10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

or

[  ] 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: 0-11595
Merchants Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Delaware	03-0287342
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
275 Kennedy Drive, South Burlington, VT	05403
(Address of principal executive offices)	(Zip Code)
802-658-3400
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Large Accelerated Filer [   ]Accelerated Filer [ X ]Nonaccelerated Filer [   ]  Smaller Reporting Company [  ]

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

[  ] Yes  [ X ] No

As of October 31, 2012, there were 6,276,372 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

MERCHANTS BANCSHARES, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited)
	As of September 30, 2012 and December 31, 2011	3
	Consolidated Statements of Income (Unaudited)
	Three and nine months ended September 30, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income (Unaudited)
	Three and nine months ended September 30, 2012 and 2011	5
	Consolidated Statements of Cash Flows (Unaudited)
	Three and nine months ended September 30, 2012 and 2011	6
	Notes to Interim Unaudited Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	43
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	44
Item 4.	Mine Safety Disclosure	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
	Signatures	45
	Exhibits

ITEM 1. Financial Statements

Merchants Bancshares, Inc.

Consolidated Balance Sheets

(unaudited)

	September 30,		December 31,
(In thousands except share and per share data)	2012		2011
ASSETS
Cash and due from banks	$	30,097	$	10,392
Interest earning deposits with banks and other short-term investments		22,935		27,420
Total cash and cash equivalents		53,032		37,812
Investments:
Securities available for sale, at fair value		526,257		511,751
Securities held to maturity (fair value of $498 and $624)		443		558
Total investments		526,700		512,309
Loans		1,072,879		1,027,626
Less: Allowance for loan losses		11,444		10,619
Net loans		1,061,435		1,017,007
Federal Home Loan Bank stock		8,145		8,630
Bank premises and equipment, net		15,221		14,232
Investment in real estate limited partnerships		5,338		5,189
Other assets		15,965		16,690
Total assets	$	1,685,836	$	1,611,869
LIABILITIES
Deposits:
Demand (noninterest bearing)	$	227,879	$	197,522
Savings, interest bearing checking and money market accounts		687,267		632,110
Time deposits $100 thousand and greater		126,095		127,303
Other time deposits		211,722		220,945
Total deposits		1,252,963		1,177,880
Short-term borrowings		55,600		0
Securities sold under agreements to repurchase		227,996		262,527
Other long-term debt		2,503		22,562
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		20,619
Other liabilities		8,126		18,744
Total liabilities		1,567,807		1,502,332
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY
Preferred stock
Class A non-voting shares authorized - 200,000, none outstanding		0		0
Class B voting shares authorized - 1,500,000, none outstanding		0		0
Common stock, $.01 par value		67		67
Authorized 10,000,000 shares; issued 6,651,760 at September 30, 2012 and December 31, 2011
Outstanding: 5,955,111 at September 30, 2012 and 5,907,080 at December 31, 2011
Capital in excess of par value		36,700		36,544
Retained earnings		85,497		79,393
Treasury stock, at cost: 696,649 shares at September 30, 2012 and 744,680 shares at December 31, 2011		(14,837)		(15,817)
Deferred compensation arrangements		6,232		6,248
Accumulated other comprehensive income		4,370		3,102
Total shareholders' equity		118,029		109,537
Total liabilities and shareholders' equity	$	1,685,836	$	1,611,869
See accompanying notes to interim unaudited consolidated financial statements

3

Merchants Bancshares, Inc.

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands except per share data)	2012		2011		2012		2011
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	11,278	$	11,641	$	33,860	$	33,830
Investment income:
Interest and dividends on investment securities		2,942		3,187		9,005		9,717
Interest on interest earning deposits with banks and other short-term investments		9		37		29		81
Total interest and dividend income		14,229		14,865		42,894		43,628
INTEREST EXPENSE
Savings, interest bearing checking and money market accounts		176		298		603		914
Time deposits $100 thousand and greater		271		288		852		896
Other time deposits		413		525		1,293		1,634
Securities sold under agreement to repurchase and other short-term debt		341		518		1,454		1,682
Long-term debt		364		492		1,253		1,513
Total interest expense		1,565		2,121		5,455		6,639
Net interest income		12,664		12,744		37,439		36,989
Provision for credit losses		250		250		700		500
Net interest income after provision for credit losses		12,414		12,494		36,739		36,489
NONINTEREST INCOME
Changes in fair value on impaired securities		0		(10)		0		(20)
Non-credit related (gain) losses on securities not expected to be sold (recognized in other comprehensive income)		0		10		0		20
Net impairment losses		0		0		0		0
Net (losses) gains on investment securities		(26)		920		422		1,047
Trust division income		670		639		2,000		1,894
Service charges on deposits		1,033		1,161		3,001		3,195
Equity in losses of real estate limited partnerships		(370)		(441)		(1,189)		(1,324)
Gain on sale of other assets		749		0		1,083		0
Other		1,143		1,133		3,406		3,253
Total noninterest income		3,199		3,412		8,723		8,065
NONINTEREST EXPENSE
Compensation and benefits		4,809		5,251		14,756		15,544
Occupancy expense		946		935		2,843		2,927
Equipment expense		891		848		2,684		2,450
Legal and professional fees		677		721		1,954		2,098
Marketing		360		475		1,264		1,259
State franchise  taxes		321		321		965		951
FDIC insurance		217		194		644		740
Prepayment penalty on long-term debt		677		861		1,363		861
Other Real Estate Owned ("OREO") expenses		65		47		129		128
Other		1,486		1,392		4,595		4,404
Total noninterest expense		10,449		11,045		31,197		31,362
Income before provision for income taxes		5,164		4,861		14,265		13,192
Provision for income taxes		1,159		680		2,911		2,281
NET INCOME	$	4,005	$	4,181	$	11,354	$	10,911
Basic earnings per common share	$	0.64	$	0.67	$	1.82	$	1.76
Diluted earnings per common share	$	0.64	$	0.67	$	1.81	$	1.76
See accompanying notes to interim unaudited consolidated financial statements

4

Merchants Bancshares, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2012		2011		2012		2011
Net income	$	4,005	$	4,181	$	11,354	$	10,911
Other comprehensive (loss) income,  net of tax:
Change in net unrealized (loss) gain on securities available for sale, net of taxes of $564, $674, $682 and $1,543		1,047		1,251		1,266		2,865
Reclassification adjustments for net securities gain included in net income, net of taxes of $9, $(322), $(148) and $(367)		17		(598)		(274)		(681)
Change in net unrealized loss on interest rate swaps, net of taxes of $19, $(113), $63 and $(110)		35		(209)		117		(204)
Pension liability adjustment, net of taxes of $29, $25, $86 and $74		53		46		159		137
Other comprehensive income		1,152		490		1,268		2,117
Comprehensive income	$	5,157	$	4,671	$	12,622	$	13,028
See accompanying notes to unaudited interim consolidated financial statements

5

Merchants Bancshares, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended Sept 30,
(In thousands)	2012		2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,354	$	10,911
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		700		500
Depreciation and amortization		1,464		1,396
Amortization of investment security premiums and accretion of discounts, net		1,794		3,185
Stock option expense		127		128
Net gains on sales of investment securities		(422)		(1,047)
Net gains on sale of loans		0		(28)
Net (gains) losses on sale of premises, equipment and other assets		(1,083)		16
Gains on sale of other real estate owned		(7)		(33)
Equity in losses of real estate limited partnerships, net		1,189		1,324
Changes in assets and liabilities:
Increase in interest receivable		545		274
Increase in other assets		(870)		(2,794)
Increase (decrease) in interest payable		2,345		(91)
(Decrease) increase in other liabilities		(12,440)		9,636
Net cash provided by operating activities		4,696		23,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale		64,336		132,025
Proceeds from maturities of investment securities available for sale		146,762		146,328
Proceeds from maturities of investment securities held to maturity		115		192
Proceeds from redemption of Federal Home Loan Bank stock		485		0
Purchases of investment securities available for sale		(225,450)		(229,110)
Loan originations in excess of principal payments		(45,366)		(97,839)
Proceeds from sales of loans, net		0		80
Proceeds from sale of other assets		334		0
Proceeds from sale of premises and equipment		788		51
Proceeds from sales of other real estate owned		505		224
Real estate limited partnership investments		(1,299)		(1,310)
Purchases of bank premises and equipment		(2,522)		(1,173)
Net cash used in investing activities		(61,312)		(50,532)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		75,083		73,363
Net increase in short-term borrowings		55,600		49
Net decrease in securities sold under agreement to repurchase, short-term		(34,531)		(9,855)
Principal payments on long-term debt		(20,059)		(8,558)
Cash dividends paid		(4,730)		(4,652)
Sale of treasury stock		15		12
Increase in deferred compensation arrangements		160		153
Proceeds from exercise of stock options, net of withholding taxes		278		0
Tax benefit from exercise of stock options		20		0
Net cash provided by financing activities		71,836		50,512
Increase in cash and cash equivalents		15,220		23,357
Cash and cash equivalents beginning of period		37,812		74,026
Cash and cash equivalents end of period	$	53,032	$	97,383
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest payments	$	3,110	$	6,730
Total income tax payments		4,350		850
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Distribution of stock under deferred compensation arrangements	$	391	$	432
Distribution of treasury stock in lieu of cash dividend		518		517
Transfer of loans to other real estate owned		140		340
(Decrease) increase in payable for investments purchased		(9,461)		10,056
See accompanying notes to unaudited interim consolidated financial statements

6

7

Notes To Interim Unaudited Consolidated Financial Statements

For additional information, see the Merchants Bancshares, Inc. (“Merchants,” “we,” “us,” “our”) Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2012.

Note 1: Financial Statement Presentation

Principles of Consolidation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 have been included. The information was prepared from our unaudited financial statements and the unaudited financial statements of our subsidiaries, Merchants Bank and MBVT Statutory Trust I.  Amounts reported for prior periods are reclassified, where necessary, to be consistent with the current period presentation.

Management’s Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting periods. The most significant estimates include those used in determining the allowance for loan losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of investment securities. Operating results in the future may vary from the amounts derived from our estimates and assumptions.

Note 2: Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not expect that this update will have a material impact on our financial condition or results of operations.

In August 2012, the FASB issued ASU 2012-03,  “Technical Amendments and Corrections to SEC Sections– Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22.” The amendments in ASU 2012-03 that have no transition guidance are effective immediately for public and private entities. Amendments that are subject to transition guidance will be effective for public companies for fiscal periods beginning after December 15, 2012, and for nonpublic entities for fiscal periods beginning after December 15, 2013.  We do not expect that this update will have a material impact on our financial condition or results of operations.

8

Note 3: Investment Securities

Investments in securities are classified as available for sale or held to maturity as of September 30, 2012.  The amortized cost and fair values of the securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	100	$	0	$	0	$	100
U.S. Agency Obligations		53,392		841		0		54,233
Federal Home Loan Bank ("FHLB") Obligations		4,563		55		0		4,618
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		175,353		8,351		0		183,704
Collateralized Mortgage Backed Securities ("Agency CMBSs")		5,090		0		66		5,024
Agency Collateralized Mortgage Obligations ("Agency CMOs")		270,792		2,825		198		273,419
Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")		4,749		9		20		4,738
Asset Backed Securities ("ABSs")		357		64		0		421
Total Available for Sale	$	514,396	$	12,145	$	284	$	526,257
Held to Maturity:
Agency MBSs	$	443	$	55	$	0	$	498
Total Held to Maturity	$	443	$	55	$	0	$	498

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2011 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		89,597		828		6		90,419
FHLB Obligations		16,545		134		3		16,676
Agency MBSs		176,756		7,100		18		183,838
Agency CMOs		211,749		2,976		245		214,480
Non-agency CMOs		5,346		2		493		4,855
ABSs		1,172		61		0		1,233
Total Available for Sale	$	501,415	$	11,101	$	765	$	511,751
Held to Maturity:
Agency MBSs	$	558	$	66	$	0	$	624
Total Held to Maturity	$	558	$	66	$	0	$	624

9

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	0	$	100	$	0	$	0	$	100
U.S. Agency Obligations		0		10,056		44,177		0		54,233
FHLB Obligations		0		0		4,618		0		4,618
Agency MBSs		398		3,573		28,335		151,398		183,704
Agency CMBs		0		0		5,024		0		5,024
Agency CMOs		0		11		5,752		267,656		273,419
Non-agency CMOs		0		0		0		4,738		4,738
ABSs		0		0		0		421		421
Total Available for Sale	$	398	$	13,740	$	87,906	$	424,213	$	526,257
Held to Maturity (at amortized cost):
Agency MBSs	$	16	$	84	$	0	$	343	$	443
Total Held to Maturity	$	16	$	84	$	0	$	343	$	443

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of December 31, 2011, are as follows:

			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	250	$	0	$	0	$	0	$	250
U.S. Agency Obligations		3,023		12,567		69,823		5,006		90,419
FHLB Obligations		3,389		0		13,287		0		16,676
Agency MBSs		20		6,118		32,897		144,803		183,838
Agency CMOs		0		0		3,056		211,424		214,480
Non-agency CMOs		0		0		50		4,805		4,855
ABSs		0		0		0		1,233		1,233
Total Available for Sale	$	6,682	$	18,685	$	119,113	$	367,271	$	511,751
Held to Maturity (at amortized cost):
Agency MBSs	$	0	$	158	$	0	$	400	$	558
Total Held to Maturity	$	0	$	158	$	0	$	400	$	558

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations.  Maturities of Agency MBSs and Agency CMOs are based on final contractual maturities.

Proceeds from sales of available for sale debt securities were $22.67 million and $64.34 million for the three and nine months ended September 30, 2012, respectively.  Gross gains of $36 thousand and $530 thousand and gross losses of $62 thousand and $108 thousand were realized from these sales for the three and nine months ended September 30, 2012. Proceeds from sales of available for sale debt securities were $54.99 million and $132.02 million during the three and nine months ended September 30, 2011, respectively. Gross gains of $970 thousand and $1.19 million and gross losses of $50 thousand and $141 thousand were realized from these sales during the three and nine months ended September 30, 2011, respectively.

10

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a  continuous unrealized loss position, at September 30, 2012 and December 31, 2011, were as follows:

	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss			Fair Value	Loss
As of September 30, 2012
Agency CMBSs	$	5,024	$	66	$	0	$	0	$	5,024	$	66
Agency CMOs		34,511		198		0		0		34,511		198
Non-agency CMOs		0		0		3,126		20		3,126		20
	$	39,535	$	264	$	3,126	$	20	$	42,661	$	284

	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of December 31, 2011
U.S. Agency Obligations	$	2,536	$	6	$	0	$	0	$	2,536	$	6
FHLB Obligations		5,047		3		0		0		5,047		3
Agency MBSs		10,452		18		0		0		10,452		18
Agency CMOs		43,708		205		2,861		40		46,569		245
Non-agency CMOs		0		0		4,805		493		4,805		493
	$	61,743	$	232	$	7,666	$	533	$	69,409	$	765

There were no securities held to maturity with unrealized losses as of September 30, 2012 and December 31, 2011.

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These discrepancies generally occur because of changes in interest rates since the time of purchase, or because the credit quality of the issuer has deteriorated. We perform a quarterly analysis of each security in our portfolio to determine if impairment exists, and if it does, whether that impairment is other-than-temporary.  

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Non-Agency CMOs are tracked individually and their performance is tracked at least quarterly. 

We use an external pricing service to obtain fair market values for our investment portfolio.  We have obtained and reviewed the service provider’s pricing and reference data document. Evaluations are based on market data and vary by asset class and incorporate available trade, bid and other market information.  Because many fixed income securities do not trade on a daily basis, the service provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.  In addition, model processes, such as the Option Adjusted Spread model are used to assess interest rate impact and develop prepayment scenarios. We test the values provided to us by the pricing service through a combination of back testing on actual sales of securities and by obtaining prices on all bonds from an alternative pricing source.

Our investment portfolio consists almost entirely of U.S. Treasury and Agency obligations, or Agency-guaranteed mortgage securities.  We have two non-agency CMOs with a current cost basis of $4.75 million.  Management, with the help of outside experts, has performed impairment analyses on these bonds.

One of the non-Agency CMOs, with a cost basis of $3.15 million and a fair value of $3.13 million at September 30, 2012, is rated BBB by Fitch and Ba3 by Moody’s.  Delinquencies have been fairly low and prepayments on the bond have led to increased credit support.  We own a senior tranche in this bond. Although losses are expected in the bond overall, our position in the structure of the bond is expected to protect us from realizing losses. The second bond has a cost basis of $1.60 million and a fair value of $1.61 million.  This bond is rated CCC by Fitch and S&P. We own a super senior tranche in this bond. Although losses are expected in the bond overall, our super senior position in the structure is expected to protect us from realizing a material loss. 

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity. 

As a member of the FHLB system, we are required to invest in stock of the FHLB of Boston (the “FHLBB”) in an amount determined based on our borrowings from the FHLBB.  At September 30, 2012, our investment in FHLBB stock totaled $8.15 million, a decrease of $485 thousand from our year end balance of $8.63 million.  We received dividend income totaling $11 thousand and $36 thousand during the three and nine months ended September 30, 2012, respectively. We received $6 thousand and $19 thousand for the three

11

and nine months ended September 30, 2011, respectively. 

Note 4: Loans and the Allowance for Credit Losses

Loans

We primarily originate residential real estate, commercial, commercial real estate, municipal obligations and installment loans to customers throughout the state of Vermont. There are no significant industry concentrations in the loan portfolio. Loans totaled $1.07 billion at September 30, 2012 and $1.03 billion at December 31, 2011.  At September 30, 2012 and December 31, 2011, total loans included $(192) thousand and $11 thousand, respectively, of net deferred loan origination fees (costs). The aggregate amount of overdrawn deposit balances classified as loan balances was $334 thousand and $399 thousand at September 30, 2012 and December 31, 2011, respectively.

Allowance for Credit Losses

We have divided the loan portfolio into portfolio segments, each with different risk characteristics and methodologies for assessing risk.  Each portfolio segment is broken down into class segments where appropriate.  Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan and lease losses.  Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class segment.  A description of the segments follows:

Commercial, financial and agricultural: We offer a variety of loan options to meet the specific needs of commercial customers including term loans and lines of credit.  Such loans are made available to businesses to finance inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment, receivables, inventory or other assets owned by the borrower.  These loans require different monitoring than commercial real estate loans because of the nature of the underlying collateral, and the fact that collateral values may change daily.  Management generally employs enhanced monitoring requirements, obtains personal guarantees and, where appropriate, may also attempt to secure real estate as collateral.

Municipal: Municipal loans consist of short and long term loans issued on a taxable and tax-exempt basis which are general obligations of the municipality. These loans are generally viewed as lower risk as municipalities have taxing power to meet their financial obligations.  Included in municipal loans are longer term loans under the federal Qualified School Construction Bond program. Proceeds are used for the construction, rehabilitation or repair of public school properties and we receive a federal tax credit in lieu of interest income on these loans.

Real Estate – Residential: Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences.  We originate adjustable-rate and fixed-rate, one- to four-family residential real estate loans for the construction, purchase or refinancing of a mortgage.  These loans are collateralized by owner-occupied properties located in our market area.  Loans on one- to four-family residential real estate are generally originated in amounts of no more than 80 percent of the purchase price or appraised value (whichever is lower).  Mortgage title insurance and hazard insurance are required.

Real Estate – Commercial: We offer commercial real estate loans to finance real estate purchases and refinancing of existing commercial properties.   These commercial real estate loans are secured by first liens on the real estate, which may include both owner occupied and non owner occupied facilities.  The types of facilities financed include apartments, hotels, warehouses, retail facilities, manufacturing facilities and office buildings.

Real Estate – Construction: We offer construction loans for the construction, expansion and improvement of residential and commercial properties which are secured by the real estate being developed. A review of all plans and budgets is performed prior to approval, third party progress documents are usually required during construction, and an independent approval process for all draw and release requests is maintained  to ensure that funding is prudently administered and that funds are sufficient to complete the project.

Installment - We offer traditional direct consumer installment loans for various personal needs, including vehicle financing. The vast majority of these loans are secured by a lien on the purchased vehicle and are underwritten using credit scores and income verification. We do not provide any indirect consumer lending activities.

For purposes of evaluating the adequacy of the allowance for credit losses, we consider a number of significant factors that affect the collectability of the portfolio. For individually evaluated loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans and leases, estimates of our exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability.  These factors include:  past loss experience; size, trend, composition, and nature of loans; changes in lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries; trends experienced in nonperforming and delinquent loans; current economic conditions in our market; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability, and depth of lending management and staff. Qualitative factors used in the evaluation of the adequacy of the allowance are reviewed and updated on a quarterly basis, these factors directly impact the allocation of the allowance.

12

Past loss experience is based on net loan losses as a percentage of portfolio balances, using a five year weighted average.  An external loan review firm and various regulatory agencies periodically review our allowance for credit losses.  

After a thorough consideration of the factors discussed above, any required additions to the allowance for credit losses are made periodically by charges to the provision for credit losses. These charges are necessary to maintain the allowance for credit losses at a level which Management believes is reasonable for the overall inherent risk of probable loss in the portfolio. While Management uses available information to recognize losses on loans, additions may fluctuate from one reporting period to another.  These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in Management’s assessment of any or all of the determining factors discussed above. 

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2012:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,102	$	410	$	3,476	$	4,557	$	233	$	21	$	18	$	11,817
Charge-offs		0		0		0		0		0		0		0		0
Recoveries		3		0		1		1		8		0		0		13
Provision (credit)		136		31		85		3		(10)		(2)		7		250
Ending balance	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2012, and our loan portfolio as of September 30, 2012:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	2,905	$	309	$	3,138	$	4,484	$	477	$	23	$	17	$	11,353
Charge-offs		(9)		0		(20)		0		0		0		0		(29)
Recoveries		21		0		13		1		21		0		0		56
Provision (credit)		324		132		431		76		(267)		(4)		8		700
Ending balance	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080
Ending balance individually
evaluated for impairment	$	4	$	0	$	270	$	60	$	0	$	0	$	0	$	334
Ending balance collectively
evaluated for impairment		3,237		441		3,292		4,501		231		19		25		11,746
Totals	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080
Financing receivables:
Ending balance individually
evaluated for impairment	$	20	$	0	$	2,132	$	581	$	0	$	7	$	0	$	2,740
Ending balance collectively
evaluated for impairment		169,430		82,048		475,189		326,601		11,285		5,252		334		1,070,139
Totals	$	169,450	$	82,048	$	477,321	$	327,182	$	11,285	$	5,259	$	334	$	1,072,879
Components:
Allowance for loan losses	$	2,795	$	435	$	3,472	$	4,502	$	196	$	19	$	25	$	11,444
Reserve for undisbursed
lines of credit		446		6		90		59		35		0		0		636
Total allowance for credit
losses	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080

13

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2011:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,122	$	115	$	2,563	$	4,856	$	193	$	25	$	27	$	10,901
Charge-offs		(2)		0		(14)		0		(85)		(2)		0		(103)
Recoveries		32		0		2		0		7		0		0		41
Provision (credit)		(274)		182		678		(507)		175		0		(4)		250
Ending balance	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2011, and our loan portfolio as of September 30, 2011:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	2,617	$	236	$	2,428	$	5,143	$	283	$	24	$	23	$	10,754
Charge-offs		(79)		0		(63)		(60)		(96)		(10)		0		(308)
Recoveries		76		0		3		43		18		3		0		143
Provision (credit)		264		61		861		(777)		85		6		0		500
Ending balance	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089
Ending balance individually
evaluated for impairment	$	39	$	0	$	215	$	0	$	0	$	0	$	0	$	254
Ending balance collectively
evaluated for impairment		2,839		297		3,014		4,349		290		23		23		10,835
Totals	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089
Financing receivables:
Ending balance individually
evaluated for impairment	$	223	$	0	$	2,380	$	588	$	0	$	1	$	0	$	3,192
Ending balance collectively
evaluated for impairment		155,820		97,015		423,240		310,275		12,238		5,857		439		1,004,884
Totals	$	156,043	$	97,015	$	425,620	$	310,863	$	12,238	$	5,858	$	439	$	1,008,076
Components:
Allowance for loan losses	$	2,448	$	295	$	3,131	$	4,306	$	254	$	23	$	23	$	10,480
Reserve for undisbursed
lines of credit		430		2		98		43		36		0		0		609
Total allowance for credit
losses	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089

14

Presented below is an aging of past due loans, including both non-accrual and restructured loans, by class as of September 30, 2012:

	30-59 Days		60-89 Days		Over 90 Days		Total Past						Greater Than 90 Days and
(In thousands)	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	0	$	150	$	9	$	159	$	169,291	$	169,450	$	0
Municipal		0		0		0		0		82,048		82,048		0
Real estate-residential:
First mortgage		1		64		887		952		437,690		438,642		0
Second mortgage		8		0		726		734		37,945		38,679		0
Real estate-commercial:
Owner occupied		0		0		401		401		217,162		217,563		0
Non-owner occupied		0		0		0		0		109,619		109,619		0
Real estate-construction:
Residential		0		0		0		0		1,960		1,960		0
Commercial		0		0		0		0		9,325		9,325		0
Installment		0		0		7		7		5,252		5,259		0
Other		0		0		0		0		334		334		0
Total	$	9	$	214	$	2,030	$	2,253	$	1,070,626	$	1,072,879	$	0

Non-accruing and restructured loans make up $2.10 million of the total past due loans in the aging table above.

Presented below is an aging of past due loans, including both non-accrual and restructured loans, by class as of December 31, 2011:

	30-59 Days		60-89 Days		Over 90 Days		Total Past						Greater Than 90 Days and
	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	0	$	40	$	8	$	48	$	146,942	$	146,990	$	0
Municipal		0		0		0		0		101,705		101,705		0
Real estate-residential:
First mortgage		39		305		731		1,075		400,256		401,331		0
Second mortgage		0		0		281		281		38,206		38,487		0
Real estate-commercial:
Owner occupied		0		325		87		412		205,844		206,256		0
Non-owner occupied		0		0		0		0		107,659		107,659		0
Real estate-construction:
Residential		0		0		0		0		1,798		1,798		0
Commercial		0		0		0		0		17,195		17,195		0
Installment		0		0		0		0		5,806		5,806		0
Other		0		0		0		0		399		399		0
Total	$	39	$	670	$	1,107	$	1,816	$	1,025,810	$	1,027,626	$	0

Non-accruing and restructured loans make up $1.60 million of the total past due loans in the aging table above.

15

Impaired loans by class at September 30, 2012 were as follows:

(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial, financial and agricultural	$	11	$	934	$	0
Real estate – residential:
First mortgage		788		1,084		0
Second mortgage		5		40		0
Real estate – commercial:
Owner occupied		324		485		0
Non-owner occupied		0		70		0
Installment		7		52		0
With related allowance recorded
Commercial, financial and agricultural		9		9		4
Real estate – residential:
First mortgage		618		635		232
Second mortgage		721		721		38
Real estate – commercial:
Owner occupied		257		257		60
Total
Commercial, financial and agricultural		20		943		4
Real estate – residential		2,132		2,480		270
Real estate – commercial		581		812		60
Installment and other		7		52		0
Total	$	2,740	$	4,287	$	334

16

Impaired loans by class at September 30, 2011 were as follows:

(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial, financial and agricultural	$	168	$	1,185	$	0
Real estate – residential:
First mortgage		1,164		1,438		0
Second mortgage		178		178		0
Real estate – commercial:
Owner occupied		588		588		0
Non-owner occupied		0		70		0
Real estate – construction:
Commercial		0		94		0
Installment		1		22		0
With related allowance recorded
Commercial, financial and agricultural		55		55		39
Real estate – residential:
First mortgage		979		979		212
Second mortgage		59		59		3
Real estate – commercial:
Non-owner occupied		0		0		0
Total
Commercial, financial and agricultural		223		1,240		39
Real estate – residential		2,380		2,654		215
Real estate – commercial		588		658		0
Real estate – construction		0		94		0
Installment and other		1		22		0
Total	$	3,192	$	4,668	$	254

17

The average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 were as follows:

	Three months				Nine months
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	24	$	0	$	49	$	1
Real estate – residential:
First mortgage		888		27		818		47
Second mortgage		331		7		325		34
Real estate – commercial:
Owner occupied		350		2		405		5
Non-owner occupied		0		0		0		0
Installment		2		0		1		0
With related allowance recorded
Commercial, financial and agricultural		13		0		23		0
Real estate – residential:
First mortgage		580		0		662		0
Second mortgage		481		0		194		0
Real estate – commercial:
Owner occupied		231		0		113		0
Total
Commercial, financial and agricultural		37		0		72		1
Real estate – residential		2,280		34		1,999		81
Real estate – commercial		581		2		518		5
Installment and other		2		0		1		0
Total	$	2,900	$	36	$	2,590	$	87

18

The average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011 were as follows:

	Three months				Nine months
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	138	$	0	$	170	$	0
Real estate – residential:
First mortgage		1,412		3		1,257		9
Second mortgage		221		0		369		1
Real estate – commercial:
Owner occupied		510		0		486		0
Non-owner occupied		120		0		86		0
Real estate – construction:
Commercial		105		0		142		0
Installment		1		0		3		0
With related allowance recorded
Commercial, financial and agricultural		138		0		306		0
Real estate – residential:
First mortgage		997		0		751		0
Second mortgage		59		0		26		0
Real estate – commercial:
Non-owner occupied		0		0		61		0
Total
Commercial, financial and agricultural		276		0		476		0
Real estate – residential		2,689		3		2,403		10
Real estate – commercial		630		0		633		0
Real estate – construction		105		0		142		0
Installment and other		1		0		3		0
Total	$	3,701	$	3	$	3,657	$	10

Impaired loans at September 30, 2012 consisted predominantly of residential real estate loans. Impaired loans totaled $2.74 million and $2.51 million at September 30, 2012 and December 31, 2011, respectively.  At September 30, 2012, $1.60 million of the impaired loans had a specific reserve allocation of $334 thousand, and $1.14 million of the impaired loans had no specific reserve allocation. At December 31, 2011, $885 thousand of the impaired loans had a specific reserve allocation of $227 thousand, and $1.63 million of the impaired loans had no specific reserve allocation.

We recorded interest income on impaired loans of approximately $36 thousand and $87 thousand during the three and nine months ended September 30, 2012, respectively. No interest income was recorded on a cash basis during the period the loan was impaired.  We recorded interest income on impaired loans of approximately $3 thousand and $10 thousand during the three and nine months ended September 30, 2011, respectively. No interestincome was recorded on a cash basis during the period the loan was impaired. The average balance of impaired loans was $2.59 million and $3.66 million during the first nine months of 2012 and the first nine months of 2011, respectively.

Nonperforming loans at September 30, 2012 and December 31, 2011 were as follows:

(In thousands)	September 30, 2012		December 31, 2011
Nonaccrual  loans	$	2,180	$	1,953
Loans greater than 90 days and accruing		0		0
Troubled debt restructured loans (“TDRs”)		560		558
Total nonperforming loans	$	2,740	$	2,511

Of the total TDRs in the table above, $372  thousand at September 30, 2012 and $224 thousand at December 31, 2011 were non-accruing.  The remaining TDRs were accruing.

19

The loans in the table below are considered impaired under the guidance in ASC 310-10-35.  Included in the total TDRs of $560 thousand at September 30, 2012 are $290 thousand of TDRs that were restructured prior to January 1, 2012. TDRs have been individually evaluated for impairment. There were no TDRs for which the allowance for credit losses was measured under a general allowance for credit losses methodology.

Presented below is a summary of our restructurings during the three months and nine months ended September 30, 2012:

	Three months ended					Nine months ended
	Number	Pre-Modification Recorded		Post-Modification Recorded		Number	Pre-Modification Recorded		Post-Modification Recorded
(Dollars in thousands)	of Loans	Investment		Investment		of Loans	Investment		Investment
Real estate – residential:
First mortgage	0	$	0	$	0	3	$	90	$	90
Real estate - commercial:
Owner occupied	0	$	0	$	0	1	$	180	$	180

Loans in the above table were classified as TDRs because the borrowers experienced financial difficulties and the bank granted concessions in loan terms. As of September 30, 2012, five loans classified as TDR totaling $372 thousand were in nonaccrual and the remaining loans were accruing. At September 30, 2012 TDRs consisted of eight residential real estate loans and one commercial real estate loan.  All nine borrowers experienced financial difficulties that led to the restructure of their respective loans. At the time of restructure, seven were in payment default and all nine demonstrated cash flow insufficient to service their debt as well as an inability to obtain funds at market rates from other sources.  At September 30, 2012, seven of the restructured loans were performing in accordance with modified agreements, while two residential loans totaling $70 thousand were in default. These two loans were also in non-accrual status.  No TDRs paid off during the third quarter of 2012.

Presented below is a summary of our restructurings during the three months and nine months ended September 30, 2011:

	Three months ended					Nine months ended
	Number	Pre-Modification Recorded		Post-Modification Recorded		Number	Pre-Modification Recorded		Post-Modification Recorded
(Dollars in thousands)	of Loans	Investment		Investment		of Loans	Investment		Investment
Real estate – residential:
First mortgage	1	$	105	$	104	2	$	158	$	156

There was one loan restructured during the three months ended September 30, 2011.  TDRs at September 30, 2011, consisted of three residential real estate loans. One of the loans was restructured with longer terms at market rates and two were restructured with rate concessions; all were performing in accordance with modified agreements with the borrowers at September 30, 2011.  At September 30, 2011 there were no defaults on TDRs.

There were no commitments to lend additional funds to borrowers whose loans were modified in a troubled debt restructuring at September 30, 2012 or at September 30, 2011.  We had no commitments to lend additional funds to borrowers whose loans were in non-accrual status or to borrowers whose loans were 90 days past due and still accruing at September 30, 2012 or at September 30, 2011. 

We recorded interest income on restructured loans of $4 thousand and $26 thousand for the three and nine months ended September 30, 2012, respectively, and $3 thousand and $7 thousand for the three and nine months ended September 30, 2011, respectively.

Our OREO balance was $0 at September 30, 2012, compared with $358 thousand at December 31, 2011 consisting of three properties plus equipment. Two properties and the equipment were sold during the third quarter of 2012. Our OREO balance was $340 at September 30, 2011.

20

Non-accrual loans by class as of September 30, 2012 and December 31, 2011 were as follows:

(In thousands)	September 30, 2012		December 31, 2011
Commercial, financial and agricultural	$	20	$	114
Real estate - residential:
First mortgage		1,026		1,146
Second mortgage		726		281
Real estate - commercial:
Owner occupied		401		412
Installment		7		0
Nonaccruing non-TDR loans	$	2,180	$	1,953
Nonaccruing TDR’s
Real estate – residential:
First mortgage		372		224
Total nonaccrual loans	$	2,552	$	2,177

Commercial Grading System

We use risk rating definitions for our commercial loan portfolios and certain residential loans which are generally consistent with regulatory and banking industry norms. Loans are assigned a credit quality grade which is based upon management’s on-going assessment of risk based upon an evaluation of the quantitative and qualitative aspects of each credit. This assessment is a dynamic process and risk ratings are adjusted as each borrower’s financial situation changes. This process is designed to provide timely recognition of a borrower’s financial condition and appropriately focus management resources.

Pass rated loans exhibit acceptable risk to the bank in terms of financial capacity to repay their loans as well as possessing acceptable alternative repayment sources, typically collateral and personal guarantees. These loans are subject to a formal annual review process; additionally, Management reviews the risk rating at the time of any late payments, overdrafts or other sign of deterioration in the interim.

Loans rated Pass-Watch require more than usual attention and monitoring by the account officer, though not to the extent that a formal remediation plan is warranted. Borrowers can be rated Pass-Watch based upon a weakened capital structure, adequate but low cash flow and/or collateral coverage or early-stage declining trends in operations or financial condition.

Loans rated Special Mention possess potential weakness that may expose the bank to some risk of loss in the future. These loans require more frequent monitoring and formal reporting to Management.

Substandard loans reflect well-defined weaknesses in the current repayment capacity, collateral or net worth of the borrower with the possibility of some loss to the Bank if these weaknesses are not corrected. Action plans are required for these loans to address the inherent weakness in the credit and are formally reviewed.

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Below is a summary of loans by credit quality indicator as of September 30, 2012:

	Unrated Residential and				Pass-		Special		Sub-
(In thousands)	Consumer		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	0		148,550		17,928		501		2,471	$	169,450
Municipal		0		82,048		0		0		0		82,048
Real estate – residential:
First mortgage		411,034		24,690		1,233		747		938		438,642
Second mortgage		36,784		1,195		0		0		700		38,679
Real estate – commercial:
Owner occupied		0		190,603		8,409		3,035		15,516		217,563
Non-owner occupied		0		96,554		10,101		1,480		1,484		109,619
Real estate – construction:
Residential		396		1,564		0		0		0		1,960
Commercial		593		8,205		527		0		0		9,325
Installment		5,259		0		0		0		0		5,259
All other loans		334		0		0		0		0		334
Total	$	454,400	$	553,409	$	38,198	$	5,763	$	21,109	$	1,072,879

Below is a summary of loans by credit quality indicator as of December 31, 2011:

	Unrated Residential and				Pass-		Special		Sub-
(In thousands)	Consumer		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	2	$	117,772	$	28,326	$	170	$	720	$	146,990
Municipal		0		101,705		0		0		0		101,705
Real estate – residential:
First mortgage		379,512		18,647		1,569		641		962		401,331
Second mortgage		38,020		146		0		0		321		38,487
Real estate – commercial:
Owner occupied		0		175,878		14,001		7,355		9,022		206,256
Non-owner occupied		0		95,239		8,891		1,195		2,334		107,659
Real estate – construction:
Residential		99		0		1,699		0		0		1,798
Commercial		81		15,925		573		0		616		17,195
Installment		5,806		0		0		0		0		5,806
All other loans		399		0		0		0		0		399
Total	$	423,919	$	525,312	$	55,059	$	9,361	$	13,975	$	1,027,626

The amount of interest which was not earned, but which would have been earned had our non-accrual and restructured loans performed in accordance with their original terms and conditions, was approximately $38 thousand and $107 thousand for the three and nine months ended September 30, 2012, and was approximately $49 thousand and $157 thousand for the three and nine months ended September 2011, respectively.

It is our policy to make loans to directors, executive officers, and associates of such persons on substantially the same terms, including interest rates and collateral, as those prevailing for comparable lending transactions with other persons.

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Note 5: Pension

We formerly had a noncontributory defined benefit pension plan (the “Plan”) covering all eligible employees. The Plan was a final average pay plan with benefits based on the average salary rates using the five consecutive Plan years of the last ten years that produce the highest average salary. The Plan was curtailed in 1995; all accrued benefits were fully vested and no additional years of service or age will be accrued.

The following table summarizes the components of net periodic benefit costs for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2012		2011		2012		2011
Interest cost	$	119	$	122	$	358	$	366
Service cost		12		14		36		42
Expected return on Plan assets		(150)		(156)		(450)		(468)
Amortization of net loss		82		70		245		210
Net periodic benefit cost	$	63	$	50	$	189	$	150

Our minimum required contribution to the Plan for 2012 is $288 thousand. We intend to make a contribution to the Plan of at least that amount during the fourth quarter of 2012.

Our Pension Plan Investment Policy Statement sets forth the investment objectives and constraints of the Plan.  The purpose of the policy is to assist our Retirement Plan Committee in effectively supervising, monitoring and evaluating the investments of the Plan.

Note 6: Earnings Per Share

The following table presents reconciliations of the calculations of basic and diluted earnings per common share for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands except per share data)	2012		2011		2012		2011
Net income	$	4,005	$	4,181	$	11,354	$	10,911
Weighted average common shares outstanding		6,269		6,221		6,252		6,206
Dilutive effect of common stock equivalents		11		10		12		7
Weighted average common and common equivalent
shares outstanding		6,280		6,231		6,264		6,213
Basic earnings per common share	$	0.64	$	0.67	$	1.82	$	1.76
Diluted earnings per common share	$	0.64	$	0.67	$	1.81	$	1.76

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding for the three and nine months ended September 30, 2012. For the three and nine months ended September 30, 2012, there were no anti-dilutive stock options outstanding which were not considered in the calculation of diluted earnings per share because the stock options’ exercise price was greater than the average market price during these periods. 

Note 7: Stock Repurchase Program

We extended, through January 2013, our stock buyback program, originally adopted in January 2007.  Under the program we may repurchase up to 200,000 shares of our common stock on the open market from time to time, and have purchased 143,475 shares at an average price per share of $22.94 since the program’s adoption.  We did not repurchase any of our shares during 2011 or during the first nine months of 2012, and do not expect to repurchase shares in the near future.

Note 8: Commitments and Contingencies

We are a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to extend credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the accompanying consolidated balance sheets.

We do not issue any guarantees that would require liability recognition or disclosure, other than our standby letters of credit. Standby

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letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $4.68 million at September 30, 2012 and represent the maximum potential future payments we could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit for on-balance sheet instruments. Our policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of our standby letters of credit at September 30, 2012 was insignificant.

We may enter into commitments to sell loans, which involve market and interest rate risk. There were no such commitments at September 30, 2012 or 2011.

We are involved in routine legal proceedings that occur in the ordinary course of business, which, individually and in the aggregate, are believed by Management to be immaterial to our financial condition and results of operations.

Note 9: Fair Value of Financial Instruments

We record certain assets and liabilities at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes.  We use quoted market prices and observable inputs to the maximum extent possible when measuring fair value.  In the absence of quoted market prices, various valuation techniques are utilized to measure fair value.  When possible, observable market data for identical or similar financial instruments are used in the valuation.  When market data is not available, fair value is determined using valuation models that incorporate Management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While Management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.  A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Ø Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Ø Level 2 -  Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Ø Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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Financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at September 30, 2012 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	100	$	0	$	100	$	0
U.S. Agency Obligations		54,233		0		54,233		0
FHLB Obligations		4,618		0		4,618		0
Agency MBSs		183,704		0		183,704		0
Agency CMBSs		5,024		0		5,024		0
Agency CMOs		273,419		0		273,419		0
Non-Agency CMOs		4,738		0		4,738		0
ABSs		421		0		421		0
Interest rate swap agreements		599		0		599		0
Total assets	$	526,856	$	0	$	526,856	$	0
Liabilities
Interest rate swap agreements		1,825		0		1,825		0
Total liabilities	$	1,825	$	0	$	1,825	$	0

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The table below presents the balance of financial assets and liabilities at December 31, 2011 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	250	$	0	$	250	$	0
U.S. Agency Obligations		90,419		0		90,419		0
FHLB Obligations		16,676		0		16,676		0
Agency MBSs		183,838		0		183,838		0
Agency CMOs		214,480		0		214,480		0
Non-Agency CMOs		4,855		0		4,855		0
ABSs		1,233		0		1,233		0
Interest rate swap agreements		207		0		207		0
Total assets	$	511,958	$	0	$	511,958	$	0
Liabilities
Interest rate swap agreements		1,613		0		1,613		0
Total liabilities	$	1,613	$	0	$	1,613	$	0

Investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participant with whom we have historically transacted both purchases and sales of investment securities.  Prices obtained from these sources include market quotations and matrix pricing. 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.  More information regarding our investment securities can be found in Footnote 3 to these Consolidated Financial Statements.

The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of our interest rate swaps are determined using prices obtained from a third party advisor.  The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

There were no transfers between Level 1 and Level 2 for the three or nine months ended September 30, 2012.  There were no Level 3 assets measured at fair value on a recurring basis during the three or nine months ended September 30, 2012 and 2011.

Financial instruments on a non-recurring basis

Certain assets are also measured at fair value on a non-recurring basis. The table below presents the balance of financial assets at September 30, 2012 measured at fair value on a non-recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
OREO	$	0	$	0	$	0	$	0
Impaired loans		2,740		0		0		2,740
Total	$	2,740	$	0	$	0	$	2,740

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The table below presents the balance of financial assets at December 31, 2011 measured at fair value on a non-recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
OREO	$	358	$	0	$	0	$	358
Impaired loans		2,511		0		0		2,511
Total	$	2,869	$	0	$	0	$	2,869

The OREO balance at December 31, 2011 of $358 thousand consists of $28 thousand in commercial loans; $257 thousand in residential real estate loans; and $73 thousand in construction loans.

We use the fair value of underlying collateral to estimate the specific reserves for collateral dependent impaired loans.  Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.  Real estate values are determined based on appraisals by qualified licensed appraisers we have hired.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale.  Other business assets are valued using a variety of approaches including appraisals, depreciated book value, purchase price and independent confirmation of accounts receivable.  OREO in the table above consists of property acquired through foreclosure and settlements of loans.  Property acquired is carried at the lower of cost or the estimated fair value of the property, determined by an independent appraisal, and is adjusted for estimated disposal costs. Certain inputs used in appraisals, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans and OREO are categorized as Level 3 within the fair value hierarchy. 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2012:

(Dollars in thousands)	Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
OREO	$	0	Appraisal of collateral	Appraisal adjustments	0%-40%
Impaired loans		2,740	Appraisal of collateral	Appraisal adjustments	0%-40%

Changes to our assumptions about unobservable inputs will impact our estimate of fair vavelue.  Discounts to appraised values reflect the age of the appraisal and estimated costs of disposition.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.

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The fair values of our financial instruments as of September 30, 2012 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value			Level 1		Level 2		Level 3
Cash and cash equivalents	$	53,032	$	53,032	$	53,032	$	0	$	0
Securities available for sale		526,257		526,257		0		526,257		0
Securities held to maturity		443		498		0		498		0
FHLB stock		8,145		8,145		0		8,145		0
Loans, net of allowance for loan losses		1,061,435		1,086,800		0		0		1,086,800
Interest rate contract-cash flow hedge		599		599		0		599		0
Accrued interest receivable		4,577		4,577		0		4,577		0
Total assets	$	1,654,488	$	1,679,908	$	53,032	$	540,076	$	1,086,800
Deposits	$	1,252,963	$	1,255,808	$	915,146	$	340,662	$	0
Short-term borrowings		55,600		55,600		0		55,600		0
Securities sold under agreement to repurchase		227,996		227,996		0		227,996		0
Other long-term debt		2,503		2,532		0		2,532		0
Junior subordinated debentures issued to
unconsolidated subsidiary trust		20,619		15,741		0		15,741		0
Interest rate contract-cash flow hedge		1,825		1,825		0		1,825		0
Accrued interest payable		249		249		0		249		0
Total liabilities	$	1,561,755	$	1,559,751	$	915,146	$	644,605	$	0

The fair values of our financial instruments as of December 31, 2011 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value			Level 1		Level 2		Level 3
Cash and cash equivalents	$	37,812	$	37,812	$	37,812	$	0	$	0
Securities available for sale		511,751		511,751		0		511,751		0
Securities held to maturity		558		624		0		624		0
FHLB stock		8,630		8,630		0		8,630		0
Loans, net of allowance for loan losses		1,017,007		1,035,131		0		0		1,035,131
Interest rate contract-cash flow hedge		207		207		0		207		0
Accrued interest receivable		5,121		5,121		0		5,121		0
Total assets	$	1,581,086	$	1,599,276	$	37,812	$	526,333	$	1,035,131
Deposits	$	1,177,880	$	1,181,066	$	829,632	$	351,434	$	0
Short-term borrowings		0		0		0		0		0
Securities sold under agreement to repurchase		262,527		263,062		0		263,062		0
Other long-term debt		22,562		23,594		0		23,594		0
Junior subordinated debentures issued to
unconsolidated subsidiary trust		20,619		15,268		0		15,268		0
Interest rate contract-cash flow hedge		1,613		1,613		0		1,613		0
Accrued interest payable		282		282		0		282		0
Total liabilities	$	1,485,483	$	1,484,885	$	829,632	$	655,253	$	0

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, FHLBB stock, accrued interest receivable and accrued interest payable approximate fair value.

The methodologies for other financial assets and financial liabilities are discussed below.

Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates and spreads currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value estimates, methods and assumptions set forth above for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and do not incorporate the exit-price concept of fair value proscribed by ASC 820-10 and should be read in conjunction with the financial statements and associated footnotes.

Deposits - The fair value for all deposits other than time deposits are equal to the amounts payable on demand (the carrying value).

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The fair value of fixed rate and fixed term certificates of deposit is estimated using a discounted cash flow method which applies interest rates currently being offered for deposits of similar remaining maturities.

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity.

Commitments to extend credit and standby letters of credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of commitments to extend credit and standby letters of credit was approximately $47 thousand and $42 thousand as of September 30, 2012 and December 31, 2011, respectively.

Limitations‑ Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments.  Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other such factors.

These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument.  These estimates are subjective in nature and require considerable judgment to interpret market data.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange, nor are they intended to represent the fair value of us as a whole.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  The fair value estimates presented herein are based on pertinent information available to Management as of the respective balance sheet date.  Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures.  Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Note 10: Derivative Financial Instruments

At September 30, 2012, we held interest rate swaps with a combined notional amount of $20 million that were designated as cash flow hedges. The swaps were used to convert the floating rate interest on our trust preferred issuance to a fixed rate of interest.  The purpose of the hedge was to protect us from the risk of variability arising from the floating rate interest on the debentures.  The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and reclassified to earnings if gains or losses are realized.  Each quarter, we assess the effectiveness of the hedging relationships by comparing the changes in cash flows of the derivative hedging instruments with the changes in cash flows of the designated hedged item.  The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.  There was no ineffective portion recognized in earnings during the third quarter of 2012 or 2011.  The fair values of the effective portion of the hedges of $(1.23) million and $(1.41) million were reflected in Other Comprehensive Income in the accompanying Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, respectively.

At September 30, 2012, we had two interest rate derivative positions, with a combined notional amount of $28.88 million that were not designated as hedging instruments.  These derivative positions related to a transaction in which we entered into an interest rate swap with a customer while at the same time entering into an offsetting rate swap with another financial institution.  In connection with the transaction, we agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate.  At the same time, we agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows our customers to effectively convert a variable-rate loan to a fixed-rate loan.  Because the terms of the swap with our customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.  The fair value of $599 thousand and $206 thousand at September 30, 2012 and December 31, 2011, respectively, was reflected in other assets and other liabilities in the accompanying Consolidated Balance Sheets. We assessed our counterparty risk at September 30, 2012 and determined any credit risk inherent in our derivative contracts was insignificant. Information about the fair value of derivative financial instruments can be found in Footnote 9 to these Consolidated Financial Statements. 

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

Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. Forward-looking statements are based on the current assumptions and beliefs of Management and are only expectations of future results. Our actual results could differ materially from those projected in the forward-looking statements as a result of, among others, continued weakness in general, national, regional or local economic conditions which impact the performance of our investment portfolio, quality of credits or the overall demand for services; changes in loan default and charge-off rates which could affect the allowance for credit losses; declines in the equity and financial markets; reductions in deposit levels which could necessitate increased and/or higher cost borrowing to fund loans and investments; declines in mortgage loan refinancing, equity loan and line of credit activity which could reduce net interest and noninterest income; changes in the domestic interest rate environment and inflation; changes in the carrying value of investment securities and other assets; further actions by the U.S. government and Treasury Department that could have a negative impact on our investment portfolio and earnings; misalignment of our interest-bearing assets and liabilities; increases in loan repayment rates affecting interest income; changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, that could lead to changes in the competitive balance among financial institutions, restrictions on bank activities, changes in costs (including deposit insurance premiums), increased regulatory scrutiny, or changes in the secondary market for bank loan and other products; and changes in accounting rules, federal and state laws, IRS regulations, and other regulations and policies governing financial holding companies and their subsidiaries which may impact our ability to take appropriate action to protect our financial interests in certain loan situations. 

Investors should not place undue reliance on our forward-looking statements, and are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, which are included in more detail in our Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q, and other filings submitted to the Securities and Exchange Commission.  We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Use of Non-GAAP Financial Measures

Certain information in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  We use these “non-GAAP” measures in our analysis of our performance and believe that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. We believe that a meaningful analysis of our financial performance requires an understanding of the factors underlying that performance. We believe that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in our underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

In several places net interest income is presented on a fully taxable equivalent basis. Specifically included in interest income is tax-exempt interest income from certain tax-exempt loans. An amount equal to the tax benefit derived from this tax exempt income is added back to the interest income total, to produce net interest income on a fully taxable equivalent basis. We believe the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in our results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution’s net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. We follow these practices. A reconciliation of tax-equivalent financial information to our consolidated financial statements prepared in accordance with GAAP appears at the bottom of the table entitled “Average Balance Sheets and Average Rates.” A 35.0% tax rate was used in both 2012 and 2011.

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General

All adjustments necessary for a fair presentation of our interim consolidated financial statements as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011 have been included. The information was prepared from our unaudited financial statements and financial statements of our subsidiaries, Merchants Bank (the “Bank”) and MBVT Statutory Trust I.  

Results of Operations

Overview

Net income was $4.00 million and $11.35 million for the three and nine months ended September 30, 2012, respectively, compared to $4.18 million and $10.91 million for the same periods in 2011.  The return on average assets was 0.97% and 0.92% for the three and nine months ended September 30, 2012, respectively, compared to 1.11% and 0.98% for the same periods last year, and the return on average equity was 13.95% and 13.47% for the three and nine months ended September 30, 2012, respectively, compared to 15.84% and 14.23% for the same periods in 2011.   

The following were the major factors contributing to our results for the three and nine months ended September 30, 2012 compared to the same periods in 2011:

· Our taxable equivalent net interest income was $13.15 million and $38.97 million for the three and nine months ended September 30, 2012, respectively, compared to $13.27 million and $38.39 million for the same periods in 2011, and $12.86 million for the second quarter of 2012. Our taxable equivalent net interest margin increased slightly during the third quarter of 2012 to 3.29% from 3.27% for the second quarter of this year;  

· We recorded a $250 thousand and $700 thousand provision for credit losses during the three and nine months ended September 30, 2012, respectively, compared to a provision of $250 thousand and $500 thousand for the three and nine months ended September 30, 2011, respectively;

· We recognized a gain on the sale of one of our branch locations of $749 thousand during the third quarter of 2012;

· We prepaid a total of  $20 million in FHLB debt during the second and third quarters of 2012, and incurred prepayment penalties of $1.36 million. We prepaid $16 million in FHLB debt during the third quarter of 2011 and incurred a prepayment penalty of $861 thousand;

· Ending loan balances at September 30, 2012 were $1.07 billion, an increase of $45.25 million over ending loan balances at December 31, 2011.  This represents an annualized loan growth rate of 6%. Quarterly average loans for the third quarter of 2012 were unchanged from the second quarter of 2012 at $1.05 billion, and were $50.40 million higher than the fourth quarter of 2011;

· Total deposits at September 30, 2012 were $1.25 billion compared to $1.18 billion at December 31, 2011.  Growth during 2012 has been concentrated in our demand deposit and money market categories.

Net Interest Income

This discussion should be read in conjunction with the tables on the following three pages.  Our taxable equivalent net interest income was $13.15 million and $38.97 million for the three and nine months ended September 30, 2012, respectively, compared to $13.27 million and $38.39 million for the same periods in 2011, and $12.86 million for the second quarter of 2012. Our taxable equivalent net interest margin increased slightly during the third quarter of 2012 to 3.29% from 3.27% for the second quarter of this year.  This quarter-over-quarter increase in the margin is a result of FHLB prepayments discussed below, combined with a reduction in the costs associated with our customer repurchase agreements.   Year-to-date the net interest margin has decreased 26 basis points to 3.30% compared to 3.56% for the first nine months of 2011.  Our continued growth in earning assets has helped to offset margin compression and allowed us to increase net interest income for the first nine months of 2012 compared to the first nine months of 2011. Average earning assets for the first three and nine months of 2012 were $1.59 billion and $1.58 billion, respectively, an increase of $129.39 million and $135.06 million over the same periods in 2011, and an increase of $8.38 million over the second quarter of 2012. 

The extended low interest rate environment continues to present a challenge as our assets reprice down at a steady rate, and new assets come on at lower rates.  Overall asset yields were 3.68% for the third quarter of 2012, compared to 3.76% for the second quarter of 2012 and 4.19% for the third quarter of last year. The average rate on our loan portfolio was 4.40% for the third quarter of 2012, an 8 basis point decrease from the second quarter of 2012, and a 39 basis point decrease from the third quarter of 2011. The average rate on our investment portfolio for the third quarter of 2012 was 2.30%, a 7 basis point decrease from the second quarter of 2012, and a 107 basis point decrease from the third quarter of 2011. These decreases were offset, in part, by decreases in the cost of our interest bearing liabilities. The average cost of interest bearing liabilities for the third quarter of 2012 was 48 basis points, a 10 basis point decrease from the second quarter of this year, and a 21 basis point decrease from the third quarter of 2011. We prepaid $10 million in long-term FHLB debt on August 30, 2012, and paid a prepayment penalty of $677 thousand.  We have prepaid a total of $20 million in long-term FHLB advances at a rate of 2.75% during 2012, incurring total prepayment penalties of $1.36 million. These prepayments will reduce our overall cost of funds going forward.

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The following tables attribute changes in our net interest income (on a fully taxable equivalent basis) to changes in either average balances or average rates for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011.  Changes due to both interest rate and volume have been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each category:

	Three Months Ended
	September 30,		Increase	Due to
(In thousands)	2012	2011	(Decrease)	Volume	Rate
Fully taxable equivalent interest income:
Loans	$       11,763	$      12,170	$          (407)	$         649	$   (1,056)
Investments	2,942	3,187	(245)	932	(1,177)
Interest earning deposits with banks and other
short-term investments	9	37	(28)	(25)	(3)
Total interest income	14,714	15,394	(680)	1,556	(2,236)
Less interest expense:
Savings, money market  & NOW accounts	176	298	(122)	36	(158)
Time deposits	684	813	(129)	(31)	(98)
FHLB and other short-term borrowings	39	0	39	0	39
Securities sold under agreements to repurchase,
short-term	302	488	(186)	(25)	(161)
Securities sold under agreement to repurchase,
long-term	0	30	(30)	(15)	(15)
Other long-term debt	57	193	(136)	(120)	(16)
Junior subordinated debentures issued to
unconsolidated subsidiary trust	307	299	8	0	8
Total interest expense	1,565	2,121	(556)	(155)	(401)
Net interest income	$       13,149	$      13,273	$          (124)	$      1,711	$   (1,835)

	Nine Months Ended
	September 30,		Increase	Due to
(In thousands)	2012	2011	(Decrease)	Volume	Rate
Fully taxable equivalent interest income:
Loans	$       35,391	$      35,226	$           165	$      3,354	$   (3,189)
Investments	9,005	9,717	(712)	1,523	(2,235)
Interest earning deposits with banks and other
short-term investments	29	81	(52)	(48)	(4)
Total interest income	44,425	45,024	(599)	4,829	(5,428)
Less interest expense:
Savings, money market  & NOW accounts	603	914	(311)	102	(413)
Time deposits	2,145	2,529	(384)	(95)	(289)
FHLB and other short-term borrowings	77	1	76	65	12
Securities sold under agreements to repurchase,
short-term	1,377	1,541	(164)	91	(255)
Securities sold under agreement to repurchase,
long-term	0	141	(141)	(71)	(70)
Other long-term debt	350	620	(270)	(253)	(17)
Junior subordinated debentures issued to
unconsolidated subsidiary trust	903	893	10	0	10
Total interest expense	5,455	6,639	(1,184)	(161)	(1,022)
Net interest income	$       38,970	$      38,385	$           585	$      4,990	$   (4,406)

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The following tables present an analysis of net interest income and illustrates interest income earned and interest expense charged for each major component of interest earning assets and interest bearing liabilities.  Yields/rates are computed on a fully taxable-equivalent basis, using a 35% rate.  Non-accrual loans are included in the average loan balance outstanding.

	Three Months Ended
	September 30, 2012			September 30, 2011
		Interest			Interest
	Average	Income/	Average	Average	Income/	Average
(In thousands, fully taxable equivalent)	Balance	Expense	Rate	Balance	Expense	Rate
ASSETS:
Loans, including fees on loans	$    1,064,507	$     11,763	4.40%	$    1,007,240	$     12,170	4.79%
Investments	507,833	2,942	2.30%	375,065	3,187	3.37%
Interest-earning deposits with banks and other short-term    investments	16,241	9	0.22%	76,887	37	0.19%
Total earning assets	1,588,581	$     14,714	3.68%	1,459,192	$     15,394	4.19%
Allowance for loan losses	(11,309)			(10,550)
Cash and due from banks	25,793			10,389
Bank premises and equipment, net	14,952			14,200
Other assets	31,440			29,961
Total assets	$    1,649,457			$    1,503,192
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits:
Savings, NOW & money market accounts	$       677,321	$          176	0.10%	$       600,639	$          298	0.20%
Time deposits	341,231	684	0.80%	355,007	813	0.91%
Total interest bearing deposits	1,018,552	860	0.34%	955,646	1,111	0.46%
Short-term borrowings	60,141	39	0.26%	1,592	0	0.00%
Securities sold under agreements to repurchase, short-term	196,117	302	0.61%	207,037	488	0.94%
Securities sold under agreements to repurchase, long-term	0	0	0.00%	3,995	30	2.97%
Other long-term debt	9,032	57	2.50%	27,763	193	2.75%
Junior subordinated debentures issued to
unconsolidated subsidiary trust	20,619	307	6.01%	20,619	299	5.86%
Total borrowed funds	285,909	705	0.98%	261,006	1,010	1.54%
Total interest bearing liabilities	1,304,461	$       1,565	0.48%	1,216,652	$       2,121	0.69%
Noninterest bearing deposits	220,646			171,648
Other liabilities	9,466			9,341
Shareholders' equity	114,884			105,551
Total liabilities and shareholders' equity	$    1,649,457			$    1,503,192
Net earning assets	$       284,120			$       242,540
Net interest income (fully taxable equivalent)		$     13,149			$     13,273
Tax equivalent adjustment		(485)			(529)
Net interest income		$     12,664			$     12,744
Net interest rate spread			3.20%			3.50%
Net interest margin			3.29%			3.61%

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	Nine Months Ended
	September 30, 2012			September 30, 2011
		Interest			Interest
	Average	Income/	Average	Average	Income/	Average
(In thousands, fully taxable equivalent)	Balance	Expense	Rate	Balance	Expense	Rate
ASSETS:
Loans, including fees on loans	$    1,051,886	$     35,391	4.49%	$       956,478	$     35,226	4.92%
Investments	506,256	9,005	2.38%	432,034	9,717	3.01%
Interest-earning deposits with banks and other short-term    investments	18,454	29	0.21%	53,020	81	0.20%
Total earning assets	1,576,596	$     44,425	3.76%	1,441,532	$     45,024	4.18%
Allowance for loan losses	(11,061)			(10,380)
Cash and due from banks	24,037			12,114
Bank premises and equipment, net	14,549			14,241
Other assets	32,762			31,049
Total assets	$    1,636,883			$    1,488,556
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits:
Savings, NOW & Money Market accounts	$       660,386	$          603	0.12%	$       591,575	$          914	0.21%
Time deposits	346,347	2,145	0.83%	360,549	2,529	0.94%
Total interest bearing deposits	1,006,733	2,748	0.36%	952,124	3,443	0.49%
Short-term borrowings	39,614	77	0.26%	2,272	1	0.06%
Securities sold under agreement to repurchase, short-term	223,540	1,377	0.82%	210,708	1,541	0.98%
Securities sold under agreement to repurchase, long-term	0	0	0.00%	6,319	141	2.98%
Other long-term debt	17,420	350	2.68%	29,987	620	2.76%
Junior subordinated debentures issued to
unconsolidated subsidiary trust	20,619	903	5.93%	20,619	893	5.89%
Total borrowed funds	301,193	2,707	1.20%	269,905	3,196	1.58%
Total interest bearing liabilities	1,307,926	$       5,455	0.56%	1,222,029	$       6,639	0.73%
Noninterest bearing deposits	207,097			153,731
Other liabilities	9,514			10,535
Shareholders' equity	112,346			102,261
Total liabilities and shareholders' equity	$    1,636,883			$    1,488,556
Net earning assets	$       268,670			$       219,503
Net interest income (fully taxable equivalent)		$     38,970			$     38,385
Tax equivalent adjustment		(1,531)			(1,396)
Net interest income, GAAP		$     37,439			$     36,989
Net interest rate spread			3.20%			3.45%
Net interest margin			3.30%			3.56%

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Provision for Credit Losses:We recorded a $250 thousand and $700 thousand provision for credit losses during the three and nine months ended September 30, 2012, respectively, compared to a provision of $250 thousand and $500 thousand for the three and nine months ended September 30, 2011, respectively. Asset quality remained high throughout 2012 and continues to be a core strength for our company. Our continued loan growth was the primary factor for the level of the 2012 provision. Our nonperforming asset totals decreased to $2.74 million at September 30, 2012, compared to $3.52 million at June 30, 2012 and $2.87 million at December 31, 2011. There were no loans fully or partially charged-off during the third quarter of 2012, and year-to-date we have booked net recoveries of $27 thousand. Our total accruing substandard loans remain low at 1.78% of total loans. Accruing past due loans were 0.01% of total loans at September 30, 2012. All of these factors are taken into consideration during Management’s quarterly review of the allowance for credit losses. We consider the allowance for credit losses to be reasonable at September 30, 2012.  See “Credit Quality and the Allowance for Credit Losses” below for additional information on the provision, the allowance for credit losses and the allowance for loan losses.

Noninterest Income:Total noninterest income decreased $213 thousand to $3.20 million for the third quarter of 2012 compared to 2011, and increased $658 thousand for the first nine months of 2012 compared to 2011. During the third quarter of 2012, we recognized a gain on the sale of one of our branch locations of $749 thousand.Additionally, during the second quarter of 2012, we recognized a gain of $334 thousand on the sale of the mineral rights we owned on properties in Oklahoma which we acquired in a bank acquisition in 1971. We also recognized gains (losses) on investment securities  $(26) thousand and $422 thousand during the quarter and nine months ended September 30, 2012, respectively.  Excluding net gains (losses) on investment securities and the gains on the sale of the branch location and mineral rights, noninterest income decreased  $16 thousand to $2.48 million for the third quarter of 2012 compared to $2.49 million for the third quarter of 2011, and increased $200 thousand to $7.22 million for the first nine months of 2012 compared to $7.02 million for the first nine months of 2011. The change for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 is primarily a result of increases in net debit card income and Trust division income, offset in part by decreased overdraft fee revenue.  Additionally, the timing of investments in low income housing partnerships lead to a reduction in equity in losses of real estate limited partnerships to $(370) thousand for the third quarter of 2012 from $(441) thousand for the third quarter of last year, and $(1.19) million for the first nine months of 2012, compared to $(1.32) million for the same period in 2011. Trust assets under management have continued to grow through 2012 and now total $531 million.

Noninterest Expense:Total noninterest expense decreased $596 thousand to $10.45 million for the third quarter of 2012 compared to 2011, and $165 thousand to $31.20 million for the first nine months of 2012 compared to 2011.  As mentioned previously, we prepaid $20 million in FHLB long-term debt during the second and third quarters of 2012 and incurred prepayment penalties totaling $677 thousand during the third quarter and $1.36 million during the first nine months of 2012.  We also prepaid $16 million in FHLB debt during the third quarter of 2011, and incurred a prepayment penalty of $861 thousand. Excluding the prepayment penalties, noninterest expense decreased $412 thousand for the third quarter of 2012 compared to 2011 and decreased $667 thousand for the first nine months of 2012 compared to 2011. Compensation and benefits were lower for both the quarter and nine months ended September 30, 2012.  Normal salary increases were offset by increased vacancies, a lower incentive accrual, and credits related to loan origination fees.  A change to our health insurance plan for 2012 resulted in a $193 thousand reduction in health and group insurance expense for the first nine months of 2012 compared to 2011.

Balance Sheet Analysis

Ending loan balances at September 30, 2012 were $1.07 billion, an increase of $45.25 million over ending loan balances at December 31, 2011.  This represents an annualized loan growth rate of 6%. Quarterly average loans for the third quarter of 2012 were $50.40 million higher than for the fourth quarter of 2011. Year-to-date growth in our commercial loan portfolio has been driven by new customer acquisition and expansion of existing relationships, partially offset in the third quarter of 2012 by decreased line of credit utilization.  Reduced loan demand by our municipal customers has led to a year-to-date reduction in municipal loan balances. Growth in our residential real estate loan portfolio continues to be driven by increased mortgage refinance volume due to the low interest rate environment.

The following table summarizes the components of our loan portfolio as of the dates indicated:

(In thousands)	September 30, 2012	June 30, 2012	December 31, 2011
Commercial, financial and agricultural	$ 169,450	$ 173,114	$ 146,990
Municipal loans	82,048	42,578	101,705
Real estate loans – residential	477,321	464,202	439,818
Real estate loans – commercial	327,182	329,698	313,915
Real estate loans – construction	11,285	9,875	18,993
Installment loans	5,259	5,842	5,806
All other loans	334	356	399
Total loans	$ 1,072,879	$ 1,025,665	$ 1,027,626

Total deposits at September 30, 2012 were $1.25 billion, compared to $1.18 billion at December 31, 2011.  Growth during 2012 has been concentrated in our demand deposit and money market categories. Securities sold under agreement to repurchase, which

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represent collateralized customer accounts, declined by $34.53 million to $228.00 million at September 30, 2012 from $262.53 million at December 31, 2011 as a result of seasonal cash flows combined with migration to other deposit products due to the low interest rate environment. Short-term borrowings were $55.60 million at September 30, 2012, compared to zero at December 31, 2011. As mentioned previously, we prepaid $20 million in long-term FHLB debt during the second and third quarters.  The rate on the borrowing was 2.75% and we paid $1.36 million in prepayment penalties as a result. 

The investment portfolio is used to generate interest income, manage liquidity and mitigate interest rate sensitivity. Our investment portfolio totaled $526.70 million at September 30, 2012, a $14.39 million increase from the December 31, 2011 ending balance of $512.31 million.

We sold bonds with a book value of $22.65 million during the third quarter of 2012 for a pre-tax loss of $26 thousand.  Our investment portfolio at September 30, 2012, including both held-to-maturity and available-for-sale securities, consisted of the following:

(In thousands)	Amortized Cost	Fair Value
U.S. Treasury Obligations	$ 100	$ 100
U.S. Agency Obligations	53,392	54,233
FHLB Obligations	4,563	4,618
Agency MBSs	175,796	184,202
Agency CMBSs	5,090	5,024
Agency CMOs	270,792	273,419
Non-agency CMOs	4,749	4,738
ABSs	357	421
Total investments	$ 514,839	$ 526,755

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by FNMA, FHLMC, or GNMA with various origination dates and maturities.  Non-Agency CMOs and ABSs are tracked individually with updates on the performance of the underlying collateral provided at least quarterly.

Our investment portfolio consists almost entirely of U.S. Treasury and Agency obligations, or Agency-guaranteed mortgage securities.  We have two non-agency CMOs with a current cost basis of $4.75 million.  Management, with the help of outside experts, has performed impairment analyses on these bonds.

One of the non-Agency CMOs, with a cost basis of $3.15 million and a fair value of $3.13 million at September 30, 2012, is rated BBB by Fitch and Ba3 by Moody’s.  Delinquencies have been fairly low and prepayments on the bond have led to increased credit support.  We own a senior tranche in this bond. Although losses are expected in the bond overall, our position in the structure of the bond is expected to protect us from realizing losses. The second bond has a cost basis of $1.60 million and a fair value of $1.61 million.  This bond is rated CCC by Fitch and S&P. We own a super senior tranche in this bond. Although losses are expected in the bond overall, our super senior position in the structure is expected to protect us from realizing a material loss. 

As a member of the FHLB system, we are required to invest in stock of the FHLB of Boston (the “FHLBB”) in an amount determined based on our borrowings from the FHLBB.  At September 30, 2012, our investment in FHLBB stock totaled $8.15 million, a decrease of $485 thousand from our year-end balance of $8.63 million.  We received dividend income totaling $11 thousand and $36 thousand during the three and nine months ended September 30, 2012, respectively.

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity.

In the ordinary course of business, we make commitments for possible future extensions of credit. At September 30, 2012, we were obligated to fund $4.68 million of standby letters of credit. No losses are anticipated in connection with these commitments.

Income Taxes

Our effective tax rate for the three and nine months ended September 30, 2012 was 22% and 20%, respectively, compared to 14% and 17% for the three and nine months ended September 30, 2011, respectively.  Our income tax provisions for these periods were less than the expense that would result from applying the federal statutory rate of 35% to income before income taxes principally because of the impact of federal affordable housing tax credits, historic rehabilitation credits and qualified school construction bond credits combined with tax exempt interest income on certain loans.  Taxes for 2011 were positively impacted by the purchase of large historic rehabilitation credits that were available in 2011.  Absent those credits, our effective tax rate for 2011 would have been approximately 20%.

Liquidity and Capital Resources

Our liquidity is monitored by the Asset and Liability Committee (“ALCO”) of our Bank’s Board of Directors, based upon our Bank’s policies. As of September 30, 2012, we could borrow up to $41 million in overnight funds, of which $36 million consists of unsecured borrowing lines established with correspondent banks. The balance of $5 million is in the form of an overnight line of credit with the FHLBB. FHLBB borrowings are secured by residential mortgage loans. The total amount of loans pledged to the FHLBB for both

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short- and long-term borrowing arrangements totaled $330.49 million at September 30, 2012. We have additional borrowing capacity with the FHLBB of $179.33 million as of September 30, 2012.  Additionally, we have established a borrowing facility with the FRB which will enable us to borrow at the discount window.

We also have the ability to borrow through the use of repurchase agreements, collateralized by Agency MBSs and Agency CMOs, with certain approved counterparties. The carrying value of the securities sold under repurchase agreements was $269.77 million and the market value was $276.56 million at September 30, 2012. We maintain effective control over the securities underlying the agreements. Our investment portfolio, which is managed by the ALCO, has a book value of $526.70 million at September 30, 2012, of which $305.57 million was pledged.  The portfolio is a reliable source of cash flow for us. We closely monitor our short-term cash position.  Any excess funds are either left on deposit at the FRB, or are in a fully insured account with one of our correspondent banks.

Of the $55.60 million in short-term borrowings, there was $39.60 million in outstanding FHLBB balances at September 30, 2012. These FHLBB short-term borrowings mature in less than 30 days.

The following table provides certain information regarding other short-term borrowed funds for the three and nine months ended September 30, 2012:

(In thousands)	Three Months Ended September 30, 2012	Nine months Ended September 30, 2012
FHLBB and other short-term borrowings
Amount outstanding at end of period	$ 55,600	$ 55,600
Maximum during the period amount outstanding	97,000	97,000
Average amount outstanding	60,141	39,614
Weighted average rate during the period	0.26%	0.26%
Weighted average rate at period end	0.25%	0.25%
Securities sold under agreement to repurchase, short-term
Amount outstanding at end of period	$ 227,996	$ 227,996
Maximum during the period amount outstanding	239,379	262,970
Average amount outstanding	196,117	223,540
Weighted average rate during the period	0.62%	0.81%
Weighted average rate at period end	0.51%	0.51%

We extended, through January 2013, our stock buyback program, originally adopted in January 2007.  Under the program, we may repurchase up to 200,000 shares of our common stock on the open market from time to time, and have purchased 143,475 shares at an average price per share of $22.94 since the program’s adoption.  We did not repurchase any of our shares during 2011 or the first nine months of 2012, and we do not expect to repurchase shares in the near future.

As of September 30, 2012, we exceeded all current applicable regulatory capital requirements. We continue to be considered well capitalized under current applicable regulations.  Our tangible equity ratio at September 30, 2012 was 7.00%, compared to 6.80% at December 31, 2011. Because we have no intangible assets, our tangible equity is the same as our book equity. The following table represents our actual capital ratios and capital adequacy requirements as of September 30, 2012.

	Actual		For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount	Percent	Amount	Percent	Amount	Percent
Merchants Bancshares, Inc.
Tier 1 leverage capital	$ 133,659	8.10%	$ 65,978	4.00%	N/A	N/A
Tier 1 risk-based capital	133,659	14.62%	36,576	4.00%	N/A	N/A
Total risk-based capital	144,791	15.83%	73,152	8.00%	N/A	N/A
Tangible capital	118,029	7.00%	N/A	N/A	N/A	N/A
Merchants Bank
Tier 1 leverage capital	$ 129,767	7.85%	$ 66,155	4.00%	$ 82,694	5.00%
Tier 1 risk-based capital	129,767	14.10%	36,812	4.00%	55,218	6.00%
Total risk-based capital	140,970	15.32%	73,624	8.00%	92,029	10.00%
Tangible capital	134,934	7.99%	N/A	N/A	N/A	N/A

· Capital for Merchants Bancshares, Inc. includes $20 million in trust preferred securities issued in December 2004. These hybrid securities qualify as regulatory capital up to certain limits.

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CREDIT QUALITY AND THE ALLOWANCE FOR CREDIT LOSSES

Credit Quality

Stringent credit quality is a major strategic focus of ours, and Management monitors asset quality on a continuous basis. We cannot assure that problem assets will remain at current levels, particularly in light of current or future economic conditions.  The asset balances in this category will be dynamic and subject to change as problem loans are either resolved or moved to nonperforming status based upon current developments and the latest available information.

The following table summarizes our nonperforming assets at the dates indicated:

(In thousands)	September 30, 2012	June 30, 2012	December 31, 2011	September 30, 2011
Non-accrual  loans	$ 2,180	$ 2,559	$ 1,953	$ 2,687
Loans past due 90 days or more and still      accruing interest	0	0	0	0
Troubled debt restructuring	560	571	558	505
Total nonperforming loans (“NPL”)	2,740	3,130	2,511	3,192
OREO	0	386	358	340
Total nonperforming assets (“NPA”)	$ 2,740	$ 3,516	$ 2,869	$ 3,532

Nonperforming assets at September 30, 2012 totaled $2.74 million, a decrease of $129 thousand from balances at December 31, 2011.   There were no loans past due 90 days and still accruing at September 30, 2012.   Of the total $2.74 million in nonperforming loans above, $2.13 million are residential mortgages, compared to $1.99 million at December 31, 2011.  The increase in nonperforming residential real estate loans is the result of the transfer of a $1.0 million residential relationship to nonaccrual during the quarter, which offset the declines in this category resulting from the resolution of several loans.  Our residential first lien mortgage portfolio consists of traditional mortgages which are underwritten using loan-to-value and debt-to-income thresholds.  We believe that additional loss exposure on current non-accruing loans is mitigated by a combination of collateral and, where needed, an appropriate reserve allocation.

TDRs consist of eight residential real estate loans and one commercial real estate loan at September 30, 2012. All nine borrowers experienced financial difficulties that led to the restructure of their respective loans. At the time of restructure, seven were in payment default and all nine demonstrated cash flow insufficient to service their debt as well as an inability to obtain funds at market rates from other sources.  As of September 30, 2012, seven of the restructured loans were performing in accordance with modified agreements, while two loans totaling $70 thousand were in default and in non-accrual.  There were no commitments to lend additional funds to borrowers whose loans have been modified in a troubled debt restructuring at September 30, 2012. We had no commitments to lend additional funds to borrowers whose loans were in non-accrual status or to borrowers whose loans were 90 days past due and still accruing.

Our OREO balance at September 30, 2012 was zero, compared with $358 thousand at December 31, 2011 and $340 thousand at September 30, 2011.  Properties that were in OREO at June 30, 2012 were sold during the third quarter.

Excluded from the non-accrual balances discussed above are our loans that are 30 to 89 days past due, which are not necessarily considered classified or impaired. Accruing loans 30 to 89 days past due as a percentage of total loans as of the periods indicated are presented in the following table:

Quarter Ended:	30-89 Days
September 30, 2012	0.01%
June  30, 2012	0.00%
December 31, 2011	0.02%
September 30, 2011	0.06%

Our residential mortgage loan portfolio continues to perform well, even under the currently stressed economic conditions. Residential loans 30 to 89 days past due at September 30, 2012 totaled $73 thousand.

Our policy is to classify a loan 90 days or more past due with respect to principal or interest, as well as any loan where Management does not believe it will collect all principal and interest in accordance with contractual terms, as a non-accruing loan, unless the ultimate collectability of principal and interest is assured.  Income accruals are suspended on all non-accruing loans, and all previously accrued and uncollected interest is charged against current income.  A loan remains in non-accruing status until the factors which suggest doubtful collectability no longer exist, the loan is liquidated, or the loan is determined to be uncollectible, and is charged off against the allowance for loan losses.  In those cases where a non-accruing loan is secured by real estate typically initiate foreclosure or replevin proceedings.  The result of such action will either be to cause repayment of the loan with the proceeds of a public sale or to give us possession of the collateral in order to manage a future resale of the asset.  Repossessed property is recorded at the lower of its cost or estimated fair value, less any estimated costs to sell.  Any cost in excess of the estimated fair value on the transfer date is

38

charged to the allowance for loan losses, while further declines in market values are recorded as OREO expense. Impaired loans, which primarily consist of non-accruing residential mortgage and commercial real estate loans, totaled $2.74 million at September 30, 2012 and $2.51 million at December 31, 2011 and are included as nonperforming loans in the table above.  At September 30, 2012, $1.60 million of impaired loans had specific reserve allocations totaling $334 thousand.

Management monitors asset quality closely and continuously performs detailed and extensive reviews on larger credits and problematic credits identified on the watched asset list, nonperforming asset listings and internal credit rating reports.  In addition to frequent financial analysis and review of well-rated and adversely graded loans, we incorporate active monitoring of key credit and non-credit risks for each customer, assessing risk through the daily reviews of overdrafts, delinquencies and usage of electronic banking products and tracking for timely receipt of all required financial statements. A management committee reviews the status of these loans each quarter and determines or confirms the appropriate risk rating, accrual status and loan loss reserve allocation.  The findings of this review process are instrumental in determining the adequacy of the allowance for credit losses.

Substandard accruing loans totaled $19.10 million at September 30, 2012, an increase of $6.70 million since December 31, 2011.  The increase since December 31, 2011 consists of borrowers in a number of industries with no relationship totaling more than $3 million. Of the total substandard accruing loans, $2.05 million are subject to federal loan guarantees. The listing of substandard accruing borrowers at September 30, 2012 includes borrowers operating in a variety of different industries and locations. Three borrowers represent 36% of performing classified loans.  Loans identified as substandard have well-defined weaknesses that, if not addressed, could result in a loss to the Bank.  These accruing substandard loans have generally continued to pay promptly and Management conducts regularly scheduled comprehensive reviews of the borrowers’ financial condition, payment performance, accrual status and collateral.  These reviews also ensure that these troubled accounts are properly administered with a focus on loss mitigation and that any potential loss exposures are appropriately quantified, and reserved for. The findings of this review process are a key component in assessing the adequacy of our Allowance for Loan Losses.

Concentrations by collateral exposure are also monitored as part of our risk management process. The composition of substandard accruing loans at September 30, 2012 consists of $13.67 million in loans secured by owner occupied commercial real estate, of which $1.79 million is subject to federal loan guarantees; and $1.48 million in commercial investment real estate, of which none is government guaranteed.  The balance consists of $2.45 million in loans to commercial borrowers, of which $254 thousand is government guaranteed; $1.26 million in loans secured by multi-family residential properties and $231 thousand in residential and home equity loans.

Allowance for Credit Losses

The allowance for credit losses is made up of two components - the Allowance for Loan Losses (“ALL”) and the Reserve for Undisbursed Lines.  The ALL is based on our estimate of the amount required to reflect the known and inherent risks in the loan portfolio, based on circumstances and conditions known at each reporting date. We review the adequacy of the ALL quarterly. Factors considered in evaluating the adequacy of the ALL include previous loss experience, the size and composition of the portfolio, risk rating composition, current economic and real estate market conditions and their effect on the borrowers, the performance of individual loans in relation to contractual terms and estimated fair values of properties that secure impaired loans.

The adequacy of the ALL is determined using a consistent, systematic methodology, consisting of a review of both specific reserves for loans identified as impaired and general reserves for the various loan portfolio classifications.  When a loan is impaired, we determine its impairment loss by comparing the excess, if any, of the loan’s carrying amount over (1) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan, or (3) the fair value of the collateral securing a collateral-dependent loan.  When a loan is deemed to have an impairment loss, the loan is either charged down to its estimated net realizable value, or a specific reserve is established as part of the overall ALL if Management needs more time to evaluate all of the facts and circumstances relevant to that particular loan.

The general ALL is a percentage-based reflection of historical loss experience and assigns a required allocation by loan classification based on a fixed percentage of all outstanding loan balances. The general allowance for loan losses employs a risk-rating model that grades loans based on their general characteristics of credit quality and relative risk. Appropriate reserve levels are estimated based on Management’s judgments regarding the historical loss experience, current economic trends, trends in the portfolio mix, volume and trends in delinquencies and non-accrual loans.

Losses are charged against the ALL when Management believes that the collectability of principal is doubtful. To the extent we determine the level of anticipated losses in the portfolio has significantly increased or diminished, the ALL is adjusted through current earnings. Overall, we believe that the ALL is maintained at an adequate level, in light of historical and current factors, to reflect the level of credit risk in the loan portfolio. Loan loss experience and nonperforming asset data are presented and discussed in relation to their impact on the adequacy of the ALL.

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The following table summarizes year to date activity in our Allowance for Credit Losses through the dates indicated:

(In thousands)	September 30, 2012	June 30, 2012	December 31, 2011	September 30, 2011
Balance, beginning of year	$ 11,353	$ 11,353	$ 10,754	$ 10,754
Charge-offs:
Commercial, financial and agricultural	(9)	(9)	(80)	(79)
Real estate – residential	(20)	(20)	(83)	(63)
Real estate – commercial	0	0	(60)	(60)
Real estate – construction	0	0	(96)	(96)
Installment	0	0	(10)	(10)
Total charge-offs	(29)	(29)	(329)	(308)
Recoveries:
Commercial, financial and agricultural	21	18	101	76
Real estate – residential	13	11	4	3
Real estate – commercial	1	1	44	43
Real estate – construction	21	13	25	18
Installment	0	0	4	3
Total recoveries	56	43	178	143
Net (charge-offs) recoveries	27	14	(151)	(165)
Provision for credit losses	700	450	750	500
Balance end of period	$ 12,080	$ 11,817	$ 11,353	$ 11,089
Components:
Allowance for loan losses	$ 11,444	$ 11,203	$ 10,619	$ 10,480
Reserve for undisbursed lines of credit	636	614	734	609
Allowance for credit losses	$ 12,080	$ 11,817	$ 11,353	$ 11,089

We recorded a provision for credit losses of $250 thousand and $700 thousand during the three and nine months ended September 30, 2012, respectively. We recorded a provision of $250 thousand and $500 thousand during the three and nine months ended September 30, 2011, respectively.

The following table reflects our nonperforming asset and coverage ratios as of the dates indicated:

	September 30, 2012	June 30, 2012	December 31, 2011	September 30, 2011
NPL to total loans	0.26%	0.31%	0.24%	0.32%
NPA to total assets	0.16%	0.22%	0.18%	0.23%
Allowance for loan losses to total loans	1.07%	1.09%	1.03%	1.04%
Allowance for loan losses to NPL	418%	358%	423%	328%

We will continue to take appropriate measures to restore nonperforming assets to performing status or otherwise liquidate these assets in an orderly fashion so as to maximize their value to us. There can be no assurances that we will be able to complete the disposition of nonperforming assets without incurring further losses.

Loan Portfolio Monitoring

Our Board of Directors grants each loan officer the authority to originate loans on our behalf, subject to certain limitations. The Board of Directors also establishes restrictions regarding the types of loans that may be granted and the distribution of loan types within our portfolio, and sets loan authority limits for each lender. These authorized lending limits are reviewed at least annually and are based upon the lender's knowledge and experience. Loan requests that exceed a lender's authority require the signature of our Senior Credit Officer, Senior Lender, and/or our President. All extensions of credit of $4.0 million or greater to any one borrower, or related party interest, are reviewed and approved by the Loan Committee of our Bank’s Board of Directors.

The Loan Committee and the credit department regularly monitor our loan portfolio. The entire loan portfolio and individual loans are reviewed for loan performance, compliance with internal policy requirements and banking regulations, creditworthiness, and strength of documentation. We monitor loan concentrations by individual borrowers, industries and loan types. As part of the annual credit policy review process, targets are set by loan type for the total portfolio. Credit risk ratings assessing inherent risk in individual loans are assigned to commercial loans at origination and are routinely reviewed by lenders and Management on a periodic basis according to total exposure and risk rating. These internal reviews assess the adequacy of all aspects of credit administration; additionally, we maintain an on-going active monitoring process of loan performance during the year.  We have also hired external loan review firms to assist in monitoring both the commercial and residential loan portfolios. The commercial loan review firm reviews, at a minimum, 60% in dollar volume of our commercial loan portfolio each year. These comprehensive reviews assess the accuracy of the Bank’s risk rating system as well as the effectiveness of credit administration in managing overall credit risks.  

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All loan officers are required to service their loan portfolios and account relationships. Loan officers, a commercial workout officer, or credit department personnel take remedial actions to assure full and timely payment of loan balances as necessary, with the supervision of the Senior Lender and the Senior Credit Officer.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

General

Our Management and Board of Directors are committed to sound risk management practices throughout the organization. We have developed and implemented a centralized risk management monitoring program. Risks associated with our business activities and products are identified and measured as to probability of occurrence and impact on us (low, moderate, or high), and the control or other activities in place to manage those risks are identified and assessed. Periodically, department-level and senior managers re-evaluate and report on the risk management processes for which they are responsible. This documented program provides Management with a comprehensive framework for monitoring our risk profile from a macro perspective; it also serves as a tool for assessing internal controls over financial reporting as required under the Federal Deposit Insurance Corporation Improvement Act and the Sarbanes-Oxley Act of 2002.

Liquidity Risk

Our liquidity is measured by our ability to raise cash when needed at a reasonable cost.  We must be capable of meeting expected and unexpected obligations to customers at any time.  Given the uncertain nature of customer demands as well as the need to maximize earnings, we must have available reasonably priced sources of funds that can be accessed quickly in time of need.  As discussed previously under “Liquidity and Capital Resources,” we have several sources of readily available funds, including the ability to borrow using our investment portfolio as collateral.  We also monitor our liquidity on a quarterly basis in compliance with our Liquidity Contingency Plan.  We have expanded our liquidity monitoring process over the last year and have partnered with our ALCO consultant to provide a more robust modeling process that monitors early liquidity stress triggers, and also allows us to model worst case liquidity scenarios, and various responses to those scenarios.

Market Risk – Interest Rate Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. Our primary market risk exposure is interest rate risk. An important component of our asset and liability management process is the ongoing monitoring and management of this risk, which is governed by established policies that are reviewed and approved annually by our Bank’s Board of Directors. Ourinvestment policy details the types of securities that may be purchased, and establishes portfolio limits and maturity limits for the various sectors. Ourinvestment policy also establishes specific investment quality limits. Our Bank’s Board of Directors has established a Board-level Asset and Liability Committee, which delegates responsibility for carrying out the asset/liability management policies to the Management-level Asset and Liability Committee (“ALCO”). The ALCO, chaired by the Chief Financial Officer and composed of members of senior management, develops guidelines and strategies impacting our asset and liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The ALCO manages the investment portfolio. Our goal is to maximize net interest income while mitigating market and interest rate risk.  We accomplish this through careful monitoring of the overall duration and average life of the portfolio, thorough analysis of securities we are considering for purchase, monitoring of individual securities, occasional repositioning of the investment portfolio, as well as selective sales of specific securities.

The ALCO is responsible for evaluating and managing the interest rate risk which arises naturally from imbalances in repricing, maturity and cash flow characteristics of our assets and liabilities. Techniques used by the ALCO take into consideration the cash flow and repricing attributes of balance sheet and off-balance sheet items and their relation to possible changes in interest rates. The ALCO manages interest rate exposure primarily by using on-balance sheet strategies, generally accomplished through the management of the duration, rate sensitivity and average lives of our various investments, and by extending or shortening maturities of borrowed funds, as well as carefully managing and monitoring the pricing of loans and deposits. The ALCO also considers the use of off-balance sheet strategies, such as interest rate caps and floors and interest rate swaps, to help minimize our exposure to changes in interest rates.  By using derivative financial instruments to hedge exposures to changes in interest rates we expose ourselves to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.  We minimize the credit risk in derivative instruments by entering into transactions only with high-quality counterparties.  The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The ALCO is responsible for ensuring that our Bank’s Board of Directors receives accurate information regarding our interest rate risk position at least quarterly. The ALCO uses an outside consultant to perform rate shocks of our balance sheet, and to perform a variety of other analyses. The ALCO consultant meets with the Board and Management-level ALCOs on a quarterly basis. During these meetings, the ALCO consultant reviews our current position and discusses future strategies, as well as reviewing the result of rate shocks of our balance sheet and a variety of other analyses. The consultant’s most recent review was as of September 30, 2012. The consultant ran a base simulation assuming no changes in rates as well as a 200 basis point rising and, because rates are quite low, a 100 basis point falling interest rate scenario which assumes a parallel and pro rata shift of the yield curve over a one-year period, and no growth assumptions.  Additionally, the consultant ran a 400 basis point rising simulation which assumed a parallel shift of the

41

curve over 24 months, and a 500 basis point rising simulation which assumed the curve flattened over a 24 month time frame.   A summary of the results is as follows:

Current/Flat Rates: Net interest income is projected to trend downward in the current rate scenario as the expected replacement rates on assets are lower than the current portfolio, and opportunities to reduce rates on deposits and term funding are limited. This downward trend becomes more pronounced each quarter as interest rates remain very low. 

Falling Rates: If rates fall, net interest income is projected to trend in line with the base case scenario initially as rate reductions in the funding base offset lower asset yields.  Thereafter net interest income trends downward rapidly as funding rate reductions subside while asset cash flow continues to reset at reduced yields.  Accelerated prepayment speeds on mortgage-based assets exacerbate the impact of lower rates. 

Rising Rates:  Higher rates are better for us under all scenarios as our low cost deposits are worth more to us when they can be invested at higher rates. In the up 200 basis points scenario, net interest income is projected to move up quickly as asset yields reprice up more quickly than funding costs and asset cash flows are reinvested at higher rates. A more pronounced rising rate scenario is projected to trend slightly lower than the up 200 basis points scenario over the first three years due to additional pricing pressure on deposit rates, but eventually moves higher.   If the rates remain at current low levels for another two years, the benefit of rising rates is muted because the starting point for asset yields will be much lower.

The change in net interest income for the next twelve months from our expected or “most likely” forecast at the September 30, 2012 review is shown in the following table. The degree to which this exposure materializes will depend, in part, on our ability to manage deposit rates as interest rates rise or fall. 

Rate Change	Percent Change in Net Interest Income
Up 200 basis points	3.25%
Down 100 basis points	(1.27)%

The ALCO uses off-balance sheet strategies, such as interest rate caps and floors and interest rate swaps, as well as borrowings with embedded caps and floors to help minimize our exposure to changes in interest rates.  As mentioned previously, we entered into interest rate swap arrangements to fix the cost of our trust preferred issuance that switched to a floating interest rate in December 2009.  See Note 10 to the accompanying Interim Unaudited Consolidated Financial Statements for further details on the interest rate swap.

The preceding sensitivity analysis does not represent our forecast and should not be relied upon as indicative of expected operating results. These estimates are based upon numerous assumptions, including, among others, the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit run-off rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, as well as historical behavior, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

The most significant ongoing factor affecting market risk exposure of net interest income during the second quarter of 2012 was the sustained low interest rate environment   Interest rates plummeted during 2008 and have remained low as the global economy slowed at unprecedented levels, unemployment levels soared, delinquencies on all types of loans increased along with decreased consumer confidence and dramatic declines in housing prices. Net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curves, and changes in the size and composition of the loan, investment and deposit portfolios.  Interest rates have decreased further during 2012.  The ten-year Treasury decreased 24 basis points to 1.65% during the first nine months of 2012. The average two-year Treasury for 2012 is approximately 0.28% and ended the quarter at 0.23%.

The model used to perform the base case balance sheet simulation assumes a parallel shift of the yield curve over twelve months and reprices every interest earning asset and interest bearing liability on our balance sheet. Prepayment assumptions for all residential mortgage products take into account prepayment assumptions most recently published by Applied Financial Technologies. Prepayment assumptions for commercial loan and commercial mortgage products are derived through an analysis of historical prepayment patterns combined with analysis of the current characteristics of the portfolio. Investment securities with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of a call. The model uses product-specific assumptions for deposits which are subject to repricing based on current market conditions

As market conditions vary from those assumed in the sensitivity analysis, actual results will likely differ due to: the varying impact of changes in the balances and mix of loans and deposits differing from those assumed, the impact of possible off balance sheet hedging strategies, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect all actions that the ALCO might take in responding to or anticipating changes in interest rates.

Credit Risk

Our Bank’s Board of Directors reviews and approves our Bank’s investment and loan policies on an annual basis. The investment policy establishes minimum investment quality guidelines, as well as specific limits on asset classes within the investment portfolio.  The loan policy establishes restrictions regarding the types of loans that may be granted, and the distribution of loan types within our

42

portfolio. Our Bank’s Board of Directors grants each loan officer the authority to originate loans on our behalf, subject to certain limitations. These authorized lending limits are reviewed at least annually and are based upon the officer’s knowledge and experience. Loan requests that exceed an officer’s authority require the signature of our Senior Credit Officer, Senior Lender, and/or President. All extensions of credit of $4.0 million or greater to any one borrower or related party are reviewed and approved by the Loan Committee of our Bank’s Board of Directors. Our loan portfolio is continuously monitored for performance, creditworthiness and strength of documentation through the use of a variety of management reports and with the assistance of an external loan review firm.  Credit ratings are assigned to commercial loans and are routinely reviewed. Loan officers or the loan workout function take remedial actions to assure full and timely payment of loan balances when necessary.

Item 4.  Controls and Procedures

Our principal executive officer, principal financial officer, and other members of our senior management have evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the disclosure controls and procedures effectively ensure that information required to be disclosed in our filings and submissions with the SEC under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management (including the principal executive officer and principal financial officer), and is recorded, processed, summarized and reported within the time periods specified by the SEC. In addition, we have reviewed our internal control over financial reporting and there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

43

MERCHANTS BANCSHARES, INC.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Please read the factors discussed in Part I – Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 8, 2012,which could materially adversely affect our business, financial condition and operating results. These risks are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

General economic and market conditions in the United States of America and abroad may materially and adversely affect the market price of shares of our common stock.  Because of these and other factors, past financial performance should not be considered an indicator of future performance.  The forward-looking statements contained herein represent our judgments as of the date of this Quarterly Report on Form 10-Q and we undertake no duty to update these forward-looking statements.  We caution readers not to place undue reliance on such statements.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits   

(a) Exhibits:

31.1*Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended

31.2*Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended

32.1**Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**Certification of 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**The following materials from Merchants Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL:  (i) Consolidated Balance Sheets at September 30, 2012 and December 31, 2011; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011; (iv) Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2012 and 2011; and (v) Notes to Interim Unaudited Consolidated Financial Statements.

_______________________________

*Filed herewith

**Furnished herewith

44

MERCHANTS BANCSHARES, INC.

SIGNATURES

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

Merchants Bancshares, Inc.

/s/ Michael R. Tuttle

Michael R. Tuttle

President & Chief Executive Officer

/s/ Janet P. Spitler

Janet P. Spitler

Chief Financial Officer & Treasurer

Principal Accounting Officer

November 5, 2012

Date

45

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF THE COMPANY PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14

CERTIFICATION

I, Michael R. Tuttle, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Merchants Bancshares, Inc.;

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 thisreport 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: November5, 2012

/s/ Michael R. Tuttle

Michael R. Tuttle

President &Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER OF THE COMPANY PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14

CERTIFICATION

I, Janet P. Spitler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Merchants Bancshares, Inc.;

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 thisreport is being prepared;

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

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

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

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

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

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

Date: November 5, 2012

/s/ Janet P. Spitler

Janet P. Spitler

Chief Financial Officer & Treasurer

Principal Accounting Officer

EX-32.1

Exhibit 32.1

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 on Form 10-Q of Merchants Bancshares, Inc. (the "Company") for the period endedSeptember  30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael R. Tuttle, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, to the best of my knowledge:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Michael R. Tuttle

Michael R. Tuttle

President & Chief Executive Officer

November 5, 2012

Date

EX-32.2

Exhibit 32.2

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 on Form 10-Q of Merchants Bancshares, Inc. (the "Company") for the period endedSeptember 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Janet P. Spitler, Chief Financial Officer, Treasurer and Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002, that, to the best of my knowledge:(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:/s/ Janet P. Spitler

Janet P. Spitler

Chief Financial Officer & Treasurer

Principal Accounting Officer

November5, 2012

Date

XML

Stock Repurchase Program (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Stock Repurchase Program [Abstract]
Stock repurchase program, number of shares authorized to be repurchased	200,000
Common stock shares purchased on the open market since program's adoption	143,475
Average price per share of repurchased shares	$ 22.94

XML

Derivative Financial Instruments (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2012 item	Dec. 31, 2011
Derivative Financial Instruments [Abstract]
Interest rate swaps designated as cash flow hedges, notional amount	$ 20,000,000
Fair values of effective portion of hedges reflected in Other Comprehensive Income	(1,230,000)	(1,410,000)
Number of interest rate derivative positions	2
Interest rate derivatives, combined notional amount	28,880,000
Fair value of interest rate derivatives	$ 599,000	$ 206,000

XML

Loans And The Allowance For Credit Losses (Summary Of Restructurings During The Periods) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012 loan	Sep. 30, 2011 loan	Sep. 30, 2012 loan	Sep. 30, 2011 loan
Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	0	1	3	2
Pre-modification Outstanding Recorded Investment	$ 0	$ 105	$ 90	$ 158
Post-modification Outstanding Recorded Investment	0	104	90	156
Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	0		1
Pre-modification Outstanding Recorded Investment	0		180
Post-modification Outstanding Recorded Investment	$ 0		$ 180

XML

Investment Securities (Summary Of Contractual Maturity Of Debt Securities Classified As Available For Sale) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	$ 398	$ 6,682
Available for Sale (at fair value), After One But Within Five Years	13,740	18,685
Available for Sale (at fair value), After Five But Within Ten Years	87,906	119,113
Available for Sale (at fair value), After Ten Years	424,213	367,271
Total Available for Sale Securities, Fair Value	526,257	511,751
Held to Maturity, Within One Year	16	0
Held to Maturity, After One But Within Five Years	84	158
Held to Maturity, After Five But Within Ten Years	0	0
Held to Maturity, After Ten Years	343	400
Total Held to Maturity Securities	443	558
U.S. Treasury Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0	250
Available for Sale (at fair value), After One But Within Five Years	100	0
Available for Sale (at fair value), After Five But Within Ten Years	0	0
Available for Sale (at fair value), After Ten Years	0	0
Total Available for Sale Securities, Fair Value	100	250
U.S. Agency Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0	3,023
Available for Sale (at fair value), After One But Within Five Years	10,056	12,567
Available for Sale (at fair value), After Five But Within Ten Years	44,177	69,823
Available for Sale (at fair value), After Ten Years	0	5,006
Total Available for Sale Securities, Fair Value	54,233	90,419
FHLB Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0	3,389
Available for Sale (at fair value), After One But Within Five Years	0	0
Available for Sale (at fair value), After Five But Within Ten Years	4,618	13,287
Available for Sale (at fair value), After Ten Years	0	0
Total Available for Sale Securities, Fair Value	4,618	16,676
Agency MBSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	398	20
Available for Sale (at fair value), After One But Within Five Years	3,573	6,118
Available for Sale (at fair value), After Five But Within Ten Years	28,335	32,897
Available for Sale (at fair value), After Ten Years	151,398	144,803
Total Available for Sale Securities, Fair Value	183,704	183,838
Held to Maturity, Within One Year	16	0
Held to Maturity, After One But Within Five Years	84	158
Held to Maturity, After Five But Within Ten Years	0	0
Held to Maturity, After Ten Years	343	400
Total Held to Maturity Securities	443	558
Agency CMBSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0
Available for Sale (at fair value), After One But Within Five Years	0
Available for Sale (at fair value), After Five But Within Ten Years	5,024
Available for Sale (at fair value), After Ten Years	0
Total Available for Sale Securities, Fair Value	5,024
Agency CMOs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0	0
Available for Sale (at fair value), After One But Within Five Years	11	0
Available for Sale (at fair value), After Five But Within Ten Years	5,752	3,056
Available for Sale (at fair value), After Ten Years	267,656	211,424
Total Available for Sale Securities, Fair Value	273,419	214,480
Non-Agency CMOs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0	0
Available for Sale (at fair value), After One But Within Five Years	0	0
Available for Sale (at fair value), After Five But Within Ten Years	0	50
Available for Sale (at fair value), After Ten Years	4,738	4,805
Total Available for Sale Securities, Fair Value	4,738	4,855
ABSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale (at fair value), Within One Year	0	0
Available for Sale (at fair value), After One But Within Five Years	0	0
Available for Sale (at fair value), After Five But Within Ten Years	0	0
Available for Sale (at fair value), After Ten Years	421	1,233
Total Available for Sale Securities, Fair Value	$ 421	$ 1,233

XML

Fair Value Of Financial Instruments (Financial Assets And Liabilities Measured At Fair Value On A Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	$ 526,856	$ 511,958
Liabilities	1,825	1,613
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Liabilities	0	0
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	526,856	511,958
Liabilities	1,825	1,613
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Liabilities	0	0
U.S. Treasury Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	100	250
U.S. Treasury Obligations [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
U.S. Treasury Obligations [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	100	250
U.S. Treasury Obligations [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
U.S. Agency Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	54,233	90,419
U.S. Agency Obligations [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
U.S. Agency Obligations [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	54,233	90,419
U.S. Agency Obligations [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
FHLB Obligations [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	4,618	16,676
FHLB Obligations [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
FHLB Obligations [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	4,618	16,676
FHLB Obligations [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Agency MBSs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	183,704	183,838
Agency MBSs [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Agency MBSs [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	183,704	183,838
Agency MBSs [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Agency CMBSs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	5,024
Agency CMBSs [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0
Agency CMBSs [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	5,024
Agency CMBSs [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0
Agency CMOs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	273,419	214,480
Agency CMOs [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Agency CMOs [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	273,419	214,480
Agency CMOs [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Non-Agency CMOs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	4,738	4,855
Non-Agency CMOs [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Non-Agency CMOs [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	4,738	4,855
Non-Agency CMOs [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
ABSs [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	421	1,233
ABSs [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
ABSs [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	421	1,233
ABSs [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Interest Rate Swap Agreements [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	599	207
Liabilities	1,825	1,613
Interest Rate Swap Agreements [Member] | Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Liabilities	0	0
Interest Rate Swap Agreements [Member] | Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	599	207
Liabilities	1,825	1,613
Interest Rate Swap Agreements [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets	0	0
Liabilities	$ 0	$ 0

XML

Pension (Net Periodic Benefit Costs) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Pension [Abstract]
Interest Cost	$ 119	$ 122	$ 358	$ 366
Service cost	12	14	36	42
Expected return on Plan assets	(150)	(156)	(450)	(468)
Amortization of net loss	82	70	245	210
Net periodic benefit cost	$ 63	$ 50	$ 189	$ 150

XML

Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 2: Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. We do not expect that this update will have a material impact on our financial condition or results of operations.

In August 2012, the FASB issued ASU 2012-03,  “Technical Amendments and Corrections to SEC Sections– Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22.” The amendments in ASU 2012-03 that have no transition guidance are effective immediately for public and private entities. Amendments that are subject to transition guidance will be effective for public companies for fiscal periods beginning after December 15, 2012, and for nonpublic entities for fiscal periods beginning after December 15, 2013.  We do not expect that this update will have a material impact on our financial condition or results of operations.

XML

Fair Value Of Financial Instruments (Financial Assets Measured At Fair Value On A Nonrecurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO	$ 0	$ 358	$ 340
Impaired loans	2,740	2,511
Total	2,740	2,869
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO	0	0
Impaired loans	0	0
Total	0	0
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO	0	0
Impaired loans	0	0
Total	0	0
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO	0	358
Impaired loans	2,740	2,511
Total	$ 2,740	$ 2,869

XML

Loans And The Allowance For Credit Losses (Aging Of Past Due Loans, Including Nonaccrual Loans, By Class) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	$ 9	$ 39
60-89 Days Past Due	214	670
Over 90 Days Past Due	2,030	1,107
Total Past Due	2,253	1,816
Current	1,070,626	1,025,810
Total	1,072,879	1,027,626	1,008,076
Greater Than 90 Days and Accruing	0	0
Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	7	0
Total Past Due	7	0
Current	5,252	5,806
Total	5,259	5,806
Greater Than 90 Days and Accruing	0	0
All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	0	0
Total Past Due	0	0
Current	334	399
Total	334	399
Greater Than 90 Days and Accruing	0	0
Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	150	40
Over 90 Days Past Due	9	8
Total Past Due	159	48
Current	169,291	146,942
Total	169,450	146,990	156,043
Greater Than 90 Days and Accruing	0	0
Municipal Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	0	0
Total Past Due	0	0
Current	82,048	101,705
Total	82,048	101,705	97,015
Greater Than 90 Days and Accruing	0	0
Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total	477,321		425,620
Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	1	39
60-89 Days Past Due	64	305
Over 90 Days Past Due	887	731
Total Past Due	952	1,075
Current	437,690	400,256
Total	438,642	401,331
Greater Than 90 Days and Accruing	0	0
Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	8	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	726	281
Total Past Due	734	281
Current	37,945	38,206
Total	38,679	38,487
Greater Than 90 Days and Accruing	0	0
Real Estate Loans – Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total	327,182		310,863
Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	325
Over 90 Days Past Due	401	87
Total Past Due	401	412
Current	217,162	205,844
Total	217,563	206,256
Greater Than 90 Days and Accruing	0	0
Real Estate Loans – Commercial [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	0	0
Total Past Due	0	0
Current	109,619	107,659
Total	109,619	107,659
Greater Than 90 Days and Accruing	0	0
Real Estate Loans – Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total	11,285		12,238
Real Estate Loans – Construction [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	0	0
Total Past Due	0	0
Current	1,960	1,798
Total	1,960	1,798
Greater Than 90 Days and Accruing	0	0
Real Estate Loans – Construction [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
Over 90 Days Past Due	0	0
Total Past Due	0	0
Current	9,325	17,195
Total	9,325	17,195
Greater Than 90 Days and Accruing	$ 0	$ 0

XML

Loans And The Allowance For Credit Losses (Loan Loss Experience And Activity In The Allowance For Credit Losses) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	$ 11,817	$ 10,901	$ 11,353	$ 10,754
Chargeoffs	0	(103)	(29)	(308)
Recoveries	13	41	56	143
Provision (credit)	250	250	700	500
Ending balance	12,080	11,089	12,080	11,089
Ending balance individually evaluated for impairment	334	254	334	254
Ending balance collectively evaluated for impairment	11,746	10,835	11,746	10,835
Financing receivables Ending balance individually evaluated for impairment	2,740	3,192	2,740	3,192
Financing receivables Ending balance collectively evaluated for impairment	1,070,139	1,004,884	1,070,139	1,004,884
Loans	1,072,879	1,008,076	1,072,879	1,008,076	1,027,626
Allowance for loan losses	11,444	10,480	11,444	10,480	10,619
Reserve for undisbursed lines of credit	636	609	636	609
Total allowance for credit losses	12,080	11,089	12,080	11,089
Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	3,102	3,122	2,905	2,617
Chargeoffs	0	(2)	(9)	(79)
Recoveries	3	32	21	76
Provision (credit)	136	(274)	324	264
Ending balance	3,241	2,878	3,241	2,878
Ending balance individually evaluated for impairment	4	39	4	39
Ending balance collectively evaluated for impairment	3,237	2,839	3,237	2,839
Financing receivables Ending balance individually evaluated for impairment	20	223	20	223
Financing receivables Ending balance collectively evaluated for impairment	169,430	155,820	169,430	155,820
Loans	169,450	156,043	169,450	156,043	146,990
Allowance for loan losses	2,795	2,448	2,795	2,448
Reserve for undisbursed lines of credit	446	430	446	430
Total allowance for credit losses	3,241	2,878	3,241	2,878
Municipal Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	410	115	309	236
Chargeoffs	0	0	0	0
Recoveries	0	0	0	0
Provision (credit)	31	182	132	61
Ending balance	441	297	441	297
Ending balance individually evaluated for impairment	0	0	0	0
Ending balance collectively evaluated for impairment	441	297	441	297
Financing receivables Ending balance individually evaluated for impairment	0	0	0	0
Financing receivables Ending balance collectively evaluated for impairment	82,048	97,015	82,048	97,015
Loans	82,048	97,015	82,048	97,015	101,705
Allowance for loan losses	435	295	435	295
Reserve for undisbursed lines of credit	6	2	6	2
Total allowance for credit losses	441	297	441	297
Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	3,476	2,563	3,138	2,428
Chargeoffs	0	(14)	(20)	(63)
Recoveries	1	2	13	3
Provision (credit)	85	678	431	861
Ending balance	3,562	3,229	3,562	3,229
Ending balance individually evaluated for impairment	270	215	270	215
Ending balance collectively evaluated for impairment	3,292	3,014	3,292	3,014
Financing receivables Ending balance individually evaluated for impairment	2,132	2,380	2,132	2,380
Financing receivables Ending balance collectively evaluated for impairment	475,189	423,240	475,189	423,240
Loans	477,321	425,620	477,321	425,620
Allowance for loan losses	3,472	3,131	3,472	3,131
Reserve for undisbursed lines of credit	90	98	90	98
Total allowance for credit losses	3,562	3,229	3,562	3,229
Real Estate Loans – Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	4,557	4,856	4,484	5,143
Chargeoffs	0	0	0	(60)
Recoveries	1	0	1	43
Provision (credit)	3	(507)	76	(777)
Ending balance	4,561	4,349	4,561	4,349
Ending balance individually evaluated for impairment	60	0	60	0
Ending balance collectively evaluated for impairment	4,501	4,349	4,501	4,349
Financing receivables Ending balance individually evaluated for impairment	581	588	581	588
Financing receivables Ending balance collectively evaluated for impairment	326,601	310,275	326,601	310,275
Loans	327,182	310,863	327,182	310,863
Allowance for loan losses	4,502	4,306	4,502	4,306
Reserve for undisbursed lines of credit	59	43	59	43
Total allowance for credit losses	4,561	4,349	4,561	4,349
Real Estate Loans – Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	233	193	477	283
Chargeoffs	0	(85)	0	(96)
Recoveries	8	7	21	18
Provision (credit)	(10)	175	(267)	85
Ending balance	231	290	231	290
Ending balance individually evaluated for impairment	0	0	0	0
Ending balance collectively evaluated for impairment	231	290	231	290
Financing receivables Ending balance individually evaluated for impairment	0	0	0	0
Financing receivables Ending balance collectively evaluated for impairment	11,285	12,238	11,285	12,238
Loans	11,285	12,238	11,285	12,238
Allowance for loan losses	196	254	196	254
Reserve for undisbursed lines of credit	35	36	35	36
Total allowance for credit losses	231	290	231	290
Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	21	25	23	24
Chargeoffs	0	(2)	0	(10)
Recoveries	0	0	0	3
Provision (credit)	(2)	0	(4)	6
Ending balance	19	23	19	23
Ending balance individually evaluated for impairment	0	0	0	0
Ending balance collectively evaluated for impairment	19	23	19	23
Financing receivables Ending balance individually evaluated for impairment	7	1	7	1
Financing receivables Ending balance collectively evaluated for impairment	5,252	5,857	5,252	5,857
Loans	5,259	5,858	5,259	5,858
Allowance for loan losses	19	23	19	23
Reserve for undisbursed lines of credit	0	0	0	0
Total allowance for credit losses	19	23	19	23
All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Beginning balance	18	27	17	23
Chargeoffs	0	0	0	0
Recoveries	0	0	0	0
Provision (credit)	7	(4)	8	0
Ending balance	25	23	25	23
Ending balance individually evaluated for impairment	0	0	0	0
Ending balance collectively evaluated for impairment	25	23	25	23
Financing receivables Ending balance individually evaluated for impairment	0	0	0	0
Financing receivables Ending balance collectively evaluated for impairment	334	439	334	439
Loans	334	439	334	439
Allowance for loan losses	25	23	25	23
Reserve for undisbursed lines of credit	0	0	0	0
Total allowance for credit losses	$ 25	$ 23	$ 25	$ 23

XML

Fair Value Of Financial Instruments (Assets Measured At Fair Value Using Significant Unobservable Inputs) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
OREO	$ 0	$ 358	$ 340
Impaired loans	$ 2,740	$ 2,511
OREO [Member] | Minimum [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Range of Inputs	0.00%
OREO [Member] | Maximum [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Range of Inputs	40.00%
Impaired Loans [Member] | Minimum [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Range of Inputs	0.00%
Impaired Loans [Member] | Maximum [Member]
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Range of Inputs	40.00%

XML

Loans And The Allowance For Credit Losses (Impaired Loans By Class) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	$ 2,740	$ 2,511	$ 3,192
Unpaid Principal Balance	4,287		4,668
Related allowance	334	227	254
Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	20		223
Unpaid Principal Balance	943		1,240
Related allowance	4		39
Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	2,132		2,380
Unpaid Principal Balance	2,480		2,654
Related allowance	270		215
Real Estate Loans – Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	581		588
Unpaid Principal Balance	812		658
Related allowance	60		0
Real Estate Loans – Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment			0
Unpaid Principal Balance			94
Related allowance			0
Installment and Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	7		1
Unpaid Principal Balance	52		22
Related allowance	0		0
With No Related Allowance Recorded [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	7		1
Unpaid Principal Balance	52		22
Related allowance	0		0
With No Related Allowance Recorded [Member] | Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	11		168
Unpaid Principal Balance	934		1,185
Related allowance	0		0
With No Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	788		1,164
Unpaid Principal Balance	1,084		1,438
Related allowance	0		0
With No Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	5		178
Unpaid Principal Balance	40		178
Related allowance	0		0
With No Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	324		588
Unpaid Principal Balance	485		588
Related allowance	0		0
With No Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	0		0
Unpaid Principal Balance	70		70
Related allowance	0		0
With No Related Allowance Recorded [Member] | Real Estate Loans – Construction [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment			0
Unpaid Principal Balance			94
Related allowance			0
With Related Allowance Recorded [Member] | Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	9		55
Unpaid Principal Balance	9		55
Related allowance	4		39
With Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	618		979
Unpaid Principal Balance	635		979
Related allowance	232		212
With Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	721		59
Unpaid Principal Balance	721		59
Related allowance	38		3
With Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment	257
Unpaid Principal Balance	257
Related allowance	60
With Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Recorded Investment			0
Unpaid Principal Balance			0
Related allowance			$ 0

XML

Loans And The Allowance For Credit Losses (Average Recorded Investment And Interest Income Recognized) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	$ 2,900	$ 3,701	$ 2,590	$ 3,657
Interest Income Recognized	36	3	87	10
Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	37	276	72	476
Interest Income Recognized	0	0	1	0
Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	2,280	2,689	1,999	2,403
Interest Income Recognized	34	3	81	10
Real Estate Loans – Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	581	630	518	633
Interest Income Recognized	2	0	5	0
Real Estate Loans – Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment		105		142
Interest Income Recognized		0		0
Installment and Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	2	1	1	3
Interest Income Recognized	0	0	0	0
With No Related Allowance Recorded [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	2	1	1	3
Interest Income Recognized	0	0	0	0
With No Related Allowance Recorded [Member] | Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	24	138	49	170
Interest Income Recognized	0	0	1	0
With No Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	888	1,412	818	1,257
Interest Income Recognized	27	3	47	9
With No Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	331	221	325	369
Interest Income Recognized	7	0	34	1
With No Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	350	510	405	486
Interest Income Recognized	2	0	5	0
With No Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	0	120	0	86
Interest Income Recognized	0	0	0	0
With No Related Allowance Recorded [Member] | Real Estate Loans – Construction [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment		105		142
Interest Income Recognized		0		0
With Related Allowance Recorded [Member] | Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	13	138	23	306
Interest Income Recognized	0	0	0	0
With Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	580	997	662	751
Interest Income Recognized	0	0	0	0
With Related Allowance Recorded [Member] | Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	481	59	194	26
Interest Income Recognized	0	0	0	0
With Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment	231		113
Interest Income Recognized	0		0
With Related Allowance Recorded [Member] | Real Estate Loans – Commercial [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Average Recorded Investment		0		61
Interest Income Recognized		$ 0		$ 0

XML

Financial Statement Presentation

9 Months Ended

Sep. 30, 2012

Financial Statement Presentation [Abstract]

Financial Statement Presentation

Note 1: Financial Statement Presentation

Principles of Consolidation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments necessary for a fair presentation of our interim consolidated financial statements as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 have been included. The information was prepared from our unaudited financial statements and the unaudited financial statements of our subsidiaries, Merchants Bank and MBVT Statutory Trust I.  Amounts reported for prior periods are reclassified, where necessary, to be consistent with the current period presentation.

Management’s Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting periods. The most significant estimates include those used in determining the allowance for loan losses, income taxes, interest income recognition on loans and investments and analysis of other-than-temporary impairment of investment securities. Operating results in the future may vary from the amounts derived from our estimates and assumptions.

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Loans And The Allowance For Credit Losses (Nonperforming Loans) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Loans And The Allowance For Credit Losses [Abstract]
Nonaccrual loans	$ 2,180	$ 1,953
Loans greater than 90 days and accruing	0	0
Troubled debt restructured loans ("TDRs")	560	558
Total nonperforming loans	$ 2,740	$ 2,511	$ 3,192

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Commitments And Contingencies (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Commitments And Contingencies [Abstract]
Contingent obligations under standby letters of credit	$ 4.68
Expiration term of contingent obligations, months	12 months

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
ASSETS
Cash and due from banks	$ 30,097	$ 10,392
Interest earning deposits with banks and other short-term investments	22,935	27,420
Total cash and cash equivalents	53,032	37,812
Investments:
Securities available for sale, at fair value	526,257	511,751
Securities held to maturity (fair value of $498 and $624)	443	558
Total investments	526,700	512,309
Loans	1,072,879	1,027,626
Less: Allowance for loan losses	11,444	10,619
Net loans	1,061,435	1,017,007
Federal Home Loan Bank stock	8,145	8,630
Bank premises and equipment, net	15,221	14,232
Investment in real estate limited partnerships	5,338	5,189
Other assets	15,965	16,690
Total assets	1,685,836	1,611,869
LIABILITIES
Demand (noninterest bearing)	227,879	197,522
Savings, interest bearing checking and money market accounts	687,267	632,110
Time deposits $100 thousand and greater	126,095	127,303
Other time deposits	211,722	220,945
Total deposits	1,252,963	1,177,880
Short-term borrowings	55,600	0
Securities sold under agreement to repurchase	227,996	262,527
Other long-term debt	2,503	22,562
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	20,619
Other liabilities	8,126	18,744
Total liabilities	1,567,807	1,502,332
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value Authorized 10,000,000 shares; issued 6,651,760 at September 30, 2012 and December 31, 2011 Outstanding: 5,955,111 at September 30, 2012 and 5,907,080 at December 31, 2011	67	67
Capital in excess of par value	36,700	36,544
Retained earnings	85,497	79,393
Treasury stock, at cost: 696,649 shares at September 30, 2012 and 744,680 shares at December 31, 2011	(14,837)	(15,817)
Deferred compensation arrangements	6,232	6,248
Accumulated other comprehensive income	4,370	3,102
Total shareholders' equity	118,029	109,537
Total liabilities and shareholders' equity	1,685,836	1,611,869
Preferred Class A Non-Voting [Member]
SHAREHOLDERS' EQUITY
Preferred stock	0	0
Preferred Class B Voting [Member]
SHAREHOLDERS' EQUITY
Preferred stock	$ 0	$ 0

XML

Fair Value Of Financial Instruments (Fair Value Of Financial Instruments) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Dec. 31, 2010
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	$ 53,032	$ 37,812	$ 97,383	$ 74,026
Securities available for sale	526,257	511,751
Securities held to maturity	443	558
FHLB stock	8,145	8,630
FHLB stock		8,630
Loans, net of allowance for loan losses	1,061,435	1,017,007
Total assets	1,685,836	1,611,869
Deposits	1,252,963	1,177,880
Short-term debt	55,600	0
Securities sold under agreement to repurchase	227,996	262,527
Other long-term debt	2,503	22,562
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	20,619
Total liabilities	1,567,807	1,502,332
Carrying Amount [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	53,032	37,812
Securities available for sale	526,257	511,751
Securities held to maturity	443	558
FHLB stock	8,145	8,630
Loans, net of allowance for loan losses	1,061,435	1,017,007
Interest rate contract-cash flow hedge	599	207
Accrued interest receivable	4,577	5,121
Total assets	1,654,488	1,581,086
Deposits	1,252,963	1,177,880
Short-term debt	55,600	0
Securities sold under agreement to repurchase	227,996	262,527
Other long-term debt	2,503	22,562
Junior subordinated debentures issued to unconsolidated subsidiary trust	20,619	20,619
Interest rate contract-cash flow hedge	1,825	1,613
Accrued interest payable	249	282
Total liabilities	1,561,755	1,485,483
Fair Value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	53,032	37,812
Securities available for sale	526,257	511,751
Securities held to maturity	498	624
FHLB stock	8,145	8,630
Loans, net of allowance for loan losses	1,086,800	1,035,131
Interest rate contract-cash flow hedge	599	207
Accrued interest receivable	4,577	5,121
Total assets	1,679,908	1,599,276
Deposits	1,255,808	1,181,066
Short-term debt	55,600	0
Securities sold under agreement to repurchase	227,996	263,062
Other long-term debt	2,532	23,594
Junior subordinated debentures issued to unconsolidated subsidiary trust	15,741	15,268
Interest rate contract-cash flow hedge	1,825	1,613
Accrued interest payable	249	282
Total liabilities	1,559,751	1,484,885
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	53,032	37,812
Securities available for sale	0	0
Securities held to maturity	0	0
FHLB stock	0	0
Loans, net of allowance for loan losses	0	0
Interest rate contract-cash flow hedge	0	0
Accrued interest receivable	0	0
Total assets	53,032	37,812
Deposits	915,146	829,632
Short-term debt	0	0
Securities sold under agreement to repurchase	0	0
Other long-term debt	0	0
Junior subordinated debentures issued to unconsolidated subsidiary trust	0	0
Interest rate contract-cash flow hedge	0	0
Accrued interest payable	0	0
Total liabilities	915,146	829,632
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	0	0
Securities available for sale	526,257	511,751
Securities held to maturity	498	624
FHLB stock	8,145	8,630
Loans, net of allowance for loan losses	0	0
Interest rate contract-cash flow hedge	599	207
Accrued interest receivable	4,577	5,121
Total assets	540,076	526,333
Deposits	340,662	351,434
Short-term debt	55,600	0
Securities sold under agreement to repurchase	227,996	263,062
Other long-term debt	2,532	23,594
Junior subordinated debentures issued to unconsolidated subsidiary trust	15,741	15,268
Interest rate contract-cash flow hedge	1,825	1,613
Accrued interest payable	249	282
Total liabilities	644,605	655,253
Significant Unobservable Inputs (Level 3) [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	0	0
Securities available for sale	0	0
Securities held to maturity	0	0
FHLB stock	0	0
Loans, net of allowance for loan losses	1,086,800	1,035,131
Interest rate contract-cash flow hedge	0	0
Accrued interest receivable	0	0
Total assets	1,086,800	1,035,131
Deposits	0	0
Short-term debt	0	0
Securities sold under agreement to repurchase	0	0
Other long-term debt	0	0
Junior subordinated debentures issued to unconsolidated subsidiary trust	0	0
Interest rate contract-cash flow hedge	0	0
Accrued interest payable	0	0
Total liabilities	$ 0	$ 0

XML

Consolidated Statements Of Comprehensive Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements Of Comprehensive Income [Abstract]
Unrealized (loss) gain on securities available for sale, tax	$ 564	$ 674	$ 682	$ 1,543
Reclassification adjustments for net securities gain included in net income, tax	9	(322)	(148)	(367)
Change in net unrealized loss on interest rate swaps, tax	19	(113)	63	(110)
Pension liability adjustment, tax	$ 29	$ 25	$ 86	$ 74

XML

Loans And The Allowance For Credit Losses (Summary Of Loans By Credit Quality Indicator) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	$ 1,072,879	$ 1,027,626	$ 1,008,076
Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	5,259	5,806
All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	334	399
Unrated Residential And Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	454,400	423,919
Unrated Residential And Consumer [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	5,259	5,806
Unrated Residential And Consumer [Member] | All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	334	399
Pass [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	553,409	525,312
Pass [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Pass [Member] | All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Pass-Watch [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	38,198	55,059
Pass-Watch [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Pass-Watch [Member] | All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Special Mention [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	5,763	9,361
Special Mention [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Special Mention [Member] | All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Substandard [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	21,109	13,975
Substandard [Member] | Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Substandard [Member] | All Other Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	169,450	146,990	156,043
Commercial, Financial And Agricultural [Member] | Unrated Residential And Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	2
Commercial, Financial And Agricultural [Member] | Pass [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	148,550	117,772
Commercial, Financial And Agricultural [Member] | Pass-Watch [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	17,928	28,326
Commercial, Financial And Agricultural [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	501	170
Commercial, Financial And Agricultural [Member] | Substandard [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	2,471	720
Municipal Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	82,048	101,705	97,015
Municipal Loans [Member] | Unrated Residential And Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Municipal Loans [Member] | Pass [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	82,048	101,705
Municipal Loans [Member] | Pass-Watch [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Municipal Loans [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Municipal Loans [Member] | Substandard [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	477,321		425,620
Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	438,642	401,331
Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	38,679	38,487
Real Estate Loans – Residential [Member] | Unrated Residential And Consumer [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	411,034	379,512
Real Estate Loans – Residential [Member] | Unrated Residential And Consumer [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	36,784	38,020
Real Estate Loans – Residential [Member] | Pass [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	24,690	18,647
Real Estate Loans – Residential [Member] | Pass [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	1,195	146
Real Estate Loans – Residential [Member] | Pass-Watch [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	1,233	1,569
Real Estate Loans – Residential [Member] | Pass-Watch [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Residential [Member] | Special Mention [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	747	641
Real Estate Loans – Residential [Member] | Special Mention [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Residential [Member] | Substandard [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	938	962
Real Estate Loans – Residential [Member] | Substandard [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	700	321
Real Estate Loans – Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	327,182		310,863
Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	217,563	206,256
Real Estate Loans – Commercial [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	109,619	107,659
Real Estate Loans – Commercial [Member] | Unrated Residential And Consumer [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Commercial [Member] | Unrated Residential And Consumer [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Commercial [Member] | Pass [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	190,603	175,878
Real Estate Loans – Commercial [Member] | Pass [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	96,554	95,239
Real Estate Loans – Commercial [Member] | Pass-Watch [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	8,409	14,001
Real Estate Loans – Commercial [Member] | Pass-Watch [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	10,101	8,891
Real Estate Loans – Commercial [Member] | Special Mention [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	3,035	7,355
Real Estate Loans – Commercial [Member] | Special Mention [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	1,480	1,195
Real Estate Loans – Commercial [Member] | Substandard [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	15,516	9,022
Real Estate Loans – Commercial [Member] | Substandard [Member] | Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	1,484	2,334
Real Estate Loans – Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	11,285		12,238
Real Estate Loans – Construction [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	1,960	1,798
Real Estate Loans – Construction [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	9,325	17,195
Real Estate Loans – Construction [Member] | Unrated Residential And Consumer [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	396	99
Real Estate Loans – Construction [Member] | Unrated Residential And Consumer [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	593	81
Real Estate Loans – Construction [Member] | Pass [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	1,564	0
Real Estate Loans – Construction [Member] | Pass [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	8,205	15,925
Real Estate Loans – Construction [Member] | Pass-Watch [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	1,699
Real Estate Loans – Construction [Member] | Pass-Watch [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	527	573
Real Estate Loans – Construction [Member] | Special Mention [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Construction [Member] | Special Mention [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Construction [Member] | Substandard [Member] | Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	0	0
Real Estate Loans – Construction [Member] | Substandard [Member] | Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	$ 0	$ 616

XML

Fair Value Of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Of Financial Instruments [Abstract]

Financial Assets And Liabilities Measured At Fair Value On A Recurring Basis

The table below presents the balance of financial assets and liabilities at September 30, 2012 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	100	$	0	$	100	$	0
U.S. Agency Obligations		54,233		0		54,233		0
FHLB Obligations		4,618		0		4,618		0
Agency MBSs		183,704		0		183,704		0
Agency CMBSs		5,024		0		5,024		0
Agency CMOs		273,419		0		273,419		0
Non-Agency CMOs		4,738		0		4,738		0
ABSs		421		0		421		0
Interest rate swap agreements		599		0		599		0
Total assets	$	526,856	$	0	$	526,856	$	0
Liabilities
Interest rate swap agreements		1,825		0		1,825		0
Total liabilities	$	1,825	$	0	$	1,825	$	0

The table below presents the balance of financial assets and liabilities at December 31, 2011 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	250	$	0	$	250	$	0
U.S. Agency Obligations		90,419		0		90,419		0
FHLB Obligations		16,676		0		16,676		0
Agency MBSs		183,838		0		183,838		0
Agency CMOs		214,480		0		214,480		0
Non-Agency CMOs		4,855		0		4,855		0
ABSs		1,233		0		1,233		0
Interest rate swap agreements		207		0		207		0
Total assets	$	511,958	$	0	$	511,958	$	0
Liabilities
Interest rate swap agreements		1,613		0		1,613		0
Total liabilities	$	1,613	$	0	$	1,613	$	0

Financial Assets Measured At Fair Value On A Nonrecurring Basis

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
OREO	$	0	$	0	$	0	$	0
Impaired loans		2,740		0		0		2,740
Total	$	2,740	$	0	$	0	$	2,740

The table below presents the balance of financial assets at December 31, 2011 measured at fair value on a non-recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
OREO	$	358	$	0	$	0	$	358
Impaired loans		2,511		0		0		2,511
Total	$	2,869	$	0	$	0	$	2,869

Assets Measured At Fair Value Using Significant Unobservable Inputs

(Dollars in thousands)	Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
OREO	$	0	Appraisal of collateral	Appraisal adjustments	0%-40%
Impaired loans		2,740	Appraisal of collateral	Appraisal adjustments	0%-40%

Fair Values Of Financial Instruments

The fair values of our financial instruments as of September 30, 2012 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value			Level 1		Level 2		Level 3
Cash and cash equivalents	$	53,032	$	53,032	$	53,032	$	0	$	0
Securities available for sale		526,257		526,257		0		526,257		0
Securities held to maturity		443		498		0		498		0
FHLB stock		8,145		8,145		0		8,145		0
Loans, net of allowance for loan losses		1,061,435		1,086,800		0		0		1,086,800
Interest rate contract-cash flow hedge		599		599		0		599		0
Accrued interest receivable		4,577		4,577		0		4,577		0
Total assets	$	1,654,488	$	1,679,908	$	53,032	$	540,076	$	1,086,800
Deposits	$	1,252,963	$	1,255,808	$	915,146	$	340,662	$	0
Short-term borrowings		55,600		55,600		0		55,600		0
Securities sold under agreement to repurchase		227,996		227,996		0		227,996		0
Other long-term debt		2,503		2,532		0		2,532		0
Junior subordinated debentures issued to
unconsolidated subsidiary trust		20,619		15,741		0		15,741		0
Interest rate contract-cash flow hedge		1,825		1,825		0		1,825		0
Accrued interest payable		249		249		0		249		0
Total liabilities	$	1,561,755	$	1,559,751	$	915,146	$	644,605	$	0

The fair values of our financial instruments as of December 31, 2011 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value			Level 1		Level 2		Level 3
Cash and cash equivalents	$	37,812	$	37,812	$	37,812	$	0	$	0
Securities available for sale		511,751		511,751		0		511,751		0
Securities held to maturity		558		624		0		624		0
FHLB stock		8,630		8,630		0		8,630		0
Loans, net of allowance for loan losses		1,017,007		1,035,131		0		0		1,035,131
Interest rate contract-cash flow hedge		207		207		0		207		0
Accrued interest receivable		5,121		5,121		0		5,121		0
Total assets	$	1,581,086	$	1,599,276	$	37,812	$	526,333	$	1,035,131
Deposits	$	1,177,880	$	1,181,066	$	829,632	$	351,434	$	0
Short-term borrowings		0		0		0		0		0
Securities sold under agreement to repurchase		262,527		263,062		0		263,062		0
Other long-term debt		22,562		23,594		0		23,594		0
Junior subordinated debentures issued to
unconsolidated subsidiary trust		20,619		15,268		0		15,268		0
Interest rate contract-cash flow hedge		1,613		1,613		0		1,613		0
Accrued interest payable		282		282		0		282		0
Total liabilities	$	1,485,483	$	1,484,885	$	829,632	$	655,253	$	0

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Pension (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Pension [Abstract]
Final average pay plan, years	5 years
Number of years that produce highest average salary under final average pay plan	10 years
Contribution to the plan	$ 288

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Investment Securities (Summary Of Amortized Cost And Fair Values Of Securities Classified As Available For Sale And Held To Maturity) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	$ 514,396	$ 501,415
Available for Sale, Gross Unrealized Gains	12,145	11,101
Available for Sale, Gross Unrealized Losses	284	765
Available for Sale, Fair Value	526,257	511,751
Held-to-maturity Securities, Amortized Cost	443	558
Held to Maturity, Gross Unrealized Gains	55	66
Held to Maturity, Gross Unrealized Losses	0	0
Held-to-maturity Securities, Fair Value	498	624
U.S. Treasury Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	100	250
Available for Sale, Gross Unrealized Gains	0	0
Available for Sale, Gross Unrealized Losses	0	0
Available for Sale, Fair Value	100	250
U.S. Agency Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	53,392	89,597
Available for Sale, Gross Unrealized Gains	841	828
Available for Sale, Gross Unrealized Losses	0	6
Available for Sale, Fair Value	54,233	90,419
FHLB Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	4,563	16,545
Available for Sale, Gross Unrealized Gains	55	134
Available for Sale, Gross Unrealized Losses	0	3
Available for Sale, Fair Value	4,618	16,676
Agency MBSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	175,353	176,756
Available for Sale, Gross Unrealized Gains	8,351	7,100
Available for Sale, Gross Unrealized Losses	0	18
Available for Sale, Fair Value	183,704	183,838
Held-to-maturity Securities, Amortized Cost	443	558
Held to Maturity, Gross Unrealized Gains	55	66
Held to Maturity, Gross Unrealized Losses	0	0
Held-to-maturity Securities, Fair Value	498	624
Agency CMBSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	5,090
Available for Sale, Gross Unrealized Gains	0
Available for Sale, Gross Unrealized Losses	66
Available for Sale, Fair Value	5,024
Agency CMOs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	270,792	211,749
Available for Sale, Gross Unrealized Gains	2,825	2,976
Available for Sale, Gross Unrealized Losses	198	245
Available for Sale, Fair Value	273,419	214,480
Non-Agency CMOs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	4,749	5,346
Available for Sale, Gross Unrealized Gains	9	2
Available for Sale, Gross Unrealized Losses	20	493
Available for Sale, Fair Value	4,738	4,855
ABSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for Sale, Amortized Cost	357	1,172
Available for Sale, Gross Unrealized Gains	64	61
Available for Sale, Gross Unrealized Losses	0	0
Available for Sale, Fair Value	$ 421	$ 1,233

XML

Consolidated Statements Of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 11,354	$ 10,911
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	700	500
Depreciation and amortization	1,464	1,396
Amortization of investment security premiums and accretion of discounts, net	1,794	3,185
Stock option expense	127	128
Net gains on sales of investment securities	(422)	(1,047)
Net gains on sale of loans	0	(28)
Net (gains) losses on sale of premises, equipment and other assets	(1,083)	16
Gains on sale of other real estate owned	(7)	(33)
Equity in losses of real estate limited partnerships, net	1,189	1,324
Changes in assets and liabilities:
Increase in interest receivable	545	274
Increase in other assets	(870)	(2,794)
Increase (decrease) in interest payable	2,345	(91)
(Decrease) increase in other liabilities	(12,440)	9,636
Net cash provided by operating activities	4,696	23,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale	64,336	132,025
Proceeds from maturities of investment securities available for sale	146,762	146,328
Proceeds from maturities of investment securities held to maturity	115	192
Proceeds from redemption of Federal Home Loan Bank stock	485	0
Purchases of investment securities available for sale	(225,450)	(229,110)
Loan originations in excess of principal payments	(45,366)	(97,839)
Proceeds from sales of loans, net	0	80
Proceeds from sale of other assets	334	0
Proceeds from sale of premises and equipment	788	51
Proceeds from sales of other real estate owned	505	224
Real estate limited partnership investments	(1,299)	(1,310)
Purchases of bank premises and equipment	(2,522)	(1,173)
Net cash used in investing activities	(61,312)	(50,532)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	75,083	73,363
Net increase in short-term borrowings	55,600	49
Net decrease in securities sold under agreement to repurchase, short term	(34,531)	(9,855)
Principal payments on long-term debt	(20,059)	(8,558)
Cash dividends paid	(4,730)	(4,652)
Sale of treasury stock	15	12
Increase in deferred compensation arrangements	160	153
Proceeds from exercise of stock options, net of withholding taxes	278	0
Tax benefit from exercise of stock options	20	0
Net cash provided by financing activities	71,836	50,512
Increase in cash and cash equivalents	15,220	23,357
Cash and cash equivalents beginning of period	37,812	74,026
Cash and cash equivalents end of period	53,032	97,383
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total interest payments	3,110	6,730
Total income tax payments	4,350	850
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Distribution of stock under deferred compensation arrangements	391	432
Distribution of treasury stock in lieu of cash dividend	518	517
Transfer of loans to other real estate owned	140	340
(Decrease) increase in payable for investments purchased	$ (9,461)	$ 10,056

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Securities held to maturity, fair value	$ 498	$ 624
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	6,651,760	6,651,760
Common stock, shares outstanding	5,955,111	5,907,080
Treasury stock, shares	696,649	744,680
Preferred Class A Non-Voting [Member]
Preferred stock, shares authorized	200,000	200,000
Preferred Class B Voting [Member]
Preferred stock, shares outstanding	1,500,000	1,500,000

XML

Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 10: Derivative Financial Instruments

At September 30, 2012, we held interest rate swaps with a combined notional amount of $20 million that were designated as cash flow hedges. The swaps were used to convert the floating rate interest on our trust preferred issuance to a fixed rate of interest.  The purpose of the hedge was to protect us from the risk of variability arising from the floating rate interest on the debentures.  The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and reclassified to earnings if gains or losses are realized.  Each quarter, we assess the effectiveness of the hedging relationships by comparing the changes in cash flows of the derivative hedging instruments with the changes in cash flows of the designated hedged item.  The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings.  There was no ineffective portion recognized in earnings during the third quarter of 2012 or 2011.  The fair values of the effective portion of the hedges of $(1.23) million and $(1.41) million were reflected in Other Comprehensive Income in the accompanying Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, respectively.

At September 30, 2012, we had two interest rate derivative positions, with a combined notional amount of $28.88 million that were not designated as hedging instruments.  These derivative positions related to a transaction in which we entered into an interest rate swap with a customer while at the same time entering into an offsetting rate swap with another financial institution.  In connection with the transaction, we agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate.  At the same time, we agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.  The transaction allows our customers to effectively convert a variable-rate loan to a fixed-rate loan.  Because the terms of the swap with our customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.  The fair value of $599 thousand and $206 thousand at September 30, 2012 and December 31, 2011, respectively, was reflected in other assets and other liabilities in the accompanying Consolidated Balance Sheets. We assessed our counterparty risk at September 30, 2012 and determined any credit risk inherent in our derivative contracts was insignificant. Information about the fair value of derivative financial instruments can be found in Footnote 9 to these Consolidated Financial Statements. 

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Document And Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Entity Registrant Name	MERCHANTS BANCSHARES INC
Trading Symbol	mbvt
Entity Central Index Key	0000726517
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		6,276,372

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Summary Of Amortized Cost And Fair Values Of Securitiies Classified As Available For Sale And Held To Maturity

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	100	$	0	$	0	$	100
U.S. Agency Obligations		53,392		841		0		54,233
Federal Home Loan Bank ("FHLB") Obligations		4,563		55		0		4,618
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		175,353		8,351		0		183,704
Collateralized Mortgage Backed Securities ("Agency CMBSs")		5,090		0		66		5,024
Agency Collateralized Mortgage Obligations ("Agency CMOs")		270,792		2,825		198		273,419
Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")		4,749		9		20		4,738
Asset Backed Securities ("ABSs")		357		64		0		421
Total Available for Sale	$	514,396	$	12,145	$	284	$	526,257
Held to Maturity:
Agency MBSs	$	443	$	55	$	0	$	498
Total Held to Maturity	$	443	$	55	$	0	$	498

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2011 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		89,597		828		6		90,419
FHLB Obligations		16,545		134		3		16,676
Agency MBSs		176,756		7,100		18		183,838
Agency CMOs		211,749		2,976		245		214,480
Non-agency CMOs		5,346		2		493		4,855
ABSs		1,172		61		0		1,233
Total Available for Sale	$	501,415	$	11,101	$	765	$	511,751
Held to Maturity:
Agency MBSs	$	558	$	66	$	0	$	624
Total Held to Maturity	$	558	$	66	$	0	$	624

Summary Of Contractual Maturity Distribution Of Debt Securities Classified As Available For Sale And Held To Maturity

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	0	$	100	$	0	$	0	$	100
U.S. Agency Obligations		0		10,056		44,177		0		54,233
FHLB Obligations		0		0		4,618		0		4,618
Agency MBSs		398		3,573		28,335		151,398		183,704
Agency CMBs		0		0		5,024		0		5,024
Agency CMOs		0		11		5,752		267,656		273,419
Non-agency CMOs		0		0		0		4,738		4,738
ABSs		0		0		0		421		421
Total Available for Sale	$	398	$	13,740	$	87,906	$	424,213	$	526,257
Held to Maturity (at amortized cost):
Agency MBSs	$	16	$	84	$	0	$	343	$	443
Total Held to Maturity	$	16	$	84	$	0	$	343	$	443

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of December 31, 2011, are as follows:

			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	250	$	0	$	0	$	0	$	250
U.S. Agency Obligations		3,023		12,567		69,823		5,006		90,419
FHLB Obligations		3,389		0		13,287		0		16,676
Agency MBSs		20		6,118		32,897		144,803		183,838
Agency CMOs		0		0		3,056		211,424		214,480
Non-agency CMOs		0		0		50		4,805		4,855
ABSs		0		0		0		1,233		1,233
Total Available for Sale	$	6,682	$	18,685	$	119,113	$	367,271	$	511,751
Held to Maturity (at amortized cost):
Agency MBSs	$	0	$	158	$	0	$	400	$	558
Total Held to Maturity	$	0	$	158	$	0	$	400	$	558

Summary Of Gross Unrealized Losses On Investment Securities Available For Sale

	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss			Fair Value	Loss
As of September 30, 2012
Agency CMBSs	$	5,024	$	66	$	0	$	0	$	5,024	$	66
Agency CMOs		34,511		198		0		0		34,511		198
Non-agency CMOs		0		0		3,126		20		3,126		20
	$	39,535	$	264	$	3,126	$	20	$	42,661	$	284

	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of December 31, 2011
U.S. Agency Obligations	$	2,536	$	6	$	0	$	0	$	2,536	$	6
FHLB Obligations		5,047		3		0		0		5,047		3
Agency MBSs		10,452		18		0		0		10,452		18
Agency CMOs		43,708		205		2,861		40		46,569		245
Non-agency CMOs		0		0		4,805		493		4,805		493
	$	61,743	$	232	$	7,666	$	533	$	69,409	$	765

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Consolidated Statements Of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 11,278	$ 11,641	$ 33,860	$ 33,830
Investment income:
Interest and dividends on investment securities	2,942	3,187	9,005	9,717
Interest on interest earning deposits with banks and other short-term investments	9	37	29	81
Total interest and dividend income	14,229	14,865	42,894	43,628
INTEREST EXPENSE
Savings, interest bearing checking and money market accounts	176	298	603	914
Time deposits $100 thousand and greater	271	288	852	896
Other time deposits	413	525	1,293	1,634
Securities sold under agreement to repurchase and other short-term debt	341	518	1,454	1,682
Long-term debt	364	492	1,253	1,513
Total interest expense	1,565	2,121	5,455	6,639
Net interest income	12,664	12,744	37,439	36,989
Provision for credit losses	250	250	700	500
Net interest income after provision for credit losses	12,414	12,494	36,739	36,489
NONINTEREST INCOME
Changes in fair value on impaired securities	0	(10)	0	(20)
Non-credit related (gain) losses on securities not expected to be sold (recognized in other comprehensive income)	0	10	0	20
Net impairment losses	0	0	0	0
Net (losses) gains on investment securities	(26)	920	422	1,047
Trust division income	670	639	2,000	1,894
Service charges on deposits	1,033	1,161	3,001	3,195
Equity in losses of real estate limited partnerships	(370)	(441)	(1,189)	(1,324)
Gain on sale of other assets	749	0	1,083	0
Other	1,143	1,133	3,406	3,253
Total noninterest income	3,199	3,412	8,723	8,065
NONINTEREST EXPENSE
Compensation and benefits	4,809	5,251	14,756	15,544
Occupancy expense	946	935	2,843	2,927
Equipment expense	891	848	2,684	2,450
Legal and professional fees	677	721	1,954	2,098
Marketing	360	475	1,264	1,259
State franchise taxes	321	321	965	951
FDIC Insurance	217	194	644	740
Prepayment penalty	677	861	1,363	861
Other Real Estate Owned ("OREO") expenses	65	47	129	128
Other	1,486	1,392	4,595	4,404
Total noninterest expenses	10,449	11,045	31,197	31,362
Income before provision for income taxes	5,164	4,861	14,265	13,192
Provision for income taxes	1,159	680	2,911	2,281
NET INCOME	$ 4,005	$ 4,181	$ 11,354	$ 10,911
Basic earnings per common share	$ 0.64	$ 0.67	$ 1.82	$ 1.76
Diluted earnings per common share	$ 0.64	$ 0.67	$ 1.81	$ 1.76

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Pension

9 Months Ended

Sep. 30, 2012

Pension [Abstract]

Pension

Note 5: Pension

We formerly had a noncontributory defined benefit pension plan (the “Plan”) covering all eligible employees. The Plan was a final average pay plan with benefits based on the average salary rates using the five consecutive Plan years of the last ten years that produce the highest average salary. The Plan was curtailed in 1995; all accrued benefits were fully vested and no additional years of service or age will be accrued.

The following table summarizes the components of net periodic benefit costs for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2012		2011		2012		2011
Interest cost	$	119	$	122	$	358	$	366
Service cost		12		14		36		42
Expected return on Plan assets		(150)		(156)		(450)		(468)
Amortization of net loss		82		70		245		210
Net periodic benefit cost	$	63	$	50	$	189	$	150

Our minimum required contribution to the Plan for 2012 is $288 thousand. We intend to make a contribution to the Plan of at least that amount during the fourth quarter of 2012.

Our Pension Plan Investment Policy Statement sets forth the investment objectives and constraints of the Plan.  The purpose of the policy is to assist our Retirement Plan Committee in effectively supervising, monitoring and evaluating the investments of the Plan.

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Loans And The Allowance For Credit Losses

9 Months Ended

Sep. 30, 2012

Loans And The Allowance For Credit Losses [Abstract]

Loans And The Allowance For Credit Losses

Note 4: Loans and the Allowance for Credit Losses

Loans

We primarily originate residential real estate, commercial, commercial real estate, municipal obligations and installment loans to customers throughout the state of Vermont. There are no significant industry concentrations in the loan portfolio. Loans totaled $1.07 billion at September 30, 2012 and $1.03 billion at December 31, 2011.  At September 30, 2012 and December 31, 2011, total loans included $(192) thousand and $11 thousand, respectively, of net deferred loan origination fees (costs). The aggregate amount of overdrawn deposit balances classified as loan balances was $334 thousand and $399 thousand at September 30, 2012 and December 31, 2011, respectively.

Allowance for Credit Losses

We have divided the loan portfolio into portfolio segments, each with different risk characteristics and methodologies for assessing risk.  Each portfolio segment is broken down into class segments where appropriate.  Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan and lease losses.  Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class segment.  A description of the segments follows:

Commercial, financial and agricultural: We offer a variety of loan options to meet the specific needs of commercial customers including term loans and lines of credit.  Such loans are made available to businesses to finance inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment, receivables, inventory or other assets owned by the borrower.  These loans require different monitoring than commercial real estate loans because of the nature of the underlying collateral, and the fact that collateral values may change daily.  Management generally employs enhanced monitoring requirements, obtains personal guarantees and, where appropriate, may also attempt to secure real estate as collateral.

Municipal: Municipal loans consist of short and long term loans issued on a taxable and tax-exempt basis which are general obligations of the municipality. These loans are generally viewed as lower risk as municipalities have taxing power to meet their financial obligations.  Included in municipal loans are longer term loans under the federal Qualified School Construction Bond program. Proceeds are used for the construction, rehabilitation or repair of public school properties and we receive a federal tax credit in lieu of interest income on these loans.

Real Estate – Residential: Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences.  We originate adjustable-rate and fixed-rate, one- to four-family residential real estate loans for the construction, purchase or refinancing of a mortgage.  These loans are collateralized by owner-occupied properties located in our market area.  Loans on one- to four-family residential real estate are generally originated in amounts of no more than 80 percent of the purchase price or appraised value (whichever is lower).  Mortgage title insurance and hazard insurance are required.

Real Estate – Commercial: We offer commercial real estate loans to finance real estate purchases and refinancing of existing commercial properties.   These commercial real estate loans are secured by first liens on the real estate, which may include both owner occupied and non owner occupied facilities.  The types of facilities financed include apartments, hotels, warehouses, retail facilities, manufacturing facilities and office buildings.

Real Estate – Construction: We offer construction loans for the construction, expansion and improvement of residential and commercial properties which are secured by the real estate being developed. A review of all plans and budgets is performed prior to approval, third party progress documents are usually required during construction, and an independent approval process for all draw and release requests is maintained  to ensure that funding is prudently administered and that funds are sufficient to complete the project.

Installment - We offer traditional direct consumer installment loans for various personal needs, including vehicle financing. The vast majority of these loans are secured by a lien on the purchased vehicle and are underwritten using credit scores and income verification. We do not provide any indirect consumer lending activities.

For purposes of evaluating the adequacy of the allowance for credit losses, we consider a number of significant factors that affect the collectability of the portfolio. For individually evaluated loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans and leases, estimates of our exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability.  These factors include:  past loss experience; size, trend, composition, and nature of loans; changes in lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries; trends experienced in nonperforming and delinquent loans; current economic conditions in our market; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability, and depth of lending management and staff. Qualitative factors used in the evaluation of the adequacy of the allowance are reviewed and updated on a quarterly basis, these factors directly impact the allocation of the allowance. Past loss experience is based on net loan losses as a percentage of portfolio balances, using a five year weighted average.  An external loan review firm and various regulatory agencies periodically review our allowance for credit losses.  

After a thorough consideration of the factors discussed above, any required additions to the allowance for credit losses are made periodically by charges to the provision for credit losses. These charges are necessary to maintain the allowance for credit losses at a level which Management believes is reasonable for the overall inherent risk of probable loss in the portfolio. While Management uses available information to recognize losses on loans, additions may fluctuate from one reporting period to another.  These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in Management’s assessment of any or all of the determining factors discussed above. 

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2012:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,102	$	410	$	3,476	$	4,557	$	233	$	21	$	18	$	11,817
Charge-offs		0		0		0		0		0		0		0		0
Recoveries		3		0		1		1		8		0		0		13
Provision (credit)		136		31		85		3		(10)		(2)		7		250
Ending balance	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2012, and our loan portfolio as of September 30, 2012:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	2,905	$	309	$	3,138	$	4,484	$	477	$	23	$	17	$	11,353
Charge-offs		(9)		0		(20)		0		0		0		0		(29)
Recoveries		21		0		13		1		21		0		0		56
Provision (credit)		324		132		431		76		(267)		(4)		8		700
Ending balance	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080
Ending balance individually
evaluated for impairment	$	4	$	0	$	270	$	60	$	0	$	0	$	0	$	334
Ending balance collectively
evaluated for impairment		3,237		441		3,292		4,501		231		19		25		11,746
Totals	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080
Financing receivables:
Ending balance individually
evaluated for impairment	$	20	$	0	$	2,132	$	581	$	0	$	7	$	0	$	2,740
Ending balance collectively
evaluated for impairment		169,430		82,048		475,189		326,601		11,285		5,252		334		1,070,139
Totals	$	169,450	$	82,048	$	477,321	$	327,182	$	11,285	$	5,259	$	334	$	1,072,879
Components:
Allowance for loan losses	$	2,795	$	435	$	3,472	$	4,502	$	196	$	19	$	25	$	11,444
Reserve for undisbursed
lines of credit		446		6		90		59		35		0		0		636
Total allowance for credit
losses	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2011:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,122	$	115	$	2,563	$	4,856	$	193	$	25	$	27	$	10,901
Charge-offs		(2)		0		(14)		0		(85)		(2)		0		(103)
Recoveries		32		0		2		0		7		0		0		41
Provision (credit)		(274)		182		678		(507)		175		0		(4)		250
Ending balance	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2011, and our loan portfolio as of September 30, 2011:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	2,617	$	236	$	2,428	$	5,143	$	283	$	24	$	23	$	10,754
Charge-offs		(79)		0		(63)		(60)		(96)		(10)		0		(308)
Recoveries		76		0		3		43		18		3		0		143
Provision (credit)		264		61		861		(777)		85		6		0		500
Ending balance	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089
Ending balance individually
evaluated for impairment	$	39	$	0	$	215	$	0	$	0	$	0	$	0	$	254
Ending balance collectively
evaluated for impairment		2,839		297		3,014		4,349		290		23		23		10,835
Totals	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089
Financing receivables:
Ending balance individually
evaluated for impairment	$	223	$	0	$	2,380	$	588	$	0	$	1	$	0	$	3,192
Ending balance collectively
evaluated for impairment		155,820		97,015		423,240		310,275		12,238		5,857		439		1,004,884
Totals	$	156,043	$	97,015	$	425,620	$	310,863	$	12,238	$	5,858	$	439	$	1,008,076
Components:
Allowance for loan losses	$	2,448	$	295	$	3,131	$	4,306	$	254	$	23	$	23	$	10,480
Reserve for undisbursed
lines of credit		430		2		98		43		36		0		0		609
Total allowance for credit
losses	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089

Presented below is an aging of past due loans, including both non-accrual and restructured loans, by class as of September 30, 2012:

	30-59 Days		60-89 Days		Over 90 Days		Total Past						Greater Than 90 Days and
(In thousands)	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	0	$	150	$	9	$	159	$	169,291	$	169,450	$	0
Municipal		0		0		0		0		82,048		82,048		0
Real estate-residential:
First mortgage		1		64		887		952		437,690		438,642		0
Second mortgage		8		0		726		734		37,945		38,679		0
Real estate-commercial:
Owner occupied		0		0		401		401		217,162		217,563		0
Non-owner occupied		0		0		0		0		109,619		109,619		0
Real estate-construction:
Residential		0		0		0		0		1,960		1,960		0
Commercial		0		0		0		0		9,325		9,325		0
Installment		0		0		7		7		5,252		5,259		0
Other		0		0		0		0		334		334		0
Total	$	9	$	214	$	2,030	$	2,253	$	1,070,626	$	1,072,879	$	0

Non-accruing and restructured loans make up $2.10 million of the total past due loans in the aging table above.

Presented below is an aging of past due loans, including both non-accrual and restructured loans, by class as of December 31, 2011:

	30-59 Days		60-89 Days		Over 90 Days		Total Past						Greater Than 90 Days and
	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	0	$	40	$	8	$	48	$	146,942	$	146,990	$	0
Municipal		0		0		0		0		101,705		101,705		0
Real estate-residential:
First mortgage		39		305		731		1,075		400,256		401,331		0
Second mortgage		0		0		281		281		38,206		38,487		0
Real estate-commercial:
Owner occupied		0		325		87		412		205,844		206,256		0
Non-owner occupied		0		0		0		0		107,659		107,659		0
Real estate-construction:
Residential		0		0		0		0		1,798		1,798		0
Commercial		0		0		0		0		17,195		17,195		0
Installment		0		0		0		0		5,806		5,806		0
Other		0		0		0		0		399		399		0
Total	$	39	$	670	$	1,107	$	1,816	$	1,025,810	$	1,027,626	$	0

Non-accruing and restructured loans make up $1.60 million of the total past due loans in the aging table above.

Impaired loans by class at September 30, 2012 were as follows:

(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial, financial and agricultural	$	11	$	934	$	0
Real estate – residential:
First mortgage		788		1,084		0
Second mortgage		5		40		0
Real estate – commercial:
Owner occupied		324		485		0
Non-owner occupied		0		70		0
Installment		7		52		0
With related allowance recorded
Commercial, financial and agricultural		9		9		4
Real estate – residential:
First mortgage		618		635		232
Second mortgage		721		721		38
Real estate – commercial:
Owner occupied		257		257		60
Total
Commercial, financial and agricultural		20		943		4
Real estate – residential		2,132		2,480		270
Real estate – commercial		581		812		60
Installment and other		7		52		0
Total	$	2,740	$	4,287	$	334

Impaired loans by class at September 30, 2011 were as follows:

(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial, financial and agricultural	$	168	$	1,185	$	0
Real estate – residential:
First mortgage		1,164		1,438		0
Second mortgage		178		178		0
Real estate – commercial:
Owner occupied		588		588		0
Non-owner occupied		0		70		0
Real estate – construction:
Commercial		0		94		0
Installment		1		22		0
With related allowance recorded
Commercial, financial and agricultural		55		55		39
Real estate – residential:
First mortgage		979		979		212
Second mortgage		59		59		3
Real estate – commercial:
Non-owner occupied		0		0		0
Total
Commercial, financial and agricultural		223		1,240		39
Real estate – residential		2,380		2,654		215
Real estate – commercial		588		658		0
Real estate – construction		0		94		0
Installment and other		1		22		0
Total	$	3,192	$	4,668	$	254

The average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 were as follows:

	Three months				Nine months
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	24	$	0	$	49	$	1
Real estate – residential:
First mortgage		888		27		818		47
Second mortgage		331		7		325		34
Real estate – commercial:
Owner occupied		350		2		405		5
Non-owner occupied		0		0		0		0
Installment		2		0		1		0
With related allowance recorded
Commercial, financial and agricultural		13		0		23		0
Real estate – residential:
First mortgage		580		0		662		0
Second mortgage		481		0		194		0
Real estate – commercial:
Owner occupied		231		0		113		0
Total
Commercial, financial and agricultural		37		0		72		1
Real estate – residential		2,280		34		1,999		81
Real estate – commercial		581		2		518		5
Installment and other		2		0		1		0
Total	$	2,900	$	36	$	2,590	$	87

The average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011 were as follows:

	Three months				Nine months
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	138	$	0	$	170	$	0
Real estate – residential:
First mortgage		1,412		3		1,257		9
Second mortgage		221		0		369		1
Real estate – commercial:
Owner occupied		510		0		486		0
Non-owner occupied		120		0		86		0
Real estate – construction:
Commercial		105		0		142		0
Installment		1		0		3		0
With related allowance recorded
Commercial, financial and agricultural		138		0		306		0
Real estate – residential:
First mortgage		997		0		751		0
Second mortgage		59		0		26		0
Real estate – commercial:
Non-owner occupied		0		0		61		0
Total
Commercial, financial and agricultural		276		0		476		0
Real estate – residential		2,689		3		2,403		10
Real estate – commercial		630		0		633		0
Real estate – construction		105		0		142		0
Installment and other		1		0		3		0
Total	$	3,701	$	3	$	3,657	$	10

Impaired loans at September 30, 2012 consisted predominantly of residential real estate loans. Impaired loans totaled $2.74 million and $2.51 million at September 30, 2012 and December 31, 2011, respectively.  At September 30, 2012, $1.60 million of the impaired loans had a specific reserve allocation of $334 thousand, and $1.14 million of the impaired loans had no specific reserve allocation. At December 31, 2011, $885 thousand of the impaired loans had a specific reserve allocation of $227 thousand, and $1.63 million of the impaired loans had no specific reserve allocation.

We recorded interest income on impaired loans of approximately $36 thousand and $87 thousand during the three and nine months ended September 30, 2012, respectively. No interest income was recorded on a cash basis during the period the loan was impaired.  We recorded interest income on impaired loans of approximately $3 thousand and $10 thousand during the three and nine months ended September 30, 2011, respectively. No interestincome was recorded on a cash basis during the period the loan was impaired. The average balance of impaired loans was $2.59 million and $3.66 million during the first nine months of 2012 and the first nine months of 2011, respectively.

Nonperforming loans at September 30, 2012 and December 31, 2011 were as follows:

(In thousands)	September 30, 2012		December 31, 2011
Nonaccrual  loans	$	2,180	$	1,953
Loans greater than 90 days and accruing		0		0
Troubled debt restructured loans (“TDRs”)		560		558
Total nonperforming loans	$	2,740	$	2,511

Of the total TDRs in the table above, $372  thousand at September 30, 2012 and $224 thousand at December 31, 2011 were non-accruing.  The remaining TDRs were accruing.

The loans in the table below are considered impaired under the guidance in ASC 310-10-35.  Included in the total TDRs of $560 thousand at September 30, 2012 are $290 thousand of TDRs that were restructured prior to January 1, 2012. TDRs have been individually evaluated for impairment. There were no TDRs for which the allowance for credit losses was measured under a general allowance for credit losses methodology.

Presented below is a summary of our restructurings during the three months and nine months ended September 30, 2012:

	Three months ended					Nine months ended
	Number	Pre-Modification Recorded		Post-Modification Recorded		Number	Pre-Modification Recorded		Post-Modification Recorded
(Dollars in thousands)	of Loans	Investment		Investment		of Loans	Investment		Investment
Real estate – residential:
First mortgage	0	$	0	$	0	3	$	90	$	90
Real estate - commercial:
Owner occupied	0	$	0	$	0	1	$	180	$	180

Loans in the above table were classified as TDRs because the borrowers experienced financial difficulties and the bank granted concessions in loan terms. As of September 30, 2012, five loans classified as TDR totaling $372 thousand were in nonaccrual and the remaining loans were accruing. At September 30, 2012 TDRs consisted of  eight residential real estate loans and one commercial real estate loan.  All nine borrowers experienced financial difficulties that led to the restructure of their respective loans. At the time of restructure, seven were in payment default and all nine demonstrated cash flow insufficient to service their debt as well as an inability to obtain funds at market rates from other sources.  At September 30, 2012, seven of the restructured loans were performing in accordance with modified agreements, while two residential loans totaling $70 thousand were in default. These two loans were also in non-accrual status.  No TDRs paid off during the third quarter of 2012.

Presented below is a summary of our restructurings during the three months and nine months ended September 30, 2011:

	Three months ended					Nine months ended
	Number	Pre-Modification Recorded		Post-Modification Recorded		Number	Pre-Modification Recorded		Post-Modification Recorded
(Dollars in thousands)	of Loans	Investment		Investment		of Loans	Investment		Investment
Real estate – residential:
First mortgage	1	$	105	$	104	2	$	158	$	156

There was one loan restructured during the three months ended September 30, 2011.  TDRs at September 30, 2011, consisted of three residential real estate loans.One of the loans was restructured with longer terms at market rates and two were restructured with rate concessions; all were performing in accordance with modified agreements with the borrowers at September 30, 2011.  At September 30, 2011 there were no defaults on TDRs.

There were no commitments to lend additional funds to borrowers whose loans were modified in a troubled debt restructuring at September 30, 2012 or at September 30, 2011.  We had no commitments to lend additional funds to borrowers whose loans were in non-accrual status or to borrowers whose loans were 90 days past due and still accruing at September 30, 2012 or at September 30, 2011. 

We recorded interest income on restructured loans of $4 thousand and $26 thousand for the three and nine months ended September 30, 2012, respectively, and $3 thousand and $7 thousand for the three and nine months ended September 30, 2011, respectively.

Our OREO balance was $0 at September 30, 2012, compared with $358 thousand at December 31, 2011 consisting of three properties plus equipment. Two properties and the equipment were sold during the third quarter of 2012. Our OREO balance was $340 at September 30, 2011.

Non-accrual loans by class as of September 30, 2012 and December 31, 2011 were as follows:

(In thousands)	September 30, 2012		December 31, 2011
Commercial, financial and agricultural	$	20	$	114
Real estate - residential:
First mortgage		1,026		1,146
Second mortgage		726		281
Real estate - commercial:
Owner occupied		401		412
Installment		7		0
Nonaccruing non-TDR loans	$	2,180	$	1,953
Nonaccruing TDR’s
Real estate – residential:
First mortgage		372		224
Total nonaccrual loans	$	2,552	$	2,177

Commercial Grading System

We use risk rating definitions for our commercial loan portfolios and certain residential loans which are generally consistent with regulatory and banking industry norms. Loans are assigned a credit quality grade which is based upon management’s on-going assessment of risk based upon an evaluation of the quantitative and qualitative aspects of each credit. This assessment is a dynamic process and risk ratings are adjusted as each borrower’s financial situation changes. This process is designed to provide timely recognition of a borrower’s financial condition and appropriately focus management resources.

Pass rated loans exhibit acceptable risk to the bank in terms of financial capacity to repay their loans as well as possessing acceptable alternative repayment sources, typically collateral and personal guarantees. These loans are subject to a formal annual review process; additionally, Management reviews the risk rating at the time of any late payments, overdrafts or other sign of deterioration in the interim.

Loans rated Pass-Watch require more than usual attention and monitoring by the account officer, though not to the extent that a formal remediation plan is warranted. Borrowers can be rated Pass-Watch based upon a weakened capital structure, adequate but low cash flow and/or collateral coverage or early-stage declining trends in operations or financial condition.

Loans rated Special Mention possess potential weakness that may expose the bank to some risk of loss in the future. These loans require more frequent monitoring and formal reporting to Management.

Substandard loans reflect well-defined weaknesses in the current repayment capacity, collateral or net worth of the borrower with the possibility of some loss to the Bank if these weaknesses are not corrected. Action plans are required for these loans to address the inherent weakness in the credit and are formally reviewed.

Below is a summary of loans by credit quality indicator as of September 30, 2012:

	Unrated Residential and				Pass-		Special		Sub-
(In thousands)	Consumer		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	0		148,550		17,928		501		2,471	$	169,450
Municipal		0		82,048		0		0		0		82,048
Real estate – residential:
First mortgage		411,034		24,690		1,233		747		938		438,642
Second mortgage		36,784		1,195		0		0		700		38,679
Real estate – commercial:
Owner occupied		0		190,603		8,409		3,035		15,516		217,563
Non-owner occupied		0		96,554		10,101		1,480		1,484		109,619
Real estate – construction:
Residential		396		1,564		0		0		0		1,960
Commercial		593		8,205		527		0		0		9,325
Installment		5,259		0		0		0		0		5,259
All other loans		334		0		0		0		0		334
Total	$	454,400	$	553,409	$	38,198	$	5,763	$	21,109	$	1,072,879

Below is a summary of loans by credit quality indicator as of December 31, 2011:

	Unrated Residential and				Pass-		Special		Sub-
(In thousands)	Consumer		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	2	$	117,772	$	28,326	$	170	$	720	$	146,990
Municipal		0		101,705		0		0		0		101,705
Real estate – residential:
First mortgage		379,512		18,647		1,569		641		962		401,331
Second mortgage		38,020		146		0		0		321		38,487
Real estate – commercial:
Owner occupied		0		175,878		14,001		7,355		9,022		206,256
Non-owner occupied		0		95,239		8,891		1,195		2,334		107,659
Real estate – construction:
Residential		99		0		1,699		0		0		1,798
Commercial		81		15,925		573		0		616		17,195
Installment		5,806		0		0		0		0		5,806
All other loans		399		0		0		0		0		399
Total	$	423,919	$	525,312	$	55,059	$	9,361	$	13,975	$	1,027,626

The amount of interest which was not earned, but which would have been earned had our non-accrual and restructured loans performed in accordance with their original terms and conditions, was approximately $38 thousand and $107 thousand for the three and nine months ended September 30, 2012, and was approximately $49 thousand and $157 thousand for the three and nine months ended September 2011, respectively.

It is our policy to make loans to directors, executive officers, and associates of such persons on substantially the same terms, including interest rates and collateral, as those prevailing for comparable lending transactions with other persons.

XML

Investment Securities (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Proceeds from sales of available for sale debt securities	$ 22,670,000	$ 54,990,000	$ 64,340,000	$ 132,020,000
Available-for-sale securities, gross realized gains	36,000	970,000	530,000	1,190,000
Available-for-sale securities, gross realized losses	62,000	50,000	108,000	141,000
Investment in FHLBB stock					8,630,000
Investment in FHLBB stock, period decrease			485,000	0
Dividend income on investment in federal home loan bank stock	11,000	6,000	36,000	19,000
Non-Agency CMO Portfolio [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of investment securities			2
Cost basis	4,750,000		4,750,000
Non-Agency CMO Portfolio [Member] | Bond 1 [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost basis	3,150,000		3,150,000
Bond, fair value	3,130,000		3,130,000
Non-Agency CMO Portfolio [Member] | Bond 2 [Member]
Schedule of Available-for-sale Securities [Line Items]
Cost basis	1,600,000		1,600,000
Bond, fair value	$ 1,610,000		$ 1,610,000

XML

Loans And The Allowance For Credit Losses (Tables)

9 Months Ended

Sep. 30, 2012

Loans And The Allowance For Credit Losses [Abstract]

Loan Loss Experience And Activity In The Allowance For Credit Losses

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2012:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,102	$	410	$	3,476	$	4,557	$	233	$	21	$	18	$	11,817
Charge-offs		0		0		0		0		0		0		0		0
Recoveries		3		0		1		1		8		0		0		13
Provision (credit)		136		31		85		3		(10)		(2)		7		250
Ending balance	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2012, and our loan portfolio as of September 30, 2012:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	2,905	$	309	$	3,138	$	4,484	$	477	$	23	$	17	$	11,353
Charge-offs		(9)		0		(20)		0		0		0		0		(29)
Recoveries		21		0		13		1		21		0		0		56
Provision (credit)		324		132		431		76		(267)		(4)		8		700
Ending balance	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080
Ending balance individually
evaluated for impairment	$	4	$	0	$	270	$	60	$	0	$	0	$	0	$	334
Ending balance collectively
evaluated for impairment		3,237		441		3,292		4,501		231		19		25		11,746
Totals	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080
Financing receivables:
Ending balance individually
evaluated for impairment	$	20	$	0	$	2,132	$	581	$	0	$	7	$	0	$	2,740
Ending balance collectively
evaluated for impairment		169,430		82,048		475,189		326,601		11,285		5,252		334		1,070,139
Totals	$	169,450	$	82,048	$	477,321	$	327,182	$	11,285	$	5,259	$	334	$	1,072,879
Components:
Allowance for loan losses	$	2,795	$	435	$	3,472	$	4,502	$	196	$	19	$	25	$	11,444
Reserve for undisbursed
lines of credit		446		6		90		59		35		0		0		636
Total allowance for credit
losses	$	3,241	$	441	$	3,562	$	4,561	$	231	$	19	$	25	$	12,080

The following table reflects our loan loss experience and activity in the allowance for credit losses for the three months ended September 30, 2011:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,122	$	115	$	2,563	$	4,856	$	193	$	25	$	27	$	10,901
Charge-offs		(2)		0		(14)		0		(85)		(2)		0		(103)
Recoveries		32		0		2		0		7		0		0		41
Provision (credit)		(274)		182		678		(507)		175		0		(4)		250
Ending balance	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089

The following table reflects our loan loss experience and activity in the allowance for credit losses for the nine months ended September 30, 2011, and our loan portfolio as of September 30, 2011:

(In thousands)	Commercial, financial and agricultural		Municipal		Real estate- residential		Real estate- commercial		Real estate-construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	2,617	$	236	$	2,428	$	5,143	$	283	$	24	$	23	$	10,754
Charge-offs		(79)		0		(63)		(60)		(96)		(10)		0		(308)
Recoveries		76		0		3		43		18		3		0		143
Provision (credit)		264		61		861		(777)		85		6		0		500
Ending balance	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089
Ending balance individually
evaluated for impairment	$	39	$	0	$	215	$	0	$	0	$	0	$	0	$	254
Ending balance collectively
evaluated for impairment		2,839		297		3,014		4,349		290		23		23		10,835
Totals	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089
Financing receivables:
Ending balance individually
evaluated for impairment	$	223	$	0	$	2,380	$	588	$	0	$	1	$	0	$	3,192
Ending balance collectively
evaluated for impairment		155,820		97,015		423,240		310,275		12,238		5,857		439		1,004,884
Totals	$	156,043	$	97,015	$	425,620	$	310,863	$	12,238	$	5,858	$	439	$	1,008,076
Components:
Allowance for loan losses	$	2,448	$	295	$	3,131	$	4,306	$	254	$	23	$	23	$	10,480
Reserve for undisbursed
lines of credit		430		2		98		43		36		0		0		609
Total allowance for credit
losses	$	2,878	$	297	$	3,229	$	4,349	$	290	$	23	$	23	$	11,089

Aging Of Past Due Loans, Including Nonaccrual And Restructured Loans, By Class

Presented below is an aging of past due loans, including both non-accrual and restructured loans, by class as of September 30, 2012:

	30-59 Days		60-89 Days		Over 90 Days		Total Past						Greater Than 90 Days and
(In thousands)	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	0	$	150	$	9	$	159	$	169,291	$	169,450	$	0
Municipal		0		0		0		0		82,048		82,048		0
Real estate-residential:
First mortgage		1		64		887		952		437,690		438,642		0
Second mortgage		8		0		726		734		37,945		38,679		0
Real estate-commercial:
Owner occupied		0		0		401		401		217,162		217,563		0
Non-owner occupied		0		0		0		0		109,619		109,619		0
Real estate-construction:
Residential		0		0		0		0		1,960		1,960		0
Commercial		0		0		0		0		9,325		9,325		0
Installment		0		0		7		7		5,252		5,259		0
Other		0		0		0		0		334		334		0
Total	$	9	$	214	$	2,030	$	2,253	$	1,070,626	$	1,072,879	$	0

Non-accruing and restructured loans make up $2.10 million of the total past due loans in the aging table above.

Presented below is an aging of past due loans, including both non-accrual and restructured loans, by class as of December 31, 2011:

	30-59 Days		60-89 Days		Over 90 Days		Total Past						Greater Than 90 Days and
	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	0	$	40	$	8	$	48	$	146,942	$	146,990	$	0
Municipal		0		0		0		0		101,705		101,705		0
Real estate-residential:
First mortgage		39		305		731		1,075		400,256		401,331		0
Second mortgage		0		0		281		281		38,206		38,487		0
Real estate-commercial:
Owner occupied		0		325		87		412		205,844		206,256		0
Non-owner occupied		0		0		0		0		107,659		107,659		0
Real estate-construction:
Residential		0		0		0		0		1,798		1,798		0
Commercial		0		0		0		0		17,195		17,195		0
Installment		0		0		0		0		5,806		5,806		0
Other		0		0		0		0		399		399		0
Total	$	39	$	670	$	1,107	$	1,816	$	1,025,810	$	1,027,626	$	0

Non-accruing and restructured loans make up $1.60 million of the total past due loans in the aging table above.

Impaired Loans By Class

Impaired loans by class at September 30, 2012 were as follows:

(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial, financial and agricultural	$	11	$	934	$	0
Real estate – residential:
First mortgage		788		1,084		0
Second mortgage		5		40		0
Real estate – commercial:
Owner occupied		324		485		0
Non-owner occupied		0		70		0
Installment		7		52		0
With related allowance recorded
Commercial, financial and agricultural		9		9		4
Real estate – residential:
First mortgage		618		635		232
Second mortgage		721		721		38
Real estate – commercial:
Owner occupied		257		257		60
Total
Commercial, financial and agricultural		20		943		4
Real estate – residential		2,132		2,480		270
Real estate – commercial		581		812		60
Installment and other		7		52		0
Total	$	2,740	$	4,287	$	334

Impaired loans by class at September 30, 2011 were as follows:

(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial, financial and agricultural	$	168	$	1,185	$	0
Real estate – residential:
First mortgage		1,164		1,438		0
Second mortgage		178		178		0
Real estate – commercial:
Owner occupied		588		588		0
Non-owner occupied		0		70		0
Real estate – construction:
Commercial		0		94		0
Installment		1		22		0
With related allowance recorded
Commercial, financial and agricultural		55		55		39
Real estate – residential:
First mortgage		979		979		212
Second mortgage		59		59		3
Real estate – commercial:
Non-owner occupied		0		0		0
Total
Commercial, financial and agricultural		223		1,240		39
Real estate – residential		2,380		2,654		215
Real estate – commercial		588		658		0
Real estate – construction		0		94		0
Installment and other		1		22		0
Total	$	3,192	$	4,668	$	254

Average Recorded Investment And Interest Income Recognized

The average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 were as follows:

	Three months				Nine months
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	24	$	0	$	49	$	1
Real estate – residential:
First mortgage		888		27		818		47
Second mortgage		331		7		325		34
Real estate – commercial:
Owner occupied		350		2		405		5
Non-owner occupied		0		0		0		0
Installment		2		0		1		0
With related allowance recorded
Commercial, financial and agricultural		13		0		23		0
Real estate – residential:
First mortgage		580		0		662		0
Second mortgage		481		0		194		0
Real estate – commercial:
Owner occupied		231		0		113		0
Total
Commercial, financial and agricultural		37		0		72		1
Real estate – residential		2,280		34		1,999		81
Real estate – commercial		581		2		518		5
Installment and other		2		0		1		0
Total	$	2,900	$	36	$	2,590	$	87

The average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2011 were as follows:

	Three months				Nine months
(In thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial, financial and agricultural	$	138	$	0	$	170	$	0
Real estate – residential:
First mortgage		1,412		3		1,257		9
Second mortgage		221		0		369		1
Real estate – commercial:
Owner occupied		510		0		486		0
Non-owner occupied		120		0		86		0
Real estate – construction:
Commercial		105		0		142		0
Installment		1		0		3		0
With related allowance recorded
Commercial, financial and agricultural		138		0		306		0
Real estate – residential:
First mortgage		997		0		751		0
Second mortgage		59		0		26		0
Real estate – commercial:
Non-owner occupied		0		0		61		0
Total
Commercial, financial and agricultural		276		0		476		0
Real estate – residential		2,689		3		2,403		10
Real estate – commercial		630		0		633		0
Real estate – construction		105		0		142		0
Installment and other		1		0		3		0
Total	$	3,701	$	3	$	3,657	$	10

Nonperforming Loans

Nonperforming loans at September 30, 2012 and December 31, 2011 were as follows:

(In thousands)	September 30, 2012		December 31, 2011
Nonaccrual  loans	$	2,180	$	1,953
Loans greater than 90 days and accruing		0		0
Troubled debt restructured loans (“TDRs”)		560		558
Total nonperforming loans	$	2,740	$	2,511

Summary Of Restructurings

	Three months ended					Nine months ended
	Number	Pre-Modification Recorded		Post-Modification Recorded		Number	Pre-Modification Recorded		Post-Modification Recorded
(Dollars in thousands)	of Loans	Investment		Investment		of Loans	Investment		Investment
Real estate – residential:
First mortgage	0	$	0	$	0	3	$	90	$	90
Real estate - commercial:
Owner occupied	0	$	0	$	0	1	$	180	$	180
	Three months ended					Nine months ended
	Number	Pre-Modification Recorded		Post-Modification Recorded		Number	Pre-Modification Recorded		Post-Modification Recorded
(Dollars in thousands)	of Loans	Investment		Investment		of Loans	Investment		Investment
Real estate – residential:
First mortgage	1	$	105	$	104	2	$	158	$	156

Nonaccrual Loans By Class

(In thousands)	September 30, 2012		December 31, 2011
Commercial, financial and agricultural	$	20	$	114
Real estate - residential:
First mortgage		1,026		1,146
Second mortgage		726		281
Real estate - commercial:
Owner occupied		401		412
Installment		7		0
Nonaccruing non-TDR loans	$	2,180	$	1,953
Nonaccruing TDR’s
Real estate – residential:
First mortgage		372		224
Total nonaccrual loans	$	2,552	$	2,177

Summary Of Loans By Credit Quality Indicator

Below is a summary of loans by credit quality indicator as of September 30, 2012:

	Unrated Residential and				Pass-		Special		Sub-
(In thousands)	Consumer		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	0		148,550		17,928		501		2,471	$	169,450
Municipal		0		82,048		0		0		0		82,048
Real estate – residential:
First mortgage		411,034		24,690		1,233		747		938		438,642
Second mortgage		36,784		1,195		0		0		700		38,679
Real estate – commercial:
Owner occupied		0		190,603		8,409		3,035		15,516		217,563
Non-owner occupied		0		96,554		10,101		1,480		1,484		109,619
Real estate – construction:
Residential		396		1,564		0		0		0		1,960
Commercial		593		8,205		527		0		0		9,325
Installment		5,259		0		0		0		0		5,259
All other loans		334		0		0		0		0		334
Total	$	454,400	$	553,409	$	38,198	$	5,763	$	21,109	$	1,072,879

Below is a summary of loans by credit quality indicator as of December 31, 2011:

	Unrated Residential and				Pass-		Special		Sub-
(In thousands)	Consumer		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	2	$	117,772	$	28,326	$	170	$	720	$	146,990
Municipal		0		101,705		0		0		0		101,705
Real estate – residential:
First mortgage		379,512		18,647		1,569		641		962		401,331
Second mortgage		38,020		146		0		0		321		38,487
Real estate – commercial:
Owner occupied		0		175,878		14,001		7,355		9,022		206,256
Non-owner occupied		0		95,239		8,891		1,195		2,334		107,659
Real estate – construction:
Residential		99		0		1,699		0		0		1,798
Commercial		81		15,925		573		0		616		17,195
Installment		5,806		0		0		0		0		5,806
All other loans		399		0		0		0		0		399
Total	$	423,919	$	525,312	$	55,059	$	9,361	$	13,975	$	1,027,626

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Commitments And Contingencies

9 Months Ended

Sep. 30, 2012

Commitments And Contingencies [Abstract]

Commitments And Contingencies

Note 8: Commitments and Contingencies

We are a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments primarily include commitments to extend credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the accompanying consolidated balance sheets.

We do not issue any guarantees that would require liability recognition or disclosure, other than our standby letters of credit. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled approximately $4.68 million at September 30, 2012 and represent the maximum potential future payments we could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit for on-balance sheet instruments. Our policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios are generally consistent with loan-to-value requirements for other commercial loans secured by similar types of collateral. The fair value of our standby letters of credit at September 30, 2012 was insignificant.

We may enter into commitments to sell loans, which involve market and interest rate risk. There were no such commitments at September 30, 2012 or 2011.

We are involved in routine legal proceedings that occur in the ordinary course of business, which, individually and in the aggregate, are believed by Management to be immaterial to our financial condition and results of operations.

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Earnings Per Share

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Earnings Per Share

Note 6: Earnings Per Share

The following table presents reconciliations of the calculations of basic and diluted earnings per common share for the periods indicated:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands except per share data)	2012		2011		2012		2011
Net income	$	4,005	$	4,181	$	11,354	$	10,911
Weighted average common shares outstanding		6,269		6,221		6,252		6,206
Dilutive effect of common stock equivalents		11		10		12		7
Weighted average common and common equivalent
shares outstanding		6,280		6,231		6,264		6,213
Basic earnings per common share	$	0.64	$	0.67	$	1.82	$	1.76
Diluted earnings per common share	$	0.64	$	0.67	$	1.81	$	1.76

Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding for the three and nine months ended September 30, 2012. For the three and nine months ended September 30, 2012, there were no anti-dilutive stock options outstanding which were not considered in the calculation of diluted earnings per share because the stock options’ exercise price was greater than the average market price during these periods.

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Stock Repurchase Program

9 Months Ended

Sep. 30, 2012

Stock Repurchase Program [Abstract]

Stock Repurchase Program

Note 7: Stock Repurchase Program

We extended, through January 2013, our stock buyback program, originally adopted in January 2007.  Under the program we may repurchase up to 200,000 shares of our common stock on the open market from time to time, and have purchased 143,475 shares at an average price per share of $22.94 since the program’s adoption.  We did not repurchase any of our shares during 2011 or during the first nine months of 2012, and do not expect to repurchase shares in the near future.

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Fair Value Of Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

Note 9: Fair Value of Financial Instruments

We record certain assets and liabilities at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements are also utilized to determine the initial value of certain assets and liabilities, to perform impairment assessments, and for disclosure purposes.  We use quoted market prices and observable inputs to the maximum extent possible when measuring fair value.  In the absence of quoted market prices, various valuation techniques are utilized to measure fair value.  When possible, observable market data for identical or similar financial instruments are used in the valuation.  When market data is not available, fair value is determined using valuation models that incorporate Management’s estimates of the assumptions a market participant would use in pricing the asset or liability.

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While Management believes our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.  A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Ø Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Ø Level 2 -  Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Ø Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Financial instruments on a recurring basis

The table below presents the balance of financial assets and liabilities at September 30, 2012 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	100	$	0	$	100	$	0
U.S. Agency Obligations		54,233		0		54,233		0
FHLB Obligations		4,618		0		4,618		0
Agency MBSs		183,704		0		183,704		0
Agency CMBSs		5,024		0		5,024		0
Agency CMOs		273,419		0		273,419		0
Non-Agency CMOs		4,738		0		4,738		0
ABSs		421		0		421		0
Interest rate swap agreements		599		0		599		0
Total assets	$	526,856	$	0	$	526,856	$	0
Liabilities
Interest rate swap agreements		1,825		0		1,825		0
Total liabilities	$	1,825	$	0	$	1,825	$	0

The table below presents the balance of financial assets and liabilities at December 31, 2011 measured at fair value on a recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury Obligations	$	250	$	0	$	250	$	0
U.S. Agency Obligations		90,419		0		90,419		0
FHLB Obligations		16,676		0		16,676		0
Agency MBSs		183,838		0		183,838		0
Agency CMOs		214,480		0		214,480		0
Non-Agency CMOs		4,855		0		4,855		0
ABSs		1,233		0		1,233		0
Interest rate swap agreements		207		0		207		0
Total assets	$	511,958	$	0	$	511,958	$	0
Liabilities
Interest rate swap agreements		1,613		0		1,613		0
Total liabilities	$	1,613	$	0	$	1,613	$	0

Investment securities are reported at fair value utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service or dealer market participant with whom we have historically transacted both purchases and sales of investment securities.  Prices obtained from these sources include market quotations and matrix pricing. 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.  More information regarding our investment securities can be found in Footnote 3 to these Consolidated Financial Statements.

The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of our interest rate swaps are determined using prices obtained from a third party advisor.  The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

There were no transfers between Level 1 and Level 2 for the three or nine months ended September 30, 2012.  There were no Level 3 assets measured at fair value on a recurring basis during the three or nine months ended September 30, 2012 and 2011.

Financial instruments on a non-recurring basis

Certain assets are also measured at fair value on a non-recurring basis. The table below presents the balance of financial assets at September 30, 2012 measured at fair value on a non-recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
OREO	$	0	$	0	$	0	$	0
Impaired loans		2,740		0		0		2,740
Total	$	2,740	$	0	$	0	$	2,740

The table below presents the balance of financial assets at December 31, 2011 measured at fair value on a non-recurring basis:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In thousands)	Total		(Level 1)		(Level 2)		(Level 3)
OREO	$	358	$	0	$	0	$	358
Impaired loans		2,511		0		0		2,511
Total	$	2,869	$	0	$	0	$	2,869

The OREO balance at December 31, 2011 of $358 thousand consists of $28 thousand in commercial loans; $257 thousand in residential real estate loans; and $73 thousand in construction loans.

We use the fair value of underlying collateral to estimate the specific reserves for collateral dependent impaired loans.  Collateral may be real estate and/or business assets including equipment, inventory and accounts receivable.  Real estate values are determined based on appraisals by qualified licensed appraisers we have hired.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale.  Other business assets are valued using a variety of approaches including appraisals, depreciated book value, purchase price and independent confirmation of accounts receivable.  OREO in the table above consists of property acquired through foreclosure and settlements of loans.  Property acquired is carried at the lower of cost or the estimated fair value of the property, determined by an independent appraisal, and is adjusted for estimated disposal costs. Certain inputs used in appraisals, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans and OREO are categorized as Level 3 within the fair value hierarchy. 

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2012:

(Dollars in thousands)	Fair value		Valuation Methodology	Unobservable Inputs	Range of Inputs
OREO	$	0	Appraisal of collateral	Appraisal adjustments	0%-40%
Impaired loans		2,740	Appraisal of collateral	Appraisal adjustments	0%-40%

Changes to our assumptions about unobservable inputs will impact our estimate of fair vavelue.  Discounts to appraised values reflect the age of the appraisal and estimated costs of disposition.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.

The fair values of our financial instruments as of September 30, 2012 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value			Level 1		Level 2		Level 3
Cash and cash equivalents	$	53,032	$	53,032	$	53,032	$	0	$	0
Securities available for sale		526,257		526,257		0		526,257		0
Securities held to maturity		443		498		0		498		0
FHLB stock		8,145		8,145		0		8,145		0
Loans, net of allowance for loan losses		1,061,435		1,086,800		0		0		1,086,800
Interest rate contract-cash flow hedge		599		599		0		599		0
Accrued interest receivable		4,577		4,577		0		4,577		0
Total assets	$	1,654,488	$	1,679,908	$	53,032	$	540,076	$	1,086,800
Deposits	$	1,252,963	$	1,255,808	$	915,146	$	340,662	$	0
Short-term borrowings		55,600		55,600		0		55,600		0
Securities sold under agreement to repurchase		227,996		227,996		0		227,996		0
Other long-term debt		2,503		2,532		0		2,532		0
Junior subordinated debentures issued to
unconsolidated subsidiary trust		20,619		15,741		0		15,741		0
Interest rate contract-cash flow hedge		1,825		1,825		0		1,825		0
Accrued interest payable		249		249		0		249		0
Total liabilities	$	1,561,755	$	1,559,751	$	915,146	$	644,605	$	0

The fair values of our financial instruments as of December 31, 2011 are summarized in the table below:

	Carrying
(In thousands)	Amount		Fair Value			Level 1		Level 2		Level 3
Cash and cash equivalents	$	37,812	$	37,812	$	37,812	$	0	$	0
Securities available for sale		511,751		511,751		0		511,751		0
Securities held to maturity		558		624		0		624		0
FHLB stock		8,630		8,630		0		8,630		0
Loans, net of allowance for loan losses		1,017,007		1,035,131		0		0		1,035,131
Interest rate contract-cash flow hedge		207		207		0		207		0
Accrued interest receivable		5,121		5,121		0		5,121		0
Total assets	$	1,581,086	$	1,599,276	$	37,812	$	526,333	$	1,035,131
Deposits	$	1,177,880	$	1,181,066	$	829,632	$	351,434	$	0
Short-term borrowings		0		0		0		0		0
Securities sold under agreement to repurchase		262,527		263,062		0		263,062		0
Other long-term debt		22,562		23,594		0		23,594		0
Junior subordinated debentures issued to
unconsolidated subsidiary trust		20,619		15,268		0		15,268		0
Interest rate contract-cash flow hedge		1,613		1,613		0		1,613		0
Accrued interest payable		282		282		0		282		0
Total liabilities	$	1,485,483	$	1,484,885	$	829,632	$	655,253	$	0

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, FHLBB stock, accrued interest receivable and accrued interest payable approximate fair value.

The methodologies for other financial assets and financial liabilities are discussed below.

Loans - The fair value for loans is estimated using discounted cash flow analyses, using interest rates and spreads currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value estimates, methods and assumptions set forth above for our financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and do not incorporate the exit-price concept of fair value proscribed by ASC 820-10 and should be read in conjunction with the financial statements and associated footnotes.

Deposits - The fair value for all deposits other than time deposits are equal to the amounts payable on demand (the carrying value). The fair value of fixed rate and fixed term certificates of deposit is estimated using a discounted cash flow method which applies interest rates currently being offered for deposits of similar remaining maturities.

Debt - The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity.

Commitments to extend credit and standby letters of credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of commitments to extend credit and standby letters of credit was approximately $47 thousand and $42 thousand as of September 30, 2012 and December 31, 2011, respectively.

Limitations‑ Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments.  Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other such factors.

These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument.  These estimates are subjective in nature and require considerable judgment to interpret market data.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange, nor are they intended to represent the fair value of us as a whole.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  The fair value estimates presented herein are based on pertinent information available to Management as of the respective balance sheet date.  Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Other significant assets, such as premises and equipment, other assets, and liabilities not defined as financial instruments, are not included in the above disclosures.  Also, the fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

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Loans And The Allowance For Credit Losses (Nonaccrual Loans By Class) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual non-TDR loans	$ 2,180	$ 1,953
Total nonaccrual loans	2,552	2,177
Installment Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	7	0
Commercial, Financial And Agricultural [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	20	114
Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing TDR's	372	224
Total nonaccrual loans	1,026	1,146
Real Estate Loans – Residential [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	726	281
Real Estate Loans – Commercial [Member] | Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total nonaccrual loans	$ 401	$ 412

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Reconciliations Of Calculations Of Basic And Diluted Earnings Per Common Share

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands except per share data)	2012		2011		2012		2011
Net income	$	4,005	$	4,181	$	11,354	$	10,911
Weighted average common shares outstanding		6,269		6,221		6,252		6,206
Dilutive effect of common stock equivalents		11		10		12		7
Weighted average common and common equivalent
shares outstanding		6,280		6,231		6,264		6,213
Basic earnings per common share	$	0.64	$	0.67	$	1.82	$	1.76
Diluted earnings per common share	$	0.64	$	0.67	$	1.81	$	1.76

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Investment Securities (Summary Of Gross Unrealized Losses On Investment Securities Available For Sale And Length Of Time) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value	$ 39,535	$ 61,743
Available-for-sale Securities, Less than 12 months, Loss	264	232
Available-for-sale Securities, 12 months or more, Fair Value	3,126	7,666
Available-for-sale Securities, 12 months or more, Loss	20	533
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	42,661	69,409
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	284	765
U.S. Agency Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value		2,536
Available-for-sale Securities, Less than 12 months, Loss		6
Available-for-sale Securities, 12 months or more, Fair Value		0
Available-for-sale Securities, 12 months or more, Loss		0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total		2,536
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total		6
FHLB Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value		5,047
Available-for-sale Securities, Less than 12 months, Loss		3
Available-for-sale Securities, 12 months or more, Fair Value		0
Available-for-sale Securities, 12 months or more, Loss		0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total		5,047
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total		3
Agency MBSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value		10,452
Available-for-sale Securities, Less than 12 months, Loss		18
Available-for-sale Securities, 12 months or more, Fair Value		0
Available-for-sale Securities, 12 months or more, Loss		0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total		10,452
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total		18
Agency CMBSs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value	5,024
Available-for-sale Securities, Less than 12 months, Loss	66
Available-for-sale Securities, 12 months or more, Fair Value	0
Available-for-sale Securities, 12 months or more, Loss	0
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	5,024
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	66
Agency CMOs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value	34,511	43,708
Available-for-sale Securities, Less than 12 months, Loss	198	205
Available-for-sale Securities, 12 months or more, Fair Value	0	2,861
Available-for-sale Securities, 12 months or more, Loss	0	40
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	34,511	46,569
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	198	245
Non-Agency CMOs [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities, Less than 12 months, Fair Value	0	0
Available-for-sale Securities, Less than 12 months, Loss	0	0
Available-for-sale Securities, 12 months or more, Fair Value	3,126	4,805
Available-for-sale Securities, 12 months or more, Loss	20	493
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value, Total	3,126	4,805
Available-for-sale Securities, Continuous Unrealized Loss Position, Aggregate Losses, Total	$ 20	$ 493

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Fair Value Of Financial Instruments (Narrative) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO balance	$ 0	$ 358	$ 340
The fair value of commitments to extend credit and standby letters of credit	47	42
Real Estate Loans – Commercial [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO balance		28
Real Estate Loans – Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO balance		257
Real Estate Loans – Construction [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
OREO balance		$ 73

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Consolidated Statements Of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements Of Comprehensive Income [Abstract]
Net income	$ 4,005	$ 4,181	$ 11,354	$ 10,911
Other comprehensive (loss) income, net of tax:
Change in net unrealized (loss) gain on securities available for sale, net of taxes of $564, $674, $682, and $1,543	1,047	1,251	1,266	2,865
Reclassification adjustments for net securities gain included in net income, net of taxes of $9, $(322), $(148) and $(367)	17	(598)	(274)	(681)
Change in net unrealized loss on interest rate swaps, net of taxes of $19, $(113), $63 and $(110)	35	(209)	117	(204)
Pension liability adjustment, net of taxes of $29, $25, $86 and $74	53	46	159	137
Other comprehensive (loss) income	1,152	490	1,268	2,117
Comprehensive income	$ 5,157	$ 4,671	$ 12,622	$ 13,028

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Investment Securities

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Investment Securities

Note 3: Investment Securities

Investments in securities are classified as available for sale or held to maturity as of September 30, 2012.  The amortized cost and fair values of the securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	100	$	0	$	0	$	100
U.S. Agency Obligations		53,392		841		0		54,233
Federal Home Loan Bank ("FHLB") Obligations		4,563		55		0		4,618
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		175,353		8,351		0		183,704
Collateralized Mortgage Backed Securities ("Agency CMBSs")		5,090		0		66		5,024
Agency Collateralized Mortgage Obligations ("Agency CMOs")		270,792		2,825		198		273,419
Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")		4,749		9		20		4,738
Asset Backed Securities ("ABSs")		357		64		0		421
Total Available for Sale	$	514,396	$	12,145	$	284	$	526,257
Held to Maturity:
Agency MBSs	$	443	$	55	$	0	$	498
Total Held to Maturity	$	443	$	55	$	0	$	498

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2011 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		89,597		828		6		90,419
FHLB Obligations		16,545		134		3		16,676
Agency MBSs		176,756		7,100		18		183,838
Agency CMOs		211,749		2,976		245		214,480
Non-agency CMOs		5,346		2		493		4,855
ABSs		1,172		61		0		1,233
Total Available for Sale	$	501,415	$	11,101	$	765	$	511,751
Held to Maturity:
Agency MBSs	$	558	$	66	$	0	$	624
Total Held to Maturity	$	558	$	66	$	0	$	624

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of September 30, 2012 are as follows:

			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	0	$	100	$	0	$	0	$	100
U.S. Agency Obligations		0		10,056		44,177		0		54,233
FHLB Obligations		0		0		4,618		0		4,618
Agency MBSs		398		3,573		28,335		151,398		183,704
Agency CMBs		0		0		5,024		0		5,024
Agency CMOs		0		11		5,752		267,656		273,419
Non-agency CMOs		0		0		0		4,738		4,738
ABSs		0		0		0		421		421
Total Available for Sale	$	398	$	13,740	$	87,906	$	424,213	$	526,257
Held to Maturity (at amortized cost):
Agency MBSs	$	16	$	84	$	0	$	343	$	443
Total Held to Maturity	$	16	$	84	$	0	$	343	$	443

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of December 31, 2011, are as follows:

			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	250	$	0	$	0	$	0	$	250
U.S. Agency Obligations		3,023		12,567		69,823		5,006		90,419
FHLB Obligations		3,389		0		13,287		0		16,676
Agency MBSs		20		6,118		32,897		144,803		183,838
Agency CMOs		0		0		3,056		211,424		214,480
Non-agency CMOs		0		0		50		4,805		4,855
ABSs		0		0		0		1,233		1,233
Total Available for Sale	$	6,682	$	18,685	$	119,113	$	367,271	$	511,751
Held to Maturity (at amortized cost):
Agency MBSs	$	0	$	158	$	0	$	400	$	558
Total Held to Maturity	$	0	$	158	$	0	$	400	$	558

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations.  Maturities of Agency MBSs and Agency CMOs are based on final contractual maturities.

Proceeds from sales of available for sale debt securities were $22.67 million and $64.34 million for the three and nine months ended September 30, 2012, respectively.  Gross gains of $36 thousand and $530 thousand and gross losses of $62thousand and $108 thousand were realized from these sales for the three and nine months ended September 30, 2012. Proceeds from sales of available for sale debt securities were $54.99 million and $132.02 million during the three and nine months ended September 30, 2011, respectively. Gross gains of $970 thousand and $1.19 million and gross losses of $50 thousand and $141 thousand were realized from these sales during the three and nine months ended September 30, 2011, respectively.

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a  continuous unrealized loss position, at September 30, 2012 and December 31, 2011, were as follows:

	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss			Fair Value	Loss
As of September 30, 2012
Agency CMBSs	$	5,024	$	66	$	0	$	0	$	5,024	$	66
Agency CMOs		34,511		198		0		0		34,511		198
Non-agency CMOs		0		0		3,126		20		3,126		20
	$	39,535	$	264	$	3,126	$	20	$	42,661	$	284

	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of December 31, 2011
U.S. Agency Obligations	$	2,536	$	6	$	0	$	0	$	2,536	$	6
FHLB Obligations		5,047		3		0		0		5,047		3
Agency MBSs		10,452		18		0		0		10,452		18
Agency CMOs		43,708		205		2,861		40		46,569		245
Non-agency CMOs		0		0		4,805		493		4,805		493
	$	61,743	$	232	$	7,666	$	533	$	69,409	$	765

There were no securities held to maturity with unrealized losses as of September 30, 2012 and December 31, 2011.

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These discrepancies generally occur because of changes in interest rates since the time of purchase, or because the credit quality of the issuer has deteriorated. We perform a quarterly analysis of each security in our portfolio to determine if impairment exists, and if it does, whether that impairment is other-than-temporary.  

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Non-Agency CMOs are tracked individually and their performance is tracked at least quarterly. 

We use an external pricing service to obtain fair market values for our investment portfolio.  We have obtained and reviewed the service provider’s pricing and reference data document. Evaluations are based on market data and vary by asset class and incorporate available trade, bid and other market information.  Because many fixed income securities do not trade on a daily basis, the service provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.  In addition, model processes, such as the Option Adjusted Spread model are used to assess interest rate impact and develop prepayment scenarios. We test the values provided to us by the pricing service through a combination of back testing on actual sales of securities and by obtaining prices on all bonds from an alternative pricing source.

Our investment portfolio consists almost entirely of U.S. Treasury and Agency obligations, or Agency-guaranteed mortgage securities.  We have two non-agency CMOs with a current cost basis of $4.75 million.  Management, with the help of outside experts, has performed impairment analyses on these bonds.

One of the non-Agency CMOs, with a cost basis of $3.15 million and a fair value of $3.13 million at September 30, 2012, is rated BBB by Fitch and Ba3 by Moody’s.  Delinquencies have been fairly low and prepayments on the bond have led to increased credit support.  We own a senior tranche in this bond. Although losses are expected in the bond overall, our position in the structure of the bond is expected to protect us from realizing losses. The second bond has a cost basis of $1.60 million and a fair value of $1.61 million.  This bond is rated CCC by Fitch and S&P. We own a super senior tranche in this bond. Although losses are expected in the bond overall, our super senior position in the structure is expected to protect us from realizing a material loss. 

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity. 

As a member of the FHLB system, we are required to invest in stock of the FHLB of Boston (the “FHLBB”) in an amount determined based on our borrowings from the FHLBB.  At September 30, 2012, our investment in FHLBB stock totaled $8.15 million, a decrease of $485 thousand from our year end balance of $8.63 million.  We received dividend income totaling $11 thousand and $36 thousand during the three and nine months ended September 30, 2012, respectively. We received $6 thousand and $19 thousand for the three and nine months ended September 30, 2011, respectively. 

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Loans And The Allowance For Credit Losses (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2012 loan	Sep. 30, 2011	Sep. 30, 2012 loan property	Sep. 30, 2011	Dec. 31, 2011 property
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	$ 1,072,879,000	$ 1,008,076,000	$ 1,072,879,000	$ 1,008,076,000	$ 1,027,626,000
Net deferred loan origination fees			(192,000)		11,000
Overdrawn deposit balances classified as loan balances	334,000		334,000		399,000
Percentage of loans originated in amounts of the appraised value of the property	80.00%		80.00%
Net loan losses, weighted average determination period, years			5 years
Nonaccrual loans	2,552,000		2,552,000		2,177,000
Total impaired loans	2,740,000	3,192,000	2,740,000	3,192,000	2,511,000
Impaired loans with specific reserve allocation	1,600,000		1,600,000		885,000
Impaired loans with no specific reserve allocation	1,140,000		1,140,000		1,630,000
Interest Income Recognized	36,000	3,000	87,000	10,000
Number of real estate properties					3
Average balance of impaired loans	2,900,000	3,701,000	2,590,000	3,657,000
Related allowance	334,000	254,000	334,000	254,000	227,000
Nonaccruing Troubled Debt Restructuring	372,000		372,000		224,000
Troubled debt restructured loans ("TDRs")	560,000		560,000		558,000
Number of loans	9		9
Interest income on restructured loans	4,000	3,000	26,000	7,000
OREO balance	0	340,000	0	340,000	358,000
Amount of interest which was not earned, but which would have been earned had our nonaccrual and restructured loans	38,000	49,000	107,000	157,000
Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	477,321,000	425,620,000	477,321,000	425,620,000
Total impaired loans	2,132,000	2,380,000	2,132,000	2,380,000
Interest Income Recognized	34,000	3,000	81,000	10,000
Average balance of impaired loans	2,280,000	2,689,000	1,999,000	2,403,000
Related allowance	270,000	215,000	270,000	215,000
Number of loans	8	3	8	3
Real Estate Loans – Residential [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	438,642,000		438,642,000		401,331,000
Nonaccrual loans	1,026,000		1,026,000		1,146,000
Nonaccruing Troubled Debt Restructuring	372,000		372,000
Troubled debt restructured loans ("TDRs")					290,000
Real Estate Loans – Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Loans	327,182,000	310,863,000	327,182,000	310,863,000
Total impaired loans	581,000	588,000	581,000	588,000
Interest Income Recognized	2,000	0	5,000	0
Average balance of impaired loans	581,000	630,000	518,000	633,000
Related allowance	60,000	0	60,000	0
Number of loans	1		1
Performing Financing Receivable [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of loans	7		7
Payment Default [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of loans	7		7
Payment Default With Foreclusure Proceedings In Process [Member] | Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Troubled debt restructured loans ("TDRs")	70,000		70,000
Non-Accrual [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of loans	5		5
Restructured With Longer Terms At Market Rates [Member] | Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of loans		1		1
Restructured With Rate Concessions [Member] | Real Estate Loans – Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of loans		2		2
Restructured [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccrual loans	$ 2,100,000		$ 2,100,000		$ 1,600,000
Number of loans		1		1
Default [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of loans	2		2
Properties Sold [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Number of real estate properties	2		2

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Earnings Per Share (Reconciliations And Calculations Of Basic And Diluted Earnings Per Share) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Earnings Per Share [Abstract]
Net income	$ 4,005	$ 4,181	$ 11,354	$ 10,911
Weighted average common shares outstanding	6,269	6,221	6,252	6,206
Dilutive effect of common stock equivalents	11	10	12	7
Weighted average common and common equivalent shares outstanding	6,280	6,231	6,264	6,213
Basic earnings per common share	$ 0.64	$ 0.67	$ 1.82	$ 1.76
Diluted earnings per common share	$ 0.64	$ 0.67	$ 1.81	$ 1.76

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Pension (Tables)

9 Months Ended

Sep. 30, 2012

Pension [Abstract]

Net Periodic Benefit Costs

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2012		2011		2012		2011
Interest cost	$	119	$	122	$	358	$	366
Service cost		12		14		36		42
Expected return on Plan assets		(150)		(156)		(450)		(468)
Amortization of net loss		82		70		245		210
Net periodic benefit cost	$	63	$	50	$	189	$	150