10-Q

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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:  000-26099

FARMERS & MERCHANTS BANCORP

(Exact name of registrant as specified in its charter)

Delaware	94-3327828
(State or other jurisdiction of incorporation or organization)	(I.R.S.  Employer Identification No.)
111 W. Pine Street, Lodi, California	95240
(Address of principal Executive offices)	(Zip Code)

Registrant's telephone number, including area code (209) 367-2300

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.

Yes x  No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

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

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

Number of shares of common stock of the registrant:  Par value $0.01, authorized 7,500,000 shares; issued and outstanding 777,882 as of October 31, 2012.

FARMERS & MERCHANTS BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION			Page
	Item 1 - Financial Statements
		Consolidated Balance Sheets (Unaudited) as of September 30, 2012, December 31, 2011 and September 30, 2011.	3
		Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011.	4
		Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011.	5
		Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the Nine Months Ended September 30, 2012 and 2011.	6
		Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2012 and 2011.	7
		Notes to the Consolidated Financial Statements (Unaudited)	8
	Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations		31
	Item 3 - Quantitative and Qualitative Disclosures About Market Risk		52
	Item 4 - Controls and Procedures		55
PART II. - OTHER INFORMATION
	Item 1 - Legal Proceedings		55
	Item 1A – Risk Factors		55
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		56
	Item 3 - Defaults Upon Senior Securities		56
	Item 4 – Mine Safety Disclosures		56
	Item 5 - Other Information		56
	Item 6 - Exhibits		56
Signatures			57
Index to Exhibits			57
31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FARMERS & MERCHANTS BANCORP

Consolidated Balance Sheets

(in thousands)	Sept. 30,		December 31,		Sept. 30,
	2012		2011		2011
Assets	(Unadited)				(Unaudited)
Cash and Cash Equivalents:
Cash and Due From Banks	$	29,863	$	45,112	$	37,829
Interest Bearing Deposits with Banks		3,601		56,548		74,782
Total Cash and Cash Equivalents		33,464		101,660		112,611
Investment Securities:
Available-for-Sale		463,177		479,820		420,809
Held-to-Maturity		68,960		63,092		63,803
Total Investment Securities		532,137		542,912		484,612
Loans		1,210,027		1,163,078		1,177,505
Less: Allowance for Loan Losses		33,604		33,017		32,963
Loans, Net		1,176,423		1,130,061		1,144,542
Premises and Equipment, Net		22,945		24,058		24,260
Bank Owned Life Insurance		48,799		47,418		46,959
Interest Receivable and Other Assets		70,633		73,575		67,239
Total Assets	$	1,884,401	$	1,919,684	$	1,880,223
Liabilities
Deposits:
Demand	$	369,635	$	389,639	$	359,649
Interest Bearing Transaction		238,223		220,736		210,730
Savings and Money Market		540,690		498,011		497,599
Time		482,957		517,811		521,310
Total Deposits		1,631,505		1,626,197		1,589,288
Securities Sold Under Agreement to Repurchase		-		60,000		60,000
Federal Home Loan Bank Advances		482		530		546
Subordinated Debentures		10,310		10,310		10,310
Interest Payable and Other Liabilities		35,773		33,301		30,859
Total Liabilities		1,678,070		1,730,338		1,691,003
Shareholders' Equity
Preferred Stock		-		-		-
Common Stock		8		8		8
Additional Paid-In Capital		75,014		75,590		75,590
Retained Earnings		122,170		109,081		108,174
Accumulated Other Comprehensive Income, Net		9,139		4,667		5,448
Total Shareholders' Equity		206,331		189,346		189,220
Total Liabilities & Shareholders' Equity	$	1,884,401	$	1,919,684	$	1,880,223

The accompanying notes are an integral part of these unaudited consolidated financial statements

3

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Income  (Unaudited)

(in thousands except per share data)	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2012		2011			2012		2011
Interest Income
Interest and Fees on Loans	$	16,505	$	17,949		$	49,283	$	52,946
Interest on Deposits with Banks		8		28			76		67
Interest on Investment Securities:
Taxable		2,315		2,247			7,958		6,988
Tax-Exempt		671		637			1,961		1,926
Total Interest Income		19,499		20,861			59,278		61,927
Interest Expense
Deposits		935		1,337			2,967		4,279
Borrowed Funds		11		549			1,047		1,632
Subordinated Debentures		87		82			262		245
Total Interest Expense		1,033		1,968			4,276		6,156
Net Interest Income		18,466		18,893			55,002		55,771
Provision for Loan Losses		600		900			1,100		5,350
Net Interest Income After Provision for Loan Losses		17,866		17,993			53,902		50,421
Non-Interest Income
Service Charges on Deposit Accounts		1,248		1,356			3,662		4,096
Net Gain on Investment Securities		149		-			149		-
Increase in Cash Surrender Value of Life Insurance		500		466			1,412		1,376
Debit Card and ATM Fees		732		704			2,197		2,078
Gain (Loss) on Non-Qualified Deferred Compensation Plan Investments		762		(1,198	)		1,381		(808	)
Other		662		442			1,986		1,357
Total Non-Interest Income		4,053		1,770			10,787		8,099
Non-Interest Expense
Salaries & Employee Benefits		7,850		7,512			23,792		22,217
Gain (Loss) on Non-Qualified Deferred Compensation Plan Investments		762		(1,198	)		1,381		(808	)
Occupancy		656		674			1,925		1,920
Equipment		686		726			2,282		2,151
ORE Holding Costs		15		364			108		1,256
FDIC Insurance		243		236			728		1,226
Other		1,548		1,507			6,337		4,528
Total Non-Interest Expense		11,760		9,821			36,553		32,490
Income Before Income Taxes		10,159		9,942			28,136		26,030
Provision for Income Taxes		3,827		3,675			10,452		9,482
Net Income	$	6,332	$	6,267		$	17,684	$	16,548
Basic Earnings Per Common Share	$	8.13	$	8.04		$	22.70	$	21.23

The accompanying notes are an integral part of these unaudited consolidated financial statements

4

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)	Three Months						Nine Months
	Ended Sept 30,						Ended Sept 30,
	2012			2011			2012			2011
Net Income	$	6,332		$	6,267		$	17,684		$	16,548
Other Comprehensive Income
Increase in Net Unrealized Gains on Available-for-Sale Securities		2,944			3,190			7,865			6,617
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income		(149	)		-			(149	)		-
Deferred Tax Expense		(1,175	)		(1,340	)		(3,244	)		(2,782	)
Change in Net Unrealized Gains on Available-for-Sale Securities, Net of Tax		1,620			1,850			4,472			3,835
Total Other Comprehensive Income		1,620			1,850			4,472			3,835
Comprehensive Income	$	7,952		$	8,117		$	22,156		$	20,383

The accompanying notes are an integral part of these unaudited consolidated financial statements

5

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Changes in Shareholders' Equity  (Unaudited)

(in thousands except share data)												Accumulated
	Common					Additional						Other		Total
	Shares			Common		Paid-In			Retained			Comprehensive		Shareholders'
	Outstanding			Stock		Capital			Earnings			Income, Net		Equity
Balance, January 1, 2011		779,424		$	8	$	75,590		$	96,030		$	1,613	$	173,241
Net Income					-		-			16,548			-		16,548
Cash Dividends Declared on															-
Common Stock ($5.65 per share)					-		-			(4,404	)		-		(4,404	)
Change in Net Unrealized Gain on Securities Available for Sale					-		-			-			3,835		3,835
Balance, September 30, 2011		779,424		$	8	$	75,590		$	108,174		$	5,448	$	189,220
Balance, January 1, 2012		779,424		$	8	$	75,590		$	109,081		$	4,667	$	189,346
Net Income					-		-			17,684			-		17,684
Cash Dividends Declared on															-
Common Stock ($5.90 per share)					-		-			(4,595	)		-		(4,595	)
Repurchase of Stock		(1,542	)		-		(576	)		-			-		(576	)
Change in Net Unrealized Gain on Securities Available for Sale					-		-			-			4,472		4,472
Balance, September 30, 2012		777,882		$	8	$	75,014		$	122,170		$	9,139	$	206,331

The accompanying notes are an integral part of these unaudited consolidated financial statements

6

FARMERS & MERCHANTS BANCORP

Consolidated Statements of Cash Flows (Unaudited)	Nine Months Ended
(in thousands)	Sept 30,			Sept 30,
	2012			2011
Operating Activities:
Net Income	$	17,684		$	16,548
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses		1,100			5,350
Depreciation and Amortization		1,293			1,358
Net Amortization of Investment Security Discounts & Premiums		2,852			624
Net Gain on Investment Securities		(149	)		-
Net Gain on Sale of Property & Equipment		-			(5	)
Net Change in Operating Assets & Liabilities:
Net (Increase) Decrease  in Interest Receivable and Other Assets		(1,418	)		2,325
Net Increase in Interest Payable and Other Liabilities		2,472			13
Net Cash Provided by Operating Activities		23,834			26,213
Investing Activities:
Purchase of Investment Securities Available-for-Sale		(122,966	)		(136,264	)
Proceeds from Sold, Matured, or Called Securities Available-for-Sale		144,383			150,104
Purchase of Investment Securities Held-to-Maturity		(10,569	)		(1,300	)
Proceeds from Matured or Called Securities Held-to-Maturity		4,675			2,412
Net Loans Paid, Originated or Acquired		(47,728	)		(6,234	)
Principal Collected on Loans Previously Charged Off		266			83
Additions to Premises and Equipment		(180	)		(1,419	)
Proceeds from Disposition of Property and Equipment		-			20
Net Cash (Used) Provided by Investing Activities		(32,119	)		7,402
Financing Activities:
Net Increase in Deposits		5,308			22,785
Net Decrease in Securities Sold Under Agreement to Repurchase		(60,000	)		-
Net Change in Other Borrowings		(48	)		(45	)
Stock Repurchases		(576	)		-
Cash Dividends		(4,595	)		(4,404	)
Net Cash (Used) Provided by Financing Activities		(59,911	)		18,336
(Decrease) Increase in Cash and Cash Equivalents		(68,196	)		51,951
Cash and Cash Equivalents at Beginning of Period		101,660			60,660
Cash and Cash Equivalents at End of Period	$	33,464		$	112,611

The accompanying notes are an integral part of these unaudited consolidated financial statements

7

FARMERS & MERCHANTS BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Significant Accounting Policies

Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.

The Company’s other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002 the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003 the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and was formed for the sole purpose of issuing Trust Preferred Securities.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.

Basis of Presentation

The accompanying consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP for financial information.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and nine-month periods ended September 30, 2012 may not necessarily be indicative of future operating results.

The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.

8

Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. Generally, these transactions are for one-day periods. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities

Investment securities are classified at the time of purchase as held-to-maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Securities are classified as available-for-sale if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Loans

Loans are reported at the principal amount outstanding net of unearned discounts and deferred loan fees and costs. Interest income on loans is accrued daily on the outstanding balances using the simple interest method. Loan origination fees are deferred and recognized over the contractual life of the loan as an adjustment to the yield. Loans are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose a loan is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or is guaranteed by a financially capable party. When a loan is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans placed on non-accrual status are returned to accrual status when the loans are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan.

9

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans are either: (1) non-accrual loans; or (2) restructured loans that are still accruing interest. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.

A restructuring of a loan constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans for customers unless: (1) the existing loan is brought current as to principal and interest payments; and (2) the restructured loan can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan amounts. After restructure a determination is made whether the loan will be kept on accrual status based upon the underwriting of the restructured credit.

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable incurred credit losses inherent in the Company's loan portfolio as of the balance sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.

The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; and (8) consumer and other. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. A credit grade is established at inception for smaller balance loans, such as consumer and residential real estate, and then updated only when the loan becomes contractually delinquent or when the borrower requests a modification. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

10

Special Mention – A special mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans classified as loss are considered uncollectible. Once a loan becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for loan losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Real Estate Construction – Real Estate Construction loans including land loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial Real Estate – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Commercial– Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – Loans secured by crop production, livestock and related real estate are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Residential 1st Mortgages and Home Equity Lines and Loans– The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments, although this is not always true as evidenced over the past several years. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

11

Consumer & Other– A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the FRB, DFI and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Allowance for Credit Losses on Off Balance Sheet Credit Exposures

The Company also maintains a separate allowance for off balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off balance sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment

Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate

Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for loan losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest income or expense as incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount, combined with the current taxes payable or refundable, results in the income tax expense for the current year.

The Company follows the standards set forth in the “Income Taxes” topic of the FASB Accounting Standards Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.

Dividends and Basic Earnings Per Common Share

The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted earnings per common share. See Note 6.

Segment Reporting

The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.

Derivative Instruments and Hedging Activities

The “Derivatives and Hedging” topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company’s exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the period ended September 30, 2012, December 31, 2011 or September 30, 2011.

Comprehensive Income

The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

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Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.  Management does not believe there now are such matters that will have a material effect on the financial statements.

2. Investment Securities

Carrying Values, Fair Values and Unrealized Gains and Losses

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows

(in thousands):

	Amortized		Gross Unrealized				Fair/Book
September 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	46,655	$	316	$	-	$	46,971
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities (1)		374,582		15,230		-		389,812
Corporate Bonds		14,641		223		-		14,864
Other		5,826		-		-		5,826
Total	$	447,408	$	15,769	$	-	$	463,177
	Amortized		Gross Unrealized				Fair/Book
December 31, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	82,195	$	413	$	13	$	82,595
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities (1)		383,380		7,792		139		391,033
Other		410		-		-		410
Total	$	471,767	$	8,205	$	152	$	479,820
	Amortized		Gross Unrealized				Fair/Book
September 30, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	162,115	$	635	$	-	$	162,750
Obligations of States and Political Subdivisions		5,813		-		-		5,813
Mortgage Backed Securities (1)		243,121		8,787		22		251,886
Other		360		-		-		360
Total	$	411,409	$	9,422	$	22	$	420,809

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

	Book		Gross Unrealized				Fair
September 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	66,098	$	2,623	$	-	$	68,721
Mortgage Backed Securities (1)		640		20		-		660
Other		2,222		-		-		2,222
Total	$	68,960	$	2,643	$	-	$	71,603
	Book		Gross Unrealized				Fair
December 31, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	59,640	$	2,736	$	-	$	62,376
Mortgage Backed Securities (1)		1,205		46		-		1,251
Other		2,247		-		-		2,247
Total	$	63,092	$	2,782	$	-	$	65,874
	Book		Gross Unrealized				Fair
September 30, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	60,130	$	2,437	$	-	$	62,567
Mortgage Backed Securities (1)		1,418		62		-		1,480
Other		2,255		-		-		2,255
Total	$	63,803	$	2,499	$	-	$	66,302

(1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

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Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized carrying amount of investment securities at September 30, 2012 by contractual maturity are shown in the following tables (in thousands):

			After 1		After 5				Total
Securities Available-for-Sale	Within		but		but		Over		Fair
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Government Agency & Government-Sponsored Entities	$	10,006	$	35,751	$	1,214	$	-	$	46,971
Obligations of States and Political Subdivisions		-		-		219		5,485		5,704
Mortgage Backed Securities		-		-		119,019		270,793		389,812
Corporate Bonds		608		13,411		845		-		14,864
Other		5,826		-		-		-		5,826
Total	$	16,440	$	49,162	$	121,297	$	276,278	$	463,177
			After 1		After 5				Total
Securities Held-to-Maturity	Within		but		but		Over		Book
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Obligations of States and Political Subdivisions	$	1,540	$	9,842	$	39,352	$	15,364	$	66,098
Mortgage Backed Securities		-		640		-		-		640
Other		-		5		2,217		-		2,222
Total	$	1,540	$	10,487	$	41,569	$	15,364	$	68,960

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following tables show those investments with gross unrealized losses and their fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2011	Value		Loss		Value		Loss		Value		Loss
Government Agency & Government-Sponsored Entities	$	4,987	$	13	$	-	$	-	$	4,987	$	13
Mortgage Backed Securities		85,090		139		-		-		85,090		139
Total	$	90,077	$	152	$	-	$	-	$	90,077	$	152
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2011	Value		Loss		Value		Loss		Value		Loss
Mortgage Backed Securities	$	10,130	$	22	$	-	$	-	$	10,130	$	22
Total	$	10,130	$	22	$	-	$	-	$	10,130	$	22

As of September 30, 2012, the Company held 360 investment securities and no securities were in an unrealized loss position. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

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The following information describes the Company’s assumptions and conclusions regarding other-than-temporary impairment status:

Securities of U.S. Government Agency and Government Sponsored Entities - The unrealized losses on the Company's investments in securities of government agency and government sponsored entities were $0, $13,000, and $0 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. Management believes that any unrealized losses were caused by interest rate fluctuations. Repayment of these investments is guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2011.

Mortgage Backed Securities - The unrealized losses on the Company's investments in mortgage backed securities were $0, $139,000, and $22,000 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The unrealized losses on the Company's investment in mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2011 and September 30, 2011.

Obligations of States and Political Subdivisions - The continuing financial problems being experienced by certain municipalities, along with the financial stresses exhibited by some of the large monoline bond insurers have increased the overall risk associated with bank-qualified municipal bonds. As of September 30, 2012, over ninety-three percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of that portion of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

There was no unrealized loss on the Company’s investment in obligations of states and political subdivisions at September 30, 2012, December 31, 2011, and September 30, 2011, respectively.

Corporate Bonds - There was no unrealized loss on the Company's investments in corporate bonds at September 30, 2012.

Sales/Calls of Securities

Proceeds from sales /calls of securities for the periods shown were as follows:

(in thousands)	Proceeds		Gains		Losses
Nine Months Ended September 30, 2012	$	44,296	$	149	$	-
Nine Months Ended September 30, 2011		55,000		-		-

Pledged Securities

As of September 30, 2012, securities carried at $307.2 million were pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law. This amount at December 31, 2011 and September 30, 2011, was $373.2 million and $382.9 million, respectively.

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3. Allowance for Loan Losses

The following tables show the allocation of the allowance for loan losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2012	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2012	$	5,823		$	2,583		$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Charge-Offs		-			-			-			(81	)		(138	)		(240	)		(198	)		(122	)		-			(779	)
Recoveries		-			89			-			16			12			61			41			47			-			266
Provision		(1,490	)		990			(72	)		356			(105	)		311			1,084			12			14			1,100
Ending Balance- September 30, 2012	$	4,333		$	3,662		$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	1,711		$	33,098
Charge-Offs		-			-			-			(80	)		(22	)		-			-			(34	)		-			(136	)
Recoveries		-			-			-			16			2			-			9			15			-			42
Provision		(44	)		1,029			(39	)		155			21			425			113			23			(1,083	)		600
Ending Balance- September 30, 2012	$	4,333		$	3,662		$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Ending Balance Individually Evaluated for Impairment		-			-			-			-			248			548			146			20			-			962
Ending Balance Collectively Evaluated for Impairment		4,333			3,662			1,861			1,542			3,267			7,711			9,514			124			628			32,642
Loans:
Ending Balance	$	335,664		$	293,864		$	32,701		$	137,464		$	43,990		$	193,053		$	167,777		$	5,514		$	-		$	1,210,027
Ending Balance Individually Evaluated for Impairment		295			2,551			-			493			1,048			2,652			257			20			-			7,316
Ending Balance Collectively Evaluated for Impairment		335,369			291,313			32,701			136,971			42,942			190,401			167,520			5,494			-			1,202,711
December 31, 2011	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2011	$	7,631		$	1,539		$	2,160		$	1,164		$	3,724		$	6,733		$	9,084		$	216		$	10		$	32,261
Charge-Offs		(25	)		(384	)		-			(449	)		(751	)		(3,559	)		(788	)		(190	)		-			(6,146	)
Recoveries		-			18			-			4			13			10			21			61			-			127
Provision		(1,783	)		1,410			(227	)		532			760			4,943			416			120			604			6,775
Ending Balance- December 31, 2011	$	5,823		$	2,583		$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Ending Balance Individually Evaluated for Impairment		686			-			-			-			80			793			54			23			-			1,636
Ending Balance Collectively Evaluated for Impairment		5,137			2,583			1,933			1,251			3,666			7,334			8,679			184			614			31,381
Loans:
Ending Balance	$	305,704		$	280,139		$	29,607		$	107,421		$	50,956		$	217,227		$	165,089		$	6,935		$	-		$	1,163,078
Ending Balance Individually Evaluated for Impairment		4,562			954			-			1,194			576			1,337			292			23			-			8,938
Ending Balance Collectively Evaluated for Impairment		301,142			279,185			29,607			106,227			50,380			215,890			164,797			6,912			-			1,154,140
September 30, 2011	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2011	$	7,631		$	1,539		$	2,160		$	1,164		$	3,724		$	6,733		$	9,084		$	216		$	10		$	32,261
Charge-Offs		(25	)		(384	)		-			(398	)		(701	)		(2,750	)		(324	)		(149	)		-			(4,731	)
Recoveries		-			-			-			3			11			10			14			45			-			83
Provision		(1,790	)		1,233			196			341			497			2,646			738			80			1,409			5,350
Ending Balance- September 30, 2011	$	5,816		$	2,388		$	2,356		$	1,110		$	3,531		$	6,639		$	9,512		$	192		$	1,419		$	32,963
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2011	$	5,726		$	2,813		$	2,362		$	1,198		$	3,450		$	6,284		$	10,794		$	252		$	63		$	32,942
Charge-Offs		(12	)		(384	)		-			(58	)		(239	)		-			(148	)		(62	)		-			(903	)
Recoveries		-			-			-			-			5			-			5			14			-			24
Provision		102			(41	)		(6	)		(30	)		315			355			(1,139	)		(12	)		1,356			900
Ending Balance- September 30, 2011	$	5,816		$	2,388		$	2,356		$	1,110		$	3,531		$	6,639		$	9,512		$	192		$	1,419		$	32,963
Ending Balance Individually Evaluated for Impairment		702			46			-			-			40			827			103			24			-			1,742
Ending Balance Collectively Evaluated for Impairment		5,114			2,342			2,356			1,110			3,491			5,812			9,409			168			1,419			31,221
Loans:
Ending Balance	$	300,918		$	284,149		$	28,979		$	104,130		$	52,451		$	219,670		$	180,329		$	6,879		$	-		$	1,177,505
Ending Balance Individually Evaluated for Impairment		3,841			1,413			-			1,273			262			1,671			349			24			-			8,833
Ending Balance Collectively Evaluated for Impairment		297,077			282,736			28,979			102,857			52,189			217,999			179,980			6,855			-			1,168,672

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The following tables show the loan portfolio allocated by management’s internal risk ratings at the dates indicated (in thousands):

September 30, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	313,441	$	15,910	$	6,313	$	335,664
Agricultural Real Estate		273,823		9,887		10,154		293,864
Real Estate Construction		24,856		3,217		4,628		32,701
Residential 1st Mortgages		135,473		1,211		780		137,464
Home Equity Lines & Loans		41,975		-		2,015		43,990
Agricultural		186,398		2,300		4,355		193,053
Commercial		161,685		5,634		458		167,777
Consumer & Other		5,195		-		319		5,514
Total	$	1,142,846	$	38,159	$	29,022	$	1,210,027
December 31, 2011	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	265,201	$	15,186	$	25,317	$	305,704
Agricultural Real Estate		254,181		21,657		4,301		280,139
Real Estate Construction		21,428		3,217		4,962		29,607
Residential 1st Mortgages		104,609		1,483		1,329		107,421
Home Equity Lines & Loans		49,631		-		1,325		50,956
Agricultural		209,555		4,083		3,589		217,227
Commercial		158,273		5,240		1,576		165,089
Consumer & Other		6,528		-		407		6,935
Total	$	1,069,406	$	50,866	$	42,806	$	1,163,078
September 30, 2011	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	260,662	$	15,482	$	24,774	$	300,918
Agricultural Real Estate		259,428		19,315		5,406		284,149
Real Estate Construction		20,781		3,217		4,981		28,979
Residential 1st Mortgages		101,230		1,503		1,397		104,130
Home Equity Lines & Loans		51,559		-		892		52,451
Agricultural		202,323		12,285		5,062		219,670
Commercial		172,702		5,971		1,656		180,329
Consumer & Other		6,479		-		400		6,879
Total	$	1,075,164	$	57,773	$	44,568	$	1,177,505

See “Note 1. Significant Accounting Policies - Allowance for Loan Losses” for a description of the internal risk ratings used by the Company. There were no loans outstanding at September 30, 2012, December 31, 2011, and September 30, 2011 rated doubtful or loss.

18

The following tables show an aging analysis of the loan portfolio by the time past due at the dates indicated

(in thousands):

	30-89 Days		90 Days or More				Total Past				Total
September 30, 2012	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	335,664	$	335,664
Agricultural Real Estate		-		-		2,551		2,551		291,313		293,864
Real Estate Construction		-		-		-		-		32,701		32,701
Residential 1st Mortgages		-		-		279		279		137,185		137,464
Home Equity Lines & Loans		101		-		528		629		43,361		43,990
Agricultural		-		-		2,374		2,374		190,679		193,053
Commercial		-		-		-		-		167,777		167,777
Consumer & Other		56		-		20		76		5,438		5,514
Total	$	157	$	-	$	5,752	$	5,909	$	1,204,118	$	1,210,027
	30-89 Days		90 Days or More				Total Past				Total
December 31, 2011	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	1,354	$	1,354	$	304,350	$	305,704
Agricultural Real Estate		-		-		954		954		279,185		280,139
Real Estate Construction		-		-		-		-		29,607		29,607
Residential 1st Mortgages		108		-		284		392		107,029		107,421
Home Equity Lines & Loans		566		-		194		760		50,196		50,956
Agricultural		284		-		1,202		1,486		215,741		217,227
Commercial		179		-		217		396		164,693		165,089
Consumer & Other		101		-		23		124		6,811		6,935
Total	$	1,238	$	-	$	4,228	$	5,466	$	1,157,612	$	1,163,078
	30-89 Days		90 Days or More				Total Past				Total
September 30, 2011	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	811	$	811	$	300,107	$	300,918
Agricultural Real Estate		-		-		1,413		1,413		282,736		284,149
Real Estate Construction		-		-		-		-		28,979		28,979
Residential 1st Mortgages		-		-		347		347		103,783		104,130
Home Equity Lines & Loans		359		-		190		549		51,902		52,451
Agricultural		3,854		-		1,531		5,385		214,285		219,670
Commercial		-		-		348		348		179,981		180,329
Consumer & Other		15		-		24		39		6,840		6,879
Total	$	4,228	$	-	$	4,664	$	8,892	$	1,168,613	$	1,177,505

19

The following tables show information related to impaired loans for the periods indicated (in thousands):

							Three Months Ended Sept. 30, 2012				Nine Months Ended Sept. 30, 2012
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	295	$	295	$	-	$	297	$	6	$	789	$	15
Agricultural Real Estate		2,558		2,551		-		2,036		-		1,402		-
Residential 1st Mortgages		494		521		-		438		-		512		-
Home Equity Lines & Loans		785		862		-		743		6		717		17
Agricultural		2,106		2,111		-		1,197		5		594		15
Commercial		111		111		-		115		2		169		4
	$	6,349	$	6,451	$	-	$	4,826	$	19	$	4,183	$	51
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	503	$	-
Residential 1st Mortgages		-		-		-		54		-		72		-
Home Equity Lines & Loans		269		314		248		174		1		152		3
Agricultural		547		1,551		548		567		-		749		-
Commercial		146		146		146		196		2		157		2
Consumer & Other		20		22		20		21		-		22		-
	$	982	$	2,033	$	962	$	1,012	$	3	$	1,655	$	5
Total	$	7,331	$	8,484	$	962	$	5,838	$	22	$	5,838	$	56
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	1,555	$	1,547	$	-	$	729	$	-
Agricultural Real Estate		955		974		-		1,341		-
Residential 1st Mortgages		1,219		1,272		-		936		13
Home Equity Lines & Loans		469		484		-		290		2
Agricultural		262		372		-		149		9
Commercial		188		264		-		195		1
Consumer & Other		-		-		-		5		-
	$	4,648	$	4,913	$	-	$	3,645	$	25
With an allowance recorded:
Commercial Real Estate	$	3,017	$	3,015	$	686	$	2,281	$	89
Agricultural Real Estate		-		-		-		529		-
Home Equity Lines & Loans		113		119		80		117		2
Agricultural		1,076		1,791		793		1,818		25
Commercial		104		107		54		120		-
Consumer & Other		24		24		23		31		-
	$	4,334	$	5,056	$	1,636	$	4,896	$	116
Total	$	8,982	$	9,969	$	1,636	$	8,541	$	141
							Three Months Ended Sept. 30, 2011				Nine Months Ended Sept. 30, 2011
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2011	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	816	$	811	$	-	$	530	$	-	$	453	$	-
Agricultural Real Estate		935		974		-		1,717		-		1,470		-
Residential 1st Mortgages		1,278		1,469		-		861		1		842		3
Home Equity Lines & Loans		190		191		-		218		-		230		1
Agricultural		140		140		-		143		3		111		6
Commercial		186		182		-		188		-		197		-
Consumer & Other		-		-		-		-		-		7		-
	$	3,545	$	3,767	$	-	$	3,657	$	4	$	3,310	$	10
With an allowance recorded:
Commercial Real Estate	$	3,033	$	3,030	$	702	$	3,041	$	44	$	2,035	$	46
Agricultural Real Estate		463		823		46		645		-		705		-
Home Equity Lines & Loans		73		82		40		74		1		118		2
Agricultural		1,533		1,548		827		2,732		2		2,065		25
Commercial		168		206		103		155		-		125		-
Consumer & Other		24		24		24		31		-		33		-
	$	5,294	$	5,713	$	1,742	$	6,678	$	47	$	5,081	$	73
Total	$	8,839	$	9,480	$	1,742	$	10,335	$	51	$	8,391	$	83

20

Total recorded investment shown in the prior table will not equal the total ending balance of loans individually evaluated for impairment on the allocation of allowance table. This is because the calculation of recorded investment for purposes of this table takes into account charge-offs, net deferred loans fees & costs, unamortized premium or discount, and accrued interest.

At September 30, 2012, the Company allocated $187,000 of specific reserves to $2.1 million of troubled debt restructured loans, of which $1.6 million were performing. The Company had no commitments at September 30, 2012 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and nine month periods ending September 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods of 5 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 15 years.

The following table presents loans by class modified as troubled debt restructured loans for the three and nine month periods ended September 30, 2012 (in thousands):

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		-	$	-	$	-		1	$	116	$	116
Residential 1st Mortgages		1		185		173		5		331		312
Home Equity Lines & Loans		1		46		43		4		414		369
Agricultural		2		175		175		3		355		355
Commercial		-		-		-		3		273		273
Total		4	$	406	$	391		16	$	1,489	$	1,425

The TDRs described above increased the allowance for loan losses by $0 and $19,000 and resulted in charge-offs of $15,000 and $64,000 for the three and nine months ended September 30, 2012.

During the three and nine months ended September 30, 2012, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.

At December 31, 2011, the Company allocated $759,000 of specific reserves to $4.9 million of troubled debt restructured loans, of which $4.7 million were performing. The Company had no commitments at December 31, 2011 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the period ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

21

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 2 years to 8 years. Modifications involving an extension of the maturity date were for periods ranging from 3 years to 10 years.

The following table presents loans by class modified as troubled debt restructured loans for period ended December 31, 2011 (in thousands):

	December 31, 2011
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		3	$	3,224	$	3,224
Residential 1st Mortgages		5		995		940
Home Equity Lines & Loans		7		381		362
Agricultural		1		140		140
Commercial		2		82		82
Consumer & Other		1		24		24
Total		19	$	4,846	$	4,772

Prior to classifying these loans as TDRs, general loss reserves of $680,000 were allocated to them under the Company’s loan loss allowance methodology.  At the time they were classified as TDRs, charge-offs of $74,000 were recorded. Based upon individual evaluation of the loans, specific loss reserves of $759,000 were required at December 31, 2011.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the twelve months ended December 31, 2011

(in thousands):

	December 31, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment
Commercial Real Estate		-	$	-
Agricultural Real Estate		-		-
Real Estate Construction		-		-
Residential 1st Mortgages		-		-
Home Equity Lines & Loans		1		12
Agricultural		-		-
Commercial		-		-
Consumer & Other		-		-
Total		1	$	12

The troubled debt restructurings that subsequently defaulted did not increase the allowance for loan losses but did result in charge offs of $12,000 during the twelve month period ending December 31, 2011.

The Company allocated $904,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011. The Company had no commitments at September 30, 2011 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the period ending September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

22

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 2 years to 8 years. Modifications involving an extension of the maturity date were for periods ranging from 3 years to 10 years.

The following table presents loans by class modified as troubled debt restructured loans for the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		-	$	-	$	-		2	$	3,032	$	3,032
Agricultural Real Estate		-		-		-		-		-		-
Real Estate Construction		-		-		-		-		-		-
Residential 1st Mortgages		4		897		847		4		897		847
Home Equity Lines & Loans		-		-		-		2		55		51
Agricultural		-		-		-		1		140		140
Commercial		-		-		-		2		82		82
Consumer & Other		-		-		-		1		24		24
Total		4	$	897	$	847		12	$	4,230	$	4,176

The troubled debt restructurings described above increased the allowance for loan losses by $0 and $126,000 and resulted in charge-offs of $50,000 and $54,000 during the three and nine month periods ending September 30, 2011.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial Real Estate		-	$	-		-	$	-
Agricultural Real Estate		-		-		-		-
Real Estate Construction		-		-		-		-
Residential 1st Mortgages		-		-		-		-
Home Equity Lines & Loans		-		-		1		12
Agricultural		-		-		-		-
Commercial		-		-		-		-
Consumer & Other		-		-		-		-
Total		-	$	-		1	$	12

The troubled debt restructurings that subsequently defaulted did not increase the allowance for loan losses but did result in charge offs of $0 and $12,000 during the three and nine month periods ending September 30, 2011.

4. Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

23

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

The Company does not record all loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Once a loan is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses observable data, the Company records the impaired loan as nonrecurring Level 2. Otherwise, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. When the fair value of the ORE is based on an observable market price or a current appraised value which uses observable data, the Company records the ORE as nonrecurring Level 2. Otherwise, the Company records the ORE as nonrecurring Level 3. Other real estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets.

24

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

			Fair Value Measurements At September 30, 2012, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	46,971	$	10,627	$	36,344	$	-
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities		389,812		-		389,812		-
Corporate Bonds		14,864		-		14,864		-
Other		5,826		5,516		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	463,177	$	16,143	$	441,330	$	5,704
			Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	82,595	$	21,109	$	61,486	$	-
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities		391,033		-		391,033		-
Other		410		-		410		-
Total Assets Measured at Fair Value On a Recurring Basis	$	479,820	$	21,109	$	452,929	$	5,782
			Fair Value Measurements At September 30, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	162,750	$	-	$	162,750	$	-
Obligations of States and Political Subdivisions		5,813		-		5,813		-
Mortgage Backed Securities		251,886		-		251,886		-
Other		360		-		360		-
Total Assets Measured at Fair Value On a Recurring Basis	$	420,809	$	-	$	420,809	$	-

25

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and nine month periods ended September 30, 2012 and 2011, there were no transfers in or out of level 1, 2, or 3.

The following table presents changes in level 3 assets measured at fair value on a recurring basis.

	Three Months Ended  September 30,					Nine Months Ended  September 30,
(in thousands)	2012			2011		2012			2011
Balance at Beginning of Period	$	5,724		$	-	$	5,782		$	-
Total Realized and Unrealized Gains/(Losses) Included in Income		-			-		-			-
Total Unrealized Gains/(Losses) Included in Other Comprehensive Income		-			-		-			-
Purchase of Securities		-			-		-			-
Sales, Maturities, and Calls of Securities		(20	)		-		(78	)		-
Net Transfers In/(Out) of Level 3		-			-		-			-
Balance at End of Period	$	5,704		$	-	$	5,704		$	-

Available for sale investments securities categorized as Level 3 assets primarily consist of obligations of states and political subdivisions. These bonds were issued by local housing authorities and have no active market. These bonds are carried at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment.

The following tables present information about the Company’s other real estate and impaired loans, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans are carried at fair value. Impaired loans are only included in the following tables when their fair value is based upon a current appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.

			Fair Value Measurements At Sept 30, 2012, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Residential 1st Mortgage	$	200	$	-	$	-	$	200
Home Equity Lines and Loans		466		-		-		466
Total Impaired Loans		666		-		-		666
Other Real Estate
Real Estate Construction		2,553		-		-		2,553
Total Other Real Estate		2,553		-		-		2,553
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	3,219	$	-	$	-	$	3,219

The fair value of impaired loans with a specific reserve or a partial charge-off was $666,000, net of an allowance for loan losses of $962,000.

The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance. ORE has been adjusted to estimated fair value, less estimated selling costs. At the time of foreclosure, foreclosed assets are recorded at the lower of the carrying amount of the loan or the estimated fair value less estimated selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically obtains updated valuations of the foreclosed assets and, if additional impairments have occurred, the impairment is recorded in non-interest expense on the Consolidated Statements of Income.

26

			Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,328	$	-	$	-	$	2,328
Residential 1st Mortgage		89		-		-		89
Home Equity Lines and Loans		166		-		-		166
Agricultural		409		-		-		409
Commercial		50		-		-		50
Total Impaired Loans		3,042		-		-		3,042
Other Real Estate								-
Real Estate Construction		2,553		-		-		2,553
Residential 1st Mortgage		371		-		-		371
Total Other Real Estate		2,924		-		-		2,924
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	5,966	$	-	$	-	$	5,966

The fair value of impaired loans with a specific reserve or a partial charge-off was $3.0 million, net of an allowance for loan losses of $1.6 million. The fair value of ORE was $2.9 million, net of a $4.1 million valuation allowance.

27

			Fair Value Measurements At Sept 30, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,329	$	-	$	2,329	$	-
Agricultural Real Estate		1,367		-		1,367		-
Residential 1st Mortgage		926		-		926		-
Home Equity Lines and Loans		33		-		33		-
Agricultural		704		-		-		704
Commercial		64		-		-		64
Total Impaired Loans		5,423		-		4,655		768
Other Real Estate								-
Commercial Real Estate		137		-		137		-
Real Estate Construction		3,045		-		3,045		-
Residential 1st Mortgage		331		-		331		-
Total Other Real Estate		3,513		-		3,513		-
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	8,936	$	-	$	8,168	$	768

The fair value of impaired loans with a specific reserve or a partial charge-off was $5.4 million, net of an allowance for loan losses of $1.7 million. The fair value of ORE was $3.5 million, net of a valuation allowance of $3.6 million.

5. Fair Value of Financial Instruments

U.S. GAAP require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.

28

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

				Fair Value of Financial Instruments Using
September 30, 2012 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	33,464		$	33,464	$	-	$	-		$	33,464
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		46,971			10,627		36,344		-			46,971
Obligations of States and Political Subdivisions		5,704			-		-		5,704			5,704
Mortgage Backed Securities		389,812			-		389,812		-			389,812
Corporate Bonds		14,864			-		14,864		-			14,864
Other		5,826			5,516		310		-			5,826
Total Investment Securities Available-for-Sale		463,177			16,143		441,330		5,704			463,177
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		66,098			-		60,983		7,738			68,721
Mortgage Backed Securities		640			-		660		-			660
Other		2,222			-		2,222		-			2,222
Total Investment Securities Held-to-Maturity		68,960			-		63,865		7,738			71,603
FHLB Stock		7,368			N/A		N/A		N/A			N/A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		331,331			-		-		340,570			340,570
Agricultural Real Estate		290,202			-		-		298,168			298,168
Real Estate Construction		30,840			-		-		31,236			31,236
Residential 1st Mortgages		135,922			-		-		141,334			141,334
Home Equity Lines and Loans		40,475			-		-		43,243			43,243
Agricultural		184,794			-		-		184,647			184,647
Commercial		158,117			-		-		157,440			157,440
Consumer & Other		5,370			-		-		5,454			5,454
Unallocated Allowance		(628	)		-		-		(628	)		(628	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,176,423			-		-		1,201,464			1,201,464
Accrued Interest Receivable		8,037			-		-		8,037			8,037
Liabilities:
Deposits:
Demand		369,635			369,635		-		-			369,635
Interest Bearing Transaction		238,223			238,223		-		-			238,223
Savings and Money Market		540,690			540,690		-		-			540,690
Time		482,957			-		483,950		-			483,950
Total Deposits		1,631,505			1,148,548		483,950		-			1,632,498
FHLB Advances		482			-		547		-			547
Subordinated Debentures		10,310			-		5,478		-			5,478
Accrued Interest Payable		526			-		526		-			526

29

December 31, 2011	Carrying		Estimated
(in thousands)	Amount		Fair Value
Assets:
Cash and Cash Equivalents	$	101,660	$	101,660
Investment Securities Available-for-Sale		479,820		479,820
Investment Securities Held-to-Maturity		63,092		65,874
FHLB Stock		7,035		N/A
Loans, Net of Deferred Loan Fees & Allowance		1,130,061		1,162,261
Accrued Interest Receivable		6,368		6,368
Liabilities:
Deposits:
Demand		389,639		389,639
Interest-Bearing		1,236,558		1,237,849
FHLB Advances & Securities Sold Under Agreement to Repurchase		60,530		63,000
Subordinated Debentures		10,310		5,953
Accrued Interest Payable		911		911
September 30, 2011	Carrying		Estimated
(in thousands)	Amount		Fair Value
Assets:
Cash and Cash Equivalents	$	112,611	$	112,611
Investment Securities Available-for-Sale		420,809		420,809
Investment Securities Held-to-Maturity		63,803		66,302
FHLB Stock		7,035		N/A
Loans, Net of Deferred Loan Fees & Allowance		1,144,542		1,183,033
Accrued Interest Receivable		7,454		7,454
Liabilities:
Deposits:
Demand		359,649		359,649
Interest-Bearing		1,229,639		1,231,089
FHLB Advances & Securities Sold Under Agreement to Repurchase		60,546		63,626
Subordinated Debentures		10,310		5,751
Accrued Interest Payable		907		907

Fair value estimates presented herein are based on pertinent information available to management as of September 30, 2012, December 31, 2011, and September 30, 2011. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.

Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.

Investment Securities - Fair values for investment securities consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Based on the available market information the classification level could be 1, 2, or 3.

30

Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans, Net of Deferred Loan Fees & Allowance - Fair values of loans are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

FHLB Advances & Securities Sold Under Agreement to Repurchase - The fair value of federal funds purchased and other short-term borrowings is approximated by the book value resulting in a Level 2 classification. The fair value for Federal Home Loan Bank advances is determined using discounted future cash flows resulting in a Level 2 classification.

Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.

6. Dividends and Basic Earnings Per Common Share

Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. On May 21, 2012, the Board of Directors of Farmers & Merchants Bancorp announced a mid-year cash dividend of $5.90 per share, a 4.4% increase over the $5.65 per share paid on June 30, 2011. The cash dividend was paid on July 2, 2012, to shareholders of record on June 20, 2012.

Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per common share for the three and nine months ended September 30, 2012 and 2011.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(net income in thousands)	2012		2011		2012		2011
Net Income	$	6,332	$	6,267	$	17,684	$	16,548
Average Number of Common Shares Outstanding		778,487		779,424		779,906		779,424
Basic Earnings Per Common Share	$	8.13	$	8.04	$	22.70	$	21.23

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three and nine months ended September 30, 2012.  This analysis should be read in conjunction with our 2011 Annual Report to Shareholders on Form 10-K, and with the unaudited financial statements and notes as set forth in this report.

31

Forward–Looking Statements

This Form 10-Q contains various forward-looking statements, usually containing the words “estimate,” “project,” “expect,” “objective,” “goal,” or similar expressions and includes assumptions concerning Farmers & Merchants Bancorp’s (together with its subsidiaries, the “Company” or “we”) operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risks and uncertainties. In connection with the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

Such factors include the following: (1) the current economic downturn and turmoil in financial markets and the response of federal and state regulators thereto; (2) the effect of changing regional and national economic conditions including the housing market in the Central Valley of California; (3) significant changes in interest rates and prepayment speeds; (4) credit risks of lending and investment activities; (5) changes in federal and state banking laws or regulations; (6) competitive pressure in the banking industry; (7) changes in governmental fiscal or monetary policies; (8) uncertainty regarding the economic outlook resulting from the continuing war on terrorism, as well as actions taken or to be taken by the U.S. or other governments as a result of further acts or threats of terrorism; and (9) other factors discussed in Item 1A. Risk Factors located in the Company’s 2011 Annual Report on Form 10-K.

Readers 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 update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

Introduction

Farmers & Merchants Bancorp, or the Company, is a bank holding company formed March 10, 1999. Its subsidiary, Farmers & Merchants Bank of Central California, or the Bank, is a California state-chartered bank formed in 1916. The Bank serves the northern Central Valley of California through twenty-two banking offices and two stand-alone ATM’s. The service area includes Sacramento, San Joaquin, Stanislaus and Merced Counties with branches in Sacramento, Elk Grove, Galt, Lodi, Stockton, Linden, Modesto, Turlock, Hilmar, and Merced. Substantially all of the Company’s business activities are conducted within its market area.

As a bank holding company, the Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”). As a California, state-chartered, non-fed member bank, the Bank is subject to regulation and examination by the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”).

Overview

The Company’s primary service area encompasses the mid Central Valley of California, a region that can be significantly impacted by the seasonal needs of the agricultural industry.  Accordingly, discussion of the Company’s Financial Condition and Results of Operations is influenced by the seasonal banking needs of its agricultural customers (e.g., during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and planting of crops. Correspondingly, deposit balances are replenished and loans repaid in fall and winter as crops are harvested and sold).

For the three and nine months ended September 30, 2012, Farmers & Merchants Bancorp reported net income of $6,332,000 and $17,684,000, basic earnings per common share of $8.13 and $22.70 and return on average assets of 1.32% and 1.23%, respectively. Return on average shareholders’ equity was 12.51% and 11.87% for the three and nine months ended September 30, 2012.

For the three and nine months ended September 30, 2011, Farmers & Merchants Bancorp reported net income of $6,267,000 and $16,548,000, basic earnings per common share of $8.04 and $21.23 and return on average assets of 1.35% and 1.20%, respectively. Return on average shareholders’ equity was 13.62% and 12.24% for the three and nine months ended September 30, 2011.

32

The primary reasons for the Company’s improved earnings performance in the first nine months of 2012 as compared to the same period last year were: (1) a $4.3 million decrease in the loan loss provision; (2) a $1.1 million decrease in ORE holding costs; and (3) a $498,000 decrease in FDIC insurance costs. These positive impacts were partially offset by: (1) a $­­­­769,000 decrease in net interest income; (2) a $1.6 million increase in salaries and employee benefits; and (3) a $1.8 million increase in other non-interest expense, primarily comprised of a $1.7 million termination fee upon early payoff of the Company’s securities sold under agreement to repurchase.

The following is a summary of the financial results for the nine-month period ended September 30, 2012 compared to September 30, 2011.

· Net income increased ­­6.9% to $17.7 million from $16.5 million.

· Basic earnings per common share increased 6.9% to $22.70 from $21.23.

· Total assets increased 0.2% to $1.9 billion.

· Total loans increased 2.8% to $1.2 billion.

· Total deposits increased 2.7% to $1.6 billion.

Results of Operations

This section discusses material changes in the Company’s income statement for the three and nine month periods ended September 30, 2012 as compared to the three and nine month periods ended September 30, 2011.

Net Interest Income / Net Interest Margin

The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the three and nine-month periods ended September 30, 2012 and 2011.

The average yields on earning assets and average rates paid on interest-bearing liabilities have been computed on an annualized basis for purposes of comparability with full year data.  Average balance amounts for assets and liabilities are the computed average of daily balances.

Net interest income is the amount by which the interest and fees on loans and other interest earning assets exceed the interest paid on interest bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes.  This adjustment is referred to as “taxable equivalent” and is noted wherever applicable.

The Volume and Rate Analysis of Net Interest Revenue summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in volume (change in volume multiplied by initial rate); (2) changes in rate (change in rate multiplied by initial volume); and (3) changes in rate/volume (allocated in proportion to the respective volume and rate components).

The Company’s earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities.  However, some maturity mismatch is inherent in the asset and liability mix. See “Item 3. Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Risk.”

33

Farmers & Merchants Bancorp

Quarterly Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

	Three Months Ended Sept 30,									Three Months Ended Sept 30,
	2012									2011
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	11,488		$	8			0.28	%	$	44,158		$	28			0.25	%
Investment Securities:
U.S. Agencies		54,059			139			1.03	%		201,893			562			1.11	%
Municipals - Non-Taxable		72,235			1,025			5.67	%		65,665			971			5.91	%
Mortgage Backed Securities		398,865			2,114			2.12	%		210,157			1,677			3.19	%
Other		19,702			62			1.26	%		7,414			8			0.43	%
Total Investment Securities		544,861			3,340			2.45	%		485,129			3,218			2.65	%
Loans:
Real Estate		777,438			11,148			5.70	%		724,776			11,610			6.36	%
Home Equity Lines & Loans		45,050			643			5.68	%		53,538			780			5.78	%
Agricultural		203,403			2,450			4.79	%		224,454			3,078			5.44	%
Commercial		167,377			2,168			5.15	%		175,116			2,374			5.38	%
Consumer		5,519			93			6.70	%		7,137			104			5.78	%
Other		236			3			5.06	%		242			3			4.92	%
Total Loans		1,199,023			16,505			5.48	%		1,185,263			17,949			6.01	%
Total Earning Assets		1,755,372		$	19,853			4.50	%		1,714,550		$	21,195			4.90	%
Unrealized Loss on Securities Available-for-Sale		14,104									7,572
Allowance for Loan Losses		(33,356	)								(32,971	)
Cash and Due From Banks		33,752									30,724
All Other Assets		142,385									134,459
Total Assets	$	1,912,257								$	1,854,334
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Transaction	$	227,410		$	35			0.06	%	$	199,767		$	57			0.11	%
Savings and Money Market		559,007			342			0.24	%		491,899			411			0.33	%
Time		496,859			558			0.45	%		534,048			869			0.65	%
Total Interest Bearing Deposits		1,283,276			935			0.29	%		1,225,714			1,337			0.43	%
Securities Sold Under Agreement to Repurchase		0			0			0.00	%		60,000			541			3.58	%
Federal Home Loan Bank Advances		6,228			11			0.70	%		555			8			5.72	%
Subordinated Debentures		10,310			87			3.36	%		10,310			82			3.16	%
Total Interest Bearing Liabilities		1,299,814		$	1,033			0.32	%		1,296,579		$	1,968			0.60	%
Interest Rate Spread								4.18	%								4.30	%
Demand Deposits (Non-Interest Bearing)		374,391									339,927
All Other Liabilities		35,617									33,790
Total Liabilities		1,709,822									1,670,296
Shareholders' Equity		202,435									184,038
Total Liabilities & Shareholders' Equity	$	1,912,257								$	1,854,334
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.08	%								0.15	%
Net Interest Income and Margin on Total Earning Assets					18,820			4.27	%					19,227			4.45	%
Tax Equivalent Adjustment					(354	)								(334	)
Net Interest Income				$	18,466			4.18	%				$	18,893			4.37	%

Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loan interest income includes fee income and unearned discount in the amount of $750,000 and $813,000 for the quarters ended September 30, 2012 and 2011, respectively. Yields on securities available-for-sale are based on historical cost.

34

Farmers & Merchants Bancorp

Year-to-Date Average Balances and Interest Rates

(Interest and Rates on a Taxable Equivalent Basis)

(in thousands)

	Nine Months Ended Sept. 30,									Nine Months Ended Sept. 30,
	2012									2011
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	40,161		$	76			0.25	%	$	35,869		$	67			0.25	%
Investment Securities:
U.S. Agencies		64,608			505			1.04	%		228,677			1,954			1.14	%
Municipals - Non-Taxable		70,024			2,995			5.70	%		66,324			2,935			5.90	%
Mortgage Backed Securities		411,721			7,353			2.38	%		198,646			5,011			3.36	%
Other		11,853			100			1.12	%		7,140			24			0.45	%
Total Investment Securities		558,206			10,953			2.62	%		500,787			9,924			2.64	%
Loans:
Real Estate		752,832			32,946			5.85	%		719,701			33,929			6.30	%
Home Equity Lines & Loans		47,537			2,041			5.74	%		55,992			2,433			5.81	%
Agricultural		201,832			7,678			5.08	%		217,753			9,151			5.62	%
Commercial		162,933			6,301			5.17	%		172,795			7,067			5.47	%
Consumer		6,068			307			6.76	%		7,509			356			6.34	%
Other		237			10			5.64	%		244			10			5.48	%
Total Loans		1,171,439			49,283			5.62	%		1,173,994			52,946			6.03	%
Total Earning Assets		1,769,806		$	60,312			4.55	%		1,710,650		$	62,937			4.92	%
Unrealized Gain (Loss) on Securities Available-for-Sale		11,502									4,346
Allowance for Loan Losses		(33,098	)								(32,556	)
Cash and Due From Banks		33,356									30,103
All Other Assets		139,926									134,777
Total Assets	$	1,921,492								$	1,847,320
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing Transaction	$	227,925		$	131			0.08	%	$	203,998		$	195			0.13	%
Savings and Money Market		535,784			997			0.25	%		484,894			1,200			0.33	%
Time		506,067			1,839			0.49	%		551,216			2,884			0.70	%
Total Interest Bearing Deposits		1,269,776			2,967			0.31	%		1,240,108			4,279			0.46	%
Securities Sold Under Agreement to Repurchase		37,664			1,018			3.61	%		60,000			1,606			3.58	%
Federal Home Loan Bank Advances		4,522			29			0.86	%		2,246			26			1.55	%
Subordinated Debentures		10,310			262			3.39	%		10,310			245			3.18	%
Total Interest Bearing Liabilities		1,322,272		$	4,276			0.43	%		1,312,664		$	6,156			0.63	%
Interest Rate Spread								4.12	%								4.29	%
Demand Deposits (Non-Interest Bearing)		366,228									322,785
All Other Liabilities		34,399									31,646
Total Liabilities		1,722,899									1,667,095
Shareholders' Equity		198,593									180,225
Total Liabilities & Shareholders' Equity	$	1,921,492								$	1,847,320
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.11	%								0.15	%
Net Interest Income and Margin on Total Earning Assets					56,036			4.23	%					56,781			4.44	%
Tax Equivalent Adjustment					(1,034	)								(1,010	)
Net Interest Income				$	55,002			4.15	%				$	55,771			4.36	%

Notes:  Yields on municipal securities have been calculated on a fully taxable equivalent basis.  Loan interest income includes fee income and unearned discount in the amount of $2,020,000 and $1,506,000 for the nine months ended September 30, 2012 and 2011, respectively. Yields on securities available-for-sale are based on historical cost.

35

Farmers & Merchants Bancorp

Volume and Rate Analysis of Net Interest Revenue

(Rates on a Taxable Equivalent Basis)

(in thousands)	Three Months Ended									Nine Months Ended
	Sept. 30, 2012 compared to Sept. 30, 2011									Sept. 30, 2012 compared to Sept. 30, 2011
Interest Earning Assets	Volume			Rate			Net Chg.			Volume			Rate			Net Chg.
Interest Bearing Deposits with Banks	$	(23	)	$	3		$	(20	)	$	8		$	1		$	9
Investment Securities:
U.S. Agencies		(383	)		(40	)		(423	)		(1,295	)		(154	)		(1,449	)
Municipals - Non-Taxable		94			(40	)		54			160			(100	)		60
Mortgage Backed Securities		1,136			(699	)		437			4,141			(1,799	)		2,342
Other		11			43			54			23			53			76
Total Investment Securities		858			(736	)		122			3,029			(2,000	)		1,029
Loans:
Real Estate		787			(1,249	)		(462	)		1,535			(2,518	)		(983	)
Home Equity Lines & Loans		(123	)		(14	)		(137	)		(362	)		(30	)		(392	)
Agricultural		(277	)		(351	)		(628	)		(639	)		(834	)		(1,473	)
Commercial		(105	)		(101	)		(206	)		(389	)		(377	)		(766	)
Consumer		(25	)		14			(11	)		(72	)		23			(49	)
Total Loans		257			(1,701	)		(1,444	)		73			(3,736	)		(3,663	)
Total Earning Assets		1,092			(2,434	)		(1,342	)		3,110			(5,735	)		(2,625	)
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction		6			(28	)		(22	)		21			(85	)		(64	)
Savings and Money Market		50			(119	)		(69	)		117			(320	)		(203	)
Time		(58	)		(253	)		(311	)		(221	)		(824	)		(1,045	)
Total Interest Bearing Deposits		(2	)		(400	)		(402	)		(83	)		(1,229	)		(1,312	)
Securities Sold Under Agreement to Repurchase		(541	)		-			(541	)		(602	)		14			(588	)
Other Borrowed Funds		16			(13	)		3			19			(16	)		3
Subordinated Debentures		-			5			5			-			17			17
Total Interest Bearing Liabilities		(527	)		(408	)		(935	)		(666	)		(1,214	)		(1,880	)
Total Change	$	1,619		$	(2,026	)	$	(407	)	$	3,776		$	(4,521	)	$	(745	)

Notes:  Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change".  The above figures have been rounded to the nearest whole number.

3rd Quarter 2012 vs. 3rd Quarter 2011

Net interest income for the third quarter of 2012 decreased 2.3% or $427,000 to $18.5 million compared to the third quarter of 2011. On a fully taxable equivalent basis, net interest income decreased 2.1% and totaled $18.8 million for the third quarter of 2012. As more fully discussed below, the decrease in net interest income was primarily due to a decrease in the net interest margin, offset somewhat by growth in average earning assets.

Net interest income on a taxable equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For the quarter ended September 30, 2012, the Company’s net interest margin was 4.27% compared to 4.45% for the quarter ended September 30, 2011. This decrease in net interest margin was due primarily to: (1) a decline in the mix of loans as a percentage of average earning assets; combined with (2) a decline in loan and securities yields that exceeded a corresponding drop in funding costs.

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Average loans totaled $1.2 billion for the quarter ended September 30, 2012; an increase of $13.8 million compared to the average balance for the quarter ended September 30, 2011. Loans decreased from 69.1% of average earning assets at September 30, 2011 to 68.3% at September 30, 2012. Additionally, as a result of the sustained low rate environment since late 2008, the annualized yield on the Company’s loan portfolio declined to 5.48% for the quarter ended September 30, 2012, compared to 6.01% for the quarter ended September 30, 2011. The decrease in yield resulted in interest revenue from loans decreasing 8.1% to $16.5 million for quarter ended September 30, 2012. The Company has been experiencing aggressive competitor pricing for loans to which it may need to continue to respond in order to retain key customers. This could place even greater negative pressure on future loan yields and net interest margin.

The investment portfolio is the other main component of the Company’s earning assets. Since the risk factor for investments is typically lower than that of loans, the yield earned on investments is generally less than that of loans. Average investment securities totaled $544.9 million for the quarter ended September 30, 2012; an increase of $59.7 million compared to the average balance for the quarter ended September 30, 2011. Tax equivalent interest income on securities increased $122,000 to $3.3 million for the quarter ended September 30, 2012, compared to $3.2 million for the quarter ended September 30, 2011. The average investment portfolio yield, on a tax equivalent basis, was 2.45% for the quarter ended September 30, 2012, compared to 2.65% for the quarter ended September 30, 2011. This decrease in yield was caused by a significant decline in the yield on the Company’s mortgage-backed securities portfolio due to: (1) a shift in mix from 30 year MBS to 10, 15 and 20 year MBS; (2) a decline in overall mortgage rates; and (3) increased prepayment speeds on MBS purchased at a premium requiring those premium to be amortized over a shorter period. This decline was partially offset by a shift in mix from short-term government agencies securities into mortgage-back securities. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2012.  Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statement of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.

Interest bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB during the third quarter of 2012. These balances earn interest at the Fed Funds rate which has been 0.25% since December, 2008. Average interest bearing deposits with banks for the quarter ended September 30, 2012, was $11.5 million, a decrease of $32.7 million compared to the average balance for the quarter ended September 30, 2011.

Average interest-bearing liabilities increased $3.2 million or 0.3% during the third quarter of 2012. Of that increase: (1) interest-bearing transaction deposits increased $27.6 million; (2) savings and money market deposits increased $67.1 million; (3) time deposits decreased $37.2 million; (4) securities sold under agreement to repurchase decreased $60.0 million (see “Financial Condition - Securities Sold Under Agreement to Repurchase”); (5) Federal Home Loan Bank (“FHLB”) Advances increased $5.7 million (see “Financial Condition – Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings”); and (6) subordinated debt remained unchanged (see “Financial Condition – Subordinated Debentures”).

During the third quarter of 2012, the Company was able to grow average interest bearing deposits by $57.6 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base.

Total interest expense on deposits was $935,000 for the third quarter of 2012 as compared to $1.3 million for the third quarter of 2011. The average rate paid on interest-bearing deposits was 0.29% for the third quarter of 2012 compared to 0.43% for the third quarter of 2011. The Company anticipates that future declines in deposit rates, if any, will be much more modest.

Nine Months Ending September 30, 2012 vs. Nine Months Ending September 30, 2011

During the first nine months of 2012, net interest income decreased 1.4% to $55.0 million, compared to $55.8 million for the first nine months of 2011. On a fully taxable equivalent basis, net interest income decreased 1.3% and totaled $56.0 million for the first nine months of 2012, compared to $56.8 million for the same period in 2011. The decrease in net interest income was primarily due to a decrease in the net interest margin, offset somewhat by growth in average earning assets.

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For the nine months ended September 30, 2012, the Company’s net interest margin was 4.23% compared to 4.44% for the same period in 2011. This decrease in net interest margin was due primarily to: (1) a decline in the mix of loans as a percentage of average earning assets; combined with (2) a decline in loan yields that exceeded a corresponding drop in funding costs.

The average balance of loans decreased by $2.6 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The yield on the loan portfolio decreased 41 basis points to 5.62% for the nine months ended September 30, 2012 compared to 6.03% for the nine months ended September 30, 2011. This decrease in volume and yield resulted in interest income from loans decreasing 6.9% or $3.7 million for the first nine months of 2012.

Average investment securities were $558.2 million for the nine months ended September 30, 2012 compared to $500.8 million for the same period in 2011. The average yield (TE) for the nine months ended September 30, 2012 was 2.62% compared to 2.64% for the nine months ended September 30, 2011. This increase in balances resulted in an increase in interest income of $1.0 million or10.4%, for the nine months endedSeptember 30, 2012.

 Average interest bearing deposits with banks for the nine months ended September 30, 2012, were $40.2 million, an increase of $4.3 million compared to the average balance for the nine months ended September 30, 2011. These balances earn interest at the Fed Funds rate which has been 0.25% since December, 2008.

Average interest-bearing liabilities increased $9.6 million or 0.7% during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Of that increase: (1) interest-bearing deposits increased $29.7 million; (2) securities sold under agreement to repurchase decreased $22.3 million; (3) FHLB advances increased $2.3 million; and (4) subordinated debentures remained unchanged.

The $29.7 million increase in average interest-bearing deposits was primarily in interest bearing transaction and savings and money market deposits, which grew $74.8 million for the nine months ended September 30, 2012, while time deposits decreased by $45.1 million during this same period. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $3.0 million for the first nine months of 2012 as compared to $4.3 million for the first nine months of 2011. The average rate on interest-bearing deposits was 0.31% in the first nine months of 2012 and 0.46% in the first nine months of 2011.

Provision and Allowance for Loan Losses

As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans to one borrower, and by restricting loans made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Credit Risk” of the Company’s 2011 Annual Report on Form 10-K. Management reports regularly to the Board of Directors regarding trends and conditions in the loan portfolio and regularly conducts credit reviews of individual loans. Loans that are performing but have shown some signs of weakness are subjected to more stringent reporting and oversight.

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable incurred credit losses inherent in the Company's loan portfolio as of the balance sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans collectively evaluated for impairment.

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A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.

A restructuring of a loan constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans for customers unless: (1) the existing loan is brought current as to principal and interest payments; and (2) the restructured loan can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan amounts. After restructure a determination is made whether the loan will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; and (8) consumer & other. See “Financial Condition – Loans” for examples of loans made by the Company. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. A credit grade is established at inception for smaller balance loans, such as consumer and residential real estate, and then updated only when the loan becomes contractually delinquent or when the borrower requests a modification. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

Special Mention – A special mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

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Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans classified as loss are considered uncollectible. Once a loan becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for loan losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Commercial Real Estate – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Agricultural Real Estate and Agricultural – Loans secured by crop production, livestock and related real estate are vulnerable to two risk factors that are largely outside the control of the Company and its borrowers: commodity prices and weather conditions.

Real Estate Construction – Real Estate Construction loans, including land loans, generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial– Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Residential 1st Mortgages and Home Equity Lines and Loans– The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments, although this is not always true as evidenced over the past several years. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other– A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

In addition, the Company's and Bank's regulators, including the FRB, DFI and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

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Provision for Loan Losses

Changes in the provision for loan losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for loan losses relative to factors such as the credit quality of the loan portfolio, loan growth, current loan losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans in accordance with the terms of the notes.

The Central Valley of California has been one of the hardest hit areas in the country during this recession. Housing prices in many areas are down as much as 60% and the economic stress has spread from residential real estate to other industry segments. Unemployment levels remain above 15% in some areas. Accordingly, over the past several years, management and the Board of Directors have increased the Company’s loan loss allowance and as of September 30, 2012, the balance was $33.6 million or 2.78% of total loans. As of September 30, 2011, the allowance for loan losses was $33.0 million, which represented 2.80% of total loans. Although, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of September 30, 2012, compare very favorably to our peers at the present time, no significant recovery has yet begun in our local markets and this has resulted in continuing borrower stress.

The provision for loan losses decreased $4.2 million to $1.1 million for the first nine months of 2012 compared to $5.3 million for the first nine months of 2011. Year-to-date net charge-offs through September 30, 2012 were $513,000 compared to $4.6 million in the first nine months of 2011. Year-to-date net charge-offs represented 0.04% of average loans through September 30, 2012, a level that, in management’s opinion, compares very favorably to the Company’s peers at the present time. See “Overview – Looking Forward: 2012 and Beyond”, “Critical Accounting Policies and Estimates – Allowance for Loan Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2011 Annual Report on Form 10-K.

After reviewing all factors above, based upon information currently available, management concluded that the allowance for loan losses as of September 30, 2012, was adequate.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2012			2011			2012			2011
Balance at Beginning of Period	$	33,098		$	32,942		$	33,017		$	32,261
Loans Charged Off		(136	)		(903	)		(779	)		(4,731	)
Recoveries of Loans Previously Charged Off		42			24			266			83
Provision Charged to Expense		600			900			1,100			5,350
Balance at End of Period	$	33,604		$	32,963		$	33,604		$	32,963

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The table below breaks out year-to-date and current quarter activity by portfolio segment (in thousands):

September 30, 2012	Commercial Real Estate			Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2012	$	5,823		$	2,583	$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Charge-Offs		-			-		-			(81	)		(138	)		(240	)		(198	)		(122	)		-			(779	)
Recoveries		-			89		-			16			12			61			41			47			-			266
Provision		(1,490	)		990		(72	)		356			(105	)		311			1,084			12			14			1,100
Ending Balance- September 30, 2012	$	4,333		$	3,662	$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2012	$	4,377		$	2,633	$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	1,711		$	33,098
Charge-Offs		-			-		-			(80	)		(22	)		-			-			(34	)		-			(136	)
Recoveries		-			-		-			16			2			-			9			15			-			42
Provision		(44	)		1,029		(39	)		155			21			425			113			23			(1,083	)		600
Ending Balance- September 30, 2012	$	4,333		$	3,662	$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604

Overall, the Allowance for Loan Losses as of September 30, 2012 increased $587,000 from December 31, 2011. However, the allowance allocated to Commercial Real Estate balances declined $1.5 million primarily as a result of a $19.0 million decline in classified loans. The “Unallocated” portion of the allowance declined from $1.7 million at June 30, 2012 to $628,000 at September 30, 2012, primarily as a result of Management adopting specific reserve factors to account for the impact that drought conditions in many areas of the country are having on the feed prices of our dairy customers.  See “Management’s Discussion and Analysis - Financial Condition – Classified Loans and Non-Performing Assets.”

See “Note 3. Allowance for Loan Losses” for additional details regarding the provision and allowance for loan losses.

Non-Interest Income

Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plans; and (6) fees from other miscellaneous business services.

3rd Quarter 2012 vs.3rd Quarter 2011

Non-interest income increased $2.3 million or 129.0% for the three months ended September 30, 2012, compared to the same period of 2011. This increase was primarily due to: (1) a $762,000 gain on deferred compensation investments for the third quarter of 2012 when compared to a loss of $1.2 million for the same period in 2011; (2) a $220,000 increase in other non-interest income primarily related to swap referral fee income; and (3) a $149,000 gain on sale of investment securities. These increases were partially offset by a $108,000 decline in service charges on deposit accounts, primarily NSF/OD fees.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although U.S. GAAP require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Nine Months Ending September 30, 2012 vs. Nine Months Ending September 30, 2011

Non-interest income increased $2.7 million or 33.2% for the nine months ended September 30, 2012 compared to the same period of 2011. This increase was comprised of: (1) a $­­­1.4 million gain on deferred compensation investments during the first nine months of 2012 as compared to a loss of $808,000 during the same period in 2011; (2) a $629,000 increase in other non-interest income primarily related to swap referral fee income; and (3) a $149,000 gain on sale of investment securities. These increases were partially offset by a $434,000 decline in service charges on deposit accounts, primarily NSF/OD fees.

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Non-Interest Expense

Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) ORE holding costs; (6) deposit insurance; (7) supplies; (8) legal fees; (9) professional services; (10) data processing; (11) marketing; and (12) other miscellaneous expenses.

3rd Quarter 2012 vs. 3rd Quarter 2011

Overall, non-interest expense increased $1.9 million or 19.7% for the three months ended September 30, 2012, compared to the same period in 2011. This increase was primarily comprised of: (1) a $338,000 increase in salaries and employee benefits due to salary increases; (2) a $762,000 gain on deferred compensation investments for the third quarter of 2012 when compared to a loss of $1.2 million for the same period in 2011. These increases were partially offset by a $349,000 decrease in ORE holding cost, primarily due to a drop in required valuation adjustments.

Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although U.S. GAAP require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.

Nine Months Ending September 30, 2012 vs. Nine Months Ending September 30, 2011

Non-interest expense increased $4.1 million or 12.5% for the nine months ended September 30, 2012, compared to the same period of 2011. This increase was comprised of: (1) a $1.6 million increase in salaries and employee benefits, primarily due to salary increases; (2) a $­­­1.4 million gain on deferred compensation investments during the first nine months of 2012 as compared to a loss of $808,000 during the same period in 2011; and (3) a $1.8 million increase in other non-interest expense primarily consisting of a one-time fee paid to terminate Securities Sold Under Repurchase Agreements. These increases were partially offset by: (1) a $1.1 million decrease in ORE holding costs; and (2) a $498,000 decrease in FDIC insurance premiums.

Income Taxes

The provision for income taxes increased 4.1% to $3.8 million for the third quarter of 2012. The Company’s effective tax rate was 37.7% for the third quarter of 2012 compared to 37.0% for the third quarter of 2011.

The provision for income taxes increased 10.2% to $10.5 million for the first nine months of 2012. The Company’s effective tax rate for the first nine months of 2012 was 37.2% compared to 36.4% for the same period in 2011.

The Company’s effective tax rate fluctuates from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the statutory rate of approximately 42% due primarily to benefits regarding the cash surrender value of life insurance; California enterprise zone interest income exclusion; and tax-exempt interest income on municipal securities and loans.

Current tax law causes the Company’s current taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the current year deductibility of loan losses; (2) deductibility of retirement and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.

Financial Condition

This section discusses material changes in the Company’s balance sheet at September 30, 2012, as compared to December 31, 2011 and to September 30, 2011. As previously discussed (see “Overview”) the Company’s financial condition can be influenced by the seasonal banking needs of its agricultural customers.

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Investment Securities and Federal Funds Sold

The investment portfolio provides the Company with an income alternative to loans. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. When market conditions are advantageous, the Company will supplement this primary mix with select investments in investment grade corporate bonds. Importantly, the Company never invested in the preferred stock or subordinated debt of Fannie Mae “FNMA” or Freddie Mac “FHLMC,” classes of securities that resulted in losses for many banks in recent years.

The Company’s investment portfolio at September 30, 2012 was $532.1 million compared to $542.9 million at the end of 2011, a decrease of $10.8 million or ­­­2.0%. At September 30, 2011, the investment portfolio totaled $484.6 million. The investment portfolio has generally increased over the past three years as deposit growth has exceeded loan growth. Additionally, the mix of the investment portfolio has changed over the past three years. To protect against future increases in market interest rates, while at the same time generating some reasonable level of current yields, the Company has invested most of its available funds over the past three years in shorter term government agency & government-sponsored entity securities and shorter term (10, 15, and 20 year) mortgage-backed securities.

The Company's total investment portfolio currently represents 28.2% of the Company’s total assets as compared to 28.3% at December 31, 2011 and 25.8% at September 30, 2011.

As of September 30, 2012 the Company held $71.8 million of municipal investments, of which $58.4 million were bank-qualified municipal bonds, all classified as held-to-maturity. The continuing financial problems being experienced by certain municipalities, along with the financial stresses exhibited by some of the large monoline bond insurers, have increased the overall risk associated with bank-qualified municipal bonds. This situation caused the Company not to purchase any municipal bonds between late 2006 and year-end 2011. However, during the first quarter of 2012 the Company began investing in bank-qualified municipals that were rated AA or better. As of September 30, 2012 ninety-three percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the approximately seven percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Average interest bearing deposits with banks for the nine months ended September 30, 2012, was $40.2 million compared to $46.7 million for the year ended December 31, 2011, and $35.9 million for the nine months ended September 30, 2011. These balances earn interest at the Fed Funds rate, which has been 0.25% since December, 2008.

The Company classifies its investments as held-to-maturity, trading, or available-for-sale. Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of September 30, 2012, December 31, 2011 and September 30, 2011, there were no securities in the trading portfolio. Securities classified as available-for-sale include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes.

Loans

Loans can be categorized by borrowing purpose and use of funds. Common examples of loans made by the Company include:

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Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties within our market area. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing and the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.20; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Real Estate Construction - These are loans for development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with LTV’s below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan.

Residential 1st Mortgages - These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however, we will make loans on rural residential properties up to 20 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off of treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”

Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; CLTV’s do not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 45%; and in some situations the Company is in a 1st lien position.

Agricultural - These are loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Commercial - These are loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.

Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.

Each loan type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan structure. See “Results of Operations - Provision and Allowance for Loan Losses” for a more detailed discussion of risks by loan type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan type. The Company’s policies require that loans are approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan.

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Most loans made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan is made.

In order to be responsive to borrower needs, the Company prices loans: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices; as long as these structures are consistent with the Company’s interest rate risk management policies and procedures (see Item 3. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk).

The Company's loan portfolio at September 30, 2012 totaled $1.2 billion, an increase of $32.5 million or 2.8% over September 30, 2011 and $46.9 million or 4.0% over December 31, 2011. These increases have occurred despite what has been a difficult economic environment combined with a very competitive pricing environment, and are a result of the Company’s intensified business development efforts directed toward credit-qualified borrowers. No assurances can be made that this growth in the loan portfolio will continue until the economy in the Central Valley of California improves.

The following table sets forth the distribution of the loan portfolio by type and percent as of the periods indicated.

Loan Portfolio	September 30, 2012				December 31, 2011				September 30, 2011
(in thousands)	$		%		$		%		$		%
Commercial Real Estate	$	337,957	27.9	%	$	307,670	26.4	%	$	302,980	25.7	%
Agricultural Real Estate		293,864	24.2	%		280,139	24.0	%		284,149	24.1	%
Real Estate Construction		32,701	2.7	%		29,607	2.5	%		28,979	2.5	%
Residential 1st Mortgages		137,464	11.3	%		107,421	9.2	%		104,130	8.8	%
Home Equity Lines & Loans		43,990	3.6	%		50,956	4.4	%		52,451	4.4	%
Agricultural		193,053	15.9	%		217,227	18.6	%		219,670	18.6	%
Commercial		167,777	13.9	%		165,089	14.2	%		180,329	15.3	%
Consumer & Other		5,514	0.5	%		6,935	0.7	%		6,879	0.6	%
Total Gross Loans		1,212,320	100.0	%		1,165,044	100.0	%		1,179,567	100.0	%
Less: Unearned Income		2,293				1,966				2,062
Subtotal		1,210,027				1,163,078				1,177,505
Less: Allowance for Loan Losses		33,604				33,017				32,963
Net Loans	$	1,176,423			$	1,130,061			$	1,144,542

Classified Loans and Non-Performing Assets

All loans are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Loan Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan review firm to perform evaluations of individual loans and review the credit risk grades the Company places on loans. Loans that are judged to exhibit a higher risk profile are referred to as “classified loans,” and these loans receive increased management attention. As of September 30, 2012, classified loans totaled $29.0 million compared to $42.8 million at December 31, 2011 and $44.6 million at September 30, 2011. This decline was primarily a result of $7.6 million of CRE loans being upgraded from classified to special mention and $9.7 million of CRE loans being upgraded from classified to pass during the first nine months of 2012.

Classified loans with higher levels of credit risk can be further designated as “impaired” loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. See “Results of Operations - Provision and Allowance for Loan Losses” for further details. Impaired loans consist of: (1) non-accrual loans; and/or (2) restructured loans that are still performing (i.e., accruing interest).

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Non-Accrual Loans - Accrual of interest on loans is generally discontinued when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When loans are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans totaled $5.8 million as of September 30, 2012. At December 31, 2011 and September 30, 2011, non-accrual loans totaled $4.2 million and $4.7 million, respectively. Although in Management’s opinion overall levels of non-accrual loans compare very favorably to our peers at the current time, the Company has experienced a small increase in non-accruals related to Agricultural and Agricultural Real Estate Loans. This is primarily due to profit pressures experienced by the Company’s dairy customers as feed prices increase as a result of drought conditions in many areas of the country.

Restructured Loans - A restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan on accrual. As of September 30, 2012, restructured loans on accrual totaled $1.6 million as compared to $4.7 million at December 31, 2011. This decline was primarily a result of two commercial real estate loans that totaled $3.0 million as of December 31, 2011 no longer being classified as a TDR since they were restructured at a market rate in a prior calendar year and are currently in compliance with their modified terms. Restructured loans on accrual at September 30, 2011, were $4.2 million.

Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the property is classified as other assets on the Company's financial statements. The Company reported $2.6 million of ORE at September 30, 2012, $2.9 million at December 31, 2011, and $3.5 million at September 30, 2011. The September 30, 2012 carrying value of $2.6 million is net of a $4.1 million reserve for ORE valuation allowance. The December 31, 2011 carrying value of $2.9 million is net of a $4.1 million reserve for ORE valuation allowance. The September 30, 2011 carrying value of $3.5 million is net of a $3.6 million reserve for ORE valuation allowance.

The following table sets forth the amount of the Company's non-performing loans (defined as non-accrual loans plus accruing loans past due 90 days or more) and ORE as of the dates indicated.

Non-Performing Assets

(in thousands)	September 30, 2012			Dec. 31, 2011			September 30, 2011
Non-Performing Loans	$	5,752		$	4,228		$	4,664
Other Real Estate		2,553			2,924			3,513
Total Non-Performing Assets	$	8,305		$	7,152		$	8,177
Non-Performing Loans as a % of Total Loans		0.47	%		0.36	%		0.40	%
Restructured Loans (Performing)	$	1,564		$	4,710		$	4,169

Although management believes that non-performing loans are generally well-secured and that potential losses are provided for in the Company’s allowance for loan losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. Specific reserves of $962,000, $1.6 million, and $1.7 million have been established for non-performing loans at September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

Foregone interest income on non-accrual loans which would have been recognized during the period, if all such loans had been current in accordance with their original terms, totaled $167,000 for the nine months ended September 30, 2012, $385,000 for the year ended December 31, 2011, and $403,000 for the nine months ended September 30, 2011.

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Except for those classified and non-performing loans discussed above, the Company’s management is not aware of any loans as of September 30, 2012, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. However, the Central Valley of California continues to be one of the hardest hit areas in the country during this recession. Housing prices in many areas are down as much as 60% and the economic stress has spread from residential real estate to other industry segments. Unemployment levels remain above 15% in many areas. As a result of this combination of: (1) significant declines in real estate values over the past several years; and (2) continuing uncertainty in general economic conditions leading to increased unemployment and business failures; borrowers who up until this time have been able to keep current in their payments may experience deterioration in their overall financial condition, increasing the potential of default. See “Part I, Item 1A. Risk Factors” in the Company’s 2011 Annual Report on Form 10-K.

Deposits

One of the key sources of funds to support earning assets (loans and investments) is the generation of deposits from the Company’s customer base. The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company.

The Company's deposit balances at September 30, 2012 have increased $42.2 million or 2.7% compared to September 30, 2011. In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth: (1) the Federal government’s decision to permanently increase FDIC deposit insurance limits from $100,000 to $250,000 per depositor (unlimited for non-interest bearing transaction accounts); and (2) the Company’s strong financial results and position which has built F&M Bank’s reputation as one of the most safe and sound banks in its market territory.  The Company expects that, at some point, deposit customers may begin to diversify how they invest their money (e.g., move funds back into the stock market or other investments) and this could impact future deposit growth.

Although total deposits have increased 2.7% since September 30, 2011, the Company’s focus has been on increasing low cost transaction and savings accounts, which have grown at a much faster pace:

· Demand and interest-bearing transaction accounts have increased $37.5 million or 6.6% since September 30, 2011.

· Savings and money market accounts have increased $43.1­­­­ million or 8.7% since September 30, 2011.

· Time deposit accounts have decreased $38.4 million or 7.4% since September 30, 2011. This decline was the continuing result of an explicit pricing strategy adopted by the Company beginning in 2009 based upon the recognition that market CD rates were greater than the yields that the Company could obtain reinvesting these funds in short-term government agency & government-sponsored entity securities or overnight Fed Funds. Beginning in 2009, management carefully reviewed time deposit customers and reduced our deposit rates to customers that did not also have transaction, money market, and/or savings balances with us (i.e., depositors who were not “relationship customers”). Given the Company’s strong deposit growth in transaction, savings and money market accounts, this time deposit decline has not presented any liquidity issues and it has enhanced the Company’s net interest margin and earnings.

The Company's deposit balances at September 30, 2012 have increased $5.3 million or 0.3% compared to December 31, 2011, due primarily to an increase interest bearing transaction deposits of 7.9%, or $17.5 million, and in savings and money market deposits of 8.6%, or $42.7 million. These increases were partially offset by: (1) decreased demand deposits in the amount of $20.0 million, or 5.1%; and (2) decreased time deposit accounts in the amount of $34.9 million or 6.7%.

Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings

Lines of credit with the Federal Reserve Bank and the Federal Home Loan Bank are other key sources of funds to support earning assets. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk and Liquidity Risk.” These sources of funds are also used to manage the Company’s interest rate risk exposure, and as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio.

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FHLB Advances as of September 30, 2012 were $482,000 compared to $530,000 at December 31, 2011 and $546,000 at September 30, 2011. The average rate on FHLB advances during the first nine month of 2012 was 0.9% compared to 1.6% during the first nine months of 2011.

There were no amounts outstanding on the Company’s line of credit with the FRB as of September 30, 2012.

As of September 30, 2012 the Company has additional borrowing capacity of $261.3 million with the Federal Home Loan Bank and $290.2 million with the Federal Reserve Bank.  Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

Securities Sold Under Agreement to Repurchase

Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings. The Company had no securities sold under agreement to repurchase at September 30, 2012 and $60 million at December 31, 2011, and September 30, 2011.

On March 13, 2008, the Bank entered into a $40 million medium term repurchase agreement with Citigroup as part of the Bank’s interest rate risk management strategy. The repurchase agreement pricing rate was 3.20% with an embedded 3-year cap tied to 3 month Libor with a strike price of 3.3675%. The repurchase agreement was to mature March 13, 2013, and was secured by investments in agency pass through securities.

On May 30, 2008, the Company entered into a second $20 million medium term repurchase agreement with Citigroup. The repurchase agreement pricing rate was 4.19% with an embedded 3-year cap tied to 3 month Libor with a strike price of 3.17%. The repurchase agreement was to mature June 5, 2013, and was secured by investments in agency pass through securities.

On June 21, 2012, the Company terminated both repurchase agreements with Citigroup resulting in an early termination fee totaling $1.7 million, included in other non-interest expense. The Company determined that the time was appropriate to replace these relatively “high-cost” borrowings with short-term FHLB advances at substantially lower rates. This rate differential will positively impact the Company’s net interest margin over the next 6-9 months, the period during which the repurchase agreements were scheduled to mature.

Subordinated Debentures

On December 17, 2003, the Company raised $10 million through an offering of trust-preferred securities. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under applicable regulatory guidelines, trust preferred securities qualify as regulatory capital (see “Capital”). These securities accrue interest at a variable rate based upon 3-month Libor plus 2.85%. Interest rates reset quarterly and were 3.24% as of September 30, 2012, 3.40% at December 31, 2011 and 3.20% at September 30, 2011. The average rate for these securities for the first nine months of 2012 was 3.39% compared to 3.18% for the first nine months of 2011.If the Company decides to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.

Capital

The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $206.3 million at September 30, 2012, $189.3 million at December 31, 2011, and $189.2 million at September 30, 2011.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios set forth in the table below of Total and Tier 1 capital to risk weighted assets and of Tier 1 capital to average assets (all terms as defined in the regulations). Management believes, as of September 30, 2012, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

In its most recent notification from the FDIC the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, the Bank must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution’s categories.

(in thousands)	Actual					Regulatory Capital Requirements					To Be Well Capitalized Under Prompt Corrective Action Provisions
The Company:	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2012
Total Capital to Risk Weighted Assets	$	225,764		15.35	%	$	117,649		8.0	%		N/A		N/A
Tier 1 Capital to Risk Weighted Assets	$	207,192		14.09	%	$	58,825		4.0	%		N/A		N/A
Tier 1 Capital to Average Assets	$	207,192		10.87	%	$	76,220		4.0	%		N/A		N/A

(in thousands)	Actual					Regulatory Capital Requirements					To Be Well Capitalized Under Prompt Corrective Action Provisions
The Bank:	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2012
Total Capital to Risk Weighted Assets	$	225,470		15.33	%	$	117,631		8.0	%	$	147,038		10.0	%
Tier 1 Capital to Risk Weighted Assets	$	206,900		14.07	%	$	58,815		4.0	%	$	88,223		6.0	%
Tier 1 Capital to Average Assets	$	206,900		10.86	%	$	76,182		4.0	%	$	95,228		5.0	%

As previously discussed (see “Subordinated Debentures”), in order to supplement its regulatory capital base, during December 2003 the Company issued $10 million of trust preferred securities. On March 1, 2005, the Federal Reserve Board issued its final rule effective April 11, 2005, concerning the regulatory capital treatment of trust preferred securities (“TPS”) by bank holding companies (“BHCs”). Under the final rule BHCs may include TPS in Tier 1 capital in an amount equal to 25% of the sum of core capital net of goodwill. Any portion of trust-preferred securities not qualifying as Tier 1 capital would qualify as Tier 2 capital subject to certain limitations. The Company has received notification from the Federal Reserve Bank of San Francisco that all of the Company’s trust preferred securities currently qualify as Tier 1 capital.

The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on September 11, 2012, the Board of Directors approved increasing the funds available for the Company’s common stock repurchase program to $20 million over the three-year period ending September 30, 2015.

During the third quarter of 2012 the Company repurchased 1,057 shares at an average per share price of $375. The Company did not repurchase any shares in the third quarter of 2011. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20.0 million.

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On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Registrar and Transfer Company, as Rights Agent, and the Company declared a dividend of a right to acquire one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock, $0.01 par value per share, to stockholders of record at the close of business on August 15, 2008. Generally, the Rights are only triggered and become exercisable if a person or group (the “Acquiring Person”) acquires beneficial ownership of 10 percent or more of the Company’s common stock or announces a tender offer for 10 percent or more of the Company’s common stock.

The Rights Plan is similar to plans adopted by many other publicly traded companies. The effect of the Rights Plan is to discourage any potential acquirer from triggering the Rights without first convincing Farmers & Merchants Bancorp’s Board of Directors that the proposed acquisition is fair to, and in the best interest of, all of the shareholders of the Company. The provisions of the Plan will substantially dilute the equity and voting interest of any potential acquirer unless the Board of Directors approves of the proposed acquisition. Each Right, if and when exercisable, will entitle the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, at a purchase price of $1,200 for each one one-hundredth of a share, subject to adjustment. Each holder of a Right (except for the Acquiring Person, whose Rights will be null and void upon such event) shall thereafter have the right to receive, upon exercise, that number of Common Shares of the Company having a market value of two times the exercise price of the Right. At any time before a person becomes an Acquiring Person, the Rights can be redeemed, in whole, but not in part, by Farmers and Merchants Bancorp’s Board of Directors at a price of $0.001 per Right. The Rights Plan will expire on August 5, 2018.

Proposed Capital Rules

On June 7, 2012, U.S. banking regulators released several draft notices of proposed rulemaking addressing industry-wide capital requirements (more commonly known as “Basel III”) and the calculation of risk weighted assets.  As currently proposed these rules would: (1) be phased in over time; and (2) be applied to all banks and bank holding companies with more than $500 million in assets.  The proposed rules which would most affect the regulatory capital requirements of the Company and the Bank include:

· Redefining the type of capital which qualifies as regulatory capital in a more restrictive manner than current rules, including the proposed phase-out of TPS as qualifying regulatory capital,

· Introducing a new “Common Equity Tier 1” capital measurement,

· Establishing higher minimum levels of capital,

· Introducing a “capital conservation buffer”,

· Increasing the risk-weighting of certain assets and commitments, in particular construction loans, loans on nonaccrual status, loans 90 days or more past due, short-term credit commitments, and deferred tax assets, and

· Altering the risk-weightings on residential real estate loans based on loan quality and the loan-to-value ratio determined at time of origination or subsequent restructuring or modification.

Under the proposed rules, any bank which is unable to maintain its “capital conservation buffer” will be restricted in its ability to declare dividends, repurchase shares and pay discretionary executive compensation.

Industry comments on the draft notices are required by October 22, 2012. Additionally, a bi-partisan letter has been sent to U.S. banking regulators signed by a majority of members of the U.S. Senate urging regulators to consider the impact that the proposed rules would have on “community banks” and the differences between community banks and large, complex financial institutions. We continue to monitor the development of the proposed rules and their potential impact.

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Critical Accounting Policies and Estimates

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These judgments govern areas such as the allowance for loan losses, the fair value of financial instruments and accounting for income taxes.

For a full discussion of the Company’s critical accounting policies and estimates see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2011 Annual Report on Form 10-K.

Off Balance Sheet Commitments

In the normal course of business the Company enters into financial instruments with off balance sheet risks in order to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit, letters of credit and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.

Off Balance Sheet Arrangements

(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Commitments to Extend Credit	$	335,255	$	300,572	$	282,737
Letters of Credit		5,600		5,087		5,424
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties		1,949		416		-

These instruments involve varying degrees of credit risk, but the Company applies the same credit policies to these instruments as it does for loans included on the balance sheet. Additionally, the Company maintains an allowance for off balance sheet commitments which totaled $142,000 at September 30, 2012, December 31, 2011, and September 30, 2011. We do not anticipate any material losses as a result of these transactions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.

Credit Risk

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.

Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.

In order to control credit risk in the loan portfolio, the Company has established credit management policies and procedures that govern both the approval of new loans and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans to one borrower, and by restricting loans made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for loan losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

52

The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans. The systematic methodology consists of two major parts.

Part 1 - includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.

Central to the first phase of the analysis of the loan portfolio is the loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DFI and FDIC.

Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan is impaired and there is a probability of loss. Management performs a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.

The second phase is conducted by segmenting the loan portfolio by risk rating and into groups of loans with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans.

Part 2 - considers qualitative internal and external factors that may affect a loan’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:

§ general economic and business conditions affecting the key lending areas of the Company;

§ credit quality trends (including trends in collateral values, delinquencies and non-performing loans);

§ loan volumes, growth rates and concentrations;

§ loan portfolio seasoning;

§ specific industry and crop conditions;

§ recent loss experience; and

§ duration of the current business cycle.

Management reviews these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second major element of the allowance.

53

Management believes that based upon the preceding methodology, and using information currently available, the allowance for loan losses at September 30, 2012 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans, or net loan charge-offs that would require increases in the provision for loan losses and thereby adversely affect the results of operations.

Interest Rate Risk

The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.

The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan, and deposit products, which reduces the market volatility of those instruments.

The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.

The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.

The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.

The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At September 30, 2012, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 0.03% if rates increase by 200 basis points and a decrease in net interest income of 0.57% if rates decline 100 basis points. Comparatively, at December 31, 2011, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was a decrease in net interest income of 0.44% if rates increase by 200 basis points and a decrease in net interest income of 0.17% if rates decline 100 basis points.

The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans and securities; pricing strategies on loans and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.

54

Liquidity Risk

Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.

The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows” of the Company’s 2011 Annual Report on Form 10-K) cash and cash equivalents, cash provided by operating activities, principal payments on loans, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $66 million and repurchase lines of $100 million with major banks.  As of September 30, 2012 the Company has additional borrowing capacity of $261.3 million with the Federal Home Loan Bank and $290.2 million with the Federal Reserve Bank.  Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.

At September 30, 2012, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities available-for-sale of approximately $231.0 million, which represents 12.3% of total assets.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. The evaluation was based, in part, upon reports and affidavits provided by a number of executives. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls over financial reporting subsequent to the date the Company completed its evaluation.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries.  Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.

There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party.

ITEM 1A. Risk Factors

See “Item 1A. Risk Factors” in the Company’s 2011 Annual Report on Form 10-K. In management’s opinion, there have been no material changes in risk factors since the filing of the 2011 Form 10-K.

55

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

The following table indicates the number of shares repurchased by the Company during the third quarter of 2012.

Period	Number of Shares		Average Price per Share		Number of Shares Purchased as Part of a Publicly Announced Plan or Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
July 2012		1,005	$	376		-	$	15,836,050
August 2012		1,057		375		1,057		15,439,675
September 2012(1)		-		-		-		20,000,000
Total		2,062	$	375		1,057	$	20,000,000

(1) On September 11, 2012, the Board of Directors approved increasing the funds available for the Company’s common stock repurchase program to $20 million over the three-year period ending September 30, 2015.

The above shares that were repurchased in July 2012 were not repurchased under the Stock Repurchase Program. They were purchased on the open market for the purpose of investing contributions previously made to the Equity Component of the Executive Retirement Plan. See Note 16 located in “Item 8. Financial Statements and Supplementary Data” in the Company’s 2011 Annual Report on Form 10-K for further information on the Executive Retirement Plan.

The common stock of Farmers & Merchants Bancorp is not widely held nor listed on any exchange. However, trades may be reported on the OTC Bulletin Board under the symbol “FMCB.OB”. Additionally, management is aware that there are private transactions in the Company’s common stock.

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Mine Safety Disclosures

Not applicable

ITEM 5. Other Information

None

ITEM 6. Exhibits

See “Index to Exhibits”

56

SIGNATURES

Pursuant to the requirement 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.

	FARMERS & MERCHANTS BANCORP
Date:  November 8, 2012	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Chairman, President
	& Chief Executive Officer
	(Principal Executive Officer)
Date:  November 8, 2012	/s/ Stephen W. Haley
	Stephen W. Haley
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial & Accounting Officer)

Index to Exhibits

Exhibit No.		Description
	31(a)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31(b)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Schema Document
	101.CAL	XBRL Calculation Linkbase Document
	101.LAB	XBRL Label Linkbase Document
	101.PRE	XBRL Presentation Linkbase Document
	101.DEF	XBRL Definition Linkbase Document

57

EX-31.A

Exhibit 31(a)

Certification Pursuant to Section 302

Of the Sarbanes-Oxley Act of 2002

For the Chief Executive Officer

I, Kent A. Steinwert, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures  and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 8, 2012	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Chairman, President & Chief Executive Officer

EX-31.B

Exhibit 31(b)

Certification Pursuant to Section 302

Of the Sarbanes-Oxley Act of 2002

For the Chief Financial Officer

I, Stephen W. Haley, certify that:

1. I have reviewed this quarterly  report on Form 10-Q of Farmers & Merchants Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures  and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 8, 2012	/s/ Stephen W. Haley
	Stephen W. Haley
	Executive Vice President & Chief Financial Officer

EX-32

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Farmers & Merchants Bancorp (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Kent A. Steinwert, Chairman, President and Chief Executive Officer, and Stephen W. Haley, Executive Vice President and Chief Financial Officer of the Company, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. $ 1350), that:

1. the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. $ 78m or 78o(d)); and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 8, 2012

/s/ Kent A. Steinwert

Kent A. Steinwert

Chairman, President

& Chief Executive Officer

/s/ Stephen W. Haley

Stephen W. Haley

Executive Vice President & Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Allowance for Loan Losses, Impaired Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
With no related allowance recorded [Abstract]
Recorded Investment	$ 6,349	$ 3,545	$ 6,349	$ 3,545	$ 4,648
Unpaid Principal Balance	6,451	3,767	6,451	3,767	4,913
Average Recorded Investment	4,826	3,657	4,183	3,310	3,645
Interest Income Recognized	19	4	51	10	25
With an allowance recorded [Abstract]
Recorded Investment	982	5,294	982	5,294	4,334
Unpaid Principal Balance	2,033	5,713	2,033	5,713	5,056
Related Allowance	962	1,742	962	1,742	1,636
Average Recorded Investment	1,012	6,678	1,655	5,081	4,896
Interest Income Recognized	3	47	5	73	116
Recorded Investment, Total	7,331	8,839	7,331	8,839	8,982
Unpaid Principal Balance, Total	8,484	9,480	8,484	9,480	9,969
Related Allowance, Total	962	1,742	962	1,742	1,636
Average Recorded Investment, Total	5,838	10,335	5,838	8,391	8,541
Interest Income Recognized, Total	22	51	56	83	141
Commercial Real Estate [Member]
With no related allowance recorded [Abstract]
Recorded Investment	295	816	295	816	1,555
Unpaid Principal Balance	295	811	295	811	1,547
Average Recorded Investment	297	530	789	453	729
Interest Income Recognized	6	0	15	0	0
With an allowance recorded [Abstract]
Recorded Investment	0	3,033	0	3,033	3,017
Unpaid Principal Balance	0	3,030	0	3,030	3,015
Related Allowance	0	702	0	702	686
Average Recorded Investment	0	3,041	503	2,035	2,281
Interest Income Recognized	0	44	0	46	89
Related Allowance, Total	0	702	0	702	686
Agricultural Real Estate [Member]
With no related allowance recorded [Abstract]
Recorded Investment	2,558	935	2,558	935	955
Unpaid Principal Balance	2,551	974	2,551	974	974
Average Recorded Investment	2,036	1,717	1,402	1,470	1,341
Interest Income Recognized	0	0	0	0	0
With an allowance recorded [Abstract]
Recorded Investment		463		463	0
Unpaid Principal Balance		823		823	0
Related Allowance		46		46	0
Average Recorded Investment		645		705	529
Interest Income Recognized		0		0	0
Related Allowance, Total		46		46	0
Residential 1st Mortgages [Member]
With no related allowance recorded [Abstract]
Recorded Investment	494	1,278	494	1,278	1,219
Unpaid Principal Balance	521	1,469	521	1,469	1,272
Average Recorded Investment	438	861	512	842	936
Interest Income Recognized	0	1	0	3	13
With an allowance recorded [Abstract]
Recorded Investment	0		0
Unpaid Principal Balance	0		0
Related Allowance	0		0
Average Recorded Investment	54		72
Interest Income Recognized	0		0
Related Allowance, Total	0		0
Home Equity Lines and Loans [Member]
With no related allowance recorded [Abstract]
Recorded Investment	785	190	785	190	469
Unpaid Principal Balance	862	191	862	191	484
Average Recorded Investment	743	218	717	230	290
Interest Income Recognized	6	0	17	1	2
With an allowance recorded [Abstract]
Recorded Investment	269	73	269	73	113
Unpaid Principal Balance	314	82	314	82	119
Related Allowance	248	40	248	40	80
Average Recorded Investment	174	74	152	118	117
Interest Income Recognized	1	1	3	2	2
Related Allowance, Total	248	40	248	40	80
Agricultural [Member]
With no related allowance recorded [Abstract]
Recorded Investment	2,106	140	2,106	140	262
Unpaid Principal Balance	2,111	140	2,111	140	372
Average Recorded Investment	1,197	143	594	111	149
Interest Income Recognized	5	3	15	6	9
With an allowance recorded [Abstract]
Recorded Investment	547	1,533	547	1,533	1,076
Unpaid Principal Balance	1,551	1,548	1,551	1,548	1,791
Related Allowance	548	827	548	827	793
Average Recorded Investment	567	2,732	749	2,065	1,818
Interest Income Recognized	0	2	0	25	25
Related Allowance, Total	548	827	548	827	793
Commercial [Member]
With no related allowance recorded [Abstract]
Recorded Investment	111	186	111	186	188
Unpaid Principal Balance	111	182	111	182	264
Average Recorded Investment	115	188	169	197	195
Interest Income Recognized	2	0	4	0	1
With an allowance recorded [Abstract]
Recorded Investment	146	168	146	168	104
Unpaid Principal Balance	146	206	146	206	107
Related Allowance	146	103	146	103	54
Average Recorded Investment	196	155	157	125	120
Interest Income Recognized	2	0	2	0	0
Related Allowance, Total	146	103	146	103	54
Consumer & Other [Member]
With no related allowance recorded [Abstract]
Recorded Investment		0		0	0
Unpaid Principal Balance		0		0	0
Average Recorded Investment		0		7	5
Interest Income Recognized		0		0	0
With an allowance recorded [Abstract]
Recorded Investment	20	24	20	24	24
Unpaid Principal Balance	22	24	22	24	24
Related Allowance	20	24	20	24	23
Average Recorded Investment	21	31	22	33	31
Interest Income Recognized	0	0	0	0	0
Related Allowance, Total	$ 20	$ 24	$ 20	$ 24	$ 23

XML

Investment Securities

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Investment Securities

2. Investment Securities

Carrying Values, Fair Values and Unrealized Gains and Losses

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows

(in thousands):

	Amortized		Gross Unrealized				Fair/Book
September 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	46,655	$	316	$	-	$	46,971
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities (1)		374,582		15,230		-		389,812
Corporate Bonds		14,641		223		-		14,864
Other		5,826		-		-		5,826
Total	$	447,408	$	15,769	$	-	$	463,177
	Amortized		Gross Unrealized				Fair/Book
December 31, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	82,195	$	413	$	13	$	82,595
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities (1)		383,380		7,792		139		391,033
Other		410		-		-		410
Total	$	471,767	$	8,205	$	152	$	479,820
	Amortized		Gross Unrealized				Fair/Book
September 30, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	162,115	$	635	$	-	$	162,750
Obligations of States and Political Subdivisions		5,813		-		-		5,813
Mortgage Backed Securities (1)		243,121		8,787		22		251,886
Other		360		-		-		360
Total	$	411,409	$	9,422	$	22	$	420,809

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

	Book		Gross Unrealized				Fair
September 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	66,098	$	2,623	$	-	$	68,721
Mortgage Backed Securities (1)		640		20		-		660
Other		2,222		-		-		2,222
Total	$	68,960	$	2,643	$	-	$	71,603
	Book		Gross Unrealized				Fair
December 31, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	59,640	$	2,736	$	-	$	62,376
Mortgage Backed Securities (1)		1,205		46		-		1,251
Other		2,247		-		-		2,247
Total	$	63,092	$	2,782	$	-	$	65,874
	Book		Gross Unrealized				Fair
September 30, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	60,130	$	2,437	$	-	$	62,567
Mortgage Backed Securities (1)		1,418		62		-		1,480
Other		2,255		-		-		2,255
Total	$	63,803	$	2,499	$	-	$	66,302

(1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized carrying amount of investment securities at September 30, 2012 by contractual maturity are shown in the following tables (in thousands):

			After 1		After 5				Total
Securities Available-for-Sale	Within		but		but		Over		Fair
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Government Agency & Government-Sponsored Entities	$	10,006	$	35,751	$	1,214	$	-	$	46,971
Obligations of States and Political Subdivisions		-		-		219		5,485		5,704
Mortgage Backed Securities		-		-		119,019		270,793		389,812
Corporate Bonds		608		13,411		845		-		14,864
Other		5,826		-		-		-		5,826
Total	$	16,440	$	49,162	$	121,297	$	276,278	$	463,177
			After 1		After 5				Total
Securities Held-to-Maturity	Within		but		but		Over		Book
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Obligations of States and Political Subdivisions	$	1,540	$	9,842	$	39,352	$	15,364	$	66,098
Mortgage Backed Securities		-		640		-		-		640
Other		-		5		2,217		-		2,222
Total	$	1,540	$	10,487	$	41,569	$	15,364	$	68,960

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following tables show those investments with gross unrealized losses and their fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2011	Value		Loss		Value		Loss		Value		Loss
Government Agency & Government-Sponsored Entities	$	4,987	$	13	$	-	$	-	$	4,987	$	13
Mortgage Backed Securities		85,090		139		-		-		85,090		139
Total	$	90,077	$	152	$	-	$	-	$	90,077	$	152
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2011	Value		Loss		Value		Loss		Value		Loss
Mortgage Backed Securities	$	10,130	$	22	$	-	$	-	$	10,130	$	22
Total	$	10,130	$	22	$	-	$	-	$	10,130	$	22

As of September 30, 2012, the Company held 360 investment securities and no securities were in an unrealized loss position. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

The following information describes the Company's assumptions and conclusions regarding other-than-temporary impairment status:

Securities of U.S. Government Agency and Government Sponsored Entities - The unrealized losses on the Company's investments in securities of government agency and government sponsored entities were $0, $13,000, and $0 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. Management believes that any unrealized losses were caused by interest rate fluctuations. Repayment of these investments is guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2011.

Mortgage Backed Securities - The unrealized losses on the Company's investments in mortgage backed securities were $0, $139,000, and $22,000 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The unrealized losses on the Company's investment in mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2011 and September 30, 2011.

Obligations of States and Political Subdivisions - The continuing financial problems being experienced by certain municipalities, along with the financial stresses exhibited by some of the large monoline bond insurers have increased the overall risk associated with bank-qualified municipal bonds. As of September 30, 2012, over ninety-three percent of the Company's bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are "investment grade." The Company monitors the status of that portion of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

There was no unrealized loss on the Company's investment in obligations of states and political subdivisions at September 30, 2012, December 31, 2011, and September 30, 2011, respectively.

Corporate Bonds - There was no unrealized loss on the Company's investments in corporate bonds at September 30, 2012.

Sales/Calls of Securities

Proceeds from sales /calls of securities for the periods shown were as follows:

(in thousands)	Proceeds		Gains		Losses
Nine Months Ended September 30, 2012	$	44,296	$	149	$	-
Nine Months Ended September 30, 2011		55,000		-		-

Pledged Securities

As of September 30, 2012, securities carried at $307.2 million were pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law. This amount at December 31, 2011 and September 30, 2011, was $373.2 million and $382.9 million, respectively.

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Dividends and Earnings Per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Dividends and Basic Earnings Per Common Share [Abstract]
Cash dividends (in dollars per share)			$ 5.90	$ 5.65
Percentage increase in cash dividend from prior period (in hundredths)			4.40%
Basic earnings per common share [Abstract]
Net Income	$ 6,332	$ 6,267	$ 17,684	$ 16,548
Average Number of Common Shares Outstanding (in shares)	778,487	779,424	779,906	779,424
Basic Earnings Per Common Share Amount (in dollars per share)	$ 8.13	$ 8.04	$ 22.70	$ 21.23

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Investment Securities Available-for-Sale: [Abstract]
Total Investment Securities Available-for-Sale	$ 463,177	$ 479,820	$ 420,809
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets: [Abstract]
Cash and Cash Equivalents	33,464
Investment Securities Available-for-Sale: [Abstract]
Government Agency & Government-Sponsored Entities	10,627
Obligations of States and Political Subdivisions	0
Mortgage Backed Securities	0
Corporate Bonds	0
Other	5,516
Total Investment Securities Available-for-Sale	16,143
Investment Securities Held-to-Maturity: [Abstract]
Obligations of States and Political Subdivisions	0
Mortgage Backed Securities	0
Other	0
Total Investment Securities Held-to-Maturity	0
Loans, Net of Deferred Loan Fees & Allowance: [Abstract]
Commercial Real Estate	0
Agricultural Real Estate	0
Real Estate Construction	0
Residential 1st Mortgages	0
Home Equity Lines and Loans	0
Agricultural	0
Commercial	0
Consumer & Other	0
Unallocated Allowance	0
Total Loans, Net of Deferred Loan Fees & Allowance	0
Accrued Interest Receivable	0
Deposits:
Demand	369,635
Interest Bearing Transaction	238,223
Savings and Money Market	540,690
Time	0
Total Deposits	1,148,548
FHLB Advances & Securities Sold Under Agreement to Repurchase	0
Subordinated Debentures	0
Accrued Interest Payable	0
Other Observable Inputs (Level 2) [Member]
Assets: [Abstract]
Cash and Cash Equivalents	0
Investment Securities Available-for-Sale: [Abstract]
Government Agency & Government-Sponsored Entities	36,344
Obligations of States and Political Subdivisions	0
Mortgage Backed Securities	389,812
Corporate Bonds	14,864
Other	310
Total Investment Securities Available-for-Sale	441,330
Investment Securities Held-to-Maturity: [Abstract]
Obligations of States and Political Subdivisions	60,983
Mortgage Backed Securities	660
Other	2,222
Total Investment Securities Held-to-Maturity	63,865
Loans, Net of Deferred Loan Fees & Allowance: [Abstract]
Commercial Real Estate	0
Agricultural Real Estate	0
Real Estate Construction	0
Residential 1st Mortgages	0
Home Equity Lines and Loans	0
Agricultural	0
Commercial	0
Consumer & Other	0
Unallocated Allowance	0
Total Loans, Net of Deferred Loan Fees & Allowance	0
Accrued Interest Receivable	0
Deposits:
Demand	0
Interest Bearing Transaction	0
Savings and Money Market	0
Time	483,950
Total Deposits	483,950
FHLB Advances & Securities Sold Under Agreement to Repurchase	547
Subordinated Debentures	5,478
Accrued Interest Payable	526
Significant Unobservable Inputs (Level 3) [Member]
Assets: [Abstract]
Cash and Cash Equivalents	0
Investment Securities Available-for-Sale: [Abstract]
Government Agency & Government-Sponsored Entities	0
Obligations of States and Political Subdivisions	5,704
Mortgage Backed Securities	0
Corporate Bonds	0
Other	0
Total Investment Securities Available-for-Sale	5,704
Investment Securities Held-to-Maturity: [Abstract]
Obligations of States and Political Subdivisions	7,738
Mortgage Backed Securities	0
Other	0
Total Investment Securities Held-to-Maturity	7,738
Loans, Net of Deferred Loan Fees & Allowance: [Abstract]
Commercial Real Estate	340,570
Agricultural Real Estate	298,168
Real Estate Construction	31,236
Residential 1st Mortgages	141,334
Home Equity Lines and Loans	43,243
Agricultural	184,647
Commercial	157,440
Consumer & Other	5,454
Unallocated Allowance	(628)
Total Loans, Net of Deferred Loan Fees & Allowance	1,201,464
Accrued Interest Receivable	8,037
Deposits:
Demand	0
Interest Bearing Transaction	0
Savings and Money Market	0
Time	0
Total Deposits	0
FHLB Advances & Securities Sold Under Agreement to Repurchase	0
Subordinated Debentures	0
Accrued Interest Payable	0
Carrying Amount [Member]
Assets: [Abstract]
Cash and Cash Equivalents	33,464	101,660	112,611
Investment Securities Available-for-Sale: [Abstract]
Government Agency & Government-Sponsored Entities	46,971
Obligations of States and Political Subdivisions	5,704
Mortgage Backed Securities	389,812
Corporate Bonds	14,864
Other	5,826
Total Investment Securities Available-for-Sale	463,177	479,820	420,809
Investment Securities Held-to-Maturity: [Abstract]
Obligations of States and Political Subdivisions	66,098
Mortgage Backed Securities	640
Other	2,222
Total Investment Securities Held-to-Maturity	68,960	63,092	63,803
FHLB Stock	7,368	7,035	7,035
Loans, Net of Deferred Loan Fees & Allowance: [Abstract]
Commercial Real Estate	331,331
Agricultural Real Estate	290,202
Real Estate Construction	30,840
Residential 1st Mortgages	135,922
Home Equity Lines and Loans	40,475
Agricultural	184,794
Commercial	158,117
Consumer & Other	5,370
Unallocated Allowance	(628)
Total Loans, Net of Deferred Loan Fees & Allowance	1,176,423	1,130,061	1,144,542
Accrued Interest Receivable	8,037	6,368	7,454
Deposits:
Demand	369,635	389,639	359,649
Interest Bearing Transaction	238,223	1,236,558	1,229,639
Savings and Money Market	540,690
Time	482,957
Total Deposits	1,631,505
FHLB Advances & Securities Sold Under Agreement to Repurchase	482	60,530	60,546
Subordinated Debentures	10,310	10,310	10,310
Accrued Interest Payable	526	911	907
Estimated Fair Value [Member]
Assets: [Abstract]
Cash and Cash Equivalents	33,464	101,660	112,611
Investment Securities Available-for-Sale: [Abstract]
Government Agency & Government-Sponsored Entities	46,971
Obligations of States and Political Subdivisions	5,704
Mortgage Backed Securities	389,812
Corporate Bonds	14,864
Other	5,826
Total Investment Securities Available-for-Sale	463,177	479,820	420,809
Investment Securities Held-to-Maturity: [Abstract]
Obligations of States and Political Subdivisions	68,721
Mortgage Backed Securities	660
Other	2,222
Total Investment Securities Held-to-Maturity	71,603	65,874	66,302
Loans, Net of Deferred Loan Fees & Allowance: [Abstract]
Commercial Real Estate	340,570
Agricultural Real Estate	298,168
Real Estate Construction	31,236
Residential 1st Mortgages	141,334
Home Equity Lines and Loans	43,243
Agricultural	184,647
Commercial	157,440
Consumer & Other	5,454
Unallocated Allowance	(628)
Total Loans, Net of Deferred Loan Fees & Allowance	1,201,464	1,162,261	1,183,033
Accrued Interest Receivable	8,037	6,368	7,454
Deposits:
Demand	369,635	389,639	359,649
Interest Bearing Transaction	238,223	1,237,849	1,231,089
Savings and Money Market	540,690
Time	483,950
Total Deposits	1,632,498
FHLB Advances & Securities Sold Under Agreement to Repurchase	547	63,000	63,626
Subordinated Debentures	5,478	5,953	5,751
Accrued Interest Payable	$ 526	$ 911	$ 907

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Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Significant Accounting Policies [Abstract]

Significant Accounting Policies

1. Significant Accounting Policies

Farmers & Merchants Bancorp (the "Company") was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the "Bank") which was established in 1916. The Bank's wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.

The Company's other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002 the Company completed a fictitious name filing in California to begin using the streamlined name "F & M Bank" as part of a larger effort to enhance the Company's image and build brand name recognition. In December 2003 the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America ("U.S. GAAP") and was formed for the sole purpose of issuing Trust Preferred Securities.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.

Basis of Presentation

The accompanying consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP for financial information.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and nine-month periods ended September 30, 2012 may not necessarily be indicative of future operating results.

The accompanying consolidated financial statements include the accounts of the Company and the Company's wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders' equity. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.

Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. Generally, these transactions are for one-day periods. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities

Investment securities are classified at the time of purchase as held-to-maturity if it is management's intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Securities are classified as available-for-sale if it is management's intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company's asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders' equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Loans

Loans are reported at the principal amount outstanding net of unearned discounts and deferred loan fees and costs. Interest income on loans is accrued daily on the outstanding balances using the simple interest method. Loan origination fees are deferred and recognized over the contractual life of the loan as an adjustment to the yield. Loans are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose a loan is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or is guaranteed by a financially capable party. When a loan is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans placed on non-accrual status are returned to accrual status when the loans are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans are either: (1) non-accrual loans; or (2) restructured loans that are still accruing interest. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.

A restructuring of a loan constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans for customers unless: (1) the existing loan is brought current as to principal and interest payments; and (2) the restructured loan can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan amounts. After restructure a determination is made whether the loan will be kept on accrual status based upon the underwriting of the restructured credit.

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable incurred credit losses inherent in the Company's loan portfolio as of the balance sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.

The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; and (8) consumer and other. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. A credit grade is established at inception for smaller balance loans, such as consumer and residential real estate, and then updated only when the loan becomes contractually delinquent or when the borrower requests a modification. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

Special Mention – A special mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans classified as loss are considered uncollectible. Once a loan becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for loan losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Real Estate Construction – Real Estate Construction loans including land loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial Real Estate – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Commercial– Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – Loans secured by crop production, livestock and related real estate are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Residential 1st Mortgages and Home Equity Lines and Loans– The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments, although this is not always true as evidenced over the past several years. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other– A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the FRB, DFI and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Allowance for Credit Losses on Off Balance Sheet Credit Exposures

The Company also maintains a separate allowance for off balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off balance sheet commitments is included in Interest Payable and Other Liabilities on the Company's Consolidated Balance Sheet.

Premises and Equipment

Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate

Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for loan losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest income or expense as incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount, combined with the current taxes payable or refundable, results in the income tax expense for the current year.

The Company follows the standards set forth in the "Income Taxes" topic of the FASB Accounting Standards Codification ("ASC"), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.

Dividends and Basic Earnings Per Common Share

The Company's common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted earnings per common share. See Note 6.

Segment Reporting

The "Segment Reporting" topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.

Derivative Instruments and Hedging Activities

The "Derivatives and Hedging" topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company's exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the period ended September 30, 2012, December 31, 2011 or September 30, 2011.

Comprehensive Income

The "Comprehensive Income" topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

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Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Cash and Cash Equivalents:
Cash and Due From Banks	$ 29,863	$ 45,112	$ 37,829
Interest Bearing Deposits with Banks	3,601	56,548	74,782
Total Cash and Cash Equivalents	33,464	101,660	112,611
Investment Securities:
Available-for-Sale	463,177	479,820	420,809
Held-to-Maturity	68,960	63,092	63,803
Total Investment Securities	532,137	542,912	484,612
Loans	1,210,027	1,163,078	1,177,505
Less: Allowance for Loan Losses	33,604	33,017	32,963
Loans, Net	1,176,423	1,130,061	1,144,542
Premises and Equipment, Net	22,945	24,058	24,260
Bank Owned Life Insurance	48,799	47,418	46,959
Interest Receivable and Other Assets	70,633	73,575	67,239
Total Assets	1,884,401	1,919,684	1,880,223
Deposits:
Demand	369,635	389,639	359,649
Interest Bearing Transaction	238,223	220,736	210,730
Savings and Money Market	540,690	498,011	497,599
Time	482,957	517,811	521,310
Total Deposits	1,631,505	1,626,197	1,589,288
Securities Sold Under Agreement to Repurchase	0	60,000	60,000
Federal Home Loan Bank Advances	482	530	546
Subordinated Debentures	10,310	10,310	10,310
Interest Payable and Other Liabilities	35,773	33,301	30,859
Total Liabilities	1,678,070	1,730,338	1,691,003
Shareholders' Equity
Preferred Stock	0	0	0
Common Stock	8	8	8
Additional Paid-In Capital	75,014	75,590	75,590
Retained Earnings	122,170	109,081	108,174
Accumulated Other Comprehensive Income, Net	9,139	4,667	5,448
Total Shareholders' Equity	206,331	189,346	189,220
Total Liabilities & Shareholders' Equity	$ 1,884,401	$ 1,919,684	$ 1,880,223

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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash Dividends Declared on Common Stock (in dollars per share)	$ 5.90	$ 5.65

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Allowance for Loan Losses, Allocation of The Allowance For Loan Losses by Portfolio Segment and By Impairment Methodology (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	$ 33,098	$ 32,942	$ 33,017	$ 32,261	$ 32,261
Charge-Offs	(136)	(903)	(779)	(4,731)	(6,146)
Recoveries	42	24	266	83	127
Provision	600	900	1,100	5,350	6,775
Ending Balance	33,604	32,963	33,604	32,963	33,017
Ending Balance Individually Evaluated for Impairment	962	1,742	962	1,742	1,636
Ending Balance Collectively Evaluated for Impairment	32,642	31,221	32,642	31,221	31,381
Loans:
Ending Balance	1,210,027	1,177,505	1,210,027	1,177,505	1,163,078
Ending Balance Individually Evaluated for Impairment	7,316	8,833	7,316	8,833	8,938
Ending Balance Collectively Evaluated for Impairment	1,202,711	1,168,672	1,202,711	1,168,672	1,154,140
Commercial Real Estate [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	4,377	5,726	5,823	7,631	7,631
Charge-Offs	0	(12)	0	(25)	(25)
Recoveries	0	0	0	0	0
Provision	(44)	102	(1,490)	(1,790)	(1,783)
Ending Balance	4,333	5,816	4,333	5,816	5,823
Ending Balance Individually Evaluated for Impairment	0	702	0	702	686
Ending Balance Collectively Evaluated for Impairment	4,333	5,114	4,333	5,114	5,137
Loans:
Ending Balance	335,664	300,918	335,664	300,918	305,704
Ending Balance Individually Evaluated for Impairment	295	3,841	295	3,841	4,562
Ending Balance Collectively Evaluated for Impairment	335,369	297,077	335,369	297,077	301,142
Agricultural Real Estate [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	2,633	2,813	2,583	1,539	1,539
Charge-Offs	0	(384)	0	(384)	(384)
Recoveries	0	0	89	0	18
Provision	1,029	(41)	990	1,233	1,410
Ending Balance	3,662	2,388	3,662	2,388	2,583
Ending Balance Individually Evaluated for Impairment	0	46	0	46	0
Ending Balance Collectively Evaluated for Impairment	3,662	2,342	3,662	2,342	2,583
Loans:
Ending Balance	293,864	284,149	293,864	284,149	280,139
Ending Balance Individually Evaluated for Impairment	2,551	1,413	2,551	1,413	954
Ending Balance Collectively Evaluated for Impairment	291,313	282,736	291,313	282,736	279,185
Real Estate Construction [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	1,900	2,362	1,933	2,160	2,160
Charge-Offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	(39)	(6)	(72)	196	(227)
Ending Balance	1,861	2,356	1,861	2,356	1,933
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	1,861	2,356	1,861	2,356	1,933
Loans:
Ending Balance	32,701	28,979	32,701	28,979	29,607
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	32,701	28,979	32,701	28,979	29,607
Residential 1st Mortgages [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	1,451	1,198	1,251	1,164	1,164
Charge-Offs	(80)	(58)	(81)	(398)	(449)
Recoveries	16	0	16	3	4
Provision	155	(30)	356	341	532
Ending Balance	1,542	1,110	1,542	1,110	1,251
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	1,542	1,110	1,542	1,110	1,251
Loans:
Ending Balance	137,464	104,130	137,464	104,130	107,421
Ending Balance Individually Evaluated for Impairment	493	1,273	493	1,273	1,194
Ending Balance Collectively Evaluated for Impairment	136,971	102,857	136,971	102,857	106,227
Home Equity Lines and Loans [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	3,514	3,450	3,746	3,724	3,724
Charge-Offs	(22)	(239)	(138)	(701)	(751)
Recoveries	2	5	12	11	13
Provision	21	315	(105)	497	760
Ending Balance	3,515	3,531	3,515	3,531	3,746
Ending Balance Individually Evaluated for Impairment	248	40	248	40	80
Ending Balance Collectively Evaluated for Impairment	3,267	3,491	3,267	3,491	3,666
Loans:
Ending Balance	43,990	52,451	43,990	52,451	50,956
Ending Balance Individually Evaluated for Impairment	1,048	262	1,048	262	576
Ending Balance Collectively Evaluated for Impairment	42,942	52,189	42,942	52,189	50,380
Agricultural [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	7,834	6,284	8,127	6,733	6,733
Charge-Offs	0	0	(240)	(2,750)	(3,559)
Recoveries	0	0	61	10	10
Provision	425	355	311	2,646	4,943
Ending Balance	8,259	6,639	8,259	6,639	8,127
Ending Balance Individually Evaluated for Impairment	548	827	548	827	793
Ending Balance Collectively Evaluated for Impairment	7,711	5,812	7,711	5,812	7,334
Loans:
Ending Balance	193,053	219,670	193,053	219,670	217,227
Ending Balance Individually Evaluated for Impairment	2,652	1,671	2,652	1,671	1,337
Ending Balance Collectively Evaluated for Impairment	190,401	217,999	190,401	217,999	215,890
Commercial [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	9,538	10,794	8,733	9,084	9,084
Charge-Offs	0	(148)	(198)	(324)	(788)
Recoveries	9	5	41	14	21
Provision	113	(1,139)	1,084	738	416
Ending Balance	9,660	9,512	9,660	9,512	8,733
Ending Balance Individually Evaluated for Impairment	146	103	146	103	54
Ending Balance Collectively Evaluated for Impairment	9,514	9,409	9,514	9,409	8,679
Loans:
Ending Balance	167,777	180,329	167,777	180,329	165,089
Ending Balance Individually Evaluated for Impairment	257	349	257	349	292
Ending Balance Collectively Evaluated for Impairment	167,520	179,980	167,520	179,980	164,797
Consumer & Other [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	140	252	207	216	216
Charge-Offs	(34)	(62)	(122)	(149)	(190)
Recoveries	15	14	47	45	61
Provision	23	(12)	12	80	120
Ending Balance	144	192	144	192	207
Ending Balance Individually Evaluated for Impairment	20	24	20	24	23
Ending Balance Collectively Evaluated for Impairment	124	168	124	168	184
Loans:
Ending Balance	5,514	6,879	5,514	6,879	6,935
Ending Balance Individually Evaluated for Impairment	20	24	20	24	23
Ending Balance Collectively Evaluated for Impairment	5,494	6,855	5,494	6,855	6,912
Unallocated [Member]
Year To Date Allowance for Loan Losses [Abstract]
Beginning Balance	1,711	63	614	10	10
Charge-Offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	(1,083)	1,356	14	1,409	604
Ending Balance	628	1,419	628	1,419	614
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	628	1,419	628	1,419	614
Loans:
Ending Balance	0	0	0	0	0
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	$ 0	$ 0	$ 0	$ 0	$ 0

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Allowance for Loan Losses, Aging Analysis of Loan Portfolio by the Time Past Due (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	$ 157	$ 1,238	$ 4,228
90 Days or More and Still Accruing	0	0	0
Nonaccrual	5,752	4,228	4,664
Total Past Due	5,909	5,466	8,892
Current	1,204,118	1,157,612	1,168,613
Total Loans	1,210,027	1,163,078	1,177,505
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	0	0
90 Days or More and Still Accruing	0	0	0
Nonaccrual	0	1,354	811
Total Past Due	0	1,354	811
Current	335,664	304,350	300,107
Total Loans	335,664	305,704	300,918
Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	0	0
90 Days or More and Still Accruing	0	0	0
Nonaccrual	2,551	954	1,413
Total Past Due	2,551	954	1,413
Current	291,313	279,185	282,736
Total Loans	293,864	280,139	284,149
Real Estate Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	0	0
90 Days or More and Still Accruing	0	0	0
Nonaccrual	0	0	0
Total Past Due	0	0	0
Current	32,701	29,607	28,979
Total Loans	32,701	29,607	28,979
Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	108	0
90 Days or More and Still Accruing	0	0	0
Nonaccrual	279	284	347
Total Past Due	279	392	347
Current	137,185	107,029	103,783
Total Loans	137,464	107,421	104,130
Home Equity Lines and Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	101	566	359
90 Days or More and Still Accruing	0	0	0
Nonaccrual	528	194	190
Total Past Due	629	760	549
Current	43,361	50,196	51,902
Total Loans	43,990	50,956	52,451
Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	284	3,854
90 Days or More and Still Accruing	0	0	0
Nonaccrual	2,374	1,202	1,531
Total Past Due	2,374	1,486	5,385
Current	190,679	215,741	214,285
Total Loans	193,053	217,227	219,670
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	179	0
90 Days or More and Still Accruing	0	0	0
Nonaccrual	0	217	348
Total Past Due	0	396	348
Current	167,777	164,693	179,981
Total Loans	167,777	165,089	180,329
Consumer & Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	56	101	15
90 Days or More and Still Accruing	0	0	0
Nonaccrual	20	23	24
Total Past Due	76	124	39
Current	5,438	6,811	6,840
Total Loans	$ 5,514	$ 6,935	$ 6,879

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Operating Activities:
Net Income	$ 17,684	$ 16,548
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Loan Losses	1,100	5,350
Depreciation and Amortization	1,293	1,358
Net Amortization of Investment Security Discounts & Premiums	2,852	624
Net Gain on Investment Securities	(149)	0
Net Gain on Sale of Property & Equipment	0	(5)
Net Change in Operating Assets & Liabilities:
Net (Increase) Decrease in Interest Receivable and Other Assets	(1,418)	2,325
Net Increase in Interest Payable and Other Liabilities	2,472	13
Net Cash Provided by Operating Activities	23,834	26,213
Investing Activities:
Purchase of Investment Securities Available-for-Sale	(122,966)	(136,264)
Proceeds from Sold, Matured, or Called Securities Available-for-Sale	144,383	150,104
Purchase of Investment Securities Held-to-Maturity	(10,569)	(1,300)
Proceeds from Matured, or Called Securities Held-to-Maturity	4,675	2,412
Net Loans Paid, Originated or Acquired	(47,728)	(6,234)
Principal Collected on Loans Previously Charged Off	266	83
Additions to Premises and Equipment	(180)	(1,419)
Proceeds from Disposition of Property and Equipment	0	20
Net Cash (Used) Provided by Investing Activities	(32,119)	7,402
Financing Activities:
Net Increase in Deposits	5,308	22,785
Net Decrease in Securities Sold Under Agreement to Repurchase	(60,000)	0
Net Change in Other Borrowings	(48)	(45)
Stock Repurchases	(576)	0
Cash Dividends	(4,595)	(4,404)
Net Cash (Used) Provided by Financing Activities	(59,911)	18,336
(Decrease) Increase in Cash and Cash Equivalents	(68,196)	51,951
Cash and Cash Equivalents at Beginning of Period	101,660	60,660
Cash and Cash Equivalents at End of Period	$ 33,464	$ 112,611

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Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Interest Income
Interest and Fees on Loans	$ 16,505	$ 17,949	$ 49,283	$ 52,946
Interest on Deposits with Banks	8	28	76	67
Interest on Investment Securities:
Taxable	2,315	2,247	7,958	6,988
Tax-Exempt	671	637	1,961	1,926
Total Interest Income	19,499	20,861	59,278	61,927
Interest Expense
Deposits	935	1,337	2,967	4,279
Borrowed Funds	11	549	1,047	1,632
Subordinated Debentures	87	82	262	245
Total Interest Expense	1,033	1,968	4,276	6,156
Net Interest Income	18,466	18,893	55,002	55,771
Provision for Loan Losses	600	900	1,100	5,350
Net Interest Income After Provision for Loan Losses	17,866	17,993	53,902	50,421
Non-Interest Income
Service Charges on Deposit Accounts	1,248	1,356	3,662	4,096
Net Gain on Investment Securities	149	0	149	0
Increase in Cash Surrender Value of Life Insurance	500	466	1,412	1,376
Debit Card and ATM Fees	732	704	2,197	2,078
Gain (Loss) on Non-Qualified Deferred Compensation Plan Investments	762	(1,198)	1,381	(808)
Other	662	442	1,986	1,357
Total Non-Interest Income	4,053	1,770	10,787	8,099
Non-Interest Expense
Salaries & Employee Benefits	7,850	7,512	23,792	22,217
Gain (Loss) on Non-Qualified Deferred Compensation Plan Investments	762	(1,198)	1,381	(808)
Occupancy	656	674	1,925	1,920
Equipment	686	726	2,282	2,151
ORE Holding Costs	15	364	108	1,256
FDIC Insurance	243	236	728	1,226
Other	1,548	1,507	6,337	4,528
Total Non-Interest Expense	11,760	9,821	36,553	32,490
Income Before Income Taxes	10,159	9,942	28,136	26,030
Provision for Income Taxes	3,827	3,675	10,452	9,482
Net Income	$ 6,332	$ 6,267	$ 17,684	$ 16,548
Basic Earnings Per Common Share (in dollars per share)	$ 8.13	$ 8.04	$ 22.70	$ 21.23

XML

Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Information about the Company's assets and liabilities measured at fair value on a recurring basis

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

			Fair Value Measurements At September 30, 2012, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	46,971	$	10,627	$	36,344	$	-
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities		389,812		-		389,812		-
Corporate Bonds		14,864		-		14,864		-
Other		5,826		5,516		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	463,177	$	16,143	$	441,330	$	5,704
			Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	82,595	$	21,109	$	61,486	$	-
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities		391,033		-		391,033		-
Other		410		-		410		-
Total Assets Measured at Fair Value On a Recurring Basis	$	479,820	$	21,109	$	452,929	$	5,782
			Fair Value Measurements At September 30, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	162,750	$	-	$	162,750	$	-
Obligations of States and Political Subdivisions		5,813		-		5,813		-
Mortgage Backed Securities		251,886		-		251,886		-
Other		360		-		360		-
Total Assets Measured at Fair Value On a Recurring Basis	$	420,809	$	-	$	420,809	$	-

Changes in level 3 assets measured at fair value on a recurring basis

The following table presents changes in level 3 assets measured at fair value on a recurring basis.

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2012			2011		2012			2011
Balance at Beginning of Period	$	5,724		$	-	$	5,782		$	-
Total Realized and Unrealized Gains/(Losses) Included in Income		-			-		-			-
Total Unrealized Gains/(Losses) Included in Other Comprehensive Income		-			-		-			-
Purchase of Securities		-			-		-			-
Sales, Maturities, and Calls of Securities		(20	)		-		(78	)		-
Net Transfers In/(Out) of Level 3		-			-		-			-
Balance at End of Period	$	5,704		$	-	$	5,704		$	-

Information about the Company's assets and liabilities measured at fair value on a non-recurring basis

The following tables present information about the Company's other real estate and impaired loans, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans are carried at fair value. Impaired loans are only included in the following tables when their fair value is based upon a current appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.

			Fair Value Measurements At Sept 30, 2012, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Residential 1st Mortgage	$	200	$	-	$	-	$	200
Home Equity Lines and Loans		466		-		-		466
Total Impaired Loans		666		-		-		666
Other Real Estate
Real Estate Construction		2,553		-		-		2,553
Total Other Real Estate		2,553		-		-		2,553
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	3,219	$	-	$	-	$	3,219

The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance. ORE has been adjusted to estimated fair value, less estimated selling costs. At the time of foreclosure, foreclosed assets are recorded at the lower of the carrying amount of the loan or the estimated fair value less estimated selling costs. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically obtains updated valuations of the foreclosed assets and, if additional impairments have occurred, the impairment is recorded in non-interest expense on the Consolidated Statements of Income.

			Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,328	$	-	$	-	$	2,328
Residential 1st Mortgage		89		-		-		89
Home Equity Lines and Loans		166		-		-		166
Agricultural		409		-		-		409
Commercial		50		-		-		50
Total Impaired Loans		3,042		-		-		3,042
Other Real Estate								-
Real Estate Construction		2,553		-		-		2,553
Residential 1st Mortgage		371		-		-		371
Total Other Real Estate		2,924		-		-		2,924
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	5,966	$	-	$	-	$	5,966

The fair value of impaired loans with a specific reserve or a partial charge-off was $3.0 million, net of an allowance for loan losses of $1.6 million. The fair value of ORE was $2.9 million, net of a $4.1 million valuation allowance.

			Fair Value Measurements At Sept 30, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,329	$	-	$	2,329	$	-
Agricultural Real Estate		1,367		-		1,367		-
Residential 1st Mortgage		926		-		926		-
Home Equity Lines and Loans		33		-		33		-
Agricultural		704		-		-		704
Commercial		64		-		-		64
Total Impaired Loans		5,423		-		4,655		768
Other Real Estate								-
Commercial Real Estate		137		-		137		-
Real Estate Construction		3,045		-		3,045		-
Residential 1st Mortgage		331		-		331		-
Total Other Real Estate		3,513		-		3,513		-
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	8,936	$	-	$	8,168	$	768

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	FARMERS & MERCHANTS BANCORP
Entity Central Index Key	0001085913
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		777,882
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012

XML

Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value of Financial Instruments [Abstract]

Book value and estimated fair value of financial instruments

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

				Fair Value of Financial Instruments Using
September 30, 2012 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	33,464		$	33,464	$	-	$	-		$	33,464
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		46,971			10,627		36,344		-			46,971
Obligations of States and Political Subdivisions		5,704			-		-		5,704			5,704
Mortgage Backed Securities		389,812			-		389,812		-			389,812
Corporate Bonds		14,864			-		14,864		-			14,864
Other		5,826			5,516		310		-			5,826
Total Investment Securities Available-for-Sale		463,177			16,143		441,330		5,704			463,177
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		66,098			-		60,983		7,738			68,721
Mortgage Backed Securities		640			-		660		-			660
Other		2,222			-		2,222		-			2,222
Total Investment Securities Held-to-Maturity		68,960			-		63,865		7,738			71,603
FHLB Stock		7,368			N/A		N/A		N/A			N/A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		331,331			-		-		340,570			340,570
Agricultural Real Estate		290,202			-		-		298,168			298,168
Real Estate Construction		30,840			-		-		31,236			31,236
Residential 1st Mortgages		135,922			-		-		141,334			141,334
Home Equity Lines and Loans		40,475			-		-		43,243			43,243
Agricultural		184,794			-		-		184,647			184,647
Commercial		158,117			-		-		157,440			157,440
Consumer & Other		5,370			-		-		5,454			5,454
Unallocated Allowance		(628	)		-		-		(628	)		(628	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,176,423			-		-		1,201,464			1,201,464
Accrued Interest Receivable		8,037			-		-		8,037			8,037
Liabilities:
Deposits:
Demand		369,635			369,635		-		-			369,635
Interest Bearing Transaction		238,223			238,223		-		-			238,223
Savings and Money Market		540,690			540,690		-		-			540,690
Time		482,957			-		483,950		-			483,950
Total Deposits		1,631,505			1,148,548		483,950		-			1,632,498
FHLB Advances		482			-		547		-			547
Subordinated Debentures		10,310			-		5,478		-			5,478
Accrued Interest Payable		526			-		526		-			526

December 31, 2011	Carrying		Estimated
(in thousands)	Amount		Fair Value
Assets:
Cash and Cash Equivalents	$	101,660	$	101,660
Investment Securities Available-for-Sale		479,820		479,820
Investment Securities Held-to-Maturity		63,092		65,874
FHLB Stock		7,035		N/A
Loans, Net of Deferred Loan Fees & Allowance		1,130,061		1,162,261
Accrued Interest Receivable		6,368		6,368
Liabilities:
Deposits:
Demand		389,639		389,639
Interest-Bearing		1,236,558		1,237,849
FHLB Advances & Securities Sold Under Agreement to Repurchase		60,530		63,000
Subordinated Debentures		10,310		5,953
Accrued Interest Payable		911		911
September 30, 2011	Carrying		Estimated
(in thousands)	Amount		Fair Value
Assets:
Cash and Cash Equivalents	$	112,611	$	112,611
Investment Securities Available-for-Sale		420,809		420,809
Investment Securities Held-to-Maturity		63,803		66,302
FHLB Stock		7,035		N/A
Loans, Net of Deferred Loan Fees & Allowance		1,144,542		1,183,033
Accrued Interest Receivable		7,454		7,454
Liabilities:
Deposits:
Demand		359,649		359,649
Interest-Bearing		1,229,639		1,231,089
FHLB Advances & Securities Sold Under Agreement to Repurchase		60,546		63,626
Subordinated Debentures		10,310		5,751
Accrued Interest Payable		907		907

XML

Consolidated Statements of Comprehensive Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Comprehensive Income [Abstract]
Net Income	$ 6,332	$ 6,267	$ 17,684	$ 16,548
Other Comprehensive Income
Increase in Net Unrealized Gains on Available-for-Sale Securities	2,944	3,190	7,865	6,617
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income	(149)	0	(149)	0
Deferred Tax Expense	(1,175)	(1,340)	(3,244)	(2,782)
Change in Net Unrealized Gains on Available-for-Sale Securities, Net of Tax	1,620	1,850	4,472	3,835
Total Other Comprehensive Income	1,620	1,850	4,472	3,835
Comprehensive Income	$ 7,952	$ 8,117	$ 22,156	$ 20,383

XML

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

U.S. GAAP require disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.

The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:

				Fair Value of Financial Instruments Using
September 30, 2012 (in thousands)	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Estimated Fair Value
Assets:
Cash and Cash Equivalents	$	33,464		$	33,464	$	-	$	-		$	33,464
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		46,971			10,627		36,344		-			46,971
Obligations of States and Political Subdivisions		5,704			-		-		5,704			5,704
Mortgage Backed Securities		389,812			-		389,812		-			389,812
Corporate Bonds		14,864			-		14,864		-			14,864
Other		5,826			5,516		310		-			5,826
Total Investment Securities Available-for-Sale		463,177			16,143		441,330		5,704			463,177
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		66,098			-		60,983		7,738			68,721
Mortgage Backed Securities		640			-		660		-			660
Other		2,222			-		2,222		-			2,222
Total Investment Securities Held-to-Maturity		68,960			-		63,865		7,738			71,603
FHLB Stock		7,368			N/A		N/A		N/A			N/A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		331,331			-		-		340,570			340,570
Agricultural Real Estate		290,202			-		-		298,168			298,168
Real Estate Construction		30,840			-		-		31,236			31,236
Residential 1st Mortgages		135,922			-		-		141,334			141,334
Home Equity Lines and Loans		40,475			-		-		43,243			43,243
Agricultural		184,794			-		-		184,647			184,647
Commercial		158,117			-		-		157,440			157,440
Consumer & Other		5,370			-		-		5,454			5,454
Unallocated Allowance		(628	)		-		-		(628	)		(628	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,176,423			-		-		1,201,464			1,201,464
Accrued Interest Receivable		8,037			-		-		8,037			8,037
Liabilities:
Deposits:
Demand		369,635			369,635		-		-			369,635
Interest Bearing Transaction		238,223			238,223		-		-			238,223
Savings and Money Market		540,690			540,690		-		-			540,690
Time		482,957			-		483,950		-			483,950
Total Deposits		1,631,505			1,148,548		483,950		-			1,632,498
FHLB Advances		482			-		547		-			547
Subordinated Debentures		10,310			-		5,478		-			5,478
Accrued Interest Payable		526			-		526		-			526

December 31, 2011	Carrying		Estimated
(in thousands)	Amount		Fair Value
Assets:
Cash and Cash Equivalents	$	101,660	$	101,660
Investment Securities Available-for-Sale		479,820		479,820
Investment Securities Held-to-Maturity		63,092		65,874
FHLB Stock		7,035		N/A
Loans, Net of Deferred Loan Fees & Allowance		1,130,061		1,162,261
Accrued Interest Receivable		6,368		6,368
Liabilities:
Deposits:
Demand		389,639		389,639
Interest-Bearing		1,236,558		1,237,849
FHLB Advances & Securities Sold Under Agreement to Repurchase		60,530		63,000
Subordinated Debentures		10,310		5,953
Accrued Interest Payable		911		911
September 30, 2011	Carrying		Estimated
(in thousands)	Amount		Fair Value
Assets:
Cash and Cash Equivalents	$	112,611	$	112,611
Investment Securities Available-for-Sale		420,809		420,809
Investment Securities Held-to-Maturity		63,803		66,302
FHLB Stock		7,035		N/A
Loans, Net of Deferred Loan Fees & Allowance		1,144,542		1,183,033
Accrued Interest Receivable		7,454		7,454
Liabilities:
Deposits:
Demand		359,649		359,649
Interest-Bearing		1,229,639		1,231,089
FHLB Advances & Securities Sold Under Agreement to Repurchase		60,546		63,626
Subordinated Debentures		10,310		5,751
Accrued Interest Payable		907		907

Fair value estimates presented herein are based on pertinent information available to management as of September 30, 2012, December 31, 2011, and September 30, 2011. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.

Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.

Investment Securities - Fair values for investment securities consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Based on the available market information the classification level could be 1, 2, or 3.

Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans, Net of Deferred Loan Fees & Allowance - Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

FHLB Advances & Securities Sold Under Agreement to Repurchase - The fair value of federal funds purchased and other short-term borrowings is approximated by the book value resulting in a Level 2 classification. The fair value for Federal Home Loan Bank advances is determined using discounted future cash flows resulting in a Level 2 classification.

Subordinated Debentures - The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

4. Fair Value Measurements

The Company follows the "Fair Value Measurement and Disclosures" topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

The Company does not record all loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Once a loan is identified as individually impaired, management measures impairment in accordance with the "Receivable" topic of the FASB ASC. The fair value of impaired loans is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value which uses observable data, the Company records the impaired loan as nonrecurring Level 2. Otherwise, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate ("ORE") is reported at fair value on a non-recurring basis. When the fair value of the ORE is based on an observable market price or a current appraised value which uses observable data, the Company records the ORE as nonrecurring Level 2. Otherwise, the Company records the ORE as nonrecurring Level 3. Other real estate is reported in Interest Receivable and Other Assets on the Company's Consolidated Balance Sheets.

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.

			Fair Value Measurements At September 30, 2012, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	46,971	$	10,627	$	36,344	$	-
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities		389,812		-		389,812		-
Corporate Bonds		14,864		-		14,864		-
Other		5,826		5,516		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	463,177	$	16,143	$	441,330	$	5,704
			Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	82,595	$	21,109	$	61,486	$	-
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities		391,033		-		391,033		-
Other		410		-		410		-
Total Assets Measured at Fair Value On a Recurring Basis	$	479,820	$	21,109	$	452,929	$	5,782
			Fair Value Measurements At September 30, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:
Government Agency & Government-Sponsored Entities	$	162,750	$	-	$	162,750	$	-
Obligations of States and Political Subdivisions		5,813		-		5,813		-
Mortgage Backed Securities		251,886		-		251,886		-
Other		360		-		360		-
Total Assets Measured at Fair Value On a Recurring Basis	$	420,809	$	-	$	420,809	$	-

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and nine month periods ended September 30, 2012 and 2011, there were no transfers in or out of level 1, 2, or 3.

The following table presents changes in level 3 assets measured at fair value on a recurring basis.

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2012			2011		2012			2011
Balance at Beginning of Period	$	5,724		$	-	$	5,782		$	-
Total Realized and Unrealized Gains/(Losses) Included in Income		-			-		-			-
Total Unrealized Gains/(Losses) Included in Other Comprehensive Income		-			-		-			-
Purchase of Securities		-			-		-			-
Sales, Maturities, and Calls of Securities		(20	)		-		(78	)		-
Net Transfers In/(Out) of Level 3		-			-		-			-
Balance at End of Period	$	5,704		$	-	$	5,704		$	-

Available for sale investments securities categorized as Level 3 assets primarily consist of obligations of states and political subdivisions. These bonds were issued by local housing authorities and have no active market. These bonds are carried at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment.

The following tables present information about the Company's other real estate and impaired loans, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans are carried at fair value. Impaired loans are only included in the following tables when their fair value is based upon a current appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.

			Fair Value Measurements At Sept 30, 2012, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Residential 1st Mortgage	$	200	$	-	$	-	$	200
Home Equity Lines and Loans		466		-		-		466
Total Impaired Loans		666		-		-		666
Other Real Estate
Real Estate Construction		2,553		-		-		2,553
Total Other Real Estate		2,553		-		-		2,553
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	3,219	$	-	$	-	$	3,219

The fair value of impaired loans with a specific reserve or a partial charge-off was $666,000, net of an allowance for loan losses of $962,000.

The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance. ORE has been adjusted to estimated fair value, less estimated selling costs. At the time of foreclosure, foreclosed assets are recorded at the lower of the carrying amount of the loan or the estimated fair value less estimated selling costs. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically obtains updated valuations of the foreclosed assets and, if additional impairments have occurred, the impairment is recorded in non-interest expense on the Consolidated Statements of Income.

			Fair Value Measurements At December 31, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,328	$	-	$	-	$	2,328
Residential 1st Mortgage		89		-		-		89
Home Equity Lines and Loans		166		-		-		166
Agricultural		409		-		-		409
Commercial		50		-		-		50
Total Impaired Loans		3,042		-		-		3,042
Other Real Estate								-
Real Estate Construction		2,553		-		-		2,553
Residential 1st Mortgage		371		-		-		371
Total Other Real Estate		2,924		-		-		2,924
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	5,966	$	-	$	-	$	5,966

The fair value of impaired loans with a specific reserve or a partial charge-off was $3.0 million, net of an allowance for loan losses of $1.6 million. The fair value of ORE was $2.9 million, net of a $4.1 million valuation allowance.

			Fair Value Measurements At Sept 30, 2011, Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Significant Unobservable Inputs
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Impaired Loans
Commercial Real Estate	$	2,329	$	-	$	2,329	$	-
Agricultural Real Estate		1,367		-		1,367		-
Residential 1st Mortgage		926		-		926		-
Home Equity Lines and Loans		33		-		33		-
Agricultural		704		-		-		704
Commercial		64		-		-		64
Total Impaired Loans		5,423		-		4,655		768
Other Real Estate								-
Commercial Real Estate		137		-		137		-
Real Estate Construction		3,045		-		3,045		-
Residential 1st Mortgage		331		-		331		-
Total Other Real Estate		3,513		-		3,513		-
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	8,936	$	-	$	8,168	$	768

The fair value of impaired loans with a specific reserve or a partial charge-off was $5.4 million, net of an allowance for loan losses of $1.7 million. The fair value of ORE was $3.5 million, net of a valuation allowance of $3.6 million.

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Allowance for Loan Losses, Loan Portfolio Allocated by Management's Internal Credit Ratings (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 1,210,027	$ 1,163,078	$ 1,177,505
Loans outstanding rated doubtful or loss	0	0	0
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	335,664	305,704	300,918
Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	293,864	280,139	284,149
Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	32,701	29,607	28,979
Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	137,464	107,421	104,130
Home Equity Lines and Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	43,990	50,956	52,451
Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	193,053	217,227	219,670
Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	167,777	165,089	180,329
Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,514	6,935	6,879
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,142,846	1,069,406	1,075,164
Pass [Member] | Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	313,441	265,201	260,662
Pass [Member] | Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	273,823	254,181	259,428
Pass [Member] | Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	24,856	21,428	20,781
Pass [Member] | Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	135,473	104,609	101,230
Pass [Member] | Home Equity Lines and Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	41,975	49,631	51,559
Pass [Member] | Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	186,398	209,555	202,323
Pass [Member] | Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	161,685	158,273	172,702
Pass [Member] | Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,195	6,528	6,479
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	38,159	50,866	57,773
Special Mention [Member] | Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	15,910	15,186	15,482
Special Mention [Member] | Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	9,887	21,657	19,315
Special Mention [Member] | Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	3,217	3,217	3,217
Special Mention [Member] | Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,211	1,483	1,503
Special Mention [Member] | Home Equity Lines and Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0	0
Special Mention [Member] | Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	2,300	4,083	12,285
Special Mention [Member] | Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,634	5,240	5,971
Special Mention [Member] | Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0	0
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	29,022	42,806	44,568
Substandard [Member] | Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	6,313	25,317	24,774
Substandard [Member] | Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	10,154	4,301	5,406
Substandard [Member] | Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	4,628	4,962	4,981
Substandard [Member] | Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	780	1,329	1,397
Substandard [Member] | Home Equity Lines and Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	2,015	1,325	892
Substandard [Member] | Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	4,355	3,589	5,062
Substandard [Member] | Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	458	1,576	1,656
Substandard [Member] | Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 319	$ 407	$ 400

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Dividends and Earnings Per Common Share (Tables)

9 Months Ended

Sep. 30, 2012

Dividends and Basic Earnings Per Common Share [Abstract]

Calculation of basic earnings per common share

Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per common share for the three and nine months ended September 30, 2012 and 2011.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(net income in thousands)	2012		2011		2012		2011
Net Income	$	6,332	$	6,267	$	17,684	$	16,548
Average Number of Common Shares Outstanding		778,487		779,424		779,906		779,424
Basic Earnings Per Common Share	$	8.13	$	8.04	$	22.70	$	21.23

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows

(in thousands):

	Amortized		Gross Unrealized				Fair/Book
September 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	46,655	$	316	$	-	$	46,971
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities (1)		374,582		15,230		-		389,812
Corporate Bonds		14,641		223		-		14,864
Other		5,826		-		-		5,826
Total	$	447,408	$	15,769	$	-	$	463,177
	Amortized		Gross Unrealized				Fair/Book
December 31, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	82,195	$	413	$	13	$	82,595
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities (1)		383,380		7,792		139		391,033
Other		410		-		-		410
Total	$	471,767	$	8,205	$	152	$	479,820
	Amortized		Gross Unrealized				Fair/Book
September 30, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	162,115	$	635	$	-	$	162,750
Obligations of States and Political Subdivisions		5,813		-		-		5,813
Mortgage Backed Securities (1)		243,121		8,787		22		251,886
Other		360		-		-		360
Total	$	411,409	$	9,422	$	22	$	420,809

Book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

	Book		Gross Unrealized				Fair
September 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	66,098	$	2,623	$	-	$	68,721
Mortgage Backed Securities (1)		640		20		-		660
Other		2,222		-		-		2,222
Total	$	68,960	$	2,643	$	-	$	71,603
	Book		Gross Unrealized				Fair
December 31, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	59,640	$	2,736	$	-	$	62,376
Mortgage Backed Securities (1)		1,205		46		-		1,251
Other		2,247		-		-		2,247
Total	$	63,092	$	2,782	$	-	$	65,874
	Book		Gross Unrealized				Fair
September 30, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	60,130	$	2,437	$	-	$	62,567
Mortgage Backed Securities (1)		1,418		62		-		1,480
Other		2,255		-		-		2,255
Total	$	63,803	$	2,499	$	-	$	66,302

(1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

Amortized cost and estimated fair values of investment securities by contractual maturity

The amortized carrying amount of investment securities at September 30, 2012 by contractual maturity are shown in the following tables (in thousands):

			After 1		After 5				Total
Securities Available-for-Sale	Within		but		but		Over		Fair
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Government Agency & Government-Sponsored Entities	$	10,006	$	35,751	$	1,214	$	-	$	46,971
Obligations of States and Political Subdivisions		-		-		219		5,485		5,704
Mortgage Backed Securities		-		-		119,019		270,793		389,812
Corporate Bonds		608		13,411		845		-		14,864
Other		5,826		-		-		-		5,826
Total	$	16,440	$	49,162	$	121,297	$	276,278	$	463,177
			After 1		After 5				Total
Securities Held-to-Maturity	Within		but		but		Over		Book
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Obligations of States and Political Subdivisions	$	1,540	$	9,842	$	39,352	$	15,364	$	66,098
Mortgage Backed Securities		-		640		-		-		640
Other		-		5		2,217		-		2,222
Total	$	1,540	$	10,487	$	41,569	$	15,364	$	68,960

Investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

The following tables show those investments with gross unrealized losses and their fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2011	Value		Loss		Value		Loss		Value		Loss
Government Agency & Government-Sponsored Entities	$	4,987	$	13	$	-	$	-	$	4,987	$	13
Mortgage Backed Securities		85,090		139		-		-		85,090		139
Total	$	90,077	$	152	$	-	$	-	$	90,077	$	152
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2011	Value		Loss		Value		Loss		Value		Loss
Mortgage Backed Securities	$	10,130	$	22	$	-	$	-	$	10,130	$	22
Total	$	10,130	$	22	$	-	$	-	$	10,130	$	22

Proceeds from calls of securities

Proceeds from sales /calls of securities for the periods shown were as follows:

(in thousands)	Proceeds		Gains		Losses
Nine Months Ended September 30, 2012	$	44,296	$	149	$	-
Nine Months Ended September 30, 2011		55,000		-		-

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Dividends and Earnings Per Common Share

9 Months Ended

Sep. 30, 2012

Dividends and Basic Earnings Per Common Share [Abstract]

Dividends and Basic Earnings Per Common Share

6. Dividends and Basic Earnings Per Common Share

Farmers & Merchants Bancorp common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. On May 21, 2012, the Board of Directors of Farmers & Merchants Bancorp announced a mid-year cash dividend of $5.90 per share, a 4.4% increase over the $5.65 per share paid on June 30, 2011. The cash dividend was paid on July 2, 2012, to shareholders of record on June 20, 2012.

Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per common share for the three and nine months ended September 30, 2012 and 2011.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(net income in thousands)	2012		2011		2012		2011
Net Income	$	6,332	$	6,267	$	17,684	$	16,548
Average Number of Common Shares Outstanding		778,487		779,424		779,906		779,424
Basic Earnings Per Common Share	$	8.13	$	8.04	$	22.70	$	21.23

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP for financial information.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and nine-month periods ended September 30, 2012 may not necessarily be indicative of future operating results.

The accompanying consolidated financial statements include the accounts of the Company and the Company's wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank's wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders' equity. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.

Cash and Cash Equivalents

Cash and Cash Equivalents

For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. Generally, these transactions are for one-day periods. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities

Investment Securities

Investment securities are classified at the time of purchase as held-to-maturity if it is management's intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Securities are classified as available-for-sale if it is management's intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company's asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders' equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.

Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Loans

Loans

Loans are reported at the principal amount outstanding net of unearned discounts and deferred loan fees and costs. Interest income on loans is accrued daily on the outstanding balances using the simple interest method. Loan origination fees are deferred and recognized over the contractual life of the loan as an adjustment to the yield. Loans are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose a loan is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or is guaranteed by a financially capable party. When a loan is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans placed on non-accrual status are returned to accrual status when the loans are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans are either: (1) non-accrual loans; or (2) restructured loans that are still accruing interest. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral.

A restructuring of a loan constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans for customers unless: (1) the existing loan is brought current as to principal and interest payments; and (2) the restructured loan can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan amounts. After restructure a determination is made whether the loan will be kept on accrual status based upon the underwriting of the restructured credit.

Allowance for Loan Losses

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable incurred credit losses inherent in the Company's loan portfolio as of the balance sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.

The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; and (8) consumer and other. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. A credit grade is established at inception for smaller balance loans, such as consumer and residential real estate, and then updated only when the loan becomes contractually delinquent or when the borrower requests a modification. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

Special Mention – A special mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans classified as loss are considered uncollectible. Once a loan becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for loan losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Real Estate Construction – Real Estate Construction loans including land loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial Real Estate – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Commercial– Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – Loans secured by crop production, livestock and related real estate are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Residential 1st Mortgages and Home Equity Lines and Loans– The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments, although this is not always true as evidenced over the past several years. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other– A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

At least quarterly, the Board of Directors and management review the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the FRB, DFI and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

Allowance for Credit Losses on Off Balance Sheet Credit Exposures

The Company also maintains a separate allowance for off balance sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off balance sheet commitments is included in Interest Payable and Other Liabilities on the Company's Consolidated Balance Sheet.

Premises and Equipment

Premises and Equipment

Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate

Other Real Estate

Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for loan losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest income or expense as incurred.

Income Taxes

Income Taxes

The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount, combined with the current taxes payable or refundable, results in the income tax expense for the current year.

The Company follows the standards set forth in the "Income Taxes" topic of the FASB Accounting Standards Codification ("ASC"), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.

Dividends and Basic Earnings Per Common Share

Dividends and Basic Earnings Per Common Share

The Company's common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted earnings per common share. See Note 6.

Segment Reporting

Segment Reporting

The "Segment Reporting" topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The "Derivatives and Hedging" topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company's exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the period ended September 30, 2012, December 31, 2011 or September 30, 2011.

Comprehensive Income

Comprehensive Income

The "Comprehensive Income" topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.

Loss Contingencies

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

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Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses [Abstract]

Allocation of the allowance for loan losses by portfolio segment and by impairment methodology

The following tables show the allocation of the allowance for loan losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2012	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2012	$	5,823		$	2,583		$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Charge-Offs		-			-			-			(81	)		(138	)		(240	)		(198	)		(122	)		-			(779	)
Recoveries		-			89			-			16			12			61			41			47			-			266
Provision		(1,490	)		990			(72	)		356			(105	)		311			1,084			12			14			1,100
Ending Balance- September 30, 2012	$	4,333		$	3,662		$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	1,711		$	33,098
Charge-Offs		-			-			-			(80	)		(22	)		-			-			(34	)		-			(136	)
Recoveries		-			-			-			16			2			-			9			15			-			42
Provision		(44	)		1,029			(39	)		155			21			425			113			23			(1,083	)		600
Ending Balance- September 30, 2012	$	4,333		$	3,662		$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Ending Balance Individually Evaluated for Impairment		-			-			-			-			248			548			146			20			-			962
Ending Balance Collectively Evaluated for Impairment		4,333			3,662			1,861			1,542			3,267			7,711			9,514			124			628			32,642
Loans:
Ending Balance	$	335,664		$	293,864		$	32,701		$	137,464		$	43,990		$	193,053		$	167,777		$	5,514		$	-		$	1,210,027
Ending Balance Individually Evaluated for Impairment		295			2,551			-			493			1,048			2,652			257			20			-			7,316
Ending Balance Collectively Evaluated for Impairment		335,369			291,313			32,701			136,971			42,942			190,401			167,520			5,494			-			1,202,711
December 31, 2011	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2011	$	7,631		$	1,539		$	2,160		$	1,164		$	3,724		$	6,733		$	9,084		$	216		$	10		$	32,261
Charge-Offs		(25	)		(384	)		-			(449	)		(751	)		(3,559	)		(788	)		(190	)		-			(6,146	)
Recoveries		-			18			-			4			13			10			21			61			-			127
Provision		(1,783	)		1,410			(227	)		532			760			4,943			416			120			604			6,775
Ending Balance- December 31, 2011	$	5,823		$	2,583		$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Ending Balance Individually Evaluated for Impairment		686			-			-			-			80			793			54			23			-			1,636
Ending Balance Collectively Evaluated for Impairment		5,137			2,583			1,933			1,251			3,666			7,334			8,679			184			614			31,381
Loans:
Ending Balance	$	305,704		$	280,139		$	29,607		$	107,421		$	50,956		$	217,227		$	165,089		$	6,935		$	-		$	1,163,078
Ending Balance Individually Evaluated for Impairment		4,562			954			-			1,194			576			1,337			292			23			-			8,938
Ending Balance Collectively Evaluated for Impairment		301,142			279,185			29,607			106,227			50,380			215,890			164,797			6,912			-			1,154,140
September 30, 2011	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2011	$	7,631		$	1,539		$	2,160		$	1,164		$	3,724		$	6,733		$	9,084		$	216		$	10		$	32,261
Charge-Offs		(25	)		(384	)		-			(398	)		(701	)		(2,750	)		(324	)		(149	)		-			(4,731	)
Recoveries		-			-			-			3			11			10			14			45			-			83
Provision		(1,790	)		1,233			196			341			497			2,646			738			80			1,409			5,350
Ending Balance- September 30, 2011	$	5,816		$	2,388		$	2,356		$	1,110		$	3,531		$	6,639		$	9,512		$	192		$	1,419		$	32,963
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2011	$	5,726		$	2,813		$	2,362		$	1,198		$	3,450		$	6,284		$	10,794		$	252		$	63		$	32,942
Charge-Offs		(12	)		(384	)		-			(58	)		(239	)		-			(148	)		(62	)		-			(903	)
Recoveries		-			-			-			-			5			-			5			14			-			24
Provision		102			(41	)		(6	)		(30	)		315			355			(1,139	)		(12	)		1,356			900
Ending Balance- September 30, 2011	$	5,816		$	2,388		$	2,356		$	1,110		$	3,531		$	6,639		$	9,512		$	192		$	1,419		$	32,963
Ending Balance Individually Evaluated for Impairment		702			46			-			-			40			827			103			24			-			1,742
Ending Balance Collectively Evaluated for Impairment		5,114			2,342			2,356			1,110			3,491			5,812			9,409			168			1,419			31,221
Loans:
Ending Balance	$	300,918		$	284,149		$	28,979		$	104,130		$	52,451		$	219,670		$	180,329		$	6,879		$	-		$	1,177,505
Ending Balance Individually Evaluated for Impairment		3,841			1,413			-			1,273			262			1,671			349			24			-			8,833
Ending Balance Collectively Evaluated for Impairment		297,077			282,736			28,979			102,857			52,189			217,999			179,980			6,855			-			1,168,672

Loan portfolio allocated by management's internal risk ratings

The following tables show the loan portfolio allocated by management's internal risk ratings at the dates indicated (in thousands):

September 30, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	313,441	$	15,910	$	6,313	$	335,664
Agricultural Real Estate		273,823		9,887		10,154		293,864
Real Estate Construction		24,856		3,217		4,628		32,701
Residential 1st Mortgages		135,473		1,211		780		137,464
Home Equity Lines & Loans		41,975		-		2,015		43,990
Agricultural		186,398		2,300		4,355		193,053
Commercial		161,685		5,634		458		167,777
Consumer & Other		5,195		-		319		5,514
Total	$	1,142,846	$	38,159	$	29,022	$	1,210,027
December 31, 2011	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	265,201	$	15,186	$	25,317	$	305,704
Agricultural Real Estate		254,181		21,657		4,301		280,139
Real Estate Construction		21,428		3,217		4,962		29,607
Residential 1st Mortgages		104,609		1,483		1,329		107,421
Home Equity Lines & Loans		49,631		-		1,325		50,956
Agricultural		209,555		4,083		3,589		217,227
Commercial		158,273		5,240		1,576		165,089
Consumer & Other		6,528		-		407		6,935
Total	$	1,069,406	$	50,866	$	42,806	$	1,163,078
September 30, 2011	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	260,662	$	15,482	$	24,774	$	300,918
Agricultural Real Estate		259,428		19,315		5,406		284,149
Real Estate Construction		20,781		3,217		4,981		28,979
Residential 1st Mortgages		101,230		1,503		1,397		104,130
Home Equity Lines & Loans		51,559		-		892		52,451
Agricultural		202,323		12,285		5,062		219,670
Commercial		172,702		5,971		1,656		180,329
Consumer & Other		6,479		-		400		6,879
Total	$	1,075,164	$	57,773	$	44,568	$	1,177,505

Aging analysis of the loan portfolio by the time past due

The following tables show an aging analysis of the loan portfolio by the time past due at the dates indicated

(in thousands):

	30-89 Days		90 Days or More				Total Past				Total
September 30, 2012	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	335,664	$	335,664
Agricultural Real Estate		-		-		2,551		2,551		291,313		293,864
Real Estate Construction		-		-		-		-		32,701		32,701
Residential 1st Mortgages		-		-		279		279		137,185		137,464
Home Equity Lines & Loans		101		-		528		629		43,361		43,990
Agricultural		-		-		2,374		2,374		190,679		193,053
Commercial		-		-		-		-		167,777		167,777
Consumer & Other		56		-		20		76		5,438		5,514
Total	$	157	$	-	$	5,752	$	5,909	$	1,204,118	$	1,210,027
	30-89 Days		90 Days or More				Total Past				Total
December 31, 2011	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	1,354	$	1,354	$	304,350	$	305,704
Agricultural Real Estate		-		-		954		954		279,185		280,139
Real Estate Construction		-		-		-		-		29,607		29,607
Residential 1st Mortgages		108		-		284		392		107,029		107,421
Home Equity Lines & Loans		566		-		194		760		50,196		50,956
Agricultural		284		-		1,202		1,486		215,741		217,227
Commercial		179		-		217		396		164,693		165,089
Consumer & Other		101		-		23		124		6,811		6,935
Total	$	1,238	$	-	$	4,228	$	5,466	$	1,157,612	$	1,163,078
	30-89 Days		90 Days or More				Total Past				Total
September 30, 2011	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	811	$	811	$	300,107	$	300,918
Agricultural Real Estate		-		-		1,413		1,413		282,736		284,149
Real Estate Construction		-		-		-		-		28,979		28,979
Residential 1st Mortgages		-		-		347		347		103,783		104,130
Home Equity Lines & Loans		359		-		190		549		51,902		52,451
Agricultural		3,854		-		1,531		5,385		214,285		219,670
Commercial		-		-		348		348		179,981		180,329
Consumer & Other		15		-		24		39		6,840		6,879
Total	$	4,228	$	-	$	4,664	$	8,892	$	1,168,613	$	1,177,505

Impaired loans

The following tables show information related to impaired loans for the periods indicated (in thousands):

							Three Months Ended Sept. 30, 2012				Nine Months Ended Sept. 30, 2012
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	295	$	295	$	-	$	297	$	6	$	789	$	15
Agricultural Real Estate		2,558		2,551		-		2,036		-		1,402		-
Residential 1st Mortgages		494		521		-		438		-		512		-
Home Equity Lines & Loans		785		862		-		743		6		717		17
Agricultural		2,106		2,111		-		1,197		5		594		15
Commercial		111		111		-		115		2		169		4
	$	6,349	$	6,451	$	-	$	4,826	$	19	$	4,183	$	51
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	503	$	-
Residential 1st Mortgages		-		-		-		54		-		72		-
Home Equity Lines & Loans		269		314		248		174		1		152		3
Agricultural		547		1,551		548		567		-		749		-
Commercial		146		146		146		196		2		157		2
Consumer & Other		20		22		20		21		-		22		-
	$	982	$	2,033	$	962	$	1,012	$	3	$	1,655	$	5
Total	$	7,331	$	8,484	$	962	$	5,838	$	22	$	5,838	$	56
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	1,555	$	1,547	$	-	$	729	$	-
Agricultural Real Estate		955		974		-		1,341		-
Residential 1st Mortgages		1,219		1,272		-		936		13
Home Equity Lines & Loans		469		484		-		290		2
Agricultural		262		372		-		149		9
Commercial		188		264		-		195		1
Consumer & Other		-		-		-		5		-
	$	4,648	$	4,913	$	-	$	3,645	$	25
With an allowance recorded:
Commercial Real Estate	$	3,017	$	3,015	$	686	$	2,281	$	89
Agricultural Real Estate		-		-		-		529		-
Home Equity Lines & Loans		113		119		80		117		2
Agricultural		1,076		1,791		793		1,818		25
Commercial		104		107		54		120		-
Consumer & Other		24		24		23		31		-
	$	4,334	$	5,056	$	1,636	$	4,896	$	116
Total	$	8,982	$	9,969	$	1,636	$	8,541	$	141
							Three Months Ended Sept. 30, 2011				Nine Months Ended Sept. 30, 2011
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2011	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	816	$	811	$	-	$	530	$	-	$	453	$	-
Agricultural Real Estate		935		974		-		1,717		-		1,470		-
Residential 1st Mortgages		1,278		1,469		-		861		1		842		3
Home Equity Lines & Loans		190		191		-		218		-		230		1
Agricultural		140		140		-		143		3		111		6
Commercial		186		182		-		188		-		197		-
Consumer & Other		-		-		-		-		-		7		-
	$	3,545	$	3,767	$	-	$	3,657	$	4	$	3,310	$	10
With an allowance recorded:
Commercial Real Estate	$	3,033	$	3,030	$	702	$	3,041	$	44	$	2,035	$	46
Agricultural Real Estate		463		823		46		645		-		705		-
Home Equity Lines & Loans		73		82		40		74		1		118		2
Agricultural		1,533		1,548		827		2,732		2		2,065		25
Commercial		168		206		103		155		-		125		-
Consumer & Other		24		24		24		31		-		33		-
	$	5,294	$	5,713	$	1,742	$	6,678	$	47	$	5,081	$	73
Total	$	8,839	$	9,480	$	1,742	$	10,335	$	51	$	8,391	$	83

Loans by class modified as troubled debt restructured loans

The following table presents loans by class modified as troubled debt restructured loans for the three and nine month periods ended September 30, 2012 (in thousands):

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		-	$	-	$	-		1	$	116	$	116
Residential 1st Mortgages		1		185		173		5		331		312
Home Equity Lines & Loans		1		46		43		4		414		369
Agricultural		2		175		175		3		355		355
Commercial		-		-		-		3		273		273
Total		4	$	406	$	391		16	$	1,489	$	1,425

The following table presents loans by class modified as troubled debt restructured loans for period ended December 31, 2011 (in thousands):

	December 31, 2011
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		3	$	3,224	$	3,224
Residential 1st Mortgages		5		995		940
Home Equity Lines & Loans		7		381		362
Agricultural		1		140		140
Commercial		2		82		82
Consumer & Other		1		24		24
Total		19	$	4,846	$	4,772

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the twelve months ended December 31, 2011

(in thousands):

	December 31, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment
Commercial Real Estate		-	$	-
Agricultural Real Estate		-		-
Real Estate Construction		-		-
Residential 1st Mortgages		-		-
Home Equity Lines & Loans		1		12
Agricultural		-		-
Commercial		-		-
Consumer & Other		-		-
Total		1	$	12

The following table presents loans by class modified as troubled debt restructured loans for the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		-	$	-	$	-		2	$	3,032	$	3,032
Agricultural Real Estate		-		-		-		-		-		-
Real Estate Construction		-		-		-		-		-		-
Residential 1st Mortgages		4		897		847		4		897		847
Home Equity Lines & Loans		-		-		-		2		55		51
Agricultural		-		-		-		1		140		140
Commercial		-		-		-		2		82		82
Consumer & Other		-		-		-		1		24		24
Total		4	$	897	$	847		12	$	4,230	$	4,176

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial Real Estate		-	$	-		-	$	-
Agricultural Real Estate		-		-		-		-
Real Estate Construction		-		-		-		-
Residential 1st Mortgages		-		-		-		-
Home Equity Lines & Loans		-		-		1		12
Agricultural		-		-		-		-
Commercial		-		-		-		-
Consumer & Other		-		-		-		-
Total		-	$	-		1	$	12

XML

Investment Securities (Details) (USD $)	9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 447,408,000		$ 411,409,000		$ 471,767,000
Gross Unrealized Gains	15,769,000		9,422,000		8,205,000
Gross Unrealized Losses	0		22,000		152,000
Total Assets Measured at Fair Value On a Recurring Basis	463,177,000		420,809,000		479,820,000
Less Than 12 Months [Abstract]
Fair Value			10,130,000		90,077,000
Unrealized Loss			22,000		152,000
12 Months or More [Abstract]
Fair Value			0		0
Unrealized Loss			0		0
Total [Abstract]
Fair Value			10,130,000		90,077,000
Unrealized Loss			22,000		152,000
Schedule of Held-to-maturity Securities [Line Items]
Book Value	68,960,000		63,803,000		63,092,000
Gross Unrealized Gains	2,643,000		2,499,000		2,782,000
Gross Unrealized Losses	0		0		0
Fair Value	71,603,000		66,302,000		65,874,000
Securities available-for-sale [Abstract]
Within 1 Year	16,440,000
After 1 but Within 5	49,162,000
After 5 but Within 10	121,297,000
Over 10 years	276,278,000
Total Assets Measured at Fair Value On a Recurring Basis	463,177,000		420,809,000		479,820,000
Held-to-maturity securities [Abstract]
Within 1 Year	1,540,000
After 1 but Within 5	10,487,000
After 5 but Within 10	41,569,000
Over 10 years	15,364,000
Total Book Value	68,960,000		63,803,000		63,092,000
Proceeds from calls of securities [Abstract]
Proceeds from calls of securities	44,296,000		55,000,000
Gains from calls of securities	149,000		0
Realized losses from call of securities	0		0
Number of investment securities held	360
Number of loss positions less than twelve months	0
Number of loss positions in twelve months or more	0
Percentage of bank qualified municipal bond portfolio rated (in hundredths)	93.00%
Percentage of portfolio not rated (in hundredths)	7.00%
Securities pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law	307,200,000		382,900,000		373,200,000
Obligations of States and Political Subdivisions [Member]
Schedule of Held-to-maturity Securities [Line Items]
Book Value	66,098,000		60,130,000		59,640,000
Gross Unrealized Gains	2,623,000		2,437,000		2,736,000
Gross Unrealized Losses	0		0		0
Fair Value	68,721,000		62,567,000		62,376,000
Held-to-maturity securities [Abstract]
Total Book Value	66,098,000		60,130,000		59,640,000
Mortgage Backed Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
Book Value	640,000	[1]	1,418,000	[1]	1,205,000	[1]
Gross Unrealized Gains	20,000	[1]	62,000	[1]	46,000	[1]
Gross Unrealized Losses	0	[1]	0	[1]	0	[1]
Fair Value	660,000	[1]	1,480,000	[1]	1,251,000	[1]
Held-to-maturity securities [Abstract]
Total Book Value	640,000	[1]	1,418,000	[1]	1,205,000	[1]
Other [Member]
Schedule of Held-to-maturity Securities [Line Items]
Book Value	2,222,000		2,255,000		2,247,000
Gross Unrealized Gains	0		0		0
Gross Unrealized Losses	0		0		0
Fair Value	2,222,000		2,255,000		2,247,000
Held-to-maturity securities [Abstract]
Total Book Value	2,222,000		2,255,000		2,247,000
Government Agency & Government Sponsored Entities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	46,655,000		162,115,000		82,195,000
Gross Unrealized Gains	316,000		635,000		413,000
Gross Unrealized Losses	0		0		13,000
Total Assets Measured at Fair Value On a Recurring Basis	46,971,000		162,750,000		82,595,000
Less Than 12 Months [Abstract]
Fair Value					4,987,000
Unrealized Loss	0		0		13,000
12 Months or More [Abstract]
Fair Value					0
Unrealized Loss	0		0		0
Total [Abstract]
Fair Value					4,987,000
Unrealized Loss	0		0		13,000
Securities available-for-sale [Abstract]
Within 1 Year	10,006,000
After 1 but Within 5	35,751,000
After 5 but Within 10	1,214,000
Over 10 years	0
Total Assets Measured at Fair Value On a Recurring Basis	46,971,000		162,750,000		82,595,000
Obligations of States and Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	5,704,000		5,813,000		5,782,000
Gross Unrealized Gains	0		0		0
Gross Unrealized Losses	0		0		0
Total Assets Measured at Fair Value On a Recurring Basis	5,704,000		5,813,000		5,782,000
Schedule of Held-to-maturity Securities [Line Items]
Book Value	66,098,000
Securities available-for-sale [Abstract]
Within 1 Year	0
After 1 but Within 5	0
After 5 but Within 10	219,000
Over 10 years	5,485,000
Total Assets Measured at Fair Value On a Recurring Basis	5,704,000		5,813,000		5,782,000
Held-to-maturity securities [Abstract]
Within 1 Year	1,540,000
After 1 but Within 5	9,842,000
After 5 but Within 10	39,352,000
Over 10 years	15,364,000
Total Book Value	66,098,000
Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	374,582,000	[1]	243,121,000	[1]	383,380,000	[1]
Gross Unrealized Gains	15,230,000	[1]	8,787,000	[1]	7,792,000	[1]
Gross Unrealized Losses	0	[1]	22,000	[1]	139,000	[1]
Total Assets Measured at Fair Value On a Recurring Basis	389,812,000	[1]	251,886,000	[1]	391,033,000	[1]
Less Than 12 Months [Abstract]
Fair Value			10,130,000		85,090,000
Unrealized Loss	0		22,000		139,000
12 Months or More [Abstract]
Fair Value			0		0
Unrealized Loss	0		0		0
Total [Abstract]
Fair Value			10,130,000		85,090,000
Unrealized Loss	0		22,000		139,000
Schedule of Held-to-maturity Securities [Line Items]
Book Value	640,000
Securities available-for-sale [Abstract]
Within 1 Year	0
After 1 but Within 5	0
After 5 but Within 10	119,019,000
Over 10 years	270,793,000
Total Assets Measured at Fair Value On a Recurring Basis	389,812,000	[1]	251,886,000	[1]	391,033,000	[1]
Held-to-maturity securities [Abstract]
Within 1 Year	0
After 1 but Within 5	640,000
After 5 but Within 10	0
Over 10 years	0
Total Book Value	640,000
Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	14,641,000
Gross Unrealized Gains	223,000
Gross Unrealized Losses	0
Total Assets Measured at Fair Value On a Recurring Basis	14,864,000
Securities available-for-sale [Abstract]
Within 1 Year	608,000
After 1 but Within 5	13,411,000
After 5 but Within 10	845,000
Over 10 years	0
Total Assets Measured at Fair Value On a Recurring Basis	14,864,000
Other [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	5,826,000		360,000		410,000
Gross Unrealized Gains	0		0		0
Gross Unrealized Losses	0		0		0
Total Assets Measured at Fair Value On a Recurring Basis	5,826,000		360,000		410,000
Schedule of Held-to-maturity Securities [Line Items]
Book Value	2,222,000
Securities available-for-sale [Abstract]
Within 1 Year	5,826,000
After 1 but Within 5	0
After 5 but Within 10	0
Over 10 years	0
Total Assets Measured at Fair Value On a Recurring Basis	5,826,000		360,000		410,000
Held-to-maturity securities [Abstract]
Within 1 Year	0
After 1 but Within 5	5,000
After 5 but Within 10	2,217,000
Over 10 years	0
Total Book Value	$ 2,222,000

[1] All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

XML

Allowance for Loan Losses, Loans by Class Modified as Troubled Debt Restructured Loans (Details) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Financing Receivable, Modifications [Line Items]
Specific reserves	$ 187,000	$ 904,000	$ 187,000	$ 904,000	$ 759,000
Troubled debt restructured loans, performing	2,100,000		2,100,000		4,900,000
Commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings	0	0	0	0	0
Modifications involving a reduction of the stated interest rate of the loan period			5 years
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	4	4	16	12	19
Pre Modification Outstanding Recorded Investment	406,000	897,000	1,489,000	4,230,000	4,846,000
Post-Modification Recorded Outstanding Investment	391,000	847,000	1,425,000	4,176,000	4,772,000
Increase in allowance for loan losses	0	0	19,000	126,000
General loss reserve					680,000
TDR's charge-offs	15,000	50,000	64,000	54,000	74,000
Period after which loan is considered to be in payment default			90 days
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					1
Recorded Investment					12,000
Number of Loans		0		1
Recorded Investment		0		12,000
Charge offs on troubled debt restructurings that subsequently defaulted		0		12,000	12,000
Minimum [Member]
Financing Receivable, Modifications [Line Items]
Modifications involving a reduction of the stated interest rate of the loan period				2 years	2 years
Period of modifications involving extension of maturity date			6 months	3 years	3 years
Maximum [Member]
Financing Receivable, Modifications [Line Items]
Modifications involving a reduction of the stated interest rate of the loan period				8 years	8 years
Period of modifications involving extension of maturity date			15 years	10 years	10 years
Performing [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loans, performing	1,600,000		1,600,000		4,700,000
Commercial Real Estate [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans		0	1	2	3
Pre Modification Outstanding Recorded Investment		0	116,000	3,032,000	3,224,000
Post-Modification Recorded Outstanding Investment		0	116,000	3,032,000	3,224,000
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		0		0
Residential 1st Mortgages [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	1	4	5	4	5
Pre Modification Outstanding Recorded Investment	185,000	897,000	331,000	897,000	995,000
Post-Modification Recorded Outstanding Investment	173,000	847,000	312,000	847,000	940,000
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		0		0
Home Equity Lines and Loans [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	1	0	4	2	7
Pre Modification Outstanding Recorded Investment	46,000	0	414,000	55,000	381,000
Post-Modification Recorded Outstanding Investment	43,000	0	369,000	51,000	362,000
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					1
Recorded Investment					12,000
Number of Loans		0		1
Recorded Investment		0		12,000
Agricultural [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	2	0	3	1	1
Pre Modification Outstanding Recorded Investment	175,000	0	355,000	140,000	140,000
Post-Modification Recorded Outstanding Investment	175,000	0	355,000	140,000	140,000
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		0		0
Commercial [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	0	0	3	2	2
Pre Modification Outstanding Recorded Investment	0	0	273,000	82,000	82,000
Post-Modification Recorded Outstanding Investment	0	0	273,000	82,000	82,000
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		0		0
Agricultural Real Estate [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans		0		0
Pre Modification Outstanding Recorded Investment		0		0
Post-Modification Recorded Outstanding Investment		0		0
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		0		0
Real Estate Construction [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans		0		0
Pre Modification Outstanding Recorded Investment		0		0
Post-Modification Recorded Outstanding Investment		0		0
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		0		0
Consumer & Other [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans		0		1	1
Pre Modification Outstanding Recorded Investment		0		24,000	24,000
Post-Modification Recorded Outstanding Investment		0		24,000	24,000
Troubled debt restructurings that subsequently default [Abstract]
Number of Loans					0
Recorded Investment					0
Number of Loans		0		0
Recorded Investment		$ 0		$ 0

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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income, net [Member]	Total
Balance at Dec. 31, 2010	$ 8	$ 75,590	$ 96,030	$ 1,613	$ 173,241
Balance (in shares) at Dec. 31, 2010	779,424
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income	0	0	16,548	0	16,548
Cash Dividends Declared on Common Stock ($5.65 and $5.90 per share)	0	0	(4,404)	0	(4,404)
Change in Net Unrealized Gain on Securities Available for Sale	0	0	0	3,835	3,835
Balance at Sep. 30, 2011	8	75,590	108,174	5,448	189,220
Balance (in shares) at Sep. 30, 2011	779,424
Balance at Dec. 31, 2011	8	75,590	109,081	4,667	189,346
Balance (in shares) at Dec. 31, 2011	779,424
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income	0	0	17,684	0	17,684
Cash Dividends Declared on Common Stock ($5.65 and $5.90 per share)	0	0	(4,595)	0	(4,595)
Repurchase of Stock	0	(576)	0	0	(576)
Repurchase of Stock (in shares)	(1,542)
Change in Net Unrealized Gain on Securities Available for Sale	0	0	0	4,472	4,472
Balance at Sep. 30, 2012	$ 8	$ 75,014	$ 122,170	$ 9,139	$ 206,331
Balance (in shares) at Sep. 30, 2012	777,882

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Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses [Abstract]

Allowance for Loan Losses

3. Allowance for Loan Losses

The following tables show the allocation of the allowance for loan losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2012	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2012	$	5,823		$	2,583		$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Charge-Offs		-			-			-			(81	)		(138	)		(240	)		(198	)		(122	)		-			(779	)
Recoveries		-			89			-			16			12			61			41			47			-			266
Provision		(1,490	)		990			(72	)		356			(105	)		311			1,084			12			14			1,100
Ending Balance- September 30, 2012	$	4,333		$	3,662		$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	1,711		$	33,098
Charge-Offs		-			-			-			(80	)		(22	)		-			-			(34	)		-			(136	)
Recoveries		-			-			-			16			2			-			9			15			-			42
Provision		(44	)		1,029			(39	)		155			21			425			113			23			(1,083	)		600
Ending Balance- September 30, 2012	$	4,333		$	3,662		$	1,861		$	1,542		$	3,515		$	8,259		$	9,660		$	144		$	628		$	33,604
Ending Balance Individually Evaluated for Impairment		-			-			-			-			248			548			146			20			-			962
Ending Balance Collectively Evaluated for Impairment		4,333			3,662			1,861			1,542			3,267			7,711			9,514			124			628			32,642
Loans:
Ending Balance	$	335,664		$	293,864		$	32,701		$	137,464		$	43,990		$	193,053		$	167,777		$	5,514		$	-		$	1,210,027
Ending Balance Individually Evaluated for Impairment		295			2,551			-			493			1,048			2,652			257			20			-			7,316
Ending Balance Collectively Evaluated for Impairment		335,369			291,313			32,701			136,971			42,942			190,401			167,520			5,494			-			1,202,711
December 31, 2011	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2011	$	7,631		$	1,539		$	2,160		$	1,164		$	3,724		$	6,733		$	9,084		$	216		$	10		$	32,261
Charge-Offs		(25	)		(384	)		-			(449	)		(751	)		(3,559	)		(788	)		(190	)		-			(6,146	)
Recoveries		-			18			-			4			13			10			21			61			-			127
Provision		(1,783	)		1,410			(227	)		532			760			4,943			416			120			604			6,775
Ending Balance- December 31, 2011	$	5,823		$	2,583		$	1,933		$	1,251		$	3,746		$	8,127		$	8,733		$	207		$	614		$	33,017
Ending Balance Individually Evaluated for Impairment		686			-			-			-			80			793			54			23			-			1,636
Ending Balance Collectively Evaluated for Impairment		5,137			2,583			1,933			1,251			3,666			7,334			8,679			184			614			31,381
Loans:
Ending Balance	$	305,704		$	280,139		$	29,607		$	107,421		$	50,956		$	217,227		$	165,089		$	6,935		$	-		$	1,163,078
Ending Balance Individually Evaluated for Impairment		4,562			954			-			1,194			576			1,337			292			23			-			8,938
Ending Balance Collectively Evaluated for Impairment		301,142			279,185			29,607			106,227			50,380			215,890			164,797			6,912			-			1,154,140
September 30, 2011	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Unallocated			Total
Year-To-Date Allowance for Loan Losses:
Beginning Balance- January 1, 2011	$	7,631		$	1,539		$	2,160		$	1,164		$	3,724		$	6,733		$	9,084		$	216		$	10		$	32,261
Charge-Offs		(25	)		(384	)		-			(398	)		(701	)		(2,750	)		(324	)		(149	)		-			(4,731	)
Recoveries		-			-			-			3			11			10			14			45			-			83
Provision		(1,790	)		1,233			196			341			497			2,646			738			80			1,409			5,350
Ending Balance- September 30, 2011	$	5,816		$	2,388		$	2,356		$	1,110		$	3,531		$	6,639		$	9,512		$	192		$	1,419		$	32,963
Third Quarter Allowance for Loan Losses:
Beginning Balance- July 1, 2011	$	5,726		$	2,813		$	2,362		$	1,198		$	3,450		$	6,284		$	10,794		$	252		$	63		$	32,942
Charge-Offs		(12	)		(384	)		-			(58	)		(239	)		-			(148	)		(62	)		-			(903	)
Recoveries		-			-			-			-			5			-			5			14			-			24
Provision		102			(41	)		(6	)		(30	)		315			355			(1,139	)		(12	)		1,356			900
Ending Balance- September 30, 2011	$	5,816		$	2,388		$	2,356		$	1,110		$	3,531		$	6,639		$	9,512		$	192		$	1,419		$	32,963
Ending Balance Individually Evaluated for Impairment		702			46			-			-			40			827			103			24			-			1,742
Ending Balance Collectively Evaluated for Impairment		5,114			2,342			2,356			1,110			3,491			5,812			9,409			168			1,419			31,221
Loans:
Ending Balance	$	300,918		$	284,149		$	28,979		$	104,130		$	52,451		$	219,670		$	180,329		$	6,879		$	-		$	1,177,505
Ending Balance Individually Evaluated for Impairment		3,841			1,413			-			1,273			262			1,671			349			24			-			8,833
Ending Balance Collectively Evaluated for Impairment		297,077			282,736			28,979			102,857			52,189			217,999			179,980			6,855			-			1,168,672

The following tables show the loan portfolio allocated by management's internal risk ratings at the dates indicated (in thousands):

September 30, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	313,441	$	15,910	$	6,313	$	335,664
Agricultural Real Estate		273,823		9,887		10,154		293,864
Real Estate Construction		24,856		3,217		4,628		32,701
Residential 1st Mortgages		135,473		1,211		780		137,464
Home Equity Lines & Loans		41,975		-		2,015		43,990
Agricultural		186,398		2,300		4,355		193,053
Commercial		161,685		5,634		458		167,777
Consumer & Other		5,195		-		319		5,514
Total	$	1,142,846	$	38,159	$	29,022	$	1,210,027
December 31, 2011	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	265,201	$	15,186	$	25,317	$	305,704
Agricultural Real Estate		254,181		21,657		4,301		280,139
Real Estate Construction		21,428		3,217		4,962		29,607
Residential 1st Mortgages		104,609		1,483		1,329		107,421
Home Equity Lines & Loans		49,631		-		1,325		50,956
Agricultural		209,555		4,083		3,589		217,227
Commercial		158,273		5,240		1,576		165,089
Consumer & Other		6,528		-		407		6,935
Total	$	1,069,406	$	50,866	$	42,806	$	1,163,078
September 30, 2011	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	260,662	$	15,482	$	24,774	$	300,918
Agricultural Real Estate		259,428		19,315		5,406		284,149
Real Estate Construction		20,781		3,217		4,981		28,979
Residential 1st Mortgages		101,230		1,503		1,397		104,130
Home Equity Lines & Loans		51,559		-		892		52,451
Agricultural		202,323		12,285		5,062		219,670
Commercial		172,702		5,971		1,656		180,329
Consumer & Other		6,479		-		400		6,879
Total	$	1,075,164	$	57,773	$	44,568	$	1,177,505

See "Note 1. Significant Accounting Policies - Allowance for Loan Losses" for a description of the internal risk ratings used by the Company. There were no loans outstanding at September 30, 2012, December 31, 2011, and September 30, 2011 rated doubtful or loss.

The following tables show an aging analysis of the loan portfolio by the time past due at the dates indicated

(in thousands):

	30-89 Days		90 Days or More				Total Past				Total
September 30, 2012	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	335,664	$	335,664
Agricultural Real Estate		-		-		2,551		2,551		291,313		293,864
Real Estate Construction		-		-		-		-		32,701		32,701
Residential 1st Mortgages		-		-		279		279		137,185		137,464
Home Equity Lines & Loans		101		-		528		629		43,361		43,990
Agricultural		-		-		2,374		2,374		190,679		193,053
Commercial		-		-		-		-		167,777		167,777
Consumer & Other		56		-		20		76		5,438		5,514
Total	$	157	$	-	$	5,752	$	5,909	$	1,204,118	$	1,210,027
	30-89 Days		90 Days or More				Total Past				Total
December 31, 2011	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	1,354	$	1,354	$	304,350	$	305,704
Agricultural Real Estate		-		-		954		954		279,185		280,139
Real Estate Construction		-		-		-		-		29,607		29,607
Residential 1st Mortgages		108		-		284		392		107,029		107,421
Home Equity Lines & Loans		566		-		194		760		50,196		50,956
Agricultural		284		-		1,202		1,486		215,741		217,227
Commercial		179		-		217		396		164,693		165,089
Consumer & Other		101		-		23		124		6,811		6,935
Total	$	1,238	$	-	$	4,228	$	5,466	$	1,157,612	$	1,163,078
	30-89 Days		90 Days or More				Total Past				Total
September 30, 2011	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	811	$	811	$	300,107	$	300,918
Agricultural Real Estate		-		-		1,413		1,413		282,736		284,149
Real Estate Construction		-		-		-		-		28,979		28,979
Residential 1st Mortgages		-		-		347		347		103,783		104,130
Home Equity Lines & Loans		359		-		190		549		51,902		52,451
Agricultural		3,854		-		1,531		5,385		214,285		219,670
Commercial		-		-		348		348		179,981		180,329
Consumer & Other		15		-		24		39		6,840		6,879
Total	$	4,228	$	-	$	4,664	$	8,892	$	1,168,613	$	1,177,505

The following tables show information related to impaired loans for the periods indicated (in thousands):

							Three Months Ended Sept. 30, 2012				Nine Months Ended Sept. 30, 2012
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	295	$	295	$	-	$	297	$	6	$	789	$	15
Agricultural Real Estate		2,558		2,551		-		2,036		-		1,402		-
Residential 1st Mortgages		494		521		-		438		-		512		-
Home Equity Lines & Loans		785		862		-		743		6		717		17
Agricultural		2,106		2,111		-		1,197		5		594		15
Commercial		111		111		-		115		2		169		4
	$	6,349	$	6,451	$	-	$	4,826	$	19	$	4,183	$	51
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	503	$	-
Residential 1st Mortgages		-		-		-		54		-		72		-
Home Equity Lines & Loans		269		314		248		174		1		152		3
Agricultural		547		1,551		548		567		-		749		-
Commercial		146		146		146		196		2		157		2
Consumer & Other		20		22		20		21		-		22		-
	$	982	$	2,033	$	962	$	1,012	$	3	$	1,655	$	5
Total	$	7,331	$	8,484	$	962	$	5,838	$	22	$	5,838	$	56
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	1,555	$	1,547	$	-	$	729	$	-
Agricultural Real Estate		955		974		-		1,341		-
Residential 1st Mortgages		1,219		1,272		-		936		13
Home Equity Lines & Loans		469		484		-		290		2
Agricultural		262		372		-		149		9
Commercial		188		264		-		195		1
Consumer & Other		-		-		-		5		-
	$	4,648	$	4,913	$	-	$	3,645	$	25
With an allowance recorded:
Commercial Real Estate	$	3,017	$	3,015	$	686	$	2,281	$	89
Agricultural Real Estate		-		-		-		529		-
Home Equity Lines & Loans		113		119		80		117		2
Agricultural		1,076		1,791		793		1,818		25
Commercial		104		107		54		120		-
Consumer & Other		24		24		23		31		-
	$	4,334	$	5,056	$	1,636	$	4,896	$	116
Total	$	8,982	$	9,969	$	1,636	$	8,541	$	141
							Three Months Ended Sept. 30, 2011				Nine Months Ended Sept. 30, 2011
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2011	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	816	$	811	$	-	$	530	$	-	$	453	$	-
Agricultural Real Estate		935		974		-		1,717		-		1,470		-
Residential 1st Mortgages		1,278		1,469		-		861		1		842		3
Home Equity Lines & Loans		190		191		-		218		-		230		1
Agricultural		140		140		-		143		3		111		6
Commercial		186		182		-		188		-		197		-
Consumer & Other		-		-		-		-		-		7		-
	$	3,545	$	3,767	$	-	$	3,657	$	4	$	3,310	$	10
With an allowance recorded:
Commercial Real Estate	$	3,033	$	3,030	$	702	$	3,041	$	44	$	2,035	$	46
Agricultural Real Estate		463		823		46		645		-		705		-
Home Equity Lines & Loans		73		82		40		74		1		118		2
Agricultural		1,533		1,548		827		2,732		2		2,065		25
Commercial		168		206		103		155		-		125		-
Consumer & Other		24		24		24		31		-		33		-
	$	5,294	$	5,713	$	1,742	$	6,678	$	47	$	5,081	$	73
Total	$	8,839	$	9,480	$	1,742	$	10,335	$	51	$	8,391	$	83

Total recorded investment shown in the prior table will not equal the total ending balance of loans individually evaluated for impairment on the allocation of allowance table. This is because the calculation of recorded investment for purposes of this table takes into account charge-offs, net deferred loans fees & costs, unamortized premium or discount, and accrued interest.

At September 30, 2012, the Company allocated $187,000 of specific reserves to $2.1 million of troubled debt restructured loans, of which $1.6 million were performing. The Company had no commitments at September 30, 2012 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and nine month periods ending September 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods of 5 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 15 years.

The following table presents loans by class modified as troubled debt restructured loans for the three and nine month periods ended September 30, 2012 (in thousands):

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		-	$	-	$	-		1	$	116	$	116
Residential 1st Mortgages		1		185		173		5		331		312
Home Equity Lines & Loans		1		46		43		4		414		369
Agricultural		2		175		175		3		355		355
Commercial		-		-		-		3		273		273
Total		4	$	406	$	391		16	$	1,489	$	1,425

The TDRs described above increased the allowance for loan losses by $0 and $19,000 and resulted in charge-offs of $15,000 and $64,000 for the three and nine months ended September 30, 2012.

During the three and nine months ended September 30, 2012, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.

At December 31, 2011, the Company allocated $759,000 of specific reserves to $4.9 million of troubled debt restructured loans, of which $4.7 million were performing. The Company had no commitments at December 31, 2011 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the period ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 2 years to 8 years. Modifications involving an extension of the maturity date were for periods ranging from 3 years to 10 years.

The following table presents loans by class modified as troubled debt restructured loans for period ended December 31, 2011 (in thousands):

	December 31, 2011
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		3	$	3,224	$	3,224
Residential 1st Mortgages		5		995		940
Home Equity Lines & Loans		7		381		362
Agricultural		1		140		140
Commercial		2		82		82
Consumer & Other		1		24		24
Total		19	$	4,846	$	4,772

Prior to classifying these loans as TDRs, general loss reserves of $680,000 were allocated to them under the Company's loan loss allowance methodology. At the time they were classified as TDRs, charge-offs of $74,000 were recorded. Based upon individual evaluation of the loans, specific loss reserves of $759,000 were required at December 31, 2011.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the twelve months ended December 31, 2011

(in thousands):

	December 31, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment
Commercial Real Estate		-	$	-
Agricultural Real Estate		-		-
Real Estate Construction		-		-
Residential 1st Mortgages		-		-
Home Equity Lines & Loans		1		12
Agricultural		-		-
Commercial		-		-
Consumer & Other		-		-
Total		1	$	12

The troubled debt restructurings that subsequently defaulted did not increase the allowance for loan losses but did result in charge offs of $12,000 during the twelve month period ending December 31, 2011.

The Company allocated $904,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011. The Company had no commitments at September 30, 2011 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the period ending September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 2 years to 8 years. Modifications involving an extension of the maturity date were for periods ranging from 3 years to 10 years.

The following table presents loans by class modified as troubled debt restructured loans for the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		-	$	-	$	-		2	$	3,032	$	3,032
Agricultural Real Estate		-		-		-		-		-		-
Real Estate Construction		-		-		-		-		-		-
Residential 1st Mortgages		4		897		847		4		897		847
Home Equity Lines & Loans		-		-		-		2		55		51
Agricultural		-		-		-		1		140		140
Commercial		-		-		-		2		82		82
Consumer & Other		-		-		-		1		24		24
Total		4	$	897	$	847		12	$	4,230	$	4,176

The troubled debt restructurings described above increased the allowance for loan losses by $0 and $126,000 and resulted in charge-offs of $50,000 and $54,000 during the three and nine month periods ending September 30, 2011.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2011 (in thousands):

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial Real Estate		-	$	-		-	$	-
Agricultural Real Estate		-		-		-		-
Real Estate Construction		-		-		-		-
Residential 1st Mortgages		-		-		-		-
Home Equity Lines & Loans		-		-		1		12
Agricultural		-		-		-		-
Commercial		-		-		-		-
Consumer & Other		-		-		-		-
Total		-	$	-		1	$	12

The troubled debt restructurings that subsequently defaulted did not increase the allowance for loan losses but did result in charge offs of $0 and $12,000 during the three and nine month periods ending September 30, 2011.

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Fair Value Measurements (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Available-for-Sale Securities: [Abstract]
Total Assets Measured at Fair Value On a Recurring Basis	$ 463,177,000	$ 420,809,000	$ 463,177,000	$ 420,809,000	$ 479,820,000
Changes in level 3 assets measured at fair value on a recurring basis [Roll Forward]
Balance at Beginning of Period	5,724,000	0	5,782,000	0
Total Realized and Unrealized Gains/(Losses) Included in Income	0	0	0	0
Total Unrealized Gains/(Losses) Included in Other Comprehensive Income	0	0	0	0
Purchase of Securities	0	0	0	0
Sales, Maturities, and Calls of Securities	(20,000)	0	(78,000)	0
Net Transfers In/(Out) of Level 3	0	0	0	0
Balance at End of Period	5,704,000	0	5,704,000	0
Other Real Estate [Abstract]
Impaired loans with a partial charge-off or where an allowance was established	666,000	5,400,000	666,000	5,400,000	3,000,000
Allowance for loan losses	962,000	1,742,000	962,000	1,742,000	1,636,000
Other Real Estate	2,600,000	3,500,000	2,600,000	3,500,000	2,900,000
ORE, valuation allowance	4,100,000	3,600,000	4,100,000	3,600,000	4,100,000
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Available-for-Sale Securities: [Abstract]
Mortgage Backed Securities	0		0
Total Assets Measured at Fair Value On a Recurring Basis	16,143,000		16,143,000
Impaired Loans [Abstract]
Agricultural	0		0
Commercial Real Estate	0		0
Other Observable Inputs (Level 2) [Member]
Available-for-Sale Securities: [Abstract]
Mortgage Backed Securities	389,812,000		389,812,000
Total Assets Measured at Fair Value On a Recurring Basis	441,330,000		441,330,000
Impaired Loans [Abstract]
Agricultural	0		0
Commercial Real Estate	0		0
Significant Unobservable Inputs (Level 3) [Member]
Available-for-Sale Securities: [Abstract]
Mortgage Backed Securities	0		0
Total Assets Measured at Fair Value On a Recurring Basis	5,704,000		5,704,000
Impaired Loans [Abstract]
Agricultural	184,647,000		184,647,000
Commercial Real Estate	340,570,000		340,570,000
Fair Value, Measurements, Recurring [Member]
Available-for-Sale Securities: [Abstract]
Government Agency & Government-Sponsored Entities	46,971,000	162,750,000	46,971,000	162,750,000	82,595,000
Obligations of States and Political Subdivisions	5,704,000	5,813,000	5,704,000	5,813,000	5,782,000
Mortgage Backed Securities	389,812,000	251,886,000	389,812,000	251,886,000	391,033,000
Corporate Bonds	14,864,000		14,864,000
Other	5,826,000	360,000	5,826,000	360,000	410,000
Total Assets Measured at Fair Value On a Recurring Basis	463,177,000	420,809,000	463,177,000	420,809,000	479,820,000
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Available-for-Sale Securities: [Abstract]
Government Agency & Government-Sponsored Entities	10,627,000	0	10,627,000	0	21,109,000
Obligations of States and Political Subdivisions	0	0	0	0	0
Mortgage Backed Securities	0	0	0	0	0
Corporate Bonds	0		0
Other	5,516,000	0	5,516,000	0	0
Total Assets Measured at Fair Value On a Recurring Basis	16,143,000	0	16,143,000	0	21,109,000
Fair Value, Measurements, Recurring [Member] | Other Observable Inputs (Level 2) [Member]
Available-for-Sale Securities: [Abstract]
Government Agency & Government-Sponsored Entities	36,344,000	162,750,000	36,344,000	162,750,000	61,486,000
Obligations of States and Political Subdivisions	0	5,813,000	0	5,813,000	0
Mortgage Backed Securities	389,812,000	251,886,000	389,812,000	251,886,000	391,033,000
Corporate Bonds	14,864,000		14,864,000
Other	310,000	360,000	310,000	360,000	410,000
Total Assets Measured at Fair Value On a Recurring Basis	441,330,000	420,809,000	441,330,000	420,809,000	452,929,000
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Available-for-Sale Securities: [Abstract]
Government Agency & Government-Sponsored Entities	0	0	0	0	0
Obligations of States and Political Subdivisions	5,704,000	0	5,704,000	0	5,782,000
Mortgage Backed Securities	0	0	0	0	0
Corporate Bonds	0		0
Other	0	0	0	0	0
Total Assets Measured at Fair Value On a Recurring Basis	5,704,000	0	5,704,000	0	5,782,000
Fair Value, Measurements, Nonrecurring [Member]
Impaired Loans [Abstract]
Residential 1st Mortgage	200,000	926,000	200,000	926,000	89,000
Home Equity Lines and Loans	466,000	33,000	466,000	33,000	166,000
Commercial		64,000		64,000	50,000
Agricultural Real Estate		1,367,000		1,367,000
Agricultural		704,000		704,000	409,000
Commercial Real Estate		2,329,000		2,329,000	2,328,000
Total Impaired Loans	666,000	5,423,000	666,000	5,423,000	3,042,000
Other Real Estate [Abstract]
Real Estate Construction	2,553,000	3,045,000	2,553,000	3,045,000	2,553,000
Residential 1st Mortgage		331,000		331,000	371,000
Commercial Real Estate		137,000		137,000
Total Other Real Estate	2,553,000	3,513,000	2,553,000	3,513,000	2,924,000
Total Assets Measured at Fair Value On a Non-Recurring Basis	3,219,000	8,936,000	3,219,000	8,936,000	5,966,000
Fair Value, Measurements, Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Impaired Loans [Abstract]
Residential 1st Mortgage	0	0	0	0	0
Home Equity Lines and Loans	0	0	0	0	0
Commercial		0		0	0
Agricultural Real Estate		0		0
Agricultural		0		0	0
Commercial Real Estate		0		0	0
Total Impaired Loans	0	0	0	0	0
Other Real Estate [Abstract]
Real Estate Construction	0	0	0	0	0
Residential 1st Mortgage		0		0	0
Commercial Real Estate		0		0
Total Other Real Estate	0	0	0	0	0
Total Assets Measured at Fair Value On a Non-Recurring Basis	0	0	0	0	0
Fair Value, Measurements, Nonrecurring [Member] | Other Observable Inputs (Level 2) [Member]
Impaired Loans [Abstract]
Residential 1st Mortgage	0	926,000	0	926,000	0
Home Equity Lines and Loans	0	33,000	0	33,000	0
Commercial		0		0	0
Agricultural Real Estate		1,367,000		1,367,000
Agricultural		0		0	0
Commercial Real Estate		2,329,000		2,329,000	0
Total Impaired Loans	0	4,655,000	0	4,655,000	0
Other Real Estate [Abstract]
Real Estate Construction	0	3,045,000	0	3,045,000	0
Residential 1st Mortgage		331,000		331,000	0
Commercial Real Estate		137,000		137,000
Total Other Real Estate	0	3,513,000	0	3,513,000	0
Total Assets Measured at Fair Value On a Non-Recurring Basis	0	8,168,000	0	8,168,000	0
Fair Value, Measurements, Nonrecurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Impaired Loans [Abstract]
Residential 1st Mortgage	200,000	0	200,000	0	89,000
Home Equity Lines and Loans	466,000	0	466,000	0	166,000
Commercial		64,000		64,000	50,000
Agricultural Real Estate		0		0
Agricultural		704,000		704,000	409,000
Commercial Real Estate		0		0	2,328,000
Total Impaired Loans	666,000	768,000	666,000	768,000	3,042,000
Other Real Estate [Abstract]
Real Estate Construction	2,553,000	0	2,553,000	0	2,553,000
Residential 1st Mortgage		0		0	371,000
Commercial Real Estate		0		0
Total Other Real Estate	2,553,000	0	2,553,000	0	2,924,000
Total Assets Measured at Fair Value On a Non-Recurring Basis	$ 3,219,000	$ 768,000	$ 3,219,000	$ 768,000	$ 5,966,000

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Significant Accounting Policies (Details)	9 Months Ended
	Sep. 30, 2012
Cash and Cash Equivalents [Abstract]
Period of transactions for cash and cash equivalents	1 day
Investment Securities
Number of components into which amount of impairment is split	2
Loans [Abstract]
Period after which loans are placed on non accrual status, minimum	90 days
Allowance for Loan Losses [Abstract]
Number of primary components of overall allowance for loan losses	2
Number of categories into which risk ratings are grouped	5
Number of risk factors on agricultural loans	2
Income Tax Disclosure [Abstract]
Percentage likely of being realized upon settlement with the applicable taxing authority, minimum (in hundredths)	50.00%
Segment Reporting [Abstract]
Number of reportable segments	1
Buildings [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives	30 years
Buildings [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives	40 years
Furniture and Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives	3 years
Furniture and Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives	7 years
Leasehold Improvements [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives	5 years
Leasehold Improvements [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful lives	10 years