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 June 30, 2013

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 July 31, 2013.

FARMERS & MERCHANTS BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART I. - FINANCIAL INFORMATION			Page
	Item 1 -	Financial Statements
		Consolidated Balance Sheets (Unaudited) as of June 30, 2013, December 31, 2012 and June 30, 2013.	3
		Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012.	4
		Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012.	5
		Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the Six Months Ended June 30, 2013 and 2012.	6
		Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012.	7
		Notes to the Consolidated Financial Statements (Unaudited)	8
	Item 2 -	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
	Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	55
	Item 4 -	Controls and Procedures	58
PART II. - OTHER INFORMATION
	Item 1 -	Legal Proceedings	58
	Item 1A – Risk Factors		58
	Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	58
	Item 3 -	Defaults Upon Senior Securities	58
	Item 4 -	Mine Safety Disclosures	58
	Item 5 -	Other Information	58
	Item 6 -	Exhibits	59
Signatures			59
Index to Exhibits			59

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)	June 30,			December 31,		June 30,
	2013			2012		2012
Assets	(Unaudited)					(Unaudited)
Cash and Cash Equivalents:
Cash and Due From Banks	$	43,917		$	47,366	$	39,673
Interest Bearing Deposits with Banks		1,389			82,060		1,096
Total Cash and Cash Equivalents		45,306			129,426		40,769
Investment Securities:
Available-for-Sale		475,414			417,991		501,892
Held-to-Maturity		67,059			68,392		70,195
Total Investment Securities		542,473			486,383		572,087
Loans & Leases		1,295,056			1,246,902		1,203,994
Less: Allowance for Credit Losses		34,235			34,217		33,098
Loans & Leases, Net		1,260,821			1,212,685		1,170,896
Premises and Equipment, Net		22,306			22,901		23,361
Bank Owned Life Insurance		51,180			50,253		48,330
Interest Receivable and Other Assets		84,008			73,038		71,844
Total Assets	$	2,006,094		$	1,974,686	$	1,927,287
Liabilities
Deposits:
Demand	$	429,526		$	462,251	$	360,290
Interest Bearing Transaction		248,447			259,141		223,343
Savings and Money Market		588,009			541,526		542,922
Time		444,175			459,108		505,670
Total Deposits		1,710,157			1,722,026		1,632,225
Federal Home Loan Bank Advances		43,300			-		50,998
Subordinated Debentures		10,310			10,310		10,310
Interest Payable and Other Liabilities		39,271			37,317		34,979
Total Liabilities		1,803,038			1,769,653		1,728,512
Shareholders' Equity
Preferred Stock:  No Par Value.  1,000,000 Shares Authorized, None Issued or Outstanding		-			-		-
Common Stock:  Par Value $0.01, 7,500,000 Shares Authorized, 777,882, 777,882 and 778,939 Shares Issued and Outstanding at June 30, 2013, December 31, 2012 and June 30, 2012, respectively		8			8		8
Additional Paid-In Capital		75,014			75,014		75,410
Retained Earnings		130,005			123,012		115,838
Accumulated Other Comprehensive (Loss) Income, Net		(1,971	)		6,999		7,519
Total Shareholders' Equity		203,056			205,033		198,775
Total Liabilities & Shareholders' Equity	$	2,006,094		$	1,974,686	$	1,927,287
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						Six Months
	Ended June 30,						Ended June 30,
	2013			2012			2013		2012
Interest Income
Interest and Fees on Loans & Leases	$	15,906		$	16,303		$	31,351	$	32,778
Interest on Deposits with Banks		3			15			47		68
Interest on Investment Securities:
Taxable		2,382			2,835			4,488		5,643
Exempt from Federal Tax		654			660			1,314		1,290
Total Interest Income		18,945			19,813			37,200		39,779
Interest Expense
Deposits		628			975			1,311		2,032
Borrowed Funds		9			493			9		1,036
Subordinated Debentures		82			87			163		175
Total Interest Expense		719			1,555			1,483		3,243
Net Interest Income		18,226			18,258			35,717		36,536
Provision for Credit Losses		250			280			250		500
Net Interest Income After Provision for Credit Losses		17,976			17,978			35,467		36,036
Non-Interest Income
Service Charges on Deposit Accounts		1,069			1,201			2,173		2,414
Net Gain on Sale of Investment Securities		154			-			889		-
Increase in Cash Surrender Value of Life Insurance		469			456			926		912
Debit Card and ATM Fees		794			742			1,521		1,465
Net (Loss) Gain on Deferred Compensation Investments		(286	)		(312	)		1,404		619
Other		764			724			1,548		1,324
Total Non-Interest Income		2,964			2,811			8,461		6,734
Non-Interest Expense
Salaries and Employee Benefits		8,895			8,021			16,940		15,942
Net (Loss) Gain on Deferred Compensation Investments		(286	)		(312	)		1,404		619
Occupancy		629			628			1,250		1,269
Equipment		678			878			1,373		1,596
Legal Fees		263			30			460		425
FDIC Insurance		246			243			486		485
Other		1,677			3,183			3,148		4,457
Total Non-Interest Expense		12,102			12,671			25,061		24,793
Income Before Income Taxes		8,838			8,118			18,867		17,977
Provision for Income Taxes		3,273			2,956			7,051		6,625
Net Income	$	5,565		$	5,162		$	11,816	$	11,352
Basic Earnings Per Common Share	$	7.15		$	6.63		$	15.19	$	14.57
The accompanying notes are an integral part of these unaudited consolidated financial statements

4

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(in thousands)	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2013			2012			2013			2012
Net Income	$	5,565		$	5,162		$	11,816		$	11,352
Other Comprehensive (Loss) Income
(Decrease) Increase in Net Unrealized  (Losses) Gains on Available-for-Sale Securities		(12,771	)		3,538			(14,588	)		4,921
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income		(154	)		-			(889	)		-
Deferred Tax Benefit (Expense)		5,434			(1,488	)		6,507			(2,069	)
Change in Net Unrealized (Losses) Gains on Available-for-Sale Securities, Net of Tax		(7,491	)		2,050			(8,970	)		2,852
Total Other Comprehensive (Loss) Income		(7,491	)		2,050			(8,970	)		2,852
Comprehensive (Loss) Income	$	(1,926	)	$	7,212		$	2,846		$	14,204
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 (Loss), Net			Equity
Balance, January 1, 2012		779,424		$	8	$	75,590		$	109,081		$	4,667		$	189,346
Net Income					-		-			11,352			-			11,352
Cash Dividends Declared on
Common Stock ($5.90 per share)					-		-			(4,595	)		-			(4,595	)
Repurchase of Stock		(485	)		-		(180	)		-			-			(180	)
Change in Net Unrealized Gain on Securities Available for Sale, Net of Tax					-		-			-			2,852			2,852
Balance, June 30, 2012		778,939		$	8	$	75,410		$	115,838		$	7,519		$	198,775
Balance, January 1, 2013		777,882		$	8	$	75,014		$	123,012		$	6,999		$	205,033
Net Income					-		-			11,816			-			11,816
Cash Dividends Declared on
Common Stock ($6.20 per share)					-		-			(4,823	)		-			(4,823	)
Change in Net Unrealized Loss on Securities Available for Sale, Net of Tax					-		-			-			(8,970	)		(8,970	)
Balance, June 30, 2013		777,882		$	8	$	75,014		$	130,005		$	(1,971	)	$	203,056
The accompanying notes are an integral part of these unaudited consolidated financial statements

6

FARMERS & MERCHANTS BANCORP
Consolidated Statements of Cash Flows (Unaudited)	Six Months Ended
(in thousands)	June 30,			June 30,
	2013			2012
Operating Activities:
Net Income	$	11,816		$	11,352
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Credit Losses		250			500
Depreciation and Amortization		782			876
Net Amortization of Investment Security Discounts & Premium		1,806			1,721
Net Gain on Sale of Investment Securities		(889	)		-
Net Change in Operating Assets & Liabilities:
Net Increase in Interest Receivable and Other Assets		(5,297	)		(1,221	)
Net Increase in Interest Payable and Other Liabilities		1,954			1,678
Net Cash Provided by Operating Activities		10,422			14,906
Investing Activities:
Purchase of Investment Securities Available-for-Sale		(220,941	)		(106,797	)
Proceeds from Sold, Matured, or Called Securities Available-for-sale		147,050			87,911
Purchase of Investment Securities Held-to-Maturity		(305	)		(10,359	)
Proceeds from Matured or Called Securities Held-to-Maturity		1,619			3,241
Net Loans & Leases Paid, Originated or Acquired		(48,683	)		(41,559	)
Principal Collected on Loans & Leases Previously Charged Off		297			224
Additions to Premises and Equipment		(187	)		(179	)
Net Cash Used by Investing Activities		(121,150	)		(67,518	)
Financing Activities:
Net (Decrease) Increase in Deposits		(11,869	)		6,028
Net Decrease in Securities Sold Under Agreement to Repurchase		-			(60,000	)
Net Change in Other Borrowings		43,300			50,468
Common Stock Repurchases		-			(180	)
Cash Dividends		(4,823	)		(4,595	)
Net Cash Provided (Used) By Financing Activities		26,608			(8,279	)
Decrease in Cash and Cash Equivalents		(84,120	)		(60,891	)
Cash and Cash Equivalents at Beginning of Period		129,426			101,660
Cash and Cash Equivalents at End of Period	$	45,306		$	40,769
Supplementary Data
Loans Transferred to Foreclosed Assets (ORE)	$	2,190		$	-
Cash Payments Made for Income Taxes	$	11,706		$	10,586
Interest Paid	$	3,601		$	4,779
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 accounting principles generally accepted in the United States of America 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, 2012. The results of operations for the three-month and six-month periods ended June 30, 2013 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 accounting principles generally accepted in the United States of America 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 & Leases

Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases 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 or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease 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 & leases placed on non-accrual status are returned to accrual status when the loans or leases 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 or lease.

9

A loan or lease 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 & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease 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 & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans & leases that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans or leases for customers unless: (i) the existing loan or lease is brought current as to principal and interest payments; and (ii) the restructured loan or lease 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 or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance-sheet date. The allowance is established through a provision for credit 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 & lease 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 & leases and general reserves for inherent losses related to loans & leases that are not impaired.

The determination of the general reserve for loans & leases 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, 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 & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases 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 & leases and periodically performs detailed reviews of all such loans & leases 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 & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. 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 or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

10

Special Mention – A special mention loan or lease 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 lease or in the Company's credit position at some future date. Special Mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease 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 or leases 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 or leases 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, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease 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 credit 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 by the weakness in residential real estate values over the past five 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.

Leases – Equipment leases subject the Company, as Lessor, to both the credit risk of the Lessee and the residual value risk of the equipment.  Credit risks are underwritten using the same credit criteria the Company would make an equipment term loan under.  Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

At least quarterly, the Board of Directors reviews 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. Upon acquisition, these properties are recorded at fair value less estimated selling costs. 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 credit 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 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 Standard 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.

12

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 consolidated 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 basic 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 June 30, 2013, December 31, 2012 or June 30, 2012.

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 generally accepted accounting principles 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.

13

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

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
June 30, 2013	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	26,327	$	155	$	-	$	26,482
Obligations of States and Political Subdivisions		5,612		-		-		5,612
Mortgage Backed Securities (1)		396,041		4,373		7,840		392,574
Corporate Securities		49,647		180		267		49,560
Other		1,186		-		-		1,186
Total	$	478,813	$	4,708	$	8,107	$	475,414

	Amortized		Gross Unrealized				Fair/Book
December 31, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	26,546	$	277	$	-	$	26,823
Obligations of States and Political Subdivisions		5,665		-		-		5,665
Mortgage Backed Securities (1)		341,212		11,570		10		352,772
Corporate Securities		22,318		252		12		22,558
Other		10,173		-		-		10,173
Total	$	405,914	$	12,099	$	22	$	417,991

	Amortized		Gross Unrealized				Fair/Book
June 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	56,764	$	314	$	-	$	57,078
Obligations of States and Political Subdivisions		5,724		-		-		5,724
Mortgage Backed Securities (1)		414,990		12,647		-		427,637
Corporate Securities		8,983		29		17		8,995
Other		2,458		-		-		2,458
Total	$	488,919	$	12,990	$	17	$	501,892

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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
June 30, 2013	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	64,648	$	1,252	$	531	$	65,369
Mortgage Backed Securities (1)		217		3		-		220
Other		2,194		-		-		2,194
Total	$	67,059	$	1,255	$	531	$	67,783

	Book		Gross Unrealized				Fair
December 31, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	65,694	$	2,296	$	3	$	67,987
Mortgage Backed Securities (1)		484		12		-		496
Other		2,214		-		-		2,214
Total	$	68,392	$	2,308	$	3	$	70,697

	Book		Gross Unrealized				Fair
June 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	67,159	$	2,498	$	51	$	69,606
Mortgage Backed Securities (1)		806		25		-		831
Other		2,230		-		-		2,230
Total	$	70,195	$	2,523	$	51	$	72,667

⁽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 cost and estimated fair values of investment securities at June 30, 2013 by contractual maturity are shown in the following tables (in thousands):

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair/Book		Book		Fair
June 30, 2013	Cost		Value		Value		Value
Within One Year	$	11,680	$	11,718	$	2,075	$	2,084
After One Year Through Five Years		64,383		64,378		13,317		13,627
After Five Years Through Ten Years		1,310		1,345		36,228		37,161
After Ten Years		5,399		5,399		15,222		14,691
		82,772		82,840		66,842		67,563
Investment Securities Not Due at a Single Maturity Date:
Mortgage Backed Securities		396,041		392,574		217		220
Total	$	478,813	$	475,414	$	67,059	$	67,783

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.

15

The following tables show those 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 at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2013	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	205,363	$	7,840	$	-	$	-	$	205,363	$	7,840
Corporate Securities		30,597		267		-		-		30,597		267
Total	$	235,960	$	8,107	$	-	$	-	$	235,960	$	8,107
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	9,626	$	531	$	-	$	-	$	9,626	$	531
Total	$	9,626	$	531	$	-	$	-	$	9,626	$	531

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2012	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	4,542	$	10	$	-	$	-	$	4,542	$	10
Corporate Securities		3,442		12		-		-		3,442		12
Total	$	7,984	$	22	$	-	$	-	$	7,984	$	22
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	528	$	3	$	-	$	-	$	528	$	3
Total	$	528	$	3	$	-	$	-	$	528	$	3

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2012	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Corporate Securities	$	3,405	$	17	$	-	$	-	$	3,405	$	17
Total	$	3,405	$	17	$	-	$	-	$	3,405	$	17
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	4,774	$	51	$	-	$	-	$	4,774	$	51
Total	$	4,774	$	51	$	-	$	-	$	4,774	$	51

As of June 30, 2013, the Company held 363 investment securities of which 82 were in a loss position for less than twelve months. No securities were in a loss position for twelve months or more. 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.

Securities of Government Agency and Government Sponsored Entities – There were no unrealized losses on the Company’s investments in securities of government agency and government sponsored entities at June 30, 2013, December 31, 2012 and June 30, 2012.

Mortgage Backed Securities - The unrealized losses on the Company's investment in mortgage backed securities were $7.8 million, $10,000, and $0 at June 30, 2013, December 31, 2012, and June 30, 2012, 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 does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013 and December 31, 2012, respectively.

16

Obligations of States and Political Subdivisions - The financial problems experienced by certain municipalities over the past five years, 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 June 30, 2013, over ninety-four 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 six 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.

The unrealized losses on the Company’s investment in obligation of states and political subdivision were $531,000, $3,000, and $51,000 at June 30, 2013, December 31, 2012 and June 30, 2012, respectively. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013, December 31, 2012 and June 30, 2012.

Corporate Securities - The unrealized losses on the Company’s investment in corporate securities were $267,000. $12,000, and $17,000 at June 30, 2013, December 31, 2012, and June 30, 2012. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013, December 31, 2012 and June 30, 2012.

Proceeds from sales and calls of securities available-for-sale were as follows:

	Three Months				Six Months
	Ended June 30,				Ended June 30,
(in thousands)	2013		2012		2013		2012
Proceeds	$	4,356	$	1,530	$	49,615	$	26,530
Gains		154		-		903		-
Losses		-		-		14		-

Pledged Securities

As of June 30, 2013, securities carried at $290.6 million were pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law. This amount at December 31, 2012, was $296.9 million.

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3. Allowance for Credit Losses

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

June 30, 2013	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated			Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2013	$	6,464		$	2,877		$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854		$	34,217
Charge-Offs		-			(400	)		-			(16	)		(22	)		(23	)		(4	)		(64	)		-		-			(529	)
Recoveries		-			-			-			-			20			20			236			21			-		-			297
Provision		(732	)		1,004			(9	)		(166	)		(249	)		123			880			29			-		(630	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2013	$	6,671		$	3,795		$	969		$	1,260		$	3,209		$	9,412		$	7,966		$	163		$	-	$	810		$	34,255
Charge-Offs		-			(400	)		-			-			(21	)		(23	)		(4	)		(46	)		-		-			(494	)
Recoveries		-			-			-			-			18			7			189			10			-		-			224
Provision		(939	)		86			8			(223	)		(222	)		1,161			924			41			-		(586	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Ending Balance Individually Evaluated for Impairment		6			300			-			-			243			596			202			55			-		-			1,402
Ending Balance Collectively Evaluated for Impairment		5,726			3,181			977			1,037			2,741			9,961			8,873			113			-		224			32,833
Loans:
Ending Balance	$	393,159		$	312,588		$	32,718		$	136,473		$	37,498		$	214,760		$	159,647		$	5,546		$	2,667	$	-		$	1,295,056
Ending Balance Individually Evaluated for Impairment		2,979			5,817			-			528			612			1,500			510			56			-		-			12,002
Ending Balance Collectively Evaluated for Impairment		390,180			306,771			32,718			135,945			36,886			213,260			159,137			5,490			2,667		-			1,283,054

December 31, 2012	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated		Total
Year-To-Date Allowance for Credit 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		-		-		-			(152	)		(259	)		(294	)		(198	)		(145	)		-		-		(1,048	)
Recoveries		-		90		-			53			14			61			117			63			-		-		398
Provision		641		204		(947	)		67			(266	)		2,543			(689	)		57			-		240		1,850
Ending Balance- December 31, 2012	$	6,464	$	2,877	$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854	$	34,217
Ending Balance Individually Evaluated for Impairment		-		-		-			-			173			996			144			61			-		-		1,374
Ending Balance Collectively Evaluated for Impairment		6,464		2,877		986			1,219			3,062			9,441			7,819			121			-		854		32,843
Loans:
Ending Balance	$	350,548	$	311,992	$	32,680		$	140,257		$	42,042		$	221,032		$	143,293		$	5,058		$	-	$	-	$	1,246,902
Ending Balance Individually Evaluated for Impairment		289		5,423		-			657			980			3,937			250			61			-		-		11,597
Ending Balance Collectively Evaluated for Impairment		350,259		306,569		32,680			139,600			41,062			217,095			143,043			4,997			-		-		1,235,305

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June 30, 2012	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated		Total
Year-To-Date Allowance for Credit 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		-			-			-			(1	)		(116	)		(240	)		(198	)		(88	)		-		-		(643	)
Recoveries		-			89			-			-			10			61			32			32			-		-		224
Provision		(1,446	)		(39	)		(33	)		201			(126	)		(114	)		971			(11	)		-		1,097		500
Ending Balance- June 30, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140				$	1,711	$	33,098
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2012	$	4,443		$	2,775		$	2,201		$	1,295		$	3,552		$	8,757		$	8,637		$	162		$	-	$	1,120	$	32,942
Charge-Offs		-			-			-			(1	)		(47	)		(240	)		-			(24	)		-		-		(312	)
Recoveries		-			89			-			-			2			59			24			14			-		-		188
Provision		(66	)		(231	)		(301	)		157			7			(742	)		877			(12	)		-		591		280
Ending Balance- June 30, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	-	$	1,711	$	33,098
Ending Balance Individually Evaluated for Impairment		-			-			-			51			60			586			197			21			-		-		915
Ending Balance Collectively Evaluated for Impairment		4,377			2,633			1,900			1,400			3,454			7,248			9,341			119			-		1,711		32,183
Loans:
Ending Balance	$	324,795		$	285,630		$	36,033		$	123,053		$	46,284		$	210,780		$	171,621		$	5,798		$	-	$	-	$	1,203,994
Ending Balance Individually Evaluated for Impairment		299			1,512			-			495			826			874			363			21			-		-		4,390
Ending Balance Collectively Evaluated for Impairment		324,496			284,118			36,033			122,558			45,458			209,906			171,258			5,777			-		-		1,199,604

19

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

June 30, 2013	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	378,570	$	7,817	$	6,772	$	393,159
Agricultural Real Estate		304,516		1,936		6,136		312,588
Real Estate Construction		26,534		6,184		-		32,718
Residential 1st Mortgages		134,766		786		921		136,473
Home Equity Lines & Loans		36,407		-		1,091		37,498
Agricultural		212,923		526		1,311		214,760
Commercial		153,445		5,861		341		159,647
Consumer & Other		5,260		-		286		5,546
Leases		2,667		-		-		2,667
Total	$	1,255,088	$	23,110	$	16,858	$	1,295,056

December 31, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	326,037	$	15,528	$	8,983	$	350,548
Agricultural Real Estate		299,642		6,605		5,745		311,992
Real Estate Construction		26,445		6,235		-		32,680
Residential 1st Mortgages		137,998		1,192		1,067		140,257
Home Equity Lines & Loans		40,866		-		1,176		42,042
Agricultural		216,164		1,168		3,700		221,032
Commercial		137,217		5,586		490		143,293
Consumer & Other		4,737		-		321		5,058
Total	$	1,189,106	$	36,314	$	21,482	$	1,246,902

June 30, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	287,439	$	30,475	$	6,881	$	324,795
Agricultural Real Estate		261,347		20,362		3,921		285,630
Real Estate Construction		28,169		3,217		4,647		36,033
Residential 1st Mortgages		120,787		1,235		1,031		123,053
Home Equity Lines & Loans		43,895		-		2,389		46,284
Agricultural		202,469		5,515		2,796		210,780
Commercial		165,113		5,906		602		171,621
Consumer & Other		5,565		-		233		5,798
Total	$	1,114,784	$	66,710	$	22,500	$	1,203,994

See “Note 1. Significant Accounting Policies - Allowance for Credit Losses” for a description of the internal risk ratings used by the Company. There were no loans or leases outstanding at June 30, 2013, December 31, 2012, and June 30, 2012 rated doubtful or loss.

20

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

(in thousands):

	30-89 Days		90 Days and				Total Past				Total
June 30, 2013	Past Due		Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	2,873	$	2,873	$	390,286	$	393,159
Agricultural Real Estate		-		-		5,817		5,817		306,771		312,588
Real Estate Construction		-		-		-		-		32,718		32,718
Residential 1st Mortgages		-		-		202		202		136,271		136,473
Home Equity Lines & Loans		152		-		243		395		37,103		37,498
Agricultural		-		-		997		997		213,763		214,760
Commercial		1		-		277		278		159,369		159,647
Consumer & Other		16		-		18		34		5,512		5,546
Leases		-		-		-		-		2,667		2,667
Total	$	169	$	-	$	10,427	$	10,596	$	1,284,460	$	1,295,056

	30-89 Days		90 Days and				Total Past				Total
December 31, 2012	Past Due		Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	150	$	-	$	-	$	150	$	350,398	$	350,548
Agricultural Real Estate		-		-		5,423		5,423		306,569		311,992
Real Estate Construction		-		-		-		-		32,680		32,680
Residential 1st Mortgages		23		-		445		468		139,789		140,257
Home Equity Lines & Loans		70		-		213		283		41,759		42,042
Agricultural		-		-		3,198		3,198		217,834		221,032
Commercial		293		-		-		293		143,000		143,293
Consumer & Other		11		-		19		30		5,028		5,058
Total	$	547	$	-	$	9,298	$	9,845	$	1,237,057	$	1,246,902

	30-89 Days		90 Days or More				Total Past				Total
June 30, 2012	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	105	$	-	$	-	$	105	$	324,690	$	324,795
Agricultural Real Estate		-		-		1,512		1,512		284,118		285,630
Real Estate Construction		-		-		-		-		36,033		36,033
Residential 1st Mortgages		11		-		452		463		122,590		123,053
Home Equity Lines & Loans		132		-		346		478		45,806		46,284
Agricultural		2,384		-		587		2,971		207,809		210,780
Commercial		327		-		97		424		171,197		171,621
Consumer & Other		44		-		21		65		5,733		5,798
Total	$	3,003	$	-	$	3,015	$	6,018	$	1,197,976	$	1,203,994

21

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

							Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2013	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	2,973	$	2,993	$	-	$	1,540	$	2	$	869	$	4
Agricultural Real Estate		4,382		4,673		-		3,945		-		4,209		-
Residential 1st Mortgages		530		580		-		633		4		665		7
Home Equity Lines & Loans		374		397		-		312		1		417		2
Agricultural		457		503		-		1,105		-		1,474		-
Commercial		92		92		-		98		2		102		4
	$	8,808	$	9,238	$	-	$	7,633	$	9	$	7,736	$	17
With an allowance recorded:
Commercial Real Estate	$	7	$	6	$	6	$	4	$	-	$	2	$	-
Agricultural Real Estate		1,449		1,843		300		1,645		-		1,283		-
Home Equity Lines & Loans		243		289		243		198		-		186		-
Agricultural		1,043		1,068		596		1,516		8		1,757		16
Commercial		418		430		202		281		2		213		4
Consumer & Other		56		58		55		201		1		202		2
	$	3,216	$	3,694	$	1,402	$	3,845	$	11	$	3,643	$	22
Total	$	12,024	$	12,932	$	1,402	$	11,478	$	20	$	11,379	$	39

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2012	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	289	$	289	$	-	$	506	$	20
Agricultural Real Estate		5,437		5,454		-		2,611		-
Residential 1st Mortgages		658		761		-		458		3
Home Equity Lines & Loans		792		871		-		775		23
Agricultural		1,932		1,954		-		1,159		19
Commercial		106		106		-		144		6
	$	9,214	$	9,435	$	-	$	5,653	$	71
With an allowance recorded:
Residential 1st Mortgages	$	-	$	-	$	-	$	54	$	-
Home Equity Lines & Loans		194		237		173		182		4
Agricultural		2,006		2,019		996		997		1
Commercial		144		144		144		159		4
Consumer & Other		61		63		61		31		-
	$	2,405	$	2,463	$	1,374	$	1,423	$	9
Total	$	11,619	$	11,898	$	1,374	$	7,076	$	80

							Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	298	$	299	$	-	$	720	$	6	$	1,035	$	9
Agricultural Real Estate		1,514		1,777		-		1,224		-		1,085		-
Residential 1st Mortgages		387		416		-		340		-		549		-
Home Equity Lines & Loans		750		821		-		762		7		704		11
Agricultural		288		288		-		299		6		293		10
Commercial		118		118		-		179		2		197		2
	$	3,355	$	3,719	$	-	$	3,524	$	21	$	3,863	$	32
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	755	$	-
Residential 1st Mortgages		108		109		51		108		-		81		-
Home Equity Lines & Loans		78		82		60		133		1		142		2
Agricultural		587		1,566		586		717		-		840		-
Commercial		245		252		197		173		-		138		-
Consumer & Other		21		22		21		22		-		23		-
	$	1,039	$	2,031	$	915	$	1,153	$	1	$	1,979	$	2
Total	$	4,394	$	5,750	$	915	$	4,677	$	22	$	5,842	$	34

Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases 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 loan & lease fees & costs, unamortized premium or discount, and accrued interest.

22

At June 30, 2013, the Company allocated $433,000 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 June 30, 2013 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and six month periods ending June 30, 2013, 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 10 years.

The following table presents loans by class, modified as troubled debt restructured loans & leases for the three and six-month periods ended June 30, 2012 (in thousands):

	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
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
Residential 1st Mortgages		-	$	-	$	-		4	$	306	$	290
Home Equity Lines & Loans		1		180		169		2		195		184
Commercial		-		-		-		2		292		292
Total		1	$	180	$	169		8	$	793	$	766

The TDRs described above increased the allowance for credit losses by $0 and $4,000 and resulted in charge-offs of $11,000 and $27,000 for the three and six-month period ending June 30, 2013.

During the three and six-months ended June 30, 2013, 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, 2012, the Company allocated $401,000 of specific reserves to $2.6 million of troubled debt restructured loans, of which $2.3 million were performing. The Company had no commitments at December 31, 2012, to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the twelve-month period ending December 31, 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 ranging from 2 years to 5 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 10 years.

23

The following table presents loans by class modified as troubled debt restructured loans during the twelve-month period ended December 31, 2012 (in thousands):

	December 31, 2012
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		1	$	116	$	116
Residential 1st Mortgages		2		216		201
Home Equity Lines & Loans		7		529		480
Agricultural		4		858		858
Commercial		3		273		273
Consumer & Other		1		41		41
Total		18	$	2,033	$	1,969

The TDRs described above increased the allowance for credit losses by $53,000 and resulted in charge-offs of $64,000 during the year ended December 31, 2012.

During the twelve-month period ended December 31, 2012, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

At June 30, 2012, the Company allocated $190,000 of specific reserves to $1.7 million of troubled debt restructured loans, of which $1.4 million were performing. The Company had no commitments at June 30, 2012 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and six month periods ending June 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 six-month periods ended June 30, 2012 (in thousands):

	Three Months Ended June 30, 2012						Six Months Ended June 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		30		29		4		146		139
Home Equity Lines & Loans		2		294		258		3		368		326
Agricultural		-		-		-		1		180		180
Commercial		1		147		147		3		273		273
Total		4	$	471	$	434	$	12	$	1,083	$	1,034

The TDR’s described above increased the allowance for credit losses by $85,000 and $29,000 and resulted in charge-offs of $37,000 and $49,000 for the three and six months ended June 30, 2012.

During the three and six-months ended June 30, 2012, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

24

4. Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic, 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 & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivables” topic. The fair value of impaired loans & leases is estimated using one of several methods, including collateral value when the loan & lease is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases 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 or lease as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant unobservable assumption, and there is no observable market price, the Company records the impaired loan or lease 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. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant unobservable assumption, and there is no observable market price, 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.

25

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 June 30, 2013, 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	$	26,482	$	21,416	$	5,066	$	-
Obligations of States and Political Subdivisions		5,612		-		-		5,612
Mortgage Backed Securities		392,574		-		392,574		-
Corporate Securities		49,560		8,122		41,438		-
Other		1,186		876		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	475,414	$	30,414	$	439,388	$	5,612

			Fair Value Measurements At December 31, 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	$	26,823	$	21,731	$	5,092	$	-
Obligations of States and Political Subdivisions		5,665		-		-		5,665
Mortgage Backed Securities		352,772		-		352,772		-
Corporate Securities		22,558		4,020		18,538		-
Other		10,173		9,863		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	417,991	$	35,614	$	376,712	$	5,665

			Fair Value Measurements At June 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	$	57,078	$	10,724	$	46,354	$	-
Obligations of States and Political Subdivisions		5,724		-		-		5,724
Mortgage Backed Securities		427,637		-		427,637		-
Corporate Securities		8,995		-		8,995		-
Other		2,458		2,148		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	501,892	$	12,872	$	483,296	$	5,724

26

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and six-months ended June 30, 2013 and 2012, 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 June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012
Balance at Beginning of Period	$	5,643		$	5,753		$	5,665		$	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		(31	)		(29	)		(53	)		(58	)
Net Transfers In/(Out) of Level 3		-			-			-			-
Balance at End of Period	$	5,612		$	5,724		$	5,612		$	5,724

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 impaired loans & leases and other real estate, 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 & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an 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 June 30, 2013, 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
Agricultural Real Estate	$	1,143	$	-	$	-	$	1,143
Residential 1st Mortgage		283		-		-		283
Home Equity Lines and Loans		184		-		-		184
Agricultural		672		-		-		672
Commercial		216		-		-		216
Total Impaired Loans		2,498		-		-		2,498
Other Real Estate
Real Estate Construction		2,399		-		-		2,399
Total Other Real Estate		2,399		-		-		2,399
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	4,897	$	-	$	-	$	4,897

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $2.5 million, net of an allowance for credit losses of $1.3 million.

27

ORE was $2.4 million, net of a $3.7 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 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 credit losses. After foreclosure, management periodically obtains updated valuations of the foreclosed assets and, if additional impairments are deemed necessary, the impairment is recorded in non-interest expense on the Consolidated Statements of Income.

			Fair Value Measurements At December 31, 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	$	235	$	-	$	-	$	235
Home Equity Lines and Loans		462		-		-		462
Agricultural		1,010		-		-		1,010
Total Impaired Loans		1,707		-		-		1,707
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	$	4,260	$	-	$	-	$	4,260

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $1.7 million, net of an allowance for credit losses of $1.4 million. The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance.

			Fair Value Measurements At June 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	$	86	$	-	$	-	$	86
Home Equity Lines and Loans		428		-		-		428
Commercial		48		-		-		48
Total Impaired Loans		562		-		-		562
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	$	3,115	$	-	$	-	$	3,115

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $562,000, net of an allowance for credit losses of $915,000. The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance.

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5. Fair Value of Financial Instruments

U.S. GAAP requires 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
June 30, 2013 (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	$	45,306		$	45,306		$	-		$	-		$	45,306
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,482			21,416			5,066			-			26,482
Obligations of States and Political Subdivisions		5,612			-			-			5,612			5,612
Mortgage Backed Securities		392,574						392,574			-			392,574
Corporate Securities		49,560			8,122			41,438			-			49,560
Other		1,186			876			310			-			1,186
Total Investment Securities Available-for-Sale		475,414			30,414			439,388			5,612			475,414
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		64,648			-			58,009			7,360			65,369
Mortgage Backed Securities		217			-			220			-			220
Other		2,194			-			2,194			-			2,194
Total Investment Securities Held-to-Maturity		67,059			-			60,423			7,360			67,783
FHLB Stock		7,187			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		387,427			-			-			387,017			387,017
Agricultural Real Estate		309,107			-			-			310,902			310,902
Real Estate Construction		31,741			-			-			31,901			31,901
Residential 1st Mortgages		135,436			-			-			137,951			137,951
Home Equity Lines and Loans		34,514			-			-			37,225			37,225
Agricultural		204,203			-			-			201,957			201,957
Commercial		150,572			-			-			149,593			149,593
Consumer & Other		5,378			-			-			5,400			5,400
Leases		2,667			-			-			2,667			2,667
Unallocated Allowance		(224	)		-			-			(224	)		(224	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,260,821			-			-			1,264,389			1,264,389
Accrued Interest Receivable		7,609			-			7,609			-			7,609
Liabilities:
Deposits:
Demand		429,526			429,526			-			-			429,526
Interest Bearing Transaction		248,447			248,447			-			-			248,447
Savings and Money Market		588,009			588,009			-			-			588,009
Time		444,175			-			444,579			-			444,579
Total Deposits		1,710,157			1,265,982			444,579			-			1,710,561
FHLB Advances & Securities Sold Under Agreement to Repurchase		43,300			-			43,300			-			43,300
Subordinated Debentures		10,310			-			5,665			-			5,665
Accrued Interest Payable		438			-			438			-			438

29

				Fair Value of Financial Instruments Using
December 31, 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	$	129,426		$	129,426		$	-		$	-		$	129,426
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,823			21,731			5,092			-			26,823
Obligations of States and Political Subdivisions		5,665			-			-			5,665			5,665
Mortgage Backed Securities		352,772			-			352,772			-			352,772
Corporate Securities		22,558			4,020			18,538			-			22,558
Other		10,173			9,863			310			-			10,173
Total Investment Securities Available-for-Sale		417,991			35,614			376,712			5,665			417,991
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		65,694			-			60,177			7,810			67,987
Mortgage Backed Securities		484			-			496			-			496
Other		2,214			-			2,214			-			2,214
Total Investment Securities Held-to-Maturity		68,392			-			62,887			7,810			70,697
FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		344,084			-			-			349,524			349,524
Agricultural Real Estate		309,115			-			-			316,302			316,302
Real Estate Construction		31,694			-			-			32,024			32,024
Residential 1st Mortgages		139,038			-			-			144,203			144,203
Home Equity Lines and Loans		38,807			-			-			41,419			41,419
Agricultural		210,595			-			-			209,578			209,578
Commercial		135,330			-			-			134,647			134,647
Consumer & Other		4,876			-			-			4,847			4,847
Unallocated Allowance		(854	)		-			-			(854	)		(854	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,212,685			-			-			1,231,690			1,231,690
Accrued Interest Receivable		6,389			-			-			6,389			6,389
Liabilities:
Deposits:
Demand		462,251			462,251			-			-			462,251
Interest Bearing Transaction		259,141			259,141			-			-			259,141
Savings and Money Market		541,526			541,526			-			-			541,526
Time		459,108			-			459,993			-			459,993
Total Deposits		1,722,026			1,262,918			459,993			-			1,722,911
Subordinated Debentures		10,310			-			5,750			-			5,750
Accrued Interest Payable		498			-			498			-			498

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				Fair Value of Financial Instruments Using
June 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	$	40,769		$	40,769		$	-		$	-		$	40,769
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		57,078			10,724			46,354			-			57,078
Obligations of States and Political Subdivisions		5,724			-			-			5,724			5,724
Mortgage Backed Securities		427,637			-			427,637			-			427,637
Corporate Securities		8,995			-			8,995			-			8,995
Other		2,458			2,148			310			-			2,458
Total Investment Securities Available-for-Sale		501,892			12,872			483,296			5,724			501,892
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,159			-			61,820			7,786			69,606
Mortgage Backed Securities		806			-			831			-			831
Other		2,230			-			2,230			-			2,230
Total Investment Securities Held-to-Maturity		70,195			-			64,881			7,786			72,667
FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		320,418			-			-			330,783			330,783
Agricultural Real Estate		282,997			-			-			292,152			292,152
Real Estate Construction		34,133			-			-			34,423			34,423
Residential 1st Mortgages		121,602			-			-			125,110			125,110
Home Equity Lines and Loans		42,770			-			-			45,809			45,809
Agricultural		202,946			-			-			202,991			202,991
Commercial		162,083			-			-			161,242			161,242
Consumer & Other		5,658			-			-			5,731			5,731
Unallocated Allowance		(1,711	)		-			-			(1,711	)		(1,711	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,170,896			-			-			1,196,530			1,196,530
Accrued Interest Receivable		7,223			-			7,223			-			7,223
Liabilities:
Deposits:
Demand		360,290			360,290			-			-			360,290
Interest Bearing Transaction		223,343			223,343			-			-			223,343
Savings and Money Market		542,922			542,922			-			-			542,922
Time		505,670			-			506,638			-			506,638
Total Deposits		1,632,225			1,126,555			506,638			-			1,633,193
FHLB Advances & Securities Sold Under Agreement to Repurchase		50,998			-			51,065			-			51,065
Subordinated Debentures		10,310			-			5,841			-			5,841
Accrued Interest Payable		796			-			796			-			796

31

Fair value estimates presented herein are based on pertinent information available to management as of June 30, 2013, December 31, 2012, and June 30, 2012. 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 & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans & leases 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 & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans & leases with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases 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.

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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 17, 2013, the Board of Directors of Farmers & Merchants Bancorp announced a mid-year cash dividend of $6.20 per share, a 5.1% increase over the $5.90 per share paid on July 2, 2012. The cash dividend was paid on July 1, 2013, to shareholders of record on June 10, 2013.

Basic earnings per 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 share for the three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,				Six Months Ended June 30,
(net income in thousands)	2013		2012		2013		2012
Net Income	$	5,565	$	5,162	$	11,816	$	11,352
Average Number of Common Shares Outstanding		777,882		778,939		777,882		779,118
Basic Earnings Per Common Share	$	7.15	$	6.63	$	15.19	$	14.57

7. Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The new guidance is effective for reporting periods beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operation, cash flows, or disclosure.

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 six months ended June 30, 2013.  This analysis should be read in conjunction with our 2012 Annual Report to Shareholders on Form 10-K, and with the unaudited financial statements and notes as set forth in this report.

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 2012 Annual Report on Form 10-K.

33

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”).

During the 2^nd quarter of 2013 the Company entered the equipment leasing business.  Equipment leasing is a form of asset-backed financing which typically preserves cash more optimally than other financial products by advancing 100% of the installed equipment cost and allowing for customized payment terms. Leases fall into one of two broad categories: (1) “finance leases”, where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; and (2) “true tax leases”, where the lessor places reliance on residual value and in so doing obtains the tax benefits of ownership.  As of June 30, 2013 the Company’s lease portfolio totaled a relatively modest $2.7 million, but this is anticipated to increase as the Company’s business development activities gain traction.

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 six months ended June 30, 2013, Farmers & Merchants Bancorp reported net income of $5,565,000 and $11,816,000, earnings per share of $7.15 and $15.19 and return on average assets of 1.13% and 1.20%, respectively. Return on average shareholders’ equity was 10.62% and 11.32% for the three and six months ended June 30, 2013.

For the three and six months ended June 30, 2012, Farmers & Merchants Bancorp reported net income of $5,162,000 and $11,352,000, earnings per share of $6.63 and $14.57 and return on average assets of 1.07% and 1.18%, respectively. Return on average shareholders’ equity was 10.46% and 11.62% for the three and six months ended June 30, 2012.

The primary reasons for the Company’s improved earnings performance in the first six months of 2013 as compared to the same period last year were: (1) a $250,000 decrease in the credit loss provision; (2) an $889,000 increase in gain on sale of investment securities; and (3) a $1.3 million decrease in other non-interest expense, primarily due to a $1.7 million fee paid in 2012 for early termination of the Company’s Securities Sold Under Agreement to Repurchase. These positive impacts were partially offset by: (1) an $819,000 decrease in net interest income; (2) a $241,000 decrease in service charges on deposit accounts; and (3) a $998,000 increase in salaries and employee benefits.

34

The following is a summary of the financial results for the six-month period ended June 30, 2013 compared to June 30, 2012.

· Net income increased 4.1% to $11.8 million from $11.4 million.

· Earnings per share increased 4.3% to $15.19 from $14.57.

· Total assets increased 4.1% to $2.0 billion.

· Total loans & leases increased 7.6% to $1.3 billion.

· Total deposits increased 4.8% to $1.7 billion.

Results of Operations

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 six-month periods ended June 30, 2013 and 2012.

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 & leases 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 Income 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.”

35

Farmers & Merchants Bancorp
Quarterly Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
	Three Months Ended June 30,									Three Months Ended June 30,
				2013									2012
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	4,286		$	3			0.28	%	$	25,434		$	15			0.24	%
Investment Securities:
U.S. Agencies		26,393			54			0.82	%		64,392			164			1.02	%
Municipals - Non-Taxable		70,217			1,001			5.70	%		72,434			1,008			5.57	%
Mortgage Backed Securities		411,670			2,178			2.12	%		429,568			2,641			2.46	%
Other		53,275			150			1.13	%		12,675			30			0.95	%
Total Investment Securities		561,555			3,383			2.41	%		579,069			3,843			2.65	%
Loans & Leases:
Real Estate		852,379			11,246			5.29	%		751,503			10,806			5.78	%
Home Equity Lines & Loans		38,505			554			5.77	%		47,640			691			5.83	%
Agricultural		189,158			2,010			4.26	%		201,039			2,614			5.23	%
Commercial		151,034			2,011			5.34	%		163,742			2,092			5.14	%
Consumer		4,959			69			5.58	%		6,046			96			6.39	%
Other		231			4			6.95	%		238			4			6.76	%
Leases		1,386			12			3.47	%		-			-			0.00	%
Total Loans & Leases		1,237,652			15,906			5.15	%		1,170,208			16,303			5.60	%
Total Earning Assets		1,803,493		$	19,292			4.29	%		1,774,711		$	20,161			4.57	%
Unrealized Gain on Securities Available-for-Sale		8,183									11,282
Allowance for Credit Losses		(34,286	)								(33,074	)
Cash and Due From Banks		34,447									33,580
All Other Assets		154,424									139,306
Total Assets	$	1,966,261								$	1,925,805
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing DDA	$	253,643		$	27			0.04	%	$	230,398		$	50			0.09	%
Savings and Money Market		566,951			219			0.15	%		523,714			304			0.23	%
Time Deposits		446,233			382			0.34	%		509,464			621			0.49	%
Total Interest Bearing Deposits		1,266,827			628			0.20	%		1,263,576			975			0.31	%
Securities Sold Under Agreement to Repurchase		-			-			0.00	%		53,406			482			3.63	%
Federal Home Loan Bank Advances		24,588			9			0.15	%		6,795			11			0.65	%
Subordinated Debentures		10,310			82			3.19	%		10,310			87			3.39	%
Total Interest Bearing Liabilities		1,301,725		$	719			0.22	%		1,334,087		$	1,555			0.47	%
Interest Rate Spread								4.07	%								4.10	%
Demand Deposits (Non-Interest Bearing)		412,429									355,917
All Other Liabilities		42,435									38,386
Total Liabilities		1,756,589									1,728,390
Shareholders' Equity		209,672									197,415
Total Liabilities & Shareholders' Equity	$	1,966,261								$	1,925,805
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.07	%								0.12	%
Net Interest Income and Margin on Total Earning Assets					18,573			4.14	%					18,607			4.22	%
Tax Equivalent Adjustment					(347	)								(349	)
Net Interest Income				$	18,226			4.06	%				$	18,258			4.14	%
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 $1.2 million and $586,000 for the quarters ended June 30, 2013 and 2012, respectively. Yields on securities available-for-sale are based on historical cost.

36

Farmers & Merchants Bancorp
Year-to-Date Average Balances and Interest Rates
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
	Six Months Ended June 30,									Six Months Ended June 30,
				2013									2012
Assets	Balance			Interest			Rate			Balance			Interest			Rate
Interest Bearing Deposits with Banks	$	37,064		$	47			0.26	%	$	54,655		$	68			0.25	%
Investment Securities:
U.S. Agencies		28,105			125			0.89	%		69,940			366			1.05	%
Municipals - Non-Taxable		70,663			2,012			5.70	%		68,906			1,970			5.72	%
Mortgage Backed Securities		389,363			4,069			2.09	%		418,218			5,239			2.51	%
Other		50,793			294			1.16	%		7,885			38			0.96	%
Total Investment Securities		538,924			6,500			2.41	%		564,949			7,613			2.70	%
Loans & Leases:
Real Estate		846,349			22,278			5.31	%		740,392			21,798			5.92	%
Home Equity Lines & Loans		39,525			1,131			5.77	%		48,794			1,398			5.76	%
Agricultural		188,518			3,979			4.26	%		201,037			5,228			5.23	%
Commercial		147,801			3,788			5.17	%		160,687			4,133			5.17	%
Consumer		4,847			156			6.49	%		6,347			214			6.78	%
Other		231			7			6.11	%		238			7			5.91	%
Leases		697			12			3.47	%		-			-			0.00	%
Total Loans & Leases		1,227,968			31,351			5.15	%		1,157,495			32,778			5.69	%
Total Earning Assets		1,803,956		$	37,898			4.24	%		1,777,099		$	40,459			4.58	%
Unrealized Gain on Securities Available-for-Sale		9,573									10,189
Allowance for Credit Losses		(34,270	)								(32,966	)
Cash and Due From Banks		33,771									33,156
All Other Assets		150,487									138,704
Total Assets	$	1,963,517								$	1,926,182
Liabilities & Shareholders' Equity
Interest Bearing Deposits:
Interest Bearing DDA	$	253,401		$	56			0.04	%	$	228,186		$	96			0.08	%
Savings and Money Market		572,082			463			0.16	%		524,045			655			0.25	%
Time Deposits		450,677			792			0.35	%		510,722			1,281			0.50	%
Total Interest Bearing Deposits		1,276,160			1,311			0.21	%		1,262,953			2,032			0.32	%
Securities Sold Under Agreement to Repurchase		-			-			0.00	%		56,703			1,018			3.61	%
Federal Home Loan Bank Advances		12,405			9			0.15	%		3,659			18			0.99	%
Subordinated Debentures		10,310			163			3.19	%		10,310			175			3.41	%
Total Interest Bearing Liabilities		1,298,875		$	1,483			0.23	%		1,333,625		$	3,243			0.49	%
Interest Rate Spread								4.01	%								4.09	%
Demand Deposits (Non-Interest Bearing)		417,111									362,102
All Other Liabilities		38,844									35,037
Total Liabilities		1,754,830									1,730,764
Shareholders' Equity		208,687									195,418
Total Liabilities & Shareholders' Equity	$	1,963,517								$	1,926,182
Impact of Non-Interest Bearing Deposits and Other Liabilities								0.06	%								0.12	%
Net Interest Income and Margin on Total Earning Assets					36,415			4.07	%					37,216			4.21	%
Tax Equivalent Adjustment					(698	)								(680	)
Net Interest Income				$	35,717			3.99	%				$	36,536			4.13	%
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 $1.9 million and $1.3 million for the six months ended June 30, 2013 and 2012, respectively. Yields on securities available-for-sale are based on historical cost.

37

Farmers & Merchants Bancorp
Volume and Rate Analysis of Net Interest Revenue
(in thousands)	Three Months Ended June 30, 2013 compared to June 30, 2012									Six Months Ended June 30, 2013 compared to June 30, 2012
Interest Earning Assets	Volume			Rate			Net Chg.			Volume			Rate			Net Chg.
Interest Bearing Deposits with Banks	$	(15	)	$	3		$	(12	)	$	(23	)	$	2		$	(21	)
Investment Securities:
U.S. Agencies		(83	)		(27	)		(110	)		(193	)		(48	)		(241	)
Municipals - Non-Taxable		(31	)		25			(6	)		50			(8	)		42
Mortgage Backed Securities		(106	)		(357	)		(463	)		(343	)		(827	)		(1,170	)
Other		113			7			120			247			9			256
Total Investment Securities		(107	)		(352	)		(459	)		(239	)		(874	)		(1,113	)
Loans & Leases:
Real Estate		1,403			(963	)		440			2,911			(2,431	)		480
Home Equity Lines & Loans		(119	)		(18	)		(137	)		(269	)		2			(267	)
Agricultural		(146	)		(458	)		(604	)		(313	)		(936	)		(1,249	)
Commercial		(163	)		82			(81	)		(341	)		(4	)		(345	)
Consumer		(16	)		(11	)		(27	)		(49	)		(9	)		(58	)
Leases		12			-			12			12			-			12
Total Loans & Leases		971			(1,368	)		(397	)		1,951			(3,378	)		(1,427	)
Total Earning Assets		849			(1,717	)		(868	)		1,689			(4,250	)		(2,561	)
Interest Bearing Liabilities
Interest Bearing Deposits:
Transaction		5			(28	)		(23	)		10			(50	)		(40	)
Savings and Money Market		24			(109	)		(85	)		56			(248	)		(192	)
Time		(70	)		(169	)		(239	)		(138	)		(351	)		(489	)
Total Interest Bearing Deposits		(41	)		(306	)		(347	)		(72	)		(649	)		(721	)
Securities Sold Under Agreement to Repurchase		(241	)		(241	)		(482	)		(509	)		(509	)		(1,018	)
Other Borrowed Funds		12			(14	)		(2	)		16			(25	)		(9	)
Subordinated Debentures		-			(5	)		(5	)		-			(12	)		(12	)
Total Interest Bearing Liabilities		(270	)		(566	)		(836	)		(565	)		(1,195	)		(1,760	)
Total Change on a Tax Equivalent Basis	$	1,119		$	(1,151	)	$	(32	)	$	2,254		$	(3,055	)	$	(801	)
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.

38

2^nd Quarter 2013 vs. 2^nd Quarter 2012

Net interest income for the second quarter of 2013 decreased 0.2% or $32,000 to $18.2 million. On a fully taxable equivalent basis, net interest income decreased 0.2% and totaled $18.6 million for the second quarter of 2013. As more fully discussed below, the decrease in net interest income was primarily due to an 8 basis point 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 June 30, 2013, the Company’s net interest margin was 4.14% compared to 4.22% for the quarter ended June 30, 2012. This decrease in net interest margin was due primarily to a decline in earning asset yields that exceeded a corresponding drop in funding costs.

Average loans & leases totaled $1.2 billion for the quarter ended June 30, 2013; an increase of $67.4 million compared to the average balance for the quarter ended June 30, 2012. Loans & leases increased from 65.9% of average earning assets at June 30, 2012 to 68.6% at June 30, 2013. As a result of the continuing impact of the sustained low rate environment since late 2008, the annualized yield on the Company’s loan & lease portfolio declined to 5.15% for the quarter ended June 30, 2013, compared to 5.60% for the quarter ended June 30, 2012. Overall, the positive impact on interest revenue from the increase in loan & lease balances was offset by the negative impact of a decline in yields resulting in interest revenue from loans & leases decreasing 2.4% to $15.9 million for quarter ended June 30, 2013. The Company has been experiencing aggressive competitor pricing for loans & leases 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 & lease 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 & leases, the yield earned on investments is generally less than that of loans & leases. Average investment securities totaled $561.6 million for the quarter ended June 30, 2013; a decrease of $17.5 million compared to the average balance for the quarter ended June 30, 2012. Tax equivalent interest income on securities decreased $460,000 to $3.4 million for the quarter ended June 30, 2013, compared to $3.8 million for the quarter ended June 30, 2012. The average investment portfolio yield, on a tax equivalent basis, was 2.41% for the quarter ended June 30, 2013, compared to 2.65% for the quarter ended June 30, 2012. 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 premiums 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 and corporate securities. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2013. 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. Average interest bearing deposits with banks consisted of: (1) $750,000 in Community Reinvestment Act (‘CRA’) qualified CD’s with various banks; and (2) $3.5 million in FRB deposits. The average rate paid on CRA qualified CD’s for the second quarter of 2013 was 0.38% and balances with the FRB 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 June 30, 2013, was $4.3 million, a decrease of $21.1 million compared to the average balance for the quarter ended June 30, 2012. Interest income on interest bearing deposits with banks for the quarter ended June 30, 2013, decreased $12,000 to $3,000 compared to the quarter ended June 30, 2012.

Average interest-bearing liabilities decreased $32.4 million or 2.4% during the second quarter of 2013. Of that decrease: (1) interest-bearing transaction deposits increased $23.2 million; (2) savings and money market deposits increased $43.2 million; (3) time deposits decreased $63.2 million; (4) securities sold under agreement to repurchase decreased $53.4 million (see “Financial Condition - Securities Sold Under Agreement to Repurchase”); (5) Federal Home Loan Bank (“FHLB”) Advances increased $17.8 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”).

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During the second quarter of 2013, the Company was able to grow average interest bearing deposits by $3.3 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $628,000 for the second quarter of 2013 as compared to $975,000 for the second quarter of 2012. The average rate paid on interest-bearing deposits was 0.20% for the second quarter of 2013 compared to 0.31% for the second quarter of 2012. The Company anticipates that future declines in deposit rates, if any, will be much more modest.

Six Months Ending June 30, 2013 vs. Six Months Ending June 30, 2012

During the first six months of 2013, net interest income decreased 2.2% to $35.7 million, compared to $36.5 million at June 30, 2012. On a fully taxable equivalent basis, net interest income decreased 2.2% and totaled $36.4 million at June 30, 2013, compared to $37.2 million at June 30, 2012. The decrease in net interest income was primarily due to a 14 basis point decrease in the net interest margin, offset somewhat by growth in average earning assets.

For the six months ended June 30, 2013, the Company’s net interest margin was 4.07% compared to 4.21% for the same period in 2012. This decrease in net interest margin was due primarily to a decline in earning asset yields that exceeded a corresponding drop in funding costs.

The average balance of loans & leases increased by $70.5 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The yield on the loan & lease portfolio decreased 54 basis points to 5.15% for the six months ended June 30, 2013 compared to 5.69% for the six months ended June 30, 2012. This decrease in yield resulted in interest income from loans & leases decreasing 4.4% or $1.4 million for the first six months of 2013.

Average investment securities were $538.9 million for the six months ended June 30, 2013 compared to $564.9 million for the same period in 2012. The average yield (TE) for the six months ended June 30, 2013 was 2.41% compared to 2.70% for the six months ended June 30, 2012. This decrease in yield, along with a decrease in balances, resulted in a decrease in interest income of $1.1 million or 14.6%, for the six months endedJune 30, 2013.

Average interest bearing deposits with banks consisted of: (1) $750,000 in Community Reinvestment Act (‘CRA’) qualified CD’s with various banks; and (2) $36.3 million in FRB deposits. The average rate paid on CRA qualified CD’s for the first six months of 2013 was 0.38% and balances with the FRB earn interest at the Fed Funds rate, which has been 0.25% since December 2008. Average interest bearing deposits with banks for the six-months ended June 30, 2013, was $37.1 million, a decrease of $17.6 million compared to the average balance for the six-months ended June 30, 2012. Interest income on interest bearing deposits with banks for the six-months ended June 30, 2013, decreased $21,000 to $47,000 compared to the six-months ended June 30, 2012.

Average interest-bearing liabilities decreased $34.8 million or 2.6% during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. Of that decrease: (1) interest-bearing deposits increased $13.2 million; (2) securities sold under agreement to repurchase decreased $56.7million; (3) FHLB advances increased $8.7 million; and (4) subordinated debentures remained unchanged.

The $13.2 million increase in average interest-bearing deposits was primarily in interest bearing transaction and savings and money market deposits, which grew $73.3 million since June 30, 2012, while time deposits decreased by $60.0 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $1.3 million for the first six months of 2013 as compared to $2.0 million for the first six months of 2012. The average rate paid on interest-bearing deposits was 0.21% in the first six months of 2013 and 0.32% in the first six months of 2012.

Provision and Allowance for Credit 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 & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases 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.” Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.

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Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance-sheet date. The allowance is established through a provision for credit 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 & lease 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 & leases and general reserves for inherent losses related to loans & leases collectively evaluated for impairment.

A loan or lease 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 & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease 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 & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans & leases that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans or leases for customers unless: (i) the existing loan or lease is brought current as to principal and interest payments; and (ii) the restructured loan or lease 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 or lease amounts. After restructure a determination is made whether the loan or lease 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 or leases 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 & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases 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 & leases and periodically performs detailed reviews of all such loans & leases 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 & leases. These credit quality indicators are used to assign a risk rating to each individual loan & lease. 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:

41

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

Special Mention – A special mention loan or lease 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 lease or in the Company's credit position at some future date. Special Mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease 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 or leases 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 or leases 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, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease 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 Bank will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit 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 Company and 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 by the weakness in residential real estate values over the past five 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.

42

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.

Leases – Equipment leases subject the Company, as Lessor, to both the credit risk of the Lessee and the residual value risk of the equipment.  Credit risks are underwritten using the same credit criteria the Company would make an equipment term loan under.  Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

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.

Provision for Credit Losses

Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases 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 declined as much as 60% and the economic stress eventually spread from residential real estate to other industry segments such as autos and commercial real estate. Unemployment levels remain above 15% in some areas. As of June 30, 2013, the Company’s credit loss allowance was $34.2 million or 2.64% of total loans & leases. As of June 30, 2012, the allowance for credit losses was $33.1 million, which represented 2.74% of total loans & leases. Although, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of June 30, 2013, 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 credit losses during the first half of 2013 was $250,000 compared to $500,000 for the first half of 2012. Net charge-offs during the first half of 2013 were $232,000 compared to net charge-offs of $419,000 in the first half of 2012. See “Overview – Looking Forward: 2013 and Beyond,” “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” located in the Company’s 2012 Annual Report on Form 10-K.

After reviewing all factors above, based upon information currently available, management concluded that the allowance for credit losses as of June 30, 2013, was adequate.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012
Balance at Beginning of Period	$	34,255		$	32,942		$	34,217		$	33,017
Charge-Offs		(494	)		(312	)		(529	)		(643	)
Recoveries		224			188			297			224
Provision		250			280			250			500
Balance at End of Period	$	34,235		$	33,098		$	34,235		$	33,098

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

June 30, 2013	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated			Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2013	$	6,464		$	2,877		$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854		$	34,217
Charge-Offs		-			(400	)		-			(16	)		(22	)		(23	)		(4	)		(64	)		-		-			(529	)
Recoveries		-			-			-			-			20			20			236			21			-		-			297
Provision		(732	)		1,004			(9	)		(166	)		(249	)		123			880			29			-		(630	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2013	$	6,671		$	3,795		$	969		$	1,260		$	3,209		$	9,412		$	7,966		$	163		$	-	$	810		$	34,255
Charge-Offs		-			(400	)		-			-			(21	)		(23	)		(4	)		(46	)		-		-			(494	)
Recoveries		-			-			-			-			18			7			189			10			-		-			224
Provision		(939	)		86			8			(223	)		(222	)		1,161			924			41			-		(586	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235

The Allowance for Credit Losses as of June 30, 2013 increased a modest $18,000 from December 31, 2012 and decreased $20,000 during the second quarter of 2013. However, the allowance allocated to the following categories of loans did change materially during the first half of 2013:

· Agricultural Real Estate allowance balances increased $604,000, primarily as a result of increased loss factors associated with continued stress in the dairy industry.

· Commercial Real Estate allowance balances decreased $732,000, primarily as a result of a $9.8 million decrease in substandard and special mention credits.

· Commercial allowance balances increased $1.1 million, primarily as a result of a $16.4 million increase in loan balances.

See “Management’s Discussion and Analysis - Financial Condition – Classified Loans & Leases and Non-Performing Assets” for further discussion regarding these loan categories.

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

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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.

2^nd Quarter 2013 vs. 2^nd Quarter 2012

Non-interest income increased $153,000 or 5.4% for the three months ended June 30, 2013, compared to the same period of 2012. This increase was primarily due a $154,000 increase in the net gain on sale of investment securities, partially offset by a $132,000 decrease in service charges on deposit accounts, primarily NSF/OD fees.

Six Months Ending June 30, 2013 vs. Six Months Ending June 30, 2012

Non‑interest income increased $1.7 million or 25.6% for the six months ended June 30, 2013 compared to the same period of 2012. This increase was comprised of: (1) an $889,000 increase in net gain on sale of investment securities; (2) a $785,000 increase in the net gain on deferred compensation investments; and (2) a $224,000 increase in other non-interest income primarily related to quarterly cash dividends from the FHLB and gain on sale of ORE properties. These increases were partially offset by a $241,000 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 Generally Accepted Accounting Principles 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.

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.

2^nd Quarter 2013 vs. 2^nd Quarter 2012

Overall, non-interest expense decreased $569,000 or 4.5% for the three months ended June 30, 2013, compared to the same period in 2012. This decrease was primarily comprised of: (1) a $1.5 million decrease in other non-interest expense primarily due to a one-time fee paid in 2012 for early termination of the Company’s Securities Sold Under Agreement to Repurchase; and (2) a $200,000 decrease in equipment expense related to ATM upgrades that also took place in June 2012. These decreases were partially offset by: (1) an $874,000 increase in salaries and employee benefits; and (2) a $233,000 increase in legal fee expense.

Six Months Ending June 30, 2013 vs. Six Months Ending June 30, 2012

Non-interest expense increased $268,000 or 1.1% for the six months ended June 30, 2013, compared to the same period of 2012. This increase was comprised of: (1) a $998,000 increase in salaries and employee benefits; and (2) a $785,000 increase in the net gain on deferred compensation investments. These increases were partially offset by: (1) a $223,000 decrease in equipment expense related to ATM upgrades that took place in 2012; and (2) a $1.3 million decrease in other non-interest expense primarily due to a one-time fee paid in 2012 for early termination of the Company’s Securities Sold Under Agreement to Repurchase.

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 Generally Accepted Accounting Principles 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.

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Income Taxes

The provision for income taxes increased 10.7% to $3.3 million for the second quarter of 2013. The Company’s effective tax rate for the second quarter of 2013 was 37.0% compared to 36.4% for the second quarter of 2012.

The provision for income taxes increased 6.4% to $7.1 million for the first six months of 2013. The Company’s effective tax rate for the first six months of 2013 was 37.4% compared to 36.9% for the same period in 2012.

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 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 deductibility of loans & lease 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 June 30, 2013, as compared to December 31, 2012 and to June 30, 2012. As previously discussed (see “Overview”) the Company’s financial condition can be influenced by the seasonal banking needs of its agricultural customers.

Investment Securities

The investment portfolio provides the Company with an income alternative to loans & leases. 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. However, during 2012, the Company began to selectively add investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.

The Company’s investment portfolio at June 30, 2013 was $542.5 million compared to $486.4 million at the end of 2012, an increase of $56.1 million or 11.5%. At June 30, 2012, the investment portfolio totaled $572.1 million. 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. Beginning in mid-2012 the Company began to reduce its investment in mortgage-backed securities in order to reduce the risk associated with fixed rate term assets purchased at a premium. Excess cash was placed into corporate securities or left on deposit with the FRB. During the first quarter of 2013, as lower coupon 20 year mortgage-backed securities were issued at lower premiums, the Company reinvested excess cash into these securities.

The Company's total investment portfolio currently represents 27.0% of the Company’s total assets as compared to 24.6% at December 31, 2012, and 29.7% at June 30, 2012.

As of June 30, 2013 the Company held $70.3 million of municipal investments, of which $57.3 million were bank-qualified municipal bonds, all classified as held-to-maturity. The financial problems experienced by certain municipalities over the past five years, along with the financial stresses exhibited by some of the large monoline bond insurers, has 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 June 30, 2013 ninety-four 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.” Additionally, in order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds and corporate securities. The Company monitors the status of the approximately six percent ($3.6 million) 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.

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Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest bearing deposits with banks consist of: (1) Community Reinvestment Act (‘CRA’) qualified CD’s with various banks; and (2) FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these 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. Interest bearing deposits with banks totaled $1.4 million at June 30, 2013, $82.1 million at December 31, 2012 and $1.1 million at June 30, 2012.

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 June 30, 2013, December 31, 2012 and June 30, 2012, 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 & Leases

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

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 Loan To Value (LTV) 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 1^st 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; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1^st lien position.

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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.

Leases –These are leases to businesses or individuals, for the purpose of financing the acquisition of equipment.  They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type. The Company’s policies require that loans & leases 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 & lease 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 & lease.

Most loans & leases 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 or lease is made.

In order to be responsive to borrower needs, the Company prices loans & leases: (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 & lease portfolio at June 30, 2013 totaled $1.3 billion, an increase of $91.1 million or 7.6% over June 30, 2012. This increase has occurred despite what continues to be a difficult economic environment combined with a very competitive pricing environment, and is a result of the Company’s business development efforts directed toward credit-qualified borrowers. No assurances can be made that this growth in the loan & lease portfolio will continue until the economy in the Central Valley of California improves.

Loans & leases at June 30, 2013 increased $48.2 million from December 31, 2012, primarily in Commercial Real Estate.

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

Loan & Lease Portfolio	June 30, 2013				December 31, 2012				June 30, 2012
(in thousands)	$		%		$		%		$		%
Commercial Real Estate	$	395,818	30.6	%	$	353,109	28.2	%	$	326,996	27.1	%
Agricultural Real Estate		312,588	24.1	%		311,992	25.0	%		285,630	23.7	%
Real Estate Construction		32,718	2.5	%		32,680	2.6	%		36,033	3.0	%
Residential 1st Mortgages		136,473	10.5	%		140,257	11.2	%		123,053	10.2	%
Home Equity Lines & Loans		37,498	2.9	%		42,042	3.4	%		46,284	3.8	%
Agricultural		214,760	16.5	%		221,032	17.7	%		210,780	17.5	%
Commercial		159,647	12.3	%		143,293	11.5	%		171,621	14.2	%
Consumer & Other		5,546	0.4	%		5,058	0.4	%		5,798	0.5	%
Leases		2,667	0.2	%		-	0.0	%		-	0.0	%
Total Gross Loans & Leases		1,297,715	100.0	%		1,249,463	100.0	%		1,206,195	100.0	%
Less: Unearned Income		2,659				2,561				2,201
Subtotal		1,295,056				1,246,902				1,203,994
Less: Allowance for Credit Losses		34,235				34,217				33,098
Net Loans & Leases	$	1,260,821			$	1,212,685			$	1,170,896

Classified Loans & Leases and Non-Performing Assets

All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified,” and these loans & leases receive increased management attention. As of June 30, 2013, classified loans & leases totaled $16.8 million compared to $21.5 million at December 31, 2012 and $22.5 million at June 30, 2012. On July 12, 2013, the Company received full payoff from one borrower of $2.7 million that was included in  the June 30, 2013 classified loan balances.

Classified loans & leases with higher levels of credit risk can be further designated as “impaired.” A loan or lease 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 Credit Losses” for further details. Impaired loans or leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).

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Non-Accrual Loans & Leases - Accrual of interest on loans & leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans or leases 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 or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans & leases totaled $10.4 million as of June 30, 2013. At December 31, 2012 and June 30, 2013, non-accrual loans & leases totaled $9.3 million and $3.0 million, respectively. On July 12, 2013, the Company received full payoff from one borrower of $2.7 million that was included in the June 30, 2013 non-accrual loan balances.

Restructured Loans & Leases - A restructuring of a loan or lease 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 or leases 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 or lease 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 or lease on accrual. As of June 30, 2013, restructured loans & leases on accrual totaled $1.6 million as compared to $2.3 million at December 31, 2012. This decline was primarily a result of 14 commercial, agricultural, and residential loans that totaled $1.0 million as of December 31, 2012 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 & leases on accrual at June 30, 2012, were $1.4 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 following table sets forth the amount of the Company's non-performing loans & leases (defined as non-accrual loans & leases plus accruing loans & leases past due 90 days or more) and ORE as of the dates indicated.

Non-Performing Assets

(in thousands)	June 30, 2013			Dec. 31, 2012			June 30, 2012
Non-Performing Loans & Leases	$	10,427		$	9,298		$	3,015
Other Real Estate		2,399			2,553			2,553
Total Non-Performing Assets	$	12,826		$	11,851		$	5,568
Non-Performing Loans & Leases as a % of Total Loans & Leases		0.80	%		0.74	%		0.25	%
Restructured Loans & Leases (Performing)	$	1,575		$	2,300		$	1,375

Although management believes that non-performing loans & leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit 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 $1.0 million, $993,000, and $915,000 have been established for non-performing loans & leases at June 30, 2013, December 31, 2012 and June 30, 2012, respectively.

Foregone interest income on non-accrual loans & leases which would have been recognized during the period, if all such loans & leases had been current in accordance with their original terms, totaled $439,000 for the six months ended June 30, 2013, $209,000 for the year ended December 31, 2012, and $177,000 for the six months ended June 30, 2012.

The Company reported $2.4 million of ORE at June 30, 2013, $2.6 million at December 31, 2012, and $2.6 million at June 30, 2012. These values are net of a reserve for ORE valuation allowance in the amount of $3.7 million at June 30, 2013 and $4.1 million for both December 31, 2012 and June 30, 2012.

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Except for those classified and non-performing loans & leases discussed above, the Company’s management is not aware of any loans & leases as of June 30, 2013, 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 or lease repayment terms, or any known events that would result in the loan or lease 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 such as autos and commercial real estate. 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 2012 Annual Report on Form 10-K.

Deposits

One of the key sources of funds to support earning assets (loans & leases 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 June 30, 2013 have increased $77.9 million or 4.8% compared to June 30, 2012. 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; 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 4.8% since June 30, 2012, 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 $94.3 million or 16.2% since June 30, 2012.

· Savings and money market accounts have increased $45.1 million or 8.3% since June 30, 2012.

· Time deposit accounts have decreased $61.5 million or 12.2% since June 30, 2012. 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 significantly enhanced the Company’s net interest margin and earnings.

The Company's deposit balances at June 30, 2013 have decreased $11.9 million or 0.7% compared to December 31, 2012. Savings and money market deposits increased 8.6% or $46.5 million while demand and interest-bearing transaction accounts decreased by $43.4 million or 6.0% and time deposit accounts decreased by $14.9  million or 3.3%. Deposit trends in the first half of the year can be impacted by the seasonal needs of our agricultural customers.

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 June 30, 2013 were $43.3 million compared to $0 at December 31, 2012 and $51.0 million at June 30, 2012. The average rate on FHLB advances during the first half of 2013 was 0.2% compared to 1.0% during the first half of 2012.

There were no amounts outstanding on the Company’s line of credit with the FRB as of June 30, 2013.

As of June 30, 2013 the Company had additional borrowing capacity of $279.1 million with the Federal Home Loan Bank and $305.6 million with the Federal Reserve Bank. Any borrowings under these lines would be collateralized with loans 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 June 30, 2013, December 31, 2012, and June 30, 2012.

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 is 3.20% with an embedded 3-year cap tied to 3 month Libor with a strike price of 3.3675%. The repurchase agreement matures March 13, 2013, and is 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 is 4.19% with an embedded 3-year cap tied to 3 month Libor with a strike price of 3.17%. The repurchase agreement matures June 5, 2013, and is 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.

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 3.1% as of June 30, 2013, 3.2% at December 31, 2012 and 3.3% at June 30, 2012. The average rate paid for these securities for the first half of 2013 was 3.2% compared to 3.4% for the first half 2012. Additionally, if the Company decided 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 $203.1 million at June 30, 2013, $205.0 million at December 31, 2012, and $198.8 million at June 30, 2012.

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.

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 June 30, 2013, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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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 June 30, 2013
Total Capital to Risk Weighted Assets	$	235,448		14.54	%	$	129,579		8.0	%		N/	A		N/	A
Tier 1 Capital to Risk Weighted Assets	$	215,027		13.28	%	$	64,789		4.0	%		N/	A		N/	A
Tier 1 Capital to Average Assets	$	215,027		10.95	%	$	78,524		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 June 30, 2013
Total Capital to Risk Weighted Assets	$	235,365		14.53	%	$	129,563		8.0	%	$	161,954		10.0	%
Tier 1 Capital to Risk Weighted Assets	$	214,946		13.27	%	$	64,782		4.0	%	$	97,173		6.0	%
Tier 1 Capital to Average Assets	$	214,946		10.97	%	$	78,404		4.0	%	$	98,005		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 programto $20 millionover the three-year period ending September 30, 2015.

There were no stock repurchases during the second quarter of 2013 or 2012. The remaining dollar value of shares that may yet be purchased under the Company’s Common Stock Repurchase Plan is approximately $20 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.

Basel III Regulatory Capital Rules

On July 2, 2013, the FRB approved final rules and the FDIC subsequently adopted interim final rules that would substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. These rules would implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA, and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.

The final rules also implement other revisions to the current capital rules but, in general, those revisions are not as onerous as originally thought when the proposed rules were issued in June 2012. For instance, the Company’s subordinated debentures will continue to qualify for Tier 1 under the rules. The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.

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 accounting principles generally accepted in the United States. 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 credit 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 2012 Annual Report on Form 10-K.

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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.

(in thousands)	June 30, 2013		December 31, 2012		June 30, 2012
Commitments to Extend Credit	$	364,521	$	334,772	$	314,117
Letters of Credit		7,151		5,281		5,817
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties		459		1,796		1,549

The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Most standby letters of credit are issued for 12 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments which totaled $142,000 at June 30, 2013, December 31, 2012, and June 30, 2012. 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 & lease portfolio, the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases 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 credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.

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

Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify loans & leases for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan or lease’s effective interest rate, the fair value of the loan or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, 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 & lease portfolio is the loan & lease 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 or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, 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 & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans & leases 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 & leases.

Part 2 - considers qualitative internal and external factors that may affect a loan or lease’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 & leases);

§ loan & lease volumes, growth rates and concentrations;

§ loan & lease 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.

56

Management believes that based upon the preceding methodology, and using information currently available, the allowance for credit losses at June 30, 2013 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit 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 & lease, 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 & leases. In addition, the magnitude of changes in the rates charged on loans & leases 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 June 30, 2013, 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 1.04% if rates increase by 200 basis points and a decrease in net interest income of 0.38% if rates decline 100 basis points. Comparatively, at December 31, 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 0.62% if rates increase by 200 basis points and a decrease in net interest income of 0.55% 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 & leases and securities; pricing strategies on loans & leases 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.

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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 2012 Annual Report on Form 10-K) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, 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 $61.0 million and repurchase lines of $100.0 million with major banks. As of June 30, 2013 the Company has additional borrowing capacity of $280.0 million with the Federal Home Loan Bank and $305.9 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 June 30, 2013, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities available-for-sale of approximately $288.0 million, which represents 14.59% 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.

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ITEM 1A. Risk Factors

See “Item 1A. Risk Factors” in the Company’s 2012 Annual Report to Shareholders on Form 10-K. In management’s opinion, there have been no material changes in risk factors since the filing of the 2012 Form 10-K.

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

There were no shares repurchased by Farmers & Merchants Bancorp during the second quarter of 2013. The remaining dollar value of shares that may yet be purchased under the Company’s Stock Repurchase Plan is approximately $20.0 million.

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.” 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”

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:  August 8, 2013	/s/ Kent A. Steinwert
	Kent A. Steinwert
	Chairman, President
	& Chief Executive Officer
	(Principal Executive Officer)
Date:  August 8, 2013	/s/ Stephen W. Haley
	Stephen W. Haley
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial & Accounting Officer)

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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

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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:  August 8, 2013	/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: August 8, 2013	/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 June 30, 2013 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.

August 8, 2013

/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

Investment Securities (Tables)

6 Months Ended

Jun. 30, 2013

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
June 30, 2013	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	26,327	$	155	$	-	$	26,482
Obligations of States and Political Subdivisions		5,612		-		-		5,612
Mortgage Backed Securities (1)		396,041		4,373		7,840		392,574
Corporate Securities		49,647		180		267		49,560
Other		1,186		-		-		1,186
Total	$	478,813	$	4,708	$	8,107	$	475,414

	Amortized		Gross Unrealized				Fair/Book
December 31, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	26,546	$	277	$	-	$	26,823
Obligations of States and Political Subdivisions		5,665		-		-		5,665
Mortgage Backed Securities (1)		341,212		11,570		10		352,772
Corporate Securities		22,318		252		12		22,558
Other		10,173		-		-		10,173
Total	$	405,914	$	12,099	$	22	$	417,991

	Amortized		Gross Unrealized				Fair/Book
June 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	56,764	$	314	$	-	$	57,078
Obligations of States and Political Subdivisions		5,724		-		-		5,724
Mortgage Backed Securities (1)		414,990		12,647		-		427,637
Corporate Securities		8,983		29		17		8,995
Other		2,458		-		-		2,458
Total	$	488,919	$	12,990	$	17	$	501,892

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
June 30, 2013	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	64,648	$	1,252	$	531	$	65,369
Mortgage Backed Securities (1)		217		3		-		220
Other		2,194		-		-		2,194
Total	$	67,059	$	1,255	$	531	$	67,783

	Book		Gross Unrealized				Fair
December 31, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	65,694	$	2,296	$	3	$	67,987
Mortgage Backed Securities (1)		484		12		-		496
Other		2,214		-		-		2,214
Total	$	68,392	$	2,308	$	3	$	70,697

	Book		Gross Unrealized				Fair
June 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	67,159	$	2,498	$	51	$	69,606
Mortgage Backed Securities (1)		806		25		-		831
Other		2,230		-		-		2,230
Total	$	70,195	$	2,523	$	51	$	72,667

⁽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 cost and estimated fair values of investment securities at June 30, 2013 by contractual maturity are shown in the following tables (in thousands):

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair/Book		Book		Fair
June 30, 2013	Cost		Value		Value		Value
Within One Year	$	11,680	$	11,718	$	2,075	$	2,084
After One Year Through Five Years		64,383		64,378		13,317		13,627
After Five Years Through Ten Years		1,310		1,345		36,228		37,161
After Ten Years		5,399		5,399		15,222		14,691
		82,772		82,840		66,842		67,563
Investment Securities Not Due at a Single Maturity Date:
Mortgage Backed Securities		396,041		392,574		217		220
Total	$	478,813	$	475,414	$	67,059	$	67,783

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 market 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
June 30, 2013	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	205,363	$	7,840	$	-	$	-	$	205,363	$	7,840
Corporate Securities		30,597		267		-		-		30,597		267
Total	$	235,960	$	8,107	$	-	$	-	$	235,960	$	8,107
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	9,626	$	531	$	-	$	-	$	9,626	$	531
Total	$	9,626	$	531	$	-	$	-	$	9,626	$	531

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2012	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	4,542	$	10	$	-	$	-	$	4,542	$	10
Corporate Securities		3,442		12		-		-		3,442		12
Total	$	7,984	$	22	$	-	$	-	$	7,984	$	22
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	528	$	3	$	-	$	-	$	528	$	3
Total	$	528	$	3	$	-	$	-	$	528	$	3

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2012	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Corporate Securities	$	3,405	$	17	$	-	$	-	$	3,405	$	17
Total	$	3,405	$	17	$	-	$	-	$	3,405	$	17
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	4,774	$	51	$	-	$	-	$	4,774	$	51
Total	$	4,774	$	51	$	-	$	-	$	4,774	$	51

Proceeds from sales of securities available-for-sale

Proceeds from sales and calls of securities available-for-sale were as follows:

	Three Months				Six Months
	Ended June 30,				Ended June 30,
(in thousands)	2013		2012		2013		2012
Proceeds	$	4,356	$	1,530	$	49,615	$	26,530
Gains		154		-		903		-
Losses		-		-		14		-

XML

Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Interest Income
Interest and Fees on Loans & Leases	$ 15,906	$ 16,303	$ 31,351	$ 32,778
Interest on Deposits with Banks	3	15	47	68
Interest on Investment Securities:
Taxable	2,382	2,835	4,488	5,643
Exempt from Federal Tax	654	660	1,314	1,290
Total Interest Income	18,945	19,813	37,200	39,779
Interest Expense
Deposits	628	975	1,311	2,032
Borrowed Funds	9	493	9	1,036
Subordinated Debentures	82	87	163	175
Total Interest Expense	719	1,555	1,483	3,243
Net Interest Income	18,226	18,258	35,717	36,536
Provision for Credit Losses	250	280	250	500
Net Interest Income After Provision for Credit Losses	17,976	17,978	35,467	36,036
Non-Interest Income
Service Charges on Deposit Accounts	1,069	1,201	2,173	2,414
Net Gain on Sale of Investment Securities	154	0	889	0
Increase in Cash Surrender Value of Life Insurance	469	456	926	912
Debit Card and ATM Fees	794	742	1,521	1,465
Net (Loss) Gain on Deferred Compensation Investments	(286)	(312)	1,404	619
Other	764	724	1,548	1,324
Total Non-Interest Income	2,964	2,811	8,461	6,734
Non-Interest Expense
Salaries and Employee Benefits	8,895	8,021	16,940	15,942
Net (Loss) Gain on Deferred Compensation Investments	(286)	(312)	1,404	619
Occupancy	629	628	1,250	1,269
Equipment	678	878	1,373	1,596
Legal Fees	263	30	460	425
FDIC Insurance	246	243	486	485
Other	1,677	3,183	3,148	4,457
Total Non-Interest Expense	12,102	12,671	25,061	24,793
Income Before Income Taxes	8,838	8,118	18,867	17,977
Provision for Income Taxes	3,273	2,956	7,051	6,625
Net Income	$ 5,565	$ 5,162	$ 11,816	$ 11,352
Basic Earnings Per Common Share (in dollars per share)	$ 7.15	$ 6.63	$ 15.19	$ 14.57

XML

Investment Securities

6 Months Ended

Jun. 30, 2013

Investment Securities [Abstract]

Investment Securities

2. Investment Securities

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
June 30, 2013	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	26,327	$	155	$	-	$	26,482
Obligations of States and Political Subdivisions		5,612		-		-		5,612
Mortgage Backed Securities (1)		396,041		4,373		7,840		392,574
Corporate Securities		49,647		180		267		49,560
Other		1,186		-		-		1,186
Total	$	478,813	$	4,708	$	8,107	$	475,414

	Amortized		Gross Unrealized				Fair/Book
December 31, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	26,546	$	277	$	-	$	26,823
Obligations of States and Political Subdivisions		5,665		-		-		5,665
Mortgage Backed Securities (1)		341,212		11,570		10		352,772
Corporate Securities		22,318		252		12		22,558
Other		10,173		-		-		10,173
Total	$	405,914	$	12,099	$	22	$	417,991

	Amortized		Gross Unrealized				Fair/Book
June 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	56,764	$	314	$	-	$	57,078
Obligations of States and Political Subdivisions		5,724		-		-		5,724
Mortgage Backed Securities (1)		414,990		12,647		-		427,637
Corporate Securities		8,983		29		17		8,995
Other		2,458		-		-		2,458
Total	$	488,919	$	12,990	$	17	$	501,892

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
June 30, 2013	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	64,648	$	1,252	$	531	$	65,369
Mortgage Backed Securities (1)		217		3		-		220
Other		2,194		-		-		2,194
Total	$	67,059	$	1,255	$	531	$	67,783

	Book		Gross Unrealized				Fair
December 31, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	65,694	$	2,296	$	3	$	67,987
Mortgage Backed Securities (1)		484		12		-		496
Other		2,214		-		-		2,214
Total	$	68,392	$	2,308	$	3	$	70,697

	Book		Gross Unrealized				Fair
June 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	67,159	$	2,498	$	51	$	69,606
Mortgage Backed Securities (1)		806		25		-		831
Other		2,230		-		-		2,230
Total	$	70,195	$	2,523	$	51	$	72,667

⁽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 cost and estimated fair values of investment securities at June 30, 2013 by contractual maturity are shown in the following tables (in thousands):

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair/Book		Book		Fair
June 30, 2013	Cost		Value		Value		Value
Within One Year	$	11,680	$	11,718	$	2,075	$	2,084
After One Year Through Five Years		64,383		64,378		13,317		13,627
After Five Years Through Ten Years		1,310		1,345		36,228		37,161
After Ten Years		5,399		5,399		15,222		14,691
		82,772		82,840		66,842		67,563
Investment Securities Not Due at a Single Maturity Date:
Mortgage Backed Securities		396,041		392,574		217		220
Total	$	478,813	$	475,414	$	67,059	$	67,783

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 market 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
June 30, 2013	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	205,363	$	7,840	$	-	$	-	$	205,363	$	7,840
Corporate Securities		30,597		267		-		-		30,597		267
Total	$	235,960	$	8,107	$	-	$	-	$	235,960	$	8,107
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	9,626	$	531	$	-	$	-	$	9,626	$	531
Total	$	9,626	$	531	$	-	$	-	$	9,626	$	531

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2012	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Mortgage Backed Securities	$	4,542	$	10	$	-	$	-	$	4,542	$	10
Corporate Securities		3,442		12		-		-		3,442		12
Total	$	7,984	$	22	$	-	$	-	$	7,984	$	22
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	528	$	3	$	-	$	-	$	528	$	3
Total	$	528	$	3	$	-	$	-	$	528	$	3

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2012	Value		Loss		Value		Loss		Value		Loss
Securities Available-for-Sale
Corporate Securities	$	3,405	$	17	$	-	$	-	$	3,405	$	17
Total	$	3,405	$	17	$	-	$	-	$	3,405	$	17
Securities Held-to-Maturity
Obligations of States and Political Subdivisions	$	4,774	$	51	$	-	$	-	$	4,774	$	51
Total	$	4,774	$	51	$	-	$	-	$	4,774	$	51

As of June 30, 2013, the Company held 363 investment securities of which 82 were in a loss position for less than twelve months. No securities were in a loss position for twelve months or more. 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.

Securities of Government Agency and Government Sponsored Entities – There were no unrealized losses on the Company’s investments in securities of government agency and government sponsored entities at June 30, 2013, December 31, 2012 and June 30, 2012.

Mortgage Backed Securities - The unrealized losses on the Company's investment in mortgage backed securities were $7.8 million, $10,000, and $0 at June 30, 2013, December 31, 2012, and June 30, 2012, 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 does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013 and December 31, 2012, respectively.

Obligations of States and Political Subdivisions - The financial problems experienced by certain municipalities over the past five years, 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 June 30, 2013, over ninety-four 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 six 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.

The unrealized losses on the Company’s investment in obligation of states and political subdivision were $531,000, $3,000, and $51,000 at June 30, 2013, December 31, 2012 and June 30, 2012, respectively. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013, December 31, 2012 and June 30, 2012.

Corporate Securities - The unrealized losses on the Company’s investment in corporate securities were $267,000. $12,000, and $17,000 at June 30, 2013, December 31, 2012, and June 30, 2012. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013, December 31, 2012 and June 30, 2012.

Proceeds from sales and calls of securities available-for-sale were as follows:

	Three Months				Six Months
	Ended June 30,				Ended June 30,
(in thousands)	2013		2012		2013		2012
Proceeds	$	4,356	$	1,530	$	49,615	$	26,530
Gains		154		-		903		-
Losses		-		-		14		-

Pledged Securities

As of June 30, 2013, securities carried at $290.6 million were pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law. This amount at December 31, 2012, was $296.9 million.

XML

Allowance for Credit Losses, Allocation of The Allowance For Credit Losses by Portfolio Segment and By Impairment Methodology (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Allowance for Credit Losses [Roll Forward]
Beginning Balance	$ 34,255	$ 32,942	$ 34,217	$ 33,017	$ 33,017
Charge-Offs	(494)	(312)	(529)	(643)	(1,048)
Recoveries	224	188	297	224	398
Provision	250	280	250	500	1,850
Ending Balance	34,235	33,098	34,235	33,098	34,217
Ending Balance Individually Evaluated for Impairment	1,402	915	1,402	915	1,374
Ending Balance Collectively Evaluated for Impairment	32,833	32,183	32,833	32,183	32,843
Loans [Abstract]
Ending Balance	1,295,056	1,203,994	1,295,056	1,203,994	1,246,902
Ending Balance Individually Evaluated for Impairment	12,002	4,390	12,002	4,390	11,597
Ending Balance Collectively Evaluated for Impairment	1,283,054	1,199,604	1,283,054	1,199,604	1,235,305
Commercial Real Estate [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	6,671	4,443	6,464	5,823	5,823
Charge-Offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	(939)	(66)	(732)	(1,446)	641
Ending Balance	5,732	4,377	5,732	4,377	6,464
Ending Balance Individually Evaluated for Impairment	6	0	6	0	0
Ending Balance Collectively Evaluated for Impairment	5,726	4,377	5,726	4,377	6,464
Loans [Abstract]
Ending Balance	393,159	324,795	393,159	324,795	350,548
Ending Balance Individually Evaluated for Impairment	2,979	299	2,979	299	289
Ending Balance Collectively Evaluated for Impairment	390,180	324,496	390,180	324,496	350,259
Agricultural Real Estate [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	3,795	2,775	2,877	2,583	2,583
Charge-Offs	(400)	0	(400)	0	0
Recoveries	0	89	0	89	90
Provision	86	(231)	1,004	(39)	204
Ending Balance	3,481	2,633	3,481	2,633	2,877
Ending Balance Individually Evaluated for Impairment	300	0	300	0	0
Ending Balance Collectively Evaluated for Impairment	3,181	2,633	3,181	2,633	2,877
Loans [Abstract]
Ending Balance	312,588	285,630	312,588	285,630	311,992
Ending Balance Individually Evaluated for Impairment	5,817	1,512	5,817	1,512	5,423
Ending Balance Collectively Evaluated for Impairment	306,771	284,118	306,771	284,118	306,569
Real Estate Construction [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	969	2,201	986	1,933	1,933
Charge-Offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	8	(301)	(9)	(33)	(947)
Ending Balance	977	1,900	977	1,900	986
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	977	1,900	977	1,900	986
Loans [Abstract]
Ending Balance	32,718	36,033	32,718	36,033	32,680
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	32,718	36,033	32,718	36,033	32,680
Residential 1st Mortgages [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	1,260	1,295	1,219	1,251	1,251
Charge-Offs	0	(1)	(16)	(1)	(152)
Recoveries	0	0	0	0	53
Provision	(223)	157	(166)	201	67
Ending Balance	1,037	1,451	1,037	1,451	1,219
Ending Balance Individually Evaluated for Impairment	0	51	0	51	0
Ending Balance Collectively Evaluated for Impairment	1,037	1,400	1,037	1,400	1,219
Loans [Abstract]
Ending Balance	136,473	123,053	136,473	123,053	140,257
Ending Balance Individually Evaluated for Impairment	528	495	528	495	657
Ending Balance Collectively Evaluated for Impairment	135,945	122,558	135,945	122,558	139,600
Home Equity Lines and Loans [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	3,209	3,552	3,235	3,746	3,746
Charge-Offs	(21)	(47)	(22)	(116)	(259)
Recoveries	18	2	20	10	14
Provision	(222)	7	(249)	(126)	(266)
Ending Balance	2,984	3,514	2,984	3,514	3,235
Ending Balance Individually Evaluated for Impairment	243	60	243	60	173
Ending Balance Collectively Evaluated for Impairment	2,741	3,454	2,741	3,454	3,062
Loans [Abstract]
Ending Balance	37,498	46,284	37,498	46,284	42,042
Ending Balance Individually Evaluated for Impairment	612	826	612	826	980
Ending Balance Collectively Evaluated for Impairment	36,886	45,458	36,886	45,458	41,062
Agricultural [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	9,412	8,757	10,437	8,127	8,127
Charge-Offs	(23)	(240)	(23)	(240)	(294)
Recoveries	7	59	20	61	61
Provision	1,161	(742)	123	(114)	2,543
Ending Balance	10,557	7,834	10,557	7,834	10,437
Ending Balance Individually Evaluated for Impairment	596	586	596	586	996
Ending Balance Collectively Evaluated for Impairment	9,961	7,248	9,961	7,248	9,441
Loans [Abstract]
Ending Balance	214,760	210,780	214,760	210,780	221,032
Ending Balance Individually Evaluated for Impairment	1,500	874	1,500	874	3,937
Ending Balance Collectively Evaluated for Impairment	213,260	209,906	213,260	209,906	217,095
Commercial [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	7,966	8,637	7,963	8,733	8,733
Charge-Offs	(4)	0	(4)	(198)	(198)
Recoveries	189	24	236	32	117
Provision	924	877	880	971	(689)
Ending Balance	9,075	9,538	9,075	9,538	7,963
Ending Balance Individually Evaluated for Impairment	202	197	202	197	144
Ending Balance Collectively Evaluated for Impairment	8,873	9,341	8,873	9,341	7,819
Loans [Abstract]
Ending Balance	159,647	171,621	159,647	171,621	143,293
Ending Balance Individually Evaluated for Impairment	510	363	510	363	250
Ending Balance Collectively Evaluated for Impairment	159,137	171,258	159,137	171,258	143,043
Consumer & Other [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	163	162	182	207	207
Charge-Offs	(46)	(24)	(64)	(88)	(145)
Recoveries	10	14	21	32	63
Provision	41	(12)	29	(11)	57
Ending Balance	168	140	168	140	182
Ending Balance Individually Evaluated for Impairment	55	21	55	21	61
Ending Balance Collectively Evaluated for Impairment	113	119	113	119	121
Loans [Abstract]
Ending Balance	5,546	5,798	5,546	5,798	5,058
Ending Balance Individually Evaluated for Impairment	56	21	56	21	61
Ending Balance Collectively Evaluated for Impairment	5,490	5,777	5,490	5,777	4,997
Leases [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	0	0	0	0	0
Charge-Offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	0	0	0	0	0
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
Loans [Abstract]
Ending Balance	2,667	0	2,667	0	0
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	2,667	0	2,667	0	0
Unallocated [Member]
Allowance for Credit Losses [Roll Forward]
Beginning Balance	810	1,120	854	614	614
Charge-Offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	(586)	591	(630)	1,097	240
Ending Balance	224	1,711	224	1,711	854
Ending Balance Individually Evaluated for Impairment	0	0	0	0	0
Ending Balance Collectively Evaluated for Impairment	224	1,711	224	1,711	854
Loans [Abstract]
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

XML

Allowance for Credit Losses (Tables)

6 Months Ended

Jun. 30, 2013

Allowance for Credit Losses [Abstract]

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

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

June 30, 2013	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated			Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2013	$	6,464		$	2,877		$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854		$	34,217
Charge-Offs		-			(400	)		-			(16	)		(22	)		(23	)		(4	)		(64	)		-		-			(529	)
Recoveries		-			-			-			-			20			20			236			21			-		-			297
Provision		(732	)		1,004			(9	)		(166	)		(249	)		123			880			29			-		(630	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2013	$	6,671		$	3,795		$	969		$	1,260		$	3,209		$	9,412		$	7,966		$	163		$	-	$	810		$	34,255
Charge-Offs		-			(400	)		-			-			(21	)		(23	)		(4	)		(46	)		-		-			(494	)
Recoveries		-			-			-			-			18			7			189			10			-		-			224
Provision		(939	)		86			8			(223	)		(222	)		1,161			924			41			-		(586	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Ending Balance Individually Evaluated for Impairment		6			300			-			-			243			596			202			55			-		-			1,402
Ending Balance Collectively Evaluated for Impairment		5,726			3,181			977			1,037			2,741			9,961			8,873			113			-		224			32,833
Loans:
Ending Balance	$	393,159		$	312,588		$	32,718		$	136,473		$	37,498		$	214,760		$	159,647		$	5,546		$	2,667	$	-		$	1,295,056
Ending Balance Individually Evaluated for Impairment		2,979			5,817			-			528			612			1,500			510			56			-		-			12,002
Ending Balance Collectively Evaluated for Impairment		390,180			306,771			32,718			135,945			36,886			213,260			159,137			5,490			2,667		-			1,283,054

December 31, 2012	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated		Total
Year-To-Date Allowance for Credit 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		-		-		-			(152	)		(259	)		(294	)		(198	)		(145	)		-		-		(1,048	)
Recoveries		-		90		-			53			14			61			117			63			-		-		398
Provision		641		204		(947	)		67			(266	)		2,543			(689	)		57			-		240		1,850
Ending Balance- December 31, 2012	$	6,464	$	2,877	$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854	$	34,217
Ending Balance Individually Evaluated for Impairment		-		-		-			-			173			996			144			61			-		-		1,374
Ending Balance Collectively Evaluated for Impairment		6,464		2,877		986			1,219			3,062			9,441			7,819			121			-		854		32,843
Loans:
Ending Balance	$	350,548	$	311,992	$	32,680		$	140,257		$	42,042		$	221,032		$	143,293		$	5,058		$	-	$	-	$	1,246,902
Ending Balance Individually Evaluated for Impairment		289		5,423		-			657			980			3,937			250			61			-		-		11,597
Ending Balance Collectively Evaluated for Impairment		350,259		306,569		32,680			139,600			41,062			217,095			143,043			4,997			-		-		1,235,305

June 30, 2012	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated		Total
Year-To-Date Allowance for Credit 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		-			-			-			(1	)		(116	)		(240	)		(198	)		(88	)		-		-		(643	)
Recoveries		-			89			-			-			10			61			32			32			-		-		224
Provision		(1,446	)		(39	)		(33	)		201			(126	)		(114	)		971			(11	)		-		1,097		500
Ending Balance- June 30, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140				$	1,711	$	33,098
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2012	$	4,443		$	2,775		$	2,201		$	1,295		$	3,552		$	8,757		$	8,637		$	162		$	-	$	1,120	$	32,942
Charge-Offs		-			-			-			(1	)		(47	)		(240	)		-			(24	)		-		-		(312	)
Recoveries		-			89			-			-			2			59			24			14			-		-		188
Provision		(66	)		(231	)		(301	)		157			7			(742	)		877			(12	)		-		591		280
Ending Balance- June 30, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	-	$	1,711	$	33,098
Ending Balance Individually Evaluated for Impairment		-			-			-			51			60			586			197			21			-		-		915
Ending Balance Collectively Evaluated for Impairment		4,377			2,633			1,900			1,400			3,454			7,248			9,341			119			-		1,711		32,183
Loans:
Ending Balance	$	324,795		$	285,630		$	36,033		$	123,053		$	46,284		$	210,780		$	171,621		$	5,798		$	-	$	-	$	1,203,994
Ending Balance Individually Evaluated for Impairment		299			1,512			-			495			826			874			363			21			-		-		4,390
Ending Balance Collectively Evaluated for Impairment		324,496			284,118			36,033			122,558			45,458			209,906			171,258			5,777			-		-		1,199,604

Loan portfolio allocated by management's internal risk ratings

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

June 30, 2013	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	378,570	$	7,817	$	6,772	$	393,159
Agricultural Real Estate		304,516		1,936		6,136		312,588
Real Estate Construction		26,534		6,184		-		32,718
Residential 1st Mortgages		134,766		786		921		136,473
Home Equity Lines & Loans		36,407		-		1,091		37,498
Agricultural		212,923		526		1,311		214,760
Commercial		153,445		5,861		341		159,647
Consumer & Other		5,260		-		286		5,546
Leases		2,667		-		-		2,667
Total	$	1,255,088	$	23,110	$	16,858	$	1,295,056

December 31, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	326,037	$	15,528	$	8,983	$	350,548
Agricultural Real Estate		299,642		6,605		5,745		311,992
Real Estate Construction		26,445		6,235		-		32,680
Residential 1st Mortgages		137,998		1,192		1,067		140,257
Home Equity Lines & Loans		40,866		-		1,176		42,042
Agricultural		216,164		1,168		3,700		221,032
Commercial		137,217		5,586		490		143,293
Consumer & Other		4,737		-		321		5,058
Total	$	1,189,106	$	36,314	$	21,482	$	1,246,902

June 30, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	287,439	$	30,475	$	6,881	$	324,795
Agricultural Real Estate		261,347		20,362		3,921		285,630
Real Estate Construction		28,169		3,217		4,647		36,033
Residential 1st Mortgages		120,787		1,235		1,031		123,053
Home Equity Lines & Loans		43,895		-		2,389		46,284
Agricultural		202,469		5,515		2,796		210,780
Commercial		165,113		5,906		602		171,621
Consumer & Other		5,565		-		233		5,798
Total	$	1,114,784	$	66,710	$	22,500	$	1,203,994

Aging analysis of the loan portfolio by the time past due

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

(in thousands):

	30-89 Days		90 Days and				Total Past				Total
June 30, 2013	Past Due		Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	2,873	$	2,873	$	390,286	$	393,159
Agricultural Real Estate		-		-		5,817		5,817		306,771		312,588
Real Estate Construction		-		-		-		-		32,718		32,718
Residential 1st Mortgages		-		-		202		202		136,271		136,473
Home Equity Lines & Loans		152		-		243		395		37,103		37,498
Agricultural		-		-		997		997		213,763		214,760
Commercial		1		-		277		278		159,369		159,647
Consumer & Other		16		-		18		34		5,512		5,546
Leases		-		-		-		-		2,667		2,667
Total	$	169	$	-	$	10,427	$	10,596	$	1,284,460	$	1,295,056

	30-89 Days		90 Days and				Total Past				Total
December 31, 2012	Past Due		Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	150	$	-	$	-	$	150	$	350,398	$	350,548
Agricultural Real Estate		-		-		5,423		5,423		306,569		311,992
Real Estate Construction		-		-		-		-		32,680		32,680
Residential 1st Mortgages		23		-		445		468		139,789		140,257
Home Equity Lines & Loans		70		-		213		283		41,759		42,042
Agricultural		-		-		3,198		3,198		217,834		221,032
Commercial		293		-		-		293		143,000		143,293
Consumer & Other		11		-		19		30		5,028		5,058
Total	$	547	$	-	$	9,298	$	9,845	$	1,237,057	$	1,246,902

	30-89 Days		90 Days or More				Total Past				Total
June 30, 2012	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	105	$	-	$	-	$	105	$	324,690	$	324,795
Agricultural Real Estate		-		-		1,512		1,512		284,118		285,630
Real Estate Construction		-		-		-		-		36,033		36,033
Residential 1st Mortgages		11		-		452		463		122,590		123,053
Home Equity Lines & Loans		132		-		346		478		45,806		46,284
Agricultural		2,384		-		587		2,971		207,809		210,780
Commercial		327		-		97		424		171,197		171,621
Consumer & Other		44		-		21		65		5,733		5,798
Total	$	3,003	$	-	$	3,015	$	6,018	$	1,197,976	$	1,203,994

Impaired loans

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

							Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2013	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	2,973	$	2,993	$	-	$	1,540	$	2	$	869	$	4
Agricultural Real Estate		4,382		4,673		-		3,945		-		4,209		-
Residential 1st Mortgages		530		580		-		633		4		665		7
Home Equity Lines & Loans		374		397		-		312		1		417		2
Agricultural		457		503		-		1,105		-		1,474		-
Commercial		92		92		-		98		2		102		4
	$	8,808	$	9,238	$	-	$	7,633	$	9	$	7,736	$	17
With an allowance recorded:
Commercial Real Estate	$	7	$	6	$	6	$	4	$	-	$	2	$	-
Agricultural Real Estate		1,449		1,843		300		1,645		-		1,283		-
Home Equity Lines & Loans		243		289		243		198		-		186		-
Agricultural		1,043		1,068		596		1,516		8		1,757		16
Commercial		418		430		202		281		2		213		4
Consumer & Other		56		58		55		201		1		202		2
	$	3,216	$	3,694	$	1,402	$	3,845	$	11	$	3,643	$	22
Total	$	12,024	$	12,932	$	1,402	$	11,478	$	20	$	11,379	$	39

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2012	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	289	$	289	$	-	$	506	$	20
Agricultural Real Estate		5,437		5,454		-		2,611		-
Residential 1st Mortgages		658		761		-		458		3
Home Equity Lines & Loans		792		871		-		775		23
Agricultural		1,932		1,954		-		1,159		19
Commercial		106		106		-		144		6
	$	9,214	$	9,435	$	-	$	5,653	$	71
With an allowance recorded:
Residential 1st Mortgages	$	-	$	-	$	-	$	54	$	-
Home Equity Lines & Loans		194		237		173		182		4
Agricultural		2,006		2,019		996		997		1
Commercial		144		144		144		159		4
Consumer & Other		61		63		61		31		-
	$	2,405	$	2,463	$	1,374	$	1,423	$	9
Total	$	11,619	$	11,898	$	1,374	$	7,076	$	80

							Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	298	$	299	$	-	$	720	$	6	$	1,035	$	9
Agricultural Real Estate		1,514		1,777		-		1,224		-		1,085		-
Residential 1st Mortgages		387		416		-		340		-		549		-
Home Equity Lines & Loans		750		821		-		762		7		704		11
Agricultural		288		288		-		299		6		293		10
Commercial		118		118		-		179		2		197		2
	$	3,355	$	3,719	$	-	$	3,524	$	21	$	3,863	$	32
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	755	$	-
Residential 1st Mortgages		108		109		51		108		-		81		-
Home Equity Lines & Loans		78		82		60		133		1		142		2
Agricultural		587		1,566		586		717		-		840		-
Commercial		245		252		197		173		-		138		-
Consumer & Other		21		22		21		22		-		23		-
	$	1,039	$	2,031	$	915	$	1,153	$	1	$	1,979	$	2
Total	$	4,394	$	5,750	$	915	$	4,677	$	22	$	5,842	$	34

Loans by class modified as troubled debt restructured loans

The following table presents loans by class, modified as troubled debt restructured loans & leases for the three and six-month periods ended June 30, 2013 (in thousands):

	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
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
Residential 1st Mortgages		-	$	-	$	-		4	$	306	$	290
Home Equity Lines & Loans		1		180		169		2		195		184
Commercial		-		-		-		2		292		292
Total		1	$	180	$	169		8	$	793	$	766

The following table presents loans by class modified as troubled debt restructured loans during the twelve-month period ended December 31, 2012 (in thousands):

	December 31, 2012
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		1	$	116	$	116
Residential 1st Mortgages		2		216		201
Home Equity Lines & Loans		7		529		480
Agricultural		4		858		858
Commercial		3		273		273
Consumer & Other		1		41		41
Total		18	$	2,033	$	1,969

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

	Three Months Ended June 30, 2012						Six Months Ended June 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		30		29		4		146		139
Home Equity Lines & Loans		2		294		258		3		368		326
Agricultural		-		-		-		1		180		180
Commercial		1		147		147		3		273		273
Total		4	$	471	$	434	$	12	$	1,083	$	1,034

XML

Allowance for Credit Losses, Impaired Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
With no related allowance recorded [Abstract]
Recorded Investment	$ 8,808	$ 3,355	$ 8,808	$ 3,355	$ 9,214
Unpaid Principal Balance	9,238	3,719	9,238	3,719	9,435
Average Recorded Investment	7,633	3,524	7,736	3,863	5,653
Interest Income Recognized	9	21	17	32	71
With an allowance recorded [Abstract]
Recorded Investment	3,216	1,039	3,216	1,039	2,405
Unpaid Principal Balance	3,694	2,031	3,694	2,031	2,463
Related Allowance	1,402	915	1,402	915	1,374
Average Recorded Investment	3,845	1,153	3,643	1,979	1,423
Interest Income Recognized	11	1	22	2	9
Recorded Investment, Total	12,024	4,394	12,024	4,394	11,619
Unpaid Principal Balance, Total	12,932	5,750	12,932	5,750	11,898
Related Allowance	1,402	915	1,402	915	1,374
Average Recorded Investment, Total	11,478	4,677	11,379	5,842	7,076
Interest Income Recognized, Total	20	22	39	34	80
Commercial Real Estate [Member]
With no related allowance recorded [Abstract]
Recorded Investment	2,973	298	2,973	298	289
Unpaid Principal Balance	2,993	299	2,993	299	289
Average Recorded Investment	1,540	720	869	1,035	506
Interest Income Recognized	2	6	4	9	20
With an allowance recorded [Abstract]
Recorded Investment	7	0	7	0
Unpaid Principal Balance	6	0	6	0
Related Allowance	6	0	6	0
Average Recorded Investment	4	0	2	755
Interest Income Recognized	0	0	0	0
Related Allowance	6	0	6	0
Agricultural Real Estate [Member]
With no related allowance recorded [Abstract]
Recorded Investment	4,382	1,514	4,382	1,514	5,437
Unpaid Principal Balance	4,673	1,777	4,673	1,777	5,454
Average Recorded Investment	3,945	1,224	4,209	1,085	2,611
Interest Income Recognized	0	0	0	0	0
With an allowance recorded [Abstract]
Recorded Investment	1,449		1,449
Unpaid Principal Balance	1,843		1,843
Related Allowance	300		300
Average Recorded Investment	1,645		1,283
Interest Income Recognized	0		0
Related Allowance	300		300
Residential 1st Mortgages [Member]
With no related allowance recorded [Abstract]
Recorded Investment	530	387	530	387	658
Unpaid Principal Balance	580	416	580	416	761
Average Recorded Investment	633	340	665	549	458
Interest Income Recognized	4	0	7	0	3
With an allowance recorded [Abstract]
Recorded Investment		108		108	0
Unpaid Principal Balance		109		109	0
Related Allowance		51		51	0
Average Recorded Investment		108		81	54
Interest Income Recognized		0		0	0
Related Allowance		51		51	0
Home Equity Lines & Loans [Member]
With no related allowance recorded [Abstract]
Recorded Investment	374	750	374	750	792
Unpaid Principal Balance	397	821	397	821	871
Average Recorded Investment	312	762	417	704	775
Interest Income Recognized	1	7	2	11	23
With an allowance recorded [Abstract]
Recorded Investment	243	78	243	78	194
Unpaid Principal Balance	289	82	289	82	237
Related Allowance	243	60	243	60	173
Average Recorded Investment	198	133	186	142	182
Interest Income Recognized	0	1	0	2	4
Related Allowance	243	60	243	60	173
Agricultural [Member]
With no related allowance recorded [Abstract]
Recorded Investment	457	288	457	288	1,932
Unpaid Principal Balance	503	288	503	288	1,954
Average Recorded Investment	1,105	299	1,474	293	1,159
Interest Income Recognized	0	6	0	10	19
With an allowance recorded [Abstract]
Recorded Investment	1,043	587	1,043	587	2,006
Unpaid Principal Balance	1,068	1,566	1,068	1,566	2,019
Related Allowance	596	586	596	586	996
Average Recorded Investment	1,516	717	1,757	840	997
Interest Income Recognized	8	0	16	0	1
Related Allowance	596	586	596	586	996
Commercial [Member]
With no related allowance recorded [Abstract]
Recorded Investment	92	118	92	118	106
Unpaid Principal Balance	92	118	92	118	106
Average Recorded Investment	98	179	102	197	144
Interest Income Recognized	2	2	4	2	6
With an allowance recorded [Abstract]
Recorded Investment	418	245	418	245	144
Unpaid Principal Balance	430	252	430	252	144
Related Allowance	202	197	202	197	144
Average Recorded Investment	281	173	213	138	159
Interest Income Recognized	2	0	4	0	4
Related Allowance	202	197	202	197	144
Consumer & Other [Member]
With an allowance recorded [Abstract]
Recorded Investment	56	21	56	21	61
Unpaid Principal Balance	58	22	58	22	63
Related Allowance	55	21	55	21	61
Average Recorded Investment	201	22	202	23	31
Interest Income Recognized	1	0	2	0	0
Related Allowance	$ 55	$ 21	$ 55	$ 21	$ 61

XML

Allowance for Credit Losses, Aging Analysis of Loan Portfolio by the Time Past Due (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	$ 169	$ 547	$ 3,003
90 Days or More and Still Accruing	0	0	0
Nonaccrual	10,427	9,298	3,015
Total Past Due	10,596	9,845	6,018
Current	1,284,460	1,237,057	1,197,976
Total Loans	1,295,056	1,246,902	1,203,994
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	150	105
90 Days or More and Still Accruing	0	0	0
Nonaccrual	2,873	0	0
Total Past Due	2,873	150	105
Current	390,286	350,398	324,690
Total Loans	393,159	350,548	324,795
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	5,817	5,423	1,512
Total Past Due	5,817	5,423	1,512
Current	306,771	306,569	284,118
Total Loans	312,588	311,992	285,630
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	32,718	32,680	36,033
Total Loans	32,718	32,680	36,033
Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	23	11
90 Days or More and Still Accruing	0	0	0
Nonaccrual	202	445	452
Total Past Due	202	468	463
Current	136,271	139,789	122,590
Total Loans	136,473	140,257	123,053
Home Equity Lines & Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	152	70	132
90 Days or More and Still Accruing	0	0	0
Nonaccrual	243	213	346
Total Past Due	395	283	478
Current	37,103	41,759	45,806
Total Loans	37,498	42,042	46,284
Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0	0	2,384
90 Days or More and Still Accruing	0	0	0
Nonaccrual	997	3,198	587
Total Past Due	997	3,198	2,971
Current	213,763	217,834	207,809
Total Loans	214,760	221,032	210,780
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	1	293	327
90 Days or More and Still Accruing	0	0	0
Nonaccrual	277	0	97
Total Past Due	278	293	424
Current	159,369	143,000	171,197
Total Loans	159,647	143,293	171,621
Consumer & Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	16	11	44
90 Days or More and Still Accruing	0	0	0
Nonaccrual	18	19	21
Total Past Due	34	30	65
Current	5,512	5,028	5,733
Total Loans	5,546	5,058	5,798
Leases [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30 - 89 Days Past Due	0
90 Days or More and Still Accruing	0
Nonaccrual	0
Total Past Due	0
Current	2,667
Total Loans	$ 2,667

XML

Dividends and Basic Earnings Per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Dividends and Basic Earnings Per Common Share [Abstract]
Dividends Payable, Date Declared			May 17, 2013
Dividends Payable, Date of Record			Jun. 10, 2013
Cash dividends per share of common stock (in dollars per share)			$ 6.20	$ 5.90
Percentage increase in cash dividend per share (in hundredths)			5.10%
Dividends payable, date paid			Jul. 01, 2013	Jul. 02, 2012
Earnings per share for the period [Abstract]
Net Income	$ 5,565	$ 5,162	$ 11,816	$ 11,352
Average Number of Common Shares Outstanding (in shares)	777,882	778,939	777,882	779,118
Basic Earnings Per Common Share (in dollars per share)	$ 7.15	$ 6.63	$ 15.19	$ 14.57

XML

Allowance for Credit Losses, Loan Portfolio Allocated by Management's Internal Risk Ratings (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 1,295,056,000	$ 1,246,902,000	$ 1,203,994,000
Loans outstanding rated doubtful or loss	0	0	0
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	393,159,000	350,548,000	324,795,000
Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	312,588,000	311,992,000	285,630,000
Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	32,718,000	32,680,000	36,033,000
Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	136,473,000	140,257,000	123,053,000
Home Equity Lines & Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	37,498,000	42,042,000	46,284,000
Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	214,760,000	221,032,000	210,780,000
Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	159,647,000	143,293,000	171,621,000
Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,546,000	5,058,000	5,798,000
Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	2,667,000
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,255,088,000	1,189,106,000	1,114,784,000
Pass [Member] | Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	378,570,000	326,037,000	287,439,000
Pass [Member] | Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	304,516,000	299,642,000	261,347,000
Pass [Member] | Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	26,534,000	26,445,000	28,169,000
Pass [Member] | Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	134,766,000	137,998,000	120,787,000
Pass [Member] | Home Equity Lines & Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	36,407,000	40,866,000	43,895,000
Pass [Member] | Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	212,923,000	216,164,000	202,469,000
Pass [Member] | Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	153,445,000	137,217,000	165,113,000
Pass [Member] | Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,260,000	4,737,000	5,565,000
Pass [Member] | Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	2,667,000
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	23,110,000	36,314,000	66,710,000
Special Mention [Member] | Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	7,817,000	15,528,000	30,475,000
Special Mention [Member] | Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,936,000	6,605,000	20,362,000
Special Mention [Member] | Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	6,184,000	6,235,000	3,217,000
Special Mention [Member] | Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	786,000	1,192,000	1,235,000
Special Mention [Member] | Home Equity Lines & Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0	0
Special Mention [Member] | Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	526,000	1,168,000	5,515,000
Special Mention [Member] | Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,861,000	5,586,000	5,906,000
Special Mention [Member] | Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0	0
Special Mention [Member] | Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	16,858,000	21,482,000	22,500,000
Substandard [Member] | Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	6,772,000	8,983,000	6,881,000
Substandard [Member] | Agricultural Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	6,136,000	5,745,000	3,921,000
Substandard [Member] | Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0	4,647,000
Substandard [Member] | Residential 1st Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	921,000	1,067,000	1,031,000
Substandard [Member] | Home Equity Lines & Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,091,000	1,176,000	2,389,000
Substandard [Member] | Agricultural [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,311,000	3,700,000	2,796,000
Substandard [Member] | Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	341,000	490,000	602,000
Substandard [Member] | Consumer & Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	286,000	321,000	233,000
Substandard [Member] | Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 0

XML

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 (Loss), net [Member]	Total
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	11,352	0	11,352
Cash Dividends Declared on Common Stock	0	0	(4,595)	0	(4,595)
Repurchase of Common Stock	0	(180)	0	0	(180)
Repurchase of Common Stock (in shares)	(485)
Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale	0	0	0	2,852	2,852
Balance at Jun. 30, 2012	8	75,410	115,838	7,519	198,775
Balance (in shares) at Jun. 30, 2012	778,939				778,939
Balance at Dec. 31, 2012	8	75,014	123,012	6,999	205,033
Balance (in shares) at Dec. 31, 2012	777,882				777,882
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income	0	0	11,816	0	11,816
Cash Dividends Declared on Common Stock	0	0	(4,823)	0	(4,823)
Change in Net Unrealized Gain (Loss) on Securities Available-for-Sale	0	0	0	(8,970)	(8,970)
Balance at Jun. 30, 2013	$ 8	$ 75,014	$ 130,005	$ (1,971)	$ 203,056
Balance (in shares) at Jun. 30, 2013	777,882				777,882

XML

Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Operating Activities:
Net Income	$ 11,816	$ 11,352
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses	250	500
Depreciation and Amortization	782	876
Net Amortization of Investment Security Discounts & Premium	1,806	1,721
Net Gain on Sale of Investment Securities	(889)	0
Net Change in Operating Assets & Liabilities:
Net Increase in Interest Receivable and Other Assets	(5,297)	(1,221)
Net Increase in Interest Payable and Other Liabilities	1,954	1,678
Net Cash Provided by Operating Activities	10,422	14,906
Investing Activities:
Purchase of Investment Securities Available-for-Sale	(220,941)	(106,797)
Proceeds from Sold, Matured or Called Securities Available-for-Sale	147,050	87,911
Purchase of Investment Securities Held-to-Maturity	(305)	(10,359)
Proceeds from Matured or Called Securities Held-to-Maturity	1,619	3,241
Net Loans & Leases Paid, Originated or Acquired	(48,683)	(41,559)
Principal Collected on Loans & Leases Previously Charged Off	297	224
Additions to Premises and Equipment	(187)	(179)
Net Cash Used by Investing Activities	(121,150)	(67,518)
Financing Activities:
Net (Decrease) Increase in Deposits	(11,869)	6,028
Net Decrease in Securities Sold Under Agreement to Repurchase	0	(60,000)
Net Change in Other Borrowings	43,300	50,468
Common Stock Repurchases	0	(180)
Cash Dividends	(4,823)	(4,595)
Net Cash Provided (Used) By Financing Activities	26,608	(8,279)
Decrease in Cash and Cash Equivalents	(84,120)	(60,891)
Cash and Cash Equivalents at Beginning of Period	129,426	101,660
Cash and Cash Equivalents at End of Period	45,306	40,769
Supplementary Data
Loans Transferred to Foreclosed Assets (ORE)	2,190	0
Cash Payments Made for Income Taxes	11,706	10,586
Interest Paid	$ 3,601	$ 4,779

XML

Allowance for Credit Losses

6 Months Ended

Jun. 30, 2013

Allowance for Credit Losses [Abstract]

Allowance for Credit Losses

3. Allowance for Credit Losses

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

June 30, 2013	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated			Total
Year-To-Date Allowance for Credit Losses:
Beginning Balance- January 1, 2013	$	6,464		$	2,877		$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854		$	34,217
Charge-Offs		-			(400	)		-			(16	)		(22	)		(23	)		(4	)		(64	)		-		-			(529	)
Recoveries		-			-			-			-			20			20			236			21			-		-			297
Provision		(732	)		1,004			(9	)		(166	)		(249	)		123			880			29			-		(630	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2013	$	6,671		$	3,795		$	969		$	1,260		$	3,209		$	9,412		$	7,966		$	163		$	-	$	810		$	34,255
Charge-Offs		-			(400	)		-			-			(21	)		(23	)		(4	)		(46	)		-		-			(494	)
Recoveries		-			-			-			-			18			7			189			10			-		-			224
Provision		(939	)		86			8			(223	)		(222	)		1,161			924			41			-		(586	)		250
Ending Balance- June 30, 2013	$	5,732		$	3,481		$	977		$	1,037		$	2,984		$	10,557		$	9,075		$	168		$	-	$	224		$	34,235
Ending Balance Individually Evaluated for Impairment		6			300			-			-			243			596			202			55			-		-			1,402
Ending Balance Collectively Evaluated for Impairment		5,726			3,181			977			1,037			2,741			9,961			8,873			113			-		224			32,833
Loans:
Ending Balance	$	393,159		$	312,588		$	32,718		$	136,473		$	37,498		$	214,760		$	159,647		$	5,546		$	2,667	$	-		$	1,295,056
Ending Balance Individually Evaluated for Impairment		2,979			5,817			-			528			612			1,500			510			56			-		-			12,002
Ending Balance Collectively Evaluated for Impairment		390,180			306,771			32,718			135,945			36,886			213,260			159,137			5,490			2,667		-			1,283,054

December 31, 2012	Commercial Real Estate		Agricultural Real Estate		Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated		Total
Year-To-Date Allowance for Credit 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		-		-		-			(152	)		(259	)		(294	)		(198	)		(145	)		-		-		(1,048	)
Recoveries		-		90		-			53			14			61			117			63			-		-		398
Provision		641		204		(947	)		67			(266	)		2,543			(689	)		57			-		240		1,850
Ending Balance- December 31, 2012	$	6,464	$	2,877	$	986		$	1,219		$	3,235		$	10,437		$	7,963		$	182		$	-	$	854	$	34,217
Ending Balance Individually Evaluated for Impairment		-		-		-			-			173			996			144			61			-		-		1,374
Ending Balance Collectively Evaluated for Impairment		6,464		2,877		986			1,219			3,062			9,441			7,819			121			-		854		32,843
Loans:
Ending Balance	$	350,548	$	311,992	$	32,680		$	140,257		$	42,042		$	221,032		$	143,293		$	5,058		$	-	$	-	$	1,246,902
Ending Balance Individually Evaluated for Impairment		289		5,423		-			657			980			3,937			250			61			-		-		11,597
Ending Balance Collectively Evaluated for Impairment		350,259		306,569		32,680			139,600			41,062			217,095			143,043			4,997			-		-		1,235,305

June 30, 2012	Commercial Real Estate			Agricultural Real Estate			Real Estate Construction			Residential 1st Mortgages			Home Equity Lines & Loans			Agricultural			Commercial			Consumer & Other			Leases		Unallocated		Total
Year-To-Date Allowance for Credit 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		-			-			-			(1	)		(116	)		(240	)		(198	)		(88	)		-		-		(643	)
Recoveries		-			89			-			-			10			61			32			32			-		-		224
Provision		(1,446	)		(39	)		(33	)		201			(126	)		(114	)		971			(11	)		-		1,097		500
Ending Balance- June 30, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140				$	1,711	$	33,098
Second Quarter Allowance for Credit Losses:
Beginning Balance- April 1, 2012	$	4,443		$	2,775		$	2,201		$	1,295		$	3,552		$	8,757		$	8,637		$	162		$	-	$	1,120	$	32,942
Charge-Offs		-			-			-			(1	)		(47	)		(240	)		-			(24	)		-		-		(312	)
Recoveries		-			89			-			-			2			59			24			14			-		-		188
Provision		(66	)		(231	)		(301	)		157			7			(742	)		877			(12	)		-		591		280
Ending Balance- June 30, 2012	$	4,377		$	2,633		$	1,900		$	1,451		$	3,514		$	7,834		$	9,538		$	140		$	-	$	1,711	$	33,098
Ending Balance Individually Evaluated for Impairment		-			-			-			51			60			586			197			21			-		-		915
Ending Balance Collectively Evaluated for Impairment		4,377			2,633			1,900			1,400			3,454			7,248			9,341			119			-		1,711		32,183
Loans:
Ending Balance	$	324,795		$	285,630		$	36,033		$	123,053		$	46,284		$	210,780		$	171,621		$	5,798		$	-	$	-	$	1,203,994
Ending Balance Individually Evaluated for Impairment		299			1,512			-			495			826			874			363			21			-		-		4,390
Ending Balance Collectively Evaluated for Impairment		324,496			284,118			36,033			122,558			45,458			209,906			171,258			5,777			-		-		1,199,604

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

June 30, 2013	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	378,570	$	7,817	$	6,772	$	393,159
Agricultural Real Estate		304,516		1,936		6,136		312,588
Real Estate Construction		26,534		6,184		-		32,718
Residential 1st Mortgages		134,766		786		921		136,473
Home Equity Lines & Loans		36,407		-		1,091		37,498
Agricultural		212,923		526		1,311		214,760
Commercial		153,445		5,861		341		159,647
Consumer & Other		5,260		-		286		5,546
Leases		2,667		-		-		2,667
Total	$	1,255,088	$	23,110	$	16,858	$	1,295,056

December 31, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	326,037	$	15,528	$	8,983	$	350,548
Agricultural Real Estate		299,642		6,605		5,745		311,992
Real Estate Construction		26,445		6,235		-		32,680
Residential 1st Mortgages		137,998		1,192		1,067		140,257
Home Equity Lines & Loans		40,866		-		1,176		42,042
Agricultural		216,164		1,168		3,700		221,032
Commercial		137,217		5,586		490		143,293
Consumer & Other		4,737		-		321		5,058
Total	$	1,189,106	$	36,314	$	21,482	$	1,246,902

June 30, 2012	Pass		Special Mention		Substandard		Total Loans
Loans:
Commercial Real Estate	$	287,439	$	30,475	$	6,881	$	324,795
Agricultural Real Estate		261,347		20,362		3,921		285,630
Real Estate Construction		28,169		3,217		4,647		36,033
Residential 1st Mortgages		120,787		1,235		1,031		123,053
Home Equity Lines & Loans		43,895		-		2,389		46,284
Agricultural		202,469		5,515		2,796		210,780
Commercial		165,113		5,906		602		171,621
Consumer & Other		5,565		-		233		5,798
Total	$	1,114,784	$	66,710	$	22,500	$	1,203,994

See “Note 1. Significant Accounting Policies - Allowance for Credit Losses” for a description of the internal risk ratings used by the Company. There were no loans or leases outstanding at June 30, 2013, December 31, 2012, and June 30, 2012 rated doubtful or loss.

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

(in thousands):

	30-89 Days		90 Days and				Total Past				Total
June 30, 2013	Past Due		Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	-	$	-	$	2,873	$	2,873	$	390,286	$	393,159
Agricultural Real Estate		-		-		5,817		5,817		306,771		312,588
Real Estate Construction		-		-		-		-		32,718		32,718
Residential 1st Mortgages		-		-		202		202		136,271		136,473
Home Equity Lines & Loans		152		-		243		395		37,103		37,498
Agricultural		-		-		997		997		213,763		214,760
Commercial		1		-		277		278		159,369		159,647
Consumer & Other		16		-		18		34		5,512		5,546
Leases		-		-		-		-		2,667		2,667
Total	$	169	$	-	$	10,427	$	10,596	$	1,284,460	$	1,295,056

	30-89 Days		90 Days and				Total Past				Total
December 31, 2012	Past Due		Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	150	$	-	$	-	$	150	$	350,398	$	350,548
Agricultural Real Estate		-		-		5,423		5,423		306,569		311,992
Real Estate Construction		-		-		-		-		32,680		32,680
Residential 1st Mortgages		23		-		445		468		139,789		140,257
Home Equity Lines & Loans		70		-		213		283		41,759		42,042
Agricultural		-		-		3,198		3,198		217,834		221,032
Commercial		293		-		-		293		143,000		143,293
Consumer & Other		11		-		19		30		5,028		5,058
Total	$	547	$	-	$	9,298	$	9,845	$	1,237,057	$	1,246,902

	30-89 Days		90 Days or More				Total Past				Total
June 30, 2012	Past Due		and Still Accruing		Nonaccrual		Due		Current		Loans
Loans:
Commercial Real Estate	$	105	$	-	$	-	$	105	$	324,690	$	324,795
Agricultural Real Estate		-		-		1,512		1,512		284,118		285,630
Real Estate Construction		-		-		-		-		36,033		36,033
Residential 1st Mortgages		11		-		452		463		122,590		123,053
Home Equity Lines & Loans		132		-		346		478		45,806		46,284
Agricultural		2,384		-		587		2,971		207,809		210,780
Commercial		327		-		97		424		171,197		171,621
Consumer & Other		44		-		21		65		5,733		5,798
Total	$	3,003	$	-	$	3,015	$	6,018	$	1,197,976	$	1,203,994

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

							Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2013	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	2,973	$	2,993	$	-	$	1,540	$	2	$	869	$	4
Agricultural Real Estate		4,382		4,673		-		3,945		-		4,209		-
Residential 1st Mortgages		530		580		-		633		4		665		7
Home Equity Lines & Loans		374		397		-		312		1		417		2
Agricultural		457		503		-		1,105		-		1,474		-
Commercial		92		92		-		98		2		102		4
	$	8,808	$	9,238	$	-	$	7,633	$	9	$	7,736	$	17
With an allowance recorded:
Commercial Real Estate	$	7	$	6	$	6	$	4	$	-	$	2	$	-
Agricultural Real Estate		1,449		1,843		300		1,645		-		1,283		-
Home Equity Lines & Loans		243		289		243		198		-		186		-
Agricultural		1,043		1,068		596		1,516		8		1,757		16
Commercial		418		430		202		281		2		213		4
Consumer & Other		56		58		55		201		1		202		2
	$	3,216	$	3,694	$	1,402	$	3,845	$	11	$	3,643	$	22
Total	$	12,024	$	12,932	$	1,402	$	11,478	$	20	$	11,379	$	39

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2012	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	289	$	289	$	-	$	506	$	20
Agricultural Real Estate		5,437		5,454		-		2,611		-
Residential 1st Mortgages		658		761		-		458		3
Home Equity Lines & Loans		792		871		-		775		23
Agricultural		1,932		1,954		-		1,159		19
Commercial		106		106		-		144		6
	$	9,214	$	9,435	$	-	$	5,653	$	71
With an allowance recorded:
Residential 1st Mortgages	$	-	$	-	$	-	$	54	$	-
Home Equity Lines & Loans		194		237		173		182		4
Agricultural		2,006		2,019		996		997		1
Commercial		144		144		144		159		4
Consumer & Other		61		63		61		31		-
	$	2,405	$	2,463	$	1,374	$	1,423	$	9
Total	$	11,619	$	11,898	$	1,374	$	7,076	$	80

							Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
June 30, 2012	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial Real Estate	$	298	$	299	$	-	$	720	$	6	$	1,035	$	9
Agricultural Real Estate		1,514		1,777		-		1,224		-		1,085		-
Residential 1st Mortgages		387		416		-		340		-		549		-
Home Equity Lines & Loans		750		821		-		762		7		704		11
Agricultural		288		288		-		299		6		293		10
Commercial		118		118		-		179		2		197		2
	$	3,355	$	3,719	$	-	$	3,524	$	21	$	3,863	$	32
With an allowance recorded:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	-	$	755	$	-
Residential 1st Mortgages		108		109		51		108		-		81		-
Home Equity Lines & Loans		78		82		60		133		1		142		2
Agricultural		587		1,566		586		717		-		840		-
Commercial		245		252		197		173		-		138		-
Consumer & Other		21		22		21		22		-		23		-
	$	1,039	$	2,031	$	915	$	1,153	$	1	$	1,979	$	2
Total	$	4,394	$	5,750	$	915	$	4,677	$	22	$	5,842	$	34

Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases 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 loan & lease fees & costs, unamortized premium or discount, and accrued interest.

At June 30, 2013, the Company allocated $433,000 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 June 30, 2013 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and six month periods ending June 30, 2013, 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 10 years.

The following table presents loans by class, modified as troubled debt restructured loans & leases for the three and six-month periods ended June 30, 2013 (in thousands):

	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
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
Residential 1st Mortgages		-	$	-	$	-		4	$	306	$	290
Home Equity Lines & Loans		1		180		169		2		195		184
Commercial		-		-		-		2		292		292
Total		1	$	180	$	169		8	$	793	$	766

The TDRs described above increased the allowance for credit losses by $0 and $4,000 and resulted in charge-offs of $11,000 and $27,000 for the three and six-month period ending June 30, 2013.

During the three and six-months ended June 30, 2013, 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, 2012, the Company allocated $401,000 of specific reserves to $2.6 million of troubled debt restructured loans, of which $2.3 million were performing. The Company had no commitments at December 31, 2012, to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the twelve-month period ending December 31, 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 ranging from 2 years to 5 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 10 years.

The following table presents loans by class modified as troubled debt restructured loans during the twelve-month period ended December 31, 2012 (in thousands):

	December 31, 2012
Troubled Debt Restructurings	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Real Estate		1	$	116	$	116
Residential 1st Mortgages		2		216		201
Home Equity Lines & Loans		7		529		480
Agricultural		4		858		858
Commercial		3		273		273
Consumer & Other		1		41		41
Total		18	$	2,033	$	1,969

The TDRs described above increased the allowance for credit losses by $53,000 and resulted in charge-offs of $64,000 during the year ended December 31, 2012.

During the twelve-month period ended December 31, 2012, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

At June 30, 2012, the Company allocated $190,000 of specific reserves to $1.7 million of troubled debt restructured loans, of which $1.4 million were performing. The Company had no commitments at June 30, 2012 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and six month periods ending June 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 six-month periods ended June 30, 2012 (in thousands):

	Three Months Ended June 30, 2012						Six Months Ended June 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		30		29		4		146		139
Home Equity Lines & Loans		2		294		258		3		368		326
Agricultural		-		-		-		1		180		180
Commercial		1		147		147		3		273		273
Total		4	$	471	$	434	$	12	$	1,083	$	1,034

The TDR’s described above increased the allowance for credit losses by $85,000 and $29,000 and resulted in charge-offs of $37,000 and $49,000 for the three and six months ended June 30, 2012.

During the three and six-months ended June 30, 2012, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification.

XML

Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

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 accounting principles generally accepted in the United States of America 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, 2012. The results of operations for the three-month and six-month periods ended June 30, 2013 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 accounting principles generally accepted in the United States of America 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 & Leases

Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases 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 or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease 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 & leases placed on non-accrual status are returned to accrual status when the loans or leases 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 or lease.

A loan or lease 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 & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease 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 & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans & leases that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans or leases for customers unless: (i) the existing loan or lease is brought current as to principal and interest payments; and (ii) the restructured loan or lease 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 or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance-sheet date. The allowance is established through a provision for credit 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 & lease 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 & leases and general reserves for inherent losses related to loans & leases that are not impaired.

The determination of the general reserve for loans & leases 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, 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 & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases 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 & leases and periodically performs detailed reviews of all such loans & leases 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 & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. 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 or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

Special Mention – A special mention loan or lease 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 lease or in the Company's credit position at some future date. Special Mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease 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 or leases 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 or leases 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, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease 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 credit 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 by the weakness in residential real estate values over the past five 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.

Leases – Equipment leases subject the Company, as Lessor, to both the credit risk of the Lessee and the residual value risk of the equipment.  Credit risks are underwritten using the same credit criteria the Company would make an equipment term loan under.  Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

At least quarterly, the Board of Directors reviews 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. Upon acquisition, these properties are recorded at fair value less estimated selling costs. 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 credit 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 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 Standard 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 consolidated 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 basic 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 June 30, 2013, December 31, 2012 or June 30, 2012.

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 generally accepted accounting principles 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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Allowance for Credit Losses, Loans by Class Modified as Troubled Debt Restructured Loans (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2013 Loan	Jun. 30, 2012 Loan	Jun. 30, 2013 Loan	Jun. 30, 2012 Loan	Dec. 31, 2012 Loan
Financing Receivable, Modifications [Line Items]
Specific reserves	$ 433,000	$ 190,000	$ 433,000	$ 190,000	$ 401,000
Troubled debt restructured loans	2,100,000	1,700,000	2,100,000	1,700,000	2,600,000
Commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings	0	0	0	0	0
Period of modifications involving a reduction of stated interest rate of the loan			5 years	5 years
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	1	4	8	12	18
Pre-Modification Outstanding Recorded Investment	180,000	471,000	793,000	1,083,000	2,033,000
Post-Modification Outstanding Recorded Investment	169,000	434,000	766,000	1,034,000	1,969,000
Increase in allowance for credit losses due to TDR	0	85,000	4,000	29,000	53,000
TDR's charge-offs	11,000	37,000	27,000	49,000	64,000
Charge offs on troubled debt restructurings that subsequently defaulted	0	0	0	0	0
Period after which loan is considered to be in payment default			90 days
Minimum [Member]
Financing Receivable, Modifications [Line Items]
Period of modifications involving a reduction of stated interest rate of the loan					2 years
Period of modifications involving extension of maturity date			6 months	6 months	6 months
Maximum [Member]
Financing Receivable, Modifications [Line Items]
Period of modifications involving a reduction of stated interest rate of the loan					5 years
Period of modifications involving extension of maturity date			10 years	15 years	10 years
Performing [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructured loans, performing	1,600,000	1,400,000	1,600,000	1,400,000	2,300,000
Commercial Real Estate [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans		0		1	1
Pre-Modification Outstanding Recorded Investment		0		116,000	116,000
Post-Modification Outstanding Recorded Investment		0		116,000	116,000
Residential 1st Mortgages [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	0	1	4	4	2
Pre-Modification Outstanding Recorded Investment	0	30,000	306,000	146,000	216,000
Post-Modification Outstanding Recorded Investment	0	29,000	290,000	139,000	201,000
Home Equity Lines & Loans [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	1	2	2	3	7
Pre-Modification Outstanding Recorded Investment	180,000	294,000	195,000	368,000	529,000
Post-Modification Outstanding Recorded Investment	169,000	258,000	184,000	326,000	480,000
Agricultural [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans		0		1	4
Pre-Modification Outstanding Recorded Investment		0		180,000	858,000
Post-Modification Outstanding Recorded Investment		0		180,000	858,000
Commercial [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans	0	1	2	3	3
Pre-Modification Outstanding Recorded Investment	0	147,000	292,000	273,000	273,000
Post-Modification Outstanding Recorded Investment	0	147,000	292,000	273,000	273,000
Consumer & Other [Member]
Loans by class modified as troubled debt restructured loans [Abstract]
Number of Loans					1
Pre-Modification Outstanding Recorded Investment					41,000
Post-Modification Outstanding Recorded Investment					$ 41,000

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Shareholders' Equity
Preferred Stock, par value (in dollars per share)	$ 0	$ 0	$ 0
Preferred Stock, authorized (in shares)	1,000,000	1,000,000	1,000,000
Preferred Stock, issued (in shares)	0	0	0
Preferred Stock, outstanding (in shares)	0	0	0
Common Stock, par value (in dollars per share)	$ 0.01	$ 0.01	$ 0.01
Common Stock, authorized (in shares)	7,500,000	7,500,000	7,500,000
Common Stock, issued (in shares)	777,882	777,882	778,939
Common Stock, outstanding (in shares)	777,882	777,882	778,939

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Dividends and Basic Earnings Per Common Share

6 Months Ended

Jun. 30, 2013

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 17, 2013, the Board of Directors of Farmers & Merchants Bancorp announced a mid-year cash dividend of $6.20 per share, a 5.1% increase over the $5.90 per share paid on July 2, 2012. The cash dividend was paid on July 1, 2013, to shareholders of record on June 10, 2013.

Basic earnings per 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 share for the three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,				Six Months Ended June 30,
(net income in thousands)	2013		2012		2013		2012
Net Income	$	5,565	$	5,162	$	11,816	$	11,352
Average Number of Common Shares Outstanding		777,882		778,939		777,882		779,118
Basic Earnings Per Common Share	$	7.15	$	6.63	$	15.19	$	14.57

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Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Consolidated Statements of Comprehensive (Loss) Income (Unaudited) [Abstract]
Net Income	$ 5,565	$ 5,162	$ 11,816	$ 11,352
Other Comprehensive Income
(Decrease) Increase in Net Unrealized (Losses) Gains on Available-for-Sale Securities	(12,771)	3,538	(14,588)	4,921
Reclassification Adjustment for Realized Gains on Available-for-Sale Securities Included in Net Income	(154)	0	(889)	0
Deferred Tax Benefit (Expense)	5,434	(1,488)	6,507	(2,069)
Change in Net Unrealized (Losses) Gains on Available-for-Sale Securities, Net of Tax	(7,491)	2,050	(8,970)	2,852
Total Other Comprehensive (Loss) Income	(7,491)	2,050	(8,970)	2,852
Comprehensive (Loss) Income	$ (1,926)	$ 7,212	$ 2,846	$ 14,204

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Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Cash and Cash Equivalents:
Cash and Due from Banks	$ 43,917	$ 47,366	$ 39,673
Interest Bearing Deposits with Banks	1,389	82,060	1,096
Total Cash and Cash Equivalents	45,306	129,426	40,769
Investment Securities:
Available-for-Sale	475,414	417,991	501,892
Held-to-Maturity	67,059	68,392	70,195
Total Investment Securities	542,473	486,383	572,087
Loans & Leases	1,295,056	1,246,902	1,203,994
Less: Allowance for Credit Losses	34,235	34,217	33,098
Loans & Leases, Net	1,260,821	1,212,685	1,170,896
Premises and Equipment, Net	22,306	22,901	23,361
Bank Owned Life Insurance	51,180	50,253	48,330
Interest Receivable and Other Assets	84,008	73,038	71,844
Total Assets	2,006,094	1,974,686	1,927,287
Deposits:
Demand	429,526	462,251	360,290
Interest Bearing Transaction	248,447	259,141	223,343
Savings and Money Market	588,009	541,526	542,922
Time	444,175	459,108	505,670
Total Deposits	1,710,157	1,722,026	1,632,225
Federal Home Loan Bank Advances	43,300	0	50,998
Subordinated Debentures	10,310	10,310	10,310
Interest Payable and Other Liabilities	39,271	37,317	34,979
Total Liabilities	1,803,038	1,769,653	1,728,512
Shareholders' Equity
Preferred Stock: No Par Value. 1,000,000 Shares Authorized, None Issued or Outstanding	0	0	0
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 777,882, 777,882 and 778,939 Shares Issued and Outstanding at June 30, 2013, December 31, 2012 and June 30, 2012, respectively	8	8	8
Additional Paid-In Capital	75,014	75,014	75,410
Retained Earnings	130,005	123,012	115,838
Accumulated Other Comprehensive (Loss) Income, Net	(1,971)	6,999	7,519
Total Shareholders' Equity	203,056	205,033	198,775
Total Liabilities & Shareholders' Equity	$ 2,006,094	$ 1,974,686	$ 1,927,287

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Fair Value Measurements (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Other Real Estate [Abstract]
Impaired loans with a partial charge-off or where an allowance was established	$ 2,500,000	$ 560,000	$ 2,500,000	$ 560,000	$ 1,700,000
ORE, valuation allowance	3,700,000	4,100,000	3,700,000	4,100,000	4,100,000
Allowance for credit losses	1,300,000	915,000	1,300,000	915,000	1,400,000
Recurring [Member]
Available-for-Sale Securities [Abstract]
Government Agency & Government-Sponsored Entities	26,482,000	57,078,000	26,482,000	57,078,000	26,823,000
Obligations of States and Political Subdivisions	5,612,000	5,724,000	5,612,000	5,724,000	5,665,000
Mortgage Backed Securities	392,574,000	427,637,000	392,574,000	427,637,000	352,772,000
Corporate Securities	49,560,000	8,995,000	49,560,000	8,995,000	22,558,000
Other	1,186,000	2,458,000	1,186,000	2,458,000	10,173,000
Total Assets Measured at Fair Value On a Recurring Basis	475,414,000	501,892,000	475,414,000	501,892,000	417,991,000
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Available-for-Sale Securities [Abstract]
Government Agency & Government-Sponsored Entities	21,416,000	10,724,000	21,416,000	10,724,000	21,731,000
Obligations of States and Political Subdivisions	0	0	0	0	0
Mortgage Backed Securities	0	0	0	0	0
Corporate Securities	8,122,000	0	8,122,000	0	4,020,000
Other	876,000	2,148,000	876,000	2,148,000	9,863,000
Total Assets Measured at Fair Value On a Recurring Basis	30,414,000	12,872,000	30,414,000	12,872,000	35,614,000
Recurring [Member] | Other Observable Inputs (Level 2) [Member]
Available-for-Sale Securities [Abstract]
Government Agency & Government-Sponsored Entities	5,066,000	46,354,000	5,066,000	46,354,000	5,092,000
Obligations of States and Political Subdivisions	0	0	0	0	0
Mortgage Backed Securities	392,574,000	427,637,000	392,574,000	427,637,000	352,772,000
Corporate Securities	41,438,000	8,995,000	41,438,000	8,995,000	18,538,000
Other	310,000	310,000	310,000	310,000	310,000
Total Assets Measured at Fair Value On a Recurring Basis	439,388,000	483,296,000	439,388,000	483,296,000	376,712,000
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	5,612,000	5,724,000	5,612,000	5,724,000	5,665,000
Mortgage Backed Securities	0	0	0	0	0
Corporate Securities	0	0	0	0	0
Other	0	0	0	0	0
Total Assets Measured at Fair Value On a Recurring Basis	5,612,000	5,724,000	5,612,000	5,724,000	5,665,000
Changes in level 3 assets measured at fair value on a recurring basis [Roll Forward]
Balance at Beginning of Period	5,643,000	5,753,000	5,665,000	5,782,000
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	(31,000)	(29,000)	(53,000)	(58,000)
Net Transfers In/(Out) of Level 3	0	0	0	0
Balance at End of Period	5,612,000	5,724,000	5,612,000	5,724,000
Nonrecurring [Member]
Impaired Loans [Abstract]
Agricultural Real Estate	1,143,000		1,143,000
Residential 1st Mortgage	283,000	86,000	283,000	86,000	235,000
Home Equity Lines and Loans	184,000	428,000	184,000	428,000	462,000
Agricultural	672,000		672,000		1,010,000
Commercial	216,000	48,000	216,000	48,000
Total Impaired Loans	2,498,000	562,000	2,498,000	562,000	1,707,000
Other Real Estate [Abstract]
Real Estate Construction	2,399,000	2,553,000	2,399,000	2,553,000	2,553,000
Total Other Real Estate	2,399,000	2,553,000	2,399,000	2,553,000	2,553,000
Total Assets Measured at Fair Value On a Non-Recurring Basis	4,897,000	3,115,000	4,897,000	3,115,000	4,260,000
Nonrecurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Impaired Loans [Abstract]
Agricultural Real Estate	0		0
Residential 1st Mortgage	0	0	0	0	0
Home Equity Lines and Loans	0	0	0	0	0
Agricultural	0		0		0
Commercial	0	0	0	0
Total Impaired Loans	0	0	0	0	0
Other Real Estate [Abstract]
Real Estate Construction	0	0	0	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
Nonrecurring [Member] | Other Observable Inputs (Level 2) [Member]
Impaired Loans [Abstract]
Agricultural Real Estate	0		0
Residential 1st Mortgage	0	0	0	0	0
Home Equity Lines and Loans	0	0	0	0	0
Agricultural	0		0		0
Commercial	0	0	0	0
Total Impaired Loans	0	0	0	0	0
Other Real Estate [Abstract]
Real Estate Construction	0	0	0	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
Nonrecurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Impaired Loans [Abstract]
Agricultural Real Estate	1,143,000		1,143,000
Residential 1st Mortgage	283,000	86,000	283,000	86,000	235,000
Home Equity Lines and Loans	184,000	428,000	184,000	428,000	462,000
Agricultural	672,000		672,000		1,010,000
Commercial	216,000	48,000	216,000	48,000
Total Impaired Loans	2,498,000	562,000	2,498,000	562,000	1,707,000
Other Real Estate [Abstract]
Real Estate Construction	2,399,000	2,553,000	2,399,000	2,553,000	2,553,000
Total Other Real Estate	2,399,000	2,553,000	2,399,000	2,553,000	2,553,000
Total Assets Measured at Fair Value On a Non-Recurring Basis	$ 4,897,000	$ 3,115,000	$ 4,897,000	$ 3,115,000	$ 4,260,000

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Investment Securities (Details) (USD $)	3 Months Ended				6 Months Ended
	Jun. 30, 2013 Security		Jun. 30, 2012		Jun. 30, 2013 Security		Jun. 30, 2012		Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 478,813,000		$ 488,919,000		$ 478,813,000		$ 488,919,000		$ 405,914,000
Gross Unrealized Gains	4,708,000		12,990,000		4,708,000		12,990,000		12,099,000
Gross Unrealized Losses	8,107,000		17,000		8,107,000		17,000		22,000
Fair/Book Value, Total	475,414,000		501,892,000		475,414,000		501,892,000		417,991,000
Individual securities in continuous unrealized loss position, fair value [Abstract]
Less Than 12 Months Fair Value	235,960,000		3,405,000		235,960,000		3,405,000		7,984,000
12 Months or More Fair Value	0		0		0		0		0
Total Fair Value	235,960,000		3,405,000		235,960,000		3,405,000		7,984,000
Individual securities in continuous unrealized loss position, aggregate losses [Abstract]
Less Than 12 Months Unrealized Loss	8,107,000		17,000		8,107,000		17,000		22,000
12 Months or More Unrealized Loss	0		0		0		0		0
Total Unrealized Loss	8,107,000		17,000		8,107,000		17,000		22,000
Schedule of Held-to-maturity Securities [Line Items]
Book Value	67,059,000		70,195,000		67,059,000		70,195,000		68,392,000
Gross Unrealized Gains	1,255,000		2,523,000		1,255,000		2,523,000		2,308,000
Gross Unrealized Losses	531,000		51,000		531,000		51,000		3,000
Fair Value	67,783,000		72,667,000		67,783,000		72,667,000		70,697,000
Individual securities in continuous unrealized loss position, fair value [Abstract]
Less than Twelve Months Fair Value	9,626,000		4,774,000		9,626,000		4,774,000		528,000
Twelve Months or More Fair Value	0		0		0		0		0
Total Fair Value	9,626,000		4,774,000		9,626,000		4,774,000		528,000
Individual securities in continuous unrealized loss position, aggregate losses [Abstract]
Less than 12 Months Unrealized Loss	531,000		51,000		531,000		51,000		3,000
12 Months or Longer Unrealized Loss	0		0		0		0		0
Total Unrealized Loss	531,000		51,000		531,000		51,000		3,000
Amortized Cost [Abstract]
Within one year	11,680,000				11,680,000
After one year through five years	64,383,000				64,383,000
After five years through ten years	1,310,000				1,310,000
After ten years	5,399,000				5,399,000
Amortized cost, before single maturity date	82,772,000				82,772,000
Investment securities not due at a single maturity date - Mortgage-backed securities	396,041,000				396,041,000
Amortized cost, Total	478,813,000				478,813,000
Fair/Book Value [Abstract]
Within one year	11,718,000				11,718,000
After one year through five years	64,378,000				64,378,000
After five years through ten years	1,345,000				1,345,000
After ten years	5,399,000				5,399,000
Fair/Book Value, before single maturity date	82,840,000				82,840,000
Investment securities not due at a single maturity date - Mortgage-backed securities	392,574,000				392,574,000
Fair/Book Value, Total	475,414,000		501,892,000		475,414,000		501,892,000		417,991,000
Amortized Cost [Abstract]
Within one year	2,075,000				2,075,000
After one year through five years	13,317,000				13,317,000
After five years through ten years	36,228,000				36,228,000
After ten years	15,222,000				15,222,000
Amortized cost, before single maturity date	66,842,000				66,842,000
Investment securities not due at a single maturity date - Mortgage-backed securities	217,000				217,000
Amortized cost, Total	67,059,000				67,059,000
Fair Value [Abstract]
Within one year	2,084,000				2,084,000
After one year through five years	13,627,000				13,627,000
After five years through ten years	37,161,000				37,161,000
After ten years	14,691,000				14,691,000
Fair/Book Value, before single maturity date	67,563,000				67,563,000
Investment securities not due at a single maturity date - Mortgage-backed securities	220,000				220,000
Fair/Book Value, Total	67,783,000				67,783,000
Proceeds from sales of securities available-for-sale [Abstract]
Proceeds	4,356,000		1,530,000		49,615,000		26,530,000
Gains	154,000		0		903,000		0
Losses	0		0		14,000		0
Gain (Loss) on Investments [Line Items]
Number of investment securities held	363				363
Number of loss positions less than twelve months					82
Number of loss positions in twelve months or more					0
Percentage of bank qualified municipal bond portfolio rated (in hundredths)					94.00%
Percentage of portfolio not rated (in hundredths)					6.00%
Securities pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law	290,600,000				290,600,000				296,900,000
Government Agency Government Sponsored Entities [Member]
Gain (Loss) on Investments [Line Items]
Unrealized losses	0		0		0		0		0
Mortgage Backed Securities [Member]
Gain (Loss) on Investments [Line Items]
Unrealized losses	7,800,000		0		7,800,000		0		10,000
Obligations of States and Political Subdivisions [Member]
Gain (Loss) on Investments [Line Items]
Unrealized losses	531,000		51,000		531,000		51,000		3,000
Corporate Securities [Member]
Gain (Loss) on Investments [Line Items]
Unrealized losses	267,000		17,000		267,000		17,000		12,000
Obligations of States and Political Subdivisions [Member]
Schedule of Held-to-maturity Securities [Line Items]
Book Value	64,648,000		67,159,000		64,648,000		67,159,000		65,694,000
Gross Unrealized Gains	1,252,000		2,498,000		1,252,000		2,498,000		2,296,000
Gross Unrealized Losses	531,000		51,000		531,000		51,000		3,000
Fair Value	65,369,000		69,606,000		65,369,000		69,606,000		67,987,000
Individual securities in continuous unrealized loss position, fair value [Abstract]
Less than Twelve Months Fair Value	9,626,000		4,774,000		9,626,000		4,774,000		528,000
Twelve Months or More Fair Value	0		0		0		0		0
Total Fair Value	9,626,000		4,774,000		9,626,000		4,774,000		528,000
Individual securities in continuous unrealized loss position, aggregate losses [Abstract]
Less than 12 Months Unrealized Loss	531,000		51,000		531,000		51,000		3,000
12 Months or Longer Unrealized Loss	0		0		0		0		0
Total Unrealized Loss	531,000		51,000		531,000		51,000		3,000
Mortgage Backed Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
Book Value	217,000	[1]	806,000	[1]	217,000	[1]	806,000	[1]	484,000	[1]
Gross Unrealized Gains	3,000	[1]	25,000	[1]	3,000	[1]	25,000	[1]	12,000	[1]
Gross Unrealized Losses	0	[1]	0	[1]	0	[1]	0	[1]	0	[1]
Fair Value	220,000	[1]	831,000	[1]	220,000	[1]	831,000	[1]	496,000	[1]
Other [Member]
Schedule of Held-to-maturity Securities [Line Items]
Book Value	2,194,000		2,230,000		2,194,000		2,230,000		2,214,000
Gross Unrealized Gains	0		0		0		0		0
Gross Unrealized Losses	0		0		0		0		0
Fair Value	2,194,000		2,230,000		2,194,000		2,230,000		2,214,000
Government Agency & Government Sponsored Entities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	26,327,000		56,764,000		26,327,000		56,764,000		26,546,000
Gross Unrealized Gains	155,000		314,000		155,000		314,000		277,000
Gross Unrealized Losses	0		0		0		0		0
Fair/Book Value, Total	26,482,000		57,078,000		26,482,000		57,078,000		26,823,000
Fair/Book Value [Abstract]
Fair/Book Value, Total	26,482,000		57,078,000		26,482,000		57,078,000		26,823,000
Obligations of States and Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	5,612,000		5,724,000		5,612,000		5,724,000		5,665,000
Gross Unrealized Gains	0		0		0		0		0
Gross Unrealized Losses	0		0		0		0		0
Fair/Book Value, Total	5,612,000		5,724,000		5,612,000		5,724,000		5,665,000
Fair/Book Value [Abstract]
Fair/Book Value, Total	5,612,000		5,724,000		5,612,000		5,724,000		5,665,000
Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	396,041,000	[1]	414,990,000	[1]	396,041,000	[1]	414,990,000	[1]	341,212,000	[1]
Gross Unrealized Gains	4,373,000	[1]	12,647,000	[1]	4,373,000	[1]	12,647,000	[1]	11,570,000	[1]
Gross Unrealized Losses	7,840,000	[1]	0	[1]	7,840,000	[1]	0	[1]	10,000	[1]
Fair/Book Value, Total	392,574,000	[1]	427,637,000	[1]	392,574,000	[1]	427,637,000	[1]	352,772,000	[1]
Individual securities in continuous unrealized loss position, fair value [Abstract]
Less Than 12 Months Fair Value	205,363,000				205,363,000				4,542,000
12 Months or More Fair Value	0				0				0
Total Fair Value	205,363,000				205,363,000				4,542,000
Individual securities in continuous unrealized loss position, aggregate losses [Abstract]
Less Than 12 Months Unrealized Loss	7,840,000				7,840,000				10,000
12 Months or More Unrealized Loss	0				0				0
Total Unrealized Loss	7,840,000				7,840,000				10,000
Fair/Book Value [Abstract]
Fair/Book Value, Total	392,574,000	[1]	427,637,000	[1]	392,574,000	[1]	427,637,000	[1]	352,772,000	[1]
Corporate Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	49,647,000		8,983,000		49,647,000		8,983,000		22,318,000
Gross Unrealized Gains	180,000		29,000		180,000		29,000		252,000
Gross Unrealized Losses	267,000		17,000		267,000		17,000		12,000
Fair/Book Value, Total	49,560,000		8,995,000		49,560,000		8,995,000		22,558,000
Individual securities in continuous unrealized loss position, fair value [Abstract]
Less Than 12 Months Fair Value	30,597,000		3,405,000		30,597,000		3,405,000		3,442,000
12 Months or More Fair Value	0		0		0		0		0
Total Fair Value	30,597,000		3,405,000		30,597,000		3,405,000		3,442,000
Individual securities in continuous unrealized loss position, aggregate losses [Abstract]
Less Than 12 Months Unrealized Loss	267,000		17,000		267,000		17,000		12,000
12 Months or More Unrealized Loss	0		0		0		0		0
Total Unrealized Loss	267,000		17,000		267,000		17,000		12,000
Fair/Book Value [Abstract]
Fair/Book Value, Total	49,560,000		8,995,000		49,560,000		8,995,000		22,558,000
Other [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	1,186,000		2,458,000		1,186,000		2,458,000		10,173,000
Gross Unrealized Gains	0		0		0		0		0
Gross Unrealized Losses	0		0		0		0		0
Fair/Book Value, Total	1,186,000		2,458,000		1,186,000		2,458,000		10,173,000
Fair/Book Value [Abstract]
Fair/Book Value, Total	$ 1,186,000		$ 2,458,000		$ 1,186,000		$ 2,458,000		$ 10,173,000

[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.

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2013

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

U.S. GAAP requires 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
June 30, 2013 (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	$	45,306		$	45,306		$	-		$	-		$	45,306
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,482			21,416			5,066			-			26,482
Obligations of States and Political Subdivisions		5,612			-			-			5,612			5,612
Mortgage Backed Securities		392,574						392,574			-			392,574
Corporate Securities		49,560			8,122			41,438			-			49,560
Other		1,186			876			310			-			1,186
Total Investment Securities Available-for-Sale		475,414			30,414			439,388			5,612			475,414
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		64,648			-			58,009			7,360			65,369
Mortgage Backed Securities		217			-			220			-			220
Other		2,194			-			2,194			-			2,194
Total Investment Securities Held-to-Maturity		67,059			-			60,423			7,360			67,783
FHLB Stock		7,187			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		387,427			-			-			387,017			387,017
Agricultural Real Estate		309,107			-			-			310,902			310,902
Real Estate Construction		31,741			-			-			31,901			31,901
Residential 1st Mortgages		135,436			-			-			137,951			137,951
Home Equity Lines and Loans		34,514			-			-			37,225			37,225
Agricultural		204,203			-			-			201,957			201,957
Commercial		150,572			-			-			149,593			149,593
Consumer & Other		5,378			-			-			5,400			5,400
Leases		2,667			-			-			2,667			2,667
Unallocated Allowance		(224	)		-			-			(224	)		(224	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,260,821			-			-			1,264,389			1,264,389
Accrued Interest Receivable		7,609			-			7,609			-			7,609
Liabilities:
Deposits:
Demand		429,526			429,526			-			-			429,526
Interest Bearing Transaction		248,447			248,447			-			-			248,447
Savings and Money Market		588,009			588,009			-			-			588,009
Time		444,175			-			444,579			-			444,579
Total Deposits		1,710,157			1,265,982			444,579			-			1,710,561
FHLB Advances & Securities Sold Under Agreement to Repurchase		43,300			-			43,300			-			43,300
Subordinated Debentures		10,310			-			5,665			-			5,665
Accrued Interest Payable		438			-			438			-			438

				Fair Value of Financial Instruments Using
December 31, 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	$	129,426		$	129,426		$	-		$	-		$	129,426
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,823			21,731			5,092			-			26,823
Obligations of States and Political Subdivisions		5,665			-			-			5,665			5,665
Mortgage Backed Securities		352,772			-			352,772			-			352,772
Corporate Securities		22,558			4,020			18,538			-			22,558
Other		10,173			9,863			310			-			10,173
Total Investment Securities Available-for-Sale		417,991			35,614			376,712			5,665			417,991
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		65,694			-			60,177			7,810			67,987
Mortgage Backed Securities		484			-			496			-			496
Other		2,214			-			2,214			-			2,214
Total Investment Securities Held-to-Maturity		68,392			-			62,887			7,810			70,697
FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		344,084			-			-			349,524			349,524
Agricultural Real Estate		309,115			-			-			316,302			316,302
Real Estate Construction		31,694			-			-			32,024			32,024
Residential 1st Mortgages		139,038			-			-			144,203			144,203
Home Equity Lines and Loans		38,807			-			-			41,419			41,419
Agricultural		210,595			-			-			209,578			209,578
Commercial		135,330			-			-			134,647			134,647
Consumer & Other		4,876			-			-			4,847			4,847
Unallocated Allowance		(854	)		-			-			(854	)		(854	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,212,685			-			-			1,231,690			1,231,690
Accrued Interest Receivable		6,389			-			-			6,389			6,389
Liabilities:
Deposits:
Demand		462,251			462,251			-			-			462,251
Interest Bearing Transaction		259,141			259,141			-			-			259,141
Savings and Money Market		541,526			541,526			-			-			541,526
Time		459,108			-			459,993			-			459,993
Total Deposits		1,722,026			1,262,918			459,993			-			1,722,911
Subordinated Debentures		10,310			-			5,750			-			5,750
Accrued Interest Payable		498			-			498			-			498

				Fair Value of Financial Instruments Using
June 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	$	40,769		$	40,769		$	-		$	-		$	40,769
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		57,078			10,724			46,354			-			57,078
Obligations of States and Political Subdivisions		5,724			-			-			5,724			5,724
Mortgage Backed Securities		427,637			-			427,637			-			427,637
Corporate Securities		8,995			-			8,995			-			8,995
Other		2,458			2,148			310			-			2,458
Total Investment Securities Available-for-Sale		501,892			12,872			483,296			5,724			501,892
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,159			-			61,820			7,786			69,606
Mortgage Backed Securities		806			-			831			-			831
Other		2,230			-			2,230			-			2,230
Total Investment Securities Held-to-Maturity		70,195			-			64,881			7,786			72,667
FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		320,418			-			-			330,783			330,783
Agricultural Real Estate		282,997			-			-			292,152			292,152
Real Estate Construction		34,133			-			-			34,423			34,423
Residential 1st Mortgages		121,602			-			-			125,110			125,110
Home Equity Lines and Loans		42,770			-			-			45,809			45,809
Agricultural		202,946			-			-			202,991			202,991
Commercial		162,083			-			-			161,242			161,242
Consumer & Other		5,658			-			-			5,731			5,731
Unallocated Allowance		(1,711	)		-			-			(1,711	)		(1,711	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,170,896			-			-			1,196,530			1,196,530
Accrued Interest Receivable		7,223			-			7,223			-			7,223
Liabilities:
Deposits:
Demand		360,290			360,290			-			-			360,290
Interest Bearing Transaction		223,343			223,343			-			-			223,343
Savings and Money Market		542,922			542,922			-			-			542,922
Time		505,670			-			506,638			-			506,638
Total Deposits		1,632,225			1,126,555			506,638			-			1,633,193
FHLB Advances & Securities Sold Under Agreement to Repurchase		50,998			-			51,065			-			51,065
Subordinated Debentures		10,310			-			5,841			-			5,841
Accrued Interest Payable		796			-			796			-			796

Fair value estimates presented herein are based on pertinent information available to management as of June 30, 2013, December 31, 2012, and June 30, 2012. 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 & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans & leases 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 & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans & leases with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases 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.

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Carrying Amount [Member]
Assets [Abstract]
Cash and Cash Equivalents	$ 45,306	$ 129,426	$ 40,769
Investment Securities Available-for-Sale [Abstract]
Government Agency & Government-Sponsored Entities	26,482	26,823	57,078
Obligations of States and Political Subdivisions	5,612	5,665	5,724
Mortgage Backed Securities	392,574	352,772	427,637
Corporate Securities	49,560	22,558	8,995
Other	1,186	10,173	2,458
Total Assets Measured at Fair Value On a Recurring Basis	475,414	417,991	501,892
Investment Securities Held-to-Maturity [Abstract]
Obligations of States and Political Subdivisions	64,648	65,694	67,159
Mortgage Backed Securities	217	484	806
Other	2,194	2,214	2,230
Total Investment Securities Held-to-Maturity	67,059	68,392	70,195
FHLB Stock	7,187	7,368	7,368
Loans & Leases, Net of Deferred Fees & Allowance [Abstract]
Commercial Real Estate	387,427	344,084	320,418
Agricultural Real Estate	309,107	309,115	282,997
Real Estate Construction	31,741	31,694	34,133
Residential 1st Mortgages	135,436	139,038	121,602
Home Equity Lines and Loans	34,514	38,807	42,770
Agricultural	204,203	210,595	202,946
Commercial	150,572	135,330	162,083
Consumer & Other	5,378	4,876	5,658
Leases	2,667
Unallocated Allowance	(224)	(854)	(1,711)
Total Loans & Leases, Net of Deferred Fees & Allowance	1,260,821	1,212,685	1,170,896
Accrued Interest Receivable	7,609	6,389	7,223
Deposits [Abstract]
Demand	429,526	462,251	360,290
Interest Bearing Transaction	248,447	259,141	223,343
Savings and Money Market	588,009	541,526	542,922
Time	444,175	459,108	505,670
Total Deposits	1,710,157	1,722,026	1,632,225
FHLB Advances & Securities Sold Under Agreement to Repurchase	43,300		50,998
Subordinated Debentures	10,310	10,310	10,310
Accrued Interest Payable	438	498	796
Estimated Fair Value [Member]
Assets [Abstract]
Cash and Cash Equivalents	45,306	129,426	40,769
Investment Securities Available-for-Sale [Abstract]
Government Agency & Government-Sponsored Entities	26,482	26,823	57,078
Obligations of States and Political Subdivisions	5,612	5,665	5,724
Mortgage Backed Securities	392,574	352,772	427,637
Corporate Securities	49,560	22,558	8,995
Other	1,186	10,173	2,458
Total Assets Measured at Fair Value On a Recurring Basis	475,414	417,991	501,892
Investment Securities Held-to-Maturity [Abstract]
Obligations of States and Political Subdivisions	65,369	67,987	69,606
Mortgage Backed Securities	220	496	831
Other	2,194	2,214	2,230
Total Investment Securities Held-to-Maturity	67,783	70,697	72,667
Loans & Leases, Net of Deferred Fees & Allowance [Abstract]
Commercial Real Estate	387,017	349,524	330,783
Agricultural Real Estate	310,902	316,302	292,152
Real Estate Construction	31,901	32,024	34,423
Residential 1st Mortgages	137,951	144,203	125,110
Home Equity Lines and Loans	37,225	41,419	45,809
Agricultural	201,957	209,578	202,991
Commercial	149,593	134,647	161,242
Consumer & Other	5,400	4,847	5,731
Leases	2,667
Unallocated Allowance	(224)	(854)	(1,711)
Total Loans & Leases, Net of Deferred Fees & Allowance	1,264,389	1,231,690	1,196,530
Accrued Interest Receivable	7,609	6,389	7,223
Deposits [Abstract]
Demand	429,526	462,251	360,290
Interest Bearing Transaction	248,447	259,141	223,343
Savings and Money Market	588,009	541,526	542,922
Time	444,579	459,993	506,638
Total Deposits	1,710,561	1,722,911	1,633,193
FHLB Advances & Securities Sold Under Agreement to Repurchase	43,300		51,065
Subordinated Debentures	5,665	5,750	5,841
Accrued Interest Payable	438	498	796
Estimated Fair Value [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Assets [Abstract]
Cash and Cash Equivalents	45,306	129,426	40,769
Investment Securities Available-for-Sale [Abstract]
Government Agency & Government-Sponsored Entities	21,416	21,731	10,724
Obligations of States and Political Subdivisions	0	0	0
Mortgage Backed Securities		0	0
Corporate Securities	8,122	4,020	0
Other	876	9,863	2,148
Total Assets Measured at Fair Value On a Recurring Basis	30,414	35,614	12,872
Investment Securities Held-to-Maturity [Abstract]
Obligations of States and Political Subdivisions	0	0	0
Mortgage Backed Securities	0	0	0
Other	0	0	0
Total Investment Securities Held-to-Maturity	0	0	0
Loans & Leases, Net of Deferred Fees & Allowance [Abstract]
Commercial Real Estate	0	0	0
Agricultural Real Estate	0	0	0
Real Estate Construction	0	0	0
Residential 1st Mortgages	0	0	0
Home Equity Lines and Loans	0	0	0
Agricultural	0	0	0
Commercial	0	0	0
Consumer & Other	0	0	0
Leases	0
Unallocated Allowance	0	0	0
Total Loans & Leases, Net of Deferred Fees & Allowance	0	0	0
Accrued Interest Receivable	0	0	0
Deposits [Abstract]
Demand	429,526	462,251	360,290
Interest Bearing Transaction	248,447	259,141	223,343
Savings and Money Market	588,009	541,526	542,922
Time	0	0	0
Total Deposits	1,265,982	1,262,918	1,126,555
FHLB Advances & Securities Sold Under Agreement to Repurchase	0		0
Subordinated Debentures	0	0	0
Accrued Interest Payable	0	0	0
Estimated Fair Value [Member] | Other Observable Inputs (Level 2) [Member]
Assets [Abstract]
Cash and Cash Equivalents	0	0	0
Investment Securities Available-for-Sale [Abstract]
Government Agency & Government-Sponsored Entities	5,066	5,092	46,354
Obligations of States and Political Subdivisions	0	0	0
Mortgage Backed Securities	392,574	352,772	427,637
Corporate Securities	41,438	18,538	8,995
Other	310	310	310
Total Assets Measured at Fair Value On a Recurring Basis	439,388	376,712	483,296
Investment Securities Held-to-Maturity [Abstract]
Obligations of States and Political Subdivisions	58,009	60,177	61,820
Mortgage Backed Securities	220	496	831
Other	2,194	2,214	2,230
Total Investment Securities Held-to-Maturity	60,423	62,887	64,881
Loans & Leases, Net of Deferred Fees & Allowance [Abstract]
Commercial Real Estate	0	0	0
Agricultural Real Estate	0	0	0
Real Estate Construction	0	0	0
Residential 1st Mortgages	0	0	0
Home Equity Lines and Loans	0	0	0
Agricultural	0	0	0
Commercial	0	0	0
Consumer & Other	0	0	0
Leases	0
Unallocated Allowance	0	0	0
Total Loans & Leases, Net of Deferred Fees & Allowance	0	0	0
Accrued Interest Receivable	7,609	0	7,223
Deposits [Abstract]
Demand	0	0	0
Interest Bearing Transaction	0	0	0
Savings and Money Market	0	0	0
Time	444,579	459,993	506,638
Total Deposits	444,579	459,993	506,638
FHLB Advances & Securities Sold Under Agreement to Repurchase	43,300		51,065
Subordinated Debentures	5,665	5,750	5,841
Accrued Interest Payable	438	498	796
Estimated Fair Value [Member] | Significant Unobservable Inputs (Level 3) [Member]
Assets [Abstract]
Cash and Cash Equivalents	0	0	0
Investment Securities Available-for-Sale [Abstract]
Government Agency & Government-Sponsored Entities	0	0	0
Obligations of States and Political Subdivisions	5,612	5,665	5,724
Mortgage Backed Securities	0	0	0
Corporate Securities	0	0	0
Other	0	0	0
Total Assets Measured at Fair Value On a Recurring Basis	5,612	5,665	5,724
Investment Securities Held-to-Maturity [Abstract]
Obligations of States and Political Subdivisions	7,360	7,810	7,786
Mortgage Backed Securities	0	0	0
Other	0	0	0
Total Investment Securities Held-to-Maturity	7,360	7,810	7,786
Loans & Leases, Net of Deferred Fees & Allowance [Abstract]
Commercial Real Estate	387,017	349,524	330,783
Agricultural Real Estate	310,902	316,302	292,152
Real Estate Construction	31,901	32,024	34,423
Residential 1st Mortgages	137,951	144,203	125,110
Home Equity Lines and Loans	37,225	41,419	45,809
Agricultural	201,957	209,578	202,991
Commercial	149,593	134,647	161,242
Consumer & Other	5,400	4,847	5,731
Leases	2,667
Unallocated Allowance	(224)	(854)	(1,711)
Total Loans & Leases, Net of Deferred Fees & Allowance	1,264,389	1,231,690	1,196,530
Accrued Interest Receivable	0	6,389	0
Deposits [Abstract]
Demand	0	0	0
Interest Bearing Transaction	0	0	0
Savings and Money Market	0	0	0
Time	0	0	0
Total Deposits	0	0	0
FHLB Advances & Securities Sold Under Agreement to Repurchase	0		0
Subordinated Debentures	0	0	0
Accrued Interest Payable	$ 0	$ 0	$ 0

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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2012. The results of operations for the three-month and six-month periods ended June 30, 2013 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 accounting principles generally accepted in the United States of America 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 & Leases

Loans & Leases

Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases 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 or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease 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 & leases placed on non-accrual status are returned to accrual status when the loans or leases 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 or lease.

A loan or lease 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 & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease 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 & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans & leases that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans or leases for customers unless: (i) the existing loan or lease is brought current as to principal and interest payments; and (ii) the restructured loan or lease 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 or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses

Allowance for Credit Losses

The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance-sheet date. The allowance is established through a provision for credit 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 & lease 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 & leases and general reserves for inherent losses related to loans & leases that are not impaired.

The determination of the general reserve for loans & leases 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, 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 & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1^st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases 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 & leases and periodically performs detailed reviews of all such loans & leases 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 & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. 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 or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

Special Mention – A special mention loan or lease 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 lease or in the Company's credit position at some future date. Special Mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease 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 or leases 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 or leases 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, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease 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 credit 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 by the weakness in residential real estate values over the past five 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.

Leases – Equipment leases subject the Company, as Lessor, to both the credit risk of the Lessee and the residual value risk of the equipment.  Credit risks are underwritten using the same credit criteria the Company would make an equipment term loan under.  Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

At least quarterly, the Board of Directors reviews 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. Upon acquisition, these properties are recorded at fair value less estimated selling costs. 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 credit 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 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 Standard 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 consolidated 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 basic 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 June 30, 2013, December 31, 2012 or June 30, 2012.

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 generally accepted accounting principles 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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Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

4. Fair Value Measurements

The Company follows the “Fair Value Measurement and Disclosures” topic, 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 & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivables” topic. The fair value of impaired loans & leases is estimated using one of several methods, including collateral value when the loan & lease is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases 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 or lease as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant unobservable assumption, and there is no observable market price, the Company records the impaired loan or lease 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. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value or the appraised value contains a significant unobservable assumption, and there is no observable market price, 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 June 30, 2013, 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	$	26,482	$	21,416	$	5,066	$	-
Obligations of States and Political Subdivisions		5,612		-		-		5,612
Mortgage Backed Securities		392,574		-		392,574		-
Corporate Securities		49,560		8,122		41,438		-
Other		1,186		876		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	475,414	$	30,414	$	439,388	$	5,612

			Fair Value Measurements At December 31, 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	$	26,823	$	21,731	$	5,092	$	-
Obligations of States and Political Subdivisions		5,665		-		-		5,665
Mortgage Backed Securities		352,772		-		352,772		-
Corporate Securities		22,558		4,020		18,538		-
Other		10,173		9,863		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	417,991	$	35,614	$	376,712	$	5,665

			Fair Value Measurements At June 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	$	57,078	$	10,724	$	46,354	$	-
Obligations of States and Political Subdivisions		5,724		-		-		5,724
Mortgage Backed Securities		427,637		-		427,637		-
Corporate Securities		8,995		-		8,995		-
Other		2,458		2,148		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	501,892	$	12,872	$	483,296	$	5,724

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the three and six-months ended June 30, 2013 and 2012, 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 June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012
Balance at Beginning of Period	$	5,643		$	5,753		$	5,665		$	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		(31	)		(29	)		(53	)		(58	)
Net Transfers In/(Out) of Level 3		-			-			-			-
Balance at End of Period	$	5,612		$	5,724		$	5,612		$	5,724

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 impaired loans & leases and other real estate, 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 & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an 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 June 30, 2013, 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
Agricultural Real Estate	$	1,143	$	-	$	-	$	1,143
Residential 1st Mortgage		283		-		-		283
Home Equity Lines and Loans		184		-		-		184
Agricultural		672		-		-		672
Commercial		216		-		-		216
Total Impaired Loans		2,498		-		-		2,498
Other Real Estate
Real Estate Construction		2,399		-		-		2,399
Total Other Real Estate		2,399		-		-		2,399
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	4,897	$	-	$	-	$	4,897

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $2.5 million, net of an allowance for credit losses of $1.3 million.

ORE was $2.4 million, net of a $3.7 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 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 credit losses. After foreclosure, management periodically obtains updated valuations of the foreclosed assets and, if additional impairments are deemed necessary, the impairment is recorded in non-interest expense on the Consolidated Statements of Income.

			Fair Value Measurements At December 31, 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	$	235	$	-	$	-	$	235
Home Equity Lines and Loans		462		-		-		462
Agricultural		1,010		-		-		1,010
Total Impaired Loans		1,707		-		-		1,707
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	$	4,260	$	-	$	-	$	4,260

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $1.7 million, net of an allowance for credit losses of $1.4 million. The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance.

			Fair Value Measurements At June 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	$	86	$	-	$	-	$	86
Home Equity Lines and Loans		428		-		-		428
Commercial		48		-		-		48
Total Impaired Loans		562		-		-		562
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	$	3,115	$	-	$	-	$	3,115

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $562,000, net of an allowance for credit losses of $915,000. The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance.

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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Parenthetical) (USD $)	Jun. 30, 2013	Jun. 30, 2012
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cash Dividends Per Share of Common Stock (in dollars per share)	$ 6.20	$ 5.90

XML

Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2013

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 June 30, 2013, 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	$	26,482	$	21,416	$	5,066	$	-
Obligations of States and Political Subdivisions		5,612		-		-		5,612
Mortgage Backed Securities		392,574		-		392,574		-
Corporate Securities		49,560		8,122		41,438		-
Other		1,186		876		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	475,414	$	30,414	$	439,388	$	5,612

			Fair Value Measurements At December 31, 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	$	26,823	$	21,731	$	5,092	$	-
Obligations of States and Political Subdivisions		5,665		-		-		5,665
Mortgage Backed Securities		352,772		-		352,772		-
Corporate Securities		22,558		4,020		18,538		-
Other		10,173		9,863		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	417,991	$	35,614	$	376,712	$	5,665

			Fair Value Measurements At June 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	$	57,078	$	10,724	$	46,354	$	-
Obligations of States and Political Subdivisions		5,724		-		-		5,724
Mortgage Backed Securities		427,637		-		427,637		-
Corporate Securities		8,995		-		8,995		-
Other		2,458		2,148		310		-
Total Assets Measured at Fair Value On a Recurring Basis	$	501,892	$	12,872	$	483,296	$	5,724

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 June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012
Balance at Beginning of Period	$	5,643		$	5,753		$	5,665		$	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		(31	)		(29	)		(53	)		(58	)
Net Transfers In/(Out) of Level 3		-			-			-			-
Balance at End of Period	$	5,612		$	5,724		$	5,612		$	5,724

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 impaired loans & leases and other real estate, 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 & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an 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 June 30, 2013, 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
Agricultural Real Estate	$	1,143	$	-	$	-	$	1,143
Residential 1st Mortgage		283		-		-		283
Home Equity Lines and Loans		184		-		-		184
Agricultural		672		-		-		672
Commercial		216		-		-		216
Total Impaired Loans		2,498		-		-		2,498
Other Real Estate
Real Estate Construction		2,399		-		-		2,399
Total Other Real Estate		2,399		-		-		2,399
Total Assets Measured at Fair Value On a Non-Recurring Basis	$	4,897	$	-	$	-	$	4,897

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $2.5 million, net of an allowance for credit losses of $1.3 million.

ORE was $2.4 million, net of a $3.7 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 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 credit losses. After foreclosure, management periodically obtains updated valuations of the foreclosed assets and, if additional impairments are deemed necessary, the impairment is recorded in non-interest expense on the Consolidated Statements of Income.

			Fair Value Measurements At December 31, 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	$	235	$	-	$	-	$	235
Home Equity Lines and Loans		462		-		-		462
Agricultural		1,010		-		-		1,010
Total Impaired Loans		1,707		-		-		1,707
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	$	4,260	$	-	$	-	$	4,260

The fair value of impaired loans & leases with a specific reserve or a partial charge-off was $1.7 million, net of an allowance for credit losses of $1.4 million. The fair value of ORE was $2.6 million, net of a $4.1 million valuation allowance.

			Fair Value Measurements At June 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	$	86	$	-	$	-	$	86
Home Equity Lines and Loans		428		-		-		428
Commercial		48		-		-		48
Total Impaired Loans		562		-		-		562
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	$	3,115	$	-	$	-	$	3,115

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2013

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

7. Recent Accounting Pronouncements

In February 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update seek to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The new guidance is effective for reporting periods beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operation, cash flows, or disclosure.

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Significant Accounting Policies (Details)	6 Months Ended
	Jun. 30, 2013 RiskFactor Segment Component Category
Cash and Cash Equivalents [Abstract]
Period of transactions for cash and cash equivalents	1 day
Investment Securities [Abstract]
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 Credit Losses [Abstract]
Number of primary components of overall allowance for credit losses	2
Number of categories into which risk ratings are grouped	5
Number of risk factors on agricultural loans	2
Residential real estate values	5 years
Income Taxes [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

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2013

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
June 30, 2013 (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	$	45,306		$	45,306		$	-		$	-		$	45,306
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,482			21,416			5,066			-			26,482
Obligations of States and Political Subdivisions		5,612			-			-			5,612			5,612
Mortgage Backed Securities		392,574						392,574			-			392,574
Corporate Securities		49,560			8,122			41,438			-			49,560
Other		1,186			876			310			-			1,186
Total Investment Securities Available-for-Sale		475,414			30,414			439,388			5,612			475,414
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		64,648			-			58,009			7,360			65,369
Mortgage Backed Securities		217			-			220			-			220
Other		2,194			-			2,194			-			2,194
Total Investment Securities Held-to-Maturity		67,059			-			60,423			7,360			67,783
FHLB Stock		7,187			N/	A		N/	A		N/	A		N/	A
Loans & Leases, Net of Deferred Fees & Allowance:
Commercial Real Estate		387,427			-			-			387,017			387,017
Agricultural Real Estate		309,107			-			-			310,902			310,902
Real Estate Construction		31,741			-			-			31,901			31,901
Residential 1st Mortgages		135,436			-			-			137,951			137,951
Home Equity Lines and Loans		34,514			-			-			37,225			37,225
Agricultural		204,203			-			-			201,957			201,957
Commercial		150,572			-			-			149,593			149,593
Consumer & Other		5,378			-			-			5,400			5,400
Leases		2,667			-			-			2,667			2,667
Unallocated Allowance		(224	)		-			-			(224	)		(224	)
Total Loans & Leases, Net of Deferred Fees & Allowance		1,260,821			-			-			1,264,389			1,264,389
Accrued Interest Receivable		7,609			-			7,609			-			7,609
Liabilities:
Deposits:
Demand		429,526			429,526			-			-			429,526
Interest Bearing Transaction		248,447			248,447			-			-			248,447
Savings and Money Market		588,009			588,009			-			-			588,009
Time		444,175			-			444,579			-			444,579
Total Deposits		1,710,157			1,265,982			444,579			-			1,710,561
FHLB Advances & Securities Sold Under Agreement to Repurchase		43,300			-			43,300			-			43,300
Subordinated Debentures		10,310			-			5,665			-			5,665
Accrued Interest Payable		438			-			438			-			438

				Fair Value of Financial Instruments Using
December 31, 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	$	129,426		$	129,426		$	-		$	-		$	129,426
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		26,823			21,731			5,092			-			26,823
Obligations of States and Political Subdivisions		5,665			-			-			5,665			5,665
Mortgage Backed Securities		352,772			-			352,772			-			352,772
Corporate Securities		22,558			4,020			18,538			-			22,558
Other		10,173			9,863			310			-			10,173
Total Investment Securities Available-for-Sale		417,991			35,614			376,712			5,665			417,991
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		65,694			-			60,177			7,810			67,987
Mortgage Backed Securities		484			-			496			-			496
Other		2,214			-			2,214			-			2,214
Total Investment Securities Held-to-Maturity		68,392			-			62,887			7,810			70,697
FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		344,084			-			-			349,524			349,524
Agricultural Real Estate		309,115			-			-			316,302			316,302
Real Estate Construction		31,694			-			-			32,024			32,024
Residential 1st Mortgages		139,038			-			-			144,203			144,203
Home Equity Lines and Loans		38,807			-			-			41,419			41,419
Agricultural		210,595			-			-			209,578			209,578
Commercial		135,330			-			-			134,647			134,647
Consumer & Other		4,876			-			-			4,847			4,847
Unallocated Allowance		(854	)		-			-			(854	)		(854	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,212,685			-			-			1,231,690			1,231,690
Accrued Interest Receivable		6,389			-			-			6,389			6,389
Liabilities:
Deposits:
Demand		462,251			462,251			-			-			462,251
Interest Bearing Transaction		259,141			259,141			-			-			259,141
Savings and Money Market		541,526			541,526			-			-			541,526
Time		459,108			-			459,993			-			459,993
Total Deposits		1,722,026			1,262,918			459,993			-			1,722,911
Subordinated Debentures		10,310			-			5,750			-			5,750
Accrued Interest Payable		498			-			498			-			498

				Fair Value of Financial Instruments Using
June 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	$	40,769		$	40,769		$	-		$	-		$	40,769
Investment Securities Available-for-Sale:
Government Agency & Government-Sponsored Entities		57,078			10,724			46,354			-			57,078
Obligations of States and Political Subdivisions		5,724			-			-			5,724			5,724
Mortgage Backed Securities		427,637			-			427,637			-			427,637
Corporate Securities		8,995			-			8,995			-			8,995
Other		2,458			2,148			310			-			2,458
Total Investment Securities Available-for-Sale		501,892			12,872			483,296			5,724			501,892
Investment Securities Held-to-Maturity:
Obligations of States and Political Subdivisions		67,159			-			61,820			7,786			69,606
Mortgage Backed Securities		806			-			831			-			831
Other		2,230			-			2,230			-			2,230
Total Investment Securities Held-to-Maturity		70,195			-			64,881			7,786			72,667
FHLB Stock		7,368			N/	A		N/	A		N/	A		N/	A
Loans, Net of Deferred Loan Fees & Allowance:
Commercial Real Estate		320,418			-			-			330,783			330,783
Agricultural Real Estate		282,997			-			-			292,152			292,152
Real Estate Construction		34,133			-			-			34,423			34,423
Residential 1st Mortgages		121,602			-			-			125,110			125,110
Home Equity Lines and Loans		42,770			-			-			45,809			45,809
Agricultural		202,946			-			-			202,991			202,991
Commercial		162,083			-			-			161,242			161,242
Consumer & Other		5,658			-			-			5,731			5,731
Unallocated Allowance		(1,711	)		-			-			(1,711	)		(1,711	)
Total Loans, Net of Deferred Loan Fees & Allowance		1,170,896			-			-			1,196,530			1,196,530
Accrued Interest Receivable		7,223			-			7,223			-			7,223
Liabilities:
Deposits:
Demand		360,290			360,290			-			-			360,290
Interest Bearing Transaction		223,343			223,343			-			-			223,343
Savings and Money Market		542,922			542,922			-			-			542,922
Time		505,670			-			506,638			-			506,638
Total Deposits		1,632,225			1,126,555			506,638			-			1,633,193
FHLB Advances & Securities Sold Under Agreement to Repurchase		50,998			-			51,065			-			51,065
Subordinated Debentures		10,310			-			5,841			-			5,841
Accrued Interest Payable		796			-			796			-			796

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Jul. 31, 2013
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	2013
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2013

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Dividends and Basic Earnings Per Common Share (Tables)

6 Months Ended

Jun. 30, 2013

Dividends and Basic Earnings Per Common Share [Abstract]

Calculation of Basic Earnings Per Common Share

The following table calculates the basic earnings per share for the three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,				Six Months Ended June 30,
(net income in thousands)	2013		2012		2013		2012
Net Income	$	5,565	$	5,162	$	11,816	$	11,352
Average Number of Common Shares Outstanding		777,882		778,939		777,882		779,118
Basic Earnings Per Common Share	$	7.15	$	6.63	$	15.19	$	14.57