- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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.

(Exact name of registrant as specified in its charter)

Mississippi		26-2498567
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3118 Pascagoula Street, Pascagoula, Mississippi		39567
(Address of principal executive offices)		(Zip Code)

[phone]

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

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

 

 

 

 

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TABLE OF CONTENTS

Part I. Financial Information			3
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 4. Controls and Procedures			31
Part II. Other Information			32
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. (Removed and Reserved)			32
Item 5. Other Information			32
Item 6. Exhibits			32
SIGNATURES			33
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

 

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Part I. Financial Information

Item 1.		Financial Statements

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

		(Unaudited)				(Audited)
		June 30, 2011				December 31, 2010
ASSETS:
Cash and due from banks		$	29,703,412				20,010,142
Federal funds sold			97,000				3,147,000
Securities:
Available for sale, at market value			153,925,747				116,333,500
Held to maturity, at amortized cost			97,231,989				112,981,596
Non-marketable equity securities			900,060				900,060
Loans, less allowance for loan losses of $3,131,205 and $3,268,217, respectively			217,980,590				216,470,346
Property and equipment, net of depreciation			15,296,331				15,727,476
Other real estate owned			2,748,923				2,275,723
Accrued income			2,583,669				2,401,057
Other assets			13,433,227				13,148,056
TOTAL ASSETS		$	533,900,948				503,394,956
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits:
Non-interest bearing demand		$	80,687,003				79,614,176
Interest bearing demand, savings, money market, and other time			377,523,260				348,586,934
Total deposits			458,210,263				428,201,110
Federal funds purchased and securities sold under agreements to repurchase			9,183,433				13,729,528
Accrued expenses and other liabilities			10,476,146				9,113,767
Total liabilities			477,869,842				451,044,405
Stockholders’ Equity:
Common stock — $2.50 par value; 5,000,000 shares authorized; 1,330,338 shares issued and outstanding			3,325,845				3,325,845
Surplus			14,500,000				14,500,000
Retained earnings			40,376,733				39,013,928
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available for sale			399,770				(1,917,980	)
Unrealized (loss) on defined benefit pension plan			(2,571,242	)			(2,571,242	)
Total stockholders’ equity			56,031,106				52,350,551
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	533,900,948				503,394,956

See accompanying notes to condensed consolidated financial statements.

 

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

		Three Months Ended								Six Months Ended
		June 30								June 30
		2011				2010				2011				2010
Interest Income:
Interest and fees on loans		$	3,468,473			$	3,604,110			$	6,804,645			$	7,087,973
Interest on investment securities:
Taxable			1,657,048				1,315,797				3,266,291				2,545,129
Exempt from federal income tax			273,645				151,458				485,306				313,732
Interest on federal funds sold			10,613				20,878				37,683				39,216
Total interest income			5,409,779				5,092,243				10,593,925				9,986,050
Interest Expense:
Interest on deposits			805,393				920,712				1,709,162				1,915,141
Interest on federal funds purchased and securities sold under agreements to repurchase			5,776				4,873				11,779				12,024
Total interest expense			811,169				925,585				1,720,941				1,927,165
Net interest income			4,598,610				4,166,658				8,872,984				8,058,885
Provision for loan losses			1,066,653				244,242				1,308,277				376,106
Net interest income after provision for loan losses			3,531,957				3,922,416				7,564,707				7,682,779
Non-Interest Income:
Service charges			1,172,639				1,142,825				2,268,255				2,146,317
Miscellaneous			439,425				652,273				798,373				1,195,362
Total non-interest income			1,612,064				1,795,098				3,066,628				3,341,679
Non-Interest Expense:
Salaries and employee benefits			1,717,757				1,801,648				3,397,197				3,921,723
Premises			743,690				758,246				1,411,259				1,542,740
Miscellaneous			1,190,713				1,495,403				2,849,371				2,884,191
Total non-interest expense			3,652,160				4,055,297				7,657,827				8,348,654
Income before income taxes			1,491,861				1,662,217				2,973,508				2,675,804
Provision for income taxes			519,138				506,589				879,017				752,359
NET INCOME		$	972,723			$	1,155,628			$	2,094,491			$	1,923,445
NET INCOME PER COMMON SHARE		$	0.73			$	0.87			$	1.57			$	1.45

See accompanying notes to condensed consolidated financial statements.

 

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

		Three Months Ended								Six Months Ended
		June 30								June 30
		2011				2010				2011				2010
Net income		$	972,723			$	1,155,628			$	2,094,491			$	1,923,445
Other comprehensive income, net of tax:
Unrealized holding gains arising during period			2,744,991				78,203				2,317,750				20,003
Comprehensive income		$	3,717,714			$	1,233,831			$	4,412,241			$	1,943,448

See accompanying notes to condensed consolidated financial statements.

 

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

		For the Six Months Ended June 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	2,094,491			$	1,923,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			628,798				716,075
Provision for loan losses			1,308,277				376,106
Net premium amortization			110,250				38,415
Reinvested earnings on securities			—				(869	)
(Increase) Decrease in accrued income receivable			(182,612	)			215,723
(Decrease) in interest payable			(28,713	)			(60,089	)
(Gain) on disposition of property and equipment			(6,200	)			(90,870	)
(Gain) on sale of securities			(196,079	)			(230,761	)
Net change in other assets and liabilities			244,513				960,526
Net Cash Provided by Operating Activities			3,972,725				3,847,701
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Federal funds sold			3,050,000				6,380,000
Purchase of securities available for sale			(115,552,300	)			(51,930,830	)
Proceeds from sales and maturities of securities available for sale			81,696,169				37,232,500
Purchase of securities held to maturity			(4,753,937	)			(99,159,221	)
Proceeds from maturities of securities held to maturity			20,365,000				82,720,000
Net (increase) in loans			(3,317,521	)			(6,448,492	)
Purchase of property and equipment			(197,654	)			(92,239	)
Proceeds from sale of property and equipment			32,000				543,180
Net Cash (Used) in Investing Activities			(18,678,243	)			(30,755,102	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			30,009,153				47,730,433
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase			(4,546,095	)			2,322,760
Dividends paid to stockholders			(1,064,270	)			(1,064,270	)
Net Cash Provided by Financing Activities			24,398,788				48,988,923
Net Increase in Cash and Due from Banks			9,693,270				22,081,522
Cash and Due From Banks, Beginning			20,010,142				14,451,113
Cash and Due From Banks, Ending		$	29,703,412			$	36,532,635

See accompanying notes to condensed consolidated financial statements.

 

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

																		Accumulated
																		Other
		Common Stock												Retained				Comprehensive
		Shares Issued				Amount				Surplus				Earnings				Income (Loss)
Balance December 31, 2010			1,330,338			$	3,325,845				14,500,000				39,013,928				(4,489,222	)
Net income			—				—				—				2,094,491				—
Cash dividends, $.55 per share			—				—				—				(731,686	)			—
Changes in unrealized gain (loss) on securities available-for-sale, net of taxes of $1,193,992			—				—				—				—				2,317,750
Balance, June 30, 2011			1,330,338			$	3,325,845				14,500,000				40,376,733				(2,171,472	)

See accompanying notes to condensed consolidated financial statements.

 

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the financial statements and notes thereto of Merchants & Marine Bancorp, Inc.’s 2010 Annual Report on Form 10-K.

December 31, 2010 Balance Sheet Presentation.

The condensed consolidated balance sheet at December 31, 2010 has been taken from the audited balance sheet at that date.

Use of Estimates.

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

2. FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Federal Funds Sold:

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities:

Fair values for investment securities are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities.

Loans:

Fair value for loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities.

Deposits:

The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

 

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

2. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

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

		June 30, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets:
Cash and federal funds sold		$	28,862				28,862			$	23,157				23,157
Securities:
Available-for-sale			153,926				153,926				116,334				116,334
Held-to-maturity			97,232				99,314				112,982				114,389
Non-marketable			900				900				900				900
Loans, net of allowance			217,981				221,276				216,470				216,162
Financial liabilities
Deposits			458,210				458,270				428,201				428,195
Federal funds purchased and securities sold under agreements to repurchase			9,183				9,183				13,730				13,730

3. DEFINED BENEFIT PENSION PLAN

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net periodic benefit cost (income):
Service cost		$	95				101			$	190				202
Interest cost			150				151				300				302
Expected return on plan assets			(181	)			(165	)			(362	)			(330	)
Amortization (gain)/loss			65				68				130				136
Net periodic pension expense:		$	129				155			$	258				310

4. SUBSEQUENT EVENTS

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

 

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

Forward-looking Statements

This Quarterly Report contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of Merchants & Marine Bancorp, Inc. (the “Company”). Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any modification or revisions to these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. The words “expect,” “intend,” “should,” “may,” “could,” “believe,” “suspect,” “anticipate,” “seek,” “plan,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Risks and uncertainties that could cause actual results to differ materially include, those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and without limitation, (i) the Company’s ability to effectively execute its business plans; (ii) greater than anticipated deterioration or lack of sustained growth in the national or local economies; (iii) rapid fluctuations or unanticipated changes in interest rates; (iv) continuation of the historically low short-term interest rate environment; (v) increased competition with other financial institutions in the markets that the Company serves; (vi) continuing consolidation in the financial services industry; (vii) losses, customer bankruptcy, claims and assessments; (viii) changes in state and federal legislation, regulations or policies applicable to banks or other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; and (ix) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (“FASB”) or other regulatory agencies.

Formation of Holding Company

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

Executive Summary

The Company is a one bank holding company which acquired 100% of the Bank’s common stock on April 24, 2008 and is the successor issuer to the Bank pursuant to Rule 12g-3(a) of the Securities Exchange Act of 1934, as amended. The Bank, a state-chartered institution since 1932, is a full service, federally insured bank serving Jackson and George Counties, Mississippi. The main office of the Bank is located in Pascagoula. Branch offices are located in Moss Point, Gautier, Escatawpa, Ocean Springs, Wade, Hurley, St. Martin, and Lucedale. The Bank offers commercial and individual financial services consisting of business and personal checking accounts, certificates of deposit, various forms of real estate, commercial and industrial and personal consumer financing. U.S. Banker magazine has ranked the Bank as one of the Top 200 Community Banks in the nation and Bauer Financial has given the Bank a 5-Star rating for the 71st consecutive quarter indicating that the Bank is one of the strongest banks in the nation. The Company is subject to regulation, supervision, and examination by the Mississippi Department of Banking and Consumer Finance, the Securities and Exchange Commission (the “SEC”), the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”). At June 30, 2011, the Company’s assets totaled $534 million and it employed 125 persons on a full-time equivalent basis.

 

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Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005. Katrina’s wide spread devastation will be felt for years to come. Some of the challenges still facing our service area include insurance availability and settlements, housing, building code changes, flood elevation revisions, population shifts and business and staffing needs.

Earnings Highlights

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

Earning Assets

A detailed comparison of the Company’s average earning assets for the second quarter of 2011, 2010 and 2009 is presented in Table 1 of this report. The Company’s earning assets include loans, investments, Federal Reserve balances and federal funds sold. Average earning assets for the first two quarters of 2011 totaled $522,357,000 compared to $446,624,000 in 2010 and $404,456,000 for the same period in 2009. The increase in average earning assets in 2011 is a result of increases in deposits. Average net loans increased by $6,458,000, $8,031,000 and $4,715,000 in the first two quarters of 2011, 2010 and 2009, respectively. Average securities increased by $74,118,000 and $30,030,000, in the first two quarters of 2011 and 2010, respectively, compared to a decrease of $18,901,000, for the first two quarters of 2009. The average balance of federal funds sold decreased by $7,285,000, $30,647,000 and $3,986,000 for the first two quarters of 2011, 2010 and 2009, respectively. Other earning assets consist of balances maintained in a Federal Reserve excess balance account. The average balance for the first two quarters of 2011 totaled $37,196,000 compared to $34,754,000 for the first two quarters of 2010.

Net Interest Income

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

 

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A bank’s net interest margin is a prime indicator of its profitability. The net interest margin reflects the spread between interest-earning asset yields and interest-bearing liability costs and the percentage of interest-earning assets funded by interest-bearing liabilities. The net margin, on a tax equivalent basis, was 3.2%, 3.2% and 3.3% for the second quarter of 2011, 2010 and 2009, respectively. The decreases in 2011 and 2010 are attributable to the decreases in rates of return on interest earning assets compared to 2009. Tax equivalent net interest income increased in the first two quarters of 2011 and 2010 by 12.2% and 5.9% and decreased in the first two quarters of 2009 by 13.1%.

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

Total average interest bearing liabilities increased 22.7% and 19.7% in the first two quarters of 2011 and 2010, compared to a decrease of 1.7% in 2009. Rates paid on these funds decreased by 36, 71 and 75 basis points in the first two quarters of 2011, 2010 and 2009, respectively. The decrease in the rates paid on these funds resulted in a decrease in interest expense of $353,000, $753,000 and $1,183,000 for the first two quarters of 2011, 2010 and 2009, respectively. Interest-bearing checking, money market funds and savings accounts average balances increased by 31.0% and 36.2% in the second quarter of 2011 and 2010 and decreased by 3.9% for the second quarter of 2009. Interest expense on these funds decreased 18.7%, 11.0% and 8.3% in the first two quarters of 2011, 2010 and 2009, respectively. Average time deposit balances increased by 3.9% in the first two quarters of 2011 and decreased by 2.4% in 2010 compared to an increase of 10.3% in the first two quarters of 2009. The average rate paid on these funds was 1.5%, 1.9% and 3.0% for the first two quarters of 2011, 2010 and 2009, respectively. Interest expense on time deposits decreased 18.2%, 38.1% and 17.7% in the first two quarters of 2011, 2010 and 2009, respectively. Average federal funds purchased and securities sold under agreements to repurchase increased 27.2% for the first two quarters of 2011, compared to decreases of 16.0% and 38.0% in the first two quarters of 2010 and 2009, respectively. Interest expense remained the same in the first two quarters of 2011 compared to 2010 and decreased by 45.4% or 12 basis points, in the first two quarters of 2010 compared to 2009, due to lower rates paid and volumes. Tables 1 and 2 provide more information on the Company’s net interest income and rates.

Interest Rate Sensitivity

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

 

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The Company uses an earnings forecast model that simulates multiple interest rate scenarios and the effects on the Company’s net margin, in addition to using traditional gap tables. The model analyzes the earnings risk by revealing the probability of reaching future income levels based on balance sheet changes caused by interest rate fluctuations. The model and traditional gap analysis indicate the Company is liability sensitive, which means that in a rising rate environment, the Company’s net interest margin will decrease. See Table 14 for a detailed analysis of the Company’s interest rate sensitivity.

The Company’s operations are not ordinarily impacted by inflationary factors. However, because the Company’s assets are largely monetary in nature its operations are subject to changes in interest rates.

Loans

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

Average loans, net of unearned income, as a percentage of average earning assets, was 42.1%, 47.8% and 50.8%, for the first two quarters of 2011, 2010 and 2009, respectively. The average loan-to-deposit ratio was 44.6%, 50.2% and 54.2% at June 30, 2011, 2010 and 2009, respectively. Average net loans increased by $6,458,000, $8,031,000 and $4,715,000 at second quarter-end 2011, 2010 and 2009, respectively.

Loan growth in the real estate portfolio resulted in an increase in loans secured by real estate from $141,329,000 at second quarter-end 2009, to $152,181,000 at second quarter-end 2010, to $164,276,000 at second quarter-end 2011. Real estate loans increased $12,095,000, $10,852,000 and $18,461,000 at second quarter-end 2011, 2010 and 2009, respectively. Commercial and industrial loans and loans to municipal and local governments totaled $25,870,000, $26,297,000 and $26,962,000 at the second quarter-end 2011, 2010 and 2009, respectively. Consumer loans decreased from $37,835,000 and $32,245,000 at second quarter-end 2009 and 2010, respectively, to $27,494,000 at second quarter-end 2011. See Tables 6 and 7 for a comparison of the loan portfolio’s composition and maturity breakdown.

Allowance for Loan Losses

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

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

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

 

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Critical Accounting Policies

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

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

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

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

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

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

 

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

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

Asset Quality

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

Total non-performing assets totaled $7,983,000, $4,175,000 and $2,940,000 at June 30, 2011, 2010 and 2009, respectively. Non-performing assets, as a percentage of total loans, were 3.7% at June 30, 2011, 2.0% at June 30, 2010, and 1.5% at June 30, 2009. Non-accrual loans and accruing loans over 90 days past due totaled $5,234,000, or 2.4% of total loans, $2,477,000, or 1.1% of total loans, and $2,839,000, or 1.4% of total loans, at June 30, 2011, 2010 and 2009, respectively. Other real estate totaled $2,749,000, or 1.3% of total loans, at June 30, 2011, $1,698,000, or 0.8% of total loans, at June 30, 2010 and $101,000, or 0.1% of total loans, at June 30, 2009. See Table 10 for additional information concerning the Company’s non-performing assets.

Securities Available-for-Sale and Investment Securities

The Company’s securities portfolio is another large component of the Company’s earning assets. Securities had book values totaling $252,058,000, $209,544,000 and $166,512,000, for the second quarter-end 2011, 2010 and 2009, respectively. The large increases in securities in 2011 and 2010 are a result of increases in deposits resulting from gaining public fund depository customers.

The securities portfolio is divided into two classifications: available-for-sale and held to maturity. The available for sale portion contains all securities which management believes could be subject to sale prior to their stated maturity. This category allows Company management to meet liquidity needs, as well as affording the Company the opportunity to take advantage of market shifts or anticipated changes in interest rates, yield curve changes, and inter-market spread relationships. This portion of the portfolio is also used to help manage the Company’s interest rate and credit risks in the overall balance sheet. In accordance with Accounting Standards Codification 320 Investment in Debt and Equity Securities, securities in the available-for-sale category are accounted for at fair market value with unrealized gains or losses excluded from earnings and reported as separate component of stockholders’ equity until realized. Unrealized gains net of taxes of $400,000 and $235,000 were included in stockholders’ equity at second quarter-end 2011 and 2010, compared to an unrealized loss of $48,000 in 2009, respectively. The held-to-maturity portion of the portfolio contains debt securities which the Company intends to hold until their contractual maturity date. These securities provide the Company with a long term, relatively stable source of income with minimal credit risk. The securities in this category are carried at their amortized costs. A portion of the Company’s investment portfolio is pledged as collateral against public deposits and securities sold under agreements to repurchase.

 

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

See Tables 3, 4 and 5 for more information about the Company’s securities portfolio composition yields and maturity distributions.

Deposits

The Company’s primary funding source for loans and investments is its deposit base. Deposits consist of checking, savings, and certificates of deposit. The Company’s ability to maintain a strong deposit base is of utmost importance in the growth and profitability of the institution. Managing the deposit mix and pricing is designed to be flexible, so that changes in interest rate movements and liquidity needs do not conflict or have an adverse effect on the Company’s balance sheet. The Company relies on local consumer, retail, corporate and governmental agencies for its deposit base. Average total deposits increased by $67,986,000, or 16.0% for the second quarter-end 2011 and $46,297,000, or 12.2%, for second quarter-end 2010, compared to a decrease of $19,670,000, or 4.9%, for second quarter-end 2009, respectively. The increases in 2011 and 2010 are due to new public deposit customers. See Tables 11 and 12 for more information about the Company’s deposits and maturity distribution.

Liquidity

Liquidity for a financial institution can be expressed in terms of maintaining sufficient funds available to meet both expected and unanticipated obligations in a cost-effective manner. The Company closely monitors its liquidity position to ensure it has ample funds available to meet its obligations. The Company relies on maturing loans and investments, federal funds and its core deposit base to fund its day-to-day liquidity needs. By monitoring asset and liability maturities and the levels of cash on hand, the Company is able to meet expected demands for cash. The Company also has access to federal fund lines at correspondent banks to meet unexpected cash needs and an inventory of readily marketable government securities.

Average federal funds purchases and securities sold under agreement to repurchase represented 2.8%, 2.6% and 3.5% of total average deposits for the second quarter-end 2011, 2010 and 2009, respectively. See Table 13 for more information concerning the Company’s short-term borrowings.

Off-Balance Sheet Arrangements

As of June 30, 2011, the Company had unfunded loan commitments outstanding of $31,156,000 and outstanding standby letters of credit of $805,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. The Company historically has been a net seller of federal funds, and a detailed statement of cash flows can be found in the accompanying financial statements.

 

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Contractual Obligations

The Company has certain contractual obligations that arise from its normal course of business. Each category of deposit represents an obligation to pay. While certain categories of deposits, (e.g., certificates of deposit) have a contracted expiration date, checking accounts and savings are subject to immediate withdrawal. Table 15 details the Company’s deposit and lease contractual obligations.

The Company also enters into agreements to extend loans and issues standby letters of credit. These contractual obligations are detailed in Table 15.

The Company also has a defined benefit plan for substantially all of its employees, as well as former employees, who have retired from the Company; consequently, the Company is contractually obligated to pay these benefits to its retired employees. As of December 31, 2010, the plan was underfunded by $2,457,000, compared to an underfunded amount of $1,907,000 at year-end 2009. The underfunded status is the result of the poor market conditions in 2008 and the resulting effect on the performance of the plan’s investment assets. Management is monitoring the funded status of its defined benefit plan closely and has begun to contribute additional funding to the plan during 2011.

Risk-Based Capital/Stockholders’ Equity

The Company places a great emphasis on maintaining its strong capital base. The Company’s management and board of directors continually evaluate business decisions that may have an impact on the level of stockholders’ equity. It is their goal that the Company maintains a “well-capitalized” equity position. Based on the capital levels defined by banking regulators as part of the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, a “well-capitalized” institution is one that has at least a 10% total risk-based capital ratio, a 6% Tier 1 risk-based capital ratio, and a 5% leverage ratio. The Company’s solid capital base is reflected in its regulatory capital ratios. The risk-based capital ratio was 20.6%, 20.4% and 21.1% at second quarter-end 2011, 2010 and 2009, respectively. The Tier 1 risk-based capital ratio was 19.5% at second quarter-end 2011, 19.2% at second quarter-end 2010 and 19.8% at second quarter-end 2009. The leverage ratio was 10.0%, 10.8% and 11.5% at second quarter-end 2011, 2010 and 2009, respectively.

The Company’s capital ratios surpass the minimum requirements of 8.0% for the total risk-based capital ratio, 4.0% for Tier 1 risk-based capital ratio and 4.0% for the leverage ratio.

Stockholders’ equity to total assets at second quarter-end 2011, 2010 and 2009 was 10.5%, 10.4% and 10.9%, respectively.

Non-Interest Income

Non-interest income includes service charges on deposit accounts, safe-deposit box rent, check cashing fees, data processing income, commissions and charges, and other fees. Service charges on deposit accounts income increased in the first two quarters of 2011 and 2010 by 5.7% and 9.0%, compared to a decrease in the first two quarters of 2009 by 6.9%. The Company updated its pricing structure during the first quarter of 2011 and this change is reflected in the increase in service charge income. The increase in 2010 is attributed to the increase in the number of accounts, and the balances of accounts subject to service charges. Miscellaneous income at second quarter-end 2011 decreased by 33.2% compared to an increase of 8.2% at second quarter-end 2010. The increase in 2010 is due to recognized gains on sales of available for sale securities. The decrease in 2011 is due to merchant fees absorbed on behalf of a public fund deposit customer.

 

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With deposit related costs constantly increasing, the Company continues to analyze means to increase non-interest income.

Non-Interest Expense

The Company’s goal is to enhance customer service through efficient and effective delivery of its products and services. Enhancing operational resources, while containing overhead expenses, is a top priority of the Company. While interest expense is one of the largest expenses of the Company, employees’ salaries, equipment and building expenses, legal fees, FDIC insurance, and other expenses combined make up the largest category of the Company’s expenses. Proper management of these costs is extremely important to the profitability of the Company.

Salary and employee benefits expense decreased 13.4% for the first two quarters of 2011, compared to increases of 1.2% and 11.1% for the first two quarters of 2010 and 2009, respectively. The decrease in 2011 is due to a reduction in the number of full time equivalent employees and a lower defined benefit pension expense. The increase in 2009 is attributed to increases in employee raises and an increase in the defined benefit pension plan expense. Occupancy and equipment expense decreased by 8.5% and 1.2% in the first two quarters of 2011 and 2010, compared to an increase of 14.9% in the first two quarters of 2009. The decrease in 2011 is attributed to a reduction in property taxes on the main branch and depreciation expense overall. The large increase in 2009 is attributable to the depreciation of several of the Company’s branches that have been remodeled. Miscellaneous expenses increased by 1.2% and 12.9% at second quarter-end 2011 and 2010, compared to a decrease of 26.1% at second quarter-end 2009. The main reason for the increase in the first two quarters of 2010 is due to an increase in FDIC insurance assessments and consultant fees. The FDIC began increasing deposit premiums in 2009 in order to replenish its reserve funds. The decrease in 2009 was due to a change in the computation of director’s deferred compensation and a reduction in professional fees.

Income Taxes

Income tax expense totaled $879,000, $752,000 and $836,000 for the second quarter-end 2011, 2010 and 2009, respectively.

 

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

The following table shows the major categories of interest-earning assets and interest-bearing liabilities with their corresponding average daily balances, related interest income or expense and the resulting yield or rate for the first two quarters ended June 30, 2011, 2010, and 2009:

		2011												2010												2009
						Interest				Average								Interest				Average								Interest				Average
		Average				Income/				Yield/				Average				Income/				Yield/				Average				Income/				Yield/
Assets		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
Interest earning assets:
Loans, net of unearned income		$	219,945			$	6,805				6.19	%		$	213,487			$	6,994				6.55	%		$	205,456			$	6,940				6.76	%
Securities held to maturity:
Taxable			75,490				915				2.42	%			138,635				2,184				3.15	%			97,109				2,203				4.54	%
Exempt from Federal income tax			27,332				424				3.10	%			20,360				314				3.08	%			10,999				181				3.29	%
Securities available for sale:
Taxable			161,790				2,413				2.98	%			31,499				400				2.54	%			52,356				787				3.01	%
Other interest earning assets			37,196				37				0.20	%			34,754				35				0.20	%			—				—				0.00	%
Federal funds sold and securities purchased under agreements to resell			604				—				0.00	%			7,889				5				0.13	%			38,536				36				0.19	%
Total interest-earning assets		$	522,357			$	10,594				4.06	%		$	446,624			$	9,932				4.45	%		$	404,456			$	10,147				5.02	%
Non interest-earning assets:
Cash and due from banks			17,617												17,386												17,186
Bank premises and equipment			15,545												16,499												17,682
Other assets			16,458												18,165												13,860
Allowance for possible loan losses			(3,229	)											(3,090	)											(3,090	)
Total assets		$	568,748											$	495,584											$	450,094

 

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

		2011												2010												2009
						Interest				Average								Interest				Average								Interest				Average
		Average				Income/				Yield/				Average				Income/				Yield/				Average				Income/				Yield/
Liabilities		Balance				Expense				Rate				Balance				Expense				Rate				Balance				Expense				Rate
Interest bearing liabilities:
INT DDA, MMF & Savings		$	312,482			$	719				0.46	%		$	238,590			$	884				0.74	%		$	175,126			$	993				1.13	%
Time deposits			111,725				843				1.51	%			107,568				1,031				1.92	%			110,222				1,665				3.02	%
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings			14,216				12				0.17	%			11,176				12				0.21	%			13,298				22				0.33	%
Total interest-bearing liabilities		$	438,423			$	1,574				0.72	%		$	357,334			$	1,927				1.08	%		$	298,646			$	2,680				1.79	%
Noninterest-bearing liabilities:
Deposits			68,880												78,943												93,456
Other liabilities			8,973												8,162												8,606
Total liabilities			516,276												444,439												400,708
Stockholder’s equity			52,472												51,145												49,386
Total liabilities and stockholders’ equity		$	568,748											$	495,584											$	450,094
Net interest income/ margin-tax equivalent						$	9,020				3.17	%						$	8,005				3.23	%						$	7,467				3.32	%
Tax equivalent adjustment:
Loans							61												81												99
Investment securities							424												314												181
Securities available for sale
Other
Total tax equivalent adjustment							485												395												280
Net interest income						$	8,535											$	7,610											$	7,187

 

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TABLE 2
TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
(Dollars In Thousands)

The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates.

		Quarter ended June 30, 2011
		2011 Compared to 2010												2010 Compared to 2009
		Increase (Decrease) Due To												Increase (Decrease) Due To
		Volume				Rate				Net				Volume				Rate				Net
Interest income on:
Loans		$	6,458			$	(189	)		$	6,269			$	8,031			$	54			$	8,085
Investment securities:
Taxable			(63,145	)			(1,269	)			(64,414	)			41,526				(19	)			41,507
Exempt from Federal income tax			6,972				110				7,082				9,361				133				9,494
Securities available for sale:
Taxable			130,291				2,013				132,304				(20,857	)			(387	)			(21,244	)
Other interest earning assets			2,442				2				2,444				34,754				35				34,789
Federal funds sold and securities purchased under agreements to resell			(7,285	)			(5	)			(7,290	)			(30,647	)			(31	)			(30,678	)
Total		$	75,733			$	662			$	76,395			$	42,168			$	(215	)			41,953
Interest expense on:
Int DDA’s & Savings deposits		$	73,892			$	(165	)		$	73,727			$	63,464			$	(109	)		$	63,355
Time deposits			4,157				(188	)			3,969				(2,654	)			(634	)			(3,288	)
Federal funds purchased, and securities sold under agreements to repurchase			3,040				—				3,040				(2,122	)			(10	)			(2,132	)
Total		$	81,089			$	(353	)		$	80,736			$	58,688			$	(753	)		$	57,935
Changes in net interest income-tax equivalent		$	(5,356	)		$	1,015			$	(4,341	)		$	(16,520	)		$	538			$	(15,982	)

The increase (decrease) due to changes in average balances reflected in the above table was calculated by applying the preceding year’s rate to the current year’s change in the average balance. The increase (decrease) due to changes in average rates was calculated by applying the current year’s change in the average rates to the current year’s average balance. Using this method of calculating increases (decreases), any increase or decrease due to both changes in average balances and rates is reflected in the changes attributable to average rate changes.

 

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

The available for sale classification of securities, established January 1, 1994 includes all portfolio securities which management believes are subject to sale prior to their contractual maturities and are stated at the lower of amortized cost or aggregate market value. Investment securities include all portfolio securities that the Company intends to hold to maturity and are carried at amortized cost. The carrying amounts of securities available for sale and portfolio securities are presented as of the dates indicated.

		June 30,
		2011				2010				2009
Securities available for sale
U. S. Treasury and other U. S. Government agencies		$	153,784			$	48,162			$	55,732
Obligations of states and political subdivisions			—				—				—
Mortgage-backed securities			—				—				—
Other securities			142				119				105
Total securities available for sale		$	153,926			$	48,281			$	55,837
Investment securities
U. S. Treasury and other U. S. Government agencies		$	63,563			$	133,313			$	92,962
Obligations of states and political subdivisions			33,669				27,050				16,813
Mortgage-backed securities			—				—				—
Other securities			900				900				900
Total investment securities		$	98,132			$	161,263			$	110,675
Total securities available for sale and investment securities		$	252,058			$	209,544			$	166,512

TABLE 4
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
(Dollars in Thousands)

The following table shows the maturities and weighted average yields of the Company’s securities available for sale and investment securities at June 30, 2011:

		Maturing
										After								After 5 Yrs
		Within								1 Yr But								But Within
		1 Year								Within 5 Yrs								10 Yrs								After 10 Yrs.
																																		Carrying
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount
Securities available for sale
U.S. Treasury and other U.S. Government agencies		$	1,429				3.00	%		$	—				0.00	%		$	152,355				3.02	%		$	—				0.00	%		$	153,784
Other securities			142				0.66	%			—				0.00	%			—				0.00	%			—				0.00	%			142
Total securities available for sale		$	1,571				1.83	%		$	—				0.00	%		$	152,355				3.02	%			—				0.00	%		$	153,926
Investment securities
U.S. Treasury and other U.S. Government agencies		$	3,000				2.43	%		$	38,506				2.18	%		$	22,057				2.30	%			—				0.00	%		$	63,563
Obligations of states and political subdivisions			1,310				4.01	%			15,486				4.03	%			12,781				4.15	%			4,092				5.84	%			33,669
Other securities			900				0.00	%			—				0.00	%			—				0.00	%			—				0.00	%			900
Total investment securities		$	5,210				3.18	%		$	53,992				3.00	%		$	34,838				3.05	%			4,092				5.84	%		$	98,132
Total securities available for sale and investment securities		$	6,781				3.13	%		$	53,992				3.00	%		$	187,193				3.02	%		$	4,092				5.84	%		$	252,058

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

 

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TABLE 5

		SECURITIES AVAILABLE-FOR-SALE																SECURITIES HELD-TO-MATURITY
		JUNE 30, 2011																JUNE 30, 2011
						GROSS				GROSS												GROSS				GROSS
		AMORTIZED				UNREALIZED				UNREALIZED												UNREALIZED				UNREALIZED
		COST				GAINS				LOSSES				FAIR VALUE				AMORTIZED COST				GAINS				LOSSES				FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES		$	153,248			$	774			$	(238	)		$	153,784			$	63,563			$	894			$	—			$	64,457
STATE AND MUNICIPAL SECURITIES			—				—				—				—				33,669				1,201				(13	)			34,857
OTHER SECURITIES			72				—				70				142				900				—				—				900
TOTAL		$	153,320			$	774			$	(168	)		$	153,926			$	98,132			$	2,095			$	(13	)		$	100,214
		SECURITIES AVAILABLE-FOR-SALE																SECURITIES HELD-TO-MATURITY
		JUNE 30, 2010																JUNE 30, 2010
						GROSS				GROSS												GROSS				GROSS
		AMORTIZED				UNREALIZED				UNREALIZED												UNREALIZED				UNREALIZED
		COST				GAINS				LOSSES				FAIR VALUE				AMORTIZED COST				GAINS				LOSSES				FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES		$	47,853			$	309			$	—			$	48,162			$	133,313			$	1,982			$	—			$	135,295
STATE AND MUNICIPAL SECURITIES			—				—				—				—				27,050				635				(84	)			27,601
OTHER SECURITIES			72				—				47				119				900				—				—				900
TOTAL		$	47,925			$	309			$	47			$	48,281			$	161,263			$	2,617			$	(84	)		$	163,796
		SECURITIES AVAILABLE-FOR-SALE																SECURITIES HELD-TO-MATURITY
		JUNE 30, 2009																JUNE 30, 2009
						GROSS				GROSS												GROSS				GROSS
		AMORTIZED				UNREALIZED				UNREALIZED												UNREALIZED				UNREALIZED
		COST				GAINS				LOSSES				FAIR VALUE				AMORTIZED COST				GAINS				LOSSES				FAIR VALUE
U S GOVERNMENT AND AGENCY SECURITIES		$	55,837			$	200			$	(305	)		$	55,732			$	92,962			$	1,236			$	(413	)		$	93,785
STATE AND MUNICIPAL SECURITIES			—				—				—				—				16,813				269				(140	)			16,942
OTHER SECURITIES			72				—				33				105				—				—				—				—
TOTAL		$	55,909			$	200			$	(272	)		$	55,837			$	109,775			$	1,505			$	(553	)		$	110,727

 

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TABLE 6
LOAN PORTFOLIO
(Dollars in Thousands)

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

		2011				2010				2009
Commercial & Industrial		$	25,870			$	26,297			$	26,962
Real Estate			164,276				152,181				141,329
Consumer Loans			27,494				32,245				37,835
Other Loans			3,472				5,645				4,540
Total Loans		$	221,112			$	216,368			$	210,666

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

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

Remaining Maturity Fixed Rate
3 months or less		$	25,839
Over 3 months through 12 months			35,355
Over 1 year through 5 years			143,097
Over 5 years			7,722
Over 1 year but variable rate			3,985
Total Loans		$	215,998

 

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TABLE 8
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)

The following table outlines the activity for the allowance for loan losses for the past three years:

		Quarter ended June 30,
		2011				2010				2009
Beginning Balance		$	3,268			$	3,100			$	3,100
Charge Offs:
Commercial & Industrial			—				118				23
Real Estate			1,310				30				16
Consumer			318				479				238
Other			—				—				—
Total Charge Offs			1,628				627				277
Recoveries:
Commercial & Industrial			—				24				5
Real Estate			4				19				—
Consumer			179				241				137
Other			—				—				—
Total Recoveries			183				284				142
Net Charge Offs			1,445				343				135
Provision for Possible Losses			1,308				376				135
Ending Balance		$	3,131			$	3,133			$	3,100
Total Loans Outstanding		$	221,112			$	216,368			$	210,666
Average daily loans		$	219,945			$	213,487			$	205,456

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

 

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TABLE 9
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)

The following table represents the allocation of the allowance for loan losses by loan categories and is based on an analysis of individual credits, historical losses, and other factors. This allocation is for analytical purposes only as the aggregate allowance is available to absorb losses on any and all loans.

		June 30,
		2011								2010								2009
		% Gross				Loan Loss				% Gross				Loan Loss				% Gross				Loan Loss
		Loans				Allowance				Loans				Allowance				Loans				Allowance
		Outstanding				Allocation				Outstanding				Allocation				Outstanding				Allocation
Commercial & Industrial			4.85			$	152				5.94			$	184				7.00			$	217
Real Estate			80.10				2,508				65.19				2,021				27.90				865
Consumer			12.42				389				23.81				738				48.87				1,515
Other			2.62				82				6.13				190				1.94				60
Unallocated			0.00				—				0.00				—				14.29				443
			100	%		$	3,131				100	%		$	3,133				100	%		$	3,100

TABLE 10
NONPERFORMING ASSETS
(Dollars in Thousands)

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

		June 30,
		2011				2010				2009
Non-accrual Loans & Accruing Loans Past Due 90 Days or more		$	5,234			$	2,477			$	2,839
Other Real Estate			2,749				1,698				101
		$	7,983			$	4,175			$	2,940
Nonperforming Assets as % of Total Loans			3.70	%			1.95	%			1.50	%
Non-accrual Loans & Loans Past Due 90 Days or More as % of Total Loans			2.37	%			1.14	%			1.35	%

 

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TABLE 11
AVERAGE DEPOSITS
(Dollars in Thousands)

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

		Quarter ended June 30,
		2011				2010				2009
Non-interest bearing deposits		$	68,880			$	78,943			$	93,456
Interest-bearing deposits			312,482				238,590				175,126
Interest-bearing time deposits			111,725				107,568				110,222
Total		$	493,087			$	425,101			$	378,804

TABLE 12
TIME DEPOSITS OF $100,000 OR MORE, MATURITY DISTRIBUTION
(Dollars in Thousands)

Maturities of time certificates of deposits $100,000 or more outstanding at June 30, 2011 are summarized in the following table:

Time remaining until maturity
3 months or less		$	16,311
Over 3 through 12 months			38,457
Over 12 months			5,838
Total		$	60,606

 

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TABLE 13
SHORT-TERM BORROWINGS
(Dollars in Thousands)

The following table presents a summary of the Company’s short-term borrowings at June 30, for each of the last three years and the corresponding interest rates:

						Daily				Average				Maximum
		June				Average				Interest				Month-End
		Balance				Balance				Rate				Balance
2011
Federal funds purchased and securities sold under agreements to repurchase		$	9,183			$	14,216				0.17	%		$	9,183
2010
Federal funds purchased and securities sold under agreements to repurchase		$	10,756			$	11,176				0.21	%		$	10,756
2009
Federal funds purchased and securities sold under agreements to repurchase		$	12,091			$	13,928				0.33	%		$	12,091

 

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TABLE 14
INTEREST SENSITIVITY
(Dollars in Thousands)

The following table reflects the interest sensitivity of the Company over various periods as of June 30, 2011 based on contractual maturities as of that date:

		0-3				4-12				1-5				Over 5
		Months				Months				Years				Years				Total
Assets
Interest-earning assets:
Loans, net of unearned income		$	30,916			$	35,355			$	147,082			$	7,722			$	221,075
Investment securities			2,900				2,310				53,992				38,930				98,132
Securities available for sale			1,571				—				152,355				—				153,926
Other interest earnings assets			18,415				—				—				—				18,066
Federal funds sold and securities purchased under agreements to resell			97				—				—				—				97
Total interest-earning assets		$	53,899			$	37,665			$	353,429			$	46,652			$	491,645
Noninterest-earning assets															42,194				42,194
Total assets		$	53,899			$	37,665			$	353,429			$	88,846			$	533,839
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Int DDAs, MMF, Savings deposits		$	33,477			$	106,417			$	133,441			$	—			$	273,335
Time deposits			26,819				62,619				14,750				—				104,188
Federal funds purchased, and securities sold under agreements to repurchase			9,183				—				—				—				9,183
Total interest-bearing liabilities		$	69,479			$	169,036			$	148,191			$	—			$	386,706
Noninterest-bearing deposits			18,202				36,420				26,065								80,687
Other liabilities			—				—				—				10,477				10,477
Stockholders’ equity			—				—				—				55,969				55,969
Total liabilities and stockholders’ equity		$	87,681			$	205,456			$	174,256			$	66,446			$	533,839
Interest sensitive gap		$	(33,782	)		$	(167,791	)		$	179,173			$	22,400
Cumulative interest sensitive gap		$	(33,782	)		$	(201,573	)		$	(22,400	)		$	—
Cumulative interest sensitive gap as a percent of total assets			-6.33	%			-37.76	%			-4.20	%			0.00	%

 

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

The following table presents, as of June 30, 2011, significant fixed and determinable contractual obligations to third parties by payment date:

		PAYMENTS DUE IN
		ONE YEAR OR				ONE TO				THREE TO				OVER FIVE
		LESS				THREE YEARS				FIVE YEARS				YEARS				TOTAL
Deposits without a stated maturity		$	204,029			$	95,548			$	54,445			$	—			$	354,022
Consumer certificates of deposit			89,438				10,265				4,485				—				104,188
Federal funds borrowed & repurchase agreements			9,183				—				—				—				9,183
Operating leases			—				—				—				—				—
Purchase obligations			—				—				—								—

COMMITMENTS

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

		ONE YEAR OR				ONE TO				THREE TO				OVER FIVE
		LESS				THREE YEARS				FIVE YEARS				YEARS				TOTAL
Commitments to extend credit:
Commercial		$	13,786			$	396			$	11			$	—			$	14,193
Residential real estate			16				—				—				—				16
Revolving home equity and credit card lines			17				139				406				—				562
Other			16,385				—				—				—				16,385
Standby letters of credit			805				—				—				—				805

 

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Item 4.		Controls and Procedures

Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls — There were no changes in the Company’s internal control over financial reporting for the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II. Other Information

Item 1.		Legal Proceedings

None

Item 1A.		Risk Factors

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

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

None

Item 3.		Defaults Upon Senior Securities

None

Item 4.		(Removed and Reserved)

Item 5.		Other Information

None

Item 6.		Exhibits

	31.1			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1			Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2			Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101			Interactive Data File

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MERCHANTS & MARINE BANCORP, INC.
Date: August 12, 2011	By:	/s/ Royce Cumbest
		Royce Cumbest, Chairman of the Board
		President and Chief Executive Officer
Date: August 12, 2011	By:	/s/ Elise Bourgeois
		Elise Bourgeois, Senior Vice President,
		Cashier and Chief Financial Officer

 

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