockholders
    
    
    (1,463,372
    )
    
    
    (1,463,372
    )Net Cash Provided by Financing Activities
    
    
    (7,435,110
    )
    
    
    11,931,176Net Increase in Cash and Due from Banks
    
    
    727,572
    
    
    
    6,379,933Cash and Due From Banks, Beginning
    
    
    20,268,465
    
    
    
    33,266,273Cash and Due From Banks, Ending
    
    $
    20,996,037
    
    
    $
    39,646,206
  5




---



##### Table of Contents



NOTES TO CONDENSED FINANCIAL STATEMENTS   As of and For the Three and Nine Months Ended September 30, 2008
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
 Interim Financial Statements
  December 31, 2007 Balance Sheet Presentation
  Use of Estimates
  2. SHARE EXCHANGE.
   6




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-looking Statements
  Executive Summary
    7




---



##### Table of Contents



Earnings Highlights
  Earning Assets
  Net Interest Income
   8




---



##### Table of Contents



Interest Rate Sensitivity
  9




---



##### Table of Contents



Loans
     Allowance for Loan Losses
    10




---



##### Table of Contents



Critical Accounting Policies
       11




---



##### Table of Contents



Asset Quality
   Securities Available-for-Sale and Investment Securities
   12




---



##### Table of Contents



Deposits
  Liquidity
    13




---



##### Table of Contents



Contractual Obligations
  Off-Balance Sheet Arrangements
  Risk-Based Capital/Stockholders Equity
    Non-Interest Income
  14




---



##### Table of Contents



Non-Interest Expense
   Income Taxes
  15




---



##### 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
    
    $
    199,279
    
    
    $
    11,130
    
    
    
    7.45
    %
    
    $
    202,731
    
    
    $
    12,008
    
    
    
    7.90
    %
    
    $
    180,889
    
    
    $
    9,770
    
    
    
    7.20
    %Securities held to maturity:Taxable
    
    
    155,261
    
    
    
    5,600
    
    
    
    4.81
    %
    
    
    134,056
    
    
    
    4,919
    
    
    
    4.89
    %
    
    
    101,302
    
    
    
    3,416
    
    
    
    4.50
    %Exempt from Federal
income tax
    
    
    8,472
    
    
    
    223
    
    
    
    3.51
    %
    
    
    8,277
    
    
    
    250
    
    
    
    4.03
    %
    
    
    8,075
    
    
    
    230
    
    
    
    3.80
    %Securities available
for sale:Taxable
    
    
    22,650
    
    
    
    590
    
    
    
    3.47
    %
    
    
    79,424
    
    
    
    3,076
    
    
    
    5.16
    %
    
    
    138,405
    
    
    
    4,555
    
    
    
    4.39
    %Federal funds sold
and securities purchased under agreements to resell
    
    
    30,799
    
    
    
    587
    
    
    
    2.54
    %
    
    
    24,823
    
    
    
    968
    
    
    
    5.20
    %
    
    
    18,524
    
    
    
    637
    
    
    
    4.59
    %Total interest-earning
assets
    
    $
    416,461
    
    
    $
    18,130
    
    
    
    5.80
    %
    
    $
    449,311
    
    
    $
    21,221
    
    
    
    6.30
    %
    
    $
    447,195
    
    
    $
    18,608
    
    
    
    5.55
    %Non interest-earning assets:Cash and due from
banks
    
    
    25,934
    
    
    
    
    
    
    
    
    
    
    
    31,026
    
    
    
    
    
    
    
    
    
    
    
    31,590Bank premises and
equipment
    
    
    15,608
    
    
    
    
    
    
    
    
    
    
    
    13,894
    
    
    
    
    
    
    
    
    
    
    
    9,362Other assets
    
    
    14,853
    
    
    
    
    
    
    
    
    
    
    
    13,920
    
    
    
    
    
    
    
    
    
    
    
    13,526Allowance for possible
loan losses
    
    
    (3,086
    )
    
    
    
    
    
    
    
    
    
    
    (3,090
    )
    
    
    
    
    
    
    
    
    
    
    (3,060
    )Total assets
    
    $
    469,770
    
    
    
    
    
    
    
    
    
    
    $
    505,061
    
    
    
    
    
    
    
    
    
    
    $
    498,613
 16




---



##### 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
    
    $
    198,535
    
    
    $
    2,220
    
    
    
    1.49
    %
    
    $
    176,554
    
    
    $
    3,080
    
    
    
    2.33
    %
    
    $
    181,605
    
    
    $
    2,460
    
    
    
    1.81
    %Time deposits
    
    
    103,729
    
    
    
    3,012
    
    
    
    3.87
    %
    
    
    102,350
    
    
    
    3,427
    
    
    
    4.46
    %
    
    
    81,249
    
    
    
    2,326
    
    
    
    3.82
    %Federal funds purchased,
securities sold under
agreements to repurchase and other shortterm borrowings
    
    
    20,028
    
    
    
    290
    
    
    
    1.93
    %
    
    
    18,775
    
    
    
    480
    
    
    
    3.41
    %
    
    
    16,838
    
    
    
    206
    
    
    
    1.63
    %Total interest-bearing
liabilities
    
    $
    322,292
    
    
    $
    5,522
    
    
    
    2.28
    %
    
    $
    297,679
    
    
    $
    6,987
    
    
    
    3.13
    %
    
    $
    279,692
    
    
    $
    4,992
    
    
    
    2.38
    %Noninterest-bearing
liabilities:Deposits
    
    
    90,603
    
    
    
    
    
    
    
    
    
    
    
    156,464
    
    
    
    
    
    
    
    
    
    
    
    172,248Other liabilities
    
    
    7,057
    
    
    
    
    
    
    
    
    
    
    
    6,040
    
    
    
    
    
    
    
    
    
    
    
    6,018Total liabilities
    
    
    419,952
    
    
    
    
    
    
    
    
    
    
    
    460,183
    
    
    
    
    
    
    
    
    
    
    
    457,958Stockholders
equity
    
    
    49,818
    
    
    
    
    
    
    
    
    
    
    
    44,878
    
    
    
    
    
    
    
    
    
    
    
    40,655Total liabilities and
stockholders
equity
    
    $
    469,770
    
    
    
    
    
    
    
    
    
    
    $
    505,061
    
    
    
    
    
    
    
    
    
    
    $
    498,613Net interest income/
margin-tax
equivalent
    
    
    
    
    
    $
    12,608
    
    
    
    3.58
    %
    
    
    
    
    
    $
    14,234
    
    
    
    3.76
    %
    
    
    
    
    
    $
    13,616
    
    
    
    3.64
    %Tax equivalent
adjustment:Loans
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    62Investment
securities
    
    
    
    
    
    
    223
    
    
    
    
    
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    64Securities available
for saleTotal tax equivalent
adjustment
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    
    
    
    
    
    
    
    
    126Net interest
income
    
    
    
    
    
    $
    12,230
    
    
    
    
    
    
    
    
    
    
    $
    13,845
    
    
    
    
    
    
    
    
    
    
    $
    13,490
 17




---



##### Table of Contents



TABLE 2
 TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
  Quarter ended September 30, 20082008 Compared to 2007
    
    2007 Compared to 2006Increase(Decrease) Due To
    
    Increase(Decrease) Due ToVolume
    
    Rate
    
    Net
    
    Volume
    
    Rate
    
    NetInterest income on:Loans
    
    $
    (3,452
    )
    
    $
    (878
    )
    
    $
    (4,330
    )
    
    $
    21,842
    
    
    $
    2,238
    
    
    $
    24,080Investment securities:Taxable
    
    
    21,205
    
    
    
    681
    
    
    
    21,886
    
    
    
    32,754
    
    
    
    1,503
    
    
    
    34,257Exempt from Federal
income tax
    
    
    195
    
    
    
    (27
    )
    
    
    168
    
    
    
    202
    
    
    
    20
    
    
    
    222Securities available for sale:Taxable
    
    
    (56,774
    )
    
    
    (2,486
    )
    
    
    (59,260
    )
    
    
    (58,981
    )
    
    
    (1,479
    )
    
    
    (60,460
    )Federal funds sold and
securities purchased
under agreements to
resell
    
    
    5,976
    
    
    
    (381
    )
    
    
    5,595
    
    
    
    6,299
    
    
    
    331
    
    
    
    6,630Total
    
    $
    (32,850
    )
    
    $
    (3,091
    )
    
    $
    (35,941
    )
    
    $
    2,116
    
    
    
    2,613
    
    
    $
    4,729Interest expense on:Savings deposits
    
    $
    21,981
    
    
    $
    (860
    )
    
    $
    21,121
    
    
    $
    (5,051
    )
    
    $
    620
    
    
    $
    (4,431
    )Time deposits
    
    
    1,379
    
    
    
    (415
    )
    
    
    964
    
    
    
    21,101
    
    
    
    1,101
    
    
    
    22,202Federal funds purchased,
and securities sold
under agreements to
repurchase
    
    
    1,253
    
    
    
    (190
    )
    
    
    1,063
    
    
    
    1,937
    
    
    
    274
    
    
    
    2,211Total
    
    $
    24,613
    
    
    $
    (1,465
    )
    
    $
    23,148
    
    
    $
    17,987
    
    
    $
    1,995
    
    
    $
    19,982Changes in net interest
income-tax equivalent
    
    $
    (57,463
    )
    
    $
    (1,626
    )
    
    $
    (59,089
    )
    
    $
    (15,871
    )
    
    $
    618
    
    
    $
    (15,253
    )
  18




---



##### Table of Contents



TABLE 3
 SECURITIES AVAILABLE FOR SALE AND PORTFOLIO SECURITIES
  SEPTEMBER 30,2008
    
    2007
    
    2006Securities available for saleU. S. Treasury and other U. S. Government agencies
    
    $
    26,982
    
    
    $
    55,021
    
    
    $
    94,840Obligations of states and political subdivisionsMortgage-backed securitiesOther securities
    
    
    72
    
    
    
    
    
    
    
    Total securities available for sale
    
    $
    27,054
    
    
    $
    55,021
    
    
    $
    94,840Portfolio securitiesU. S. Treasury and other U. S. Government agencies
    
    $
    164,594
    
    
    $
    155,965
    
    
    $
    113,925Obligations of states and political subdivisions
    
    
    8,102
    
    
    
    9,950
    
    
    
    9,969Mortgage-backed securitiesOther securities
    
    
    600
    
    
    
    600
    
    
    
    600Total investment securities
    
    $
    173,296
    
    
    $
    166,515
    
    
    $
    124,494Total securities available for sale and investment securities
    
    $
    200,350
    
    
    $
    221,536
    
    
    $
    219,334
 19




---



##### 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 saleU.S. Treasury
and other U.S.
Government
agencies
    
    $
    8,008
    
    
    
    2.58
    %
    
    $
    16,960
    
    
    
    3.19
    %
    
    
    1,985
    
    
    
    4.55
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    26,953Other Securities
    
    
    101
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    101Total securities
available
for sale
    
    $
    8,109
    
    
    
    2.58
    %
    
    $
    16,960
    
    
    
    3.19
    %
    
    $
    1,985
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    27,054Investment securitiesU.S. Treasury
and other U.S.
Government
agencies
    
    $
    22,010
    
    
    
    4.65
    %
    
    $
    95,729
    
    
    
    4.65
    %
    
    $
    46,855
    
    
    
    4.89
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    164,594Obligations of states
and political
subdivisions
    
    
    1,309
    
    
    
    9.34
    %
    
    
    3,271
    
    
    
    5.10
    %
    
    
    3,522
    
    
    
    5.35
    %
    
    
    
    
    
    
    0.00
    %
    
    
    8,102Other securities
    
    
    600
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    600Total investment
securities
    
    $
    23,919
    
    
    
    3.37
    %
    
    $
    99,000
    
    
    
    4.09
    %
    
    $
    50,377
    
    
    
    4.83
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    173,296Total securities
available for sale
and investment
securities
    
    $
    32,028
    
    
    
    4.95
    %
    
    $
    115,960
    
    
    
    5.05
    %
    
    $
    52,362
    
    
    
    5.57
    %
    
    
    
    
    
    
    0.00
    %
    
    $
    200,350
  20




---



##### Table of Contents



TABLE 5
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
(Dollars in Thousands)
 SECURITIES AVAILABLE-FOR-SALE
    
    
    
    
    
    
    
    
    
    
    SECURITIES HELD-TO-MATURITYSEPTEMBER 30, 2008
    
    
    
    
    
    
    
    
    
    
    SEPTEMBER 30, 2008GROSS
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    GROSSUNREALIZED
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    UNREALIZED
    
    UNREALIZEDAMORTIZED COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUE
    
    
    COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY SECURITIES
    
    $
    27,018
    
    
    $
    19
    
    
    $
    (84
    )
    
    $
    26,953
    
    
    
    $
    164,594
    
    
    $
    1,333
    
    
    $
    (469
    )
    
    $
    165,458STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,102
    
    
    
    49
    
    
    
    (31
    )
    
    $
    8,120OTHER SECURITIES
    
    
    72
    
    
    
    29
    
    
    
    
    
    
    
    101
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    600TOTAL
    
    $
    27,090
    
    
    $
    48
    
    
    $
    (84
    )
    
    $
    27,054
    
    
    
    $
    173,296
    
    
    $
    1,382
    
    
    $
    (500
    )
    
    $
    174,178SECURITIES AVAILABLE-FOR-SALE
    
    
    
    
    
    
    
    
    
    
    SECURITIES HELD-TO-MATURITYSEPTEMBER 30, 2007
    
    
    
    
    
    
    
    
    
    
    SEPTEMBER 30, 2007GROSS
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    GROSSUNREALIZED
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    UNREALIZED
    
    UNREALIZEDAMORTIZED COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUE
    
    
    COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY SECURITIES
    
    $
    54,983
    
    
    $
    39
    
    
    $
    (1
    )
    
    $
    55,021
    
    
    
    $
    155,965
    
    
    $
    615
    
    
    $
    (143
    )
    
    $
    156,437STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,950
    
    
    
    11
    
    
    
    (52
    )
    
    
    9,909OTHER SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    600TOTAL
    
    $
    54,983
    
    
    $
    39
    
    
    $
    (1
    )
    
    $
    55,021
    
    
    
    $
    166,515
    
    
    $
    626
    
    
    $
    (195
    )
    
    $
    166,946SECURITIES AVAILABLE-FOR-SALE
    
    
    
    
    
    
    
    
    
    
    SECURITIES HELD-TO-MATURITYSEPTEMBER 30, 2006
    
    
    
    
    
    
    
    
    
    
    SEPTEMBER 30, 2006GROSS
    
    GROSS
    
    
    
    
    
    
    
    
    
    
    GROSS
    
    GROSSUNREALIZED
    
    UNREALIZED
    
    
    
    
    
    
    AMORTIZED
    
    UNREALIZED
    
    UNREALIZEDAMORTIZED COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUE
    
    
    COST
    
    GAINS
    
    LOSSES
    
    FAIR VALUEU S GOVERNMENT AND
AGENCY SECURITIES
    
    $
    94,993
    
    
    $
    3
    
    
    $
    (156
    )
    
    $
    94,840
    
    
    
    $
    113,925
    
    
    $
    86
    
    
    $
    (732
    )
    
    $
    113,279STATE AND MUNICIPAL
SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,969
    
    
    
    9
    
    
    
    (167
    )
    
    
    9,811OTHER SECURITIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    600TOTAL
    
    $
    94,993
    
    
    $
    3
    
    
    $
    (156
    )
    
    $
    94,840
    
    
    
    $
    124,494
    
    
    $
    95
    
    
    $
    (899
    )
    
    $
    123,690
 21




---



##### Table of Contents



TABLE 6
 LOAN PORTFOLIO
  2008
    
    2007
    
    2006Commercial & Industrial
    
    $
    27,236
    
    
    $
    38,656
    
    
    $
    44,429Real Estate
    
    
    124,460
    
    
    
    123,526
    
    
    
    110,890Consumer Loans
    
    
    44,356
    
    
    
    41,497
    
    
    
    39,908Other Loans
    
    
    580
    
    
    
    540
    
    
    
    521Total Loans
    
    $
    196,632
    
    
    $
    204,219
    
    
    $
    195,748
 TABLE 7
 LOAN MATURITIES & INTEREST RATE SENSITIVITY
  Remaining Maturity Fixed Rate3 months or less
    
    $
    21,620Over 3 months through 12 months
    
    
    41,532Over 1 year through 5 years
    
    
    120,772Over 5 years
    
    
    9,284Over 1 year but variable rate
    
    
    2,945Total loans
    
    $
    196,153
 22




---



##### Table of Contents



TABLE 8
 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
  Quarter ended September 30,2008
    
    2007
    
    2006Beginning Balance
    
    $
    3,100
    
    
    $
    3,100
    
    
    $
    3,000Charge Offs:Commercial & Industrial
    
    
    75
    
    
    
    51
    
    
    
    4Real Estate
    
    
    61
    
    
    
    9
    
    
    
    Consumer
    
    
    463
    
    
    
    486
    
    
    
    481Other
    
    
    
    
    
    
    
    
    
    
    Total Charge Offs
    
    
    599
    
    
    
    546
    
    
    
    485Recoveries:Commercial & Industrial
    
    
    35
    
    
    
    61
    
    
    
    12Real Estate
    
    
    152
    
    
    
    
    
    
    
    Consumer
    
    
    167
    
    
    
    153
    
    
    
    360Other
    
    
    
    
    
    
    
    
    
    
    Total Recoveries
    
    
    354
    
    
    
    214
    
    
    
    372Net Charge Offs
    
    
    245
    
    
    
    332
    
    
    
    113Provision for Possible Losses
    
    
    245
    
    
    
    332
    
    
    
    213Ending Balance
    
    $
    3,100
    
    
    $
    3,100
    
    
    $
    3,100Total Loans Outstanding
    
    $
    196,632
    
    
    $
    204,219
    
    
    $
    195,748Average daily loans
    
    $
    199,279
    
    
    $
    202,731
    
    
    $
    180,889
 Percentages:
    
    2008
    
    2007
    
    2006Allowance for loan losses to end of quarter total loans
    
    
    1.6
    %
    
    
    1.5
    %
    
    
    1.6
    %Allowance for loan losses to average loans
    
    
    1.6
    %
    
    
    1.5
    %
    
    
    1.7
    %Allowance for loan losses to nonperforming assets
    
    
    416.7
    %
    
    
    254.9
    %
    
    
    358.0
    %Net charge offs to average loans
    
    
    0.1
    %
    
    
    0.2
    %
    
    
    0.1
    %
 23




---



##### Table of Contents



TABLE 9
 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
  September 30,2008
    
    
    2007
    
    
    2006% Gross
    
    
    Loan Loss
    
    
    % Gross
    
    
    Loan Loss
    
    
    % Gross
    
    
    Loan LossLoans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    AllowanceOutstanding
    
    
    Allocation
    
    
    Outstanding
    
    
    Allocation
    
    
    Outstanding
    
    
    AllocationCommercial & Industrial
    
    
    14.80
    
    
    
    459
    
    
    
    10.22
    
    
    $
    317
    
    
    
    22.70
    
    
    $
    704Real Estate
    
    
    5.30
    
    
    
    164
    
    
    
    25.00
    
    
    
    775
    
    
    
    56.65
    
    
    
    1,756Consumer
    
    
    45.87
    
    
    
    1,422
    
    
    
    22.73
    
    
    
    705
    
    
    
    20.39
    
    
    
    632Other
    
    
    22.58
    
    
    
    700
    
    
    
    24.55
    
    
    
    761
    
    
    
    0.27
    
    
    
    8Unallocated
    
    
    11.45
    
    
    
    355
    
    
    
    17.50
    
    
    
    542
    
    
    
    
    
    
    
    100
    %
    
    $
    3,100
    
    
    
    100
    %
    
    $
    3,100
    
    
    
    100
    %
    
    $
    3,100
 TABLE 10
 NONPERFORMING ASSETS
  September 30,2008
    
    2007
    
    2006Non-accrual Loans & Accruing Loans Past Due 90 Days or more
    
    $
    479
    
    
    $
    1,037
    
    
    $
    621Other Real Estate
    
    
    265
    
    
    
    179
    
    
    
    245$
    744
    
    
    $
    1,216
    
    
    $
    866Nonperforming Assets as % of Total Loans
    
    
    0.38
    %
    
    
    0.60
    %
    
    
    0.44
    %Non-accrual Loans & Loans Past Due 90 Days or More
as % of Total Loans
    
    
    0.24
    %
    
    
    0.51
    %
    
    
    0.32
    %
 24




---



##### Table of Contents



TABLE 11
 AVERAGE DEPOSITS
  QUARTER ENDED SEPTEMBER 302008
    
    2007
    
    2006Non-interest bearing deposits
    
    $
    90,603
    
    
    $
    156,464
    
    
    $
    172,248Interest-bearing deposits
    
    
    198,535
    
    
    
    176,554
    
    
    
    181,605Interest-bearing time deposits
    
    
    103,729
    
    
    
    102,348
    
    
    
    81,249Total
    
    $
    392,867
    
    
    $
    435,366
    
    
    $
    435,102
 TABLE 12
 TIME DEPOSITS OF $100,000 OR MORE, MATURITY DISTRIBUTION
  Time remaining until maturity3 months or less
    
    $
    26,703Over 3 through 6 months
    
    
    16,993Over 6 through 12 months
    
    
    16,110Over 12 months
    
    
    6,243Total
    
    $
    66,049
 25




---



##### Table of Contents



TABLE 13
 SHORT-TERM BORROWINGS
  Daily
    
    Average
    
    MaximumSeptember
    
    Average
    
    Interest
    
    Month-EndBalance
    
    Balance
    
    Rate
    
    Balance2008Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    13,375
    
    
    $
    20,028
    
    
    
    1.93
    %
    
    $
    13,3752007Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    16,028
    
    
    $
    18,775
    
    
    
    3.41
    %
    
    $
    16,0282006Federal funds purchased and
securities sold under
agreements to repurchase
    
    $
    14,072
    
    
    $
    16,838
    
    
    
    1.63
    %
    
    $
    14,072
 26




---



##### 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
    
    $
    22,099
    
    
    $
    41,532
    
    
    $
    123,717
    
    
    $
    9,284
    
    
    $
    196,632Investment securities
    
    
    2,155
    
    
    
    21,764
    
    
    
    99,000
    
    
    
    50,377
    
    
    
    173,296Securities available for sale
    
    
    101
    
    
    
    8,008
    
    
    
    16,960
    
    
    
    1,985
    
    
    
    27,054Federal funds sold and securities
purchased under agreements to
resell
    
    
    9,793
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,793Total interest-earning assets
    
    $
    34,148
    
    
    $
    71,304
    
    
    $
    239,677
    
    
    $
    61,646
    
    
    $
    406,775Noninterest-earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,003
    
    
    
    51,003Total assets
    
    $
    34,148
    
    
    $
    71,304
    
    
    $
    239,677
    
    
    $
    112,649
    
    
    $
    457,778Liabilities and stockholders equityInterest-bearing liabilities:Int DDAs, MMF, Savings deposits
    
    $
    66,570
    
    
    $
    32,386
    
    
    $
    80,962
    
    
    $
    
    
    
    
    179,918Time deposits
    
    
    38,453
    
    
    
    63,006
    
    
    
    15,166
    
    
    
    
    
    
    
    116,625Federal funds purchased, and securities
sold under agreements to repurchase
    
    
    13,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,375Total interest-bearing liabilities
    
    $
    118,398
    
    
    $
    95,392
    
    
    $
    96,128
    
    
    $
    
    
    
    $
    309,918Noninterest-bearing deposits
    
    
    18,596
    
    
    
    
    
    
    
    59,331
    
    
    
    10,626
    
    
    
    88,553Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,592
    
    
    
    8,592Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,715
    
    
    
    50,715Total liabilities and
stockholders equity
    
    $
    136,994
    
    
    $
    95,392
    
    
    $
    155,459
    
    
    $
    69,933
    
    
    $
    457,778Interest sensitive gap
    
    $
    (102,846
    )
    
    $
    (24,088
    )
    
    $
    84,218
    
    
    $
    42,716Cumulative interest sensitive gap
    
    $
    (102,846
    )
    
    $
    (126,934
    )
    
    $
    (42,716
    )
    
    $
    Cumulative interest sensitive gap
as a percent of total assets
    
    
    -22.47
    %
    
    
    -27.73
    %
    
    
    -9.33
    %
    
    
    0.00
    %
 27




---



##### Table of Contents



TABLE 15
 CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES, AND
OFF-BALANCE SHEET ARRANGEMENTS
  PAYMENTS DUE INONE TOONE YEAR
    
    THREE
    
    THREE TO
    
    OVER FIVEOR LESS
    
    YEARS
    
    FIVE YEARS
    
    YEARS
    
    TOTALDeposits without a
stated maturity
    
    $
    89,226
    
    
    $
    19,035
    
    
    $
    139,586
    
    
    $
    20,623
    
    
    $
    268,470Consumer certificates
of deposit
    
    
    101,459
    
    
    
    11,694
    
    
    
    3,472
    
    
    
    
    
    
    
    116,625Federal funds borrowed
& repurchase agreements
    
    
    13,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,375Operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 COMMITMENTS
  ONE TOONE YEAR
    
    THREE
    
    THREE TO
    
    OVER FIVEOR LESS
    
    YEARS
    
    FIVE YEARS
    
    YEARS
    
    TOTALCommitments to extend
credit:Commercial
    
    $
    11,926
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11,926Residential real estate
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Revolving home equity
and credit card lines
    
    
    335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335Other
    
    
    8,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,589Standby letters of credit
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192
 28




---



##### Table of Contents



Item 4T. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in Internal Controls
 29




---



##### 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 Matter 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 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. 350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act
of 2002.
 30




---



##### Table of Contents



SIGNATURES
  MERCHANTS & MARINE BANCORP, INC.Date: November 14, 2008
    By:
    /s/ Royce CumbestRoyce Cumbest, Chairman of the BoardPresident and Chief Executive OfficerDate:  November 14, 2008
    By:
    /s/ S. M. DicksonS. M. Dickson, Executive Vice President(Principal Financial and Accounting Officer) 31